Friday, November 15, 2013

90% of life is showing up.

As trumpeted across the media, the four day meeting of the Third Plenum of the 18th Central Committee of the Communist Party has ended, and China's leaders announced that among the decisions were an "easing of" its one-child family policy and the abolition of its "re-education through labor" camps. As much as these policy changes are being trumpeted as evidence of how far China has come, they really are a reminder of how far China and its leaders have to go.

In the wake of the shutdown of the federal government last month, Chinese President and Communist Party General Secretary Xi Jinping took the opportunity to remind the world of the failings of the American political system. Year after year, as China's foreign exchange reserves have piled up, the leaders of the regime have gone to great pains to critique America for its profligacy and political instability, among myriad other failings. China's much heralded rise, and its ambitions to supplant American leadership, reflect not just its growing economic and military power, but the values of frugality, stability and conservatism Chinese leaders eagerly contrast with the chaos and moral decay of the west.

Little is ever said amidst these frequent rebukes of the role that America has played in enabling the resuscitation of the Chinese people, to say nothing of the Chinese Communist Party itself, from the depths of economic calcification reached in the 1970s. Much is made of the success of the market reforms instituted under the leadership of Deng Xiaoping beginning in 1978, and indeed the growth trajectory of China's GDP has been extraordinary. But the success of China's economic transformation could not have happened absent the free trade policies of the United States, and to a lesser extent western Europe, that enabled that growth.

Under American global leadership since the end of World War II, international trade policies have uplifted the Asian continent out of severe poverty. Japan led the way, in the wake of the devastation of WWII, building a manufacturing juggernaut enabled by American business insight and market access. The Japanese model of export driven economic growth and development then became the model for the Asian tiger nations of Singapore, Taiwan, Hong Kong and South Korea, which like Japan have risen from abject poverty a half-century ago to among the highest levels of per capita income in the world.

That was the American half-century. As we opened our markets, our share of global GDP steadily declined. Our trade policies actively supported the rise of Asia out of poverty and the globalization of our leading corporations. That real middle class incomes stagnated at home should have come as no surprise. It was simple economics.

But the Asian Tigers, and even Japan, were relatively small countries, who as trading partners were able to build their domestic economies around export trade with America without destroying the host upon which they fed. Through that economic period, there were unintended consequences that exacerbated the challenges we now face. The combined reinvestment of Asian nation trade surpluses in US dollars--and the similar practice embraced by OPEC nations selling us oil--led to relative stability in the US dollar and enabled steady increases in US borrowing without the increases in US interest rates or declines the value of dollar assets that would otherwise have undermined Asian growth.

But it was trade in goods and services with China and India, respectively, that ultimately showed the limit of the export driven model, as the damage to the US economy and middle class has now become too extreme to ignore. The challenges we now face--underinvestment in infrastructure, chronic deficit spending, and socially debilitating inequality--have conspired to contribute to the fraught domestic politics that President Xi now trumpets as the rationale for the world to turn to China for future leadership. China's gleaming new cityscapes--and the Chinese dream of Xi's rhetoric--are being built not upon the ingenuity of the Chinese system, but instead upon the hollowing out of the American economy.

The policy changes Xi and his colleagues announced this week only draw attention to the depravity that remains central to the Chinese system. Even as there is a rising wealthy population within the Chinese elite and urban cores, economic growth within China remains dependent upon the Foxconn-style factory model that is one step short of a slave economy. The Communist Party social and economic policies continue to drive Chinese peasants from their land while securing billions of dollars in stolen wealth for Party members. Dissent and banned religious practice remains punishable by prison and the Orwellian "re-education" that is to be moderated, but not eliminated, under recently announced Party reforms.

The Party plans to modify the decades old one-child policy is perhaps the most shocking reminder of the starkly immoral nature of Communist Party control over the most intimate aspects of Chinese personal life. Unauthorized pregnancies continue to be aborted by force up until birth, and children found to have been born in violation of the law remain at risk of being "confiscated" by police. The proposed may relax the rules surrounding who is to be allowed more than one child, but does nothing to curtail this most fundamental power of State control over the population.

This week, the US aircraft carrier George Washington arrived in the Philippines from Hawaii. The stories were so familiar from other disasters in recent years. The helicopters arriving over the horizon, coming to the aid of the population devastated by Typhoon Haiyan needing not just food and water, but the most basic help from building and securing aid distribution capacity, to recovering, identifying and burying the dead. The carrier and accompanying ships brought aid, logistics and people trained and capable of responding to the need on the ground.

Nine years ago, in the days following the 2004 tsunami, it was the US carrier Abraham Lincoln and the Navy hospital ship Mercy that steamed from the Persian Gulf to Banda Aceh, that city on the northern tip of Sumatra that had born the brunt of the tsunami and seen tens of thousands of its residents die. Like Banda Aceh, the Philippines are located close to the Chinese mainland--just 700 miles from Hong Kong--yet once again it was an American flotilla that steamed over 5,000 miles to bring critical aid, while the Chinese sat on their hands.

Last month, President Xi trumpeted China's rising essential role in the region at the Asia-Pacific meetings that President Obama chose not to attend due to turmoil in Washington. Yet just a few weeks later, he was nowhere to be seen as the people of the Philippines faced their crisis. The Chinese government committed just $100,000 to the Philippines relief effort after the typhoon struck.

President Xi has a long way to go to build the credibility of China as a modern state to be looked to by the world for leadership. Just the name of its recent meeting, the Third Plenum of the 18th Central Committee of the Communist Party, is a reminder that while much in the world has changed over the past quarter century--from the fall of the Berlin wall to the Arab spring--China remains a throwback the Cold War era. As much as Xi would like to show the world the face of a man whose time in Iowa left him an admirer of American freedoms, the pronouncements from his first plenum are a stark reminder of the deep corruption and cruelty that lie at the heart of the Chinese system, and of the ghosts of Tiananmen that still haunt the Chinese leadership.

But it is the response to Typhoon Haiyan that has demonstrated how far China has to go before it will be embraced as a global leader. Leadership is not just about words at meetings of world leaders, or reserves held bank vaults, but about conduct in the world. It is not about what you do to build up your own country, but what you do to uplift others. President Xi and his colleagues disappeared this week when their neighbors across the water were crying in pain, and their inaction spoke volumes. Because, at the end of the day, leadership is not about ideology or rhetoric, it is about showing up.

Thursday, November 07, 2013

Secrecy and intelligence in a free society.

Twenty years ago, an article entitled Secrecy and Intelligence in a Free Society was written by the Center for the Study of Intelligence that explored the challenges of intelligence and secrecy within a free society. The summation of the CIA document could have been penned this week:

"Free society needs intelligence. It needs secrecy. But there has been a loss of proportion, a loss of confidence and trust, and a lack of understanding on all sides. These must be overcome because the free society needs to make wise use of the capabilities at its command — and I include covert capabilities in this. It is high time that a mending took place."

The article was part of a self-study within the CIA which came twenty years after the Church Commission review of intelligence oversight which was formed in the wake of Watergate-era abuses, and twenty years before our current crisis of intelligence. The The recurring need to review the conduct of intelligence activities speaks to the continuing tension surrounding the role of intelligence and secrecy within our government and society.

Yet the fundamental expectations of Americans are that the nation's intelligence apparatus will continue to be employed effectively to keep Americans safe, whatever scorn and derision may be cast upon those agencies from time to time for whatever abuses of power may occur. This was demonstrated dramatically with the criticism directed toward intelligence services for failing to disrupt the plans of the Tsarnaev brothers whose bombs in Boston were constructed from cookware that can be purchased at and explosive material readily obtainable from fireworks stores and gun shops in many states. 

It has been remarkable to me in recent days to encounter three vastly different reactions to the events and testimony surrounding the National Security Agency disclosures of the range of its electronic eavesdropping activities.

For his part, NSA Director James Clapper has seen little if anything to apologize for in the conduct of the NSA surveillance programs. He has not been insensitive to criticism, but rather confronted clearly the notion that gathering intelligence is the central charge of the NSA and serves an essential purpose: "Leadership intentions is kind of a basic tenet of what we collect and analyze."

The dilemma of intelligence and the perspective of the intelligence operative was dramatically presented in the movie Three Days of the Condor, which presents the dilemma of intelligence gathering impinging on liberty in a free society. At the end of the movie, Robert Redford's character has taken the stance of Edward Snowden, and delivered information on CIA intelligence gathering methods to the New York Times, convinced of the outrage that will ensue. Redford's CIA counterpart challenges his idealistic belief that Americans would readily sacrifice their comfort for their idealism and principles.

"Ask them [the American People] when they're running out [of oil]. When it's cold at home and the engines stop and people who aren't used to hunger ... go hungry! They won't want us to ask [for their permission] ... They'll want us to get it for them."

In contrast to James Clapper's sanguine stance, the NSA's tapping of Angela Merkel's phone sparked the demand by Senate Intelligence Committee Chairwoman Diane Feinstein that the NSA cease the "collection of intelligence on leaders of US allies – including France, Spain, Mexico and Germany." Yet, rhetoric aside, Feinstein's stance, particularly as Senate Intelligence Committee Chair, is untenable. For example, Mexico is certainly an ally, but it is also a country rife with the corruption of public officials. It would be irresponsible for our intelligence services not to assess the extent to which the President of Mexico is being influenced by--to say nothing of personally corrupted by--the leaders of the drug cartels.

It is unarguable, along the same vein, that Saudi Arabia--widely proclaimed to be one of our strongest allies--is responsible for the funding of radical Islamic groups, including many no doubt who are at war with us. Certainly Senator Feinstein is not suggesting that the US intelligence services--particularly the least invasive electronic intelligence programs of the NSA--cease the use of all means available to us to understand the lay of the land in the volatile and evolving Middle East. Or perhaps her stance is that it is OK to surveil the leaders of Arab or Muslim states with whom we are allied, but not European states. And what about Israel, who has famously spied on us? Does our president not want the best possible intelligence to divine which of Benjamin Netanyahu's words are--like Feinstein's--rhetoric to appease a domestic audience and which mark true lines in the sand?

In contrast to Senator Feinstein, whose public comments certainly cannot reflect her stance in the closed confines of the Senate Intelligence Committee, I was surprised this week by the comments of a friend at Google. He suggested that people within Google are just beginning to recover from the realization that the federal government has been using its resources to monitor private Internet communications.

My friend explained the shock on the part of the tech community by suggesting that it would have taken a massive amount of computing power to hack into the encrypted communications backbone, unless it had a backdoor. He readily accepted the notion that the NSA had the computing muscle to do it, and reluctantly acknowledged that as an infrastructure funded early on with military research money, it was not inconceivable that there were backdoors into the system. Backdoors, as one hacker scolded another in the movie WarGames thirty years ago, are not secret.

My friend commented that the disdain within the tech community for government was validated by the fiasco, and no doubt that disdain contributed to the shock of learning that the same government that could not launch an effective e-commerce website after three years of planning had nonetheless successfully hacked into areas of the Internet infrastructure presumed to be unassailable. For my friend and his colleagues at Google, it has been a rude awakening. Like the early stages of grief, it is not apparent that people in the tech world have get fathomed the implications of their new understanding of the world around them.

The NSA issue revolves around the nature of secrets, and the security infrastructure that undergirds a free society. The NSA is charged with giving the President of the United States the best possible intelligence, and given that charge it is unlikely to foreswear an effective means of gathering intelligence, absent a clear and compelling--to say nothing of urgent--rationale.

The NSA surveillance activities constitute violations of privacy, not the murder or suborning of foreign leaders, after all. If it meant that the NSA was able to advice President Obama that it believed that Angela Merkel would ultimately support keeping Greece in the Euro, that was worthwhile intelligence that contributed to global economic stability at a fragile time. If it meant that the NSA has been able to suggest that Vladimir Putin would support a middle ground on Syria, or to suggest how far Ayatollah Ali Khamenei is inclined to support Iranian President Hassan Rouhani, so much the better. Perhaps it is even useful if those adversaries are not sure how much we know.

At the end of the day, NSA Director James Clapper's testimony rang true. He appeared to be neither lying nor disingenuous. And for my friend at Google, this has been an awakening. Alone among the three, Senator Feinstein's remarks evinced dissembling and calculating disingenuousness. The film analogy for her, of course, is Claude Raines, in Casablanca. Senator Feinstein, Chair of the United States Senate Intelligence Committee was shocked, shocked to hear what the National Security Agency was doing on behalf of the American people.

The Senator cannot have it both ways. If it is true that she is shocked, and that she believes that the NSA should not be gathering the best intelligence it can about the President of Mexico, then she should resign her position, because it suggests that she is not serious about defending the interests of the nation she is sworn to serve. If, on the other hand, she is not really shocked, but understands that there is a delicate balance--as the CIA study above noted--in managing the role of intelligence services in a free society, then she owes us not her feigned outrage, but her leadership in helping Americans understand that balance.

Through his revelations, Edward Snowden is forcing us to recognize what our intelligence services do on our behalf. This is not a movie with clearly defined good and evil characters, it is the real world and the answers are not simple. Perhaps it is time that we confront it honestly rather than just recoil in horror or feigned outrage. It is our government: We, the people. It is time we owned it and learned how to have a real discussion about the very real issues and choices surrounding secrecy and intelligence in a free society.

Wednesday, October 23, 2013

The anger of the Al Sa'ud.

There is something oddly satisfying about seeing the Al Sa'ud monarchy of Saudi Arabia throwing an international hissy fit. This story began last week when the Saudi government announced that it was rejecting the seat on the United Nations Security Council. In rejecting the seat—which it was awarded after concerted lobbying by the Saudi’s themselves—the Kingdom of Saudi Arabia lambasted the United Nations, and the Security Council in particular, for its failure to act against the Syrian regime of Bashir al Assad, as well as its failure to address the Israeli-Palestinian issue.

The rejection of the United Nations for failing to match the Kingdom’s longstanding "support of moderation and in support of resolving disputes by peaceful means" and intimations of dissatisfaction with the non-democratic structure of the Security Council was imperious and utterly without irony. The Saudis, after all, are one of the most repressive and feudal ruling elites in the world, who have a long history of covert funding of extremist Islamist terrorist groups across the globe. The rejection that began as a slap at the United Nations evolved in the ensuing days into a barely concealed assault on the foreign policy of the Obama administration. Not since 9/11 have Saudis grabbed the world stage to vent their anger at America with the full throated passion we have seen this week.

Prince Bandar bin Sultan—for many years a running buddy of the Bushes and the newly crowned head of Saudi intelligence—has seen the full betrayal of everything that matters to the Saudis, as the current American administration has repeatedly acted against Saudi wishes. The Saudis have watched as the Obama administration betrayed long-time American ally Hosni Mubarak in Egypt, and then turned its back on General Sisi after his coup against the Muslim Brotherhood. They have watched as Barack Obama vacillated  in his support of Sunni fighters in Syria and then walked away from a military attack on the Assad regime. They are now watching as Barack Obama pursues the possibilities for rapprochement with Iran, in the wake of the election of Hassan Rouhani, an action that would mark a complete and utter betrayal of everything for which the half-century old Saudi-American alliance has stood.

Of course, there never was an alliance between the United States and Saudi Arabia, at least not in the deeper sense of a coalition grounded in the pursuit of common interests. Ours has been a transactional political relationship that produced something that each side needed. We needed a stable and predictable supply of oil and a recycling of petrodollars. They needed the protection of U.S. military power to secure the interests of the Al Sa'ud regime against all enemies, foreign and domestic.

That was the relationship. Other issues—such as U.S. support of Israel and Saudi support of ultra-orthodox Islam—became points of tension along the way, but were never allowed to undermine the central rationale for the relationship.

Since the first oil embargo in 1973, the essential Saudi-American relationship has been predicated on 'you get our oil, we get your military,' as Jimmy Carter created the Rapid Deployment Force—the precursor to CENTCOM—to secure the Saudi oil fields and the Kingdom. Since that time, it has become standard fare to watch American presidents paying obeisance to one Saudi king or another.

It is oil—a geological coincidence—that had bought them everything. But somehow, Prince Bandar seems to have spent too many evenings watching Lawrence of Arabia, which celebrates the emergence of the Saudi nation, and not enough watching Syriana, which portends a post-apocolyptic vision, a world of declining oil reserves where growing rising popular anger turns Islamist terrorism against the Saudi homeland. The past weeks have been a rude introduction to a future of declining influence, where it is a race against time before the Al Sa'ud family century runs its course.

The endgame on Syria took the worst possible turn for the Saudis. The New York Times headline said it all. U.S. and Russia Reach Deal to Destroy Syria’s Chemical Arms. Syria was not at the table, to say nothing of the Saudis. Instead, the old Cold War adversaries sat down and worked things out. It was like the clock had been turned back a hundred years, to the early 20th century, with US Secretary of State John Kerry and Russian Foreign Minister Sergey Lavrov playing the roles of the British and French diplomats Sykes and George-Picot, who in 1916 secretly mapped out what would become the boundaries of the modern Middle East after the fall of the Ottoman Empire.

Oddly enough, when Vladimir Putin seized the moment to rebuild Russia's relevance in the world as he helped Barack Obama extract himself from a foreign policy mess of his own making, few back in the Washington, DC really had much to say about it. Unlike every other issue, where the pundits and politicians quickly go to the mattresses, criticism of the President was largely muted, even if it mean ceding some respectability to the ceaselessly self-promoting Russian. The relative quiet surrounding the Syria denouement did not reflect a return to the internationalist notion of decades past that partisan politics "ends at the water's edge," but rather sheer exhaustion and lack of any better ideas.

But it was Putin who really put Bandar in his place. Bandar had been lobbying the Russians for months to cut Assad loose. Last month, Bandar made his final play  as he brandished both the carrot and the stick to induce Putin to turn on Russia's long-time ally. First, as reported in Al-Safir, Bandar offered an alliance between the Saudis and the Russians (not members of OPEC) with the prospect of controlling the world oil markets. Then he offered a barely veiled threat to the security of Russia's 2014 Sochi Olympics. Give me Assad's head on a platter, Bandar proposed, and “I can give you a guarantee to protect the Winter Olympics next year. The Chechen groups that threaten the security of the games are controlled by us.”

For Bandar to sit across from Putin—whom he should have revered as a spymaster of the old school—and believe he could intimidate him was a dramatic misreading of Saudi power. Putin rejected Bandar's entreaties out of hand, and as to the Saudi's threats, Putin—whose career has been defined as much as anything by Russia's Chechen wars—responded, “We know that you have supported the Chechen terrorist groups for a decade. And that support, which you have frankly talked about just now, is completely incompatible with the common objectives of fighting global terrorism."

With a population that is one-sixth Muslim, and a country whose southern borders abut Muslim nations, the Russians are acutely aware of the threat posed to their nation from Muslim extremism. Mistaking a transactional relationship for an alliance, Bandar demonstrated that the Saudis have no common interests with the Russians, but instead confessed to what all presumed to be the case: As the paymasters of Islamic terror networks, the Saudis are the source of the very problems that are of the greatest concern to the Russian national security establishment. Putin's response mirrored the Bush Doctrine of a decade ago: "Any nation that supports terrorism we regard to be as a hostile regime." 

Then, as if the world were piling on just when the Saudis were down, came this week's headline, "U.S. surges past Saudis to become world's top oil supplier." The PIRA Energy Group report pointed to the resulting security of global oil supplies for years to come, a factor that can only undermine Saudi power and leverage.

Even if the Arab Spring has not yet arrived in the Gulf, it is becoming apparent that the Saudi's world is changing. The Saudis and the Gulf monarchies are under increasing pressure, both from increasingly restive populations as well as the consequences of over-leveraging that has left many of those states unable to support their current spending levels at the current market price of oil.

This week, the Al Sa'ud monarchy has seen its world begin to unravel. World leaders are no longer bending to their will. They have seen their long-held grip over American foreign policy in the region weaken. They made their play against the Russians, and Putin did not blink. The Saudis—who are used to dealing from a position of strength and leverage—are now being confronted with their own weakness. And weakness is the trait that the Al Sa'ud despise most of all.   

Sunday, October 20, 2013

The long war.

A week after Government reopened, the focus of attention has turned to the war for control over the direction of the Republican Party. Earlier this year, Sarah Palin voiced her grievances with the subordination of true Republican principles by establishment Republicans, and, flashing her inimitable disdain toward the GOP establishment, she suggested it might be time for the Tea Party to split off from the GOP.

For as long as I can remember, the Republican Party has been riven between conservatives and moderates. Growing up in New England, the iconic profile of political courage was not that of the young JFK serving as commander of PT-109, but rather Joseph Nye Welsh standing up to Joe McCarthy during the Army-McCarthy hearings in 1954.

Welsh, a partner at a white shoe Boston law firm, was serving as counsel to the Army when he berated McCarthy for persisting in attacking an associate at his firm. His words--"You've done enough. Have you no sense of decency, sir?"--publicly embarrassed McCarthy, and marked the end of his crusade to expose Communist sympathizers within the State Department and the Army itself. It was not a Democrat who took on McCarthy, but rather a high brow Boston Republican. It was not a cabal of Democrats in the Senate that led the ensuing campaign to censure McCarthy, but rather a small group of Republican Senators, led by Maine's Margaret Chase Smith and Vermont's Ralph Flanders, that brought him down.

Today's simmering civil war within the Republican Party reflects sectarian animosities with deep roots. The image of Joe McCarthy, a Catholic farm boy from the upper mid-west, being humiliated by the Episcopalian, Phi Beta Kappa, Harvard lawyer is an enduring one that reflects the historic animosities between Main Street and Wall Street Republicanism. For many on the right in the GOP today, Welsh is no hero. It is McCarthy who is owed an apology, whose reputation in history has been been treated indecently. Evidence uncovered in the Kremlin archives, they argue, has proven the bulk of McCarthy's claims to be accurate. The State Department was in fact riddled with Soviet agents of influence. At best, in their view, McCarthy's tactics were ill-conceived. At worst, he was an American hero pilloried by the liberal left, but ultimately betrayed by moderates in his own party.

The demise of McCarthy at the hands of Republican moderates was just one moment in a recurring history of internecine warfare. Ten years after McCarthy's humiliation, the conservative wing of the party would find vindication with the victory of Arizona Senator Barry Goldwater over New York Governor Nelson Rockefeller. Notably, it was in response to Rockefeller's speech at the Republican National Convention accusing Goldwater of being an extremist--rather than against some Democrat attacks--that Goldwater uttered his famous words, "I would remind you that extremism in the defense of liberty is no vice. And let me remind you also that moderation in the pursuit of justice is no virtue."

Goldwater's words would become the defining defense of conservative Republicanism, just as the ensuing decades of success by conservatives in dominating the Republican Party politics and moving the GOP to the right ultimately began with the Goldwater campaign.

Growing up in famously Democratic Massachusetts, voters as often as not turned to Republicans for steady, mature leadership. John Volpe, Frank Sargent and Bill Weld--and later Mitt Romney--were moderate Republicans who became successful Governors of that deep blue state. Liberal Democratic Massachusetts--the world of academia and the professional classes--was a side show in Boston. Once you got past the liberal bastions of Cambridge, Newton and Brookline, the Democratic Party in Massachusetts was the captive domain of Billy Bulger--the powerful brother of recently convicted mobster Whitey Bulger--who as State Senate President dominated Massachusetts' well-honed patronage machine. It was the party of Billy Bulger and Joe Kennedy, the party of ethnic passions and Kennedy money. It was against that background that the Republican Party was rewarded for being the party of prudence and reason, and entrusted with the responsibilities of governing. "If you were not a Democrat in your 20's, you had no heart. If you were not a Republican in your 40's, you had no brain," the saying went. Republicans were supposed to be the grown-ups.

Sarah Palin--and her Tea Party compatriots--inherited a different Republican Party, one that was profoundly changed by Nixon's Southern Strategy that leveraged the passions of the Goldwater faction with the new realities on the ground that grew out of the Voting Rights Act of 1965. The modern GOP has been more overtly divided between the northeastern elites that date back to the founding of the GOP, and its increasingly southern and western base. No events up until the formation of the Tea Party highlighted the regional and class resentments within the GOP more than Patrick Buchanan's presidential campaigns of "peasants with pitchforks" challenging the incumbent George H.W. Bush in 1992 and Bob Dole four years later. As Buchanan said at the time, "If the country wants to go in a liberal direction... it doesn't bother me as long as I've made the best case I can. What I can't stand are the back-room deals. They're all in on it, the insider game, the establishment game--this is what we're running against."

Only time will tell if the events of the past week rise to the historic significance of the McCarthy-Welsh standoff or the 1964 convention. But the capitulation of Ted Cruz and House Republicans in the recent debt ceiling battle is already being viewed in the eyes of Cruz and his supporters less as a defeat at the hands of President Obama and Senate Democrats than a product of abject betrayal from within the Republican ranks.

And this is an honest portrayal. Ted Cruz and his followers in the House indeed had victory within their grasp--many of them salivated at the prospect of going over the cliff--before they prostrated themselves before Mitch McConnell and other Senate Republicans, who, in the name of bipartisanship, yielded to the unholy alliance of Wall Street elites and Republican elders. The humiliation was complete, as summed up in the New York Times headlineAt 11th Hour, G.O.P. Blinks in Standoff.

The battle within Republican ranks will only intensify in the weeks and months ahead. While the conventional wisdom is that Ted Cruz is leading the GOP down a path toward electoral suicide, conservative loyalists within the party reject that formulation. They argue instead that theirs is the only strategy that offers the GOP a path to success. Bipartisanship--the mantra of party leaders who have been vocal in berating Cruz and his followers--is itself what must be resisted. Bipartisanship--as FreedomWorks co-founder and former Republican Majority Leader Dick Armey famously said--is another name for date rape.

Conservative Republicans--harkening back to the Goldwater campaign--make the simple argument that the most committed wins. Goldwater might have lost--and lost badly--but that loss laid the groundwork for the decades of success that followed. Grover Norquist, founder of Americans for Tax Reform, solidified the modern Republican Party electoral strategy around a coalition of single issue, litmus test voting groups--non-negotiable pro-gun, anti-tax, pro-life, home-schoolers, property tax rights and other principles--that produced conservative success for decades.

For moderate Republicans, the absolutism inherent in Norquist's formulation is anathema to the notion of politics as the art of the possible, the politics that have enabled Republicans to win and govern successfully in blue states from Massachusetts to California. But conservatives push back and argue instead that GOP success at the national level over the four decades since Lyndon Johnson's second term in office was built around the strength of those convictions. Other than the loss to Jimmy Carter in the wake of the Watergate scandal, they argue, the Republican Party did not lose a straight up election to the Democrats for forty years from 1968 to 2008. Conservatives attribute Bill Clinton's victory in 1992 to Ross Perot taking 19% of the vote--largely from the Republican column--as Clinton beat Bush 43-38%.

While Republican strategists looking at demographic changes argue that it is imperative to broaden the GOP coalition from its aging, white base, conservatives are loath to abandon the absolutism of the Norquist strategy that has served the GOP well. People of faith within the GOP coalition point to New Jersey Governor Chris Christie's overwhelming popularity as a pro-life Republican governor of a traditionally blue state as evidence that there is no need to give ground on their core values. Similarly, second amendment voters point to the rapid fading of the gun issue nationally, even in the wake of repeated tragic events. They argue not only that ceding the gun issue is not critical to electoral success at that national level, but that to do so would cost the GOP the proven passions of the pro-gun voters.

Establishment Republicans and traditional large contributors who are urging the GOP to turn back from the trail that Ted Cruz is blazing, will be hard pressed to counter the passion and energy that the debt ceiling battle has unleashed. The argument that moderation is important to winning back public support that has turned against the GOP will once again be countered by those on the right who will argue that on election day, it is passion and core principles that brings out voters. The animosities voiced by Ted Cruz and his followers toward establishment Republicans mirror similar grievances dating back decades. They believe that they have been wronged by the establishment urge to bipartisanship and they will be loath to let it happen again.

Faced with the logic of the world according to Ted Cruz, a friend who is a national GOP strategist suggested that it was the Democrats who would ultimately benefit in elections to come from the rise of Ted Cruz. "My humble opinion is that they over estimate the Tea Party / social conservative base. Watch the Texas Governor's race. The Dem's will win... So called moderates will vote the Dem's in... Cruz strategy hurts Republicans in the long term. Hope you are well."

Tuesday, October 15, 2013

Uneasy lies the head.

At the end of 2012, after he had been safely ensconced in the White House for another four years, President Obama had a chance to put all of the budget wrangling to bed, for good. The Bush-era tax cuts--passed as the Republican solution to the accumulating surpluses beginning in the last years of the Clinton presidency--were set to expire at the end of 2012, and the President had a choice to make. He could make a budget deal with Congress to extend some or all of the tax cuts, or he could do nothing.

For a decade, it had been a Democrat mantra that the Bush tax cuts were the cause of our fiscal imbalances, and that they should be repealed at best, or allowed to expire, at worst. As President, Barack Obama had repeatedly talked about the need for more revenue. But, at the end of the day, even with his reelection behind him, he was not prepared to seize the moment. He was not prepared to allow tax rates to go up on the middle class, even if only to the levels in place at the end of the Clinton presidency. Thus, the moment was lost and the surge in federal debt continued.

Today, such a moment has been reached for Senator Ted Cruz. Newly arrived in the Senate, Cruz emerged as the majordomo of the House Tea Party Republicans who have chosen to use their leverage over the funding of the government and raising of the debt ceiling to win concessions on spending and the implementation of the Affordable Care Act. Like President Obama, Ted Cruz has the opportunity of a lifetime to change the course of American history, simply by convincing his minions in the House of Representatives to do nothing. Just as by doing nothing late last year, President Obama had the opportunity to resolve decades of partisan wrangling over deficits, so too Ted Cruz can achieve the equivalent of the Tea Party holy grail of a balanced budget amendment to the Constitution if he has the nerve to stand his ground.

In the last iteration of the debt ceiling negotiations, in 2011, the resolution included the requirement that there be a Congressional vote on a balanced budget to the Constitution. Of course, such a vote required a two-thirds majority prior to even being considered by the states, and, as such, was a non-starter. But a balanced budget amendment remains the sine qua non of the libertarian and Tea Party world views, and now Ted Cruz has it within his grasp.

Ted Cruz may have felt heat before, somewhere in his life, but it is nothing like the pressure he will come under in the next 48 hours. For almost a week now, John Boehner and the House suicide caucus have faded from the front pages, and Cruz himself has been the target of unrelenting ire within the Republican establishment. DC elders, having failed to make progress in the House, turned to their attention to putting together a deal in the Senate, in the hope that at the last minute, faced with the fate of the world hanging in the balance, Ted Cruz and the radicals in the House would fold.

Karl Marx famously observed that historical personages and events appear twice, the first time as tragedy and the second time as farce. And thus it appears to be with these debt ceiling events, as this one has devolved into one more media extravaganza. Two years ago, world markets took the notion of an American default quite seriously. The Dow dropped over 16% as that prolonged negotiation dragged on, and bond market volatility was pronounced. Not so this time. With 48 hours to go before the apocalypse descends upon us--with dire predictions of rising Treasury bond yields and plummeting stocks--markets remain largely unaffected. The Dow is down less than 1% over the past month, and benchmark Treasury bond yields are lower now than one month ago. Investors, it seems, no longer take Washington predictions of doom too seriously.

There are two pivotal insights here. First, the bond markets appear to have internalized the simple truth that there will be no payment default on any U.S. Treasury obligations, come what may. When any Treasury securities come due--obligations that bear the full faith and credit of the United States of America--and are presented to the Federal Reserve Bank for payment--the same Federal Reserve that creates $85 billion each month out of whole cloth in its quantitative easing program--they will be paid. There are no effective constraints to such payments by the Fed, and to not pay maturing Treasury securities when due would violate the 14th Amendment to the Constitution.  

Second, from a bond market perspective--and given the fallacy of the potential for a payment default--all of the institutional pressures from the fiscal negotiations point to downward pressures on deficits, one way or the other. Therefore, the future looms to be one of reduced borrowing, reduced debt, and, the ravings of the anti-fed faction in the Cruz caucus notwithstanding, low inflation. All of those factors translate into lower bond interest rates, not higher ones. For now, with the global depression continuing to haunt Europe and Japan, or the Chinese yuan as little more than a proto-currency, investors have nowhere to go but the dollar.

Goldman Sachs has estimated that a failure to raise the debt ceiling would cause a 4.2% pullback in economic activity, thus the real consequence of a failure to raise the debt ceiling will be to throw the U.S. economy into recession. Goldman's report suggests that this, rather than any cash default, would be the material consequence of non-action by Congress.

This is the endgame that Ted Cruz is playing with. It is the path of least resistance to achieve the effective equivalent of a balanced budget amendment. But unlike the passage of a balanced budget amendment, there would be no phase in or time to prepare. Instead, if funding is curtailed effective this Friday morning, the impact will be harsh and it will be immediate.

The media consensus is that the Republican Party is the loser as a result of the ill-conceived strategy thrust upon them by Ted Cruz, and that Republicans must ultimately come crawling back to the President and the Democrats, take their medicine, and forsake their goals. But Ted Cruz does not have to play it that way. His is a high stakes game for the nation, as well as for Cruz himself. If he folds his cards now, just as victory lies within his grasp, the Tea Party movement will have been stripped bare and left with nothing but the continuing antics and buffoonery of their clown princess Sarah Palin, with Cruz relegated to the shadows. Instead of the resentments of his peers in the Senate, it will be the Tea Party base that will turn on Cruz for his weakness, and thus dash his own political ambitions.

But if Cruz confounds the odds and plays his ace card, he will cast the nation into an uncharted economic abyss. There is a reason that balanced budgets have not been achieved through the normal appropriation process: everyone, on both sides of the aisle, likes to spend money and bring home the bacon for their constituents. Members of Congress may like the Ryan budget in theory--for all his rhetoric, Ryan never specifies what he would cut to bring spending down to 19-20% of GDP--but in practice no one wants to cut anything that benefits their constituents or their contributors.

That is the outcome that could transform the nation, and its budget debates, as Cruz's most loyal Tea Party acolytes would learn the hard way that their Medicare and veterans benefits, and the other programs upon which they rely, are all the stuff of government. With tax receipts only covering 81% of mandatory and discretionary spending, everything would be cut back significantly. Ted Cruz will have delivered the holy grail to his followers, but in the face of the turmoil that ensues, he may find little he garners little gratitude or praise in its wake.

Saturday, October 12, 2013

Peas in a pod.

They despise each other, call each other terrorists and gangsters. They cannot imagine ways in which they are similar. They occupy opposite ends of the political spectrum. They each believe that they stand for essential higher values that much of the public chooses to ignore at their peril. They believe their actions, as much as they might engender public resentments, are in service of long-term goals critical to the well-being of their supporters and, ultimately, the public at large.

And in service of those values, they are willing to exercise the greatest leverage they have, at the point in time when the impact of that leverage is greatest, to accomplish goals that have proven to be out of their reach through the normal workings of government.

In a nutshell, they disdain the regular order of things and the workings of government when it does not produce the outcomes that they desire. And to them, those outcomes warrant wreaking havoc on the larger economy if need be.

The Tea Party caucus in Washington, meet the Service Employees International and the Amalgamated Transit Unions that represent the BART transit system employees in San Francisco. While the Tea Party caucus continues to keep the federal government shut down and world markets in an increasing state of anxiety, the BART unions have proven that they are willing to shut down the San Francisco area economy if their demands are not met, regardless of the harm inflected on hundreds of thousands of people across the region. In what has traditionally been a union town, more than three quarters of the public are opposed to the proposed labor action by BART workers in a recent poll, most of them strongly opposed.

The Tea Party, of course, has been front and center in the movement to undermine the power of public sector unions exactly because of the leverage unions have been able to exert--through the ability to strike and elect political supporters to public office--to achieve their goals. And to be sure, the ability of public sector unions to strike has been one of four significant sources of fiscal instability undermining the finances of local governments across the country. The other three: public financing of political campaigns that contributes to corruption deeply embedded in our democracy, financial derivatives that place great risk on public sector balance sheets, and the mobility of capital that has drained urban economies of their middle class job base.

The problem of public pensions is directly related to these four factors. Public pensions themselves are not the problem, but rather an evolving underlying economy that has undermined the assumptions upon which those pensions were based. A bit over a decade ago, public sector pensions were largely fully funded, and the projected investment return assumptions appeared reasonable. The structure of those pensions did not change. What changed was the validity of the underlying economic assumptions, and the impact on local economies of the combined forces of globalization and technology.

Ultimately, the challenge to BART workers is that the median middle class incomes of taxpayers and transit riders who ultimately fund their wages and benefits have stagnated over the past decade. As such, BART workers are not simply asking for a fair share for themselves, but to improve their economic position relative to the commuting public that they serve. As such, fact finding and arbitration--the traditional means of resolving labor disputes--would be unlikely to achieve union demands. Arguments about the 1% and income inequality have little salience in a situation where the funding is derived from the BART riding public and local sales taxes. Larry Ellison does not ride BART, and even Google employees have their own bus system.

Like the Tea Party, BART workers have the strong support of barely one-quarter of the population. Yet, there is little doubt that those that support the goals and tactics of the BART unions particularly revile the Tea Party, and would be loath to acknowledge those things that they have in common. Both the Tea Party and Bart unions are attempting to use the threat of massive economic dislocations to achieve outcomes that they have otherwise been unable to achieve. And both find themselves confronting a public that finds economic blackmail to be an unacceptable strategy for the pursuit of parochial political and economic interests, and as such risk long-term public opprobrium that may undermine any near term gains they believe they can achieve.

Thursday, October 10, 2013

The Taker Caucus

As a child of a family therapist, I have been trained from my formative years to look at events through the lens of family history. My grandparents included a Goldwater Republican from Chicago, a Nixon Republican from Montgomery, Alabama, and two Humphrey Democrats from Kiev. Thus, I am the picture of a modern Californian: part fiscal conservative, part social liberal, half immigrant. One documented, one not.

As a Californian, I am proud of my state's embrace of immigrants. They come from other states and other countries to imagine new technologies and build a future that exists only in their imagination. And they come from other countries with a willingness to work hard and a determined faith that their family's future will only be constrained by their own energy and imagination.

From a Tea Party perspective, no doubt, the world that I embrace is emblematic of all they disdain. Social insurance reforms were implemented here years ago. Immigration reform pushes the boundaries of what is permissible within a federal context. The simple fact is that the work and energy here is driven by the young and the newly arrived. Industries from tech to Hollywood to aerospace are enabled by the qualities and motivations of the labor force, educational institutions and financial infrastructure. In this context, enforcing health insecurity as the grounding of personal freedom seems at best quaint, at worst cruel.

The Tea Party has all the elements of revanchist denial of the world as it is. Rick Santelli's original rant on the floor of the Chicago Mercantile Exchange that is credited with being the founding moment of the movement was itself steeped in the ironies and rhetorical manipulations that have defined the Tea Party. After all, Santelli stood before an audience of commodity traders on a cable network that caters to the financial markets and decried the behavior of "losers" who took on the no down payment mortgages and liar loans on offer from Wall Street. Santelli's rant justified the now deeply rooted denial across the entire industry of bankers and traders that they in any way contributed to the $24 trillion of losses across the national economy that the Dallas Fed has traced to the 2008 financial crisis. In the half decade since Santelli laid down the emotional foundation for the Tea Party, those traders and others have been made fully whole by TARP and other legislation, and Fed policies have restored upwards of $4 trillion to the balance sheets of the rescued Wall Street banks--funds that were effectively stolen from the accounts of retirees, pension funds and other savers across the economy. Yet, to this day, there has not been even a whisper of gratitude from Wall Street to the nation that paid the price for the arrogance and excesses of the financial sector.

The famous plea at an early Sarah Palin rally to "not let the Government get its hands on our Medicare" became the second foundational rhetorical manipulation of the Tea Party movement. Like Santelli's rant, this plea to protect the common folk from the predations of government harkened back to the anti-government language that served Ronald Reagan to such great effect. But if one can debate the complex roots of the financial collapse, the fact of Medicare as a government program is unarguable.

Suzanne Mettler, of Cornell University, has documented the extent of public attitudes denying their own use of government programs. Her data suggesting that 40% of Medicare users deny that they have used a social program is fundamental to the challenges underlying the divide in Washington today. If Reagan helped through his rhetoric to harden anti-government attitudes across a broad section of the American public, the process of cognitive dissonance--or simple denial--has now resulted in people who instinctively hate government apparently concluding that anything on which they depend must not be government. Thus, a large share of Medicare beneficiaries deny that they benefit from any government program, just as our leading bankers continue to deny that they are beneficiaries of public largesse.

As a Californian, I hear the continued slights of the Golden State's slide into fiscal irrectitude. Even as Jerry Brown has demonstrated what a principled elder statesman can accomplish, he is criticized for relying on a mix of tax increases and spending cuts to tackle the State's serious fiscal challenges. But the slings and arrows from the conservative right are a bit hard to take. In particular, it is hard to abide the pious words of supply side guru Art Laffer and former Club for Growth President Stephen Moore who, in a recent Wall Street Journal op-ed, extolled the policy paths of those states--largely those of the old Confederacy--who, in contrast to California, are eliminating their income taxes and pursuing supply side policies.

How easy it is to be one of those states that Laffer and Moore praise. How easy is the rhetoric of the Tea Party members of Congress who have brought the nation's business to a halt with their demands to end the binging on public money, the profligacy that is undermining our moral character and financial stability. With a rhetorical slight of hand that harkens back to Ronald Reagan's folksy indictments of welfare queens and food stamps, one Tea Party member of Congress after another repeats the calumnies against all those who would deny them the power they crave but have been unable to achieve through the regular order of things.

It is the rhetoric manipulations that are so galling. The arrogant claims to fiscal rectitude of the Tea Party bely the underlying realities. They are not the makers of their own imagination, but are rather in large numbers the takers that they have been so quick to disdain. Their members are older and more dependent on Medicare than the rest of the population. They might prefer to imagine that Medicare is not a government program, but it is, and this year its share of the federal budget will surpass Defense to become the largest area of expenditure after Social Security. They might imagine that what they are taking out of it is only what they put in over their in the workforce, but that is a far cry from the truth. The average Medicare recipient now takes out ten times what they paid in.

Medicare is a general welfare program. Say it slowly. And repeat.

But it is more than that. Too many of those Tea Party pols that quote shibboleths from the founders to somehow justify their own anti-democratic conduct, and who decry debt and profligacy, come from states that take more from the public trough than they put in. This is the essential problem with the Laffer/Moore hypothesis: The states do not stand alone. There are, in the Tea Party terms, makers and there are takers, and the flow of federal dollars dwarf the local dollars.

Here are some data points: Consider a cohort of Red states whose Tea Party members have been so quick to disdain the rest of us. Mississippi, Alabama, Louisiana, South Carolina, Virginia, Tennessee and Kentucky. Each of those states voted Republican in each of the past three presidential cycles, except for Virginia. And take a cohort of Blue states who in Tea Party eyes are the epitome of Liberal corruption, of all that troubles our nation--California, Massachusetts, New York, Connecticut and New Jersey--each of which voted Democrat over those same years, to confirm their lascivious nature.

Citizens in those Red states earn on average $24,000 per year, and taxes paid from those states to the federal government total just over $6,000 per capita. In contrast, citizens in the Blue states earn an average of $33,000, and the taxes paid per capita are a bit over $12,000. The Blue states are wealthier, and they provide more revenues to the Federal Government. No surprise there.

But due to our Constitutional framework, smaller states are better represented in Congress. 1.2 times better in this case. The Red states cohort here has one member of Congress per 556,000 people, while the Blue states have one per 651,000. The consequence of this over-representation often gets lost in the arrogance of the Red state hubris: They take back more than they give, and have succeeded in assuring that a disproportionate share of federal dollars flow back to their states to subsidize their economies and standards of living. While Red states pay in $6,000 per person, they get back $11,000 per person. In contrast, those Blue states pay in $12,000, but get back just two thirds of what they contribute, or just over $8,000.

There is nothing new in this. Literally dating back to Reconstruction, the federal dollars has invested disproportionate sums to build up the economy of the south. Military bases, waterways, electrification, hospitals, the list goes on. The bottom line is that today this cohort of Red states gets back over $4,000 per person more that they pay inalmost exactly the reverse of this group of Blue states, which contribute $4,000 more per capital than they get back. Those Red state residents are not just getting all of their federal dollars back, but a bonus equal to 20% of their per capita income. Courtesy of the Blue states. Courtesy of the Constitutionally defined power structure. And courtesy of the regular order of budget decision-making over the years that has, and continues, to pour money into smaller and rural communities.

This data set is not an aberration. Of the 20 states that take substantially more than they contribute, 14 voted Republican Bush/McCain/Romney. In contrast, of the 16 states that contribute materially more than they get back, only three--Texas, Nebraska and Arkansas--are red states, while 10 are deep blue.

I happen to believe that we do have a debt problem to attend to, and that entitlement spending is slowly usurping the capacity of the federal government to invest in needed areas. But it gets old listening to the same old rhetoric--from bankers whose industry has sapped the nation and retirees who prefer not to believe that they are beholden to the rest of us--about how everyone else is the problem.

From a Californian perspective, these numbers are stark. After all, that money that we send back--that primarily ends up subsidizing the economies of Red states--comes at a price: It increases the amount we must tax ourselves. You have to admire the brilliance of those anti-tax, small state Republicans. In a quite literal sense, when Californians approved an increase in income tax rates this past election day, we were agreeing to tax ourselves so that we could continue to send money to those states of the old Confederacy. This continuing flow of outside tax dollars from other states then allows politicians in those states to cut their tax rates on their own citizens and trumpet their anti-tax bona fides.

And this is celebrated on the pages of the Wall Street Journal as inspired public policy.

If the Tea Party Republicans want to radically reduce spending, how about a simple new rule that says that no state will receive back more money from the federal government than it pays in. That way, the excess tax receipts coming from those Blue states can be used to pay down the deficit, and those Red states can learn to walk the walk for a while and get along on their own without our money. A little fiscal rectitude is good for the soul. Jerry Brown tells us so frequently.

But if the Tea Party shuns this suggestion, I would suggest we give the Suicide Caucus a more apt name. The Taker Caucus. They are taking money from the rest of us, and rather than showing the least bit of humility or gratitude, they have make clear their intention to destroy the regular order of the democracy of which they are supposed to be a part, and from which they have taken so much, for so many years.

The discourtesy and ingratitude of too many of the Tea Party caucus is shameful. At our family gatherings, my Republican grandparents could not have had less in common with the Russian immigrants who sat across the table. As hard as they might try, they could never really understood each other. Their worlds were just too far apart. But they knew that their lives and futures would be forever intertwined, and based on that alone they built a foundation of respect and mutual appreciation. And that is how it should be in our politics. Our collective future depends on it.

Friday, September 06, 2013

No honorable man.

This is how Vali Nasr, an Iranian-born Shi'a and Dean of the Johns Hopkins School of Advanced International Studies makes the case for American action in Syria:
"It is in America’s strategic interest... to take decisive action to mortally wound the Assad regime. Ensuring that Syria does not become a haven for Al Qaeda—a legitimate fear—would have to immediately follow. 
"Mr. Assad may be right to think the Obama administration does not want involvement in Syria, but the horrors of this war have effectively forced America into it. The risks of intervention are great, and success is uncertain, but doing nothing would be, at this point, far worse. 
"America should act decisively and in a timely manner, and based on a strategic vision that includes a way out of this war. That would impress American allies and adversaries alike. That is what the world needs and what Mr. Obama should focus on."
Nasr's comments tell so much of the story. He argues for intervention in a war that Americans by and large want no part of. He does not advocate, as the President has argued, for a narrow action that would punish President Bashar al-Assad for the use of sarin gas in contravention of international agreements. Nor does he suggest that American action should tilt the balance of power in the Syrian civil war. Rather, he argues for decisive action to mortally wound the Assad regime. 

Nasr is not a member of the Neocon establishment in making the case for American action in pursuit of regime change.  Nor is he a Sunni Muslim arguing for American intervention on behalf of his rebel co-religionists. Rather, he is a scholar whose recent books, The Dispensable Nation and The Shia Revival, together provide the backdrop of the current dilemma, who believes that America must act, essentially, because only America can. Nasr is making a case that is anathema to the left and the right alike, and—unless the President outdoes himself this Tuesday—much of the rest of the country.

For much of the country, the notion that America has a unique role to play in the world is not itself objectionable, and there is even a recognition that military force plays a role. But it is when Nasr appends the codicil that the Obama administration take aggressive action in Syria based on a strategic vision that includes a way out of this war that he loses much of his audience. Assume for a moment an exit strategy. He just slips that in at the end, as though it is easy, that it can be trusted that there will be an easy way out. Like when Donald Rumsfeld in his own smarmy way assured the country that an invasion of Iraq would be brief, five days, five weeks but certainly no more than five months.

I want to write my own argument about the many reasons to stay out of Syria. It feels like déjà vu all over again. Nasr's words appeal to what I think are the better angels of my nature, to my deeply rooted belief that the world needs America, but the events of the past half century have taught me to be suspect both of our motives and of our capabilities. Now, as I hear in Nasr's words, the rolling of the drums and the tramping of the feet, I have to pinch myself and remember, we already know that road. We know exactly where it ends. 

Somehow, our capacity to learn from our own recent experiences has become impaired. The President wants to talk in terms of limited, narrow actions, but can he really believe it is so simple? He has found a comfort zone as the cruise missile warrior, but it is a fantasy. As soon as the photographs of the inevitable collateral damage emerge, Americans who are now being implored to enter Syria to tip the scale against the Assad regime will reap the resentments of the families and clans of those we kill. Lest we forget that in 2003 American soldiers were welcomed as liberators by the largely Shiite marsh Arabs in the early days of the Iraq war. Or that in its 1982 invasion of southern Lebanon, Israelis were greeted warmly by the Lebanese Shi'a seeking relief from their Palestinian occupiers.

In each case, the logical argument that "my enemy's enemy is my friend" proved to be short-lived, and just as Saddam became the modern Saladin in the eyes of many in the Arab world for taking the blows of the western invaders, one can easily imagine a defiant and resurgent Bashar al-Assad reaping the praise of the Arab street once the American missiles fall and images of the bodies of maimed and dead Syrian children are broadcast across the world. Taking a page out of Saddam's playbook, Assad will be able to point to the Saudis and the Gulf monarchies that are backing the American action and funding the foreign Salafist fighters who themselves are slaughtering Syrians, and remind the world that they are the ones who are bent on destroying the relatively secular and tolerant society that Syria once has been.

And should Assad achieve that high ground, what will be our response when he uses gas again, challenging a United States President who has sought to fight a war on the cheap to up the ante. Has a President who apparently gave little thought to what comes after a red line is crossed considered what the next six moves look like?

We are entering a world that we have never mastered, and whose loyalties and enmities defy our grasp. Some have made the argument that arming the rebels is necessary to assure that America has influence in the post-Assad era, but that argument as well seems to be unsubstantiated by our recent history. Ten years after Rumsfeld's five day war morphed into a decade, and we lost 4,500 young Americans and spent $2 trillion, Iraq has traded a Sunni despot for a Shiite autocrat and is on the brink of a civil war of its own. And Nouri al-Maliki, our hand picked Prime Minister is every day moves closer to an overt alliance with Iran.

And now, the same Shiite community that was liberated from Saddam and his Baath Party's predations by American soldiers has little but scorn for the notion of an American action to liberate Syrians from Assad and the Syrian Baathists. As America considers an attack on the Assad regime and offers of aid and comfort to the Sunni, al Qaeda allied rebels, one Iraqi summed their take on the situation: No honorable man will accept what the Americans want to do in Syria.”

Of course, even as the President continues to argue that he is motivated by the Assad regime's use of chemical weapons, the administration's rhetoric is obliquely about Iran more than it is about Syria. It is about the nature of "red lines" and the President's withering credibility. Thus, the importance of the proposed Syrian attack as a warning to others around the world that this type of behavior is not to be tolerated.

It is about Iran, and it is about Israel. Over the course of the escalating Syrian civil war, Israel has struggled to remain neutral. And for good reason. As much as there has been a permanent state of hostilities between Israel and the Assad regime, it was a classic example of the devil you know. It is only in the past week that Israel endorsed President Obama's plans. This may well turn out to be a mistake, particularly given the incremental nature of the President's vision. If a few cruise missiles are lobbed in, with little effect on the outcome, Israel could realize the worst of all possibilities. First, Israel will have become a partisan in an active conflict with Hezbollah and Iran. Second, by whipping up AIPAC in support of the proposed war resolution, it may give ammunition to those who are only too eager to frame the debate in Congress as being about Jewish control over U.S. foreign policy. And finally, while it will have supported the President in giving "meaning" to one red line, Israel will in truth have no greater assurance that the President's red line with respect to Iran's production of nuclear weapons is meaningful.

In Sweden this week, the President sought to deflect the issue from his own words about red lines, but to no avail. Instead, he remained trapped in his own contorted insistence that the international community sign on to a military action that would be taken by the United States to punish a violation of international law, without going through the steps laid out in international law to legally authorize such action. It was not Putin who undermined the President, but the weakness of his own arguments. By the time he returned to the nation's capital, the President had managed to secure the endorsement of just a bare majority of eleven of the G-20 countries that the Assad regime's use of chemical weapons warranted a response, while of that group only Saudi Arabia and Turkey voiced support for the proposed American missile attack.

The story published this week of the assault on Maaloula—an ancient, Aramaic-speaking Christian community—by a Syrian rebel force comprising the al Qaeda controlled al-Nusra Front and the Free Syrian Army illustrates the overwhelming complexity of the Syrian conflict, as well as why the Syrian Christian community that comprises 10% of the population has largely supported the Assad regime. This story, along with the televised execution of unarmed Alawites by Sunni fighters, will only give Congress greater pause regarding efforts to support any side of the conflict. The Sunni Taliban in Afghanistan and Pakistan, the Shiite Mahdi Army in Iraq, and Shiite Hezbollah in Lebanon are each adversaries that began as allies in wars past. Despite the pleas of John McCain's and others for regime change in Syria, Congress and the American people may be a hard sell.

If President Obama is to prevail and win his war resolution, it may turn out that it is neither Vali Nasr's arguments nor the President's impassioned words that will bring Congress to the his side. Instead, it may be the arguments that are emerging from the traditional partisans of our political wars. On the right, Bill Kristol of the Weekly Standard, has laid down the fundamental principle that the nation will be weakened irreparably in the world by a defeat on the proposed resolution. Specifically, Kristol quotes James Ceaser of the University of Virginia:
"Republicans should support some version of the authorization of force resolution. They should do so even if they think that the President’s policy will prove ineffective, do no good, waste money, or entail unforeseen risks; they should do so even if they think he has gotten the nation into this situation by blunders, fecklessness, arrogance, or naiveté; and they should so even if, and especially, if they have no confidence in his judgment. The simple fact is that the nation and our allies will be at further risk if the world sees a presidency that is weakened and that has no credibility to act. Partisans may be tempted to see such a result as condign punishment for the President’s misjudgments; they may feel that he deserves to pay the price for his hypocrisy and cheap and demagogic attacks on his predecessor. But at the end of the day, Republicans need to rise above such temptations; the stakes are too high. The weaker the president’s credibility on the world scene, the more the need to swallow and do what will not weaken it further. President Obama is the only president we have. That remains the overriding fact."
On the other side of the aisle, Democrats who are loath to follow the President may find themselves trumped by the evolving politics of the vote before them. The President's advisors know full well that the rest of the Obama presidency lies in the balance, and that a defeat would leave him "permanently weakened." Thus, for Democrats, the vote to come may have little to do with chemical weapons and the wisdom of war and peace, and become instead an up or down vote of no confidence in the President and the leader of their party.

Thus, for all the high brow talk about the moral issues involved, the Syria war resolution may well force many in Congress to vote against both their own beliefs as well of those of many Americans, and the issues that drive that vote may turn out to be quite different from those being debated today.

Sunday, August 25, 2013

Money for nothing.

Wall Street's hold over the nation's politics ultimately lies in the power of its narrative. As MIT economist Simon Johnson wrote in the wake of the 2008 financial collapse, the power amassed by the finance industry over the past quarter century is not simply a function of the corrupting power of its political contributions, but rather its success in the creation of a belief system within the halls of power. Johnson sums up his observation about the power of Wall Street as follows:

"It did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world." 

The power of this narrative is demonstrated by the continued obeisance paid to industry chieftains even as the nation continues to struggle with the economic fallout of the banking crisis and bank lending continues to lag. Members of Congress might publicly decry the "too-big-to-fail and too-big-to-jail" culture that has evolved, but they continue to line up in pursuit of lucrative seats on the finance industry oversight committees and bid for their cut of the billions in contributions made by the finance industry to Congressional campaigns. Five years after the historic financial collapse, the essential narrative remains intact and the power of the largest banks remains unchallenged. Despite deep public support, legislation to break up the banks or to reimpose Glass-Steagall restrictions—even when offered on a bi-partisan basis—is still not taken seriously.

But Wall Street today is not the Wall Street of prior eras. Over the past quarter century, financial services deregulation has led to increased concentration and profitability in the banking sector. As measured by FDIC data, the asset share of the largest banks has more than doubled from below 30% in 1984 to over 80% today, including a strong uptick since the 2008 financial collapse. During this same timeframe, profits in the financial services sector increased significantly. Based on Bureau of Economic Analysis data, in the decades prior to deregulation, the financial sector share of total domestic corporate profits fluctuated from below 10% to as high as 16%. Beginning in the mid-1980s—as deregulatory efforts gained momentum—the financial sector share of domestic corporate profits increased steadily, finally reaching 30 to 40% of total domestic corporate profits following the comprehensive deregulation of financial services under President Clinton in 1999 and 2000. This increase in the share of total private sector profits is significant, and it reflects the emergence of finance from an essential function in support of the broader economy—a notion central to the narrative that Johnson describes above—to an industry increasingly in service of itself.

Increasing concentration in the financial sector brought with it the realization that the largest institutions were too big to fail. This had significant ramifications both for those institutions as well as for the broader competitive landscape. Those institutions that were viewed as too-big-to-fail were accorded preferential borrowing costs in the capital markets because of the implied federal backstop, resulting in an effective public subsidy. Recently, two economists—Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz—estimated that prior to the 2008 collapse, the largest banks had a borrowing cost advantage, including the interest rate paid on their bonds and customer deposits, of 60 basis points relative to their competitors, and that cost advantage increased to 80 basis points after 2008. In a world of already low interest rates on bonds and bank certificates of deposits, 80 basis points, or almost 1%, is a substantial benefit.

Bloomberg used the Ueda/di Mauro data to calculate that the annual benefit to the largest banks totaled $83 billion, and reached the stunning conclusion that the annual benefit to the top five banks—JP Morgan, Citigroup, Bank of America, Wells Fargo and Goldman Sachs—totaled $64 billion, or an amount "roughly equal to their typical annual profits... In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders."

The Bloomberg conclusion directly contradicted the industry narrative that concentration within the banking industry is a natural market phenomenon that itself promotes efficiency and is—central to the Johnson narrative—essentially a public good. The central irony of this massive public subsidy as laid out by Bloomberg should not be lost: The larger a financial institution is, the more disastrous their failure would be, and therefore the more certain it can be of a public bailout in the a crisis. In turn, the greater the certainty of a bailout, the lower the institution's borrowing costs and the greater the competitive advantage that it garners through the implied federal guaranty. The result is that massive, hidden subsidies flow to those institutions that present the greatest risks to the larger economy, and in turn give those institutions a competitive advantage that ultimately leads to even greater market concentration—and systemic risk—over time.

If this attack on the dominant banking narrative were not enough, a 2012 Bank for International Settlements research report further undermined the core presumption that a growing financial sector is good for the overall economy. The BIS report authors conclude that growth in the financial sector suppresses economic growth and productivity. The rationale for this conclusion is fundamentally simple and observable: a growing financial sector ultimately drains scarce talent and other resources from the productive sectors of the economy.

Over the course of a quarter century, the leading firms on Wall Street have successfully used their political clout to promote deregulation to their own financial advantage. They have garnered an increasing share of the economic pie, secured a massive public subsidy and undermined the competitive marketplace, while magnifying systemic risk and providing less value to the real economy along the way. The societal problem that ultimately must be confronted is not simply the growth of the financial sector, but its evolution from a competitive industry essential to the efficient allocation of capital to the productive sectors of the economy to a highly concentrated "rent-seeking" oligopoly that uses its political power in pursuit of ends that are increasingly self-serving, and—if the BIS data is to be believed—a drain on the larger economy.

The public has long since turned a deaf ear to claims regarding the essentiality of the too-big-to-fail banks and the critical contributions of modern finance to the common weal. As the belief system that Simon Johnson described as essential to the power of Wall Street lies increasingly stripped of its essential credibility, members of Congress and the administration will be left to choose between the money—the billions upon billions of campaign cash—and the stark reality that there is no longer justification for continuing to support the status quo. 

Saturday, August 17, 2013

Twitter revolution.

If a revolution is not on Twitter, did it really happen?

For sixty years, the military has been the dominant political force in Egyptian politics. The three presidents since 1956, Gamel Abdel Nasser, Anwar Sadat and Hosni Mubarak, each assumed the presidency after leadership positions in the Egyptian Army and Air Force. For sixty years, the army has been the dominant force in an economy with three major sources of foreign currency: tourism, canal fees and sales of cotton. And for sixty years, the Egyptian leaders and their army backers have been at war with the Muslim Brotherhood.

Our attention has been riveted on the Arab Spring, and on events in Egypt in particular, for the past two years. And through this time, we have watched through the lens of our own interpretation of events, of our own essential role, and of our own understanding of politics and democracy. Even as myriad other nations are making the long and difficult transition to popular democracy—Zimbabwe, Myanmar and Rwanda come to mine—we embraced the Arab Spring as our own as we marveled at the role that Twitter and Facebook played, and saw validation of our essential role in those events as Arab participants on the street gathered around our reporters, as if to bring us into their struggle.

It was the new American triumphalism. These events mattered because we were part of them. Our technology was an enabling force. And the aspirations of those battling on the ground centered around our core values. Freedom and liberty were at stake. It was an easy narrative and an easy thrill.

Two years ago, in the middle of it all, President Obama called then-President Mubarak to lay down the American marker. He warned Mubarak “to refrain from any violence against peaceful protesters.” “The United States,” he reportedly said “will continue to stand up for the rights of the Egyptian people.” As later reported, Mubarak admonished Obama in the same call, “You don’t understand this part of the world. You’re young.”

As in Syria, President Obama has come to learn, one hopes, that words are cheap. As we have watched the Arab Spring founder, we have learned reluctantly that sectarian divisions—be they of clan, tribe, nationality or religion—run far deeper than the commitments to democratic values. Indeed, as we watched events transpire in Egypt, the Muslim Brotherhood demonstrated that fact by its deeds, regardless of its words.

Democracy suited the Muslim Brotherhood at this moment in Egypt. With a swift migration from authoritarian rule to a democratic process, those who are most organized on the ground have the advantage. Yet, if anything, the results in the 2012 Egyptian presidential election demonstrated the divisions in the Egyptian electorate, as Muhammad Morsi won a slim majority in the final round of voting 52% to 48%. With voter turnout of only 52%, President Morsi took office with the active endorsement of just 27% of the Egyptian electorate.

Against that backdrop, Morsi moved ahead to take on those who would impeded his agenda and limit the rights to rule that the Brotherhood had worked for so long to win. Those who argued that his narrow victory should have led him to be more inclusive of minority rights and interests ignored the practical realities of democracy. We talk of the importance of minority rights, and our constitutional structure provides significant guarantees in that regard, but that is not the norm. Fundamentally, democracy is a process for selecting leaders, but it does not suggest or guarantee that such elected leaders will either embrace the broader principals of democracy or the rights of those who oppose them. It is a system for the allocation of power, and if successful, the transition of power.

When Morsi largely ignored those who advocated for minority rights, I was reminded of the famous conversation between the newly elected George W. Bush and Dick Cheney. They had just won the contested 2000 presidential election through a 5-4 Supreme Court and asked each other if the narrowness of and questions surrounding their victory make them chart a centrist course and moderate their conservative agenda? No, they decided, “full speed ahead.” They had won, and in a democracy that is what matters.

Accordingly, Morsi moved forward aggressively to take on the power of both the Egyptian judiciary and the army. Both were bastions of the ousted regime, though both still had significant power and popularity across the now divided electorate. In particular, the army retained significant power over the economy, ranging from jobs within the industries it controlled to the ability to set prices for gasoline and fuel.

Morsi’s disregard for the realities of popular opinion peaked when, less than a half a year into his term, he pushed through a new constitution. Over the objections of opposition political parties and leaders, the document was drafted by a constitutional assembly largely comprising his Islamist allies. Just six months to the day since his election, the new constitution was approved through a public referendum by 64% of the voters. Turnout was 33%, therefore the new constitution was actively endorsed by 21% of the Egyptian electorate.

Morsi read President Obama well. Americans have a tendency to embrace political leaders who we can identify with. When Yuri Andropov became head of the Soviet Union, the press largely ignored his role in the crushing of anti-Soviet uprisings in Hungary and Czechoslovakia, and focused instead on his preferences for Johnnie Walker scotch and Dave Brubeck. So too the press coverage of Morsi focused less on the core values and aspirations of the Muslim Brotherhood than on his time at the University of Southern California. After all, what is not to like about a man who ends an interview “Go Trojan!” He could just as well have said “Hi mom!”

Every action Morsi took was legal and within the rules. But more to the point, he understood that to keep American support required that the continue to utter the shibboleths about reverence for democracy and swore fealty to Egypt’s international obligations (read: peace treaty with Israel).

And so he did. But every step of the way, as America cast a blind eye, Morsi was worked to eliminate opposition and to change the rules to tilt the playing field toward his central objective: To assure the continuation in power of the Muslim Brotherhood and steer Egypt toward its Islamist path.

And this is the democratic way. Democracy is a legal structure for the allocation of political power without force. But those who win do what they can to keep power, and those who lose do what they can to get it back. There was ample evidence of that this week as Republicans in North Carolina acted swiftly in the wake of the Supreme Court overturning of portions of the Voting Rights Act of 1965 to pass new election laws that will have the effect of suppressing the participation of voters viewed as less likely to vote Republican.

The events in Egypt are tragic. But as we debate whether we should withhold our foreign aid or not, whether this is a coup or not, and whether or not Morsi must be reinstated, we should step back and recognize that these are local events at play, with a long history, and it is not about us. People in and out of Egypt, on every side, blame America for supporting the other side. Those who believe the action by General Sisi was a coup suggest that he would not have acted without American support. Those who believe Morsi was usurping the rights of the majority of Egyptian suggest that Obama gave him the go ahead as a quid pro quo for keeping the Israeli treaty in place.

The path to democracy is a struggle, and perhaps it is best achieved when Americans turn off their smart phones and pay a little less attention. We think that our participation is critical: our funding, our technology, our sanctioning what is acceptable and what is not. But the evidence may suggest otherwise. Democratization in Myanmar has been astonishing to watch as it progresses along a slow path. Somehow, the generals there have decided to slowly cede power. And that has been the path in country after country over the past three decades. After years of turmoil, the evolution in Rwanda has been equally surprising, even (or perhaps because) that country has limited media access.

In the words of Daniel Patrick Moynihan, perhaps Egypt could benefit from a bit of benign neglect, as far as its American audience is concerned. The Egyptians have to deal with each other and find their own path forward. Egypt does not have the Sunni-Shia split that threatens so many countries in the region, as its population is barely 1% Shia. Instead, Egypt is challenged by the tension between Islamists and secularists, which is perhaps as difficult to reconcile, as at its core the secularism so visible in Tahrir Square in 2011 is anathema to political Islam.

And any president of Egypt has to make peace with, or at least accept the reality of the power of the military and the role of the courts, as the other loci of power in that nation. Apparently, Morsi made a terrible misjudgment about his own power, and now he and the Egyptian people are paying a terrible price. But that is not necessarily a reason that America should do more. It may be a reason we should do less.