Enlightened Layperson

The End and the Beginning

2011-09-28T22:31:00.001-07:00

Well, I was sworn in as a lawyer on Monday. That means I am no longer and Enlightened Layperson (at least on legal issues). But if any of my readers are still out there, you can continue to follow me at Essayist-Lawyer. (So I will still be EL). First post is now up.

Liberty and Folkways

2011-09-23T20:27:00.000-07:00

I highly recommend this excellent piece by David Fum on how most people define liberty. Frum points out that when people talk about their rights and freedom they are generally not talking about anything so abstract as the rights set forth in the Bill of Rights or any other universal concept. What they mean, ultimately, is their accepted folkways.

The occasion of the post was the City of Chicago attempting to save money on its employee health insurance costs by charging an extra $50 per month unless they engaged in a regular exercise program. On the one hand he found the outraged reaction, treating this as a totalitarian nightmare amusing. On the other hand, he said, there is a serious insight here. When these people say freedom, they don’t mean, say, the criminal procedure protections offered by the Bill of Rights. After all, what are the chances they will ever actually be charged with a crime? Freedom to them means the right to their favored lifestyle, unhindered. And, although he does not add this, probably unchallenged.

On the one hand, I suppose I’ve known this all along. On the other hand, having it put in such stark relief explains a lot.

It’s easiest to understand when the coercive power of the state is implicated. After all, one of the commenters on the thread pointed out, any number of corporate employers do the same thing. And insurance companies may offer discounts for healthy lifestyles. But these meet with less resistance because, after all, you can always find another job or another insurer. But then again, no one forces city employees to work for the city; they are free to take another job, too. It explains the NRA crowd who seem utterly unconcerned about any part of the Constitution except the Second Amendment – nothing else infringes on their folkways. It explains the sense that freedom is being threatened even when the state coercion is very slight – use of taxpayer dollars to build trains and other public transportation, discussion of relaxing zoning laws to allow higher density housing, requiring posting of calorie and nutrition information in restaurants, and so forth. To people who identify a personal car with freedom, who like the quiet and roominess of the suburbs, who don’t want to be nagged about their food, these things feel intrusive even if there is no force involved.* People’s favored lifestyles are being criticized and officially disapproved of. That is intrusion enough.

It may explain part of what is behind Jonah Goldberg’s Liberal Fascism. In interviews he has argued that nothing Republicans do is as intrusive as, say, a ban on smoking in bars because they don’t seek to impose a lifestyle. (As the Religious Right influence in the Republican Party continues to grow, it will be harder and harder for Goldberg to deny that conservatives, too, seek to impose a lifestyle). It explains the reviewer who said the very embodiment of liberal fascism was Jimmy Carter going on TV in a sweater urging people to turn the thermostat down.

It also explains the hostility and that the sense that freedom is being threatened ever when the coercive power of the state is not implicated – switchboards that say, “For English, press one,” fast food restaurants offering healthy alternatives, store clerks who say “Happy Holidays” instead of “Merry Christmas,” and,, of course, any visible (or invisible) presence of Islam. The state is not involved in any of these, and the greatest coercion at stake is having to press one to get English. People make up elaborate PC conspiracies (presumably abetted by the state), but what is really happening, for the most part is that familiar folkways are being challenged and criticized. That feels intrusive enough.

Fum does not explore why this rage over a threat to one’s folkways is so much a right wing phenomenon. Why don’t you year it on our side? Right wingers I assume would say the answer is simple – ours is the officially favored lifestyle and theirs is the one under siege. I think there is something to this. In particular, our side has been highly successful getting part of its agenda, in the form of abortion and gay rights, enacted by the courts. What right wing lifestyle concern (other than gun ownership) has ever been constitutioalized? And our side is, after all, the beneficiary of building trains, nutrition labels, smoking bans, and so forth. But is it all as one-sided as right wingers often think? Their side has been the beneficiary of road building to accommodate more automobile traffic, density restrictions on housing, separate residential and commercial zoning, loopholes in fuel efficiency standards for SUV’s, various privileges given to churches, abstinence education, and so forth. The War on Drugs is a whole lot more intrusive expression of disapproval of a lifestyle than most conservatives will ever know.

I am inclined to think that our side’s reaction is not rage because instead we prefer condescension. We don’t so much reject any other lifestyle as illegitimate as feel smugly superior to anyone who doesn’t share it. And we do treat other lifestyles, such as suburban sprawl and heavy car traffic as social ills to be overcome. I think our side would do well to overcome its self-righteousness and acknowledge that yes, some people like living in suburbs, sprawl and all, and some people equate private cars with freedom and some people feel really threatened when you speak of their favored lifestyle as a social ill to be overcome. Try to imagine how it would feel if someone talked that way (in similarly smug and patronizing tones) about your favored lifestyle. And stop equating your consumer choices as marks of moral superiority instead of, you know, consumer choices.

This being said, not all folkways are worthy. Some really do have to be changed. Frum offers the example of outlawing thatched roofs in Boston in the 1630’s (a fire hazard) and building sewers in New York in the 1840’s (this encountered a lot of resistence!) And, although he does not mention it, a much less benign and amusing example was the resistance to desegregation, often expressed in terms of a threat to liberty. Even unhealthy lifestyles are not purely a matter of personal choice if they raise everyone’s insurance rates (much less are taxpayer subsidized though Medicare). But we are well-advised to keep in mind the extent to which most people do equate freedom with preservation of their folkways – and be sensitive to this before rushing to be too judgmental.

The Real Dispute on Charity

2011-09-22T21:21:00.000-07:00

HT Andrew Sullivan, here quite an interesting link (no longer accessible, alas) to libertarian Doug Mataconi challenging liberal assumptions on the true nature of compassion. Specifically, he says that liberals want the fake compassion of government programs and libertarians want the real compassion of voluntary giving. He also complains that in discussing the subject liberals and conservatives/libertarians are talking past each other, and that the liberal view of compassion as government programs has become so dominant in discourse as to drown out alternatives.

Certainly every time I read conservative critiques of government social programs (either by libertarians or by Evangelicals), I do indeed come away with the impression that we are talking past each other, though perhaps not for the same reasons he does. To me it all comes down to a book I read by a rabbi about contrasting Christian and Jewish views of charity. Both religions, he commented, emphasize the importance of charitable giving. Both see it as having two purposes, to provide for the poor, and to teach us to be generous. But Jews focus more on providing for the poor and Christians focus more on teaching people to be generous.

This has some important implications. If the focus is on teaching people to be generous, then charity has to be voluntary; to coerce it defeats its entire purpose. If people’s voluntary donations do not adequately provide for the poor, then the remedy is to teach generosity better. Since generosity comes from the heart, it is a deeply personal matter that cannot be coerced. The focus is on the rights of the giver. In the Jewish view, by contrast, a mandatory tax does make sense.* Since the purpose is to provide for the por, ensuring sufficient resources to see to it that the poor are adequately provided for takes priority. By all means, let’s do better at teaching people to be generous, but in the mean time, the poor have to be provided for. The focus is on the needs of the recipient.

This, I would say, is the real difference in viewpoints. Evangelical Christians say that how charitable they wish to be is a private matter that the government has no business dictating. Libertarians say that being taxed for anything beyond essential core functions of government is a violation of their rights. Both denounce any taxpayer funded social services as socialism. I would say that socialism is the view that only the needs of the recipient matter, and that the rights of the giver have no legitimate place in public discourse, the Jewish view taken to its illogical conclusion. But the view I hear from libertarians is the opposite – that only the rights of the giver matter, and that the needs of the recipient have no legitimate place in public discourse. The absolutism of this view is alarming. I prefer a less absolutist view – that the proper balance between the rights of the giver and the needs of the recipient is a proper subject of public discourse.

To be fair to Mataconi, he does not appear to take the absolutist libertarian viewpoint. He acknowledges at least some scope for a taxpayer funded safety net and criticizes governmental social programs at least partly based on their effectiveness. But he offers two links (inaccessible because I cannot access the original) that do come much closer to the absolutist libertarian view. The first concedes that there might be room to disagree on whether private efforts would be sufficient, but then moves on to more important matters -- there is nothing compassionate about robbing people of their hard-earned money and theatening them with prison cells for tax evasion. Clearly, the adequacy of private efforts are a minor matter easily brushed aside; the important thing is the coercive and illegitimate nature of taxation. Still, ultimately he fails to address what to do if private contributions are not sufficient. The second, by contrast, does. He argues at length that we should learn to distinguish between society and that state. Society has legitimate business providing for the poor and the sick; the state does not. Society should not let the uninsured die for lack of coverage; the state should. And there’s the answer. If voluntary giving is not enough to pay for medical case, better for the uninsured to be left to die than for taxpayers to be forced to foot the bill.

I suppose my answer to all this would be that I am not willing to leave the uninsured to die because voluntary charity should provide for them. People don’t always do what they should. Government has a way of stepping in when they don’t. So sure, I believe that voluntary private charity should be sufficient to provide for the poor and the sick. I also believe that people should refrain from committing crimes, businesses should be scrupulously honest in their dealings, married people should live happily ever after, and all food on the shelves should be clean and safe. I also acknowledge that it doesn’t always work out that way. That’s why we have a criminal justice system, civil courts, divorce courts, and public health inspectors. And since private charity does not, in fact, adequately provide for the poor and the sick we have a social safety net. I would also say that I measure a society’s compassion, not just by how subjectively generous people are in their hearts, but by how objectively well it cares for its weakest members.

And that, I believe, is the real dispute over charity -- is its purpose to provide for the poor, or to teach us to be generous. Which matters more, the rights of the giver, or the needs of the recipient? Until we bring these alternate viewpoints into the clear light, the talking past each other will continue.**

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*It is probably impolitic to point out that Islam takes a distinction Jewish view here. Islam favors a mandatory tax to provide for the poor with additional, voluntary donations strongly encouraged.
**And what is really interesting is how the same person can flip from one view to another apparently without noticing he difference. Left libertarian Jim Henley says that he might have written something like that once. He even says, "I supported the true empathy of unforced charity, worried about government programs 'crowding out' civil society, and believed that the 'coerced' nature of redistributive policies made it impossible to be 'moral' at all, since morality requires affirmative choice." Clearly the focus is on charity as teaching us to be generous and entirely on the rights of the giver. The needs of the recipient are secondary at best. But he explains that he has change his mind. The reasons he gives essentially deal with his severe doubts about the ability of private contributions to do the job – the costs of modern medicine are too great, local communities are easily overwhelmed, and the emotional burden can be just too great outside of the sort of impersonal bureaucratic organization that gives some professional distance. In other words, the needs of the recipient will not be met. Does he not see the basic difference in outlook between these two views?

Why We Should Abandon the Myth of the Social Security Trust Fund

2011-09-21T20:43:00.000-07:00

For years, few things have been so sacred to Democrats at the myth of the Social Security trust fund. Working age people pay a regular tax that goes into the trust fund and is invested in U.S. Treasury bonds (the safest investment there is!) and receive their payments back, with interest earned, upon retirement. Democrats would obsessively worry about its health (Reagan is raiding the Social Security Trust fund! ) and urge that it be protected (let’s use the Clinton surpluses to shore up the Social Security trust fund!). Now Rick Perry is leading a whole chorus of Republicans denouncing Social Security as a Ponzi scheme because current retirees are being paid out of current income, and warning that without drastic the system will go broke. The CBO warns that the trust fund will go broke in 2037. And suddenly its defenders are having to explain why Social Security can be simultaneously pay-as-you-go and a trust fund.

And really, we had it coming for obscuring the true nature of Social Security. The myth of the Ponzi scheme is simply a variant on the myth of the trust fund – pointing out how poorly the trust fund model applies. But once you drop the trust fund model, and the claim that it is a Ponzi scheme loses its credibility.

What is really happening is simple. Social Security is a tax-and-transfer system. People of working age are paying taxes to support retirees. When today’s working people retire, a younger generation of works will be taxed to support them. And so on. So long as everyone pays in and everyone expects to live long enough to benefit, there is little resistance to such a system. All advanced industrial countries in the world have such a system in one form or another.

So where does the trust fund come into the picture? Until extremely recently, Social Security ran a surplus, i.e., it took in more than it paid out. And what became of the surplus? It was used to fund other government operations. But the general fund, when it used Social Security funds to run operations, would say that it owed Social Security a certain amount to be paid back in the future. Critics called that raiding the Social Security trust fund. Anti-critics called it investing in U.S. treasury bonds. But raiding the Social Security trust fund and investing it in treasury bonds are exactly the same thing. Either one just means using Social Security tax revenue to fund current operations. The "trust fund" is nothing but an accounting gimmick, a theoretical promise that when Social Security falls into deficit, other taxes will be used to pay the benefits. Talk of the trust fund running out just means that this theoretical promise will expire and the government will no longer be obliged to use non-Social Security taxes to pay Social Security benefits.*

I can understand why supporters would want to encourage the myth of the trust fund. Fearing that people would not be willing to pay a tax during their working lives to support current retirees, and that retirees might have misgivings about asking working people to foot the bills for their own retirements, advocates of Social Security proposed the fiction that really people were paying into a trust fund ad receiving their investments back. Such arguments remove the usual resistance to a tax-and-transfer system, but the play into the hands of people who claim it is a fraud or in danger of failing.

Why? Well, for one thing, since there isn't an actual trust fund, it is very easy to make the case that no such trust fund exists or, if it does, that it is being egregiously mismanaged. Real trust funds start with a lump sum and have bunch of financial experts looking for the best investments. Real retirement accounts and pension funds have to have actual money and investments to cover future payments. Social Security simply takes the incoming revenues, pays current obligations, and then spends the surplus on other government operations. You would, indeed, never be able to get away with running an actual trust fund that way (hence the accusation that it is fraudulent). All of which is irrelevant once you concede that there is no trust fund, but only a simple tax-and-transfer system.

But even more significant is the scary talk of the trust fund running out in 2037 (or whenever). If you treat Social Security as a real trust fund that means (a) that we can keep making payments with no trouble up till then, but then (b) that once the trust fund runs out, Social Security will run out of funding and payments will cease.

The real situation is both more and less alarming. It is more alarming in the sense that the shortfall has begun right now and we are already obligated to start cutting into everything else to pay for the gap in Social Security. Maybe the thought that everything but Social Security having its funding cut to pay for Social Security doesn't bother you, but it definitely bothers me. On the other hand, expiring of the trust fund does not mean that all funding will collapse. It means the theoretical oblitgation to strip everything else to pay for Social Security will cease. Revenues will continue to come in. They will merely fall about 25% short of obligations. Cut Social Security obligations by 25% for everyone born after (say) 1956 and the problem will be solved. Or, if you don't like that approach, there are any number of other alternatives to match revenues to obligations.

But pretending there is a trust fund in the light of all evidence to the contrary does nothing to protect the program. It simply exposes the embarrassing contradictions.**
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*So what would have happened if we had followed Bill Clinton's advice and used his surpluses to "shore up the Social Security trust fund"? Assuming the surpluses would have continued and the economy had not crashed (two dubious assumptions), we would have continued to un surpluses until Social Secuity obligations began exceeding revenues. Then the surpluses would gradually have dwindled. This would mean using non-Social Security taxes to pay for Social Secuity benefits, on an indefinite basis. But so what?
**And I can't resist a link to Paul Krugman, bless his heart, defending the concept of a Social Security trust fund. His logic is most unpersuasive (at least to me). He points out that Ronald Reagan cut income taxes while raising Social Security taxes. This had the practical effect of not actually cutting total taxes, but merely making them more regressive, but it sold well as a plan to protect Social Security. "[I]f you say that there is no link between the payroll tax and future Social Security benefits – which is what denying the reality of the trust fund amounts to – then Greenspan and company pulled a fast one back in the 1980s: they sold a regressive tax switch, raising taxes on workers while cutting them on the wealthy, on false pretenses." To which I can only say, "Well, DUH!" I've known that all along.

Slice Four: European Semi-Fascists

2011-09-17T17:41:00.001-07:00

This leads to the darkest and ugliest form of right-wing nationalism that both despises the liberal, cosmopolitan Jewish tradition, even as it supports Israel and Zionism – the European anti-immigrant, anti-Muslim parties, which reach degrees of nastiness that in the U.S. would not be tolerated in mainstream religion or politics, but are relegated to the margins.

I will admit to not following these European parties much, but they take a growingly nasty, semi-fascist tone. They belong to a longstanding and ugly European traditional of blood and soil nationalism, one that has a deep-seated tradition of anti-Semitism, distrusting the Jew as liberal cosmopolite without national loyalty. The current version is much the same, only it substitutes Muslims for Jews as the internal enemy and passionately supports Israel. The old hatred for the liberal cosmopolitan Jew remains, but with the assurance that they hate liberal, cosmopolitan Jews only because they are liberal and cosmopolitan, not because they are Jewish. The distinction between the good Jew and the bad Jew is made far more explicit than any mainstream politician or religious figure in the United States would dare.

To take the most exteme example, consider Anders Breivik. Jews and Zionism were not his primary concern when he opened filre on Norway's Labor Party youth, but the subject did appea in his manifesto. One commentator remarks:

Breivik's "Zionism" coexists with a virulent brand of selective anti-Semitism -- one that sees Jews as likely carriers of cosmopolitan, nontraditional values and targets liberal Jews for special loathing. In his discussion of Nazism, Breivik agrees that most German and European Jews in the 1930s were "disloyal" -- "similar to the liberal Jews today." Hitler's error, he believes, was to lump the "good" Jews with the "bad," instead of rewarding the former with a Jewish homeland in a Muslim-free Palestine.

As for the present, Breivik estimates that about three-quarters of European and American Jews, and about half of Israeli Jews, "support multiculturalism"; he urges fellow nationalists to "embrace the remaining loyal Jews as brothers rather than repeating the mistake of" the Nazis. What to do with today's "disloyal" Jews, he does not say.

Another quotes him as saying“[P]lease learn the difference between a nation-wrecking multiculturalist Jew and a conservative Jew…Never target a Jew because he is a Jew, but rather because he is a category A or B traitor.” Both observe that Breivik is by no means alone. The semi-fascist English Defense League harasses Muslims and is led by a Holocaust denier, but engages in pro-Zionist demonstations. >Meanwhile “a Belgian politician known for his contacts with SS veterans, an Austrian with neo-Nazi ties, and a Swede whose political party has deep roots in Swedish fascism,” met with members of the Israeli Knesset to express solidarity with their stuggle against Arabs.

What is going on? The most obvious answer is simply that Muslims have replaced Jews as the accepted scapegoat and since Israel is a Western outpost fighting the Muslim hoards, it must be an ally. Certainly, I think there is a great deal of truth to that, but I do not think it is the whole truth. The other part of it is that nationalists, even as they define themselves by their enemies, often each other, have a strong affinity for each other just beneath the surface.

At the risk of offending Godwin’s Law, Europe, say, 1870 to 1940 is a fine example. It was in the later 19th Century that right wing and nationalist became synonymous. * Indeed, the right wing's great claim to legitimacy was that they were more patriotic than their rivals. Right wing nationalists, if ever they seemed intellectually unfashionable, might comfort themselves with the thought that liberals with their belief in universal human rights, and socialists, with their international brotherhood of labor, might talk a good game, but can they be counted on when the chips are really down? When the test comes, we’ll see who really stands by their country in its hour of peril.**

Then Hitler invaded, and a funny thing happened. Liberals and socialists patriotically stood up for their countries, while right wing hyper-nationalists all turned out to be a pack of traitors! The remnants (and descendants) of French anti-Dreyfussards, -- who in the 19th Century fiercely protected France from one Jew falsely accused of spying for the Germans -- now collaborated en masse with German occupiers. To this day, French ultra-nationalist Jean Marie Le Pen defends the German occupation as not "particularly inhuman." The same pattern held across much of Europe -- the Arrow Cross in Hungary, the Iron Guard in Romania, the Ustasha in Croatia, Quisling's Nasjonal Samling in Norway and an impressive host of other ultra-nationalists, who regularly impugned the patriotism of their opponents, showed that they came to powe by opening collaberating with Nazi invaders. Even the extreme Zionist Lehi approached the Nazis in 1940 to propose an alliance -- Nazis would sent European Jews to Israel and cooperate with them in expelling the British!

Why should this be so? It is easy enough to explain for the liberals – they saw Hitler as an obvious threat to universal human rights. Likewise the Socialists *** saw his hype-nationalism as anathema to an international brotherhood of – well, anything. But why were so many right wing hyper-nationalists the first to cut a deal with the Nazis?

The reasons are varied. In some cases, no doubt they acted out of sincerely patriotic motives, believing that resistance was hopeless than their best chance was to cut the best deal possible. But certainly they would have accepted no such excuses if the positions had been reversed, and the liberals or socialists had been the collaborators and the right wing the resistance. Others defined themselves in terms of some enemy other than Germany and were willing to accept German support on the theory that thine enemy’s enemy shall be thy friend. But it must have become apparent before long that Germany was a far worse enemy than – well, whoever else they opposed. I can only assume that in the end, right wing super-nationalists so often turned out to be traitors who collaborated with Hitler because at some level they saw him as a kindred spirit and liked what he stood for.

As I say, it's easy to call Godwin on these comments and to accuse me of comparing support for Israel with collaboration with Hitler. That is not what I mean. I mean, rather, that ultra-nationalist cooperation with the Nazis is only the most extreme example of all ultra-nationalists being much alike under the skin. And I am saying that European semi-fascists are fond of Israel’s most hard line Likudniks, not out of any inherent fondness for Israel or Jews, but simply because they respect and admire hard line nationalism in all its forms. They despise liberal, cosmopolitan Jews because they recognize libeal cosmopolitanism, not rival nationalism, is the true opponent of ultra-nationalism. And who knows, maybe if push comes to shove, they will discover that Islamic nationalism, too, is a kindred spirit.

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*It was not always so. More on this in my next post.
**Am I being anachronistic here, attributing to late 19th and early 20th Century right wingers the aggrieved resentment at being intellectually unfashionable that obviously so roils the American right today? Mayber, But I am inclined to think that this sort of siege mentality is an important part of right wing authoritarian thinking in any age.
***By socialists, I refer mostly to the Social Democrats, who retained enough of Marx to continue believing in an international brotherhood of labor (and to recognize that it could be preserved only by avoiding international wars), but not enough to take the whole revolution and class warfare too seriously. Communists, by contrast, were little more than Soviet agents. They opposed Hitler when they got the order, but no sooner.

A Brief Aside: Mel Gibson

2011-09-11T21:06:00.001-07:00

And on the subject of right-wing anti-Semites who support Jewish nationalism, I suppose I should drop a note on Mel Gibson's latest movie about the Maccabean Revolt. For anyone who doubted that Mel Gibson was an anti-Semite, he clarified the issue with his notorious anti-Semitic rant in 2006, which dealt his career a setback. And no, the fact that he was drunk at the time does not absolve him of the remarks. After all, most drunk people, when stopped by the police, don't launch into tirades against Jews. But it turns out he is a great admirer of the the Jewish war for independence against the Greek Empire in the 2nd Century B.C.

I could see several reasons why this might be so. For one thing, these were pre-Christian Jews, and therefore still the Chosen People and free of the taint of having rejected Jesus. Second, Gibson is a Catholic and therefore learned the Books of the Maccabees as scripture and not mere apocrypha, or even history. But above all else, it the story is clearly part and parcel with his other movies like Braveheart and The Patriot. This will be his third movie about a nationalistic revolt. Apparently Mel Gibson like nationalistic revolts on general principle.

Pseudo Libertarians and Essential Core Functions

2011-09-08T21:14:00.000-07:00

Of all Lofgren’s many comments about Republicans, none hit home for me more, or caused me more skepticism than his complaint that, for all their hostility to government:

[M]ost Republican officeholders seem strangely uninterested in the effective repeal of Fourth Amendment protections by the Patriot Act, the weakening of habeas corpus and self-incrimination protections in the public hysteria following 9/11 or the unpalatable fact that the United States has the largest incarcerated population of any country on earth. . . . Instead, they prefer to rail against those government programs that actually help people.

Well, sure, hasn't he ever heard Ronald Reagan's famous quote, that the scariest words in the English language are "I'm from the government and I'm here to help." But Ronald Reagan's hostility to government never stopped him from favoring a huge expansion in privacy invasions and incarceration in his so-called War on Drugs.

The whole distinction is key to the entire Republican world view. Did Lofgren seriously work with Republicans for 28 years and never learn the concept of Essential Core Function? Or, as someone else put it, the difference between the Mommy Party and the Daddy Party? *

Lofgren will never read my blog, but for anyone who does and shares his confusion, let me explain the difference between real libertarians and what I would call pseudo-libertarians. Real libertarians distrust the government in all its aspects, both “mommy” aspects and “daddy” aspects. They differ on which “mommy” functions (if any) are legitimate. As for “daddy” functions (armies, police and prisons), they regard these as more necessary and legitimate than mommy functions, but also more dangerous. Hence real libertarians try to limits daddy functions as well as mommy functions to the minimum necessary. Wars in genuine self defense are acknowledged as necessary, but wars of choice should be avoided. Police are obviously necessary for traditional crimes like murder, rape, theft and so forth, but victimless crimes like gambling, drug trafficking or prostitution should be allowed. That's why real libertarians are big advocates of drug legalization.

Pseudo-libertarians, by contrast, essentially divide government into its Essential Core Functions, i.e., daddy functions, and everything else, i.e., mommy functions. Opposition to government and protection of freedom are therefore seen as confining government to its essential core functions. Daddy functions are, by definition, not seen as threats to liberty because they are Essential Core Functions. It is only when government spreads into mommy functions that liberty is in danger because mommy functions mean that government is metastasizing beyond its proper role, and who knows how far it will spread. The same rule applies, by the way, to opposition to government spending. Any spending whatever on mommy functions is an outrageous extravagance that we cannot afford and must be ruthlessly cut. Armies, policy and prisons, by contrast, don’t count as “spending” because they are Essential Core Functions and therefore you don’t have to worry about how to pay for them.

Once you understand this distinction, it explains a lot. It explains why wiretapping, indefinite detention, endless war and torture under George Bush were not threatening, and remain unthreatening even when now under the much-feared Obama, but universal health care is the end of all liberty. It explains why the Republican base is completely unconcerned about the possibility that Governor Perry might have executed an innocent man. Executions, far from seeming like the ultimate government intrusion on liberty and therefore to be carefully controlled, are an Essential Core Function and therefore not threatening, even if they get the wrong person sometimes. It explains why pseudo-libertarians seem so unconcerned about the War on Drugs. Focusing on the shocking searches and seizures, police kicking in doors, the SWAT teams, the long prison sentences for minor offenses and so forth doesn’t conjure up loss of liberty to a pseudo libertarian; it merely shows that the Drug War is within the government’s Essential Core Functions and therefore not threatening to liberty. And it explains why a business lobby that sponsored Arizona's anti-immigration law as a business opportunity to increase prisoners for the private prison industry could unironically call itself the conservative, free-market orientated, limited-government group.**

The most extreme form I have seen of this was a letter to the editor explaining that government is really just a monopoly on violence and clearly a monopoly on violence has no business providing services. Wrap your head around this if you can. Government is not threatening liberty so long as it is being violent. Only when it does anything that is not violent do we have to start worrying.

Back to Lofgren, he discusses Republicans' extreme acts of obstructionism and sabotage in ominous terms, "[L]egislating has now become war minus the shooting, something one could have observed 80 years ago in the Reichstag of the Weimar Republic. " But, he says, Republicans are not just doing this to undermine Democratic adminstations, they are seeking to undermine people's confidence in government itself, because the more people's confidence in government is undermined, the more they will vote for Republicans, the anti-government party. But, once again, their attempt to undermine people's faith in government applies only to government in its mommy functions. Daddy functions are a different matter altogether. And, indeed, polls show that while people's confidence in government in general and Congress in particular falls ever lower, confidence in the military and the police remain high. Certainly, it is important for the public to have confidence in the military and the police. The 60's and '70's were an alarming example of what happens to society when the public does not have confidence in the military and the police.

But the military and the police are not just the most essential core functions of the government (although they are that). They are also deeply (and properly) authoritarian organizations that are supposed to be kept under civilian control. But the more the public reveres the military and police and holds civilian authorities in contempt, the harder such civilian control will be to maintain.*** It has long been clear to me that the Republicans aspire to a de facto one party state, somewhat along the lines of Mexico or Japan. What Lofgren seems to be implying is that Republicans are seeking to hollow out our democratic institutions altogether until only the authoritarian ones actually function.

That is why the Weimar analogy seems so ominous. The reasons German democracy fell are many and complex. But one of them was that the German people became so disgusted watching the petty bickering and incompetence of their democratic leaders (salted with a hefty dose of obstructionism and sabotage by anti-democratic parties, who were by no means limited to the Nazis) that they longed for a dictatorship to cut through the squabbles and just get things done. It is starting to look familiar.

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*If you follow the link, by the way, you will see pseudo-libertarian assumptions within it. Mommy nurtures; daddy protects. Daddy can be cold and distant, but mommy can be suffocating. The assumption is that infringements on libety come only from the mommy side and that the only libety problem one might have with daddy is that he allows too much of it. But this is nonesense, of course. Daddy doesn't just protect, he disciplines and punishes. It isn't just that he can be cold and aloof; he can be overly strict, punitive, and even abusive. When daddy infringes on your liberty, it is usually a lot more direct and severe than when mommy does.

**This was another story I regarded with some skepticism. It sounded too much like some classic left wing conspiracy theory. Still, the story originate with NPR, which is certainly a respectable organization. Reading the story with a cautious eye, what one comes away with is not that the Arizona anti-immigration law was a conspiracy by the private prison industry to increase the number of inmates, but that anti-immigration legislators saw a powerful potential ally in the private prison industry and sought to enlist their help. Such things are normal in the legislative process, though smellier than usual in this case.

***Just to be clear, I am not afraid of an outright military dictatorship. I am afraid of a military and police that hold themselves aloof from the wider society and feel superior to it, and civilian authorities too timid to stand up to them.

More Real Than Reality

2011-09-08T20:08:00.000-07:00

In one of Star Trek’s decidedly inferior episodes, The Savage Curtain the Enterprise approaches a planet and receives a broadcast from Abraham Lincoln, asking to come on board. Lincoln has always been Kirk’s hero, so he agrees and doesn’t know what to make of it. Kirk knows it is impossible for this stranger to actually be Lincoln, yet "his kindness, his gentle wisdom, his humor, everything about him is so right."

Of course, it does turn out to be impossible. They are actually part of an elaborate game by rock-like creatures on the planet wanting to stage a battle between good and evil and creating famous historic characters to play the parts. (Lincoln is on the side of good, of course). The less said of the rest of the episode the better. But there is one good line at the end, when Kirk wistfully says that they all seemed so real, especially Lincoln. Spock says that in many ways they were more real than the actual historic characters. “Because they were taken from our impressions of them, how could they be anything but what we expected?”

Ghastly as the rest of the episode is, this statement is actually quite profound. If Captain Kirk has stepped through the Guardian of Forever and met the real Lincoln, he would no doubt have been disappointed. The real Lincoln would have been a flawed human being with his own quirks and annoying habits, quite incapable of living up to Kirk’s expectations. The false Lincoln, made to match for Kirk’s expectations, was a whole lot more subjectively “real” to Kirk that that objectively real Lincoln could possibly have been.

I have taken a lesson from this, not just that anything that seems too good to be true probably is, but that anything that too perfectly fits your prejudices and preconceptions should not be trusted. This impression is strengthened by the book, They Never Said It, a collection of spurious quotes.* The two most common sources of spurious quotes – Lenin, who regularly has people’s worst fears put in his mouth, and (you guessed it) Lincoln, who is made a source of quotes for absolutely everything people want to support.

On the whole this has served me well. For instance, when I saw this picture of Sarah Palin, I immediately spotted it, not so much as a hoax, but more of a spoof, the perfect expression of what Palin's enemies think of her, rather than an actual pictue.

All of which is an overly lengthy lead-in to what a lot of liberal blogs have been commenting on – the recent piece by former Republican Congressional staffer Mike Lofgren his old bosses. Emotionally, it is very appealing, a former Republican expressing exactly all my prejudices and preconceptions about the Republicans, based on inside information. It seems too good to be true. Is it?

If it were anonymous, I would assume it was a hoax. But the author published under his own name. Legistorm on Lofgren confirms that Mike Lofgren really is (was) a Congressional staffer. And Michael Tomasky, who shares my concern, is willing to take the word of James Fallows, who has plenty of Washington contacts and vouches that Lofgren is for real. (He also comments that Lofgren has worked "mainly" for Republicans).**

So apparently this is for real. Substantive comments to follow in my next post.

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*And yet it did have quotes that appealed to my preconceptions and I wanted to believe.

**Tomasky also asks the question – how did someone like that get to be a Republican in the first place. He answers that Lofgren has been on Capitol Hill for 28 years, and that when he first arrived, it was perfectly normal and acceptable for a Republican to be sane.

Slice Three: Glenn Beck

2011-09-04T17:03:00.000-07:00

Next, we move from Christian Zionists in general to a particular Mormon Zionist – Glenn Beck. Granted, Beck is not so religiously bigoted as a lot of Evangelical Christian leaders. He belongs to a religion they despise as heretical and makes at least the attempt to be inclusive in religious matters. But (as his detractors are fond of pointing out), he dabbles very heavy in anti-Semitic conspiracy theories, without ever quite descending into anti-Semitism.

Most notoriously, his "expose" of George Soros as the puppet master was rife with anti-Semitic stereotypes. Some, like the Jew as banker and internationalist have at least the advantage of being based in fact and legitimately controversial. Others are longstannding anti-Semitic classics, like the view of Soros as conspirator and puppet master running a shadow government behind the scenes and controlling all world events. All in all, the portrayal was a sot of latter day Protocols of the Zion Elders. Nor does the Soros piece stand alone. He has promoted anti-Semitic sources from Eustace Mullins, who as blamed Jews for everything from running to Federal Reserve for their own benefit to 9-11 to concentration camps; to Elizabeth Dilling, author of amy anti-Semitic conspiracy screeds and supporter of Nazi Germany, and Malaysian Prime Minister Mahathir Mohammed, who blamed Malaysia's economic collapse on a Jewish plot (led by Soros, or course) against a Muslim economy. Beck's defense, when confronted with with these associations, is to explain that he never actually read the books by Mullins and Dilling that he was promoting. And when he set forth the nine most dangerous people, in the present or recent past, eight were Jewish.

At the same time, Beck is a passionate supporter of Israel. He reaches out to Orthodox Jews. He held his “Restoring Courage” rally in Jerusalem to express his solidarity with Israel (or at least with the most expansionist elements thereof). He generally lets it be known that he regards Israel as a heroic outpost fighting a lonely battle against Islamic extremism, and that the slightest hestitation in our support will incur the wrath of God.

In short, Beck, far more than any mainstream conservative politician or Christian Zionist, makes a clear Good Jew/Bad Jew distinction. In short, Beck sets himself up as arbiter of Jewish authenticity, with authority to decide who is an is not an Authentic Real Jew. Soros is not an Authentic Real Jew because he is an atheist and does not support Israel. Reform Jews are not Authentic Real Jews because of their association with liberal politics. And Israel's tent city protesters are not Authentic Real Israelis, but puppets of the radical left and militant Islam because, well, because Beck doesn't approve of their politics.

And it is this more than anything else, more than Beck's incredibly frivolous Nazi analogies, more than his constant dabbling in anti-Semitic stereotypes, that that has led to conflict between him and the Jewish community, including conservative Jews who would really like to see their fellow Jews move more in Beck's direction. But they are outraged that any goy would presume to have the authority to determine who is an is not a Authentic Real Jew -- especially when his definition is so narrow as to exclude the largest group of practicing Jews in the U.S. and as many as 87% of all Israelis. So he has been forced to walk back his claims that Reform Jews are not Real Jews and that ahe has the prerogative of determining what is legitimate in Israeli domestic politics.

Perhaps Glenn Beck and others like him should consider the possibility that Jewish authenticity may be more broadly defined than they like. The stereotype of the liberal, cosmopolitan Jew is as well established as the stereotype of the Jewish banker and, like so many stereotypes, it persists because there is at least some truth in it. Soros, besides a currency speculato, is a thoroughly international figure who favors international cooperation on many matters that transcend borders. It is not too presumptuous to guess that one reason he has no fondness for Israel is that Israel represents the sort of blood and soil nationalism that he despises and regards as the problem in today's world. This tradition of the Jew as internationalist, as liberal cosmopolite, as critic of nationalism is sufficiently well established that maybe it, too, is part of what it can be to be an Authentic Real Jew.

I want to address this issue later, but only after looking at the nastiest aspect right wing Jew-hating but Israel loving tendancy -- the European semi-fascist movement.

The Right Wing, Jews, and Zionists:Slice One

2011-09-04T16:17:00.000-07:00

NOTE: This was my original post on the subject, but I accidentally deleted it and am trying to reconstruct it from memory.

Now, if the news will settledown and give me some peace, I would like to write a series on a topic long churning in my head -- the curiously ambivilent relationship between the right wing, Israel and Jews.

Jews have long been a traditionally liberal constituency, but the right wing sees a winning forumula for gaining Jewish support -- unflagging support for Israel as an ally against the Muslim forces of jihad. So far, rather to their surprise, the tactic has not been successful in gaining much Jewish support. My essential argument is that this is because right wing pro-Zionists, while not in themselves anti-Semitic, follow in a longstanding right wing tradition of anti-Semitism. Their support for Israel or Jews is conditioned on Jew abandoning their liberal tradition and adopting a sort of nationalism much like the right wing's own -- a sort of nationalism many Jews find deeply distasteful.

I'll begin with the most benign example of this tendancy in the person of Sarah Palin. Or rather, to be fair to Palin, on my unsupported speculation about what she thinks. Sarah Palin is a great supporter of Israel and even wears the Star of David in a gesture of solidarity, but none of this has done much to win her Jewish support. Why not? David Frum attempts to explain the hostility in response to a column by Jennifer Rubin gives his opinion. Interestingly enough, he does not believe the source of the hostility is primarily Palin's attitude equating ignorance with virtue.*

More than any politician in memory, Palin seems to divide her fellow-Americans into first and second class citizens, real Americans and not-so-real Americans. To do her justice, she has never said anything to indicate that Jews fall into the second, less-real class. But Jews do have an intuition that when this sort of line drawing is done, we are likely to find ourselves on the wrong side.

Jonathan Chait puts it more directly -- he says that Rubin is playing into a longstanding anti-Semitic stereotype accusing Jews of being too intellectual and too cosmopolitan, lacking national loyalties. Indeed, this stereotype of the Jew as national alien lacking true patriotism dates back at least to the Nineteenth Century, when it replaced to older view of the Jew as religious alien. This tradition is why such talk raises Jewish hackles.

Without claiming to know what goes on in Sarah Palin's head, my guess would be that she doesn't know about this history. Indulging in further groundless speculation, I would guess that if someone raised it with her she would be outraged. How could anyone think such a thing? Of course she thinks Jews are Authentic Real Americans. At least Authentic Real Jews are. I would further guess that if anyone asked Palin the difference between an Authentic Real Jew and a liberal imitation Jew, she would express it in terms of Orthodox versus non-Orthodox or perhaps religious versus secular. My final guess would be that, if pressed on the subject, it would turn out that Palin does not know the first thing about Orthodox Judaism or the issues that matter to a religious Jew. The real distinction would turn out to be loyal Likudniks versus any Jew who has ever criticized Israel.

In that case, Frum can relax. Although he has moved far to the left on economic issues, he remains a neocon on foreign policy matters. That makes him an Authentic Real Jew, if not an Authentic Real American.**

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*He does, however, offerthe perfect conservative smackdown for the whole anti-intellectual outlook that equates ignorance with virtue. "Igorance is bad. But we all start ignorant. Jews . . . expect their leaders to start early and work hard to remedy their ignorance by learning things."
**Frum can't possibly be an Authentic Real American because he is a Canadian. Besides, he is so blinded by loyalty to the country of his birth that he fails to see that its single payer healthcare system has turned Canada into a nightmare of oppression, if not a Communist dictatorship.

Slice Two: Christian Zionists

2011-08-31T19:39:00.000-07:00

Moving from Sarah Palin to people who have actually expressed views on Jews as well as Israel, we have the odd phenomenon of the Christian Zionists. Quite famously, Evangelical Christians combine unwavering support for Israel with a belief that Jews, like anyone who does not take Jesus Christ as his or her personal savior, will go to Hell.

Critics dismiss such supporters as the Armegeddon Lobby, supporting Israel only because it plays an essential role in their End Times Scenario, which ends with Israel and the Jews being wiped out by the Anti-Christ. But given the extraordinary ability of most people to simultaneously hold contradictory ideas, I am willing to give Christian Zionists the benefit of the doubt here. A lot of what is at work may simply be a general Manichean mindset -- meximum support for Israel because they are Good and on Our Team, standing against the Evil Arabs.*
But that still raises an awkward bit of cognitive dissonance. After all, to a strict Fundamentalist Christian, Jews are just as Hell-bound as Muslims? So how can the epic struggle between Good and Evil be played out between two sets of Hell-bound participants?

Returning again to the realm of speculation about other people’s motives, is it possible that the whole End Times scenario is largely an attempt rationalize such an outlook? Granted, millenarianism is a long-standing Christian tradition. Granted, all Christian millenarians used the same scriptures to explain the times they live in. But let’s face it. The prophecies are vague enough to mean just about anything. How they are shaped and formed depends a lot on the preconceptions of the person interpreting them. So if you want to give Israel your unqualified support because you see them as the last outpost of Western Civilization against Evil Arab, but run into trouble because, after all, you think Jews are Hell-bound, it can be really convenient to have a lot of prophecies around that give an important role in the End Times to Israel. That overcomes the obstacle of how it can be our sacred duty to support one Hell-bound faction against another.

But other obstacles remain. The next obstacle is a harder one. According to all traditional rules of Evangelical Christianity, a Christian’s first duty to the Hell-bound is to try to convert them. After all, you never know when someone may be hit by the hypothetical buls and go to Hell because you failed to bring them to Jesus. But trying to convert Jews to Christianity invariably causes friction with Israel and threatens to undo the alliance. How do you deal with this? One solution is the Jews for Jesus approach, defining Jewishness as tribal membership rather than adherence to a particular religion, and arguing that Laws of Moses still apply to Jews even after they convert (anything Peter and Paul may have said to the contrary!). The trouble with this approach is that most Jews (including the Israeli authorities) just don’t buy it. There can be secular Jews and even atheist Jews, but a Christian Jew is a contradiction in terms, and is basically regarded by most Jews as a traitor. So many Christian Zionists make it part of their prophecy that there will be a miraculous mass conversion of the Jews to Christianity in the near future. This relieves Christians of their duty to evangelize to Jews and removes a major source of conflict between Christian and Jewish Zionists. **

But even that does not remove all obstacles. One such obstacle is how to get along with Jews who are not Zionists. Reverent John Hagee attracted a lot of attention and outrage by his statement that Hitler was God’s instrument to force the Jews from Europe to Israel. Most reactions to this statement have been expressions of shock and outrage that he could call Hitler God’s instrument or brush off his crimes so lightly. But let me raises another point. If God was displeased with the Jews for living in Europe because he wants all Jews to go to Israel, then what does that say about American Jews today? Are we also defying God’s will by living in the United States when God really wants us to go to Israel? My guess is that Hagee would manage to fudge this issue, too, and figure out some reason why the United States has God’s special favor and it is therefore acceptable for Jews to live here, too. But at the same time, the Christian Right’s insistence on the U.S. as a Christian country strongly seems to imply that any American who is not an Evangelical Christian is a second class citizen. What does that make Jews? And are any Jews shirking their duty to live in Israel second class Jews as well?

Then there is the whole question of the idealization of Israel. It’s fair to ask, how much of this idealization is neither millenarian prophecy nor Manichean standing firm against Evil, but a sort of romantic idealization of Israel as a land of bearded men in black coats and broad-brimmed hats, pious and militant, untainted by the decadence and secularism of the United States and Europe? This, too, is speculation about other people’s motives, but I note that Jeffrey Goldberg has pointed out that Israel is a lot more than bearded men in black coats -- it has many secular residents with the same decadent habits as the rest of the West (including an annual gay pride march).

But in the end, all of these can be overcome with sufficient mental gymnastics. What can’t be overcome is the unstated condition Christian Zionists place on their support for Israel – maximum belligerence and intransigence. Granted, with the current government in power, this hasn’t been much of an issue. But consider that when Ariel Sharon withdrew from the Gaza and was shortly after paralyzed with a stroke, Pat Robertson took it as a sign of God’s displeasure. So what happens if the Israelis decide some time that maximum belligerence is not, in fact, in their interest, and that they want to make some sort of compromise? When Israelis, in other words, stop being Authentic Real Jews.

Christian Zionists’ relationship with Israel reminds me of nothing so much as this book review on "philo-Semitism" (the opposite of anti-Semitism). It cites a Jewish joke, “Q: Which is preferable—the antisemite or the philosemite? A: The antisemite—at least he isn’t lying.” The point behind the joke, the author explains, is that the philo-Semite loves Jews, not as they really are, but as he believes they should be for his own purposes. If Jews refuse to stick to the script, this sort of idealization quickly proves to be a two-edged sword. Let any secular or Jewish Zionist keep this in mind.
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*Something similar happened in the Cold War. Before militant Islam arrived on the scene many Arab countries, though not Communist, were Soviet allies and thus (to a Manichean mindset) proxies of the Evil Empire.
**Any Jew hit by the Hypothetical Bus between now and the anticipated mass conversion is presumably unfortunate collateral damage.

A Few Reflections on Hurricane Irene

2011-08-29T21:03:00.000-07:00

(1) Isn’t it interesting that with the hurricane threatening all up and down the Eastern Seaboard, what we kept hearing was that it was threatening New York? Kind of tells you where our media capital is. And who is really self-centered.

(2) FEMA has improved a lot since Katrina. And Obama is terrified of having another Katrina take place on his watch. (And his enemies are basically disappointed that it didn’t).

(3) Let’s be glad it wasn’t as bad as we feared.

(4) Even if it had been as bad as we feared, Irene would not have come even close to Katrina on the disaster scale.

(5) Yes, I agree with people who warn against crying wolf and warning that we are facing another Katrina when we aren’t.

(6) That being said, ramping up all these possible responses that ultimately were not needed was not a waste of time. It is better seen as preparation. The thing about Katrina-sized disasters is that (fortunately) they aren’t very common. This is good, but it contains a danger – the danger that when one of these mercifully rare disasters does come along, we will be woefully unprepared for it (see Katrina). Since we don’t want major disasters to happen often, but do want to be prepared when one finally does come along, the best way to do that is to test the machinery on lesser disasters. This time, the machinery worked very well – at least for this much lesser hurricane. How it would have worked on a Katrina-scale disaster is anyone’s guess. But dealing with the Irenes of the world is what will prepare us for the Katrinas.

PS: As for on Paul and his nostalgia for the hurricane that wiped out Galveston, I will make one comment at least partly in his defense. The difference between then and now was not just one of government, but of technology. There were no weather satellites in those days, so there was no way the people of Galveston could have known the hurricane was headed their way until too late. Nowadays, I suppose that even with no government intervention, if the people of Galveston had watched the news and seen the weather report warning of the coming hurricane, they would have known enough to flee the island without any government evacuation order. That being said, I really do think an orderly, government-directed evacuation and assistance in reconstructing is much to be preferred to general, unorganized flight. But let’s all be glad that we now have weather satellites that will give plenty of advance warning, government or no government.

The Fall of Qaddafi (or is it Gaddafi?)

2011-08-21T21:21:00.000-07:00

I might as well add my own voice to the reaction to the fall of Qaddafi (Gaddafi). I rejoice as much as the next person, but with a caveat.

The Libyan tyrant was a curse to his own people and all his neighbors. He went out of his way to make enemies. The world is better off without him. But remember, getting rid of the tyrant is the easy part. The damage to his society remains. And, as a general rule, the worse the tyrant, the worse the damage to clean up and the more difficult the transition. Our wars in Afghanistan and Iraq gave a quick and easy victory over a tyrant, and then a growing mess taking his place that became more and more our responsibility.

Granted, there is a difference here. We have left this war to the Libyans and limited ourselves to air support. That is certainly for the best. But as the "what next" problems begins to grow and become more complicated, let's be very wary about making it our own.

My Ideal Republican Candidate -- David Stockman

2011-08-21T14:17:00.000-07:00

I suppose my ideal choice of candidates for this election would be Robert Reich as the Democratic candidate and David Stockman as the Republican. It's pointless to argue that neither one is electable. If they run against each other, one of them would have to win. The problem, of course, is that neither one is running, much less nominatable.

It's no secret that I would vote for Reich because I would look to him to undertake strong enough fiscal and monetary stimulus to actually revive the economy, and that I think Stockman is dead wrong. So why would I want him for a Republican candidate and be willing to take a chance with him as President?

For one, thing, because I have no doubt that he is sincere. While I may suspect other Republicans of calling for spending cuts and higher interest rates as sabotage, Stockman really means it, and I would count on him to follow through. Furthermore Stockman holds no illusions that we can balance the budget without tax cuts or with spending cuts for the poor only. If elected, he would seek to cut middle class entitlements and raise middle class taxes in a serious attempt to bring actual balance to the budget. He would also appoint members to the Federal Reserve who would actually raise interest rates, rather than intimidate the Fed into postponing any attempt to revive the economy until after the election.

Granted, I think all this would be disasterous, but hey, I could be wrong. And I trust STockman at least not to do anything truly insane like -- well, see here for where my feverish imagination can take me. And if it does turn out to be as disasterous as I expect, one of two things will happen. (1) Stockman will acknowledge he was wrong and change his policies. (2) Stodkman will insist he is right and his policies are a painful but necessary transition. Democrats will win the next election by a landslide and Robert Reich will be our next President.

Of course, Stockman could never be nominated by today's Republican Party. Aside from his willingness to raise taxes, he doesn't meet any of their culture war standards (see his Wikipedia entry here). Although born in Texas, he made his fortune on Wall Street. His wife heads Republican Majority for Choice. And I'm going to guess, he regards the whole culture war business as a foolish distraction from the real issues.

He has another obvious problem as well. I remember well when he was fired as budget director from the Reagan Administration, a political cartoon of the day said, "There goes the only person in Washington who can add and subtract." Stockman retains his ability to add and subtract to this day, which definitely makes him unelectable under any circumstaces.

What Is It About Contraception?

2011-08-20T20:58:00.000-07:00

Although I have been skeptical of Robert Altmeyer's on-line book on authoritarians, it did raise one interesting point I wished Altmeyer had described in more detail. When authoritarians play the Global Change Game (a complex, multi-player role playing game in which participants play the nations of the world and are supposed to learn of the difficult environmental challenges the world faces), they lacked a capacity for international cooperation, and they refused to curb population growth. Alter describes three authoritarian iterations of the game* in considerable detail and watches three quite different outcomes, but in all cases, they refuse to curb population growth, and in no case does Altmeyer go into detail about how or why this was so. I wish he had, because it might shed some light on conservatives’ determination to defund Planned Parenthood and outrage at insurance companies being required to cover contraceptives for free.

This is baffling in particular because it is directly opposed to another reason often posed for opposing birth control, the demographic arms race. The demographic arms race viewpoint rests on the assumption that (1) people’s social and political viewpoints are immutable encoded on their genes and can never be changed by education and assimilation, and (2) “they” will continue to breed like rats so “we” have to start having more babies just to keep up. This was the viewpoint Margaret Sanger ran into among eugenicists who were all in favor of providing contraceptives to poor immigrant women, but opposed making them available to native-born American women. It is rampant on the hard right in people like Mark Steyn who say, If you cannot outbreed the enemy, cull 'em." It has been rampant, too, on the hard left, among Third World revolutionaries who denounce birth control as soft genocide and regard a woman’s role as breeding babies for their glorious revolution. It might be called an attitude of “contraception for thee, but not for me.”

But that is not what is going on here. What we are seeing here is more an attitude of “contraception for me but not for thee.” In other words, a determination to lose the demographic arms race. I’m talking about people like Fox New's Greg Gutfeld quipping “Eliminate poverty by eliminating the poor.” (This, too, is an old trope, widely used by the hard left to explain why contraception has no role in fighting poverty). Although I cannot find the link, Glenn Beck denounced an African ecoligically sustainable project (funded by Al Gore and George Soros, of course) as genocidal because African women who participated started using contraception and having fewer children. And the Washington Times' Jeffrey Kuhner has openly come out and denounced contraception as unnatural and un-Christian.

It makes me want to sigh and roll my eyes and ask them, how many children do you have? For Beck the answer is apparently three natural and one adopted. Gutfeld, although married, apparently has none. And Kuhner's Wikipedia entry mentions a wife but no children, although it is brief enough to possibly be omitting them. Is it so far-fetched to assume, then, that all three men practice contraception? And that their righteous indignation is therefore more thatn a little hypocritical? This attitude, too, is nothing new. When Margaret Sanger began her practice among poor immigrant women, a number of birth control devices (such as condoms, diaphragms or cervical caps) had, in fact, been invented. Birth rates among middle class, native born women somehow managed to fall. When she tried to obtain birth control for the poor, she ran into fierce resistance and a campaign to outlaw contraception altogether. But somehow these fierce struggles never seemed to do much to raise birth rates among the middle class.**

So why are so many people on the right denouncing contracepting for the poor as immoral, while practicing it themselves? I can think of two possible reasons. Some people oppose widespread availability of contraception because they believe it will encourage sex outside of marriage. If every woman could be required to present a marriage certificate as a precondition to getting contraception, they would probably not object. Others really do have religious objections to all contraception as immoral.

But they run into a problem. Any serious attempt to deny access to contraception to the general public would run into a firestorm of opposition and be quickly defeated, at considerable political cost to the people proposing it. So that rules it out. The best they can hope to do is to deny access to women who are not in a position to resist. Right wing religious groups have been doing that in Republican administrations since Reagan in foreign aid, steering funds to religious organizations that seek to deny birth control to Third World women. And now they are getting bolder and moving on to deny such access to our own poor and powerless women at home.
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*By contrast, players with low authoritarian scores coopeated well. Although Altmeyer does not discuss the reason for their opposition to birth control, it seems unlikely to have been about hostility to casual sex in an political and ecological role playing game. Most likely, the demographic arms race viewpoint was at work.

**I also got some fascinating lessons on the subject in Constitutional Right when we got to Griswold vs. Connecticut. As late as the 1960’s, Connecticut had anti-contraceptive statutes on the book. (So did Massachusetts). No one had ever been prosecuted under these statues, our professor explained, but that did not mean they were without effect. Connecticut is a very small state geographically, and little more than a suburb of New York City. Women who could afford a private doctor evaded the law by going to a New York doctor for their birth control. But poor women could not afford a private doctor, and the law did succeed in keeping Planned Parenthood from setting up a clinic. The effect was to deny contraception to the poor and only the poor. (He did not discuss what respective birth rates in Connecticut were at the time. Presumably they retained the last resort of sterilization). The struggle over allowing such a clinic, he said, was one between rival elites over whether the poor should be allowed to practice birth control. The poor remained passive and took no part.

2011-08-17T20:46:00.000-07:00

Okay, my resolve to avoid discussing the election until the Iowa caucus has lasted about as long as it took Rick Perry to shoot off his mouth.

Let’s start with the obvious. The implied threat of violence if Bernanke ever visits Texas is just macho posturing. I no more believe the Governor of Texas intends to incite mob violence against the Chairman of the Federal Reserve than that he intends to secede. No point fainting over it.

Second, is he advocating tighter money? The general conservative line is that he is dead wrong to call for violence (even if it is just so much hot air), but right to call for tighter money. The view of some liberals and monetariests is that he is, indeed, calling for tighter money, and that he is dead wrong about that. I consider myself unconvinced.

Put me in the third category, of people who long suspected the Republicans are committing economic sabotage, but never expected them to come right out and admit it. Admittedly, Perry’s statement was somewhat ambiguous. He said:

We’ve already tried this. All it’s going to be doing is devaluing the dollar in your ocket and we cannot afford that. We have to learn the lessons of the past three years that they’ve been devastating. The President of the United States has conducted an experiment on the American economy for almost the last three years, and it has gone tragically wrong and we need to send him a clear message in November of 2012 that new leadership is coming.

This appears to be a statement that he believes we need tighter money, and that any monetary easing would be economically disasterous. No sign of sabotage there.

But he also says, “If this guy prints more money between now and the election -- I don’t know what y’all would do to him in Iowa, but we -- we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous -- or treasonous in my opinion.” And, when asked if he thought the Fed's primary motive was to get Obama reelected, he said, “If they print more money between now and this election, I would suggest that’s exactly what’s going on.” Both these statements sound like an acknowledgment that monetary expansion can improve the economy and is therefore illegitimate because it might help Obama be reelected. In orther words, sabotage.

Granted, if I wanted to be charitable, I could square this circle. He could mean that the Fed mistakenly thinks that monetary expansion will help the economy (and, by extension, Obama), but that really it will be harmful. Or he could mean that monetary expansion will temporarily improve the economy just long enough to sway the election, but will do greater damage in the long run. And that latter view could explain why he regards any attempt to revive the economy before the election as illegitimate. But that seems a lot more sophisticated than the general tenure of his remarks, and I am in no mood to be charitable.

Although I regard the implied threat of violence as so much hot air, I do regard Perry’s speech as a threat. Originally I took it as a threat to Bernanke that if he tried to revive the economy before the election, he (Perry) would take it as an unfriendly act and refuse to reappoint Bernanke to the Fed after he won the election. It seemed like a hollow threat. Presupposing Perry would win the election is a case of counting your chickens before they are hatched and besides, why would Bernanke want to be reappointed to such a hot seat? But this comment convinced me that it was a more immediate and obvious threat. It was a threat that if the Fed does anything to revive the economy before the election, Republicans will regard it as an attempt to sway the outcome and denounce the Fed for being partisan. And there is nothing the Fed dreads more than accusations of partisanship.

Of course, allowing the Republicans to sabotage the economy to sway the election their way is equally partisan. And a lot less public spirited.

P.S.

Incredible! A conservative who actually gets it: "The idea that Bernanke would be playing politics by printing money between now and the next presidential election suggests that doing so would improve short-term economic growth and improve President Obama’s reelection prospects. However, if a more expansionary monetary policy would help the economy, why would anyone oppose such a policy, let alone call it treason?"

Why Perry would oppose it is obvious enough; it hurts his chances of election. Expecting a presidential candidate to want the economy to be revived just in time to undermine his prospects is asking for more public spirit than can be reasonably expected of anyone. But for him to be unable to imagine any reason for Bernanke to want to revive the economy now, as opposed to in 2013 other than a illegitimate attempt to sway the election really is disturbing. It suggests he has no concept of public spirit at all. And it arguably may be taken to imply he considers a Democratic presidency inherently less than legitimate.

See also this comment that comments like this just might, indeed, make Bernanke want to avoid a Perry presidency.

What if the Republicans Win?

2011-08-14T20:06:00.000-07:00

I'm going to try to stay away from election until the Iowa caucus. Let's see how well I do. I did think, though, that I might as well put down my reflections on what happens if the Republicans win in 2012. By this I mean win the Presidency, hold onto the House, and get a majority, though not filibuster-proof, in the Senate.

(1) Senate Republicans, after using the 60-vote filibuster as a matter of routine, will find a way to get rid of it.

(2) Obamacare and Frank-Dodd will be repealed. I think this will be the end of the line for universal health care, at least for another generation. Up till now, the official Republican position is that health insurance for all, though not all that important, was not per se objectionable, but they didn't like the way the Democrats were going about it. This time they have made clear that they will fight to the death any expansion in the number of people with access to health insurance (and probably favor controlling health care costs by pricing even more people out).

(3) Having made such a big deal about the importance of spending cuts, I don't see how they can possibly change their minds and decide that big spending is only bad if a Democrat is in the White House. On the other hand, I don't believe that even a President Bachman will find the political nerve to cut spending by 40% overnight. So what we will probably get is significant spending cuts, targeting primarily programs for the poor and assistance to states. There will not, however, be any deficit reduction because all spending cuts will be more than offset by even larger tax cuts, aimed primarily at the top. It is Republican dogma that the harmful effects of deficits do not apply if they are caused by tax cuts.

(4) I don't think they will be able to kill Social Security of Medicare, or turn Social Security into a 401(k). Interestingly, even as they plan to turn programs for the poor into block grants and Medicare into something a lot like Obamacare, they have not even raised the possiblity of turning Social Security into a 401(k). My guess is that this is because the idea was toxic enough when Bush proposed it, and given what has happened to 401(k)'s since, it will be even more toxic now. I don't rule out their getting rid of Medicaid altogether, or at least for people under 65. The elderly vote a lot more than the poor.

(5) Right now Republicans are very upset at the Fed for its expansionary policies and calling for higher interest rates. A number of commentators have remarked they were singing a different tune when the economy was in recession and Bush was President. But then again, the Fed has become a lot more unconventional since then. So I really have no sense whether they will appoint members who favor tighter monetary policy, or suddenly change their minds once a Republican is in power.

(6) They will undoubtedly seek to engage in a lot of regulatory rollback, but I have not idea how far it will go. Neither do I have a sense whether they will revive torture as an official policy (probably).

(7) They will undoubtedly send any future terror suspects to Guantanamo to be held forever without a trial. Let's hope there aren't any.

If we get a Republican as President and a Democratic majority in either house, I expect utter gridlock and dysfunction. Republicans will be unable to repeal Obamacare or Frank-Dodd, but the President may seek to block enforcement by refusing to appoint any officials. So far as I know, there is no precedent for what happens then.*

I can't find the link, but I am sure Jonathan Chait ran an aticle speculating that if Mitt Romney won the election, he would convert to understand the need for stimulus (his reelection would depend on reviving the economy, after all) and speculates on whether it would be worth it. His conclusion is probably not because he dislikes too many of Romney's other policies. My conclusion is no, because it would effectively be submitting to blackmail. It would be allowing the Republicans to say, "Give us the presidency, and we'll stay sane. But if you even elect another Democrat, we'll go off our meds and make this country completely ungovernable."
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*Congress has passed legislation forbidding the President from refusing to spend money it has appropriated. This has been upheld by the Supreme Court, but today's Supreme Court might change its mind.

Reflections on the Election

2011-08-13T15:16:00.000-07:00

As a firm believer in the pathology of the permanent campaign, I try to stay away from the subject of the election until the Iowa Caucus, but this year it appears I will not be able to keep the resolve, so here are my comments.

Personally, I wish Obama would drop out. He’s shot his bolt. It’s fallen short. Clearly ha has no plan for what to do next. This is not someone I want to give another term. I’d love to see him stop aside in favor of Robert Reich, a serious Keynesian, or Bria Schweitzer, the Montana governor who vetoed Tea Party legislation with a branding iron – now there is someone who knows how to fight. My ideal candidate, really, would be Bill Clinton. When you want to persuade people to adopt a controversial program, moral authority is everything. And Clinton, though he may be a draft-dodging womanizing sleaze, has tremendous moral authority on economic and budgetary issues. If anyone can convince people to give stimulus one more try, it should be the man who balanced the budget and presided over prosperity of a kind not seen in 30 years. Unfortunately, he is excluded by the 22nd Amendment. What a shame!

Given, though, that the Spend More Party is looking utterly discredited, I really would like to give the Spend Less Party a chance. If it works, great. If it doesn’t the only way to truly discredit austerity is to try it. (Whether austerity takes longer to discredit than expansion remains to be seen). Unfortunately, the Spend Less Party has responded to losing an election by losing its mind, which makes me very uncomfortable about giving them the reins of power. Certainly if Jon Huntsman won the nomination I would vote for him, but that looks about as likely as Brian Schweitzer or Robert Reich wining the Democratic nomination. If Mitt Romney can convince me that insanity is purely an electoral strategy and he will attempt sanity when elected, I might grudgingly consider him. The others are nuts. (Or at least doing their best to impersonate nuts).

I also want to put in a comment on Rick Perry. Current conventional wisdom is that he is the savior of the Republican Party, that he has the nomination already wrapped up, and that, given, the current state of the economy, Republicans are almost certain to prevail in 2012, so we might as well skip the formality of an election and just inaugurate him now. I think this is a bit of a rush to judgment. One of the statements I have seen is that Rick Perry's speeches to secessionists will play well with the Tea Party, the presumption being that since the Tea Party is the most mobilized faction in American politics right now, winning their vote is all that matters. My own guess is that Perry's flirtation with secessionists will be much used against him by opponents to portray his as a dangerous nut, even in th Republican primary, to say nothing of the general election. It shouldn't be necessary to point out that flirtation with secessionists is a liability in US politics, but apparently it is necessary, so I will point it out. Flirtation with secessionists is a liability in US politics. Presumably Perry's defense will be that he didn't mean it, he was just pandering. (Of course, he will put it more artfully than that). And I'm sure this is true. I do not for one minute believe that the Governor of Texas seriously contemplates secession from the Union. But you can tell a lot about a politician by who he panders to.

Reflections on the Conservative Approach

2011-08-13T13:12:00.000-07:00

It's very hard for people on my side of the spectrum to tell to what extent Republicans are sincere in believing that immediate, deep spending cuts will be economically beneficial and to what extent they are engaging in deliberate sabotage (consciously or unconsciously). But I will stick to addressing consevatives who are sincere.

The less sophisticated appear to believe that immediate, deep spending cuts will bring about immediate improvement by freeing up resources for more productive use. The problem, of course, is that a recession by definition means that significant economic resources are going unused. The short-term effects of deep cuts in government spending are that even more resources will be unused. But others, more sophisticated, recognize that cuts will mean short-term pain and argue that short-term pain is worth the cost. That is the argument I want to address -- including why these more sophisticated conservatives are so enthusiastic acout short-term pain.

Megan McArdle, speaking of Ireland, argues that shrinking government spending, despite the painful cuts, depressed economy, and even large deficts that result, is worthwhile to avoid the worse consequences of an outright default, "[F]iscal crises are much, much worse than austerity budgets. Fiscal crisis means that rather than unpleasant cuts, you have sudden, unmanageable collapses in things like public pension plans. The resulting suffering is not unpleasant; it is disastrous."

To this a liberal critic responds that cutting spending to fend off a future default doesn’t work – by shrinking the economy, it depresses tax revenues and thereby increases the deficit. The trouble with this argument is that ultimately cutting ca balance the budget, albeit at geat cost, and some conservatives advocate this approach. Suppose, for instance, that President Bachman actually keeps her promise and refuses to raise the debt ceiling, necessitating an overnight 40% cut in spending. The results would be catastrophic as McArdle herself acknowledges. But the economic contraction is so severe as to cut revenues by two-thirds, the deficit will shrink. It will not disappear because the shinking economy will mean less revenues, necessitating more cuts and continuing the cycle. Eventually, though, an end point will be reached. The budget will balance and the economy will presumably bottom out, albeit at considerable cost, possibly including the collapsing pension plans and disasterous suffering that we are trying to avoid by balancing the budget.

This is not merely theoretical. Something like it happened to Chile in the Great Depression. Faced with collapsing export prices, the Chileans cut and cut and cut, shrinking their economy by half, but eventually its credit was restored, and it bottomed out and began to recover. The top current examples, much touted as positive models by conservatives, are the Baltics, Latvia, Estonia and Lithuania. All three countries maintained their currency pegs and balanced their budgets. Not coincidentailly, these three also suffered the worst relative economic declines of any country in the recent crisis, but they did ultimately bottom out and start to recover. Conservatives eagerly call on the rest of us to emulate them.

The same dynamic applies to mortgage foreclosures. Liberals warn that without some sort of mortgage relief, the market will be flooded with foreclosed houses, further driving down prices. The drop in prices will cause even more homeowners to be under water, leading to more foreclosures, and perpetuating the cycle. But eventually it has to run out of people to foreclose on. Some people, after all, have paid off their mortgages. Others have mortgages close enough to being paid to be worth almost any sacrifice to own the house free and clear. So ultimately the wave of foreclosures will have to cease. Since banks will not be able to sell their homes for more than market price, they will take their losses either way. The difference will be that without debt relief housing prices will fall much lower and many more people will lose their houses without debt relief than with it.

So it seems fair to ask, given the severity of their downturns, why do conservatives think the Baltics are such wonderful models to follow? And given that it will cause great suffering to home owners, no gains to the banks, and losses to everyone’s property values including their own, why are conservatives so dead set against mortgage relief?

One reasons, I suspect, is that they believe there is an inevitable bottom we have to hit, and any attempt avoid sinking so low merely prolongs the pain. The faster we bottom out, the quicker we can start recovery. But more than that, I think they regard any suggest that proper intervention may make the bottom less low is cheating and attempting to thwart the will of the free market.

And that, I think, leads to the deeper answer. They see these as moral issues. Economic conservatives, so far as I can tell, regard the primary moral issues in economics (aside from shrinking government, of course), as paying debts and making sure no one escapes punishment for bad decisions. Human suffeinrg ranks much lower on their scale of moral priorities. And as for collateral damage to the innocent, well it takes balls to execute an innocent man.

Counter Cyclical is Counnter Intuitive

2011-08-10T21:26:00.000-07:00

It’s becoming increasingly clear that the problem with being counter-cyclical is that it is counter-intuitive. It meets with fierce popular resistance even though it doesn’t call for any painful measures because it just feels wrong. How can the remedy for a bubble brought on by easy credit be easier credit? How can the remedy for running up too much debt be running up more debt. And it families are having to cut back and make sacrifices, shouldn’t government be doing the same thing? Arguing that the rules that apply to families don’t apply to government just generates resentment – no fair, why doesn’t government have to play by the same rules we do? And stimulus spending invariably distributes benefits unevenly, which increases the resentment.

There are a lot of fine bumper sticker anti-Keynesian slogan – Government should balance its budget, just like families; if we have to make sacrifices, so should government, you can’t spend your way to prosperity, and, of course, you’re mortgaging our children’s future.

The responses to these slogans are all too vague and abstract to offer any emotional satisfaction. One response is to talk about just what would have to be cut, which is never very popular. But the response is always, too bad, we can’t afford it. We need a snappy comeback. So what intuitively appealing, emotionally satisfying, bumper sticker slogans are there in favor of Keynes.

Here are mine:

I won’t promise services in good times and take them away just when they are needed.

When half the raft is losing air, the other half has to inflate to keep it afloat.

As the private sector stands up, government can stand down.

Unemployment is not cured by layoffs.

Government spending = teachers and Social Security

You can’t shrink your way to prosperity.

(I think the one about not curing unemployment with layoffs works. Not so sure about the others).

Results are What Matters

2011-08-10T21:04:00.000-07:00

Here are posts by Jonathan Chait and Paul Krugman sayung much the same thing.

When Franklin Delano Roosevelt ran for President in 1932, it was as a Tea Party candidate. Roosevelt denounced Hoover as a big spender and promised to make drastic cuts in federal spending and balance the budget. Whether he actually meant it and later changed his mind, or whether he was lying from the start, FDR obviously thought attacking big government spending was a winning argument. And he was right; he won by a landslide.* He then promptly went back on all his promises and became a bigger spender than Hoover ever thought of. And the funny thing was, the American people forgave him.

Granted, his big spending ways weren't popular. In 1935, fully 70% of those surveyed thought it was time to balance the budget and start reducing the national debt. Yet in 1936 55% of the public thought the Administration's policies were helping recovery, as opposed to 45% who thought they were harming. And at the time of the 1936 election, 65% of the public favored balancing the budget, as opposed to a mere 28% who diaagreed. None of this, however, kept Roosevelt from winning by an even bigger landslide in 1936 than he did in 1932. In 1937, Roosevelt gave the people what they wanted and balanced the budget. The economy promptly slumped, as did his popularity.

The moral here is obvious. Nothing succeeds like success. Voters want results and don't care so much how they are achieved. Big spending and big deficits are something that people oppose in an abstract and theoretical way. A bad economy is something that affects people concretely in their real lives. Given the choice between the two, people will vote the real economy any time.

Andrew Sullivan is Stating to Annoy Me

2011-08-10T20:13:00.000-07:00

Andrew Sullivan is starting to annoy me. I suppose I should give him credit for finally coming out and saying that our economy just has to go through this and we shouldn't try to do anything about it. But could he please at least acknowledge that this isn't a winning political message?

Granted, he has occasionally suggested that the economically optimum approach may be short-term stimulus and long-terms cuts, but that just isn’t olitically feasible, so let's forget all about it. Swing voters are too upset over our debt level to tolerate any more big spending, so we should concentrate on cuts, regardless of how they affect the economy. What Sullivan doesn’t understand is that what is economically optimal ultimately IS what is politically optimal.

Sullivan presents evidence that voters when surveyed want deficit reduction, but prefer Obama’s balanced approach of tax increases and spending cuts over the Republican approach of spending cuts only. He presents ample evidence that the voters just don’t buy the theories of Keynes. And I’ll agree with him on both counts. But the evidence is also overwhelming that what voters care most about is not deficit cutting, but the economy and jobs. Voters are angry over the debt ceiling quarrel for the same reason they were angry over the whole spectacle of healthcare reform – why is congress throwing all its energy ad ego into that instead of issues we care about like the economy and jobs? (The fact that both bills seemed to be all about ego and winning rather than the public good didn’t help either). The sight of Obama running around campaigning on how he is going to cut spending and raise taxes is just going to reinforce the notion that Washington is out of touch.

Finally, let mepose two hypotheticals to Sullivan.

Suppose Obama and the Republicans agree on some big spending cuts. I personally don’t think this will be all that popular because, while voters hate government spending in the abstract, actual cuts tend to be much less popular. But never mind, we’ll assume the cuts are popular. Now assume Keynes is right. The cuts withdraw demand from the economy and the economy shrinks as a result. My guess is, these two events will not be linked in the eyes of most voters. But so what? Does Sullivan really think voters will say, “So what if the economy is in the tank, at least they finally cut spending”? I’m guessing no, people will be too upset about the economy being in the tank to care much about the cuts.

Suppose, by contrast, that Obama, having failed as a poker player, decides to imitate McCain and be a high stakes craps shooter. Suppose he draws up Paul Krugman’s dream stimulus and persuades all Democrats in Congress to join him in his crapshoot. Suppose he persuades a handful of Republicans to go along as a amatter or economic sabotage. (“You think I’m wrecking the economy? Then help me really wreck it and it should get you a landslide next year.”)
No doubt such a measure would be very unpopular. Glenn Beck would call it our Archduke Ferdinand moment. Fox News and talk radio would say that Obama so ignoring the will of the people was the moment our democracy died and we became a Communist/fascist/Islamist/atheist dictatorship. They would darkly hint that armed rebellion was in order, although, mindful of Anders Breivki and Timothy McVeigh, I think cooler heads would prevail. But a rash of vandalism and death threats would break out against members of Congress who voted for the measure. Tea Parties would vow primary challenges against every Republican who voted for the monstrosity. Some hotheaded House Republican s might even institute impeachment proceedings. And it would probably not go over well with swing voters either. They would be angry that politicians in Washington were ignoring the will of the people and continuing thei spending spree. Obama’s ratings would plummet, except among the liberal base.

But suppose it worked. Suppose the economy actually did start recovering? I am guessing these two events would be linked in the minds of most voters because Democrats would do their best to pitch the connection. They could compare it to George Bush’s surge – a publicly unpopular action that seemed like just doubling down on a hopeless policy, but in fact finally turned and seemingly intractable situation around. But even if the voters did not connect the two events, the message would be loud and clear – the economy would be improving, and Republicans would not be happy about it.

Does Sullivan really believe that voters response would be that economic improvement was all fine and good, but ignored the really important issue of cutting spending?

And if Sullivan's position is really that there is nothing we can do about the economy so we should start cutting regardless of the pain, he should come out and say so and not pretend his position will be politicall popular.

A Proposed Approach to the Long-Run Budget

2011-08-07T15:51:00.000-07:00

While any immediate attempt to cut deficits would be disasterous, there is no question that we have a serious long-term problem as more and more people start using Social Security and Medicare that has to be addressed. Nor is there any doubt to my mind that entitlements will have to be "reformed," i.e., cut. Nor do I doubt that the cuts necessary to bring our long-term budget into balance will be unacceptable, and that taxes will have to be increased. So here is my proposal.

(1) Explain why immediate plans to balance the budget would be disasterous. (Hint: Explain that putting people back to work will cut the deficit in half, and discuss the pain of very specific cuts in time of recession).

(2) Assure people that onee the economy reaches a certain level of recovery (I will leave to experts to determine what that level is), serious steps to address the deficit will be needed.

(3) Propose yet another bipartisan commission (groan!). Set the rules that until the economy reaches the appropriate degree of recovery, no spending cuts or tax increases will take effect, but that once it does, the commission must balance the budget within 10 years. Use CBO figures. Sit the proposal for fast track -- no amendments and no filibusters.

(4) Here is the twist. Don't have it come up with a single plan. Have it offer four plans. One will balance but budget by spending cuts only. One will have three dollars of spending cuts for every dollar of tax increases. One will adopt a 2:1 ratio. One will go 50-50. (And for Republicans on the commission, you may propose revenue neutral tax reforms that you think will benefit the economy, but no tax cuts until the budget actually balances). Of course, this will mean not requiring a super-majority to pass the proposal. Any proposal should require approval of only half the members.

(5) Make the next election a referendum on which plan to adopt. Republicans, of course, will choose the cuts only plan. Democrats can choose whichever plan seems most palatable. Whichever party wins can pass its plan in the next Congress.

Now What?

2011-08-07T14:18:00.001-07:00

OK, I'm a bit late to the game, but my basic take on the debt ceiling deal is that for a complete capitulation, it could be worse. The Republicans got the raising the debt ceiling tied to equivalent cuts in spending, no tax inceases, further opportunities to humiliate Obama, and a new hostage to be used routinely in future debt ceiling negotiations. Democrats got spending cuts back loaded, protected programs for the poor from automatic cuts, put defense spending on the table and (possibly) demonstrated that Republicans will step away from the precipice at the last moment. Backloading to avoid immediate economic damage and protecting the poor are important priorities.

So, given that Republican are unwilling to cooperate with Obama in any policies he may believe will benefit the economy, the obvious question is now what. The economy looks just about poised to tank again and Republicans have cut off any action to revive it. Immediate economic recovery may be the only thing to keep the government out of the hands of complete lunatics in 2012. So what can Obama do? I have three suggestions.

(1) Make recess appointments to the Federal Reserve of officials willing to adopt unconventional measures to revive the economy. Right now Republican Senators are apparently ready to filibuster any appointment that would make a difference the House is apparently threatening to hold regular pro forma sessions to block recess appointments. (See here for an excellent discussion of this mess -- and how it is not exclusively the Republicans' fault). Jonathan Bernstein recommends a non-controversial appointment as a warning shot. I say you might as well be hanged for a sheep as a lamb. Republicans will freak out over any recess appointments, you might as well give them something to freak out ove.r Clearly Congress is not going to pass any fiscal stimulus; that leaves the Fed.

(2) Alas, I cannot find the link. It is probably outrageously optimistic, but but I hear rumors that federal and state attorney generals are contemplating a settlement with Bank of America, to serve as a prototype for other banks, that would drop criminal charges in exchange for real relief for underwater homeowners. Since the household debt burden is the primary factor holding back recovery, this would be very important news indeed. Unfortunately, I have heard way too may such false starts to put too much stock in this one.

(3) If you can't get stimulus, you might as well propose it. Yes, granted, political will fo rthe stimulus has passed, and much of it was unpopular to begin with. My response would be this: What is resented is a benefit or a burden is the sense that it is unequally distributed. A bailout of (say) auto companies or a public works project invokes resentment because people see themselves as being taxed for someone else's benefit. By contrast, a universal refund is widely popular because everyone share in it. The bad news, of course, is that a universal refund does nothing for anyone's cash flow and therefore has limited long term effect.

The stimulus most commonly mentioned is some sort of payroll tax holiday -- preferable one longer and deeper than the little one we have now. It will be politically popular because it means a wage increase for everyone, and a tax cut for employers to encourage hiring. Both those things should be well-received. So the Republicans refuse to pass it. So what? Have Senate Democrats introduce it, talk it up, and at least use it to embarrass Republicans. Perhaps you might get a similar opportunity to embarrass with a proposal for aid to the states -- I think by now it is becoming clear that state budget cuts hurt, and that federal assistance to avoid them would probably be popular.

Why do I suspect, though, that Obama's basic response will be to make a few empty speeches and accomplish nothing?

I Think We've Hit Disloyalty (or THIS is What I Was Afraid Of)

2011-07-31T09:13:00.000-07:00

Looking back at some of my old posts on dangerous polarization, they seem to come from an age of innocence. That innocence is no more.

New Zealand columnist Paul Buchanan compared the Republican/Tea Party/Fox opposition to Obama to conservative Chilean opposition to Salvador Allende, seeking to make the country ungovernable, and preferring a military coup to compromise. I was somewhat dismissive at the time. Clearly the Republican Party was not calling for violent insurrection or a military coup, and I was not sure if one could stick strictly to legal opposition and be disloyal.

Well, now we have it. The Republican Party has clearly overstepped the boundaries of loyal opposition and moved into what I would consider disloyalty. Refusal to cooperate on legislation -- fine. That's hardball but still loyal. Whipping up paranoia and hysteria -- that can go too far and become dangerous, but the line between normal hyperbole and incitement is not always clear. But threatening to default on our obligations with unknown ramifications for the economy that could stretch into the indefinite future -- now that's disloyalty.

Something more is going on here, too. Originally, Republicans insisted that they would not raise the debt ceiling past the next election unless they got spending cuts equivalent to the amount they raised the debt ceiling and no tax increases. There is no particular reason this should be so. Raising the debt ceiling has never been linked to equivalent cuts in spending before, but no matter. The point is that after extensive wrangling, Democrats have agreed to all these terms and the Republicans still won't agree to raise the debt ceiling. In fact, they have made fairly clear that no matter what Obama endorses, they will oppose. In other words, it is not enough to achieve what they want, only forcing over something Obama will not agree to will do.* And, after all, Congress has the Constitutional power to do that -- if they have the 2/3 majority in both houses to override a Presidential veto. Given that they have a majority in only one house (and not the 2/3 needed to override a veto), some sort of compromise is necessary. But large portions of the Republican Party would rather default on our obligations with unknown damage to our economy than get what they want in a manner insufficiently humiliating to the President.

THAT'S disloyalty.

Since I was worried about about polarization tearing apart our democracy, I grappled with what exactly I was afraid would happen. What was my model of failure. I ruled out Germany and Italy (an anti-democratic party being elected and abolishing democracy from within), Chile (military coup), Spain (civil war), the US in 1860 (civil war). So what was my model I feared we would become? At the time, I said California, a government so dysfunctional as to be non-functional. Since then we can add Wisconsin, Ohio and Florida. But watching Republicans who don't have the 2/3 majority to get their way by the accepted constitutional process preferring default to any sort of compromise, I have a new model of what to fear. The United States in 2011.
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*This is the concept set foth by Machiavelli when he said that it is better to be feared than loved because love depends on others and fear depends on the ruler. Or Orwell in 1984, saying that to get someone to do your will is to make him suffer, or how will you know the other person is doing your will and not his own. That is the mindset the Republican Party has reached.

On a More Personal Note

2011-07-30T21:03:00.000-07:00

I've finally graduated from law school. Hurray! And I took the Bar Tuesday and Wednesday. If all goes well, I will be sworn in as a lawyer in September.

That just leaves one problem. Once I become a lawyer, I will no longer be an Enlightened Layperson (at least on legal matters). So if any of you still read my blog, do you have any suggestions for a new name for myself?

I Could Almost Wish . . .

2011-07-30T14:45:00.000-07:00

If the Republican Party were sane, I could almost welcome its coming to power in 2012 (or sooner). If I believed we could recover quickly, I would almost welcome a default. But it isn't and we won't, so I have to hold on, closing my eyes and wishing for the best.

Why would I want to Repoublican Party to come to power in 2012? The answer is simple. Up till now we have been fighting the recession with fiscal and monetary expansion and, at the least, have not succeeded in achieving a strong recovery. Is a stronger stimulus called for. Maybe so, but the political will for one is not present. Republicans have made the case that the deficit is causing the recession and what is needed is deep spending cuts to free up resources for more productive uses.

If the Republican Party were sane, I would say fine. The "spend more" party has not brought about an economic revival, so let's give the "spend less" party a chance. One of two things will happen. Either it will work and the economy will recover, or it will not and the economy will get worse. If the economy gets better -- well, that's what we want after all. It would require rethinking a lot of my economic beliefs, but that seems a small price to pay for a real recovery. If the economy gets worse, then austerity will be discredited and stimulus will get a second chance. Granted, there will be a lot of personal hardship along the way, which I would prefer to avoid. But apparently the only way to discredit austerity is to try it and watch it fail. It worked with the US in the Great Depression. It worked in Asia and Latin America in the 1990's. And apparently nothing less is going to work today.

As for a default, well Megan McArdle has an excellent post up on why any attempt at an overnight 40% cut in government spending would discredit the concept VERY rapidly and probably dampen enthusiasm for spending cuts for quite some time. She thinks Republican will get the blame for such a catastrophe and be swept from office. I'm not so sure.

Be that as it may, either way the human costs will be considerable, and, as a liberal, such things upset me. But either way, if the damage could be rapidly repaired, I would consider it worth while to discredit austerity once and for all.

Unfortunately, I have no such confidence. I don't fully understand the implications of what a default will mean -- and neither does anyone else, really. But by all accounts, it will deliver a shock to a very weak economy and cause a downturn. Quite possibly, it might damage our credit rating to the point of forcing austerity and preventing any further stimulus. Almost certainly, when the economy turns down, the President will get blamed, and the Republicans will sweep in 2012.

I suppose dealing with the realities of power might eventually sober them up, but who knows how much damage they can do in the meantime? Maybe I'm letting my imagination ru away with me. Maybe President Bachman, with her newly elected Tea Party Congress won't decide that a second Great Depression is a small price to pay for getting rid of the New Deal. Maybe they won't decide that a Great Depression without a safety net is better than a Great Recession with a safety net. So maybe they won't try to force overnight 40% spending cuts, or elminate unemployment insurance, food stamps and Medicaid. Maybe they won't end Frank-Dodd, the SEC, the FDIC, and possibly the Federal Reserve. Maybe they won't sell off the national park system to timber and mining companies. Maybe they won't consider the end of 80% of all home mortgages an acceptable price for ending Fannie and Freddie. Maybe they won't revive the gold standard. But given the current mood of the Tea Party, I don't want to bet the nation's future on any of these things.

And even if the newly empowered Tea Party do only one or two of these things and are ridden out on a rail at the next election, it will be very difficult to put Humpty Dumpty together again.

About That Intuition --

2011-07-23T21:59:00.000-07:00

Okay, I didn't see that coming. I have argued before that when terrorists attack, first intuitions about who they are are usually good. This latest one in Norway is an exception. My initial intuition was exactly the same as most people's -- that these were jihadis, probably with Al-Qaeda. Why?

Well, going over old attack , my intuitions have generally been sound. With the first attack on the World Trade Center, I (like most Americans) had no idea who it would be and did not expect and answer for months. It came within a week -- Mideastern Islamic terrorists. Okay.

With the Oklahoma City Bombing, a lot of people immediately assumed Mideastern terrorists, now in the Heartland. I didn't. I was working for the state legislature at the time and the right wing was in the midst of a freakout over having a Democrat in the White House. We were getting inundated with their literature.* So they were very much in my mind at the time of the bombing. But there was more than that. The Oklahoma City Federal Building just didn't seem like a "sexy" enough target to interest Mideastern Terrorists. An attack on the World Trade Center is an attack on America. An attack on the Oklahoma City Federal Building is an attack on the federal government.** Granted, jihadis probably don't make the distinction -- but our own domestic militias certainly do. (Besides, how many Mideastern terrorists could find Oklahoma City on a map?)

The 9-11 attacks were something different altogether. That had to be the work of Mideastern terrorists, probably Al-Qaeda. First of all, it was manifestly an attack on America, something our homegrown militias would never do. Second, it was unthinkable that our domestic terrorists would do anything that big. And third, well, Bin Laden had been in the news a lot lately, so he seemed like the obvious choice.

Much the same applies to the Madrid bombings of 2004. The Spanish government tried to blame them on the Basques, but it just wasn't credible. The Basques just didn't do anything on that scale. Jihadis did.

My intuitions have usually been sound. When a gunman shoots up Virginia Tech, I assume a crazed loner because almost all mass shootings are the work of crazed loners. When a bomb goes off at the Martin Luther King Day parade in Spokane, Washington, I assume white supremacists because (1) there is a lot of white supremacist activity in the Spokane area and (2) Mari tn Luther King Day is an obvious target. When a bomb is found in Times Square, I don't pay much attention to people who think it is someone opposed to Obamacare because (1) Manhattan isn't exactly militia central, but it has a lot of Muslims, who may include at least some extremists and (2) a bomb in Times Square bears no apparent connection whatever to Obamacare. It looks more like an attack on America. When a gunman shoots down an Arizona Democratic Congresswoman meeting with constituents, I dismiss all thought of jihad and assume either a lone crazed nut or an angry constituent. (Admitted, I thought his anger would be over something a little more substantial than her inability to explain the meaninglessness of language).

So, when I read that a gunman in Norway is mowing down teens at a youth camp, I would assume lone crazed nut. Hearing it happened within an hour of a car bomb in Oslo that targeted the prime minister's office, I assume the attacks must be connected, and further assume Mideastern terrorists, probably Al-Qaeda. Why? Because although the shooting could be a crazed loner, a bomb outside the Prime Minister's office just screams terrorist. Because the two events happening so close is too neat to be a coincidence. They have to be coordinated, and that type of coordination is a hallmark of Al-Qaeda. Both the bombing, which looks like an attack on Norway's entire system of government, and the senseless slaughter of innocents at the youth camp reek of Al-Qaeda. I was surprised that the attack was in Norway instead of Denmark, land of the cartoons, but the newspapers gave plenty of possible Islamist connections. Even the news that the gunman was a blond, Nordic-looking fellow with an east Norwegian accent was not conclusive. He might be a convert, after all, chosen so as not to look suspicious.

But now it appears he is a right-wing anti-immigrant nationalists. I didn't know Norway had right wing anti-immigrant terrorists. Learning that there are doesn't really surprise me. What utterly surprises me is his choice of target. I would expect an anti-Muslim, anti-immigrant terrorist to hit a mosque, or an Islamic cultural center or maybe an immigration office, but not the Prime Minister's office, and definitely not a youth camp. I can only assume he staged the attacks in hopes that Muslims would be blamed.

Update: So, it appears he chose his targets as an attack on the liberals who are enabling Muslim immigration. I realize it is a mistake to project too much about a general movement from the actions of one deranged member. But it suggests a radicalization of at least the more extreme members of the anti-immigration movement, a willingness to move away from attacks on immigrants to attacks on the core of the political establishment. (In US lingo, to move from mere hate crime to real terrorism). This is the sort of thing that is going to make authorities take right-wing threats much more seriously than in the past.
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*With the sole exception of one petition signed by the John Birch Society, they were all prepared literature from out of state and not from constituents.
**Also, the bombing took place on April 19, which seasoned militia watchers says is a sacred day to militias. I did not know this at the time.

Giving Up Our Values: Been There, Done That

2011-05-22T16:28:00.001-07:00

I suppose one of the reasons I have so little patience with the argument that Islamic terrorism poses such an existential threat to us that our moral value are a luxury we just can't afford is that I am old enough to remember hearing such arguments before during the Cold War.

Granted, at least back then no one was arguing that we should torture. But we had plenty of allies who tortured, and we often abetted them and encouraged them. Any concern for freedom, democracy or human rights beyond our borders was dismissed as simply expendible in view of the emergency. Even within our borders, there had been revelations of shocking abuses by our government -- domestic spying, harassment of political opponents and the like. Plenty of people argued that the Russians had a hopeless advantage over us because they were not constrained by democracy and open government, that democratic accountability was an unsupportable burden, and, in short, that the only way to defeat the Soviets was to become as much like them as possible. To anyone who argued that if we became just like the Soviets, what was the point of beating them in the first place the answer was simply survival. We and the Russians had enough nuclear missiles pointed at each other to destroy each other many times over. With the stakes that high, maintaining our values and remaining free and democratic had to take second place to protecting our existence.

I remember those times and those arguments. As I listened, I hoped they were wrong and feared they were right. And then 1989 came along, Communism collapsed all across Eastern Europe, and doomsayers were proven gloriously wrong. The Soviet Union was unmasked as nothing but a Third World country with nuclear missiles. Its despotism and secrecy, far from being sources of strength, were continually undermining it. Our openness and accountability were not fatal weaknesses, but vital strengths. Arguments by many that the Soviets had a hopeless advantage in intelligence because they controlled the flow of information and we did not turned out to be false. In fact, the Soviets found our free flow of information baffling if not incomprehensible.

With freedom and openness so vindicated at the end of the Cold War, I had hoped such debate was at an end. But with the September 11 attack came the same arguments, often by the same people, that against such a ruthless and devious enemy, our freedom and values were a luxury we simply could not afford. Well guess what. The Soviet Union was a nation spreading from Leningrad to Vladivostok, with more people than the US and enough nuclear missiles to destroy us many time over. Al-Qaeda never had more than a few thousand members, hiding and sneaking around, with no more than small arms. It's late in the game to be saying this, I realize, but if we could survive the Cold War and keep freedom intact, we can do the same for the War on Terror. If enough nuclear missiles to destroy us many times over couldn't turn us into a dictatorship, then neither should terrorist with box cutters. Anyone who would argue that our values can't survive a challenge should read up on old Cold War literature making the exact same arguments -- and remember how it all turned out.

Some Very Unoriginal Thoughts on Torture and Finding Bin Laden

2011-05-22T12:07:00.001-07:00

I know it's late to be addressing the role of torture and finding Osama Bin Laden, but now that everyone else had put their two bits worth in, I might as well, too. In fact, it may have been better to delay and allow more information to come out.

Let me begin with a qualification. Every report that comes from insiders with an agenda to promote should be take with a grain of salt. I remember too well the story of John Kiriakou, the CIA agent who implied that he was personally involved in the interrogation of Abu Zubayda. By his account, Abu Zubayda gave only limited information in response to conventional interrogation, but after a single water boarding broke and gave extensive information. It later turned out that Kiriakou was not present but was merely repeatig what he had been told, that Abu Zubayda was treated far more brutally that he had been led to believe, and that his role was much exaggerated.

That being said, this account by top investigative reporter Michael Isikoff appears to be based on multiple sources, many of which were not inteded for public disclosure, and may be treated as the best account we currently have. He gives the following chronology:

Even before 9/11, US intelligence knew that Bin Laden communicated with the outside world by way of couriers. Identifying his couriers was therefore a high priority among US interrogators.

December, 2001, Mohammed al-Qahtani, believed to be the 20th hijacker for 9/11 is captured at the battle of Tora Bora and taken to Guantanamo. Once is identity is learned (by fingerprints) he is savagely tortured and reveals that he was trained in computers by "Abu Ahmed al-Kuwaiti," a high level courier working for 9/11 mastermind Khalid Sheik Mohammed (KSM). This is what is generally reported as giving the courier's nickname or nom de guerre. It also reveals an important bit of information since "al-Kuwaiti" means exactly what it sounds like -- he was from Kuwait. (That Abu Ahmed was an associkate of KSM, also a Kuwaiti, further established that they were different people). Abu Ahmed means father of Ahmed and may mean that he actually had a son by that name, or it may be purely symbolic. The torturers also learned that the Kuwaiti was at Tora Bora, but, of course, not what became of him after that.

Mohamedou Ould Slahi, Al-Qaeda association uncertain, arrested in Mauritania September 29, 2001, bounced around various countries and tortured, and ends up in Guantanamo, where he is also tortured. He reports that the Kuwaiti was killed at Tora Bora. (Note: Since Slahi was arrested in another country before the battle of Tora Bora, he could not possibly know what had become of the Kuwaiti).

March 1, 2003, KSM is captured in Pakistan. He is savagely tortured, including being waterboarded 183 times, in various black sites. Months later, when asked about the Kuwaiti, KSM acknowledges his existence, but denies that he was of any importance and says he is retired.

January 23, 2004, Hassan Ghul, whose role in Al-Qaeda and identity remain a mystery, is captured i Iraq and sent to a black site. After apparently brief torture, he confirmed the Kuwaiti's importance as a trusted messenger in the very top ranks of the Al-Qaeda hierarchy, but said the Kuwaiti had disappeared and he (Hassan Ghul) had no further contact with him. He also identified Abu Faraj al-Libi (the Libyan) as the new number three in Al-Qaeda. Hassan Ghul is no longer in US custody, and his fait remains unknown.

May 2, 2005, More detailed account of the phone call Ab Faraj al-Libi is captured in Pakistan. Subjected to torture but not to waterboarding, the Libyan denied knowning the Kuwaiti and gave a made-up name for Bin Laden's courier. KSM also denied Hassan Ghul's account.

According to Isikoff, there were many mentions of the Kuwaiti by many detainees and many tidbits gleaned about him -- that he spoke Pushtun as well as Arabic (very useful when operating in Afghanistan and Pakistan), that he was good with computers, that he was a member of the inner circle, and that he was present at Tora Bora. Much of the information was false. But sorting through it, the CIA reached the conclusion that the mysterious Kuwaiti, true identity unknown, was probably Bin Laden's contact with the outside world. Hassan Ghul's statement that he had dropped out of sight was taken as evidence that he was hiding with Bin Laden. KSM and the Libyan's denials of his importance were taken as signs that they were hiding something.

Unknown date in 2007, the CIA determines the Kuwaiti's identity, though not his location. How they did that remains unknown, as does his original name. It should be noted that this took place during the Bush Administration. This means that at least some of the Bush officials touting the value of torture (though probably not all) know how this was determined. No one from either the Bush or Obama Administration is revealing how the Kuwaiti's real identity was determined. This probably means it involved some source that is still active.

Unknown date, 2009, courier's phone call to someone being monitor reveals his location. The CIA begins tracking him.

August, 2010, CIA tracks the Kuwaiti courier to a compound in Abbottobad. Its extreme security measures draw their attention. By September, they increasingly begin to suspect the compound houses Bin Laden.

March 14, 2011, although aerial surveillance has not actually spotted Bin Laden (apparently he never left the house, even within the compound), the CIA is confident enough to begin discussing options.

So what are we to conclude from all this? First, torture did not lead any Al-Qaeda operative to reveal the location of Bin Laden, the location of his trusted courier, or the true identity of the courier. Quite possibly, none of the captives knew this information. Neither is it clear that anyone under torture even revealed that the Kuwaiti was Bin Laden's contact with the outside world at all. Abu Faraj, the Libyan, had to have known this information, but gave a false name. It is unknown whether any of the others knew.

Second, torture apparently did yield many partial leads that the CIA was able to compile into a composite portrait of Bin Laden's trusted courier, who they determined to be the unknown Kuwaiti. This appears to have taken some time, and to have involved some blind alleys, such as the false name the Libyan gave.

Third, once the CIA had assembled its portrait, it turned to conventional intelligence gathering methods. In other words, it appears to have relied on torture, 2001 to at least 2005 and conventional intelligence gathering, 2007 to 2011. It is not clear what was going on 2005 to 2007.

To offer this as a defense of torture moves into some very disturbing territory. After all, all defenses of torture up until now have presupposed some degree of urgency. Ticking bombs give way to slow fuses, but the assumption has always been that there is some sort of a deadline and some sort of dire consequence if it is not met. Here there was no deadline. It took five years from when the CIA first learned of the Kuwaiti and three years from Hassan Ghul's confirmation of his importance to learn his identity, another two years to locate him, another year to trace him to the compound, and many months of surveillance to be comfortable (without ever positively confirming) that Bin Laden was there. And what would the consequences of not finding him have been? Simply the continuation of a status quo that we had learned to live with quite comfortably.

What proponents of torture are essentially arguing for is the mosaic theory of intelligence gathering. This amounts to the view that every scrap of intelligence, no matter how tiny, is worth while because it can be assembled into a larger picture. I have no general quarrel with this view. It is, as I understand it, how much of intelligence gathering works. But in the Bush Administration, the mosaic theory was used to justify indefinitely detaining and torturing anyone, innocent or guilty, high level or low level, for any scrap of information that might fit somewhere in the mosaic. My answer to anyone who would argue that torture was necessary because it filled in vital part of the mosaic would be that I would hold the mosaic theory to the same standard as the ticking bomb. We will never know if, in the absence of torture, we might have gleaned enough information from conventional interrogation, captured documents, and the like to assemble an adequate portrait of the mysterious Kuwaiti courier. To this day, we do not know how the CIA determined his identity.

The ticking bomb argument itself is dangerous -- how can we possibly know any situation is not a ticking bomb? But the mosaic theory of torture pushes the justification beyond any limits whatever. Or, as this Daily Kos poster puts it, "[I]f torture is acceptable to gain a sliver of information that MAY, given 6 years of hard conventional intelligence work down the line, be of value, then why have any rules at all on anything? After all, anything MIGHT work at some point in the future, including massacre of civilians."

Some General Thoughts on Killing Bin Laden

2011-05-19T06:57:00.000-07:00

I know it's a little late to weigh in on Bin Laden, but let me give a few general thoughts. I hope to get to the question of torture soon. But let me add a few, mostly bureaucratic, thoughts.

Abbottabad

Look, I know this isn't very original, but when I heard that for all these years Bin Laden had been hiding, not in the Pakistani border areas, but in a town only about 30 miles from Islamabad, my first thought was that the Pakistani intelligence service must be either grossly incompetent, or more complicitous than we ever suspected.

Our intelligence services

First and most obviously, congratulations to our intelligence services for a job well done. This is the sort of cooperation among agencies that everyone has been advocating. That being said, it is also easier to achieve this sort of triumph given (1) unlimited time and resources, and (2) a narrow and limited objective. The second point is the more important. It is always easier to achieve a narrow and specific objective like "find Bin Laden" than than an extremely broad, general, open ended one like, "identify and stop all possible threats to us." And yes, I know, in order to avoid tunnel vision we really do need broad, open-ended mandates like figuring out what threats are out there. My point is not that we should give up broader objectives for narrower ones, but that we should not expect this impressive success to mean that our intelligence agencies are now infallible. They aren't.

Raid vs. bombing

From what I understand, Obama was presented with three choices -- send in special forces, bomb the compound, or watchful waiting. Without claiming any special information, I would guess that the military probably favored bombing (it would be their men whose lives were on the line, after all), and the intelligence services favored the raid. I would expect the intelligence services to favor a raid in hopes of capturing documents, laptops and other such information. By all accounts, their hopes have been well vindicated. Bombing would have destroyed all this valuable information. Bombing would have had other drawbacks as well, most notably the risk of collateral damage. After all, the compound was in a residential area, and might not have housed Bin Laden. (Apparently he never left the house, so aerial surveillance was not able to confirm his presence). So, once again, congratulations on a job well done.

The birth certificate

Yes, seriously. Seeing the raid come so soon after Obama released the long form certificate reminded me of The Essence of Decision, a history of the Cuban Missile Crisis with a particular focus on the bureaucratic operations of the respective governments. It discusses how Kennedy sought to conceal preparations for the confrontation by carrying on with normal activities, such as meeting with astronauts and foreign dignitaries and making commitments in Connecticut and Cleveland. He succeeded in distracting the Washington press core and (through them) the general public. But there were signs of a crisis brewing that could not be hidden from more sophisticated observers in Washington. Lights were burning late in the Pentagon and the State Department. Cots were being moved into offices. Certain prominent officials became inaccessible while their cars assembled together at the White House. Observing which sections were lighting up revealed where the crisis would be. British intelligence was able to figure out what was happening within 36 hours. Top investigative reporters for the New York Times and Washington Post figured out what was happening withing five days and had to be persuaded not to print the story ahead of the President's public announcement. One organization that was not able to figure out what was going on, despite an extensive intelligence apparatus in Washington, was the KGB.

It seems safe to assume that al-Qaeda does not have anything like the KGB's intelligence network in Washington, to say nothing of the slowness of communication by courier, but Obama still had to keep the attack secret until it was over. So a part of me wonders whether the timing of the birth certificate was a clever (and highly successful) ploy to distract. The timeline, if nothing else, is interesting:

March 14, 2001: The first of five national security meetings on how to respond to the compound.
Thursday, April 21: White House counsel asks the President's personal counsel to contact Hawaiian officials about how to request a waiver.
Friday, April 22: Obama sends the request to the Hawaii Department of Health
Monday, April 25: Counsel goes to Hawaii to pick up the birth certificate
Tuesday, April 26: Birth certificate delivered to the White House
Wednesday, April 27: Obama releases the long form
Thursday, April 28: Obama is asked for the final decision on the attack
Friday, April 29: Obama authorizes the commando attack on the compound, but it is delayed by inclement weather
Saturday, April 30: Obama attends the White House Correspondent's dinner and roundly mocks Donald Trump
Sunday, May 1: Bin Laden killed

It will, no doubt, be some time before we learn about all the meetings going on in Washington in the days leading up to the attack, but top officials must have had some idea it was near at hand. So I wonder if close observers of the Washington scene, ones too shrewd to be distracted by Birther nonsense, could observe signs of a crisis brewing, similar to the ones before the Cuban Missile Crisis.

What I Really Don't Get about the Debt Ceiling

2011-05-15T22:04:00.000-07:00

Why didn't Congress just raise it during the lame duck session?

My Take on the Debt Ceiling

2011-05-15T20:51:00.000-07:00

As the game of chicken continues over the national debt, I might was well put in my two cents' worth.

The Republicans ultimately backed down from a government shutdown, for reasons that are no secret. Three times the President and Congress have reached an impass over spending that led to a government shutdown, once between Ronald Reagan and a Democratic Congress and twice between Bill Clinton and a Republican Congress. In all three cases, public opinion backed the President. The Clinton era shutdowns made a particularly strong impresion on Republicans. They ran for office proclaiming the federal government a monster of tyranny and government spending an outrage that called for massive, MASSIVE cuts, made with a meat axe, if not a chain saw. Voters lapped it up and gave the Republicans a landslide. Republicans then took voters at their word and assumed they actually hated government as much as they claimed to. They assumed that if the voters hated government that much, a shutdown would be popular. So they allowed a shutdown. It quickly turned out that, in fact, the American people considered the federal government a monster of tyranny and government spending a outrage that called for massive, MASSIVE cuts, made with a meat axe, if not a chain saw -- unless it caused any sort of personal inconvenience, in which case, forget it.

Republicans have taken that lesson to heart this time and backed down from a government shutdown. But they have convinced themselves that refusal to raise the debt ceiling is different. I believe about 40% of the federal budget is now financed by borrowing. The more extreme budget cutters believe that cutting off the federal government's ability to borrow will force an immediate 40% budget cut. More moderate Republicans, including the House leadership, recognize that instant 40% cuts are not realistic, but hope to use that prospect to leverage less immediate and less drastic cuts. No doubt bolstering Republican confidence are numerous polls showing that the American people overwhelmingly oppos raising the debt ceiling. The unpopularity of raising the debt ceiling has convinced Republicans that they will pay little political price for refusing to do so.

I am unconvinced. So far as I can tell, refusal to raise the debt ceiling will act as a sort of partial shutdown in slow motion. As we have been told numerous times, once we hit the debt ceiling, the federal government willimmediately lose its ability to borrow. But, by resorting to "extraordinary measures," it can keep from defaulting for about two and a half months. Simply put, those "extraordinary measures" mean shutting down more and more government services until current expenditures come into line with current revenue.

Such cuts will be painful. The focus of cuts has been on discretionary non-defense spending. Assume it is cut to zero. This will mean, among other things, shutting down the Veteran's Health Administration, the FBI, the federal prison system and all national parks; laying off all federal civilian employees (payroll is part of discretional non-defense spending); and cancelling all federal contracts. Drastic as such cuts would be, discretionary non-defense spending makes up only about 15% of the total budget. Assuming the deficit is about 40% of the budget, these drastic measures would go less than half way towards balancing the budget. We would still have to make 25% cuts in defense and entitlement spending, including Social Security and Medicare. Does anyone consider such a prospect politically realistic? Can anyone seriously believe the American people would simply bite the bullet and accept such cutswhen a far less painful alternative, in the form of raising the debt ceiling, was available?

The same consideration applies to a lesser degree to people who think the unpopularity of raising the debt ceiling will make it a good bargaining tool. The Clinton era shutdown also began as a dispute over raising the debt ceiling. It lasted considerably less than two and a half months. Raising the debt ceiling is unpopular now. How long will this principaled opposition last when it turns out that refusal means closing national parks, suspending clinical research, halting cleanup of toxic waste sites, and other inconveniences of the sort that accompanied the last shutdown? My own guess is that the American people will be dead set against raising the debt ceiling -- until the refusal begins to cause them any personal inconveniece. At that point, political pressure will start risig fast to reach some sort of resolution, principled opposition be damned.

Terrorists: By Their Targets Shall You Know Them

2011-01-11T21:01:00.000-08:00

It would seem that everything possible has been said about the Arizona shooting and what could I possibly have to add? People have debated whether Loughner should be considered an isolated, deranged loner, or influenced by today's political climate. They have debated whether, even if if was an isolated, deranged loner, we should still change today's political climate. A few have even tried to portray him as a left winger or speculated whether the shooting was the work of an illegal immigrant (can't find link). And, of course, many conservative are asking why there was such a rush to judgment on this attack, as opposed to calls to withhold judgment when a Muslim attacks. What original comment could I possibly offer?

I can think of one. When the attack took place, before the attacker was known, the immediate question was whether the attacker was an isolated, deranged loner or an unbalanced extremist who had been watching too much Fox. A few Arizonans (again, can't find link) wondered whether he was an illegal Mexican immigrant.

No one even seems to have considered the possibility of a jihadi. Why not?

My guess would be, this just didn't look like the work of jihad. For one thing, as I've commented before mass shootings in the US are almost always the work of isolated, deranged loners. But more to the point, a Democratic Arizona Congresswoman, or a federal judge who (presumably) handles mostly border and immigration cases just aren't the sort of target that interests jihadis.

Likewise, some people thought the Times Square bomb might be be the work of anti-government militias, but it seemed fairly obvious to me that it had to be the work of jihadis. Why? Because it was in Times Square, not exactly a hangout for "patriot" militias, but exactly the sort of target that appeals to Islamic extremists. Ditto blowing up airplanes, attacks on military bases, and, of course, 9-11. By contrast, the Oklahoma City bombing looked like the work of homegrown anarchists because it was an obvious attack on the federal government, rather than an attack on America.

Certainly, there was an unseemly rush to judgment here. But when an Arizona Democratic Congresswoman who had been the target of prior vandalism and death threats because of her votes on healthcare and immigration, it is not too far-fetched to guess that the attacker is probably a constituent displeased with her political positions. The impression is strengthened when a fellow victim was a federal judge who received death threats over controversial decisions on immigration. It is also a very good bet that the attacker is mentally unbalanced. (And, in fact, Loughner was a constituent who was displeased with with his Representative's positions. It just turned out that his displeasure was over her view on the meaning of language. Who could have guessed that?)

In short, I agree that when news comes out of a shocking terrorist attack, we should not rush to judgment before learning the facts. But it is also true that we will probably have some initial intuitions about who was behind it. And these intuitions are generally a pretty good guide.

Welcome, Republican Governors

2010-12-31T17:53:00.000-08:00

Most news accounts I have read focus on the incoming Republican Congress and do not say much about all the incoming Republican governors. Newspapers in each states may discuss their individual governor, but I have not seen much national coverage on Republican governors in general. This is a shame because I believe that Republican governors are significant as a general phenomenon. They come to power at a time states are facing severe budget cuts, and they will have to determine how to make them.

While I rejoice in seeing some truly crazy candidates, I am glad, really, to see so many mainstream Republicans elected as governor. My reasons for rejoicing are obvious. States are facing enormous budget shortfalls. Thus far, the federal government has spared states the worst by offering stimulus money, but Republicans (except for ones in state government) have made clear that this is no longer politically acceptable.*

(NOTE: These maps differ substantially in the deficits they show because one refers to total deficit and one to deficit in the general fund. The states with general fund deficits much larger than total deficits are ones that segregate large portions of their budgets as unalterable).

So Republican governors are stuck. This is, after all, what they wanted. In fact, Republicans have been working for the past three decades to bring this about. Republicans have learned the hard way that, although everyone applauds the general proposition of cutting government spending, no one likes any actual cuts. So they have spent the last three decades cutting taxes without offsetting spending cuts in hopes of forcing a future fiscal crisis that could force the spending cuts they could never get through on the merits. And now their day has finally arrived. The budget crisis they wanted has come to pass. No doubt they had hoped the Democrats would be in power at the time to be blamed. At least three exceptions (Colorado, Minnesota and New York) have Democratic governors facing major cutbacks, but only because the Republican alternative was completely insane. Most states, however, will have Republican governors to deal with the fruits of thirty years of starve the beast policy. And now the beast is starving. I can't wait to see what happens.

Lame Ducks Behaving Badly

2010-12-22T21:48:00.001-08:00

I really can understand any Republican who might want to label the post-election sessio as "lame ducks behaving badly." Democrats are taking advantage of the last days of their control of Congress to push through as much of their agenda as possible. I do understand why Republicans may see this as dirty.* I am obviously biased here, because I like the substantive agenda Democrats are pursuing, but let me give them two procedural defenses.

First of all, lame ducks behaving badly are a venerable American tradition. The practice goes back as far as 1800 when, after losing to the Jeffersonians, the Federalist Congress created a huge number of new federal judgeships and John Adams packed them with a bunch of Federalist judges. And it has continued all the way down to Bill Clinton's last minute administrative regulations to achieve what he could not get through Congress.

Second, and more importantly, this really is not as egregious as what Bill Clinton did as a lame duck. What made Clinton's actions so outrageous was that not that they took place in the lame duck period, but that they were frankly an attempt to bypass to legislative process altogether and act as an elective dictator in the face of clear Congressional opposition. This would be objectionable on separation of powers grounds no matter when it took place. That it was an attempt to impose a fait accompli on his successor mere compounds the offense; it does not create it. Congress, in passing a bunch of bills during the lame duck session that they could not pass with an election pending, is exercising legitimate, constitutional legislative powers, even if the etiquette is not so good. Granted, in his showdowns with a Republican Congress, President Obama may very well end up trying to sidestep the legislative process and do administratively what he could not get through Congress. But let's cross that bridge when we come to it.
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*It can't help that Democrats are also giving the lie to the assumption that Republicans are much better than Democrats at maintaining party discipline. This rule apparently only applies in the house, not the Senate.

The Budget Deal

2010-12-22T20:31:00.000-08:00

I didn't want to jinx the budget agreeement by treating it as a done deal unless it really became a done deal. Now that it is a done deal, I would say that it is as good as anyone could hope for and maybe better. Democrats got what they wanted most -- a one-year extension of unemployment benefits that Republicans seemed determined to fight tooth and claw. The one-year break in Social Security tax is problematic if extended (likely), but about as good as we could hope for in the short run. I fully agree with Megan McArdle that a deal in which Republicans don't get anything they want is utterly unrealistic. But that is what many Democrats were asking.

After continually insisting that unemployment benefits must not be extended without some compensating spending cut, Republicans have agreed to extend them if there is a tax cut. Republicans are now madly scrambling to explain that a tax cut is really the functional equivalent of a spending cut. The war on arithmetic continues. Or, as Jonathan Chait puts is, "Why were Republicans so flexible? They are willing to deal away a lot if they're getting tax cuts for the rich. . . . [I]t's the party's core policy goal, and if you help them attain it they can be surprisingly reasonable."

Of course, this is a wildly fiscally irresponsible agreement. But that's a good thing. When your economy is still struggling to extricate itself from a severe recession, the last thing you need is fiscal responsibility. You need irresponsible counter-cyclical measures. Fiscal responsibility can wait until the economy is stronger. Of course, the Republicans may yet ruin everything by being fiscally responsible after all and pushing for serious spending cuts. And I expect plenty of bipartisan irresponsibility whenever our economy does become strong enough to seriously tackle the budget. (I expect the deficit to be much smaller when our economy recovers, but still dangerously large and unsustainable).

I also wholehearted agree with Matt Yglesias that this is reassuring in at least one regard. Republicans are not trying to sabotage the economy to ensure a victory in 2012. This really is a good faith dispute about the best policy.

Update:

I like this post by Megan McArdle, arguing that the reason we are seeing so much extraordinary fiscal irresponsibility right now is that both parties recognize a painful need to balance the budget is coming up and are trying to create irrevocable "facts on the ground" to force the other party to make most of the concessions when that inevitable time arrives. Since I think we can rule out the possibility that anyone has read Keynes or believes that deficits are temporarily necessary, this does, indeed, seem the most likely explanation.

A Perfect Ticking Bomb (Not!)

2010-10-31T22:16:00.000-07:00

This latest terrorist plot seemed made to order for the ticking bomb scenario. A terrorst plot has seemingly been thwarted. Large numbers of brilliantly disguised bombs, powerful enough to destroy an airplaine in flight, are being sent out on multiple planes to multiple targets. The plot can't be aborted because the bombs have already been shipped out. Sure, we've stopped some of the bombs, but how do we know there aren't more out there? And now a suspect has been arrested? Can't we torture her to find out if there are any more bombs out there and, if so, where?

I was going to write a post explaining that no, not even this was a true ticking bomb. Granted, it comes remarkably close to what I have called the three essential conditions of a ticking bomb: (1) an immediate, known danger that we lack one critical piece of information to stop, (2) a suspect in custody known to have that information, (3) no possibility of finding the critical information to stop the attack other than torture. This actually does look remarkably like the first aspect of the ticking bomb -- a crystal ball with just one clouded spot. In this case, we have mostly thwarted the plot, but there may be more bombs out there. And we had the suspect who mailed the bombs.

So I was preparing to argue that the final condition -- no other way to find the bombs -- had not been met. The fact is, we now have a huge amount of information, rapidly growing. And, more importantly, we know what to look for and where it came from and that, too, cannot be changed now that the packages have been sent off. Yes, searching every package to come out of Yemen for that past few days will be a huge hassle, but it is doable. The inconvenience it causes is the sort of thing people can tolerate, considering the danger.

That was the post I was preparing to write, but events got ahead of me. It turns out the suspect was not, after all involved in the plot, but a simple victim of identity theft. Case closed.

(PS: Oh, and kudos to all the people, across many countries, who stopped the plot. A job well done!)

Causes of the Crisis: Financing of the Shadow Banks

2010-08-18T19:31:00.000-07:00

And so we return to the old question, how does the shadow banking system finance its operations? One way, obv iously, is by selling its financial products to investors. But since ultimately the finance system is a system of making loans, it has to raise the funds to make loans somehow. There appear to be two main answers. One way is by "selling commercial paper," that is by taking out a series of short-term loans (known as commercial paper). Securitizers, in particular, used this method, using their securitizations as collateral.

These short-term loans came mostly from money market mutual funds, the most user-frienly portion of the shadow banking system. Money market funds accept"deposits" by selling shares for exactly $1, no more and no less. Shares are kept at $1 so that investors can cash out at any time for the same amount they paid in, like closing out a bank account. They pay interest and dividends to investors, usually at a higher rate than a certificate of deposit at a conventional bank. Some even offer checks like conventional bank accounts. But they are not insured. To avoid losing value, money market mutual funds limit their "commercial paper" loans to municipal governments, blue chip companies, and the like. Unlike in conventional banking, ordinary customers do not make direct deposits, but have intermediaries make their investments. Direct deposits generally come from local governments, corporations, investment institutions, and high net worth individuals. However, the Federal Reserve comments that even the most sophisticated investors in money market mutual funds have no tolerance for risk and are prone to "herd-like" behavior.

The other main source of funding are "repurchase agreements" or "repo" for short. As everyone knows, the FDIC insured conventional bank deposits for up to $100,000 before the 2008 crisis and up to $250,000 since. For ordinary depositors this is not a problem. Anyone with more money than that will probably not want to keep in in cash anyhow, but to invest it in something that offers better returns. But large corporations, banks, and so forth, may have large blocks of cash between investments, much greater than anything the FDIC would insure. (Nor are conventional banks equipped to handle such large deposits and withdrawals). But they still want somewhere short-term and risk-free to park it. Typically, the owner makes a one-day loan to an investment bank or other shadow bank and takes some safe financial instrument, such as a senior tranch security, as collateral. The short-term nature of these loans keeps them safe and liquid. Each day, the lender has the option of rolling over the loan or withdrawing it (allowing the bank to "repurchase" the collateral). Like ordinary depositors, repo lenders often close out all or part of their loan. So long as new lenders are opening new accounts and an equal rate, this is not a problem for the bank. Unlike ordinary depositors, repo lenders are powerful enough to change the terms of their loans as a condition of rollover.

All these funding sources -- investment in money market mutual funds, the short-terms loans known as commercial paper, and repo agreements -- have in common with bank deposits that they are risk-adverse and can be closed at will. A leading argument, therefore, is that when securities started looking shaky, these lenders did just that, setting off a run on the shadow banking system. Most ordinary people did not recognize the run because their own bank deposits were insured, and because it had none of the traditional features of a bank run -- long lines outside the bank, panicked mobs in the street and so forth.

The run began (so far as I can tell) in mid-2007 on banks' structured investment vehicles (SIV's). These were subsidiaries of banks, established off their balance sheets so as to evade capital requirements, that invested in securitized loans, purchases with "commercial paper" loans from money market mutual funds. As these investments came more and more into doubt, money markets stopped making loans. SIV's were experiencing a run. The Treasury Department tried to pool all the SIV's into a single SIV, but banks were not interested. Instead, they took the SIV's back onto their own balance sheet. A portion of the shadow banking system had vanished.

It was about this time that repo lenders started getting nervous. Up until then, repo lenders accepted the bank's collateral at face value. That is to say, they would deposit one dollar of repo for every dollar in collateral. Around August, 2007, repo lenders stopped taking collateral at face value. Instead, they would loan only 90 cents for every dollar of collateral. This is called a 10% "haircut." As the crisis escalated, haircuts kept rising, to over 45% when Lehman Brothers failed.

Nor was this haircut limited to sub-prime mortgages. All housing securities were suspect because they were based on grossly inflated prices. But the problems were not limited to real estate. All securitized loans became suspect. Lenders demanding more and more collateral effectively means that the system is getting less and less funding. If not a full-scale run, it is suffering a severe pinch.

But the most devastating part of the crisis, the part truly threatening a run that would threaten the entire system, occurred in the aftermath of the Lehman Brothers failure. When Lehman Brothers failed, Reserve Primary Fund, a money market mutual fund, was forced to write off Lehman debts that "broke the buck," i.e., caused its shares to fall below $1 (for only the second time in the history of money market mutual funds). This set off a panic by depositors, who had always assumed a money market was as safe as a bank account, and the beginning of a run. And, as everyone knows, the greatest danger of banks runs is that they are highly contagious. A run on money market mutual funds threatened to put an end to major corporations' normal system of financing day-to-day operations, and also threatened day-to-day funding of municipal governments, to say nothing of funding shadow banks. It drove interest rates on commercial paper from 2% to 8%. Desparate, the Treasure Department moved to insure all existing money markets. So far as I can tell, it was the prospect of a run on money markets more than anything else that convinced Chairman Ben Bernanke and Treasury Secretary Hank Paulson to request, and Congress to pass, the TARP.

So just how bad was the withdrawal of funding from the shadow banking industry?

This graph gives a good estimate. Most striking is the explosive growth of the finance industry, particularly since the mid-90's. (Unfortunately, the graph does not give these figures as a percent of GDP). Equally striking is the shadow banking industry's growth, overtaking conventional banking, and then its rapid decline. Its funding has fallen from $20 trillion to about $16 trillion, a 20% drop. Conventional banking, by contrast, has suffered a minimal dip, but definitely an interruption of growth. It should be noted that at their peak conventional banking had total funding of $13 trillion and shadow banking $20 trillion for a total of $33 trillion. Total GDP, by contrast, was approximately $14 trillion, or about half the total.

Around the time of the Savings and Loan Crisis, uncomfortable questions began to be raised about the health of the banking system in general. There was a rise in gallows humor on the subject. "Safe as money in the bank" suddenly didn't seem so reassuring. Cartoons showed depositors opening a bank account telling the bank, "But first I need two forms of ID and a major credit card." Such has not been the case in this financial crisis. "Safe as money in the bank" has, indeed, been a comforting mantra, compared to other things we thought were safe as money in the bank, but weren't.

Causes of the Crisis: Shadow Banking

2010-08-05T20:37:00.000-07:00

When Alan Greenspan kept interest rates low, housing and housing prices took off. It is, as Zandi points out, a well-established rule that asset prices and interest rates move in opposite directions because an asset that can be purchased as a lower rate of interest has a higher present value. Unfortunately, unlike earlier booms, the housing boom was not based on any technological advances in how houses were built, but only on easy credit. Mortgages, in turn, were fed into an insatiable pit informally known as the shadow banking system.

Despite its colorful name, the shadow banking system simply refers to any financial institution that is not a traditional commercial bank. Shadow banks are nothing new. In fact, as this paper points out, all banks could once be considered shadow banks, in the sense that they were loosely regulated and financially fragile. The FDIC brought commercial banks out of the shadows, insured deposits, and tightly regulated lending, but left a small "shadow" financial industry in the form of investment banks playing the stock market. Since then a wide range of non-traditional institutions have grown up, from money market mutual funds that are almost like traditional banks, to wild west hedge funds.

One of the things the shadow banking industry does (or did) is securitize. Someone, either a commercial bank or a finance company backed by an investment bank, would make a mortgage loan. Instead of keeping the loan, the originator would sell it to a "loan warehouse," either a "conduit" belonging to the bank holding company but off the balance sheet of the commercial bank, or a federally backed conduit. Once there, someone, Fannie, Freddie, or the Special Purpose Vehicle (SPV) for a bank holding company or investment bank, would pool loans and slice them into tranches (slices) for sale. Senior tranches got priority in payments, but the lowest interest rates, with risk and payment escalating up the ladder. Securitized loans were bought by banks, insurance companies, pension funds, asset managers, and hedge funds.

By this time, any kind of loan receiving regular payments could be similarly sliced and diced. Here is one thing that was never made clear to me. Different types of loans carry different interest rates. A home mortgage, for instance, is traditionally considered very safe. Defaults are (traditionally) rare because defaulting means losing one's home, and even when they do happen, the loan is backed by a stable asset, easily located, and (until recently) reliably appreciating. A car loan, by contrast, has a higher default rate and is backed by a very portable asset that is easier to hide and depreciates rapidly, so it carries a higher rate. And a credit card is an unsecured loan with no downpayment, so interest rates are very high indeed. So were these different rates of risk and return reflected in the security slices? Or were all senior tranches treated as equivalent, regardless of the loans behind them, with safer loans simply creating more senior tranches and riskier loans more high-risk tranches?

As housing prices continued to escalate and the securitization machine kept wanting more, several things happened, some in the world of housing, and some in the world of high finance. In the world of housing, the building boom started reaching its natural limit, as booms always do. This one came faster than most because it was not, after all, based on any technological advance that made housing cheaper to make, but only on easy credit. People had been buying houses at an unsustainable rate. And so, as often happens when a boom reaches its natural limits, people tried to artificially sustain it, creating a bubble. In the world of housing, that meant moving more and more into sub-prime territory. Sub-prime lending, as a share of the total, had fairly stable from 1997 to 2003. From 2004 to 2006, it took off.
Making so many sub-prime loans, notoriously, also led to the abandonment of common sense underwriting standards. Lenders all too often stopped doing assets checks or asking for proof of income. As housing prices soared higher and higher, they increasingly went out of reach to many buyers. Lenders started asking less and less for down payments, sometimes waiving them altogether. When even that failed to make a house affordable, lenders offered "teaser" rates, with artificially low interests rates for two years, to increase later. Loan originators who tried to maintain reasonable underwriting standards found themselves undercut by less scrupulous rivals and had little choice but to lower their standards as well. A similar process went on with regulation. Financial regulation was hopelessly fragmented. If any regulatory agency attempted to maintain discipline, lenders could simply choose a laxer agency. So regulators, too, saw little choice but to lower standards or lose out to rival agencies.

So how did high finance deal with all these bad loans? By disguising them through ever more complex systems of securitization. The favored form was a collateralized debt obligation or CDO. These, too, were well established forms of securitization before the 2000's, usually a custom-made pool of corporate bonds or loans that were securitized. If an asset-backed security or sub-slice of such a security started looking shaky, financial companies would pool together the shaky securities and securitize them. The product was known as an ABS CDO, short for asset-backed security collateralized debt obligation. A more accurate name might have been "chef's special" because an ABS CDO essentially took the leftovers no one wanted, threw them in the same pot, and offered up slices (tranches) of the resulting product. Toward the end, securitizers started making CDO's of CDO's, known as CDO's squared, or even CDO's cubed.

Credit ratings agencies regularly certified senior tranches of the chef's special as triple A. Credit ratings agencies had the same problems as everyone else -- if the didn't tell securitizers what they wanted to hear about their securities, securitizers would simply hire some other agency to do their ratings.

And about the time sub-prime lending the starting to take off, the SEC relaxed standards limiting how much debt the five major investment banks could run, relative to their equity.

All of which raises an obvious question. Couldn't anyone see the system was headed for trouble. The answer appears to be yes, some people did indeed see that the system was headed for trouble -- and set out to make a buck off it.

Causes of the Crisis: Too Much Money Chasing Too Few Investments

2010-08-02T20:52:00.000-07:00

The prosperity of the Roaring Nineties had two main bases, a solid foundation of productivity growth stemming from information technology, and a more dubious foundation of easy credit and financial innovation. The good times came to an end the old-fashioned way -- with the bursting of a bubble in the stock market. Zandi describes the bursting mostly of a tech bubble while Krugman describes a broader bubble in the stock market as a whole. Both agree that something went seriously wrong with the economy once the bubble burst, but neither seriously explores what.

The decline following the bursting of the bubble was shallow, with unemployment only rising to about 6.5 percent.* But recovery was painfully slow, especially on the employment front, even though Alan Greenspan cut the interest rate the Fed charged banks all the way to 1%, well below the inflation rate of 2.5%, and the Bush Administration gave a Keynesian stimulus in the form of a huge tax cut. Greenspan feared a Japanese style lost decade and, as the recession pushed down already low inflation rates, began to worry about deflation.

So what was the problem? The 9-11 attacks certainly didn't help, but there must have been something more than that. As a mere Enlightened Layperson, I can only offer a few guesses. One is that the '90's productivity growth resulting from adopting new information technologies had reached its natural limits and was not going to keep on giving. Another (much discussed these days) is that recovery following a financial crisis always tends to be slow and painful. As in the 1920's, stock market speculators had been buying on the margins and running up a lot of debt. The 90% margins of the 1920's were no longer allowed. Margins were 50%, but borrowing even half of what you invest can lead to ruinous debt when the underlying stocks end up as so much designer toilet paper. Dot-coms and other tech companies had run up large debts of their own, which ended up as worthless after they failed. Another possible explanation is that the stock market crash had scared investors away from financing anything new and dynamic.

When the economy did move into expansion, an abundance of indicators suggested that this was a far less healthy growth than what had prevailed in the '90's, most likely because it was based on housing. So what's wrong with housing? Economists classify housing as a form of investment, but it is more accurately described as somewhere between consumption and investment. Housing is investment in the sense that it involves long term loans several times larger than the initial down payment. But it is consumption in the sense that a house is a consumer product that does nothing to increase the economy's productive capacity or productivity. Or, put differently, housing is investment in the sense of the financial resources it ties up, but not in the sense of promoting future growth. Given the choice of what to base an economic expansion on, housing would be about last on the list. But central bankers don't get to choose what part of the economy takes off, so Greenspan kept interest rates low in hopes of getting something going, and that something turned out to be housing.

Greenspan is often blamed for the current economic disaster for keeping interest rates too low for too long. Still, one would normally expect too-low interest rates to set off either inflation or an ordinary bubble of the sort we have experienced many times in the past without a comparable disaster. Something else must have gone wrong as well. So far as I can tell, two things went wrong. One was a classic case of investment-level inflation; too much money chasing too few productive investments. The other was changes in how the finance system handled all that money.

Too much money had several origins. Remember those disturbing trade deficits that plagued Mexico and Thailand before their financial crises? Remember how they were financed by foreign investment, investment reaching 6%, 7%, even 8% of GDP? Investment that outran productive outlets, set off a speculative boom, and ultimately proved unsustainable and stampeded out as fast as it stampeded in? Well, the same thing started happening to the US as well. **
Trade deficits, running at a very manageable 1.5% of GDP in 1996 and only slightly higher in 1997, began rapidly escalating afterward, peaking at 6% of GDP in 2006. These deficits appear to have begun escalating about the time of the 1997 Asian financial crisis. These may have been either trade-driven (the Asian downturn hurt ourt exports) or investment-driven (capital flight from Asia to the safety of the US). Some people believe the influx of foreign investment contributed to the stock bubble that burst in 2000. It certainly contributed to the housing bubble.

But at the same time, the housing bubble was international. Many countries besides the US experienced a similar surge in housing prices, followed by a downturn, often even worse than ours.

Several things appear to have been happening at once. For one, Alan Greenspan was not the only central banker leaving interest rates low; the tendency was world-wide. For another, international savings had become more mobile than ever before. And critically, there was what Ben Bernanke called a "global savings glut;" a "vast pool of money" that grew from from $36 trillion to $70 between 2000 and 2008. The source of this appears to be partly recycles petrodollars, but mostly an immense growth in wealth in China, which also has a tremendously high savings rate.

China's extraordinary savings rate led to the same paradox that played so large a role in causing Japan's "lost decade" -- too much savings can lead to the buildup of too much debt. This is because the influx of too much investment tends both to bid up prices of assets and to bid down returns. This leaves the finance system in general in the same place the hedge funds were in at the time of the LTCM crisis, desparately taking more and more risks with more and more borrowed money to feed the insatiable appetites of investors. Rising asset prices and falling returns also strongly encourage speculation over productive, long-term investment.

Next: Internal problems in the finance system.
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*It should go without saying that if unemployment gave any sign of falling even close to 6.5% today, there would be dancing in the streets.

**Krugman discusses the dangers of such large trade deficits, but does not address what size of deficit would be safe. He does comment that Australia has been running trade deficits of 4% of GDP "for decades," all funded by foreign capital. So perhaps the danger is not in the specific size of the deficit, but in rapidly rising deficits, which we certainly had.

Leadup to the Crisis: The Undoing of the Old System

2010-07-18T16:08:00.001-07:00

Roosevelt's highly successful financial reforms first began to come under pressure in the 1970's, as inflation began to accelerate. Slowly and inconspicuously at first, several things began to chip away at the old financial order.

In 1968, when Fannie Mae was privatized, it was split. FNMA (Federal National Mortgage Association) was privatized and bought up private mortgages. The Government National Mortgage Association (Ginnie Mae) remained a governmental entity and bought up mortgages issued by governmental entities such as the FHA or the VA. It was Ginnie Mae that first got the idea of pooling mortgage payments and selling a portion of the income to investors in 1970. Fannie and Freddie soon followed. In 1977, a banker named Lew Ranieri introduced the privately securitized mortgage.

Another financial innovation of the 1970's was the first breach of the wall between commercial and investment banks, from the investment side -- the money market mutual fund. Investment firms began offering money market mutual funds as an alternative to bank accounts. These funds kept their shares constantly at $1 so that investors could withdraw whatever they put in at any time, just like a bank account. They made short-term, low-risk loans, known as commercial paper, to blue chip companies and, although not insured, were considered just as safe as a bank account. But they had better returns than a bank account, even a certificate of deposit. With inflation running high and rapidly eroding savings in bank accounts, banks found themselves more and more strapped for funds, including funds to finance home mortgages. (Money mutual funds did not finance home mortgages).

In the 1980's, these two innovations began to merge. Savings and Loans, the primary fianciers for home mortgages, were trapped between fleeing depositors, fixed rate loans, and rising interest rates. One response was the invention of the adjustable rate mortgage (ARM), a mortgage with interest that fluctuates with general interest rates. These began to be used in the early 1980's to cope with extremely high interest rates. Another was that S&L's began selling mortgages to Fannie, Freddie and the private securitizers and buying mortgage backed securities. Inexperienced in the world of high finance, S&L's did poorly. The ultimate failure of so many thrifts left a gaping hole in the finance of home mortgages.

As interest rates dropped after 1982, mortgage-backed securities began running into another problem. Defaults were still rare, but home owners were refinancing at lower rates or paying of their loans early. The made mortgage backed securities a less reliable source of income than anticipated. Securitizers responded by carving up securities into tranches (slices) setting priority in payment. Senior tranches got paid first, but at the lowest rate. As priority dropped, risk and return rose. By the mid-80's, other finance companies began to recognize that the principles of securitization did not have to be limited to home mortgages. They began expanding the practice to equipment leases, auto loans, credit cards, student loans, or anything else that required frequent payments.

A new finacial institution called a "special purpose vehicle," generally backed by an investment bank, arose to buy and securitize loans. High finance increasingly began establishing loan originators, not backed by any deposits, to make loans to be sold and securitized. It increasingly encroached on areas traditionally occupied by commercial banking, filling in the gap left by the failure of Savings and Loans, and funding car loans, credit cards, and other consumer loans. And how was all this financed, without deposits? Apparently by commercial paper, that is, by short-term loans from money market mutual funds, using the loans to be securitized as collateral.

Naturally with all these encroachments by high finance on commercial banking, commercial banks wanted to return the favor. Throughout the 1980's and '90's, the Federal Reserve increasingly allowed commercial banks to trade in stocks and issue commercial paper. Slowly, the wall became so eroded that repeal was little more than a formality. After repeal, "bank holding companies" were formed that could hold commercial banks, investment banks and insurance companies as separate subsidiaries. Commercial banks also began moving into the securitization business, establishing Structured Investment Vehicles (SIV's) to securitize their loans. SIV's were, in effect, a clever accounting gimmick that allowed banks to evade regulations requiring them to hold capital against their loans by "selling" these loans to SIV's that were actually owned by the bank. And what did banks do with the income from selling their loans? They invested it, often in securitized loans.

The risks of securitization are obvious, at least in hindsight. A company making loans to sell has strong incentives to think purely in terms of quantity, not quality. The buyer should have an incentive to impose strict quality control except that it, too, just intends to pass the loans along to someone else. And buyers of the securitized products assumed that even if there were some bad loans in there, tranching (prioritizing) payments should take the risk away. In short, quality control was Somebody Else's Problem. Worse, regulators also believed that securitized loans were safer than direct loans. Applying the eminently reasonable rule that banks should hold more capital the riskier a loan, they rated mortgages as riskier than mortgage backed security and therefore required more capital for direct loans than securitized loans. Banks understandably responded by securitizing more.

The dangers of such a system should have become apparent during the mid 1990's with a sort of a dress rehearsal crisis. Securitization of credit card loans made credit cards easier and easier to get. Once the privilege of people with an established income and credit rating, by the mid-'90's credit cards were being handed out like candy. Predictably enough, many new users ended up in over their heads and went bankrupt. Zandi regards unsupportable credit card debt as one of the causes of the 1998 LTCM financial crisis. The asset-backed securities market briefly froze during that crisis, but the larger economy was not harmed and, for the most part, did not even notice that it had happened.

Nonetheless, despite the prosperity of the 1990's (at least within the US), the evidence was growing that the finance system was running of control. These warning signs were ignored. In fact, at the end of the '90's, two pieces of legislation were passed that further deregulated an already dangerous system. In 1999, the Gramm-Leach-Bliley Act removed the Glass-Steagel wall between commercial banking and investment banking, a wall that (see above) had largely fallen anyhow. Some people blame the removal of the wall for the crisis, while many conservatives argue exactly the opposite, that it was removal of the wall that allowed commercial banks to rescue investment banks (as when Bank of America bought out Merrill Lynch). So far as I (as an Enlightened Layperson) can tell, the conservatives are right on this one.

More important was the Commodities and Futures Modernization Act of 2000, which effectively prevented regulation of financial derivatives. As for securitization, no one even seems to have regarded it as an issue.

Leadup to the Current Crisis: The Old Financial Order

2010-07-11T10:09:00.001-07:00

So, at last we get to the question of how we got to where we are now. This is only an Enlightened Layperson's opinion and analysis, with no claim to special expertise. My main sources are Zandi, Krugman, and Wikipedia.

Any attempt to understand how we got here has to start in the 1930's because that is where the modern system of financial regulation began, and discuss how the finance system outgrew it. Roosevelt's financial reforms, it must be emphasized, were wildly sucessful; they tamed the boom-and-bust cycle that had troubled the economy until then and largely kept it at bay for another 50 years. Best known was the FDIC, which ensured bank deposits and put an end to bank runs.

In exchange for protection, banks were subject to tighter regulation, including requirements to hold a certain amount of their deposits in cash (actually, this existed even before) and restriction from certain risky activities. Presumably, this includes (or should include) close regulatory oversight in general, but particularly it included the Glass-Steagal act, which (it has been endlessly repeated) separated commercial banks from investment banks and insurance companies. Or, translated into terms a person ignorant of finance, like me, can understand, the Glass-Steagal act forbade any financial institution that accepts deposits from investing and trading in stocks, financing mergers, or underwriting (financing) issuance of stock. Or, more simply put, anyone taking deposits had to stay the hell out of the stock market, which was considered too dangerous. It was also driven by a fear that combining the functions would lead to conflict of interest. Another financial reform was the founding of the Securities Exchange Commission (SEC) to oversee the formation and exchange of securities and prevent secrecy and fraud.

An underappreciated financial reform was the development of the fixed rate mortgage by the Federal Housing Authority (FHA). Before that, most home mortgages were short-term, for a period of three to five years, required a 40-50% down payment, and featured balloon payments, i.e., the borrower first paid off the interest and then had to pay the principle in a lump sum. The FHA developed a mortgage requiring only a 20% down payment, with fixed and unchanging payments over a period of 30 years. This proved wildly popular, both with buyers, many of whom were able to afford a home for the first time, and with banks, which found the fixed rate mortgage to be one of the safest and most reliable of all loans.

And then, of course, there is the Federal National Mortgage Association (Fannie Mae). Fannie was founded in 1938, not to issue mortgage loans directly, but to buy them from banks in order to encourage banks to keep issuing more. Originally, Fannie was allowed to buy only mortgages that were insured by the FHA. Fannie Mae was (semi) privatized in the 1960's and the Federal Home Loan Mortgage Corporation (Freddie Mac) created to compete with it.

The background of the current, crisis, then, is the story of house the finance system gradually outgrew these reforms and morphed into something new, outside the established regulatory system.

In Which I Proclaim the Obama Presidency a Failure

2010-07-05T13:20:00.000-07:00

It's time to face facts. The Obama Presidency is a failure. Banking reforms (assuming they) pass, may be worth something, but even healthcare reform will be worthless if Republicans repeal it after they take control in 2012. And barring extraordinarily self-destructive behavior on Republicans' part (always a possibility), they will win in 2012.

The reason is simple. Presidents are ultimately judged on one criterion and one only; the performance of the economy on their watch. This is not fair. Performance of the economy is often beyond the President's control. Prompt action by the current administration (and other countries around the world) may very well have prevented a full-scale depression. And recovery from a financial crisis as severe as we suffered in 2008 may be inevitably slow.

But none of that matters. The point is, the economy is sinking down, and nothing seems able to stop it. Prognosticators explain that when an economy begins to recover from a recession (or begins to fall into one) is spits out all sorts of contradictory data. But the data is going fast from contradictory to uniformly bad. All the people whose job it is to be reassuring are reassuring us that the economy is not experiencing a double dip. But I am inclined to think we are experiencing something else -- an L-shaped recession, Japan style. Consumer spending is lagging because consumers are worried about high unemployment. Businesses are not hiring because consumer spending is so low. It's a vicious cycle with (seemingly) no way out. Although I believe we have averted the dangers of a catastrophic, depression-like drop, prolonged stagnation seems inescapable.

If the economy is failing, the President's popularity falls. With the fall of his popularity, he loses political capital and the ability to pass his agenda -- anything in his agenda. Furthermore, when a President lacks domestic credibility, his international political capital falls. Foreign leaders lose respect for a leader who lacks respect at home. With the failing economy, the prospects for any international diplomatic success suffer.

There is an old joke that an outgoing President gives the incoming one three boxes, one to be opened each year if the economy is going badly. The first box says, "Blame the previous administration." The second one says, "Blame the Federal Reserve." The third one says, "Prepare three more boxes." Granted, we are only in the second year. But barring some miracle, I see no reason to expect that the next two years will be any better.

Krugman, Keynes and Hoover

2010-07-05T12:31:00.000-07:00

Reading Krugman's book, one of the most striking things to me was how much it brought up all the old issues I had learned in basic economics. In international trade, for instance, the issue of fixed versus floating exchange rates. Fixed exchange rates have the advantage of making international trade easier and more predictable. Floating rates cause wild fluctuations with great inconvenience to anyone engaged in international trade. But fixed exchange rates undermine a country's ability to set its own economic policy and require it to prioritize maintaining its exchange rate over the health of its domestic economy. A third alternative is trade and capital restrictions, but these introduce distortions and onerous regulations. So, Krugman says, if we can't have fixed exchange rates, freedom to set domestic economic policy, and international free trade, which of the three are we willing to sacrifice. In college I read books from the 1950's to the 1970's making exactly the same point.

And then there is the matter of the IMF. The Keynesian/monetarist approach to a economic downturn is to lower interest rates, run a deficit, and let the currency fall. The IMF, Krugman complains, demands exactly the opposite, that a country facing a crisis raise interest rates, balance the budget, and maintain its exchange rate whatever the domestic cost. And my response to all that is, so what's new? That is what the IMF has always done, so far back as I can remember. The IMF has always regarded domestic consumption as a waste of resources that should be reserved for important people like foreign creditors and investors. In theory, if an economy were to cut domestic consumption to zero, export its entire GDP, and hand its entire export income over to foreign creditors, the IMF would probably regard its economic management as ideal. Even the IMF realizes that this is not altogether realistic, but it does expect a country to cut domestic consumption as much as possible, export as much of what it produces as possible, and divert as much as possible of its export revenue to foreign creditors. And to be willing to sacrifice its domestic population (especially those worthless poor people who don't produce any foreign exchange and can't cause capital flight) to the wishes of international investors. Why does Krugman treat any of this in the 1990's at anything new?

And yet, although I am inclined to share Krugmans's outrage, a disturbing thought lurks at the back of my mind. What if the IMF, after all, is right? There is some evidence in their favor. As Krugman acknowledges, Mexico and Argentina followed IMF orthodoxy and experienced a short, sharp drop, followed by a rapid recovery. Japan, by contrast, followed Keynesian/monetarist orthodoxy and experienced a "lost decade." So what if retrenching and getting it over with fast is, after all, the better policy?

There are counter-arguments, of course. A small, open economy like (say) Thailand depends on foreign investment and exports for its success. A large economy like (say) Japan or the US relies mostly on domestic investment and produces mostly for domestic consumption. Sacrificing domestic consumption to please foreign investors may therefore make more sense in a country that produces most for export than one the produces mostly for itself. Krugman describes in detail how Britain and Australia were able to devalue their currency without suffering any harm, while devaluation by Thailand or Mexico set off a panic.

That debate is becoming more and more current now. Although both the US and Europe initially responded to the economic crisis with Keynesian stimulus, Europe is now embracing austerity, while the US will almost certainly run deficits into the indefinite future. So on one hand, we should have a simple test. If Europe's economy crashes and bounces back, while the US sinks into a Japanese-style lost decade, we will know that the IMF/Hoover approach is right and it is time to start balancing the budget, no matter how painful. By contrast, if the US does better than Europe, we can chalk it up as a victor to Keynes.

Or can we? The Republicans are blocking any further stimulus and calling for spending cuts, but it seems unlikely that they will make any but the tiniest token cuts in spending any time soon. Assuming they take over Congress in 2010, they may even show themselves to be good Keynesians by enacting another tax cut. All this means we can expect huge federal deficits as far as the eye can see. But states do not have the option of running deficits. Barring major federal assistance (which Republicans and Blue Dogs will almost certainly block), states will be making deep cuts next year. The US, too, will be embracing austerity, just not at the federal level.

It's a dilemma. On the one hand, I would really like Keynes to be right, not just as a matter of intellectual and ideological satisfaction, but because I really would rather not have to put an already traumatized economy through any more pain. On the other hand, since austerity is heading our way whether we like it or not, I would really like for it to work.

The 1990's: Decade of Crises

2010-06-27T19:56:00.000-07:00

Most Americans think of the 1990's as a golden age of prosperity that we would love to return to and so it was -- for the United States. For much of the rest of the world, the 1990's were a time rocked by one financial crisis after another, an escalating series of warnings that our financial system was badly out of control. This is one of the areas where Zandi and Krugman complement each other best. Zandi has a chart showing the LIBOR spread (the difference between interest on US treasury bond and loans between major banks), demonstrating how financially turbulent the '90's really were, although his narrative mostly sticks to the 2000's. Krugman describes some of these crises in detail.

The Savings and Loan Crisis: A warning shot across our bow. This one actually began in the 1980's. One of the major reforms of the 1930's was government insurance of deposits in commercial banks (including savings and loans) in exchange for tighter regulation. This reform was highly successful. It stopped bank runs and kept finance on a sound basis up at least until the mid 1970's. Trouble came in the '70's in the form of high inflation. Inflation eroded the value of people's savings, so long as checking accounts were forbidden under Depression-era laws from paying interest. There were no panicked bank runs, but people began more and more moving their money from traditional bank accounts into something that paid interest. The trend accelerated in the early '80's when interest rate skyrocketed. Banks felt a squeeze. Savings and Loans lobbied to be allowed to pay interest to depositors. But this caused a new set of problems, as interest rates on deposits varied, but thrifts kept receiving the same fixed rate on their mortgages. So they pressed (successfully) to be allowed to make higher-risk, higher-return loans. A classic boom and bust followed, with many S&L's taking excessive risks, an epidemic of overbuilding. As required by law, the federal government shut down the involvent thrifts, paid their depositors, and cleaned up the mess they left. The cost was just as much, relative to GDP, as the cost of TARP. Areas where the overbuilding boom was strongest took years to recover. But the damage to the national economy was minimal. Commentators differ on whether the crisis had anything to do with the 1990-91 recession. Even if it did, the recession was a mild one.

Seen from the clear light of hindsight, the Savings and Loan crisis was a clear warning that the general trend toward deregulation sweeping the country should not be extended to finance.

Japan's lost decade. It does not make Zandi's LIBOR chart, but Krugman points out that the Savings and Loan debacle was merely one of many speculative bubbles that formed in the 1980's. Sweden and the other Scandinavian countries had a severe speculative bubble after deregulating banks in the late 1980's and are widely seen as writing the book on how to handle such a crisis. Japan, by contrast, may be seen as writing the book on how not to handle such a crisis. Japan let its bubble build to such extraordinary heights that when it finally deflated, real estate and stock prices fell by 60%. (In our case, the figure is closer to 30%, a somewhat comforting thought). Furthermore, when asset prices fell but debts remained, everyone refused to face what was happening. Banks did not write off bad debts; regulators did not close failed banks. Japan went into a decade of stagnation and deflation. Krugman fears much the same for us today.

Orange County and Baring Bank. Although Krugman does not discuss it, Zandi's chart shows a small blip around 1993 with the Orange County bankruptcy. The timing is odd, since Orange County actually went bankrupt in December, 1994, but the crisis was real and unsettling. Municipal funds are supposed to make only the most conservative investments because taxpayer money is at stake, but conservative, tax-averse Orange County looked the other way as its treasurer made some high-risk, high return investments in derivatives dependent on low short-term interest rates. So long as the investments were successful, Orange County had good services with low taxes and no one asked any questions. Then interest rates went up, the investments failed, and Orange County ended up defaulting on its bonds. About two months later, in February, 1995, England's Barings Bank failed because of a poorly supervised trader's high-risk speculation in derivatives. The story was much the same as in Orange Country; so long as his investments paid off, no one asked whether such high returns were actually a danger sign. Then they failed, taking down more than the bank's available trading capital, and broke the bank.

Mexican and Argentine peso crisis. These financial crises were overshadowed by one that broke in Mexico (and Argentina) in December, 1994. (Clearly the end of 1994 and beginning of 1995 were a bad time for financial crises). To give a brief background, in the 1970's, rising oil prices gave Arab countries more money than they knew what to do with. This money generally ended up in foreign banks, which made large loans, especially to Latin America, without too much thought to countries' ability to repay. Throughout the 1980's, much of Latin America was mired in intractible economic downturn, with living standards declining as debt service ate up more and more of their income. Ultimately, the IMF convinced these countries that the remedy was to fight inflation, cut government spending (especially on any sort of social program) and open up their countries to more foreign trade and investment. For a time, it seemed to work. Argentina stopped inflation by tying the peso to the dollar to prevent the Argentine government from financing by printing press. Mexico let foreign imports and investment flood in. All seemed well, at least to foreign investors.

But troubles were developing just below the surface. Argentina's tying the peso to the dollar left that country at the mercy the dollar's fluctuations and unable to respond when dollars began to withdraw from the country. And Mexico was showing other problems. It developed a huge trade deficit, i.e., shortfall of exports compared to imports, eventually reaching 8% of GDP. How can a country import more than it exports on a sustained basis? How does it finance all those imports. The answer is, by foreign investment. Well, isn't that what developing countries are supposed to want to attract, to make them grow? Yes, but you can get too much of a good thing. Foreign investment tends to be a fickle ally turn against a country on a moment's notice. That was what happened to Mexico in December, 1994. The Mexican peso was overvalued and hurting Mexican exports. But devaluation caused a panic, sent foreign investors fleeing, and threw the economy into a severe downturn.

The Asian Contagion. I remember well that throughout Latin America's debt crisis of the 1980's financial commentators were forever asking Latin American countries why they couldn't be like the rapidly growing Asian countries. If Latin America was seen as the embodiment of vice, Asia was the embodiment of virtue. And then in 1997, something similar struck Asia.

It began in Thailand. Thanks to foreign investment, Thailand was growing rapidly, become one of the Asian exporters. But too much foreign investment was coming in, chasing too few productive outlets. And, as always, this led to asset inflation, i.e. rampant speculation and a bubble. As in Mexico, the trade deficit started growing ominously, reach 6% of GDP, 7% and even 8%. As in Mexico, too many investors were all investing in the same place at once and, as in Mexico, eventually they figured out their mistake and all fled at once. (And, as in Mexico, the triggering event was a devaluation). The financial crisis rapidly spread from Thailand to Malaysia, Indonesia, the Philipinnes, and even South Korea and Hong Kong.

The crisis was blamed in large part on "crony capitalism," the there was also a vague realization at the time that international capital flows were much to blame. Capital flows showed an unfortunate tendancy to turn into capital stampedes, with everyone rushing into the same country at once, and then rushing out again when it appears over-saturated. It the influx had been kept to a manageable level in the first place, capital flight would never have taken place. China largely escaped the contagion because it had capital controls in place, and there was some discussion of whether such controls might be acceptable in general. Krugman heavily emphasizes the Asian crisis in his book, which was originally written shortly afterward.

Long Term Capital Management. I must admit, I had never heard of this 1998 crisis, although it threatened to crash the whole financial system. Krugman's account is harder to follow than most of his book, due to greater use of jargon such as "liquidity and risk premia," "ever narrower profit margins" and "arbitraging away liquidity and risk premia." What I understand him to be saying is this. Riskier investments carry a higher return than safe ones. The reasons are somewhat complex, but the most obvious reason is that investors are normally risk-averse and prefer safer investmensts over riskier ones. So high risk investments have to offer higher returns to persuade people to invest.

Enter hedge funds. Hedge funds have nothing to do with garden stores, and are not even the hedges that mark the outer limits of the finance system. They are so called because they hedge, i.e., limit risk by making contrary investments. (Of course, hedging would also limit returns). They also borrow huge amounts of money compared to original investment, which magnifies both risk and returns. Hedge funds believed that they could cash in on the higher returns of high-risk investments while avoiding actual risk by clever hedging strategies, and thereby have their cake and eat it too. At first it worked, leading to consistently high returns. But in the end you can't have your cake and eat it too. Thinking the risk was eliminated, more and more investors flocked in and more and more hedge funds got in on the act. With more and more people wanting to take on risky investments, the need for higher returns diminished more and more. So hedge funds took greater and greater risks, making investments no sane person would touch with a ten foot pole, and borrowing more and more, assuring themselves all the time that clever hedging strategies were avoiding the risks. But, once again, convincing investors their hedging strategies avoided the risk caused more investors to flock in and returns to diminish. Sooner or later, they were bound to end up in over their heads, taking risks so great no hedging strategy could elminate them.

Eventually they overreached by investing heavily in Russia at a time when Russia was in such complete economic and social breakdown that it did not even have a functioning currency and operated on a barter system. But its stock market was booming, courtesy of insane speculators. Sooner or the Russian stock market had to crash. When it did, people who had lent hedge funds the money they invested in Russia started calling in loans, i.e., the hedge funds suffered a run. To pay their lenders, hedge funds all simultaneously had to sell their high-risk investments that nobody else would touch with a ten-foot pole -- and nobody did. This came perilously close to crashing the whole finance system, but Alan Greenspan cut interest rates, and the panic ceased. In the clear light of hindsight, maybe it would have been less disasterous if the finance system had crashed them, as it became even more perilous in the ten years that followed.

Y2K and the tech bubble. Zandi's chart shows too other financial crises, Y2K (which never amounted to anything) and the bursting of the tech bubble, which did.

And now for the scary part. All these crises were symptoms of a financial system badly out of control, but they all showed it out of control in different ways. The earlier crises, such as the savings and loans, or Japan's lost decade, were the results of conventional banks allowed to run riot. Orange County and the Barings Bank demonstrated the dangers of derivatives. The Latin American and Asian crises showed the dangers of too free and rapid movement of international capital. The LTCM crises showed just how easily hedge funds can crash the whole system. If there is a single theme here, I would say it is the danger of stampedes. Investors can create a bubble in even the soundest investment if they all stampede in at once. And some stampedes are driven by little more than everyone else stampeding somewhere at the same time.

The current financial reform in the process of passing tightens regulations on the largest conventional banks and on derivatives. So far as I can tell, it does nothing to address the dangers of international capital, or of hedge funds, much less of the system's general tendancy to stampede. But only by fighting stampedes can we possibly avert such a crisis in the future.

The Great Depression

2010-06-25T21:06:00.000-07:00

Paul Krugman's book frequently refers to the Great Depression but, surprisingly, does not give any extended analysis of it. The Wikipedia offers many alternative explanations, Keynesian, monetarist, Austrian, and debt deflation. To this it adds several less general theories -- income inequality (growth in the 1920's was too skewed toward the top, causing investment to outpace consumption), weakness of the banking system, and the gold standard (countries were forced to protect their supply of gold, regardless of the harm to their domestic economies). What it does not explain is a dirty little secret -- you don't have to choose between these theories. Each theory assumes a single, specific cause, when an epic fail on the scale of the Great Depression is almost always the result of a series of cascading failures. One can quibble about the importance of different factors proposed by different theories but still accept all as at least partially true. So I will recount the Depression freely adopting any of these theories where they work, but with a emphasis on the debt deflation theory, both because it comes closest to popular understanding of the Great Depression, and because of its obvious resonance with today's situation.

Whatever the excesses of the 1920's, the overall prosperity of the era was based on a solid foundation of techological advancement. It was in the 1920's that cars went from a rich man's luxury to something the general public could afford, that movies went from sleazy peep shows for the poor to a major industry and respected art form, that radio and telephones became widely available and commercial broadcasting began, that electricity and running water became universal in urban areas. It was, in short, when the 20th century really established itself. Productivity grew at an extraordinary rate, and major investments transformed the economy and society. But toward the end of the decade, return on actual investments in physical plant began falling. Invariably, this means that investment will fall and a recession will set in.

Why did return on investments fall? The inequality theory holds that growth had been too concentrated at the top, allowing investment to outrun consumption. The Austrian theory holds that credit was too easy, leading to investment at unsustainable rates. Another possibility is that the technological revolution that made the Roaring '20's possible had simply run its course and that a slowdown -- painful, no doubt, but not catastrophic -- was inevitable. Most theories, however, dismiss the falling return on tangible investments as simply another turn of the business cycle that might have led to an ordinary recession if other events had not intervened.

As returns on real investment fell, investors turned to speculation on the stock market. The stock market boom, regarded at the time as a sign of health, was actually an early symptom that the economy was in trouble. As everyone remembers, the stock market was driven to artificial heights by buying on the margin. Investors paying only part of the price of the stock they buy and borrowing the rest from the brokerage firm, to be repaid when the stock is sold, was a well-established practice that continues to this day. In the 1920's the "margin" was 10%, that is, investors could pay only 10% of the price of stock and borrow the rest. It was this practice that drove the stock to such dizzying heights. It was also this practice that might the crash so catastrophic -- suddenly the collateral backing all those debts had lost its value, but the debt remained.

The great amount of bad debt set of a vicious cycle of debt liquidation. Brokers called in loans, which could not be paid. Debtors withdrew money from banks to repay loans, causing banks to lose capital and have to call in loans. As banks came under further pressure, they held more cash and made fewer loans, limiting economic activity for lack of credit, which made more and more borrowers unable to repay. As deflation set in, debts became more onerous, and even debts that had once been good became unsupportable.

Yet the first major bank failure did not occur until over a year after the stock market crash. The New York Bank of the United States failed in December, 1930. The Bank had been involved in stock market trading to an uncertain degree, enough, in any event, to make depositors nervous and start a run. Bank runs proved highly contagious and rapidly spread, to many banks that had nothing to do with the stock market. The contagion was not purely psychological. Many farmers had overborrowed in 1919 when land prices were artificially inflated and long been struggling to keep up their mortgages. Small community banks, with no loans other than to farmers, had also been struggling. The economic downturn caused a drop in commodity prices. Drought further squeezed the farmers and led to a vicious cycle of defaults, foreclosures, and bank runs. This, in turn, led to further deflation, which made more debts bad, which continued the cycle.

But there had been many depressions before. Why was this one so much worse? The usual conservative/libertarian answer is government intervention, and they are essentially correct. In earlier depressions, there had been no central bank, and the federal government made up no more than 2% of the GDP. What this meant was that the federal government could not help in previous depressions, but neither could it harm anything. By the 1930's it had grown greatly in its ability to act for good or for ill, but did not know what it was doing.

In the absence of a central bank, private banks guaranteed each other, acting in concert to bail out any one that came under pressure, let the run prove contagious. (J.P. Morgan could be said to have acted as de facto central banker). The creation of a federal reserve system destroyed private agreements among banks to protect each other, yet the Fed failed to act to stem the spreading bank failures (partly because most of the banks going under were not To Big To Fail). The Fed was also constrained in how much it could do to expand the money supply by limited gold itssupplies. Herbert Hoover was by no means inactive in the face of the Depression, but he largely limited himself to moral suasion. He persuaded a large group of employers to refrain from wage cuts and large-scale layoffs and attempted to persuade banks to protect each other as they had done pre-1913. He also began a public works program, though on a much smaller scale than the New Deal. But he also sought to balance the budget under conditions of disasterously falling revenue, raising the top tax rate from 24% to 63%, which proved ruinous.

So, in effect, libertarians are saying because banks sometimes bailed each other out in the absence of a central bank, but the Fed failed to do so, we are better off without the Fed, and because Hoover's attempts to close the deficit made the Depression worse, we are better off with a government too small to affect anything. This is like observing that a car without a steering wheel will go more or less straight, but steering in the wrong direction is disasterous and therefore urging people to remove their steering wheels as a safety measure.

Franklin D. Roosevelt is also awkward for libertarians because his first term (at least) is characterized by such a rapid improvement in the economic situation. At the time FDR came to power, the finance system was in a state of full-on panic. About half the states had shut down their banks altogether to stop the bank runs, and others were joining fast. The day before he was inaugurated, stock exchanges in New York and Chicago shut down. FDR and Hoover agreed on the need for a national bank holiday, but not the terms. Roosevelt's first act upon becoming President was to declare a "bank holiday" temporarily closing all banks. He then called Congress into session, and they hastily passed the Emergency Banking Act, which allowed the Treasury Department to close down any unsound banks and merge them with sound banks, and the Federal Reserve to make enough loans to sound banks to keep them going. The Act was a stunning success. The bank panic promptly ceased, depositors flocked back to banks to return their deposits, and recovery began. Roosevelt also went off the gold standard to allow the Fed to expand the money supply as needed. So far as I know, even libertarians have a hard time arguing with any of that.

FDR undertook numerous programs, some successful, some not, including public works on a huge scale, the Civilian Conservation Corp, rural electrification, the encouragement of unions, establishment of federal labor law, and the like. Throughout his first term, economic growth was very rapid, although given the depth of the hole the US economy was in, climbing out would necessarily take some time. By 1936, the economy had returned to 1929 levels, although unemployment (always a "lagging indicator," as Ronald Reagan put it) remained high. But there can be no doubt that something went very wrong in 1937. The economy suffered a recession-within-a recovery. Economic activity shrunk rapidly, and unemployment rose dramatically. If the drop had continued another three to four years, it would have been every bit as bad as the 1929-1932 decline. But it did not. The recession reversed after about a year, and recovery began anew.

There is a general consensus that FDR was to blame for the 1937 recession, but disagreement on why. Keynesians blame it on Roosevelt moving prematurely to balance the budget. Monetarists blame it on the Federal Reserve acting prematurely to tighten monetary policy. Business leaders blamed it on anti-business policies including hostile taxes, threats of anti-trust actions, and widespread strikes. Of course, it is entirely possible that all these factors were at work, having a greater effect in combination than any one would have had singly. Empirically, there is no way to tell, because Roosevelt reversed all these policies at once. The economy soon recovered. (Preparations for WWII helped).

So what is a libertarian to do? They have one of two options. Either claim that growth would have been even higher without FDR's policies, or more convincingly blame Hoover's interventioninsm for starting the Depression, then jump ahead to 1937, and airbrush out FDR's embarrassing first term.

American Depressions Before 1929

2010-06-23T19:54:00.000-07:00

Before 1929, periodic booms and busts were a regular feature of the economic system. I focus on US booms and busts, not because no one else had them, but simply because the US is the country I know most about.

The panic of 1819. This can be viewed as a ,classic Austrian depression caused by the central bank continuing to spike the punch long after the party got out of hand, a lesson in the danger of slamming on the brakes too fast, or and adjustment to life after the Napoleonic Wars. The US government financed the War of 1812 without a central bank by loans from private banks. Private banks often over-issued currency, leading to out-of-control inflation and speculation. The Second Bank of the US was founded partly to finance government, especially any future wars, and partly to issue a sound common currency. Instead, it encouraged state banks in their lending sprees. People also took advantage of easy credit to buy western land from the government. At the same time, Europe was adjusting to life after the Napoleonic Wars. During the war and in the immediate aftermath, Europeans were importing vast amounts of American farm products and not competing with American industry. As Europe began to recover, its imports dropped and exports grew. The Bank of the US sought to curb inflation by calling in loans and demanding payment in hard currency. Crash ensued, many banks failed, and countless people went bankrupt. Growth resumed in about two years, though effects lingered well into the 1820's.

The panic of 1837. The US government deposited its tax revenues in the Bank of the US and borrowed from the Bank to fund its operations. The Bank also acted as a private bank, making loans to private parties. Andrew Jackson was an inveterate haters of all banks, especially the Bank of the US, in part because of the events of 1819. At the time Jackson became President, the US was running huge surpluses and rapidly paying down the national debt. Jackson resolved to refrain from either spending the surpluses or cutting taxes until the debt was paid off. His goal, in part, was that if the US government no longer had any debts, it would no longer need a bank. The plan succeeded. Jackson paid off the national debt (the only time in US history, and perhaps the only time in the history of any major country). He then vetoed a recharter of the Bank in 1836, withdrew all federal funds, and distributed them among private banks.

Private banks responded with a vast orgy of dubious lending, with rampant inflation and speculation. In effect, Jackson fired the people who take away the punch bowl before the party gets out of hand, raided their liquor cabinet, distributed the contents, and was shocked -- shocked -- when the party got out of hand. His shock was genuine, by the way; Jackson hated speculators as much as he hated banks; indeed, he hated banks for encouraging speculation. He therefore slammed on the brakes, demanding gold and silver for all purchases of federal land. (Selling federally owned western land to private parties was one of the biggest sources of speculation). The country plunged into depression and took six years to recover.

The Long Depression, 1873-1893. Though less steep than the Great Depression, the Long Depression was also world-wide and persistent. Its origins are somewhat mysterious, and there is some dispute whether it was a single depression or a series of recessions. A major cause in the US appears to have been overbuilding of railroads, which had reached its limit. When the Great Northern railway failed, it brought down the Jay Cooke Investment Bank, and panic followed. (Many European countries appear to have had similar overbuilding and crashes in railroads). Tight money policies in the United States and Germany, with a insistence on a gold-only standard also contributed. (This is not a favorite depression among Austrians). French war reparations following the Franco-Prussian War and a wave of international protectionism have also been singled out as contributing factors.

The Panic of 1907. Interestingly, this and not the Great Depression, is the one pre-1990's financial crisis that Paul Krugman's book describes at length. It began when the Knickerbocker Trust (similar to a bank, but not quite the same) lent too much money to a set of speculators trying to corner the market on United Copper Company stock. The effort failed and bankrupted both the speculators and United Copper. This started a run on Knickerbocker Trust and the speculators' banks. Soon panic spread to the other trusts and threatened banks as well. (There was no central bank at the time, but New York banks made some attempts to insure each other. Trusts were not covered by the agreement).

The problem was that J.P. Morgan was out of town that week. As soon as he got back, Morgan (who had already bailed out the US treasury in 1893!) audited threatened institutions and determined which ones were sound. He joined forces with John D. Rockefeller and provided a sufficient infusion of cash to keep the sound banks from failing. He then summoned the presidents of all the city banks to his office and told them the stock market would fail unless they raised $25 million to loan it within 10 minutes. He also directed how this infusion of cash would be used. He followed up by loaning $30 million to New York City to keep it from going bankrupt, buying out a failing brokerage firm, and order the stronger trust companies to put forward $25 million to protect the weaker ones. Finally he persuaded Teddy Roosevelt to waive anti-trust objections -- before the stock exchange re-opened.

If only we had had J.P. Morgan in 2008 to provide $700 billion in TARP money taxpayers would have been off the hook! But that sort of power in a private citizen scares people. Besides, although J.P. Morgan saved the banking system, he did not really save the economy. It had been in decline since before the crisis, and took a turn considerably for the worse after.

It was also this crisis that persuaded the United States that we really needed a central bank. J.P. Morgan was just not an adequate substitute. The Federal Reserve was established in 1913. Many conservative economists blame it for the Great Depression.

Inflation and Speculation

2010-06-20T20:24:00.000-07:00

The longest serving chairman of the Federal Reserve was William McChesney Martin, who served from 1951 to 1970 and is famous for his remark that the job of the Fed is to "take away the punch bowl just as the party gets going." Paul Krugman's book comments that this referred more to the Fed's role in fighting inflation than pricking speculative bubbles.

That may be because, although the 1950's and '60's had serious and growing problems with the threat of inflation, they were little troubled by bubbles.* In the 1970's, the Fed tried to stimulate the economy in the wake of oil shocks at the expense of fighting inflation. Inflation escalated throughout that decade, ultimately reaching 13%, but with no sign of a bubble. In the early 1980's, Federal Reserve Chairman Paul Volcker severely tightened the money supply, raising interest rates as high as 20% and throwing the economy into its worst recession since WWII, with unemployment over 10%. In this he succeeded in bringing inflation down to acceptable levels, where it has remained to this day. However, the speculative bubble made a comeback.

In fact, since Volcker broke the inflationary spiral, we have averaged about one bubble a decade, each worse than the one before. In the 1980's Savings and Loans set off a real estate bubble, driving land prices to unsustainable heights and ending in a costly bailout (just as expensive, relative to GDP, as the TARP). Real estate and building had a several-year hangover where the boom was biggest. Opinion is divided on whether the bubble contributed to the 1990-91 recession, and, in any case, it was a mild one. In the 1990's we had a tech stock bubble (Krugman argues that it was a general stock bubble), which burst in 2000, leading to the 2001 recession. That was also a mild one, but recovery was worrisomely slow, and ultimately only came about because of the new housing bubble. That one has proven catastrophic.

Which leads me to an Enlightened Layperson's conjecture that I wish some real economist would address -- that inflation and speculation are really variants on the same thing. Both can come from demand straining against capacity, too much expansion of the money supply, too-easy credit, debt building too quickly, or whatever your theory of the business cycle. The difference is essentially that inflation occurs at the consumption level and speculation occurs at the investment level. Inflation occurs when too much money chases too few goods, i.e., when consumers with too much cash want to buy more than the economy is capable of producing. Speculation occurs when too much money chases too few investment opportunities, i.e., when investors with too many resources want more opportunities to invest than the economy can productively offer. Inflation drives up the price of consumer goods. Speculation drives up the price of investments.

There are also differences between them. Inflation does not appear to have any natural limits. So far the record is held by Hungary, 1945-46, with a inflation that peaked at over 40 quadrillion percent in one month. Speculation, by contrast, does have limits. Speculative bubbles invariably burst, well before they approach some of the more extreme excesses of hyperinflation.** Furthermore, when speculative bubbles burst, asset prices fall, sometimes to more realistic levels, sometimes to serious undervaluation. Halting inflation does not normally mean deflation; it simply means that prices stabilize where they currently are. And finally, although halting inflation is always traumatic to an economy, the prospects for a quick recovery are better than the prospects after a bubble bursts.

I am not suggesting that inflation and speculation are mutually exclusive; it is certainly possible to have both at once. Nor do I claim to know if internationally or over time there has tended to be any trade-off between them. But certainly in the post WWII US, there seems to be a pattern. For three decades, lots of inflation and little bubbling. In the next three decades, low inflation, and one speculative bubble a decade. Without claiming to know why, I could venture a wild guess. From the end of WWII up until the mid-'70's, most economic growth took place among the general public with relatively little at the top. This may have caused consumption to outpace investment and inflation to result. Since the, growth has been concentrated primarily at the top. This may have caused investment to outpace consumption and speculation to result.
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*Confession: This is more a general impression than anything thoroughly researched. I stand ready to be corrected.

**A hyperinflationary bubble could be said to burst when people just stop using the depreciated currency and move directly to barter, so that currency stops circulating altogether. In that case, the hyperinflationary bubble could be said to have burst and given way to hyperdeflation.

The Business Cycle: A Brief Overview

2010-06-16T20:55:00.000-07:00

Discussing finance and the economy requires a brief discussion of the business cycle. Roughly speaking, a recession happens when an economy falls below its productive capacity and leaves many resources unused. Inflation occurs when the economy strains against its productive capacity. The study of why the economy falls below or strains against its capacity is called demand-side economics. Supply side is the study of how total economic capacity can be expanded. (It has largely been hijacked since Ronald Reagan's time by people who believe the most effective way to expand total capacity is tax cuts at the top).

The various theories of the business cycle see themselves as rivals, but an Enlightened Layperson can see them, in many ways, as complementary and freely use all of them at once.

Keynesian economics. This was (mostly) what I learned in college. It has the advantage of being the easiest to understand because it ignores finance and focuses entirely on the real (material) economy. The economy is divided into three categories, consumption, investment (defined as actual building, rather than financial investments), and government. Consumption is considered non-problematic. Most people, given money to spend can reliably be counted on to spend (most of) it. The problem is with investment, "a flighty bird" subject to great fluctuations. Furthermore, when investment falls, consumption is imperiled. People lose jobs and income, which causes a reduction in consumption. The loss of consumer spending is a loss of income to businesses, which in turn hire and pay less, and so on down the line. This process is known as the multiplier.

Keynes' remedy for a drop in investment is for government to step in and temporarily take over investment until the private economy recovers. Keynesian economics also favors forms of assistance like unemployment insurance, which blunt the effect of the multiplier by allowing people who lose jobs to cut consumption less.

The concept of a multiplier effect from falling investment is not too controversial, although there is hot debate over how large the multiplier effect is. The more obvious problem with Keynesian economics is that it makes no attempt to explain why investment goes through such wild gyrations. Other economics theories do address that issue, and their answer usually lies with the system of finance.

Monetarism. This theory was developed by libertarian economist Milton Friedman during the 1960's when the Great Depression was a safe distance off and problems with inflation were beginning to ignite. Monetarism sees growth and inflation mostly as products of the money supply. If the money supply grows too quickly, inflation results, and the money supply should be tightened. If the money supply becomes to constricted, it causes recession and the money supply should be expanded.

Everyone understands why printing too much money causes inflation. Buy why does printing too little cause recession? And won't trying to fight recession by printing money just cause more inflation? Well, central banks "print" money by buying treasury bonds from banks and un-print it by selling the bonds back. (Banks apparently do not have the option to refuse). Central banks also lend money to regular banks. The point is that the more money central banks pump into regular banks, the more money banks can lend out to get the economy rolling.

Thus business cycles are caused by either central banks pinching too tight (causing recession) or overdoing it (causing inflation). The remedy is to move in the opposite direction, to tighten the money supply in case of inflation or expand it in case of recession.

But this, too, doesn't really explain how the business cycle gets started. After all business cycles existed without central banks as well. There are two main attempts to address that issue, both sub-categories of the "credit cycle" theory of the business cycle, but with very different perspectives.

Debt-deflation theory: This theory was developed by Irving Fisher during the Great Depression. A growing economy relies on credit and therefore creates debt. When the debt load becomes excessive, people begin paying debts off. But when everyone pays off debt at the same time, economic activity slows and prices fall (because sellers outnumber buyers). Deflation sets in, which makes debts even more onerous, which leads to more attempts to pay them off, and a vicious cycle ensues. Although this theory was long neglected in favor of the views of Keynes and Friedman, it is making a comeback because the current crises looks very much like a debt-deflation cycle at work.

Because of its emphasis on the dangers of deflation, the debt deflation theory is sympathetic to expansionist monetary policy to prevent deflation, or even to inflate one's way out of debt. It is also sympathetic to a Keynesian stimulus; government running up debt to compensate for private parties paying it off.

Austrian theory. Originated by Ludwig von Mises (an Austrian), the Austrian theory of business cycles holds that they are caused by too-easy credit, which leads to careless and bad investments. Eventually the bubble bursts, the bad investments fail, and recession sets in. Given the mess too much easy credit has gotten us into today, all of this is hard to deny. But the Austrian School is regarded by most mainstream economists as a bunch of kooks, although they have many right-wing political followers, including Ron Paul, Glenn Beck, and most of the John Birch society. (Many of my Google searches in researching this post led to Austrian tracts).

So what's wrong with the theory that too-easy credit leads to a dangerous boom-and-bust cycle, given that it is obviously true? For one thing, other theories of the business cycle seek the golden mean. Keynesian economics seeks just the right level of economic activity, that neither strains economic capacity (causing inflation) nor falls below it (causing recession). Monetarism seeks to expand the money supply at the right speed, neither too fast nor too slow. Debt deflation warns against the buildup of excessive debt, but also that running too little debt leads to stagnation. But Austrian economics only warns against the dangers of too-easy credit and never considers the possibility that too-tight credit might also cause problems.

This leads to bizarre consequences. For one thing, Austrians do not accept easy money policies as a way of relieving a recession. Even in the depths of the bust, their first fear is re-igniting the boom. Another is that they do not accept any sort of intervention at all as appropriate. Recessions, even depressions, are not seen as a problem, just a flushing-out of bad investments. Only the boom that preceeds the bust is a problem.

It also leads to some extreme suggestions on how to prevent the boom-and-bust cycle. All involve abandoning central banking and the entire modern system of finance. And by the modern system of finance, I mean not just the fancy financial instruments that caused the current crash, but banks and paper money altogether. All want to return to the gold standard, allowing government to issue only gold coins as money. Some want an unregulated system of banks, with each bank free to issue its own gold certificates (bank notes). Of course, we had just such a system from 1837 to 1913. The result was that banks frequently over-issued notes and loans leading to too-easy credit and exactly the boom-and-bust cycle the Austrians predict.

Some therefore respond by proposing to abolish banks altogether, or rather, to allow banks as vaults for storing money, but forbid them from lending it out. So where would credit come from? Well, people would be perfectly free to lend their own money, just not anyone else's. Home purchases would presumably be financed by direct installments to the seller, corporations by bonds and -- well, I don't know enough about modern finance to understand the full implications, but I could say this much with confidence. Such a system would, indeed, eliminate any problems caused by too-easy credit. But the Austrians really need to think of the dangers of too-tight credit strangling an economy to death. We are dealing with them now.

Bad Blogging Habit, Continued

2010-06-16T20:33:00.000-07:00

This post has an interesting analysis of the problems in our finance system. In effect, fiancial institutions are driven, less by what investors want than by what generates the most volume of trades because that is where the money is. In other words, we have a system of Paganini finance.

That would explain a lot!

Finance: Some Very Basic Concepts

2010-06-13T20:45:00.000-07:00

Part of struggling to understand what the financial crisis and financial reform are about includes struggling to understand the terminology. And not just complex and technical jargon, but basic concepts like a "bank." What is a bank, exactly? The most obvious answer is it's where you park your money to keep it safe, the the answer is more complex than that. Are Savings and Loans banks? What about credit unions? What about investments banks, which have the word "bank" in their name, but don't take deposits at all?

Paul Krugman offered a rough definition of banking in his book. A bank is an institution that borrows money to invest. Specifically, it promises its lenders that they can cash out fast, while making investments that are not easily liquidated. Such an arrangement is inherently unstable -- if too many lenders want to cash out at once, the bank cannot liquidate its investments fast enough to satisfy all of them. Panic and a bank run ensue. Since the experts don't agree on which financial institutions should or should not be called "banks," I will just refer to any institution that borrows to invest as a financial institution and refer to the ones that take deposits as commercial banks (a term sometimes used to distinguish them from investment banks).

This led to the next very elementary question -- what is the difference between a lender and an investor. The distinction is straightforward enough at your neighborhood commercial bank, but it becomes less clear as you move deeper into the realm of high finance. Basically, though, a lender gives a financial institution money with a clear, contractual right to repayment on pre-determined terms that are independent of the institution's fortunes. In other words, a lender (in theory, at least) gets no less if the borrower is doing poorly and no more if the borrower is doing well. Investors, in effect, get what is left when borrowers are paid off, but they have no right to any specific amount. Investors reap the profits in good times and bear the losses in bad times. If the institution fails, lenders recover what they can in bankruptcy proceedings, and investors get nothing at all. Investors, in short, are the ones who bear the risks.

For a commercial bank the distinction is obvious. Depositors are the lenders. A bank account is, in effect, a loan to the bank that can be called in at any time, in whole or in any part. A bank account is listed on the bank's balance sheet as a liability because the depositor can withdraw or close it any time, although the cash in the account is, of course, an asset.

In an insurance company, policy holders are lenders who can call in their loans only if they have a misfortune.

In a non-financial corporation, stockholders are investors and bond holders are lenders. Bonds pay interest on pre-determined terms. Stocks pay dividends that depend entirely on the profitability of the corporation.

And then there is high finance. Most accounts of high finance focus on the sorts of investments they make -- complex and risky investments that commercial banks are barred from making. What I am still struggling to understand is where high finance gets its funding, i.e., who it borrows from to make its investments. The answer (so far as I can tell) is that various high finance institutions borrow from each other, sort of like taking in each other's wash.

Again, I understand what happens when there is a run on a commercial bank. Depositors all want their money back at the same time. The bank doesn't have (most of) it in the vault and can only pay a few of them. The bank fails. Most of the depositors lose their money. The bank is no longer available to make loans. (And, although this does not get so much attention, presumably anyone who owes the bank is off the hook). Worse still, a single bank run can lead to a run of runs. The damage to the larger economy can be devastating. Recessions can come from many causes, but, so far as I can tell, true depressions come from some sort of malfunction in the finance system.

It was to prevent such an outcome that deposit insurance was instituted, and it was highly successful. Runs on commercial banks ceased. The industrial world, at least, stopped having depressions, and until the current crisis, even threats of depression. But, as I understand it, in the latest crisis a series of non-depository financial institutions suffered runs as their lenders (known as counterparties) all started calling loans at the same time.

What I am still struggling to understand is who those counterparties were, and what happens to the finance system when high finance institutions suffer runs.

Banking Reform: A Personal Comment

2010-06-12T13:40:00.000-07:00

The Senate and House are now about to hold a conference committee to reconcile their respective versions of the banking reform bill. I want to post on the subject before it is too late.

But first, let me be clear. I do not understand finance. I have never understood finance. Since the 2008 crash, I have been struggling mightily to wrap my head around the subject, making progress, but only beginning to understand how little I know. In college, I took some basic undergraduate courses in economics and attempted a paper on the IMF, but whenever our economics courses made the most elementary discussion of finance, my mind went blank. Yet finance is a very important subject. Most of our economic disturbances, and certainly the major ones, are the result of something going wrong in the finance system.

2008 was both the year our financial system went off a cliff and the year I started law school. In 2005-2006 I started learning the joys of net surfing on the job. Occasionally an article would pop up warning that we were in a huge real estate bubble and no one knew what would happen when it burst. I didn't understand the stories and mostly ignored them. In 2007, I came into some money and asked a realtor about buying a house. She said better buy now, because housing prices were about to crash. In my innocence, I thought good, I'll wait till housing prices crash and then buy cheap. (Besided, I was about to start law school and not have an income, which made buying a house just then seem like a really bad idea. Which means I know more about finance than a lot of mortgage originators, apparently).

Over the summer of 2008, gas prices soared to $4.00 at the pump, food prices went up, and bad news rained in from all sides. At that time I commented that we seemed to be facing stagflation for the first time since the 1970's and that the accepted remedy was for the Federal Reserve to tighten the money supply, raise interest rates, and induce a recession to squeeze inflation out of the system. But the finance system was healthy last time and could withstand the strain. In 2008 I had my doubts. It was a foolish concern. What I should have remembered is that if your goal is to induce a recession to squeeze out inflation, an unhealthy finance sector is more than capable of doing the job without any help from the Fed.

In August, 2008, I started law school. In September, all hell broke loose in the financial system. Everywhere, articles popped up trying to explain what was happening that I couldn't make heads or tails of. People were talking about asset-backed securities, LIBOR spreads and the relative merits of mark-to-market and mark-to-model accounting. I didn't know a hedge fund from a line of credit at a garden store or the LIBOR spread from an exotic brand of mustard. Articles attempting to explain what was going on mostly confused. (Someone who worked in the finance industry was quoted as saying that the problem with most articles in the popular press was that they needed to be about four times as long to even begin to explain what was happening).

So I went to Borders to look for a book explaining it. Most of what they had were either investment books on how to make money in the crash (which assumed much greater financial sophistication than I had), books with detailed explanations of some sub-part (which also assumed greater sophistication than I had and left large areas unexplained) or books advocating a certain course of action (all of which had some sort of ideological axe to grind). What I wanted was something entitled Sub-Prime Crisis for Dummies or The Complete Idiot's Guide to the Financial Crisis. There was no such book. The best alternative I could find was Financial Shock by Mark Zandi. Zandi is an economist for Moody's ratings who served (as it would turn out) as a financial advisor for the McCain campaign and for the Obama Administration. His book had blurbs from everyone from Lawrence Kudlow to Barney Frank. So it did not look like the work of anyone with an ideological agenda. It described the sub-prime crisis and the workings of the finance system as an insider, explaining the system to outsiders. It made what was going on comprehensible (though still rather dry and technical). It had two major shortcomings. First, it focused too much on the financial crisis as a crisis of sub-prime mortgages, rather than a general crisis in the financial system (although it moved more toward that later on). Second, and more seriously, it was written in summer of 2008, at which time the author could say that the worst seemed to be over. Little did he know everything up till then was just a preview for coming attractions! (He has since corrected that shortcoming with an updated edition).

I spent Christmas Break of 2008-2009 visiting my parents and reading Financial Shock. My mother commented that it looked dull and technical and bought me Paul Krugman's The Return of Depression Economics. Depression Economics has less depth than Financial Shock, but more breadth. It does not have much description of the inner workings of high finance, or much technical explanation of all the complex financial instruments that brought the system down. But it has a longer-term and more international focus, looking in particular at international currency crises in 1990. In this (as in some other things), the books reinforce each other. Zandi has a chart of the LIBOR spread, which is not an exotic mustard, but the spread in interest rates between US Treasury bonds and loans between major banks. The spread goes up in financial crises, when banks become nervous about lending to each other. Both books demonstrate that the 1990's, which Americans think of as a golden age of prosperity, was in fact a time rocked by constant financial crises, all of which should have warned us that our finance system was running badly out of control. I also read the mid 1990's book, When Corporations Rule the World, particuarly its section on finance, warning about the dangers of an out-of-control finance system, citing many of the same incidents that Krugman mentions and that show up on the LIBOR chart.

Finally, as the Senate debated financial reform, I read up on it on internet sites, from Wikipedia, to serious geek sites, trying to drive these complex and technical concepts into my head. It got so bad that I would read the sites late into the night and go to bed with financial information whirling in my head. In the morning I would be wakened by my cat, crying to be fed, and mistake him for a bank, crying to be deregulated! (Upon waking up further, I would realize that a cat just wants food and doesn't know about banks at all. Lucky cat!)

So, despite still not understanding finance, despite knowing no more about it than an Enlightened Layperson who has done some desparate cramming, I will, nonetheless, presume to do a series of posts on finance and banking reform. I hope to follow (and be influenced by) Krugman, taking a historical approach through past financial crises, up to the Great Depression, the 1990's, the present, and a mighty attempt to understand what Congress is debating.

Wish me luck!

One Final Comment on Healthcare

2010-06-10T22:26:00.000-07:00

Healthcare reform has largely dropped out of the news since passing. Although I believed that as a political matter, it should have been made to vest, there was one potential policy advantage in waiting till 2014.

People like Sarah Palin and Michelle Bachman insist that it will lead to death panels in the sense that if everyone has access to healthcare, it will have to be rationed and people will be denied essential services. The obvious retort is that if some people don't have access to healthcare at all, they are by definition being denied essential services. In effect, what Palin and Bachman are saying is don't let anyone else get access because it will take services from me. Not a very edifying argument, but one with a certain appeal.

But is it true? For life-threatening conditions or serious illness, no. We already have mechanisms in place to ensure that no one is left to die in the street. Most of the uninsured entering the system will be reasonably healthy. But what the Massachusetts experience has shown is that, although critical care will not be much affected, primary care will be severely strained. The influx of 32 million people, fairly healthy, but without regular care up till then, will be a serious strain on our primary care system.

That is the advantage of a four-year lag. It will give us time to prepare by training a large number of primary care providers to cope with this sudden influx. We should be working on that between now and then. For instance, we should vastly increase scholarships to become nurse practitioners and physician assistants. (These two categories are qualified to give primary care to a generally healthy person, but they are less expensive and quicker to train than family doctors). We should be advertising, urging people to follow these two careers because they will be growth industries in a few years. And if we are unable to train enough primary care providers on our own, we should start admitting more immigrants who can offer primary care.

So, what are we doing now to prepare for the influx? So far as I can tell, nothing.

Obligatory Oil Spill Post

2010-06-06T16:41:00.000-07:00

So, what should Obama do about the oil spill? I fully agree with people who say that getting mad and pounding the table seems pretty pointless. I never agreed with the people who said that jihadi attacks are happening because Obama isn't belligerent enough in his speeches, but at least jihadis are human actors who might conceivably respond to that sort of thing. Oil is not. Oil will keep gushing out without the slightest regard to whether the President of the US loses his temper. (And British Petroleum doesn't like the situation any more than anyone else. They aren't delaying in blocking the leak because the President isn't angry enough at them).

At the same time, I do think his response has been lacking. So here is my suggestion. Pretend it is an earthquake in Haiti. There seems to be a general consensus that Obama's response to the Haitian earthquake was all one could ask for. So why not duplicate it here in the US? Leave plugging the leak to BP, but go all out in cleaning up the slick. (This column goes so far as to suggest making it the new Civilian Conservation Corp). Publicize the all-out you are doing to clean up the spill. Unveil a generous plan to help the Gulf Coast states recover from the impact. (If it causes embarrassment in people opposed to all government spending, but eager to benefit from it, so much the better).

But there's more than that. One of the frustrating things about the spill has been our sense of helplessness. Americans may hate relying on government, rather than ourselves. But, as the spill makes clear, it turns out that, after all, Americans would rather rely on government than on British Petroleum. At least the President is someone we elect and feel we can, to some degree, hold accountable. (And even people who didn't vote for the man and hate his guts can still hope to impose some accountability on the office). But really, what people want most of all in a crisis like this is to get past this sense of helplessness and be about to do something about it. So give us something to do. What charities are available to clean up a mess like this? Tell us who they are and where we can donate. Is anyone taking volunteers? How about giving a shout-out to former Presidents Clinton and Bush for their good work raising funds for Haiti and asking them to do the same for the Gulf Coast? Or mobilizing that network of supporters to help in the clean up?

A local newspaper article discussed barber shops and beauty shops collecting hair and old nylons to make oil booms. Well what about it? Why not urge hair cutting places to donate their hair for oil booms and urge everyone to go out and get a haircut? Better, get your own hair cut (okay, there isn't much of it) and donate the clippings along with Michelle's old nylons. Or, better yet, see if Michelle and the girls will get their hair cut, too. Best of all, stage a photo op with all the Gulf Coast state governors getting all your hair cut. (This is the sort of thing where dislike of the man can give way to respect for the office. My hair is joining presidential hair in stopping the oil slick!)

As for anger, I will admit, I don't live on the Gulf Coast, and maybe if I did, I would feel different. But as it is, I am inclined to see this anger mostly as frustration that will dissipate if given a creative outlet. And I can't muster any desire to punish British Petroleum. Nothing government does to BP could possibly be as bad as what nature is doing to them every single day.

I Don't Get It

2010-06-06T16:18:00.000-07:00

Seriously. When did even the slightest deviation from the Israeli line become a radical, unthinkable policy for a US President to pursue? It wasn't always like that.

Truman had grave misgivings whether to recognize Israel at all.

Eisenhower was furious when Israel, Britain and France invaded the Sinai, condemned their actions at the United Nations, and put strong pressure on them to withdraw.

Nixon send Kissinger to mediate a cease-fire between Israel and the Arab governments in the Yom Kippur War.

Carter mediated a peace treaty between Israel and Egypt.

Reagan opposed Israel's invasion of Lebanon, made an effort to restrain Israel, and negotiated the withdrawal of the PLO.

Clinton mediated an agreement between Israel and the Palestinian Authority.

The roles of mediator and marionette are incompatible. It is impossible to be perceived as an honest broker if you make it a policy to automatically rubber stamp everything one party wants or does.

I can only conclude from this that our relationship with Israel moved from ally to poodleduring the presidency of G.W. Bush. Up till then, the belief that our only proper association with Israel was one of unconditional obedience was one policy viewpoint, and not such an uncommon one. But it was not the only one to hold any sway in serious policy circles. But G.W. Bush adopted a clear policy -- we would be Israel's poodle, and everyone else was expected to be our poodle.

Now Obama is making some feeble, half-hearted steps from poodle back to ally and everyone who is anyone is throwing a collective fit at his radical, unheard-of actions.

Tea Parties: Two Attempts at Analysis

2010-06-03T20:38:00.000-07:00

There is a certain bizarre unreality to the the Tea Party movement. Here we are, in the midst of the worst economic downturn since the Great Depression, and enraged demonstrators are out in the street, demanding that we adopt the policies of Herbert Hoover. Jacob Weisberg at Slate doesn't think this is so strange. The Tea Parties are just typical Western libertarian conservatives, expressing their "opposition to any expanded role for government, whether in promoting economic recovery, extending health care coverage, or regulating financial markets."

I find this argument unconvincing for two reasons. First of all, does Weisberg really believe that if the government had adopted the policies of Hoover, allowed the financial system to crash, cut spending when most needed and (some even propose) refused to expand monetary policy, that Tea Partiers would be pleased with these developments? As we sunk into depression, would they be proclaiming how happy they were that the government was off their back and letting them starve in peace? Pardon my skepticism. The other reason is the demographics of the movement. Tea Partiers tend (with many exceptions) to be older -- some already receiving Social Security and Medicare, others anticipating receiving them within the next ten years. Why is rage over government spending strongest in the age group that most benefits from it? Do they want their Social Security and Medicare cut off?

Assuming the answer in both cases is no, I see two other answers to who the Tea Partiers are and why they are so upset over government spending.

One explanation is economic. They are of an age group that receives or will soon receive Social Security and Medicare. They also know that these programs will come under increasing strain in the near future as our population over 65 swells. They therefore fear government taking on any more obligations lest it threaten obligations to them. Seen from this perspective, their opposition to (any more) government spending is perfectly rational. I do wish they'd be more honest about it, though.

The other explanation about the Tea Party movement is that is is first and foremost about culture. The problem is not the amount of taxes (which have not, in fact, increased), or the amount of spending (deficits, after all, started ballooning as soon as the financial crisis hit, but they didn't seem too concerned so long as Bush was in power). It is not even what the money is being spent on. The real question is who is spending it.

By this view, Tea Partiers see their own culture, authentic Real American culture, under siege by a mocking liberal elite that has no respect for their values and no reverence for the things they hold dear. This is not an unreasonable complaint. Modern liberals do mock and look down on a lot of what might be considered traditional American culture and values. Preaching tolerance and cultural relativism, too often they are willing to extend it to everyone except our own. The Democratic Party represents this liberal elite -- as well as Spanish speaking immigrants, Muslims, and really anyone outside the Real American consensus. The real problem with government spending is not that it is too great, or that it is driving taxes too high, or even that it is going to unworthy people, but that the inauthentic, un-American Democrats are in charge of it. And, when you get right down to it, the real problem with government in the first place is that it sometimes falls into the hands of Democrats.

Despair: What Comes Next?

2010-05-31T19:52:00.000-07:00

So, we've had another failed terrorist attack and the Obama Administration has agreed to suspend the Miranda Warning in order to avoid the frightful results that didn't happen when we read the Miranda Warning to Richard Reid and Umar Abdumatallab. So why haven't I had any posts on the War on Terror lately? Despair, mostly. Glenn Greenwald enjoys flailing wildly in impotent rage. I do not. But what other options are open when the Obama Administration:

Orders the extra-judicial killing of a US citizen;

Retroactively legalizes telecom reps setting up shop in FBI office to bypass usual warrant requirements;

Prosecutes two whistle blowers when the Bush Administration never prosecuted any;

Issues procedures for military commissions the presiding judge describes as "only a marginal improvement, and which go beyond the Bush rules by forbidding credit for time served;

Escalates covert operations against Iran and resorts to new tricks to keep them unaccountable;

Makes no changes to Bangram prision in Afghanistan which is Bangran: worse than Guantanamo, and where two-thirds of the 600 prisoners are estimated to be innocent;

Etc. Etc.

It's not that I blame Obama exclusively. At least he's not quite as bad as Congress, which is passing legislation to prevent lawyers for Guantanamo detainees from offering any effective defense, seeking to forbid the release of any detainee even if proven innocent, and even discussing legislation requiring terror suspects (including US citizens) to be locked away forever in military detention without a trial.

Any one of these developments would once have inspired me to an outraged post. But now what is there left?

The unfortunate fact is that terror suspects have no political power, and are up against the combined might of the military, the intelligence community, and much of our domestic security apparatus. There is no political upside in acknowledging they have any rights the white man is bound to respect, and much in proving how "tough" you can be. Matthew Yglesias describes the dynamic well, "If you have an incumbent administration being urged by the opposition to seize more power, and the public wants the administration to seize more power, then you get what we have today." The current escalation in jihadi plots can only escalate this dynamic.

So is there any alternative to despair? Any at all? I see only one, and it is a weak one. But if more right-wing terror plots are thwarted, although it will not convince anyone that Arabs have human rights, it might at least convince right wingers to limit Obama's power lest it be used against them.

Mostly, though, I can only think of despair.

Postscript

2010-05-22T20:11:00.000-07:00

I will admit it. Although I cited Congressional Budget Office (CBO) figures in my last post, I did not read the report in any degree of detail. Having now looked over the figures in some detail, I am more sympathetic to people who are alarmed at our long-term financial system and Obama's big-spending ways and warn that they are unsustainable. But I am not prepared to let Bush off the hook either.

My old assumption was the Bush inherited a balanced budget and intentionally destroyed it with his tax cuts, creating a structural deficit. (The wars and Medicare D didn't help either). Then in 2008 the economy fell into severe recession, exploding the cyclical deficit. Obama added some short-term stimulus spending that temporarily raised the deficit even higher. But with the expiration of the stimulus and economic recovery, we will be back to the same structural deficit we had before recession hit.

In this I was not entirely wrong, but only partly right. The Bush Administration long disguised the full extent of the structural deficit they had created by claiming that its tax cuts would expire on January 1, 2011. The CBO dutifully made its deficit projections by assuming that this would happen. Not surprisingly, deficits were projected to drop considerably beginning in 2011.

The Obama Administrtion proposes to let the tax cuts on incomes over $250,000 a year expire, but to keep the tax cuts on all other incomes. This substantially increases the structural deficit, though not as much as if all the tax cuts were extended. This is not the only action that increases the deficit, but it is, the CBO comments, by far the biggest ticket item.

There are other changes as well. The most obvious one is health care reform but, if the CBO is to be believed, taxes to pay for it will essentially match expenditures (with a small deficit some years and a small surplus others). The Obama Administration also wants to index the Alternative Minimum Tax (AMT) so that middle income people will not slowly be pushed into the AMT by inflation. Let the record reflect that bracket creep is a regressive and oppressive way to raise taxes and I support indexation. Fortunately, the revenue loss from indexing the AMT is offset by various minor proposed tax increases, so the net effect is essentially zero.

Another accounting gimmick to disguise the full extent of the structural deficit is to mandate cuts in Medicare reimbursement rates. The Obama Administration eliminates this, acknowledging (in effect) that it will not happen. This raises the deficit by a modest but growing amount, reaching $45 billion by 2020. Various other spending increases are proposed, none all that large, but they add up. To partially disguise the full extent of the increased spending, the White House makes unrealistic assumptions about cuts in defense spending. Its proposals to freeze discretionary non-defense spending in the near term do not make even a minor dent in the deficit.

Still, treating health care reform as a wash and the AMT and other tax tweeks as a wash, the other spending increases don't seem all that large or disturbing. And, in fact, in the earlier budgets, the bulk of Obama's deficit increase seems to be holding onto the Bush tax cuts. Without them, the earlier deficit increases don't seem so large at all. But over time, they increase because of one deadly, deadly item -- interest on the national debt.

The most baneful effect of sustained deficits is the interest they run up over time. Ronald Reagans tax cuts did, in fact, starve the beast, but not in the way he intended. Government spending did not drop as a result of his tax cuts, but his large, sustained deficits did change its composition. As more and more of the budget became devoted to paying interest on the national debt, less and less was available for social programs -- or anything else. Of course, interest rates were higher in the '80's. Currently, interests rates on US Treasury Bonds are at all-time lows. Too low, in fact. They are a sign that investors are afraid of taking risks and fleeing to safety. But this will not continue. Sooner or later, the world economy will improve, and rates on US Treasury bonds will go up.

According to CBO estimates, if the Bush tax cuts are allowed to expire in their entirety and no other change is made in the budget, structural deficits will run between 2% and 3% of the GDP. Under the Obama projected budget, structural deficits will be between 4% and 5%. And, the CBO estimates, structural deficits in the 2-3% range are sustainable, while deficits in the 4-5% range are not. In effect, if the deficit stays at 2-3%, debt will stabilize between 60% and 70% of GDP because we will be able to pay off old debt as quickly as we accumulate new. Interest payments will remain stable. At 4-5%, however, debt will continually escalate, reach 90% of GDP by 2020 and then -- who knows. The result of this escalating debt is that more and more of the budget will be eaten up by debt service and less and less will be available for anything else. Bruce Bartlett estimates that debt service will consume 20% of revenues before 2020, causing interest rates to rise and forcing drastic budget cuts.

So, while I continue to defend Obama's current profligacy as necessary to jump-start the economy, once the economy is jump started, he needs to do a great deal more to cut the deficit. Allowing all Bush tax cuts, not just the top rates, is a good first step. We desparately need the revenue, and the Tea Party crowd will be more willing to let rich people be taxed if they know they have to pay too. ;-). Once that is done, it should be possible to get structural deficits down to a sustainable 2-3% with not-too-drastic modifications.

And what else do I suggest, either to bring the deficit down to 2-3%, or to eliminate it altogether? Off the top of my head, raise the ceiling for paying Social Security taxes, or eliminate it altogether. Raise the retirement age, phasing it up to 70. And, despite howls of protest about death panels, consider applying effectiveness research to Medicare.

But mostly I think I need to take the Budget Simulator.

WWKD (What Would Keynes Do?)

2010-05-21T20:47:00.000-07:00

So, if if the Keynesian view divides deficits between "structural" and "cyclical," what does it propose to do about the alarming budget deficits we are running today. For the time being, nothing. Why? Look at the chart again.
Yes, the chart makes clear that deficits are at unprecedented heights, about 10% of the GDP. It is also undisputed that such staggering deficits are unsustainable. But it is also clear that the explosion of deficit is cyclical, rather than structural and will diminish with recovery.

But what if the recovery stalls out (as may well be the case)? The Keynesian prescription is even more profligacy. Is that crazy? No crazier than the (essentially Keynesian) claim that Ronald Reagan's tax cuts spurred growth that recovered about 30% of their lost revenue. When an economy operates below capacity, government that pays out more than it takes in stimulates economic activity that, in turn, lowers the deficits. It's a dirty little secret, but Obama's stimulus has alread done just that. Quite famously, he came into office facing a $1.2 trillion deficit. With his added stimulus spending, the deficit was projected to reach $1.8 billion. Instead, it came in at $1.4 trillion due to the beginnings of a recovery which most experts do, in fact, attribute to the stimulus. This amounts to saying the stimulus recovered two-thirds of what it put out. The return on Reagan's tax cuts seems paltry by comparison!

Similar trends hold for this year. 2010 began with a $1.35 trillion projected deficit. This rose to $1.6 trillion in February, with additional requests for tax cuts to promote jobs. By April the estimate was back down to $1.3 trillion with continued economic improvement. Where do we go from here? Stay tuned.

Congressional Budget Office projections on future deficits, both in terms of dollars and percentage are revealing. It estimates the deficit will peak at $1.5 trillion or 10.3% of the GDP in 2010, then fall to $1.342 trillion or 8.9% of GDP in 2011, $914 billion or 5.8% of GDP in 2012, and $747 billion or 4.5% of GDP in 2013. (After that it stabilizes and begins a disturbing increase around 2019). Of course, CBO projections are often wildly inaccurate, but they make clear that half or more of the deficit is cyclical and can be expected to end with recovery.

A structural deficit of 4-5% of GDP is a whole lot more sustainable than one of 10%. Indeed, as the chart above shows, such deficits have been quite common for the past 30 years. It is, nonetheless, a serious problem, and will only get worse as an aging population consumes more and more Social Security and Medicare. So Keynes would agree -- unlike our cyclical deficits, which can be safely ignored or even encourages, the structural deficit is a serious problem that must be addressed. But a severe recession is the wrong time to address it.

Furthermore, even with a solid recovery under way, to try to get rid of the entire deficit in a single year. Trying to cut federal spending amounting to 5-10% of the GDP in a single year amounts to cutting out 5-10% of the GDP. By contrast, the current recession, the worst since the 1930's, amounted to a GDP drop of closer to 4%.

So when will the economy be strong enough to start serious work on balancing the budget? And what should we do? It's hard to say, but the budget balancing of the 1990's is the most obvious model. In 1993, the US was about two years out of a mild recession, with unemployment beginning to fall, but still feeling weak and shaky. President Clinton pushed through an across-the-board tax increase, focused especially on the upper brackets. Republicans howled in protest, warning that the tax increase would be economically ruinous. The economy ignored them. Republicans also deserve credit after they took control of Congress, firmly holding the line on spending, but without making any dramatic cuts. Between the tax increase and holding the line on spending, balancing the budget turned out to be easier than anyone anticipated.

So, if the economy continues to recover (yeah, I know, a big "if"), by the middle of next year we should be officially out of the recession for about two years, with unemployment starting to fall. That would be a good time to restore Clinton's tax rates and start freezing discretionary spending. Of course, just because a certain level of tax increase and a freeze in spending balanced the budget in the '90's doesn't mean it would work again. After all, the '90's were an unusually prosperous decade, and vigorous growth helped a lot. We can't count on it happening again. Conventional wisdom is that the severity of the finance crisis means that credit will be tight, inhibiting growth, for the foreseeable future. But Clinton made an important discovery, although it seems obvious in retrospect. When growth takes place primarily at the top, even modest changes in tax rates at the top can have a dramatic effect on revenue. Conventional wisdom further has it that growth will take place primarily at the top for the foreseeable future.

So there's my recommendation for addressing the deficit. It probably won't turn out to be enough, and we may have to try something more later on. But the point is not to act prematurely. Only when cyclical deficits are clearly falling will it be time to address the structural deficit. That will be when it is most tempting to ignore it.

It's Agreed: Not All Deficits Are Equal

2010-05-20T21:34:00.001-07:00

Budget deficits appear to be like the weather -- everyone talks about them, but no one does anything about them. The political will just isn't there.

At least one reason political will is lacking is that although everyone deplores the immense deficits we are running, no one deplores all deficits equally. Conservatives (at least movement conservatives) and liberals (at least economically literate liberals) see different kinds of deficits as qualitatively different.

Conservatives divide deficits into two types -- deficits resulting from tax cuts and deficits resulting from spending increases. While all deficits resulting from spending increases are deplored, (movement) conservatives don't see deficits resulting from tax cuts as a problem for two reasons:
(1) Starve the beast. Tax cuts choke off government revenue, precipitate a future budget crisis, and ultimately force spending cuts and reduction in total government.
(2) Supply side. Tax cuts spur so much economic growth that they ultimately increase revenue and avoid the need for spending cuts. Needless to say, these two theories directly contradict each other.

It should go without saying that the two conservative concepts of why deficits caused by tax cuts are acceptable are mututally contradictory, and that holding both of them in your head at once calls for a certain exercise in doublethink. As such, it's probably too much to ask for any one conservative to refute both of them. But recently two dissident conservatives have written two fine separate articles criticizing the two alternate theories.

Bruce Bartlett, writing for Forbes, takes on starve the beast. Although he briefly acknowledges the supply side view, he does not appear to take it very seriously. Rather, he hearkens back to the good old days when conservatives opposed any tax cuts not paid for by spending cuts and sees the embrace of tax cuts now, spending later as a mixture of political opportunism and hopes of starving the beast. Reagan justified his tax cuts in such terms and the junior Bush urged them as "a fiscal straightjacket for Congress." But so far attempts to starve the beast by running up deficits have signally failed.* Bartlett argues that deficits were only effective in forcing spending cuts in the past because people feared that the only alternative was a tax increase. But once conservatives adopted the dogma that taxes could never be increased, no matter what, all incentive for fiscal discipline ended. He goes so far as to suggest that tax cuts, by reducing the bite from spending, actually encourage spending increases.

Meanwhile, Kevin Williamson of the National Review wearily explains why tax cuts do not increase revenue. Tax cuts, by spurring growth, can partially pay for themselves. The Reagan tax cuts recooped about 30% of their revenue. This is a far cry from the supply side claim today that all tax cuts reclaim over 100%. Proponents grossly exagerate the value of tax cuts by assuming that any growth that follows a tax cut is caused by the tax cut. And, like Bartlett, Williamson acknowledges the basic problem: everyone hates government spending in the abstract, but no one wants to cut any particular program.

Both men do a fine job of refuting the respective theories of why deficits causes by tax cuts don't count, yet each leaves a little anomaly. Bartlett is left with the oddity that spending actually increases when taxes go down. And Williamson defends supply side economics as partly true -- tax cuts partially recover lost revenue. And here I would suggest that liberals who follow Keynesian economics would fully anticipate both outcomes.

Like movement conservatism, liberal (Keynesian) economic theory also distinguishes between different types of deficits. It divides budget deficits into "cyclical" and "structural." A cyclical deficit is the result of shortfalls in revenue and increases in payouts as a result of an economic downturn. Cyclical deficits will resolve themselves once the economy improves. Any attempt to cut them is undesirable, requiring either increasing taxes when the economy can least afford them or cutting services when the economy most needs them. Structural deficits, by contrast, are gaps between revenue and expenditures that remain even in good times. These are a problem and do need to be reduced, although the middle of a severe recession is the wrong time to address them.

This chart confirms Bartlett, that tax receipts and government expenditure rise and fall in almost perfect opposition to each other:
But the simplest explanation is a cyclical one. Revenues fall and payouts rise during economic downturns. Revenues raise and payouts fall in good times. As for Williamson, he failes to note that Reagan's tax cuts were made during a severe recession.** Keynesian theory predicts that during a recession, the economy is operating below capacity and deficits provide stimulus. It would, indeed, predict that tax cuts would partially pay for themselves during an economic downturn. It does not logically follow that they would be equally effective during good times. In fact Reagan's supply side economics were really just Keynes by another name.

Next post: Keynesian approach to the current deficits.
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*At least at the federal level. States, which have balanced budget requirements in their constitutions, can be forced by lost revenue to cut spending, or at least to shift it off onto municipal governments.

**Not quite as bad as the one we're having now, but until the current downturn it was often referred to as the Great Recession.

The Deficit

2010-02-01T16:26:00.001-08:00

Just a quick (if belated) note on Obama and the State of the Union address. I thought he handled the deficit and accusations of big spending just right. He acknowledged the severity of the deficit and the seriousness of the problem, but also pointed out that (1) a great deal of the deficit was the inevitable result of such a severe recession, and (2) his spending was necessary to keep things from getting even worse. I tried to think up how to fit in a 5-minute lesson in Keynsian economics, but it probably isn't possible. He also acknowledged the need to address the deficit, but also the need to postpone action until the economy is stronger. Perfect balance.

Republican response was completely predictable: (1) Denounce the huge deficits, (2) call for a tax cut, (3) make only the most minimal suggestions for cuts in spending. This will undoubtedly be their program if they retake Congress in 2010.

If they retake Congress and the White House in 2012, their program will change to (1) cut taxes, (2) make minimal spending cuts, (3) ignore the deficit altogether until next time a Democrat wins the election.

Update:

Apparently I was unduly cynical. At least some Republicans have decided to bite the bullet and call for future reductions in Social Security. We'll see how that plays out.

What about the Individual Mandate?

2010-01-25T19:57:00.000-08:00

Of all the provisions in the proposed healthcare bill, none has aroused such hostility as th individual mandate. It is denounced on the right as forcing people to buy a service they don't want. Opponents on the left rather hypocritically denounce the individual mandate in similar terms, although their real objection is that payments have to go to a profit-seeking insurance company. And the thought of having such a requirement forced on them angers and offends most people.

The essential counter is that the individual mandate, however, unpopular, is necessary as a matter of risk pooling. If insurance companies are not allowed to deny coverage for a pre-existing condition, they will have greater expenses and need more revenue. Besides, people will be tempted not to buy insurance until they get sick, further increasing insurance costs while undermining revenue. Insurance is, in effect, a system whereby the (currently) healthy subsidize the sick.

As a matter of policy, I am not sure this is absolutely necessary. One might allow insurance companies to charge as much as necessary for premiums to sick people and just provide and adequate subsidy to make them affordable. But whatever the policy merits, the whole risk pool argument will never fly as a matter of politics. For one thing, people hate being told that they have to do something because it is their duty to society. But beyond that, if you are trying to sell the idea to Republicans/libertarians, you will never get anywhere pushing the idea of risk pool. The problem is not just that the idea is too complex and wonky for Republican/libertarians to understand. It is that they don't want to understand it or, perhaps, that they understand it perfectly well and are morally opposed.

The problem with risk pooling to a Republican/libertarian is that it is collectivist. The healthy are being asked to pay in to subsidize the sick. That is redistributionist and therefore violates their most basic moral principles. To be told that is your duty to pay into a pool while healthy so that the sick can have access to healthcare looks like a case of robbing Peter to pay Paul -- even if everyone can expect to become Paul some day.

But that leaves an alternative that might be a more acceptable way of looking at it. Healthy people are not being asked to buy insurance to subsidize the sick. They are being asked to pay their dues now, when they are healthy, so they can collect the benefits later when they are sick. When people develop a medical problem, their rates will go up, so they will almost certainly need a subsidy to buy insurance. People who try to cash in on the benefits when they're sick without paying their dues when they're well are a bunch of free riders the system should not support. (Of course, many people will need subsidies to pay for insurance even when well, but we'll sort of gloss over that). So, if instead of having an individual mandate, you simply make the rule that anyone who doesn't buy insurance now when they are healthy will not qualify for a subsidy later on if they get sick, that will be an approach highly agreeable to conservatives.

The problem, of course, is that it will not be acceptable to liberals. Liberals will ask what if someone is too ill-informed, short-sighted or just plain poor to buy health insurance. Are we to leave them to die in the gutter? So far as I can tell, the answer from a libertarian is that this is not a legitimate concern so far as public policy goes. If people don't pay their dues and run into trouble, there is always private charity. We conservatives pay much more to charity than you liberals. If you really cared, you would pay as much as we do. But how much to pay is strictly a private matter and not any business of the government. Not letting government rob Peter to pay Paul is a whole lot more important to a libertarian than what becomes of Paul if he can't pay his doctor bill.

Nonetheless, if anyone wants an individual mandate with any chance of getting past a Republican filibuster, this is the only possibility I could see.

Reflections on Breaking up the Healthcare Bill

2010-01-23T21:46:00.000-08:00

One of the proposals for dealing with the new 41-59 Republican "majority" in the Senate is to break the healthcare bill into pieces and pass them one by one, daring the Republicans to vote against them. This proposal has been much criticized. From a policy perspective, it is criticized because the popular and unpopular parts of the bill are mutually indispensable and an attempt to separate them would just send premiums skyrocketing. From politics perspective, Republicans may do anything from automatically filibustering anything to supporting the pieces and then claiming credit. ("Look, we blocked the dreaded Obamacare and gave you this wonderful (if mostly the same) system instead.") Nonetheless, I would like to give my analysis, both in terms of politics and policy, of the separate parts.

Standardizing of benefits and premiums.

One of the Democratic proposals was a standardization of health insurance packets. All policies will offer the same basic benefits packet, the only difference being how much of the tab the insurer versus the insured pays. Likewise, insurance companies will be required to risk pool to offer similar rates to everyone throughout the community. To be honest, I don't have a clear sense of the merits of how this compares to the current, immensely varied system.

But regardless of the policy merits, as a political matter, Republicans will fight this tooth and nail and invoke the filibuster over it. It goes against their basic principles at two levels. First of all, having government dictate benefits packages and rates violates their sense of free market capitalism (and, by extension, freedom). Second, many Republicans propose bare-bones policies as a cost-control measure. If patients bore more of the cost of healthcare, the theory goes, they will consume less of it. Many Republican would like to encourage policies that cover only routine, preventive care and major, catastrophic care.

As a policy matter, this may not be such a bad idea. My big problem with it is there are some things too big to be routine care and too small to be catastrophic that may fend off later catastrophes. A woman who receives an abnormal Pap smear having the abnormality burned out before it becomes life-threatening cancer would be a classic example. My advice would be to allow bare bones policies, but require them to cover any intermediate condition the doctor certifies and a matter of life and death. As a political matter, my guess is that it will be embarrassing for Republicans to vote against that, and that were are unlikely to see Tea Parties demonstrating, demanding that their insurance be allowed to exclude life-saving treatment.

Pre-existing conditions, rescission, and lifetime caps.

As a matter of politics, these are the most popular part of the healthcare bill, and Republicans will probably not want to face a 30 second ad accusing them of voting against them. Nor are we likely to see too many Teabaggers out protesting demanding their insurance companies' right to drop them if they get sick and offering to die as martyrs to free enterprise.

More realistically, both Republicans and Tea Parties may resist these measures on the grounds that they will make premiums skyrocket. And, of course, that is true. As a policy matter, it is the big reason many on our side oppose breaking the bill into its constituent parts. We do recognize the basics of the market and that there is no free lunch. If insurance companies are to be forces to incur all these additional costs, they have to be allowed additional revenue.

If Republicans resist banning pre-existing conditions and lifetime caps (I can't imagine anyone defending rescission), they will undoubtedly argue that these will make insurance more expensive. Democrats should freely acknowledge as much -- and then call for subsidies to help people pay for the increased rates. Personally, though, I believe this is worth passing even if subsidies don't pass. After all, what will happen if we do force insurance companies to take on so many more costs but don't offer subsidies? Insurance rates will skyrocket. The public will be outraged. And Congress will face one of three choices: (1) do nothing; (2) change the law to allow the bad old practices; (3) create a subsidies to help people buy insurance. Granted, the Teabaggers will probably be outraged at the subsidies and call for repealing the law instead, but I am guessing they will be in the minority, and the pressure for subsidies will be too strong to resist.

Subsidies

As a matter of policy, there is no doubt that if we are going to ban denials based on pre-existing conditions, rescission, and lifetime caps, we will need subsidies to cope with the increased rates. (Really, we need them anyhow). As a matter of politics, Republicans and the Tea base will no doubt be outraged and see the subsidies as "socialism," "a complete government takeover of healthcare," and something that calls for taxes. So there will be considerable resistance to such subsidies. On the other side, there is the threat of 30 second ads that "Senator So-and-So cast the deciding vote that blocked assistance to individuals and small businesses buying health insurance." And there is the specter of public wrath when premiums skyrocket and no help is at hand. So we may be able to pry loose a few Republicans to vote for subsidies to help buy insurance.

The other question is how to fund such subsidies. Republicans have an inflexible principle: No tax increases, even, no matter what the circumstances. That's going to be a tough one to overcome. No doubt even Republicans who do agree to subsidies will insist on financing them by cutting other spending. Here's my only suggestion. There is generally less resistance to taxes if people are assured that a particular tax goes into a particular fund to support a particular program. It feels more accountable that way. I personally think this is generally a bad system and that programs should be paid for from the general fund and all compete on an equal basis. The other problem is that whatever the revenue source for the fund, there is no way to ensure that it matches actual need for subsidies. But no matter. If creating a separate tax to pay for a "trust fund" is the only way to get subsidies enacted, I say go for it. (Of course, Republicans might just filibuster anything that raises taxes anyhow, regardless of skyrocketing premiums).

Cost control.

There are three cost control measures Republicans favor: (1) limiting malpractice claims; (2) allowing insurance companies to compete across state lines; and (3) bare bones policies. Everything else is "rationing," "government control of health care," "government bureaucrats coming between you and your doctor," "pulling the plug on granny" and even "death panels," "euthanasia of seniors" and perhaps even T-4. Republicans will not yield one inch on this. It is a matter of basic principle to them. Free markets, not government, must be in charge of controlling costs.

Notice that they have been sure there were death panels in there somewhere even before the healthcare bill was proposed in the first place. Republicans began to be alarmed over the subject ever since the stimulus bill included funds for comparative effectiveness research. That alone was enough to set off their alarm bells, even though it was only research and had no authority to mandate at all. Ever since the healthcare bill was proposed, Republicans have been sure there are death panels (by one name or another) in some part of it somewhere, even if their location constantly migrates. This is a huge, HUGE issue to them; anything that may suggest government restricting access to healthcare, or rationing it.

It's useless to point out that comparative effectiveness research is something the Mayo Clinic does that allows them to deliver top quality healthcare at well below average rates. It's pointless to argue that insurance companies deny people treatment all the time. It's useless to point out that pricing people out of healthcare altogether (which is what the free market approach will do) is ITSELF a form of rationing. None of those matter. What is important to Republicans is that all those are part of the private sector. Any cost control measure in the bill will be work of the Evil Government.*

So no cost controls other than tort reform or competition across state lines will be in any bill that can get through the Senate. But don't despair. Republicans do favor "entitlement reform." "Entitlement reform" is a euphemism for cutting Medicare, something they have denounced this bill for doing. But they fear openly taking responsibility for it and want to appoint a commission to make recommendations. Maybe, with luck, we can appoint some people to the commission who will make reasonable cost control recommendations.

Next post: The most controversial issue of all: Individual mandate.

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*And, to be fair to Republicans, their fears are not entirely crazy. Larger organizations do indeed tend to be more bureaucratic and rigid than smaller ones. It may be true that what works well at the Mayo Clinic would become overly rigid and bureaucratized if done by a large insurance company, let alone the government.

Memo to the Democrats

2010-01-22T20:52:00.000-08:00

OK, nothing very original in this post, but hey, I'm a busy law student. I don't have time.

To the Democrats: No, it wasn't because you moved too far too fast or pushed too far to the left. No, you wouldn't have gotten bipartisan cooperation if only you hadn't asked so much. And no, having a different order of priorities would not have made the slightest difference. And, finally, no, the Republicans are not going to be the least bit more cooperative now that they've tasted blood and are closing in for the kill.

What did you do wrong. Two things. (1) You were Democrats. (2) You were in power. In that you violated the 28th Amendment that every Republican knows was passed during the Reagan Administration by Bruce Ackerman's informal Amendment process: "Republicans shall at all times be in power."

What could you have done differently? Well, you might have had a come-to-Jesus moment, changed your registration to Republican, and reported to Fox News for your marching orders. Short of that, nothing. No matter what you did, no matter how moderate or restrained, you would still have been denounced as wild-eyed leftwing extremists. It's a standard formula they trot out every time. They used it against Bill Clinton, the junkfood-eating Arkansas hillbilly from the centrist DLC, and they'll use it on you. Stop being a battered wife and trying to figure out you offended the abuser. And don't get silly ideas like that he'll change now, or it's different this time. Go out and take a self-defense class instead.

Granted, I may be overreacting. The news cycle is very short sighted and tends to project current trends indefinitely into the future. Why, just a year ago, conventional wisdom had it that the Republicans were divided, demoralized, and headed for decline. And I remember very well in 1995 people were writing epitaphs for the Clinton Administration as a failure and assuming that the Republicans has a complete free reign to pass anything they wanted, even though they didn't have a veto-proof majority.

It didn't work that way. Republicans did a great job of attacking Clinton and his agenda as dangerously radical, but when they actually tried to enact their own agenda, it turned out not to be very popular. Clinton reinvigorated his presidency by challenging the Republicans to a showdown and winning. Both came away from the encounter chastened and were able to work together to some degree. I actually thought the Republicans would conclude from that that there was such a thing as being too right wing. We all get these foolish delusions sometimes. But you have a lot more experience than I do, and less excuses.

So, maybe you'll have the chance to do it again. If so, the time to start is right now. Conventional wisdom already holds that when Senate Democrats outnumber Republicans 60-40, they hold a razor-thin advantage," and that when it shifts to Dems 59, GOP 41, Democrats have lost the "majority." Folks, I know that pundits have to keep their mouths moving or their brains may start working, but doesn't it indicate that something is the matter when holding a wide majority in the House, a 59-41 majority in the Senate and the Presidency are all dismissed as inconsequential compared to the Republican's 41-59 Senate lead?

For starters, don't fumble on the 5-yard line. No one respects a team that does that. Then, start offering up a lot of popular legislation and dare the Republicans to block it. Better yet, choose legislation that will be popular with independent swing voters but not the Tea Party base and force the Republicans to choose which group to piss off. Alternately, you could completely give up and let them sweep the 2010 election. I'm guessing that the Tea Party's message of taking a chainsaw to government will be wildly popular until they win elections and actually start to do it.

Of course, it that's your strategy, you'd better be prepared to actually roll up your sleeves and clean up the mess they make. This post (much repeated across the Left Blogosphere) rather strongly indicates that you are much too afraid of responsibility ever to actually stand up for your principles and try to govern.

If that's the case, then why on earth should anyone vote for you? Granted, the Republicans don't seem that interested in governing either, but at least they have the courage of their convictions and are ready to say so.

But if all you are interested in doing is tiptoeing around, trying to avoid offending the Republicans or taking any sort of responsibility, I would suggest changing your name. To the Cheese-Eating Surrender Party.

Signing Off, Again

2010-01-11T22:03:00.000-08:00

And, once again, school is resuming, and my blogging will go into temporary suspension. And I had so hoped to post about the Warren Court!

So, What Am I Afraid Of?

2010-01-11T20:33:00.001-08:00

So, given that democracies die when polarization gets out of hand, and given that I am warning about the dangers of out of control polarization, am I actually afraid that our democracy is in danger of dying? The answer has to be no, but . . .

Although polarization is the underlying disease that destroys democracy, the ultimate failure can take place in many ways -- an undemocratic party controlling the levers of power and subverting the system from within, civil war, military coup, foreign invasion of a country weakened by division, and any combination of the above. I do not see any of these as being in the cards. So I have long been asking myself, "Then what are you afraid of?" Paul Krugman (and others following his lead) finally offered the answer -- Californication. The danger we face is not the overthrow of our government or the complete breakdown of democracy, so much as government and democracy becoming dysfunctional to the point of being non-functional.

Krugman focuses on the danger of a permanent Republican minority. Extremism may shrink the Republican Party enough that it can never win a majority, but not too small to block the majority from taking action. This is the pattern in California. Worse yet, a party that knows it will never hold actual power is relieved from any actual responsibility. It can feel free to wreck things as much as possible, knowing that the dominant party will be blamed. Or, in the words of Matthew Yglesias:

You can have a system in which a defeated minority still gets a share of governing authority and participates constructively in the victorious majority’s governing agenda, shaping policy around the margins in ways more to their liking. Or you can have a system in which a defeated minority rejects the majority’s governing agenda out of hand, seeks opening for attack, and hopes that failure on the part of the majority will bring them to power. But right now we have both simultaneously. It’s a system in which the minority benefits if the government fails, and the minority has the power to ensure failure. It’s insane, and it needs to be changed.

In California, the minority's ability to block action takes the form of the two-thirds requirement to pass a budget. In the federal government, it takes the form of the filibuster. I am still not clear when it became the rule that to pass legislation, the dominant party must have not only a majority in both houses, but a super-majority in the Senate. Scholars of the filibuster say it did not happen overnight. The filibuster was invoked for 8% of all legislation in the 1960's, 27% in the 1980's, and 70% in the 2007-2008 Congress. In Lyndon Johnson's time, it was assumed that Medicare could pass by a 55-45 vote. Another Senate observer believes that pure obstructionism began with the Clinton healthcare bill in 1994.

Speaking as a casual observer, I remember that the Senate was divided 50-50 following the 2000 election and the general assumption was that in case of a tie, Dick Cheney would cast the deciding vote. No one suggested that legislation was impossible because the Republicans did not have a 60 vote majority. Yet when the Democrats won Congress in 2006, reporters casually spoke of a 60-vote majority being required to pass legislation. They did not report on Republican invocation of the 60-vote rule for 70% of all legislation as extraordinary because they did not see it that way. And with healthcare legislation, reporters have made amply clear that requiring a 60-vote majority is the "ordinary" way of doing things and passing legislation by a simple majority is an extraordinary measure, sometimes referred to at the "Armageddon option."

Paralysis of the legislature endangers democracy in other ways as well. Presidents have long tended to act through executive decree if Congress proved unwilling to give them what they want. This does grave damage to democracy if it is simply a matter of the President and Congress pursuing different agendas. But if Congress becomes paralyzed and legislation impossible, but President may have little choice. A paralyzed Congress, IOW, can encourage an already dangerous slide toward elective dictatorship.

And these are only the dangers we face if the current polarization makes Republicans lose. Krugman briefly touches on the alternative. The Tea Party movement has no positive program, except, perhaps, tax cuts. Otherwise it is driven by incoherent rage at government and shows no interest dealing with the real world, let alone governing. What if that makes the Republicans win?

Polarization: What is Disloyalty?

2010-01-11T18:19:00.000-08:00

As I have said before, democracy begins to unravel when polarization reaches the point that some parties place winning before loyalty to the democratic rules of the game. The loyal opposition, in other words, becomes disloyal. New Zealand's Paul Buchanan believes that we are getting there fast. By disloyal opposition, he means not only the Republican party establishment in and out of Congress, but the broader opposition such as Fox News, talk radio, Tea Parties, etc.

But what does it mean to break the democratic rules of the game? Does one have to resort to actual illegality, or can one remain within the letter of the law and still be "disloyal"? Buchanan believes that "loyalty" requires not only obedience to the law, but to unwritten norms as well. The difference is whether one regards the party in power as an adversary or an enemy, and politics as a high stakes game or war. He gives the example of opposition to the Allende government in Chile as an example of disloyalty, although his example is not very illuminating. As examples of disloyalty, he cites refusing to pass any laws at all and organizing hostile strikes and demonstration (hardball, sometimes extremely so, but legal), as well as arming and financing right-wing paramilitaries and negotiating with the army for a coup (illegal).

Needless to say, neither Republicans, nor Tea Partiers, nor Fox News are organizing paramilitaries or negotiating for a coup. If disloyalty = illegality, then we still have a hardball but loyal opposition. But Buchanan believes the US context sets the bar for disloyalty a good deal lower, to encompass such acts as refusing to engage in any meaningful negotiations on healthcare or finance reform, shouting liar during an address to Congress, crowing that the US was not allowed to host the Olympics, openly expressing hope Obama fails, overheated denunciations, paranoid rumors receiving encouragement, Tea Parties, flirtation with Birthers, condoning people showing up at demonstrations armed, encouraging stockpiling of weapons in anticipation of a gun ban, and encouraging military insubordination.

Buchanan sees these things as each tolerable each in isolation, but signs of disloyalty when seen in combination because they seek to delegitimize the Obama presidency. I, by contrast, see these things as qualitatively different. (In fact, while Buchanan lists these acts randomly, I have listed them in what I consider escalting order of severity). To refuse to negotiate on a piece of legislation you deem dangerous is not disloyalty. Nor is it disloyalty to block innocuous legislation as a bargaining chip. Shouting liar is merely bad manners. Hostile demonstrations are, after all, an accepted feature of American politics. Also accepted features are a great deal of spin and cherry picking, a certain amount of unrealistic or exagerated fear, and some fibs.

Telling flagrant lies and whipping up paranoia and hysteria are a good deal more dangerous. I refer, of course, to everything from Sarah Palin's talk of "death panels" to Republicans' reluctance to repudiate the "birthers" to some of the more overheated signs at Tea Parties to the nonsense Glenn Beck spouts on Fox News. The United States has had a paranoid right wing for a long time. portions of the paranoid right may fairly be described as disloyal even if their actions are strictly peaceful and lawful. (I'm thinking of you, John Birch Society).

The paranoid right has long had a few representatives in Congress, and mainstream Republicans have not always been able to fully dissociate themselves from it. But even if the paranoid right has a toehold in power, we have survived just fine by keeping it from getting any more. It is different altogether for the paranoid right to capture (or be near to capturing) a major political party, or for its more paranoid fantasies to be broadcast on a major news network to the broad general public. Telling willful and flagrant lies for political advantage may be classified as disloyalty, but at some point lies stop being lies and the leaders who tell them begin believing their own propaganda. What we face is a large portion of the general public and a major political party becoming completely unmoored from objective reality. That is not disloyalty so much as derangement.

Finally, there is the matter of people agitating for political violence. The good news here is that they remain marginalized (at least so far). We have not (so far) seen anything like the rise of militias of the sort that occurred under Bill Clinton. Nor are we seeing the sort of romanticization of political violence that occurred under Clinton. To the contrary, violence is (almost) uniformly rejected as illegitimate. The Republican base emphatically rejects any suggestion that today's overheated rhetoric could escalate into actual violence as a liberal slander. In the 1990's, many militia types hailed Al Capone as a capitalist hero who knew the value of the right to keep and bear arms. When Glenn Beck compares Obama to Al Capone today, he means it as condemnation.

And while the militia movement (and some mainstream libertarians) romanticized political violence and the value of an armed citizenry in the 1990's, I never recall their basic assumptions being challenged. People argued whether the militia movement was racist, but I don't recall anyone saying, like liberal columnist EJ Dionne, "Free elections and open debate are not rooted in violence or the threat of violence. They are precisely the alternative to violence, and guns have no place in them." Or ultra-libertarian Justin Raimondo, "The whole point of even attending such a gathering, or, indeed, any sort of rational discussion about anything, is that we leave our guns—embodying the possibility of coercion—outside the door. We forsake force, and rely solely on our persuasive powers to get our point across."

Of course, in the 1990's, protestors were not actually showing up wearing guns.

My (not so) New Hobbyhorse

2010-01-07T14:07:00.000-08:00

It's not really a new subject, since I've posted on it before, but expect it to become an obsession with me, to the extent that I have added a new label (and post-dated some previous posts with it). I am becoming obsessed with how democracies fail. On the one hand they fail many different ways. Some are subverted from within by anti-democratic parties. Some fall to military coups. Some dissolve into civil war. Some fall to foreign invaders.* But in all cases, the underlying dynamic is the same. Rival factions become increasingly polarized, shun all compromise and cooperation, disregard (or, sometimes, openly oppose) the rules of democratic fair play, and tear the democratic fabric apart. It is for that reason that today's highly polarized politics worry me.

Why has Obama moved so timidly on shutting down GTMO and ending torture? At least in part, because because of polarization and intense Republican attacks. Why has he refused to prosecute Bush era crimes and done his best to cover them up? At least in part, for fear of the partisan firestorm such an action would unleash. Why is healthcare reform so difficult to pass? Polarization. Why are we unable to take any action on global warming? Polarization. Ditto finacial reform? Polarization. The list goes on. Whatever your prime issue, polarization is almost certainly what is impeding action on it.

I do not mean to imply by this that everything on the Democratic agenda automatically deserves to succeed simply because the Democrats won in 2008. But I do suspect that things have reached the point where partisanship is becoming an end in itself regardless of the merits of policy. Or, as Saturday Night Live put it,"Mr President, We do not want to defeat health care reform, we want to defeat you, and this seems like the best way to do it."

This country has become so polarized that every issue, every one, has to be seen through the lens of polarization. The merits of a policy have become secondary.

Continued, next post

A Few More Straws in the Wind

2010-01-06T13:19:00.000-08:00

So, the Obama Administration has decided that if it isn't going to torture anybody or indefinitely detain Abdulmutallab without trial, it might as well at least expand the no-fly list, create a bigger hassle at airports, and subject passengers from whole countries, including Nigeria, to greater scrutiny. I suppose given heights of Republican hysteria, a Democratic administration has to mistreat somebody to show that it cares.

In a possible piece of good news, right-wing correspondent Michael Yon was senselessly hassled and subject to mindless scrutiny by TSA screeners. Good! The only way it will ever be politically safe to advance civil liberties is if a right-winger is hassled by a liberal administration. Maybe Yon can inspire the right wing to get some sanity back into airport procedures.

Of course, sanity in airports will only increase the pressure to torture people. . .

In other news, Glenn Greenwald has some excellent links, one explaining all the random noise distracting intelligence from real leads. (Alas, he does not give any figures on what percentage of tips are things like reports from the suspect's own father and how many are anonymous tips from paid informants, fourth-hand rumors and the like. Recognizing that some things have to be classified, that sort of general information can still be useful in figuring out what is going on and how the system went wrong).

The other explained the amount of distraction that accompanies even well-targeted intelligence gathering. Radical Yemeni cleric Anwar al-Awlaki is an obvious and very legitimate intelligence target. And, in fact, his e-mails are being monitored. He corresponded by e-mail with both Fort Hood shooter Nidal Hassan and underpants bomber Umar Farouk Abdulmutallab. So did tens of thousands of others. How do you know which two correspondents out of tens of thousands will turn out to be the terrorists?

Update:

Apparently the Secret Service is regularly interviewing birthers. Good! For the same reason as screening Yon.

A Very Good Point

2010-01-06T09:37:00.000-08:00

Adam Serwer has a very good point, amplifies by Obsidian Wings. We should all be grateful to Umar Farouk Abdulmatallab's father for approaching the US embassy to mention his son's alarming radicalism. Would he have done that if he had believed it would lead to his son being tortured, then locked away forever without a trial in a very ill-famed prison?

Another important question is, why aren't Democrats shouting this to the skies. Yes, I know, it is hard to call for sanity when the opposing party is denouncing sanity as unpatriotic. Torturing the Other and locking him away forever as far away as possible has a lot of appeal and recognizing the Other as human is hard, especially when one of Them just tried to kill a lot of Us. But it is time for the Obama Administration to grow the part of itself that Abdulmutallab damaged and make the attempt. The only way you will ever relieve the pressure to hurt more Muslims it to convince people that Muslims are human, too. And what better way to show it than to point out that the senior Abdulmutallab, himself a Muslim, was willing to tip off the US against his own son.

Read the torture memos over. Don't ask if it's torture. Ask if it's something a father would willingly expose his son to. And remind people, this father was willing to tip off a foreign country against his own son only because he was convinced of our justice and humanity. Anything that undermines that reputation is going to undermine the flow of tips.

Emphasize the importance of such tips. They have served us well up till now. Worried parents and the CAIR tipped of the FBI when five American Mustlims went to Pakistan to join the jihad. In Saudi Arabia today 60-70% of all information about al-Qaida suspects now comes from relatives, friends and neighbors, rather than security agencies or surveillance. Obama, Administration spokesmen, and leading Democrats should be hammering on this theme over and over again. Not all Muslims are our enemies. They have provided us with countless useful tips. To keep the tips coming, we must be seen to be fair and humane. Interviews with the senior Abdulmutallab and some of the parents who turned in their sons would help.

[And while we're at it, if Obama really wants to close GTMO, he should be revealing the stories of people wrongly held their who have gotten on with their lives after release. Of course, that would just emphasize more the crimes of his predecessor and heighten partisan attacks . . .].

Torture Memos, Continued

2010-01-04T20:35:00.000-08:00

The memos describing torture authorized almost perfectly match the accounts given by the detainees to the Red Cross. At the time the Red Cross report first came out, there were questions as to its accuracy, but the parallels make amply clear that it is accurate.

The third memo authorizes a general process of 30 days, with the option to renew. The Red Cross accounts describe processes of a month or two.

The second memo authorizes sleep deprivation by chaining to the ceiling for up to 180hours (seven and a half days). The Red Cross report describes chaining to the ceiling for up to seven days.

The first memo authorizes placing Abu Zubayda in a cramped box, although he was wounded. Abu Zubayda described being placed in a cramped box, although wounded.

The memos authorize slamming subjects against a false wall, with a rolled towel around their necks to prevent whiplash. The Red Cross report describes subjects slammed against a wall with rolled towels against their necks to prevent whiplash. Zubayda mentions that the first time he was slammed against a solid wall, but afterward a plywood false wall was placed to soften the impact.

The memos state, and the Red Cross reports confirm, that only the three highest value detainees were waterboarded.

And so forth.

But in the end, this fine parsing over what is and is not torture might not be so bad if one keeps in mind that the Convention Against Torture (Article 16) requires each member to "prevent in any territory under its jurisdiction other acts of cruel, inhuman or degrading treatment or punishment which do not amount to torture." In other words, the distinction between torture and "merely" "cruel, inhumane or degrading treatment" is hard to make, but it is not in any event the distinction between lawful and unlawful, but only between a more and serious offense. That is what makes the final memo particularly appalling. One can argue over whether the CIA black sites cross over the line into torture or are merely "cruel inhumane and degrading," but the final memo argues that they are not cruel, inhumane or degrading, either.

First, the memo points out that since the black sites are other countries, they are not in "territory under [US] jurisdiction." The memo thus interprets the treaty as allowing members to evade this provision by taking their prisoners into each other's territory and engaging in cruel, inhumane and degrading conduct there. The memo further argues that, in ratifying the treaty, the Senate said it interpreted "cruel, inhumane and degrading" as equivalent to "cruel and unusual" under the Constitution. Since the Constitution does not apply to non-citizens outside the US, Article 16 allows us to be as cruel, inhumane and degrading as we want so long as it stops just short of torture and happens to non-citizens on foreign soil. Finally, the memo "enhanced interrogation" is being done to people who have not been convicted of a crime, and is not meant as punishment, but only to make them talk, government interest in fighting terrorism will outweigh any harm done. The memo then argues in detail its great care not to harm detainees by never dousing them with water cold enough to cause hypothermia, not allowing them to hang by the wrists when suspended from the ceiling, waterboarding with saline so they don't get pneumonia or electrolyte depletion, and other such acts of tender solicitude.

The worst part is, at least some Supreme Court justices these days would probably buy this argument. Antonin Scalia sees it as positively an affront to suggest that non-citizens outside the US have any rights. He has also expressed the general opinion that the ban on "cruel and unusual punishment" applies only to people who have been convicted of a crime. Before then, it is open season. And in the odious case of Martinez v. Chavez, the Supreme Court effectively approved the use of torture to extort a confession so long as the police ultimately conclude the subject was innocent and do not prosecute him. However, I am confident that Justice Kennedy would disagree, and that such a viewpoint would be rejected by today's Supreme Court on a vote of 5 to 4.

The Final "torture memo" released was the CIA Inspector General's Report. It adds relatively little, partly because it heavily quotes the original Yoo memo, partly because the three later memos quote heavily from it, but mostly because whole pages are blacked out. It makes the point that only some of the high value detainees were subject to "enhanced interrogation techniques," but that "unenhanced" techniques included forcible shaving, stripping, hooding, isolation, shackling upright, and sleep deprivation and diapering for up to 72 hours. It discusses the necessity of torture for gaining information, the difficulty in knowing whether a detainee is withholding or not, (Abu Zubayda continued to be waterboarded on orders from above long after his immediate interrogators believed he had told all he knew), the damage torture might have to America's moral standing, and fears of getting caught.

The most significant part of the Inspector General's Report is probably pages 85-89, in which they attempt to assess the effectiveness of their techniques. They conclude that torture did, in fact, yield valuable information, but they cannot determine which techniques were most effective since all were used at once. Page 87 identifies individuals, and page 88 plots that the subjects revealed under torture, although they did not uncover any evidence these plots were imminent.

In other words, no true ticking bomb. They cannot say that these plots could not have been discovered by other means, or even that they would have occurred at all. And, for what it is worth, FBI Agent Ali Soufan disputes this account, attributing much of the information the CIA says it obtained by torture in fact came from other sources. Not having any inside information, I cannot presume to judge.

I am well aware that many people, especially in light of the most recent attack, will say so what. The CIA black sites housed only a handful of high-value detainees, all high ranking Al-Qaeda members, all with important information, and all vile and evil terrorists who deserved what they go. And perhaps if those few had been the only ones tortured, one might dismiss the whole episode as a detail, a regretable incident that may or may not have been necessary. But what all too many people today are forgetting is that torture was not limited to a handful of high value Al-Qaeda detainees. The Senate Armed Services Committee has extensively documented that torture by the military was extensive, systematic, extending far beyond high level detainees or even low-level insurgents, and ordered from the very top. Any serious discussion of torture under the Bush Administration has to take into account that it was a regular, planned military policy -- and is probably still going on, albeit without official approval, to this day.

Torture Memos

2010-01-03T21:23:00.000-08:00

This post addresses an unpleasant subject, one I have intended to write about for months, but somehow always managed to avoid -- the Torture Memos. Not the original one by John Yoo, that claimed the President had authority to torture, any law to the contrary notwithstanding. These are the memos explaining why various acts did not violate existing laws against torture, released by Obama before the general firestorm of controversy convinced him not to let anything else from the Bush Administration be released.

They begin with August 1, 2002 memo signed by John Yoo that (apparently) got things started. Abu Zubayda had been captured, and the CIA suspected he was holding back information and wanted to use "enhanced" techniques. They asked whether such techniques would violate anti-terrorism statutes. The outcome was predetermined. Yoo dissected the law in a manner familiar to anyone who has attended law school, breaking it down into constituent parts and determining which parts are met. (For instance, to violate the torture statute, an action must (1) take place outside the US, (2) be done under color of law (3) on a person in custody, (4) inflict severe physical or mental pain or suffering, and (5) be intentional. Needless to say, conditions 1 through 3 can be safely assumed). The opinion, cool, detached and clinical, shows a stunning lack of imagination about what these techniques mean in the flesh and blood rather than on paper. Stress positions and long time standing can't possibly be painful because they will be limited by muscle fatigue. (Does he not realize that muscle fatigue, if severe, is itself painful?) Sleep deprivation can't be so bad because it has been done for 11 days in controlled experiments without long-term harm. (He obviously hasn't read memoirs of Soviet prisoners describing what prolonged sleep deprivation, for considerably shorter times than 11 days are like). And, of course, there is waterboarding. Severe pain is not distinguished from severe suffering. Prolonged mental harm is considered torture if it "profoundly disrupt[s] the senses," or involves the threat of imminent death. He acknowledges that waterboarding is an "imminent threat of death," but it doesn't cause prolonged mental harm because soldiers do it in SERE training. (Does Yoo not understand the difference between what is done at gunpoint and what is done in a training exercise?) But not to worry, even if you do end up causing severe pain or suffering or prolonged mental harm, you didn't intend to do it because I told you it was okay.

Apparently this memo was just a little too disingenuous because it was followed up by the Bradbury memo of May 10, 2005, which is somewhat more legally sophisticated than its predecessor. For instance, it acknowledges that experiencing many of these techniques as a prisoner may not be entirely the same as experiencing them as a trainee. It acknowledges that some things like muscle fatigue, waterboarding, or sleep deprivation, though not specifically painful, might be considered "suffering." But no problem. Pain, if sufficiently severe, is always torture, suffering, no matter how severe, is not torture unless sufficiently prolonged. (That clears waterboarding). And, unlike the earlier memo, it acknowledges the sleep deprivation, if sufficiently prolonged, may "profoundly disrupt the senses," (once again, try reading memoirs of Soviet prisoners to understand just how profound the disruption is, and just how unbearable). But it still approves the technique on the theory that prisoners will get over it once they sleep again. Unlike the earlier memo, which says there is no precedent on what is torture because no one has ever been prosecuted under the torture statute, the later memo admits there is precedent on what is torture when some other country does it -- and then engages in self-congratulatory preening for not being as bad as all that. (In fact it cites a case finding that prolonged sleep deprivation and waterboarding, described as "water torture," were torture, at least combined with other techniques such as beating).

But if it is legally more nuanced than its predecessor, the second memo is also more graphic. It described prisoners being kept awake for up to 180 hours by shackling them to the ceiling, which, it assures us, is not painful. (Care to try it?). Being held on one's feet for seven days causes swelling in the legs, but no problem, the swelling is not painful (ditto). It also gives a disturbingly graphic account of waterboarding. This is where it is revealed that it was done to Abu Zubayda 83 times and KSM 183 times. It also says that, unlike SERE training, which merely cut off oxygen and allowed CO2 levels to rise, waterboarding by the CIA allowed water to enter the upper respiratory tract, where it could be inhaled and cause pneumonia. Subjects also responded by swallowing as fast as they could. Some apparently drank so much water that the interrogators had to switch to saline to prevent electrolyte depletion. (Just how much water is that?) Finally, the memo offers the reassurance that a doctor will at all times be standing by to prevent harm. Somehow, though, that is not very reassuring because torturers regularly do exactly that -- to prevent the subject from being killed by accident.

Another memo follows, even more disturbing, that described the techniques as used in combination. Although the description of the techniques in combination is even more graphic and disturbing than reading about them separately, the memo naturally approves them. It engages is a certain self-congratulation for not using all the techniques at once, although all that means is that it is not possible to make a prisoner hold a stress position, slam him into the wall, hold him in a cramped box, and waterboard him all at the same time.

But perhaps most disturbing of all, even as the memo continues to insist that no "prolonged mental harm" is caused, it also explains that the purpose of the milder techniques is to "bring the detainee to 'a baseline, dependent state," 'demonstrat[ing] to the [detainee] that is has no control over basic human needs." (quotation marks and brackets in the original). The purpose of the harsher techniques is "to create a state of learned helplessness and dependence." I am reminded of nothing so much as the Star Trek episode Catspaw:

KIRK: So, are you going to wave your magic wand and destroy my mind, too?

SYLVIA: There's no damage, really, just a removal of all knowledge and will.

KIRK: You don't call that damage?

(Quoted from memory, minor errors are possible. Subject continued in the next post).

Data Mining: The Needle in a Haystack Problem

2010-01-01T14:11:00.000-08:00

Let us be fair to Obama. He does appear to be committed to ending his predecessor's policies of torture and indefinite detention without hearing. He has, admittedly, been rather timid and incomplete in his approach, often more interested in covering up his predecessor's crimes than rooting them out. And even this tepid approach has engendered considerable resistence, which can only escalate in the wake of the most recent attack. But there is a clear and identifiable difference here between the Obama and Bush approaches.

By contrast, Obama has not created any daylight between himself and Bush on wiretapping (as it was finally approved by Congress). Nor is that all. The Bush Administration's approach to wiretapping attracted the most attention because of its blatant illegality, but it was only a small part of a larger whole that we still know very little about, and that the Obama Administration has embraced, apparently without modification. Consider:

The Inspector General's Report on surveillance found no evidence of intentional misuse of the warrantless surveillance program (p. 13), but warned that in its current, legal form it involves "unprecedented collection activities" that must be closely monitored (p. 38). The IG report gave only the vaguest hints what the warrantless surveillance consisted of, other than to quote NSA director Michael Hayden to the effect that saying the activities were "more aggressive" than FISA allowed, but "less intrusive" because the period of time was much shorter than authorized by a FISA warrant (p. 16). This appears to confirm reports by the Washington Post that computers were sifting "hundreds of thousands" of calls, faxes and e-mails into and out of the US. After various levels of screening, some agents were allowed to listen to some conversations -- about 5,000 people according to one source.

The Post article denied that any domestic calls had been subject to warrantless surveillance. But USA Today famously reported that the NSA was also keeping an immense database of all domestic phone calls, "the largest database ever assembled in the world," looking for suspicious patterns. The legality of this program has never been settled. The same goes for the less publicized Homeland Security program keeping score on international travelers to assess their threat risk.

There is no question about the legality of of National Security Letters, which allow the FBI to command the production of a wide variety of information without having to resort to a subpoena, let alone a warrant. FBI use of NSL's has been extensive, with some 140,000 such letters issues from 2003 to 2006, an average of nearly 50,000 a year. Approximately half of those letters did not lead to any prosecution at all, and most others were used in immigration, money laundering or fraud cases. Very few were used to prosecute actual terrorists. The total number dropped to 16,000 once such abuses were revealed, but soon began edging up again afterward. Also legal is the ever-expanding terrorism watch list, along with the much smaller No-Fly list, which nonetheless contains many dubious entries and torments even more innocent people who happen to have the same name as a tangential terror suspect.

And then there were plans that were rejected at first, only to be adopted in other form such as TIPS, which sought to recruit mail carriers, meter readers, repairmen and so forth as spies and informants. Or Total Information Awareness, that was supposed to analyze patterns in everything. These did not so much disappear as mutate. These are the Bush era policies and programs that the Obama Administration is keeping intact. All fit under the broad rubric of data mining.* All seek to vacuum up huge quantities of data and analyze it for patterns indicating terrorist activity.

Data mining has its defenders. For instance former libertarian Richard Posner argues that there is no danger to civil liberties because the initial scrutiny is done by machine, and only seen by human eyes (or ears) if the program indicates a threat to national security. The only danger could be in abuse the blackmail political rivals. Others at the time of the USA Today article argued that because of the sheer volume of data, there could be no danger to privacy.

The basic problem with looking for terrorists by data mining is there just aren't that many terrorists out there. The estimated number of Al-Qaeda operatives in Yemen is 300. Another 200 are estimated to be in Pakistan. John Ashcroft's sweeping dragnet after 9-11 netted a grand total of one (Ali Saleh al-Marri). The sleeper cells predicted at the time never appeared. (I realize, of course, that Al-Qaeda is not the only terrorist organization in the world. But it is the only one that targets us). In short, we are looking for a needle in a haystack. Data mining in such an instance poses serious problems.

Security expert Bruce Schneier explains well. When searching for a needle in a haystack, adding more "hay" does not good at all. Computers and data mining are useful only if they are looking for something relatively common compared to the database searched. For instance, out of 900 million credit card in the US, about 1% are stolen or fraudulently used every year. One in a hundred is certainly the exception rather than the rule, but it is a common enough occurrence to be worth data mining for. By contrast, the 9-11 hijackers were a 19-man needle in a 300 million person haystack, beyond the ken of even the finest super computer to seek out. Even an extremely low rate of false alarms will swamp the system.

And that does, in fact, appear to have happened. The FBI, frustrated with all the false leads generated, began referring to them as "calls to Pizza Hut." An NSA data miner acknowldged, "Frankly, we'll probably be wrong 99 percent of the time . . . but 1 percent is far better than 1 in 100 million times if you were just guessing at random."

But there are obvious problems with generating so many false leads. The first is whether it is useful at all. The Inspector General's Report was unable to quantify its usefulness to any degree, other than to say that Hayden vouched for its usefulness and said that it would have captured two of the 9-11 hijacker. But has it thwarted any actual terrorist attacks? Most thwarted attacks have begun with a specific tip. (This is worth an entire post). Another, which Schneier focuses on, is the waste of manpower investigating false leads that might be put to other use.

But besides uselessness and the time and effort wasted on false leads, there are real civil libertarian dangers as well. Bush's defenders are quick to point out that none of the data mining led to COINTELPRO style abuses. So far as I know, this is true. But there are other kinds of dangers as well. When a system regularly generates false leads and forces police to investigate them, these fruitless investigations, too, are an infringement on the liberty of people senselessly investigated and expose everyone to the risk of such pointless investigation. Investigation of false alarms differs from COINTELPRO-style abuses in being mindless rather than malicious, but it infringes on liberty nonetheless.

The other danger is that any police force tasked with looking for needles in a haystack, there will be strong institutional and bureacratic pressure to find something. If no needles are turning up, the temptation will be to find a prickly piece of hay and try to convince people that it is sort of like a needle. This can, indeed, lead to COINTELPRO sorts of abuses. In Maryland, state police investigated everyone from anti-war groups to PETA to customers protesting a 72% rate increase as possible terrorists. (The article also cites abuses by city police and the FBI, but links are not functioning).

Obviously, this is not the best time politically to call for a cutback in data mining activities. Obama is already under sufficient attack for not torturing, for using civilian trials, and for releasing GTMO detainees determined not to be terrorists. For him to move away from data mining now would lead to a wingnut feeding frenzy. But what we need is not any more information to swamp the system, but better analysis of what we already have. And no ridiculous rules against leaving your seats for the last hour of flight.

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*Actually, NSL's quite probably are not a data mining tool so much as a method to streamline data collection that it is easy to get sloppy and overuse.