Wednesday, November 25, 2015

The new world order.

Speaking before the Council on Foreign Relations last week, Hillary Clinton established the objective that is commonly held among all presidential aspirants: ISIS must not be contained, it must be destroyed. Yet beyond that statement, despite all the fury generated on the campaign trail by the ISIS attacks and the failures of American strategy to date, there is little that any of the candidates have suggested that differs much from what we have been doing so far. Aerial bombardment, special ops and arming the Kurds, plus other stuff at the margin. With 75% of Americans opposed to putting American forces on the ground, according to a Reuters/Ipsos poll this week, only Lindsay Graham has remained outside of the arc of consensus that spans the left and the right and insisted that we must put armed forces on the ground in Syria.

Our engagement in Syria has a certain Alice in Wonderland quality to it. By all accounts, we are opposed to almost every side of that country's civil war. Our attempts to "train up" our own moderate fighting force has been an expensive failure. The notion that we were going to train moderate Syrian Sunnis on Saudi soil to return to Syria to fight Sunni extremists, who were themselves weaned on Saudi-Wahhabi theology and funded by Qatari money, was from the beginning steeped in irony. Our ability to engage our Sunni allies in the region to spearhead the anti-ISIS fight has had limited success. The Saudis, who funneled money into anti-Assad rebels from early in the uprising, briefly participated in the anti-ISIS airwar, but their interests remain primarily sectarian and their focus has shifted to their proxy war with Iran in Yemen. The Turks, who could steamroll ISIS should they choose to, are essentially in business with the caliphate, providing an outlet for its oil sales and a transit corridor for its recruits, and view growing Kurdish political and military strength in the wake of the Iraq war as the more immediate threat to Turkish interests. Only Jordan, led by Oxonian King Abdullah, has remained a stalwart ally, consistently embracing US interests as his own.

The formula that Hillary set forth this week suggests that ending the Syrian civil war is a necessary first step toward defeating ISIS. The strategy envisions enlisting Syrian Sunni rebel groups that are now focused on fighting Assad--of which there may be as many as 1,000--as a fighting force against ISIS. Turning those groups against ISIS requires first getting rid of Assad and creating a more benign Syrian government. This new government would have to retain the loyalty of Assad's senior military staff--lest they defect to ISIS as Saddam's Baathist generals did--as well as be acceptable to the Sunni population. This would allow for an end to the civil war. Once that political concord is achieved, those forces now targeting Assad would be turned against ISIS, providing the fighting force we need on the ground in lieu of sending our own.

If this generalized description of governmental reform and reconciliation as a prerequisite to military success on the ground sounds familiar, it should: It mirrors what we have been working toward for the past decade in Iraq. The battle against ISIS in Iraq has foundered on the continuing alienation of the Sunni population from the Shi'a dominated central government, which has not been resolved as promised since Nouri al Maliki was removed as Iraq Prime Minister. Trust, it appears, can be neither imposed from outside nor built quickly. In Syria, Hillary's strategy is predicated on two assumptions that seem to be tenuous at best. First, that there is a feasible replacement regime that would be embraced in short order by the warring parties. Second, that the range of powerful actors who thus far have been ignored in the strategy formulation process--notably Jabhat al Nusra, the al Qaeda-affiliated militia that is arguably the strongest military force in the country--do not have their own end-game in mind.

In her talk last week, Hillary largely ignored Russia's recent entry into the Syrian civil war in defense of the Assad regime. Syria has been a Russian ally for decades and Russia's naval base on Syria's Mediterranean coast is one of only two Russian naval facilities on foreign soil. This week's downing of a Russian attack aircraft by at Turkish F-16, and the ensuing emergency meeting of NATO--the Turkish action was the first downing of a Russian aircraft since the end of the Cold War--will add some larger perspective to the Syria conflict, and force us to recognize that for all of the attention to Bashar al-Assad, and even to ISIS, how we manage our relationship with Russia is far more important than either of those issues.

If Russia is committed to the survival of its ally in Syria, that is a factor that cannot be ignored. Over the past few days, the notion of putting American forces on the ground in Syria seemed to be gaining support domestically. But to do so absent an alliance with Russia that goes beyond current "deconfliction" efforts to avoid unintended incidents between our aircraft and theirs in our respective air wars over Syrian territory would be enormously risky, as the downing of the Russian jet suggests. If we have troops on the ground while Russia is independently engaged in an air war over the country, it is inevitable that at some point American soldiers would be killed by Russian bombs, leading to terrible potential escalation possibilities.

Hillary's silence with respect to Russia was notable. It was over four years ago that Barack Obama declared that Bashar al-Assad must go, yet as America ramped up its verbal war on Assad, no consideration was given to whether Russia might come to the defense of its ally. Since that declaration by President Obama, however, Russia has seized the Crimea and sponsored a war in eastern Ukraine. That is to say, in the intervening years, Russian President Vladimir Putin has declared to the world--and to the United States in particular--that Russia is back from the dead, and can no longer be disregarded as a force in the world. Putin's domestic approval ratings are now near 90%, in large measure because of his reassertion of Russian interests on the global stage and his willingness to stand up to the United States. One has to imagine that Putin's entry into the Syrian conflict is a calculated step to reassert Russia's strategic interests beyond its immediate borders, and that he would not have engaged in the fight without first determining that he was prepared to stick it through to the end.

The Obama administration's determination to overthrow Assad has grown in intensity as the civil war has worn on, as civilian deaths mounted, and as our embarrassment at Assad's defiance of our demand that he step down has grown deeper. But the Assad regime has never been a strategic concern to American interests nor to our allies. Israel cautioned early on against American efforts to force Assad to step down, believing that what might come in their wake would very likely be worse. On the other hand, our relationship with Russia is one of critical national interest. For almost a quarter of a century, U.S. foreign policy has reflected a "unipolar" status wherein our military power allowed us to do what we wanted, when we wanted, wherever we wanted in the world. Russia's entry into the Syria conflict signals a change in the world. Their military may not be a match for ours, but as one Russian general noted recently, they are the only nation on earth with the capability of turning the United States into dust with a nuclear strike and their strategic interests will have to be taken into account.

Hillary's strategy to defeat ISIS had an eerily familiar ring to it. Nation building in a land torn by tribal and religious conflict. Notions of democracy in a country lacking core institutions. But its biggest gap was not taking into account Russia's determination to protect its ally and its interests. That may be a negative factor or it may be one that offers real opportunities, but one thing is for sure, it cannot be ignored.

Wednesday, November 18, 2015

Déjà vu, all over again.

The bodies were still warm on the streets of Paris, and the reprise of the Global War on Terror was ramping up back here at home. We can hear the old talking points being dusted off. In our new, real time, twitter world, it took barely a nanosecond for the attacks to start after the candidates at the Democratic presidential debate declined to call radical Islam by its name. How can you fight an enemy that you refuse to name, came the rebuke, in many splendored formsWe have been down this path before.

In the last Republican presidential debate, Jeb Bush made a brief stab at taking the high ground in the immigration debate that was dominating the Republican contest before the Paris attacks. Married to a Mexican woman and a supporter of comprehensive immigration reform, Jeb admonished his colleagues to be careful about the political ramifications of the harsh language that they were using that has already alienated Hispanic voters. "It would send a signal that we're not the kind of country that I know America is. Even having this conversation sends a powerful signal."

It has been barely a week, and Bush's words have already been rendered quaint. In the wake of the Paris attacks—and particularly after word spread that one of the attackers had entered Europe as a refugee carrying a Syrian passport—Republican presidential contenders have been falling all over each other to tout how tough they would be on Syrian immigrants. Chris Christie—vying for a way back to the grownup debate—landed the most dramatic sound bite: I would take no refugees from Syria, not even a three year old orphan.

Jeb sees himself to be a compassionate man. From the outset of the primary season he has struggled with the harsh tenor of the campaign rhetoric, and nowhere more so than on immigration. He has watched as Donald Trump and Ted Cruz have shown no bounds in their vilification of Hispanic immigrants, but had no comeback to Trump's simple declaration during the last debate: We are a country of laws. We need borders.

This week, Jeb again stumbled between his compassion for refugees, his urgent need to connect with Christian conservatives as his campaign flounders, and his better judgement, when he suggested that the US should accept only Syrian Christian refugees. He suggested that his rationale was that the Syrian Christians were uniquely caught between ISIS and the Assad regime, but he had his facts wrong, as Syria's Christian community has been largely supportive of the Assad regime. He may have been trying to find a compassionate middle ground where America didn't completely abandon the Syrians' exodus, but as he has been wont to do, his words just made things worse.

Jeb quickly walked back his words. Perhaps it was his brother who pulled him back on the issue. George has been down this road before, and even as the Republican candidates are railing against the Democrats for refusing to cite radical Islam as our enemy, they might recall that W. struggled as well with how to label Al Qaeda and their ilk in the months following 9/11. He and his administration ultimately came to realize that religious labels—radical Islam and Islamofascists most notably—undermined the ability of the US to build and sustain alliances with Muslim nations.

As much as Jeband now Ted Cruzmight want to appeal to the Christian conservative base by carving out special treatment for their co-religionists, their words impact how America is viewed across the Islamic world, and what they say as a candidate will live on should they become commander in chief. Jeb, in particular, bears the Bush name and legacy, and there is little doubt that there are those in the Muslim world who will find in his suggestion that only Syrian Christians be offered sanctuary in the United States validation that his brother was indeed a Crusader all along—a central tenet of Osama bin Ladin's rhetoric—and point to Jeb's words as proof positive that America was and remains a crusader nation.

Over the past two weeks, ISIS attacks have killed 400 people. They killed 224 Russian tourists flying on a passenger jet out of Sharm El Sheik, Egypt. They killed 43 worshippers at a mosque in Beirut. They killed 129 in Paris. And they injured hundreds more.

Fourteen years ago, we were Paris. We were Beirut. We were Russia. In the wake of the 9/11 attacks, countries around the world expressed their sympathy and support for the United States. As the World Trade Center lay smoldering in lower Manhattan, the leading daily newspaper of France, Le Monde, pronounced Nous sommes tous Américains. We Are All Americans. We might, like Jeb, imagine ourselves a compassionate nation, but over the past days of tragedy, we have not proven to be the America of our and Jeb's imagination. For all the outrage over the horrific events in Paris, we have shown little or no similar compassion for the dead and dying in Beirut. Perhaps it is as simple as the fact that the city long known as the Paris of the Middle East remains in the Middle East and the dead and dying are Shi'a Muslims. While Nous Sommes Paris adorned the pages of the Russian news service SputnikNews in the wake of the Paris attacks, it is hard to find a corresponding response in the American press to the death of the many more Russians who died in the Sinai bombing. For reasons that confound the imagination, a quarter century after the fall of the Soviet Union it seems that when Russians die they are still little more than communists in our eyes.

The political firestorm over Syrian refugees erupted as Jeb's compatriots seized on one Syrian passport to demonstrate a threat to the homeland. If they imagined that by their words they were demonstrating their capacity to lead the nation, it has been a dreadful performance. These were not attacks on America, but they are right, that may yet come. However, if it does, it may come at the hands of a Syrian. Or perhaps a Frenchman, as most of the Paris attackers were. Or perhaps fifteen jihadis from Saudi Arabia, the ancestral homeland of the radical Wahhabi branch of Islam that birthed much of the worldwide scourge that has challenged the world for decades now, including ISIS itself. ISIS is a devious and strategic organization. One could not put it past them to have instructed the Paris attacker to make sure that his passport survived the attack, imagining the havoc it would create in western countries.

This week, a Reuters/Ipsos poll found that 60% of Americans believe that we should be doing more to attack ISIS. At the same time, the poll suggested that 65% opposed sending special forces to the region and 76% opposed sending ground troops. These numbers point in opposite directions, and suggest a populace that has no idea of the choices that we are likely to face in the months ahead and the costs that may be involved.

American public support for the war in Iraq lasted barely two years, and turned against the war by the middle of 2005. The question of whether the debate leading up to the Iraq war resolution was an honest one, and whether that war was "sold" to the American public remains a source of controversy and anger. In the days to come, we are going to have another national debate about terrorism, and how our nation should respond, and those who propose taking the country to war once again should consider that history.

Republican Senator Arthur Vandenberg, long-time chair of the Senate Armed Services Committee famously suggested that our nation's politics should end at the water's edge. Foreign policy and war are too important, Vandenberg asserted, to allow them to be embroiled in our eternal partisan battles—as we have seen erupt in a matter of hours in this go round—specifically because international relationships and alliances require that our nation's commitments endure from one administration to another, and survive transitions from one political party to another.

Barack Obama was elected on a platform of ending US intervention in the Middle East, and the American public continues to demonstrate strong opposition to many of the actions that an effective response to ISIS might entail. Whether it is a return to putting boots on the ground as part of an international coalition or once again enhancing government surveillance capabilities, public antipathy looms as the fruit of how the public debate was conducted last time we went down this road. Fourteen years ago, we started out with the same debate about what to call radical Islam, and the quality of our public discourse went downhill from there.

Already, there are calls to go to war, and we have not even been attacked yet. If our political leaders want to lead, and if they want our policies in the region to be successful and endure better than they have over the past decade, they should take a long look at how we got to where we are, and each take it upon themselves to do a better job of leading a public debate that will bring Americans to understand the choices that we face than they did the last time we went down this road.

Monday, September 28, 2015

Jeb fades to black.

Free stuff is back. Responding to a man at a South Carolina Republican gathering last week who observed that Republicans had little visible support among African Americans, Jeb Bush harkened back to the Romney campaign four years ago. Unlike the Democrats, Bush suggested, his message to black voters was not to "get in line and we'll take care of you with free stuff." Rather, Bush explained, his vision is of a world where African Americans "can achieve earned success."

Jeb's is a message that might work if it came from his political protégé Marco Rubio, a child of immigrants and product of Miami-Dade County public schools. But Jeb is the scion of a generations-old political family and the product of Phillips Andover Academy. The notion of earned success is a bit harder to parse for a man who was given his first job by his father's close friend James Baker at a bank that Baker owned. From then on--whether in his real estate or political pursuits--Jeb's career was nurtured through the extensive Bush family relationship network.

One of the things that sets Jeb apart from Donald Trump is that Jeb seems to have no idea when he is being offensive, while Trump relishes every moment of it. Bush's free stuff meme--that African Americans vote Democrat because they get free stuff--is not just paternalistic, it ignores the long history of the African Americans as supporters of the Republican Party--the party of Lincoln and the Emancipation Proclamation, after all--up until the post-World War II era, and the political machinations by the GOP that prompted black voters to shift their political allegiance.

Harry Truman's integration of the Army and the ensuing Democratic Party embrace of civil rights as part of its party platform in 1948--in the face of bitter opposition from the segregationist "Dixiecrat" wing of the party--started the migration of black voters to the Democratic Party. The passage of civil rights legislation in the mid-1960s may have prompted further movement of the black electorate, but it is important to note that Republicans in Congress voted in larger percentages for the Civil Rights Act of 1964 and the Voting Rights Act of 1965 than did Democrats. It was Richard Nixon's active outreach to invite the southern segregationist wing of the Democratic Party to join the GOP that marked the end of significant black support for the Republican Party.

It was not the free stuff that the Democrats offered, but rather an affirmative decision by the Republican Party to trade its historical base among New England Republicans and black voters for the southern and segregationist wing of the Democratic Party. To suggest that African American voters left the Republican Party in search of free stuff has the history wrong. To paraphrase Ronald Reagan, blacks did not leave the Republican Party, the Republican Party left them.

Jeb seemed oblivious to the fact that he was proffering his free stuff narrative while campaigning in a state that had only weeks earlier lowered the Confederate flag from its Capitol grounds--a flag that had been raised in 1948 at the time that the Dixiecrats walked out of the Democratic Party convention. He seemed to see no irony in his bemoaning the appeal of free stuff in a state that seceded from Union lest its white population and economy be deprived of the ultimate free stuff: the free labor of enslaved black Americans. And he no doubt gave no thought to the fact that the State of South Carolina is among the largest recipients of free stuff from the federal government--that is to say from the rest of us--as each year it receives back from the federal government far more than its citizens pay in taxes, with 2014 net revenues from the federal government equal to 26.7% of its gross state product. Far from being a state built on earned success, South Carolina is built on a culture of free stuff.

Jeb's defense of his remarks this week on Fox News Sunday--reiterating his assertion that people "don't want free stuff"--are truly the words of a man who was born into wealth. Of course people want free stuff. We want roads and education and prescription drugs and other people to fight our wars. And we don't want to pay for them. The World Wide Web and the social networks that now consume our free time are built on people's preference for free stuff, even if they have to trade away their privacy in the bargain. And despite his wealth, Jeb is no different. Jeb--like his tormentor Donald Trump--could have chosen to fund his own political campaign, but he prefers to take hundreds of millions of dollars of other people's money, money that Jeb continues to insist is free--that it comes with no strings attached--despite the scorn that Trump rightfully heaped upon him for that suggestion.

Jeb just cannot get out of his own way. Early on, he stumbled over the question of the Iraq war, and could not bring himself to accept that for most Americans the trillions of dollars spent and tens of thousands of young soldiers killed or maimed--not to mention the hundreds of thousands of Iraqi casualties--have not led the nation to a better place. Then he offered a tax plan that delivers massive tax cuts to the rich in the midst of a campaign where Donald Trump has drawn an angry Republican base to endorse his call to increase taxes on the rich. More recently, Jeb published an op-ed in the Wall Street Journal suggesting the wide ranging steps he would take to spur deregulation, only to find his plan ridiculed by the normally conservative readership as little more than a pandering road map for business lobbyists and campaign fundraising.

Jeb increasingly has the aura of an aging football coach trying to get by on a playbook of a prior era. Donald Trump has made waves this year by channeling the anger of Republican primary voters who for decades now have seen their incomes stagnate and prospects for the future dim. Trump has begun to raise questions of class privilege and income mobility, issues that for too long have been forbidden topics in our political discourse. But Jeb has been unable to adapt his message or his narrative on earned success to even recognize the differences between his world and that of most Americans. It is not just his inability to grasp the disdain among the Republican base for his brother's record of war and spending, but Jeb has shown himself to have a tin ear for the very real resentments toward the political class and economic elites that have become central to the race. Instead, he just keeps returning to the bromides of the Reagan era--cut taxes, cut regulation, and it will be morning again in America. His meme about free stuff and earned success is just par for the course.

But no one is buying what Jeb is selling. Bush might continue to be the frontrunner among the Republican field based upon prediction models, but that just shows how difficult it is has been for the political cognoscenti to believe how poorly Jeb is performing. With all that money and all of those connections--the free stuff on which his campaign of inevitability was constructed--it is finally sinking in that Jeb himself may simply not be up to the job. 

Tuesday, September 15, 2015

Left, right and center.

According to a Monmouth University poll released this week, Bernie Sanders leads Hillary Clinton 43% to 36% among likely New Hampshire voters. Up until now, Sanders has not been taken seriously by most observers in the media. The man is a socialist and this is America, after all. Even as Sanders surged past the presumptive Democratic Party nominee in the polls in the first primary states of Iowa and New Hampshire, political observers have continued to view the erosion in Hillary's support as an indicator that there is an opportunity for Joe Biden. Sanders is simply not taken seriously.

It is the word. Socialist. Commentators are quick to suggest that Sanders is not taken seriously because he is so far outside what is labeled as the consensus mainstream of American politics. Yet that is not true. Rather, it is the positions of the political parties that have shifted.

Over the past several decades, the entire political spectrum has shifted to the right. Thus, Ben Carson, Ted Cruz and others who would have been viewed as being on the extremes of the political spectrum a few decades ago are easily within the mainstream of the Republican Party today. On the other hand--particularly since the Clinton administration--the Democratic Party has migrated toward the center. Elizabeth Warren, whose views would have been well within the mainstream of the Democratic Party in the pre-Clinton years now is viewed as a radical of sorts.

Just because Bernie Sanders is on the left fringe of the two main political parties today, that does not place him on the fringe of American political thought. His main policy positions--for which he was excoriated on the pages of the Wall Street Journal this week--are more neo-Roosevelt than neo-Marxist. National health insurance, Social Security, rebuilding infrastructure, and low cost tuition at public universities sound remarkably like the political platforms of Dwight Eisenhower, Nelson Rockefeller and Richard Nixon, but today clearly are outside the accepted range of political debate.

Bernie Sanders' speech at Liberty University in Lynchburg, Virginia this week may have woken some people up. It was an impressive performance on several levels. First, for the political maturity and respect he showed in speaking before a large evangelical Christian audience that he knew would not be supportive of many of his views, and second for the passion and clarity of the delivery. Sanders acknowledged areas of disagreement at the outset--views on abortion and gay marriage--and then framed the challenges of social justice, poverty and income inequality as moral imperatives common to Jews, Protestants and Catholics. While a Jewish politician speaking before an evangelical Christian audience may seem like an odd precursor to the visit of Pope Francis to Congress next week, Sanders' focus on issues of social justice and poverty mirrors many of the themes that the Pope has continued to address. In the Republican dominated Congress next week, Pope Francis will confront the mirror opposite audience--members who support the Church's opposition to abortion and gay marriage, but who oppose both his weakening of Church doctrine on those issues and his embrace of issues of social justice, poverty and income inequality.

The same day that Bernie Sanders spoke in front of 12,000 people in Virginia, Donald Trump was speaking to a gathering perhaps twice that size in Dallas. Unlike Sanders, Trump is always speaking to an adoring crowd these days. But like Sanders, his message is increasingly shaking up traditionalists within his party. Sanders and Trump are suggesting a melding of left and right on issues of economic, financial and tax policy that is frightening many on both sides of the aisle. Both Sanders and Trump argue for changes to the income tax that would increase the tax burden on the wealthy. Both Sanders and Trump describe the economic status quo as a rigged system that benefits a small group at the top to the detriment of the large middle class. Both Sanders and Trump embrace economic reforms that would punish the outsourcing of jobs. These positions are traditional fare for the socialist Sanders, yet are ones that have lost favor in all but rhetorical terms in the Democratic Party over the past two decades. Trump's castigation of a rigged system that benefits the wealthy, calling for increased taxes on the rich and the elimination of the special tax treatment afforded to hedge fund and other asset managers, and suggesting in his Dallas speech a 35% tariff on imported manufactured goods, all place him far outside the mainstream of the present-day GOP. Like Sanders, Trump's rhetoric is not as far outside of his party's tradition as some like to think. Trump's rhetoric in many respects mirrors the presidential campaign of Pat Buchanan in 1996, whose "peasants with pitchforks" insurgency assaulted GOP policies that served the interests of corporate and financial elites to the detriment of the middle class. 

Last week, Jeb Bush released his own tax reform plan. The Bush plan is a version of traditional Republican tax policy in the post-Reagan era, reflecting reductions in nominal tax rates across the board and a narrowing of deductions. The impact of Trump's rhetoric and increased focus on the issue of income inequality were reflected in the Bush plan by the elimination of the carried interest provision and increases in the earned income tax credit.

While supporters heralded Bush's elimination of the carried interest provision and increases in the earned income tax credit, the bottom line of the Bush plan is that it would deliver an estimated 53% of the estimated $3.6 trillion in tax reductions over ten years to the top 1%. Six months after giving a policy speech that decried an economic situation where "only a small portion of the population is riding the economy’s up escalator," Bush produced a tax reform plan that provides an estimated $82,000 tax cut to the wealthiest taxpayers, while the annual savings to the other 99% of taxpayers would range from $500 to $1,500.

The timing and substance of the Bush proposal were startling. As the standard bearer for the political center, and still in the eyes of many the presumptive nominee, Bush continues to demonstrate a tin ear. Several months ago, he stumbled badly on questions about the Iraq war and Iraq policy going forward. Now, he chose to publish a tax reform plan that did little but further demonstrate his inability to read the mood of the electorate whose support he is seeking. Even if he believed that the Republican base would ultimately embrace the kind of tax cut plan that has long been central to the Republican playbook, Bush failed to pay heed to the power of Trump's populist rhetoric and recognize that perhaps, just perhaps, this was not the moment in the campaign to launch a tax cut proposal that once again disproportionately benefits the wealthiest Americans. 

For years, there have been issues where the left and the right were in alignment. Concern over the power of Wall Street, corporate welfare, trade policy, and federal power over education policy come to mind. But the power of the center has long trumped the ability of those on the left and the right to drive public policy on those or other issues. Right now, Sanders and Trump are driving the political debate. Sanders may be a socialist, but the issues that he is raising have broad appeal and a long history of support within the Democratic Party base. In a similar manner, Trump has tapped into resentments toward corporate and financial elites that have a long history within the GOP, and those who suggest that Trump is not saying anything substantive about policy are not paying attention.

Monday, September 07, 2015

Sins of the father.

Jeb is playing defense, but for no good reason. After all, Bush is the true conservative in the race for the Republican presidential nomination and should be entitled to the support of the Republican base. His record as Florida governor demonstrates his bona fides as a fiscal conservative. His treatment of Terri Schiavo, harnessing the power of the state to keep a dying woman alive demonstrated his bona fides as a Christian conservative. His argument for affirmative American actions to support a floundering Iraqi regime demonstrates his fealty to Neoconservative foreign policy principles. Yet day after day, Bush is mocked by a man who has no such bona fides, a man who seems to be making it up as he goes along, a man who has done everything short of mocking his manhood.

This is not the race that Jeb wanted to run. The man who swore that he would only run for president if he could run a campaign infused with joy continues to struggle under Trump's barbs. There is little evidence of joy in Jeb's campaign, his demeanor instead is alternately angry, annoyed and fed up. Jeb pronounced when he declared his candidacy that he was willing to lose the nomination if that was what was required to remain a viable candidate in the general election. Of course, Donald Trump understood the silliness of that formulation: you cannot win the general if you do not win the nomination first. So Donald Trump is taking Bush at his word and helping him lose the nomination. This week, Jeb's numbers fell solidly into single digits, while Trump numbers continue to rise.

Jeb's claim that he would prefer to lose the nomination than compromise his principles is admirable in some philosophical sense, but the notion that he will not calibrate his campaign to the tenor of the electorate violates a time-tested mantra for Republican electoral success since Richard Nixon: go to the right in the primaries and to the center in the general election. Of course, a central tenet of that strategy is duplicity. You tell the right wing of the party one thing to win the nomination, you tell the nation something else to win the election. It is exactly that duplicity that appears to have led the Republican primary electorate to reject a host of traditional politicians in favor of the two men now leading in the polls--Donald Trump and Ben Carson--neither of whom has held elective office.

Jeb understands that essential duplicity. He understands that time-tested strategy. He just suggested as a condition of his candidacy that he wouldn't play by those rules.

Centrist Republicans and independents who recall Jeb's father with fondness looked at Jeb's prospective candidacy and thought it should be a slam dunk. Just go to the electorate and say, I am my father, not my brother. And say it over and over again. Domestic policy? I am my father, not my brother. More important, foreign policy. I am my father, not my brother.

But the world according to centrist Republicans and independents is irrelevant to the Republican primary process, and as much as George H.W. Bush has found great favor with voters as time has passed, conservatives will always see him as the man who violated his sworn pledge and raised taxes, and whose fidelity to the pro-life cause was always in question. To the primary electorate, particularly the evangelical base of the party, I am my father, not my brother would have to be flipped to I am my brother, not my father. And that was the path that Jeb chose. Forget standing on principle, or even showing reasoned judgment, Jeb went so far as to say that his brother would be his primary advisor on foreign policy.

Centrist Republicans and independent just shook their heads in wonder.

Jeb's struggles to win the affection of the right wing of his party mirror his father's struggles thirty-five years ago. George Herbert Walker Bush ran for president as a traditional Republican Party candidate in 1980, just as the years of the GOP as the party of sound money and social moderation were coming to an end. Bush entered the race as the favorite of the GOP establishment wing, only to be soundly trounced by Ronald Reagan as the primary season got rolling. 

Like Jeb today, Jeb's father ran up against a candidate who skillfully and passionately appealed to the right wing, activist base of the party, an electorate who then, as now, were particularly disdainful of the establishment wing of the GOP. The Ronald Reagan that Bush ran against was more similar to Donald Trump than many care to remember. Today, pundits like to recall Ronald Reagan as the sunny optimist who described America as a shining city on a hill, and as a politician willing to cross the aisle and share a drink and a story with Tip O'Neill after a day's work was done. Those pundits fault Donald Trump for not conveying the positive, uplifting message that Ronald Reagan did.

Yet their's is a revisionist history of the times. Just as Trump is vilifying immigrants and playing to the nativist sentiments of the GOP primary electorate, Reagan's campaign was imbued with barely coded racial rhetoric that was abhorrent to New York and New England Republicans, but was effective in solidifying the support of the historically Democrat southern and rural electorate that was first brought into the GOP by Richard Nixon's Southern Strategy. In a campaign strategy orchestrated by Lee Atwater to attract supporters of the segregationist and 1968 presidential candidate George Wallace, Reagan flew to the Nashoba County Fair in Mississippi to demonstrate that he stood with southern whites against the civil rights movement, and he sprinkled his campaign rhetoric with stories vilifying "Cadillac driving welfare queens" and food stamps abuse by blacks. Reagan also scorned the traditional fiscal prudence of the GOP in favor of supply side economics and a tax cutting fervor that Bush famously labeled as "voodoo economics." 

Jeb's father's final capitulation to the new realities of the GOP did not come in his acceptance of Reagan's offer of the vice presidency, but rather in Bush's selection of Reagan political operative Lee Atwater to run his successful 1988 president campaign--a campaign characterized by his no-tax pledge, and the racial fear mongering manifest in the Willie Horton campaign ad.

Jeb's father and brother won the White House by embracing the advice of political strategists and long-time running buddies Lee Atwater and Karl Rove. There was no nonsense about running campaigns that were joyful or subordinating politics to principles. George H. W. Bush learned to eat pork rinds when Lee told him to, to walk away from his pro-choice and other sentiments of his traditionalist GOP heritage, and to sign off on racially charged wedge campaign tactics. President Bush 41 and President Bush 43 did not run on their own terms, but embraced the strategies that their advisors laid out for them.

Jeb prefers to point to Trump as the cause of his campaign woes, and like his father before him, Jeb seems to be discounting the appeal and effectiveness of an opponent he personally and politically disdains. Yet the obsession with Trump may be masking Jeb's larger problem--which he should have learned from watching his father's defeat in 1980 and victory in 1988--which is that his own conviction that he is the candidate truest to conservative principles will not suffice as a campaign strategy. Donald Trump may not be Ronald Reagan, but the Ronald Reagan that whipped Jeb's father was not the saint of people's imagination either. Jeb might have the better resume, he might be a man of compassion, but neither experience nor compassion are the currencies of the moment. 

Tuesday, August 18, 2015

The Trump moment.

Each week it just keeps getting better. The production values, the element of surprise, the buy-in. We have reached the capitulation phase of the Trump bubble. The punditocracy now believes not only that he might win Iowa, but that he probably will. And New Hampshire. Of course, no one casts a ballot for another five months, and we have seen many people take victory laps this early in the process who were never heard from again.

This week, the Fox News Poll put Donald Trump way out front in the Republican contest with 25% of the sample of registered voters. In second place is Johns Hopkins University neurosurgeon Ben Carson at 12%. Then, sliding into first place among actual politicians running for the Republican nomination for President, is Texas Senator Ted Cruz with 10%. The poll had several notable results. First, the continued stammering performance of the presumptive nominee, Jeb Bush, whose numbers fell from 15% to 9%. Second--though "notable" might be an overstatement--was Marco Rubio leading the pack in the race for "who would be your second choice" with 13%.

There are reasons that people like Donald Trump. Listen to him when he calls into Morning Joe or some other political gabfest, and he will really tell you what is on his mind. Listen to Scott Walker--who has probably suffered the greatest decline from borderline frontrunner status to where he is on the brink of being lapped by Carly Fiorina and John Kasich--drone on about how he won three races in four years (really, Scott, do you realize that just makes you an average Congressman) or Jeb stumble over exactly why it is he wants his brother to be his foreign policy advisor, and the Donald seems in contrast to be straightforward, confident and unscripted. Given the contrast with his cautious and highly scripted peers, it is no wonder that his supporters forgive the highly flexible nature of his positions on most any issue.

Whether you love him or hate him, or are just along for the entertainment value, Trump speaks with a clarity that is not typically part of our political discourse. At the first Republican debate, he startled people when he pointed to his fellow candidates on stage and commented not just that he had made political contributions to several of them, but that as a businessperson when he made those contributions he fully expected to receive something back in return--comments about campaign finance that the trendy news website declared to be "shockingly insightful:"

"I will tell you that our system is broken. I gave to many people. Before this, before two months ago, I was a businessman. I give to everybody. When they call, I give. And you know what? When I need something from them, two years later, three years later, I call them. They are there for me. And that's a broken system."

Speaking to a crowd at the Iowa State Fair over the weekend, Trump expounded on how the system works:

"Many of the people that gave to Jeb, and to Hillary, and to everybody else, they're friends of mine, or enemies of mine, but they're people I know. These are not people that are doing it because they like the color of his hair, believe me. These are highly sophisticated killers. And when they give $5 million or $2 million or a $1 million to Jeb, they have him just like a puppet. He'll do whatever they want. He is their puppet. Believe me. And with me, I had yesterday a lobbyist call me up, it's a friend of mine, good guy, smart as hell. He's for his client. I don't blame him. He said, 'Donald, I want to put $5 million into your campaign.' I said, I don't need it, I don't want it. He said, 'No, no, I want to put five million in.' I said 'I don't want it. Because when you come back to me in two years and you want help for a company that you're representing or a country that you're representing, I'm going to do the right thing for the people of the United States. And I don't want to have to insult you.'"

Trump has upended the traditionally cautious political debate. In a campaign with well over a dozen candidates--many, if not all, with credible resumes boasting years of service as governors and senators, plus two prominent figures from industry and medicine--it is the reality show celebrity, birther and huckster extraordinaire who is leading the pack. But more than just leading the pack, Donald Trump has proven his ability to do what each of the others can only dream of: he can tap into the zeitgeist of a disenfranchised electorate and thumb his nose at big money fat cats--all while standing in front of a Butter Cow and giving kids helicopter rides at the Iowa State Fair. In a year where political money has been a driving narrative of the race--Jeb's $100 million war chest vs. Sheldon Adelson backing Marco Rubio vs. the Koch brothers picking Scott Walker vs. the Clinton money machine--Trump has asserted a scathing critique of our entire campaign finance system in words that everyone can understand.

Over the past several decades, the magnitude of spending on federal elections and lobbying has grown dramatically. Built upon the words of the First Amendment protecting freedom of speech and the right to petition the Government, a series of federal court decisions--including the Supreme Court decision in Citizens United--now provide the legal infrastructure supporting what Trump suggests is a massive influence peddling industry. The root of the problem has been the Supreme Court fixation on corruption as a function of quid pro quo relationships, while the art of lobbying and contributions in our nation's capital is not about quid pro quo contributions for official acts, but instead is about relationships that keep the quid and the pro quo separated in time but still deliver the goods.

Our corruption is deeper, more complex, and far more damaging. As the Donald observed--while the Butter Cow stood by in rapt attention--once you take the money, "they have him just like a puppet." And the money in question is huge. According to, the finance industry alone paid out $507.3 million to federal candidates and parties in the 2014 campaign cycle, and that was an off year. The largest single recipient was New Jersey Democratic Senator Cory Booker, who received just over $4.1 million, with Republican leaders Mitch McConnell and John Boehner close behind at $3.7 million and $3.3 million, respectively. And that is just contributions from one industry.

The simple fact is that none of this money is contributed without a purpose. A lot of money is contributed because in Washington, DC, a lot is at stake, whether in legislation, in regulatory rulings or in other ways. As noted on OpenSecrets, the money that industries, companies, unions and issue groups spend on lobbying is often just a drop in the bucket compared to what they can reap in return if their lobbyists are successful.

The notion that access and influence are part of an economic relationship between donors and public officials that is comparable in its long-term effect to quid pro quo corruption--as OpenSecrets and Trump each suggest--is the theory that was specifically rejected by Supreme Court Justice Anthony Kennedy in his majority opinion in Citizen's United. While Kennedy rejects explicit quid pro quo relationships as bribery, he embraces the notion that a natural alignment exists between elected officials and their contributors where "It is well understood that a substantial and legitimate reason, if not the only reason, to cast a vote for, or to make a contribution to, one candidate over another is that the candidate will respond by producing those political outcomes the supporter favors." 

From where Anthony Kennedy sits, the politician who delivers the goods is being appropriately responsive to the interests of contributors, while to Donald Trump that politician is a puppet. Trump's casual allegory of sophisticated killers and puppet-masters poses a challenge to Kennedy's central conclusion in Citizen's United that "The appearance of influence or access... will not cause the electorate to lose faith in our democracy." 

Many have argued for years that political money is a destructive force, but perhaps when Trump says it--and says it as a candidate speaking in plain English to an adoring crowd from the base of the Republican Party--people will begin to pay attention.  If Trumps words are "shockingly insightful" it is only because people have not been paying attention. The shocking part is that a majority of Supreme Court justices still seems to be unwilling to acknowledge that our nation's capital is plagued by a systemic corruption that is rooted in money.

When Donald Trump's moment ultimately fades--which it must--and the Republican primary season returns to script, we will see whether his comments about political money have any lasting impact. One might imagine that when the mega-donors reassert their control over the process, people will demand to know exactly what those donors expect to get for their money. Or perhaps Anthony Kennedy is correct, and while people may claim to be shocked they nonetheless accept that money is an eternal fact of life in our democracy.

Saturday, August 15, 2015

It's not about the politics.

When the Puerto Rico debt crisis burst into the news, Puerto Rico Governor Alejandro García Padilla pronounced that the Commonwealth's debt crisis "is not about politics." Of course, to paraphrase H.L. Menken, when a politician says something is not about politics, chances are it's all about politics. That is not to say that Puerto Rico's massive debts are payable or that the math is not suffocating, but long before the debts were massive, and long before the math became intractable, there were the politics. To put in place a plan to address Puerto Rico's debt crisis without taking account of the long simmering witch's brew of island and federal politics and policies that led us to this point would be folly.

While federal and island officials alike are loath to use the "c" word, Puerto Rico has been a colony of the United States for just over one hundred years. Like colonies across the globe that traded hands among European powers as the spoils of one war or another, Puerto Rico was ceded to the United States--along with Guam and the Philippines--by Spain in 1898 after its defeat in the Spanish-American War.

Americans are generally not comfortable with the notion that we are a colonial power. Global hegemon or imperial nation perhaps, but not colonial overlord. Maybe it is because we were once a colony ourselves. Perhaps our struggles to overcome our legacy as a slave power left us uncomfortable with the idea that through much of the 20th century we ruled over Caribbean sugarcane plantations where the descendants of slaves continued to toil.

The Founders set forth the terms of America's dominion over its colonies under Article Four of the Constitution--aptly known as the Territories Clause--and directed that full plenary power and responsibility over America's territories was to be vested in Congress. For the better part of the century that Puerto Rico has remained an American colony, a series of legal cases have explored and defined the relationship of US territories to the United States, but over that time little has fundamentally changed. As set forth in the Territories Clause, and as confirmed repeatedly by the Supreme Court, Puerto Rico remains an unincorporated territory of the United States for which Congress remains fully and unambiguously responsible.

It is notable, then, that throughout the public discussion and debate over the past several months about the insolvency of Puerto Rico, there has been little or no discussion of the ultimate responsibility of Congress for events that have transpired. Congress has never been shy about exercising its oversight powers in areas that offer political opportunity--Benghazi and the IRS are recent examples--and is often swift to demand full accountability and point the finger of blame at others for any manner of controversy or scandal that might come up, but with respect to the territories, where the responsibility of Congress is clear, we have heard a deafening silence. There is no Committee on the Territories in either the House and the Senate through which it might have exercised its responsibility over the years, and none of the Tea Party members who carry a copy of the Constitution in their breast pocket have been seen thumbing through it in front of an assembled gaggle of reporters demanding that Congress be held accountable for its own failure of duty as the Puerto Rico crisis has escalated.

The economic and fiscal crisis now confronting Puerto Rico has been building for years, and is a direct outgrowth of political and policy decisions made at the local and national level. It was two decades ago that Congress--with the support of then-Governor Pedro Rossello of the pro-statehood party--legislated the end of the Section 936 tax benefit program that for decades had been the basis for a thriving manufacturing sector on the island and a domestic capital market that provided low cost funding for infrastructure and other purposes. And it was in the same timeframe that Puerto Rican activists demanded the curtailment of missile testing on the island of Vieques, which ultimately resulted in the closing of the Roosevelt Roads naval base on Puerto Rico.

The end of the 936 program and the closing of Roosevelt Roads both came to a head around 2006, which is generally viewed as the beginning of the long slide in employment on Puerto Rico, the outmigration of Puerto Ricans to the mainland, and the growth in debt that Governor García Padilla now deems to be unpayable. The end of the 936 program and the closing of Roosevelt Roads were political decisions for which Congress and Puerto Rican officials each bear culpability and that together laid the groundwork for the current crisis.

Puerto Rico politics have long been defined by differences over the preferred political relationship with the United States. Governor García Padilla's Popular Democratic Party stands for continued Commonwealth status while the New Progressive Party of former Governor Rossello stands for statehood. The third force in local politics, representing those who favor independence, has historically had a far smaller share of the vote--though Puerto Rican "nationalism" remains a powerful political and cultural force.

Much to the chagrin of the United States, the United Nations Special Committee on Decolonization--created to support self-determination for colonized peoples--instigated several plebiscites on the political status of Puerto Rico, beginning in 1993 when the Puerto Rico electorate voted 45%, 45% and 10% for statehood, current status and independence, respectively. Over the years, the preference for statehood has grown, with the most recent plebiscite showing a 60+% preference for statehood over the current territorial status, and just last month the Puerto Rico non-voting delegate to Congress, Pedro Pierluisi--a member of the statehood party--published an op-ed in the New York Times arguing that statehood is the only solution for what ails the Commonwealth.

But neither the United Nations nor Puerto Rico politicians can make Puerto Rico a state. That can only come about through an act of Congress, and Congressional approval of a new state that would more likely than not send two new Democrats to the US Senate and a half dozen or so new Democrats to the House of Representatives--projected to come primarily at the expense of red state delegations--is unlikely to win approval in a Republican-dominated Congress. Nonetheless, the political status of the former Spanish colony that would be the 17th largest state if admitted to the Union remains the dominant political subtext even as Puerto Rico careens into insolvency.

Today, Congress and the White House are largely speaking with one voice as they argue against a "bailout" for Puerto Rico. Instead--as evidenced by the support of both Hilary Clinton and Jeb Bush--the magic bullet that many support is to allow Puerto Rico to seek protection under the federal Bankruptcy Code, which is not currently available for US territories. Bankruptcy seems like a neat solution, though advocates conveniently ignore the fact that allowing Puerto Rico access to bankruptcy protection would also be a form of bailout, but one that would place the cost of the bailout on the backs of the millions of Americans that currently own Puerto Rico bonds--directly or through mutual funds--that would take a significant haircut in any debt restructuring mandated by a bankruptcy court.

The presence of hedge funds--a category of opportunistic investors that is quite different from mutual funds--as owners of a share of Puerto Rico debts is going to complicate any proposed resolution. Puerto Rico bonds have been purchased by mutual funds for years, if not decades, and they are now among the most widely held securities in Americans' savings accounts. Hedge funds only became significant buyers of Puerto Rico debt over the past two years, most notably in 2014 when Puerto Rico issued $3.5 billion of bonds to pay operating costs and push the advent of the current insolvency crisis a year down the road.

At that time, Puerto Rico's traditional mutual fund investor community declined to participate in the new financing. That was the moment when the decade-long decline in Puerto Rico fiscal affairs had become fully evident and a tipping point had been reached. At that time, when access to capital looked to be precluded--forcing the Puerto Rico administration to come to grips with its fiscal problems--the hedge fund community saw an opportunity and purchased nearly all of the multi-billion dollar financing.

The $3.5 billion bond issue purchased by the hedge fund community seemed like a blessing at the time for the Puerto Rico administration of Governor García Padilla. It not only allowed the inevitable collapse to be pushed down the road, but more specifically it allowed the crisis to be deferred to a presidential election year, when a politically friendly solution would be more likely due to the large Puerto Rican representation in key electoral college states. Governor García Padilla showed his cards with respect to the deeply political calculus involved when he bluntly threatened both political parties if they fail to support Puerto Rico's preferred solution of achieving access to the bankruptcy courts: “Puerto Ricans decide the elections in Florida. That’s very important. By deciding the election in Florida, we can decide [who is the next] president of the United States.”

Hilary Clinton and Jeb Bush have read the electoral map, and are now each on record supporting Governor García Padilla's demand that Puerto Rico be allowed access to bankruptcy protection. And they are not alone. National publications from the New York Times to the Weekly Standard have made similar arguments, and the Obama administration seems to be heading in that direction.

Bankruptcy sounds like such a reasonable solution. After all, municipal governments across the country are allowed to use bankruptcy as a tool for renegotiating debts that have become unaffordable. Puerto Rico leaders believe that they have sufficient leverage over the national political parties to secure the legislative changes necessary to allow them to use bankruptcy as a means to renegotiate their outstanding obligations, while leaving their powers of self-governance--as enshrined in the 1952 Commonwealth Constitution approved by Congress--largely unaffected going forward. For their part, Democrats and Republicans in Congress seem to be embracing bankruptcy as a path of least resistance, one that allows them to wash their hands of the problem while others pay the bill.

However, despite the appeal of bankruptcy as an easy solution for Puerto Rico, it is unlikely to play out that way over time. The mutual fund community--the trustees for the millions of Americans that own Puerto Rico bonds--has indicated that it will fight efforts in Congress to change the bankruptcy code on an after-the-fact-basis. But it is the hedge fund managers--individuals with their own money on the line--who constitute the greatest threat to the easy solution envisioned by politicians in Puerto Rico and Washington. Those investors--whose money Governor García Padilla eagerly accepted when it seemed politically advantageous to do so--who will take the fight all the way to the Supreme Court to demand adherence to the law as well as Congressional accountability.

It may be appealing given the anti-Wall Street mood in the country to place some share of the burden on the backs of hedge fund managers--after all, they are highly compensated opportunists who bought Puerto Rico bonds after the insolvency was evident--but there will be considerable political blowback against that line of argument once it becomes apparent that the tens of billions of dollars that a Puerto Rico bankruptcy bailout is going to cost would primarily be seized from the retirement savings of tens of millions of ordinary Americans.

Ultimately, the problem with bankruptcy as a solution is that it will not solve the problem. The insolvency of Puerto Rico is not simply a fiscal crisis but is a constitutional one. Since the approval of its constitution in 1952, Puerto Rico has enjoyed significant powers of self-government, but as the Supreme Court has ruled, none of those powers has removed Congress from its position of ultimate responsibility, and like a parent that has ignored its responsibility for a wayward child, Congress may have looked the other way, but at the end of the day it remains responsible for the welfare of all of the US territories. If the failure of duty is placed on Congress--as the Constitution suggests that it must be--then at the end of the day the price of the Puerto Rico debt crisis is one that we all will be forced to pay, and Puerto Rico and the Congress will have to recraft their relationship going forward so that the current problems are not repeated in the future.

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.