Wednesday, July 08, 2015

The euro question.

Greece GDP per capita nearly tripled in the fifteen years prior to it Greece adopting the euro. It has been a disaster since then. Maybe the crisis is about the idea of the euro, not just about Greece.

When Greeks went to the polls last week, did anyone really imagine that they were going to vote to accept German terms to end the current round of the Greek financial crisis? In the middle of an economic depression, would Greeks really vote to cut pensions for the poorest Greeks, along with the middle class, to further cut social services and to raise taxes across the board, for the promise that--for the moment--they can remain members of the Eurozone?

How would voters across the United States have responded back in the darkest moments of the 2008 financial crisis if our political leaders who were considering a massive bailout of our financial system had put the question to vote: Shall the US Government and Federal Reserve Bank provide a couple of trillion dollars to bail out AIG, Citibank, Goldman Sachs, and other global banks who lost their shirts on complex financial bets... Of course we would have voted no. And so did the Greeks.

Greek Prime Minister Alexis Tsipris knew this. He knew that the Greek demos--the ones who literally brought us democracy to begin with--would not vote to assuage the Germans, to prostrate themselves before the world and apologize for their profligacy and laziness. This was not going to happen, whatever the carrot might be. He wanted a no vote, and he got a no vote.

Few knew better than the Germans that this would be the outcome. After all, they too had once been a defeated people, suffering in the wake of their defeat in World War I under the cruel thumb of foreign powers. They had accepted treaty obligations under duress and built up debts that buried the German nation in a deep depression. Like the Greeks last week, the German volk did not sit back and accept responsibility for their past misdeeds and the wretchedness of their circumstances. When the opportunity came, they voted for a political party that promised relief from the Treaty of Versailles and Germany's World War I debts.

Long ago, in the wake of two world wars, there was a dream of a united Europe. It was a dream of those who believed that German power in the heart of Europe would best be restrained if it were placed in the center of an economic union. And it was a dream of the French to create a third force that would counterbalance the influence of the United States on the world scene.

Six years after the European Union was finally created in 1993, the euro was introduced as the common currency of 19 of the 28 member nations of the EU. But monetary unions created among otherwise independent nations are complicated concepts and historically almost never survive. When the global financial collapse came in 2008, the weaknesses of the Eurozone became pronounced. In the face of impending financial collapse across the continent, German Chancellor Angela Merkel made clear then as she did last week with respect to Greece: each European country is responsible for its own banks and its own debts. One nation after another bailed out their banks. There may have been a European Central Bank, but there was no European central banking system as we understand it. There was no interdependency, and--as the Greeks learned painfully last week--there is no deposit insurance.

The financial crisis of 2008 begged the question of whether the concept of a united Europe itself had failed. Neither of the two original ambitions of a united Europe had been realized. Far from being tamed, Germany emerged as the single dominant European economic power, and on foreign policy Europe failed to emerge as a unified force in political or military terms. With respect to the rationale behind the creation of the euro, the 2008 collapse rendered quaint notions of Europe decoupling from the dollar, and as continued technological change made currency markets seamless to consumers, EU nations with their own sovereign currencies have seen no disadvantage in being outside of the monetary union.

But whatever its failings, the creation of the Eurozone has been a boon for Germany. As an export-driven economy, the common currency has provided Germany with captive export markets where it can sell its goods with no fear of its currency value rising against that of nations that buy its stuff. Germany has outperformed all other countries in the Eurozone since its creation, and there are structural reasons why that go beyond traditional images of German workforce discipline and superior engineering.

In the normal world--a world of freely exchanged currencies among independent nations--an importing nation has to purchase the currency of an exporting nation to buy the stuff it wants. That demand for the currency of the exporting nation pushes up that currency's value. If the exporting nation wants to keep the value of its currency from rising--which would make its stuff more expensive and thus make the exporting nation less competitive--the exporting nation has to buy something in return from the importing nation in order to keep the trading levels of the two currencies in balance. This interrelationship is central to global trade and national economic strategies.

Asian nations that have prospered since World War II provide examples of how trade and currency flows work. Those nations--like Germany--built their economies over the past fifty years with "export-driven" strategies tied to a currency "peg." A currency peg, in this case, refers to economic policies designed to keep a given nation's currency in a stable relationship with the US dollar. In order to sustain an export-driven economic growth strategy over time, as a nation's exports to the United States grow, that nation must balance the upward pressure on its own currency by recycling those dollars back into the United States, whether by purchasing goods and services, buying US Treasury securities or other means.

In Europe, the creation of a single currency has allowed Germany to avoid the need to adopt economic policies to manage the value of its currency relative to its trading partners. Since the creation of the Eurozone, Germany has been able to sell as much stuff as it wanted to across Europe with no resulting pressure on the Deutsche Mark, for the simple reason that there no longer is a Deutsche Mark. As an export engine, Germany has been able to build its manufacturing economy at the expense of other European economies with no fear of having to address a rising currency value.

For the weaker, southern European economies in particular, being in the Eurozone has been problematic. Open trade and currency markets provide important feedback loops to participating nations that guide them toward policies that will balance currency relationships and bi-lateral capital flows over time. Stronger countries have incentives to invest in weaker countries where costs are lower, while weaker countries have incentives to improve labor productivity and adopt other policies to support economic growth. The creation of a currency union disrupts those feedback loops and distorts decision-making in each country, as has been evident in Greece.

Over its fifteen years as a Eurozone country, Greece has underperformed a wide range of regional non-euro countries, including those in and out of the European Union. The histogram below presents data from the International Monetary Fund that suggests that European countries outside of the Eurozone have fared far better than Greece over the past fifteen years. Many of those countries faced far more difficult social and economic challenges--particularly those emerging from the Soviet block--than Greece has faced, yet they adapted to the demands of international markets.

The measures that Germany has demanded that Greece implement--reduced pensions, labor market reforms, delayed retirement--mirror those that currency and capital markets would have pushed Greece to make if it was not in a currency union. A central element of the crisis in Greece has been the problem of forcing difficult decisions through a political process--as reflected in the Greek vote against capitulating to German demands--instead of making those difficult decisions in response to market forces, as did those non-euro nations illustrated in the histogram.

The Greece financial crisis has become a long-running morality tale, pitting the profligacy and obstinance of the Greeks against the fiscal rectitude of the Germans, but it is not that simple. It is true that the Greeks are profligate. They refuse to pay the taxes that they owe. They retire too early, and they have little regard for the rules and regulations of financial prudence that are innate to the Germans. All of that may be true, but is secondary to whether membership in the Eurozone has benefitted Greece relative to the status quo ante. 

The graphic below illustrates the point. It presents a comparison of the trends in industrial production in Greece and Germany before and after the adoption of the euro by Greece. Few people seem to recall Greece when it was a poor, developing country with dirt roads everywhere and few signs of affluence. Voluntary payment of taxes--what we take for granted in the United States--is the exception not the rule globally, so that alone is not a measure of economic maturity. Indeed, non-collection of taxes--translated into a low effective tax rate--should be a boon to economic growth, not a deterrent. As illustrated in this graph, Greece had experienced a long period of industrial growth prior to joining the Eurozone, as GDP per capita almost tripled over the fifteen year period from 1985 to 2001, the year Greece adopted the euro, from $4,832 to $12,419.

The underlying question raised by the Greek financial crisis has been largely ignored, which is whether Greek adoption of the euro--or even the creation of the Eurozone at all--was a bad idea to begin with, and one that will not get better with time. This is the question that Germany must fear, that Greece, and others, ultimately come to realize that it is Germany that has benefited most from the creation of the euro, and that others, particularly the weakest economies, may have paid a steep price to be members of the Eurozone club.

Sunday, June 28, 2015

The price of politics.

Charlie Baker, the very popular Republican Governor of Massachusetts stumbled last week. When asked what he thought about the confederate flag flying over the capitol in South Carolina, Baker fell into the trap of suggesting that flying the flag was a matter of local choice and tradition. After friends asked him what on earth he was thinking, Baker made no bones about it: he apologized for his comments.

Baker did not walk back his remarks to be politically correct. Rather, it was his original comments that picked up on Republican Party talking points pandering to "conservatives" in South Carolina and the base of the Republican Party that were the hallmark of political correctness. Political correctness dominates politics during presidential primary seasons. Hillary Clinton, for example, a long-time supporter of global free trade agreements, sat mute on the sidelines during the recent vitriolic debate over providing fast track trade negotiation authority to President Obama in order to avoid raising the hackles of union members and Democrat voters on the left. Since formally entering the fray, Hillary has done her best to channel Elizabeth Warren and tamp down her ties to Wall Street and defense hawk credentials, despite the fact that she faces no material threat to her nomination.

Baker was not alone in wondering how it was that he found himself defending something that John McCain famously described as "a symbol of racism and slavery." Jeb Bush, whose political roots are similar to Baker's, was also caught flat-footed by the issue. The scion of a New England Republican family with strong civil rights bona fides, Bush removed the confederate flag from the capitol in Tallahassee early in his first term as governor of Florida, only to embrace the same talking points that tripped up Baker. A Fox News commentator made news when she tried to bail out flailing Republican candidates by suggesting that they had no obligation to address the issue at all, as the confederate flag was historically the banner of southern Democrats, who for a century or more stood in opposition to the GOP, itself the party of Abraham Lincoln and northern abolitionists.

And so it was, until Richard Nixon changed the face of the modern Republican Party.

Few recall in the prevailing political climate that the seminal legislation of the civil rights era drew greater support from the Republican Party than the Democratic Party. While the Civil Rights Act of 1964 and the Voting Rights Act of 1965 are largely identified with Democrat President Lyndon Johnson, it was the Democratic Party at the time that tried to block both pieces of legislation and the Republican Party that voted in overwhelming numbers for their passage. When the Civil Rights Act finally reached the floor of the US Senate in 1964--after a long Democrat filibuster--it was supported by 82% of Senate Republicans, compared with two-thirds of the Senate Democrats. When the Voting Rights Act came to the floor a year later, 94% of Republicans supported the bill, against a far smaller majority of Democrats.

In that era, the Republican Party had strong support among black voters. In 1944 and 1948, the Republican Party presidential candidate Thomas Dewey had a strong civil rights record, at a time when the Democratic Party was deeply split on the issue. In 1956--two years after the landmark Supreme Court decision in Brown vs. Board of Education--Dwight Eisenhower won 39% of the non-white vote in his reelection campaign against Adlai Stevenson. Four years later, in the last presidential election before the Civil Rights Act came to the floor of the US Senate, Eisenhower's Vice President Richard Nixon won 32% of the non-white vote.

The popular vote in the 1960 presidential race was split 50-50 between Nixon and John Kennedy. To this day, many contend that Nixon may well have won that election and that the margin of victory turned on Election Day dirty tricks orchestrated by the Kennedy political machine. Whatever the truth of those claims, Nixon left that election determined to make sure that his next race for the White House would not be so close.

In the wake of his narrow election loss in 1960, Nixon and his advisors crafted the "Southern Strategy" to bring southern Democrats disaffected by the Democratic Party's embrace of civil rights to the Republican Party. Nixon essentially traded away the New England Republican Party--with its long historical commitment to civil rights--for the disaffected south by embracing racially targeted and divisive tactics. In terms of the Electoral College, the trade was an easy bet. The Republican Party picked up a solid advantage in winning over 150 electoral votes across the south, while ceding its historical advantage with respect to the 60 or so electoral votes in New England and New York.

When Nixon won the presidency in 1968, his share of the non-white vote fell from 32% to 12%--a level that as been barely exceeded by any Republican presidential candidate in the ensuing half century. By 1972, the "solid south," long the cornerstone of the Democrats, was firmly in the Republican camp. For the ensuing half-century, the solid south has been the cornerstone of the modern Republican Party, and over the course of the past half-century many Republican politicians, who knew better, said and did things they knew they did not believe in.

The GOP did not have to continue down the path that Richard Nixon embraced in the wake of his loss to JFK in 1960. After Nixon resigned in the face of certain impeachment in 1974, GOP leaders could have reversed course, but they chose not to, presumably because they believed that the strategy was working. As this graph illustrates, the swap of the New England for the South was complete and has endured. As of 2014, there was not a single white Democrat in Congress from the deep south--though as Charlie Baker has demonstrated, the Massachusetts tradition of electing Republican governors has continued.

Over time, Republican electoral strategy migrated from overt racial tactics to the use of code and "dog whistles" to garner electoral support of its targeted voters, and wedge strategies to use hot-button political issues to drive voter turnout. Years later, prominent GOP political strategist and South Carolinian Lee Atwater described the evolution of the Southern Strategy from overt to covert racial tactics.

''You start out in 1954 by saying, 'N-----, n-----, n-----.' By 1968 you can't say 'n-----'. That hurts you. Backfires. So you say stuff like forced busing, states' rights and all that stuff. You're getting so abstract now [that] you're talking about cutting taxes, and all these things you're talking about are totally economic things and a byproduct of them is [that] blacks get hurt worse than whites…. You follow me? Because obviously sitting around saying, 'We want to cut this,' is much more abstract than even the busing thing, and a hell of a lot more abstract than 'N-----, n-----.'''

For years, Republican candidates and strategists have criticized leaders of the African American community and black voters for their loyalty to the Democratic Party, yet they rarely acknowledge that black voters were pushed out of the Republican Party as much as they may have been attracted to the Democrats. Ten years ago, Republican National Committee Chairman Ken Mehlman spoke before the national convention of the NAACP and apologized for the decades-old GOP strategy of leveraging racial polarization to its political advantage. But Mehlman's comments were neither widely applauded nor adopted as talking points across the party of which he was a leader.

Events in South Carolina over the past two weeks have demonstrated that the racially-targeted political strategy that Richard Nixon set in motion to assure his own electoral victory fifty years ago remains deeply ingrained in the GOP, Mehlman's apology notwithstanding. South Carolina Governor Nikki Haley has been widely applauded for her leadership in enabling GOP leaders to recognize that the time had come to confront the issue of the confederate flag. However, Charlie Baker's apology and Haley's leadership on the flag issue should not mask the reality that the essence of the Southern Strategy strategy--as exemplified in tactics ranging from voter suppression to Donald Trump's eloquent characterization of Mexican immigrants as criminals and rapists--remains alive and well. While Republican leaders and pundits are congratulating Haley for her leadership in tackling the flag issue, they have remained silent on the enduring implications of its fifty-year long racially-focused political strategy that has been and remains so important to the GOP success.

Monday, June 22, 2015

When character is revealed.

Jeb Bush is back.

Three weeks ago, the long-time presumptive front-runner for the Republican Party nomination for President had reached a new low. Based on a Quinnipiac University national poll published on May 28th, the Republican primary contest was a dead heat, with five candidates--Jeb Bush, Florida Senator Marco Rubio, Wisconsin Governor Scott Walker, former Arkansas Governor Mike Huckabee and Johns Hopkins pediatric neurosurgeon Ben Carson--each polling at 10%.

Bush's decline from top dog corresponded with his difficulty responding to questions about the Iraq War and global warming, leaving him looking tentative, surly and unprepared. The man who was determined to run a positive and joyful campaign, and not to pander to the Republican base, was succeeding in doing neither.

Then last week he formally declared his candidacy and somehow he got his mojo back. His presentation was crisp. There was a new bounce in his step. All of a sudden--as confirmed by a subsequent Wall Street Journal/NBC News poll--he was looking once again like a presumptive nominee.

This is who Jeb Bush was supposed to be. His father's son more than his brother's brother. More Jim Baker, less Dick Cheney. A serious and thoughtful candidate who would stand out as an adult among children. As Bush went on offense, he convincingly painted his erstwhile protege--and the other frontrunner in the WSJ/NBC poll--Marco Rubio as a one term Senator with no executive experience. Scott Walker--the tentative candidate of the Koch Brothers wing of the party--similarly looked over-matched. And if Bush is truly back, it should mark the end the budding candidacy of Ohio Governor John Kasich and put a final nail in the casket of New Jersey Governor Chris Christie.

All of a sudden, it was beginning to look like the Republican battle would boil down to what it was long predicted to be: a race between Jeb Bush and a conservative candidate to be named later--with Texas Senator Ted Cruz emerging from a conservative confab last week as the new leading horse. A Bush candidacy would change the presumed dynamics of the 2016 race, as Bush--a convert to Catholicism, fluent in Spanish, husband to a naturalized Mexican wife and father to three Latino children--has the potential to garner significant support among Hispanic voters.

Then, just a day after Bush threw his hat in the ring, Donald Trump followed suit and lost no time making trouble. A mojordomo of the birther movement, Trump immediately upended Jeb Bush's fluent outreach to Latino voters when he brought pandering to the anti-immigrant base of the Republican Party to new heights, proclaiming in his campaign announcement speech that Mexican immigrants are "bringing drugs, they're bringing crime. They're rapists and some, I assume, are good people." Trump may or may not ever become a serious factor in the Republican race, but his offensive language was a reminder that for the past half-century, racially charged rhetoric has been an essential part of the national GOP playbook.

Dylann Roof's cold blooded murder of nine black churchgoers in Charleston two days later left GOP candidates outdoing each other in their embarrassing efforts to express outrage at Roof's racist attack while not insulting evangelical and conservative Republican primary voters whom they seem to presume have some degree of sympathy for Roof's white supremacist cause. Instead of castigating Trump for his disgraceful words two days earlier or demonstrating any semblance of moral leadership, the Republican presidential candidates fell all over themselves trying to avoid labeling Roof for what he was, bringing to mind the words of W.E.B Debois a century ago.

"We stand again to look America squarely in the face and call a spade a spade. We sing: This country of ours, despite all its better souls have done and dreamed, is yet a shameful land."

This has been a test for Jeb Bush. From the outset of his campaign, Bush suggested that if he decided to run for the presidency, he would run on his principles and beliefs and not pander to the Republican base. He would only run--and could only demonstrate his capacity to lead the nation as a whole--if he was prepared to lose the primaries. Yet in this critical moment, he failed to stand on principle. In a carefully worded press release, Bush pointed to his own removal of the confederate flag from the state house in Tallahassee as an indication of his "position on how to address" the issue, but offered no view on what should be done in South Carolina. Instead, Bush suggested that he was "confident" that--despite decades of evidence to the contrary--leaders in South Carolina "will do the right thing."

We have been down this road before. Fifteen years ago, in a defining moment of that political race, George W. Bush used the same formulation that Jeb has now adopted when he defeated John McCain in the South Carolina primary en route to winning the presidency. After McCain angered local voters by suggesting that the confederate flag was "a symbol of racism and slavery," W. suggested instead that flying the confederate flag was a state issue, even as he suggested obliquely that it was something that local leaders were "working to address."

There can be no doubt that both Bush brothers--raised as they were in a family of New England Republicans with a long history of commitment to civil rights--agree with McCain and view the confederate flag as a symbol of racism and slavery. This had to be a moment that Jeb and his advisors anticipated. No one would have foreseen the Dylann Roof's murders, but the confederate flag continues to fly over the South Carolina capitol, and it will be a political issue as long as it does. It loomed to be for him, as it was for his brother, a moment when he would have to choose between standing up for principle or opting for political self-interest.

It has been barely a week since Jeb Bush announced his candidacy. Now the questions once again revolve around what he actually stands for. A month ago, his campaign foundered on the question of his relationship with his brother, his brother's policies, and his brother's politics. This week he had one good day, but since then it has been downhill. This was a moment of simple moral clarity. If he was prepared--as he claimed--to take on the worst elements of his party, this was the moment to do it. Choosing not to do so may improve his viability in the Republican primaries--as it did for his brother before him--but it will surely cost him in the general election. And he knew that. He knew he was at a fork in the road, and he knew what the right path was. He just chose not to take it.

Saturday, June 06, 2015

A conspiracy, a scam, accountable to nobody.

Just imagine what Michael Lewis must think of the FIFA scandal. Although Michael Lewis is a prolific non-fiction author who has written about the misdeeds and abuses of Wall Street for a quarter of a century, he has never seen the highest law enforcement officials in the land throw the book at Wall Street as they did last week at the world soccer organization known as FIFA.

Lewis first burst on the scene twenty-five years ago when he published Liar’s Poker. Liar’s Poker described the world of bond trading and the development of mortgage-backed securities at Salomon Brothers where Lewis worked. Salomon Brothers was the gorilla on Wall Street back then, before collapsing in ignominy in the wake of its failed effort to rig the Treasury auction. But mortgage-backed securities lived on, and ultimately morphed into the complex securities that brought the world financial system to its knees in 2008.

Lewis has been a prolific author since leaving Salomon Brothers. He is most famous for Moneyball, his story about the Oakland Athletics that introduced the then-arcane world of statistical analysis to the average baseball fan, and ultimately to the world of sports as a whole. But he always returned to finance. The Big Short described aspects of the 2008 financial collapse in language the average reader could understand. Flash Boys shed light on the systemic corruption of the US stock markets that allows a select group of investors to front-run the rest of us, padding their pockets with our retirement savings.

When Attorney General Loretta Lynch stood before the world and brought the hammer down on the leaders of FIFA, Lewis surely must have looked on with incredulity. After all, the racketeering, money-laundering and wire fraud charges levied against a global assortment of FIFA luminaries was the product of a prosecutor armed with the resources of the FBI slowly working up the chain of command. First they turned American FIFA executive Chuck Blazer, then they followed him around the world, picking up one bad actor after another until the Godfather himself, FIFA President Sepp Blatter stepped aside. Surely if the US Department of Justice and the FBI could bring down FIFA, they could have exacted some degree of retribution from those who brought the world's financial system to it knees.

It is hard for many Americans to grasp what is going on here. First of all, we don’t even call it football like the rest of the world. But more to the point, most of us have never heard of Sepp Blatter, despite his being a global celebrity of sorts. But FIFA is a non-profit organization with $1.5 billion in financial reserves that is largely funded by American money. It is the point of access for advertisers wanting to reach the largest sporting audience in the world, and most of the leading advertisers are American companies. Roger Bennett, a British football journalist whose daily soccer podcast on ESPN, Men in Blazersis essential listening for this scandal, put it succinctly the other day:

"McDonald's. Budweiser. Visa. Coke. When those massive American-based, global, multi-nationals are embarrassed, and suddenly their brands are linked to corruption, to bribery, to fraud, to the 1,200 deaths of essentially slave workers building the stadiums in Qatar. FIFA had to take action. And that action involves money, because that's the only language that FIFA understands. We've always said it had to be America that took FIFA down." 

But really the credit should go to Andrew Jennings, the British journalist whose book Foul!: the Secret World of Fifa; Bribes, Vote Rigging and Ticket Scandals provided a roadmap for the FBI and Lynch to follow. And follow it they did. When Roger Bennett asked why the US Department of Justice was leading the charge against FIFA, ESPN investigative reporter and anchor Bob Ley summed it up: "Because the banking laws of the United States have been trifled with." 

Which of course brings it all back to Michael Lewis, who has spent a quarter of a century chronicling nothing if not the trifling with the banking laws of the United States.

I get the din of bribery and corruption that swirls around FIFA. It is what happens when money and power meet. And some of it is simply comical. Jeffrey Webb, one of the indicted co-conspirators accused of taking millions of dollars in bribes in return for his vote as the FIFA delegate from the Cayman Islands describes himself as one of the leading bankers in the Cayman Islands. Really? A Cayman Islands banker? Is that not business card code for money laundering?

And then there is Sepp Blatter himself speaking to students at Oxford two years ago: "Perhaps you think I am a ruthless parasite sucking the lifeblood out of the world and out of football—the Godfather of the FIFA gravy train. There are those who will tell you that FIFA is just a conspiracy, a scam, accountable to nobody. There are those who will tell you of the supposed sordid secrets that lie deep in our Bond villain headquarters in the hills above Zurich." How hard would it be to imagine Blatter's words spoken by Lloyd Blankfein, the CEO of Goldman Sachs, the original "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," as journalist Matt Taibbi suggested, who, like Lewis, must  be wondering why the FBI has never called.  Lewis, after all, laid out a similar roadmap, providing the names, the dates, the systemic fraud and corruption.

I get that many people find it hard to believe South Africa Sports Minister Fikile Mbalula when he denies that the six million dollars that South Africa paid to Jeffrey Webb and several others was a bribe to secure their support for South Africa’s bid for the 2010 World Cup. But many people also find it hard to believe that bankers Lewis described in The Big Short who deliberately designed securities to fail before selling them to clients did not similarly commit some manner of indictable offense. And many other people find it hard to believe that when the New York Stock Exchange sold access to hedge funds that enabled them to front-run average investors, none of those officials went to jail either.

Attorney General Loretta Lynch and her FBI colleagues have done their job. They have painstakingly followed the roadmap from the bottom of a corrupt global conspiracy to the top. That is a good thing. It is only their choice of which corrupt global conspiracy to tackle that seems curious.

Goldman Sachs—and I am only using Goldman as a metaphor for Wall Street—never bribed Jeffrey Webb, or at least I am not aware of any allegation that they did. But Goldman Sachs has put its money to good use, and perhaps better use than the FIFA leadership. Over the past decade, Goldman Sachs—once again, Goldman is just shorthand for the entire financial services industry—paid out almost six billion dollars in political contributions to members of the US Congress over the past decade. Those contributions were surely made with some idea of what was expected in return, and to ensure that their interests were represented at the highest levels of the US government.

Blatter has offered the typical CEO defense of the bribery and corruption rife within his organization. "I can't monitor everyone all of the time." But then he went further and suggested a credo that we have never heard from the leaders of our own banking industry in the wake of one scandal after another, one multi-billion fine after another. "We cannot allow the reputation of football and FIFA to be dragged through the mud any longer. It has to stop here and now." And then he did what no one did in the wake of the global financial collapse. He resigned.

The prosecution of FIFA came about because a journalist laid out a roadmap, and a prosecutor and the FBI picked up that roadmap and chose to follow it. The determination that Atttorney General Lynch has shown in her pursuit of wrongdoing at FIFA raises the question of why misdeeds on Wall Street were never pursued with similar zeal. Perhaps the roadmap that Michael Lewis laid out is not as compelling, or perhaps the culprits on Wall Street were simply better at playing the game and covering their tracks. Two years ago, Sepp Blatter described FIFA to students at Oxford as a conspiracy, a scam, accountable to nobody, words that many might apply to what Wall Street has become. It is all well and good that the US Justice Department has decided to police the rest of the world; it does beg the question as to why they have not been playing the same role here at home.

Friday, May 29, 2015

Tiptoeing around the fringe.

Last week, Seymour Hersh published The Killing of Osama bin Laden in the London Review of Books. According to Hersh, the Oscar winning movie Zero Dark Thirty chronicling the killing of Osama bin Laden was a work of fiction. According to Hersh, Osama bin Laden was not found through the diligent efforts of a CIA analyst tracking an Al Qaeda courier. The Pakistani intelligence service did know where bin Laden was living and was protecting him. And the Pakistanis were aware of and facilitated the raid on Abbottabad, where Navy Seals killed him.

This is not the first time Hersh has accused Barack Obama of not being forthright with the public. Last year, Hersh published The Red Line and the Rat Line, in which he claimed that the Syrian government of Bashir al Assad did not launch the chemical weapons attack that nearly resulted in a US attack on the Syrian regime. Instead, Hersh asserted that the chemical attack was launched from rebel-held territory as part of a Turkish operation instigated by the President of Turkey, who was seeking to provoke an American attack on the Syrian regime.

The response to Hersh's articles has been unequivocal. With respect to The Killing of Osama bin Laden, Obama administration officials denied Hersh's allegations in the harshest possible terms, while pundits and others in the media have belittled the once-iconic journalist as having become a conspiracy theorist and a crank.

It may well be that Seymour Hersh has wandered off the reservation into the world of conspiracy theories, but he offers in each case a plausible story line that fits well with the motivations of the parties to the conflicts. You don't have to believe Hersh's accounts to find that they illuminate hard truths about the challenges we continue to face in the region.

Hersh's rendition of the killing of bin Laden makes more sense in many respects than what we now understand to be the truth of what transpired. According to the official story, the CIA tracked down bin Laden to a house in Abbottabad by following the movements of an al-Qaeda courier over time. Hersh claims instead that the CIA learned of bin Laden's location from a Pakistani intelligence officer who approached the CIA seeking a part of the $25 million reward offered for the information. According to the official story, neither the Pakistan's military nor its Inter-Services Intelligence agency (ISI) knew of bin Laden's whereabouts at the time of the US raid that killed him. Hersh claims instead that the ISI had located bin Laden in the tribal areas of Pakistan several years earlier and--with the support of the Saudis--was keeping him under wraps in Abbottabad.

And according to the official story, the Pakistanis knew nothing about the US raid until the Navy Seal team was leaving the country after killing the al Qaeda leader. Hersh claims instead that once the US learned from the informant where bin Laden was and demanded his return, the Pakistanis agreed to facilitate the Navy Seal raid as long as they were assured both that bin Laden would not be taken alive and that any Pakistani knowledge of bin Laden's whereabouts or facilitation of the raid would be denied.

The essential assertion of the Hersh story was that Pakistan's intelligence service knew where bin Laden was all along. It is the central point around which everything else revolves and that is vociferously denied by the Obama administration. That aspect of the official story--that bin Laden was living within two miles of a major Pakistani military training facility in Abbottabad but no one knew he was there--has always been the least plausible element of the official account. Over the past year, two news accounts have supported key elements of Hersh's version of events. Last year, New York Times reporter Carlotta Gall confirmed that the ISI had known bin Laden's whereabouts for years and had been protecting him. Then, last month, a Pakistan-based journalist disclosed the name of the Pakistani "walk-in"--an ISI agent who was subsequently relocated to the US with his family--who had provided the CIA with the information about bin Laden's whereabouts. The CIA has subsequently acknowledged the walk-in, but denied that he provided specific information regarding bin Laden's whereabouts.

Hersh's article published last year about the Syrian chemical weapons attack similarly presents a version of events significantly at odds with the official account. Both versions of the Syria story begin with President Obama's ill-conceived words setting down a red line threatening the Assad regime with retaliation if it used chemical weapons. In the official account, after Obama had laid down his red line, Assad launched a chemical weapons attack. In the wake of the attack, Obama equivocated about whether to make good on his threats and launch a military assault on the Syrian regime, until he was ultimately bailed out by the Russians who got the Assad regime to agree to give up its chemical weapons.

Hersh describes a completely different sequence of events. The central actor in Hersh's account is Turkey President Recep Tayyip Erdoğan. Up until 2011, Erdoğan had been a close supporter of Assad. Then, early on in the Syria uprising, the two had a public falling out and since that time Erdoğan has been determined to destroy his former ally.  

Hersh writes that both the military and the CIA immediately recognized that Obama's laying down a red line was a serious error. They pushed from the beginning for clarification of what it meant, what would constitute a violation, and what the consequences would be. The Turkish President understood as well that laying down a red line was a mistake, but one that provided him with an opportunity. According to Hersh, the Turks conspired to launch the chemical weapons attack that became the focus of international outrage as a "false flag" operation intended to point blame at Assad and trigger an American retaliation. As Hersh tells it, after the chemical attack Obama pushed for a massive assault on Assad even as the military and the CIA pushed back, believing that a US attack would lead a broader regional war. The military joint chiefs of staff--and particularly joint chiefs chairman General Martin Dempsey--did not believe from the outset that there was clear evidence that the Assad regime had launched the attack. The evidence against Assad only weakened under further investigation, leading Obama to seek a face saving way out.

Yet, if Hersh's accounts are true, those lies can be rationalized as having been in the interest of national security. Once the US learned of bin Laden's whereabouts, the Pakistanis insisted on secrecy about their role, and for good reason. Keeping Pakistan's role a secret was critical to keeping the relationship intact--a relationship that serves a range of US interests, including suppression of the Taliban, maintaining relative calm in the Indian subcontinent, keeping pressure on Iran's eastern flank, and preserving some semblance of American control over the Pakistani nuclear arsenal. Similarly, even if Erdoğan is a scheming egoist, Turkey remains an essential ally as well, both as a power in the region and as the southern flank of the NATO alliance. Of course, the President may not have lied. It may simply be that in his old age, Seymour Hersh has become a conspiracy theorist and a crank. 

Whether one believes Hersh's accounts or not, his stories paint credible portraits of key parties to each event. Taken together, they paint a coherent picture of the dynamics that the United States faces in the region. Today, the United States is struggling to execute an effective strategy to roll back the rise of ISIS, while almost every one of our allies in the region is either standing on the sidelines or actively acting to undermine our efforts. 

Turkey, our NATO ally and the country with the strongest military in the region, borders on ISIS territory but has proven to be largely sanguine about its presence. Erdoğan's singular priority is the destruction of the Assad regime that was once his close ally. Turkey is actively supporting Jabhat al Nusra, the al Qaeda affiliated Sunni rebel group widely viewed as the most powerful faction in the Syrian conflict, and which is tacitly allied with ISIS in opposition to Assad. Turkey has been and continues to be the conduit for jihadi fighters and funding coming from other countries to join ISIS as well as other groups. Similarly, Saudi Arabia and other Gulf states are actively backing Sunni jihadist groups fighting Assad. For Saudi Arabia and the Gulf monarchies, Assad and Iran are their sworn enemies. ISIS is of less concern to them.

Our relationships with Turkey, Saudi Arabia and the Gulf monarchies exemplify our challenge in the region. While in the US media the battle against ISIS is presented as the sine qua non of the conflicts in that region, our allies there have each chosen their own paths, and are each now either actively or tacitly aligned with ISIS. And so it has always been with Pakistan, our other ally in the region, whose ISI created and nurtured the Afghan Taliban against whom we fought the longest war in our history. 

In the official stories of the killing of Osama bin Laden and the Syrian chemical attacks, our allies had only marginal roles. While we tracked down and killed bin Laden on their turf, the much vaunted Pakistani intelligence service was oblivious to what was happening. When Assad launched chemical weapons at his own people, our President bumbled his way along until the Russians finally bailed him out. But to hear Seymour Hersh tell it, in both events, our allies were cunning and devious in the pursuit of their own interests, and worked against us each step of the way. In his telling, our allies Pakistan and Saudi Arabia protected the architect of 9/11 for the better part of a decade while their US ally was searching the globe to find him. In his telling, it was our ally the Turks who seized on Barack Obama's ill-conceived red line comment as an opportunity to manipulate Barack Obama into going to war in Syria, while it was our adversary the Russians who bailed him out.

Hersh may be making his stories up out of whole cloth, but they ring true. We may think we are leading the fight against ISIS today, but none of our allies seem to be following. Instead, they are soldiering on, just as Hersh portrays them, feigning to be our friends, while fighting us every step of the way. Only Iran, it seems, is prepared to fight by our side against ISIS, but our allies won't abide it. 

Thursday, May 21, 2015

Jeb's dilemma.

Jeb Bush finally got his answer right. Bowing to the political correctness of the moment, the aspiring President Bush III fell into line and spoke the magic words. If I knew then what I know now, I would not have launched an invasion of Iraq. 

It did not come easily. Bush readily admitted that he has a hard time disagreeing with his family and he was loath to say anything about the Iraq War that might cast his older brother in a bad light. Even as he said the magic words, he was walking it back:

“That’s not to say that the world [isn’t] safer because Saddam Hussein is gone. It is significantly safer. That’s not to say that there [wasn’t] a courageous effort to bring about a surge that created stability in Iraq. All of that is true. And that’s not to say that the men and women who’ve served uniform and many others who went to Iraq to serve, they did so, certainly, honorably. But, we’ve answered the question now.”

Bush's grudging response made it clear that candidates are being asked the wrong question. Across the board, from the dozen or so Republicans through Hillary Clinton, the candidates to succeed Barack Obama have embraced the "If I knew then what I know now" consensus, blaming the decision to invade Iraq, in Bush's words, on "mistakes as it related to faulty intelligence in the lead-up to the war."

But intelligence regarding WMD was not what led George W. Bush and his administration to take the country to war. Deputy Secretary of Defense Paul Wolfowitz, in his 2003 interview with Sam Tanenhaus in Vanity Fair just weeks after the U.S. invasion, succinctly set forth the administration's rationale for war against Saddam: "There have always been three fundamental concerns. One is weapons of mass destruction, the second is support for terrorism, the third is the criminal treatment of the Iraqi people. Actually I guess you could say there's a fourth overriding one which is the connection between the first two..." The subsequent 911 Commission Report documented the administration's extensive focus on Saddam Hussein in the wake of the 9/11 attack, including the determination to use the attack as a pretext to bring down the Iraqi dictator.

Immediately after the publication of the Wolfowitz interview, the Pentagon and Conservative commentators objected to emphasis in the Vanity Fair article that the administration had settled on WMD as the sole or primary rationale for the invasion. A Pentagon official asserted, correctly, that in the Vanity Fair interview Wolfowitz "made clear that there were multiple reasons for the use of military forces against Iraq." Writing a few weeks later, Bill Kristol, conservative doyen and editor of The Weekly Standard, disputed the notion that the war had been sold to the American public on false pretenses, explicitly focusing on the conflation of chemical and nuclear weapons under the single acronym WMD. "No one doubts that Saddam's regime had weapons of mass destruction, used weapons of mass destruction, and had an ongoing program to develop more such weapons." Kristol's first two assertions were unarguably true. We knew that Saddam had had chemical weapons--which he used against both Iran and his own people--because we sold them to him. And the Bush administration intelligence on that matter was flawless because Wolfowitz's boss, Secretary of Defense Donald Rumsfeld, had arranged the sale of those weapons to Saddam as the envoy of President Reagan 19 years earlier. Only the latter assertion about an ongoing program was in doubt.

The WMD intelligence-failure narrative gained favor, particularly among Democrats who had voted for the war but had come to regret their vote--and now has been embraced by nearly all of the presidential contenders--but it was not a deciding factor for President Bush or his team at the time. Their determination to bring down the Iraq regime rested on firmly held convictions about both Saddam Hussein in particular and their broader foreign policy theory of regime change as the preferred path to best effect change in the Middle East. WMD or no, Saddam was who they thought he was, and one only needs to look at the viciousness of his former generals who are now leading the ISIS campaign of terror if one doubts what Saddam's regime was capable of.

At the end of his 2003 article, Kristol raised the central issue: "People of good will are entitled to disagree, even in retrospect, about the wisdom and probable effects of Saddam's forcible removal." This week, Scott Walker commented that "Any president would have likely taken the same action [President George W.] Bush did with the information he had." But this is not true. Most likely not even George W.'s father. This was exactly the issue that James Baker and Brent Scowcroft raised in 1991 when they advised President Bush I not to send troops to Baghdad in the closing days of the first Gulf War and not to depose Saddam Hussein because of the chaos they believed would ensue. And it was exactly the issue raised again by Scowcroft in 2002 when he advised President Bush II through a Wall Street Journal op-ed Don't Attack Saddam, mirroring those same concerns--and widely interpreted at the time as reflective of the view of the President's father. And it is apparent from the 9/11 Commission Report that just "any president" would likely not have even have considered invading Iraq--given the lack of evidence linking Saddam to 9/11--unless, like Bush II, that president's administration came into office looking for an opportunity to take Saddam out.

So far, of the candidates running for president, only Rand Paul has focused explicitly on the issue Kristol raised. Just a few days before the Jeb Bush story broke, Paul asserted that toppling Saddam Hussein--as well as our broader policy of regime change in the Middle East-- was a mistake: “Each time we topple a secular dictator, I think we wind up with chaos and radical Islam seems to rise.” Paul was roundly dismissed as an isolationist, despite articulating views that mirrored the Republican Party mainstream prior to the ascendancy of the neoconservatives under the second Bush administration.

As documented in the 9/11 Commission Report, the determination to invade Iraq in 2003 was a decision in search of supporting intelligence, not the other way around. The lessons of the Iraq war are about the limitations of regime change and preventive war as foreign policy doctrines. Today, as we hear literally the same rationales for war coming from Iran hawks that Wolfowitz expressed to Sam Tanenhaus regarding Iraq over a decade ago, it is important to know what each candidate sees as the lessons of our recent history. The question for Jeb Bush is not about spurious faulty intelligence, but whether as President Bush III he would choose to walk the foreign policy path of his father or that of his brother, or whether his loyalty to his family would render him incapable of choosing between the two.  

Sunday, May 10, 2015

The shaming of the American worker.

President Obama is fed up. At long last, he has found an issue where he can move forward in common cause with Republicans in Congress and his own Democrat compatriots won't stand for it. Massachusetts Senator Elizabeth Warren first set the President off by comments claiming that the proposed trade deal would exacerbate income inequality and erode national regulatory sovereignty. "The idea that we can shut down globalization, reduce trade … is wrong-headed," the President responded. "That horse has left the barn." And then it got personal. Warren and her allies were being dishonest, spreading lies about the deal, he suggested. They are, the President inferred, behaving like Republicans.

It is hard for the rest of us to debate the merits of the TPP because the actual terms have not yet been disclosed to the public. And this was the essence of Warren's response. The President is trying to have it both ways: he criticizes opponents for misrepresenting the deal--even as he deliberately mischaracterizes their stance as being anti-trade--but won't allow the public a peak at the text or engage in a direct public debate of the issues that Warren and others have raised. Speaking this week, he amped up the rhetoric as he derided his erstwhile Democrat allies for wanting to “pull up the drawbridge and build a moat around ourselves.”

It is good to see robust opposition forming to the TPP. The alliance of Tea Party critics on the right with the Warren Democrat camp on the left is heartwarming, and in another era or in another political system might have constituted a political force in defense of the broader public interest. The American middle class has not been treated well by our political system over the past several decades--in terms of incomes and job security, and the sharing of growing economic wealth--and both the substance and politics of the TPP tell the story why.

Globalization and technology have combined to turn the American economy into part of a globalized system of production and consumption. International trade theory, as famously set forth by British economist David Ricardo two hundred years ago, suggests that the world as a whole benefits through systems of free trade that lead each nation to produce those goods and services where they have a comparative advantage. Combine our modern capitalist world and the World Wide Web with Ricardo's theory, and the world effectively shrinks, accelerating the migration of investment and jobs.

We all know the story that has unfolded over the post-World War II era, when first Japan, then the Asian Tigers, and finally China became the beneficiaries of increasingly free trade. And Ricardo's theory has been proven right. Free trade has lifted hundreds of millions, if not billions, of people around the world out of destitute poverty, as the share of the world population living in extreme poverty declined by fifty percent--from 43% in 1990 to 21% in 2010.

The American middle class paid the price of opening our markets and shipping millions of jobs overseas to the benefit of other nations. During the past forty-five years--going back to 1969--median U.S. income has been flat in real terms, after having increased by 50% over the prior fifteen years. Since 1973, wages and salaries have declined steadily as a share of U.S. GDP, from 54% to 45%, even as corporate profits have reached record highs. Globalization has created an economy in which the economic benefits of growing productivity and global wage competition have inured to the benefit of corporate management and investors even as it has depressed family incomes. As a result--the President's snarky riposte notwithstanding--from the perspective of the average American family that may not appreciate the nuances of David Riccardo's economic theory, building a moat around ourselves might seem like a good idea.

No doubt, the American middle class should be applauded for the sacrifices that it has made for the rest of the world. But our politics are not about sacrificing for the greater good. Political money spent to buy the support of members of Congress or occupants of the White House has grown dramatically, and those who spend that money rarely do it for charitable purposes. And so it is with trade agreements. One purpose of the TPP no doubt is to align the world in the manner envisioned by David Ricardo, to boost aggregate global incomes to the ultimate benefit of all nations. But the TPP is also about private interests, and as such it addresses both traditional issues such as intellectual property and patent rights, but also apparently adds new corporate protections such as the right to seek damages for lost profits deriving from a participating nation's sovereign action, such as raising the minimum wage, implementing environmental regulations or putting warning labels on cigarettes. Apparently, Americans can parse the difference between the public and private benefits of free trade agreements. In a Pew Research Center poll in 2010, Americans indicated overwhelming support for free trade while showing significant skepticism for free trade agreements.

Supporters of free trade agreements have consistently suggested two strategies to protect workers from the impact of opening up domestic markets to global competition. The first is trade adjustment assistance and job retraining programs, which may be useful for those who lose their jobs but does little or nothing for those who keep their jobs but whose incomes are undermined by global wage competition. The second is education, claimed by many to be the silver bullet that will prepare American workers for new careers in the new economy of the future.

Educational attainment is directly linked to family income and employment security. In the wake of the Great Recession this linkage has become increasingly stark. Three years after the 2008 collapse--when the recession was officially over--the unemployment rate for those with a college degree was half the rate for those with a high school degree, while the unemployment rate for those with a professional degree was half again the rate for those with a college degree. In a free trade world, higher education has become as essential for Americans as a high school degree was a half-century ago.

But even significant increases in the educational attainment of U.S. workers have failed to offset the impacts of globalization on middle class incomes. From 1980 to 2009, college participation rates--the percentage of high school graduates who enroll in two and four year colleges--rose steadily from 49.3% to 70.1%, yet over that same thirty-year period median per capita income remained stagnant in real terms. That is to say, increasing educational attainment may have led to increased job security for Americans that pursued higher education but it did not translate into real growth in median incomes, as global wage competition allowed companies to retain the economic benefits of significant increases in labor productivity.

Since 2009, faced with cuts in federal Pell grants, significant tuition increases at state colleges and universities, and Congressionally-mandated increases in student loan costs, fewer high school graduates continued on to college. By 2013, the national college participation rate declined to 65.9%, with the decline most pronounced among low-income students, from a peak of 58.4% in 2007 to 45.5% in 2013. With the trend of reduced public funding of higher education unlikely to be reversed, it is reasonable to expect that the struggles of the middle class will only be exacerbated by the new proposed trade deal.

Against that backdrop, the idea of building a moat around the country might look like an attractive path forward to many Americans . Considering a half-century of flat real wages that are at least in part attributable to the impacts of globalization, why should anyone be mocked by the President for advocating a position that might benefit those individual U.S. workers whose jobs will be put at risk? With armies of paid lobbyists fighting tooth and nail to have the interests of their corporate clients addressed in the TPP, why should workers and their families in Indiana or Ohio be asked to quietly accept the inevitability of one more trade deal so that others might prosper?

President Obama's stance on TPP is that Americans should trust him. But even for those who fundamentally support free trade, the experience of the last half-century is hard to square with the President's conviction. The President can talk about the benefits of global trade to middle income Americans--they have heard it all before--but he ignores the fact that supporters of free trade have consistently declined to support measures that might assure that all Americans have affordable access to the higher education that is essential to their ability to prosper in a free trade world or to provide for a sharing of the economic benefits of globalization and productivity growth beyond senior management and investors.

Mr. Spock's utopian mantra on Star Trek that "the needs of the many outweigh the needs of the few" does not apply to our politics, where increasingly the loudest voices heard are those of the few. President Obama must know that this is not a debate about free trade--which Americans overwhelmingly support--but part of a larger, continuing debate about how we make the rules and who benefits in our economy and society. With corporate America and the Republican Party lined up four square behind the President, it seems unlikely that in this proposed trade deal the interests of the few are going to be set aside for the interests of the many, and it is understandable why the President's erstwhile allies are having a hard time taking him at his word.

Thursday, April 30, 2015

A failed model of government.

In his piece this week, "Baltimore, a Great Society Failure," National Review editor Rich Lowry presents events in Baltimore as demonstrative of the failure of social programs dating back fifty years to the War on Poverty. "The city hasn’t been 'neglected.'" Lowry asserts, "It has been misgoverned into the ground. It is a Great Society city that bought into the big-government vision of the 1960s more than most, and the bitter fruit has been corruption, violence and despair." Lowry's piece walks through all of the evils that plague urban America. Hostility to business, high taxes, crime, patronage, single parent families and teachers unions. All in a state, he points out, with among the most generous welfare systems in the country.

Lowry's focus may have been Baltimore, but his larger purpose was to take advantage of the public's momentary focus on the plight of urban America to suggest that more of the same is unlikely to cure what ails that or other cities. Conditions in Baltimore mirror the state of affairs across urban America. Lowry's is an indictment of social policies dating back a half century to the Great Society of Lyndon Johnson. "This is a failure exclusively of Democrats..." Lowry stated, just in case his point was lost on anyone. "It is an indictment of a failed model of government." 

In the normal course of events, a presidential campaign should be the platform for a public debate on issues such as those raised by Lowry. This debate is nothing new, as the ink on the Great Society legislation was barely dry before Daniel Patrick Moynihan--a Democrat in Richard Nixon's administration--raised questions that mirror those suggested by Lowry forty-five years later. Whether the Democrat nominee is Hillary Clinton--or by some outside chance former Baltimore Mayor and Maryland Governor Martin O'Malley--Lowry has provided the broad strokes of the conservative critique of Democrat domestic policy. For her part, Hillary will be torn between the law and order centrism of her husband in her effort to retain white male voters, and the progressive stance of the Democratic left that Lowry suggests "has a soft spot for rioters." It is a trap, as Lowry understands well, from which she will have no easy escape.

Lowry's piece was not directly prescriptive of what should be done for what ails Baltimore, but his prescription was implicit: end federal programs and investments that have failed to work, and focus instead on tax, regulatory, education and other institutional reforms at the local level. If we are to engage the debate that Lowry suggests on the effectiveness of federal spending in alleviating problems of poverty and economic development, perhaps we could broaden our horizons beyond just the past fifty years. This April marked the 150th anniversary of the Robert E. Lee's surrender to Ulysses S. Grant at Appomattox Courthouse in April 1865. Since the end of the Civil War, the federal government has made huge investments in the south--through the location of military bases, investments in waterways, hospitals and rural electrification, and in myriad other ways.

What began as an effort to control the south during reconstruction continued as an effort to lift the south up from poverty and spur economic development. It continues today in large measure due to our constitutional bi-cameral framework that gives smaller states a disproportionate number of representatives and power in Congress relative to larger states. Year in and year out, smaller states get more back from the federal government than they pay in.  For example, in 2013 alone the eleven former states of the confederacy received $287.7 billion more back from the federal government than they paid in.

Of course, that $287.7 billion of federal money had to come from somewhere, and that somewhere is the rest of us. My state, California, which is significantly disadvantaged due to its size, pays in almost $100 billion more each year than it receives back from the federal government. Our money flows through Washington, DC, to benefit residents of the former states of the confederacy and other small states, who benefit to the tune of an annual subsidy on the order of 20% of their personal income.

For 150 years, the federal government has poured money into the south, but to little avail. Perhaps the simple proof of Lowry's argument of the failure of social program spending is less in Baltimore than in the former confederate states. After a century and a half of throwing federal money at the problems of poverty and underdevelopment in the south, a brief review of socio-economic indicators--infant mortality, educational attainment, life expectancy--show that cohort of states firmly ensconced in the bottom quintile of states. In Lowry's words, it is an indictment of a failed model of government.

If we are going to discuss the effectiveness of federal policies in our cities--and we should--it is time to discuss as well why some states continue to benefit systemically to the disadvantage of others, with little or no benefit to show for it in terms of relative progress as measured by socio-economic indicators. Californians are often ridiculed for our high income tax rates relative to other states. If only we could manage our affairs like Tennessee--47th, 44th and 41st in infant mortality, life expectancy and educational attainment, respectively--a friend of mine often suggests, our tax rates would be lower and our economy would expand faster.

My friend has a point. Perhaps it is time for some accountability, as Lowry suggests, and to put an end to this failed experiment that has flooded federal money into a cohort of smaller states, to no demonstrable effect. A simple solution would be a constitutional amendment that provides that no state shall have to pay in to the federal government more than 110% of what it gets back.

Last year, California contributed $334.4 billion to the federal government and received $238.7 billion, for a net outflow of $95.7 billion. If California's contribution to other states that for so long have fed disproportionately at the federal trough were limited to 10%, as suggested above, the savings to Californians would roughly equal the $75.2 billion we now pay in our very high income taxes.

Today, Californians are being taxed $238.7 billion to fund our fair share of federal spending, and an additional $95.7 billion to pay for transportation, education, healthcare and water projects in states across the south and elsewhere. $95.7 billion is almost equal to the entire California General Fund budget and we sure could use that money back here at home. In one fell swoop, we would have the capacity to rebuild our own transportation, education and water systems. Or we could completely eliminate the state income tax and restore California's role as an economic engine for the nation and the world.

The proposed constitutional amendment--the Howard Jarvis Restoration of Freedom and Accountability Act--should appeal to Lowry and the conservative, federalist sensibilities of the Republican caucus. We can start from the principle that it is our money, and there should be limits on the extent to which we should be required to dole it out to Washington and the rest of the country. Call it a taxpayer revolt. In Rich Lowry's words, we are dealing with a failed model of government and it is time to change. 

Monday, April 27, 2015

Glass houses.

Sitting with Sean Hannity last week, Kentucky Senator Rand Paul expressed his outrage at money received by Bill and Hillary Clinton over the years and actions that they may have taken as public officials to benefit those who contributed funds. In various guises, the Clintons have been the beneficiaries of billions of dollars of funds given over the course of their decades in public life, whether paid as political campaign contributions when they were in or running for public office, for speeches during their years as private citizens, or as contributions to support the activities of the Clinton Foundation, including the Clinton Global Initiative.

As we have watched over the years, Paul and Hannity rained down accusations on the Clintons, suggesting nefarious interconnections between the activities of the Clinton Foundation and ultimately Hillary's actions as Secretary of State. There was no allegation of a specific illegal act--after all, unlike many of his colleagues in Congress, Paul is an ophthalmologist by training not a prosecutor--but instead suggestions of a broad conspiracy of money exchanged for political favors.

"How could this happen in America?" Paul railed on.

How indeed? As the foremost libertarian in Congress, a believer in free markets, and a principled opponent of government regulation, he should appreciate that in American politics, political influence is just one more marketplace. Republicans accusing the Clintons of illegal conduct from corruption to murder is nothing new. Bill Clinton was impeached after all. Voters returned him to office after waves of accusations and allegations, and today, after all that we have lived through--the screeds published by Regnery press, the grist that launched Fox to the top of the network rankings, to say nothing of Bill's sordid womanizing--Bill Clinton remains among the most admired figures in American life and Hillary is the presumptive presidential nominee of her party. Therefore, if one embraces libertarian theory and that markets incorporate all known information, then one must conclude that voters in political marketplace have long since rendered their judgment in favor of the Clintons.

The new wave of accusations against the Clinton's is nothing new. The commingling of money and politics has a long tradition in our democracy.  I am sure that Paul would contend the growth of government spending over the course of the republic from 3% of GDP to 30% was driven by the simple fact that government spending benefits people and companies and that those beneficiaries fund political campaigns to protect their interests. Government regulation has grown because it protects private interests as well as protecting the common good, and those whose interests are protected regularly fund political campaigns to gain or secure such regulatory protection.

Even if these exchanges of political money for political favors are not illegal under our laws, Americans understand that money paid to gain political influence is a corrupting fact in our democracy. The Center for Responsive Politics tracks the flow of political contributions to members of Congress and for each two year election cycle. For example, according to CRP data Rand Paul raised $5.7 million in the run-up to his recent reelection to the Senate during the 2014 campaign cycle. Of that money, $834,000, or just under 15% came from the finance sector. I am just using Paul as an example, of course. Based upon CRP data, the financial services sector is the largest funder of political campaigns and lobbying at the Congressional level. Over the past ten years, that sector has spent over $3.8 billion on campaign contributions and lobbying, an amount that totals almost $1 million per member of Congress per year. The financial services industries have strategic interests in Washington, DC, where their lobbyists work to promote and protect their interests, and call on those members whose campaigns they have funded to secure their support when needed.

Charles Koch, a libertarian like Senator Paul, has been outspoken in protesting the selling of corporate interests in the nation's capital. In his Wall Street Journal editorial in March 2011, he attacked crony capitalism and corporate purchasing of special favors in Washington that he suggests erode our overall standard of living. Today, businesses--including Koch Industries Charles Koch concedes--spend money in Washington because it works. There are few investments a company can make that offer a higher potential return on investment than government contracts or regulatory protection procured through campaign contributions and lobbying in Washington, DC.

The average American shares the perspective that their government is for sale. It strains credibility to assert that political money of the magnitude reported by the Center for Responsive Politics is not provided for the purpose of influencing public policy and gaining a financial return. Charles Keating, the CEO of Lincoln Savings and Loan said it best a quarter century ago in the wake of an earlier financial crisis. Keating famously contributed $1.3 million--a pittance by today's standards--to the campaigns of five senators, seeking their help working with bank regulators. When asked during a congressional hearing in the wake of what became known as the Keating Five scandal if he intended to get something in return for his money, Charles Keating responded simply "I certainly hope so." And so it is today.

From the founding of the republic, the intermingling of money and political power have been central to the nation's politics. Today, Americans on the right and on the left, members of the Tea Party and the Occupy Movement, are animated by their deep distrust of the workings of the nation's capital. Americans know instinctively that the financial collapse, the stagnation of the middle class, the increasing share of the economy dominated by the non-productive financial sector, and influence of political money are interrelated.

Of course, Charles and David Koch are major actors in the world of political money. They have famously committed to raise $900 million for the 2016 campaign cycle. They recently hosted a well-publicized retreat of potential Republican presidential candidates to vet their commitment to the Koch agenda. Charles Koch's principled opposition to the corruption of Washington, DC, was not enough to keep him and his brother from being willing buyers in the political marketplace at the highest levels, and the slate of potential Republican presidential nominees that attended the Koch fandango in hope of winning a share of the Koch money--which included Senator Paul--showed that there were willing sellers as well.

As a general matter there is no stated quid pro quo in these matters, no smoking guns that link the payment of money to a specific vote by a member of Congress. Congress is comprised largely of lawyers who understand that under law a quid pro quo is the essence of a corrupt relationship. But the perception of corruption, as it is seen by the average American is not about the explicit quid pro quo, it is about the nature of the enterprise seen in its totality.

Rand Paul is not a lawyer, so perhaps his outrage stems from his perception of the totality of the Clinton enterprise, not whether any particular law was broken. "It reminds me of people using the system to enrich themselves, I think it looks unseemly," Paul concluded. And indeed it does.

But "How could this happen in America?" Clearly Rand Paul has not been paying attention. He should know well how this happens in America. He is a U.S. Senator, after all.

Thursday, April 23, 2015

A year of living dangerously.

Hillary Clinton is in, and with her announcement the rest of the Democrats considering running for president in 2016 are out. In a manner reminiscent of the Republican Party of old, Democrats have ceded the nomination to Hillary Clinton. It is not exactly clear why this is the case. She clearly has a large following in the party and has a huge fundraising base, but that was true eight years ago as well. Perhaps it is because she lost a close race for the nomination last time that she is being handed the baton this time. Or perhaps the theory is that as the scorned candidate and cuckolded spouse she has suffered enough, that it is her turn. Whatever the reason, Hillary is off to a rocky start, and it could be a long year.

It used to be that the Republican nomination outcome was pre-ordained. Sure, the GOP went through a primary process, and every so often--1964 comes to mind--the clash between the conservative and establishment wings of the party could be titanic. But the era of the GOP as a tightly controlled cabal where candidates waited their turn and tenure and experience were rewarded is over. This year, the imprint of Barack Obama is evident as well. Tenure and experience are passé. Ted Cruz, Rand Paul and Marco Rubio are first-term Senators, and each mock rather than defer to the establishment candidate, Jeb Bush. John McCain, Bob Dole and George H. W. Bush must look on and shake their heads.

Hillary Clinton, by contrast, will be the candidate of experience. She only announced her candidacy two weeks ago, but already Clinton fatigue has begun to settle in. Hillary has been in the public eye for a quarter of a century, yet she began her campaign with a strategy to remake her image. Her campaign--we knew this already--will be a meta-campaign. It will not be about what she believes in or promises to do, instead everything she says and everything she does will be scrutinized from the perspective of strategy. What she says will not be the focus, but rather why she is saying it. Little or nothing will be taken at face value.

This is because strategy rather than commitment and values are central to the Clinton brand. Bill Clinton emerged from the back woods of Arkansas and won the White House as a "New Democrat". A New Democrat was a phenomenon not of principle but of strategic positioning. In accordance with game theory, in a two party race a candidate should seek to position him or herself as close to the opposing candidate as possible in an effort to capture the "median voter" in the center, and then take by default everyone else on their side of the ideological spectrum. Bill Clinton embraced this strategy and moved as close as he could to the moderate Republican position with the expectation that he could then take all of the votes to the left of that position. Thus it was that voters on the left who voted for Bill Clinton for President in 1992 described the experience as being at a shotgun wedding. Bill Clinton said it best early on in his first term when he pronounced to his cabinet "We're all Eisenhower Republicans now."

Hillary's coronation has not been eagerly embraced by the Democratic left. She has been unable to convince those who have urged Elizabeth Warren to run that she shares the Massachusetts Senator's outrage at the pandering to Wall Street, or those who admire Vermont Senator Bernie Sanders that she is animated by passion for traditional Democrat values, including support for labor and distrust of free trade, charter schools and other hallmarks of now-entrenched New Democrats. In Hillary's remarks declaring her candidacy, she took the obligatory swipes at Wall Street and growing income inequality. But her claims that she would work to repeal of the carried interest exemption that blesses hedge fund and other investment managers with a lower tax rate than Warren Buffet's secretary or perhaps champion campaign finance reform rang hollow, and were quickly dismissed even by Wall Street supporters as a necessary strategy would never be manifest in policy down the road. Hillary's claims that she would take on Wall Street and campaign finance--issues that animate both the right and the left against the entrenched center--only served as a reminder that the Clintons have been the recipients--through campaign contributions, speaking fees and donations to the Clinton Foundation--of literally billions of dollars in largesse from the richest people, corporations and countries in the world.

The issue of money is likely to haunt the Clinton campaign in the months to come. Any hope that Democrats might have had of making hay of the corrosive effects of money on our democracy--whether targeting Citizen's United, SuperPACs, or the $900,000,000 David and Charles Koch have committed to raise for this campaign cycle--will be neutralized by the many manifestations of the ways that the Clintons have enriched themselves and their world.

This week, the New York Times published a story suggesting linkages between the activities of the Clinton Foundation, Hillary's actions as Secretary of State, and Bill Clinton's receipt of a $500,000 speaking fee from a Russian Bank, surrounding the sale of uranium assets by a Canadian company to a Russian company. The story is a product of an agreement reached by the Times, together with the Washington Post and Fox News, with Peter Schweizer, author of the forthcoming book "Clinton Cash: The Untold Story of How and Why Foreign Governments and Businesses Helped Make Bill and Hillary Rich" to research the information he has compiled regarding connections between political contributions and speaking fees paid to the Clintons, contributions to the Clinton Foundation, and Hillary Clinton's actions as a public official.

A decade ago, Philadelphians saw up close the mixing of philanthropy and politics erupt into a corruption scandal. Vince Fumo was a powerful Democratic State Senator in Pennsylvania who created a charitable organization called Citizens Alliance for Better Neighborhoods. In 2004, Philadelphia Electric Company made a $17 million contribution to Fumo's charity. Federal prosecutors began an investigation into whether the PECO contribution had been given in exchange for Fumo agreeing to support utility deregulation in Pennsylvania. Ultimately, the corruption case could not be proven, but Fumo and two members of his Senate staff were indicted on charges of obstruction of justice for destroying electronic evidence, including e-mail related to the federal investigation.

The parallels with the Clinton foundation are ominous: A charitable organization created by powerful political figures, staffed by political associates, taking philanthropic contributions from people and organizations who can benefit from the actions of the sponsors of the charitable organization, and, of course, the destruction of electronic communications that in the worst light could be seen as bearing on those interrelationships.

While the Times was quick to deny that they had documented any quid pro quo or illegal actions in their scrutiny of the uranium deal, the Clinton campaign asserted in the article that no one "has ever produced a shred of evidence supporting the theory that Hillary Clinton ever took action as secretary of state to support the interests of donors to the Clinton Foundation." That may well be true, but it is not necessarily is the point either. For Americans who are distressed by seeing Republican presidential candidates catering their stances on Israel and Iran to curry favor with casino magnate and mega-donor Sheldon Adelson, or who cannot imagine that the $5 billion of Wall Street money given to Congressional campaigns over the past decade is not linked to the increasing concentration of wealth and power in the finance industry, the magnitude of the Clinton empire is troubling in and of itself.

It is just two weeks into the 2016 Presidential campaign and Democrats have ceded their nomination to Hillary Clinton. They better hope that she and Bill have good answers to the questions that are going to be coming their way. We could be in for a long year.

Monday, April 20, 2015

A trick question.

It's a trick question: Who should be driving GOP foreign policy, James Baker or Sheldon Adelson?

Perhaps nothing epitomizes the state of affairs in the Republican Party today more than the estrangement of James Baker from the Republican establishment. Nothing, because for what seems like decades James Baker was the Republican establishment. White House Chief of Staff to Presidents Reagan and Bush 41, Secretary of the Treasury to the former and Secretary of State to the latter, Baker was the quintessential political insider, negotiator and diplomat, mover and shaker.

Baker's fall from grace began on a gentle slope in 2002 when he and Bush 41 National Security Advisor Brent Scowcroft demurred on the wisdom of launching the second Iraq War. Baker and Scowcroft had opposed toppling Saddam at the end of the first Gulf War for fear that a civil war would ensue, and they saw the same risks in the plans of the ascendant neoconservatives who had grabbed the reigns of American foreign policy under Bush 43. As the promised dream of a brief war leading to a grateful new democratic nation deteriorated into the beginnings of a national nightmare, Baker had one last moment in the sun. In 2006, as the co-chair of the Iraq Study Group, Baker stood as a reminder of what internationalism in foreign policy was supposed to look like.

That moment, of course, was short lived. Baker endorsed bringing Syria and Iran into negotiations on regional issues to settle the hemorrhaging Iraq conflict. But realism in foreign policy had been replaced by the "revolutionary utopianism" of the neoconservative movement, as Scowcroft described it in 2005: “How do the neocons bring democracy to Iraq? You invade, you threaten and pressure, you evangelize... This was said to be part of the war on terror, but Iraq feeds terrorism.” Democracy, freedom and liberty were on the march, and the tip of the American spear would not be negotiation among adversaries, it would be regime change. Baker's worldview was outdated. It smacked of compromise, at best, of appeasement, at worst.

After a decade when he receded from public view, Baker's slide went into free fall last month when he addressed the liberal, pro-peace Jewish organization J Street. In one fell swoop, Baker ran afoul of the mainstream Jewish establishment--with whom he has had tendentious relations over the years--when he lent credibility to the anti-establishmentarian, anti-AIPAC, J Street organization, and of the leadership of the Republican Party when he criticized Israeli Prime Minister Bibi Netanyahu, who has become a god among men in Republican circles, and enjoys the personal protection of casino magnate and Republican Jewish mega-donor Sheldon Adelson.

It is all about Iran, of course, and about the searing hatred in Republican circles of President Obama. Netanyahu, Adelson, and at least forty-nine Republican Senators are on record opposing any deal that might emanate from the current negotiations. In the wake of Baker's J Street criticism of Netanyahu's judgment on Iran and commitment to peace in the region--comments that placed him closer to the views of the President than Congressional Republicans--Presidential aspirant Jeb Bush moved to distance himself from his father's consigliere--and the man who orchestrated his brother's victory in the Florida recount of 2000--further deepening Baker's estrangement from the party that he once owned.

This week, the National Journal reported on a GOP poll that suggests that the 2016 election could revolve as much around national security and foreign policy as the economy. In the wake of two long wars, metastasizing conflicts within the Muslim world, growing hostility between Russia and the west, and the national embarrassment of the President and forty-seven Republican Senators competing for the attention of the Ayatollahs in Tehran, a full throated debate over foreign policy is certainly long overdue. But the enthusiasm of GOP operatives for the poll and the conviction that American anxiety over national security necessarily bodes well for one party in particular may be misplaced. It may be that the estrangement of James Baker from the center of gravity of the Republican Party mirrors the widespread disillusionment of Americans with our nation's war policies, where less than 40% of Republicans and Democrats alike believe that we have achieved our objectives in the Iraq and Afghan wars.

American foreign policy has shifted profoundly since the Reagan-Bush years when Baker was at the apex of his career. The neoconservative embrace of regime change during the Bush 41 years has become central to our relationship with others in the world with whom we have disagreements. We eschew negotiations with our enemies or outcomes that reflect a balance of interests--that is to say all of those things that remain central to James Baker's worldview--in favor of overt demands for regime change. It has become central to our relationship with Vladimir Putin and with Syria's Bashir al Assad, as it is with Iran. In each case, we work assiduously to seek the downfall of a regime in power, and in each case, we presume to know that what would come next would be better should we succeed.

Yet the events of the past decade suggest that things are not that simple. There is scant evidence that what would come next in any country whose system we are determined to overthrow would necessarily be better. In Russia, as much as we disdain the naked aggression and hubris of Vladimir Putin, the chance that his downfall in the wake of steadily increasing western pressures would lead to a liberal, democratic alternative seems far less likely than the ascendency of a more chauvinistic, right wing successor, allied with the intelligence services, the military and the Russian Orthodox Church. In Syria, the rise of Sunni radicalism in the forms of ISIS and Jabhat al-Nusra have given credence to warnings from Russia and others--to say nothing of Syrian Christian and other minority communities that support Assad--that continuing American pressure for Assad to resign could lead to a situation that would be worse, not better.

The regional sectarian war that James Baker and Brent Scowcroft feared as an outgrowth of the first Iraq war in 1991 is now coming to be, drawing in Saudi Arabia and Iran as they foresaw. In the upcoming presidential campaign, the candidates are likely to tell us how tough they are and how they will take the fight to our adversaries. But after years of war and vitriol, Americans may wonder how it is that Richard Nixon could bring the cold war to an end and normalize relations with the Soviet Union and China, and how Israeli Prime Minister Menachem Begin could ink a peace treaty with Egypt, and ask why those who aspire to lead our nation seem to have lost the capacity to imagine any path to peace with our adversaries today other than through war.