No simple choices.

Democracy is a complex process. As we support the expansion and growth of democracies across the world, we should appreciate the challenges it will create for us. Even as our own democracy is becoming increasingly dysfunctional before our eyes, we cling to the notion that it will produce effective outcomes elsewhere, that the new democrats of our creation—Hamid Karzai and Nouri al-Maliki come to mind—will make the choices we think they should make rather than the ones that suit their own political calculus.

The simple reality is that elected politicians each make rational choices based on their own, often very personal, balancing of a variety of factors. They may be elected to serve the interest of their constituents—however that is defined—but the reality is that their motivations are far more complex than that.

It is rare that the future of a community and the process of democratic decision making can be seen in stark relief, but such is the moment that faces the United States Virgin Islands. This week, the legislature of "America's Paradise"—a 105,000 person territory just east of Puerto Rico—will vote whether to approve an agreement negotiated between Virgin Islands Governor John deJongh, Jr. and Hess Oil and PDVSA, the national oil company of Venezuela, the two giant oil companies who together own the now-shuttered HOVENSA oil refinery on the south shore of St. Croix, the largest of the U.S. Virgin Islands.

At stake in the pending vote is nothing less than the economic future of St. Croix, and to a great extent the U.S. Virgin Islands as a whole.

The HOVENSA refinery was constructed a half-century ago on pristine waterfront land, as part of a strategy among the federal and territorial governments to end sugar cane cultivation on St. Croix and replace the largely agrarian economy with an industrial center. Each government had something to benefit from the strategy. For the local government, the industrialization of St. Croix offered the prospect of building a middle class society, while it would allow the United States federal government to get out of the business of being the overlord of a predominantly black, plantation economy.

For fifty years, the strategy worked. Family incomes in the U.S. Virgin Islands grew to far exceed its Caribbean nation neighbors. The Virgin Islands became an economic magnet for workers from the "down islands" seeking greater economic opportunity, and remittances home became an economic driver for the region. Then, eighteen months ago, Hess Oil and PDVSA closed the refinery. Under assault by Wall Street—and in particular hedge fund manager Paul Singer of Elliot Management—Hess Oil terminated all of its refining and distribution activities to focus exclusively on exploration, while new refinery capacity in Venezuela made the HOVENSA refinery expendable for PDVSA. In January of 2012, with no advance notice, the refinery was shut down.

The impact of the refinery shutdown was devastating for St. Croix, and for all of the Virgin Islands. The impact on the small, closed economy was devastating. In the wake of the refinery shutdown, 2,400 jobs were lost on an island of 50,000 residents. Overnight, the local unemployment rate skyrocketed from around 4% to nearly 20%. The shutdown devastated the Territorial public finances as well. As recently as five years ago, the refinery contributed nearly $200 million in corporate and personal income, gross receipts and other taxes to the Territorial treasury, an amount comprising 22% of the General Fund revenues.

In light of that backdrop, the pending vote would seem to entail little drama. After all, on the face of it, the prospect of restarting the refinery under new ownership offers the possibility of new life for a community and economy that is experiencing deep pain. Refinery economics have turned around from a half-decade ago when refineries were closed across the east coast of the United States, and there are now active suitors for the St. Croix facility that remains one of the largest in the world. The prospect of reopening the refinery offers the potential of hundreds, if not a thousand or more high paying jobs. In addition, for the Territorial government that has reduced its workforce by 20% over the past several years, a reopening of the refinery offers the prospect of stabilizing its public finances, and securing the future of a depleted public employee pension fund.

But if public hearings and town meetings held in recent days are any evidence, the prospect of passage remains up in the air. At a meeting the other day on St. Croix, a majority of those in attendance indicated that they opposed the reopening of the refinery. The issue at that meeting, as well as in legislative testimony, was framed using the paradigm of health vs. money. Local activists challenged Territorial legislators not to vote for jobs at the expense of public health, while others suggested that data collected by the EPA and the US Department of Health provided little evidence of adverse health affects beyond personal anecdotes.

Obscured in the "health vs. jobs" arguments was the harsh reality that if the HOVENSA refinery is not reopened, the share of the St. Croix population living in poverty will increase for years to come, with the poorer health outcomes that that outcome entails. All one has to do is look at the example of Detroit to see this issue in black and white. With the closing of industry within that city, the air and water may well be cleaner, yet with the economic decline of Detroit, public health outcomes have deteriorated for children and adults alike. Industrial jobs and public health are not necessarily at odds with each other.

While a “yes” vote offers the prospect of economic rebirth, a “no” vote will assure years of litigation between the Territory and the oil companies, as each has very different interpretations of their rights going forward in the absence of a sale to a new owner, and bankruptcy of the refinery holding company would likely ensue. Rather than the prospect of new jobs and revenues to the local government, if the proposed agreement is ultimately rejected by the Territorial legislature, the only thing the Territorial government will have to show for it will be millions of dollars of legal fees, further draining the public treasury of scarce and badly needed public funds.

But this is a democracy, and thus the votes will not necessarily turn based upon these differing visions of the future. Rather, each of the legislators will consider their own priorities. They certainly will consider those two outcomes, but balanced against those will be the vagaries of local politics, with very personal and obscure twists.

With two days left before the vote, there were only five committed votes in favor of the proposed agreement. Had a vote been taken within a few months after the refinery closed down—while the pain of job losses was still fresh—no doubt attitudes would have been different and senators inclined to vote "no" would have viewed things differently. Yet up until the day of the vote, I continue to believe that the result will be a "yes" vote, because the lesson of Detroit is so clear, and because the future welfare of a generations of island residents may rest with the outcome. But these are democratic votes, and it is a democratic process. And as Tip O'Neill famously said, All politics is local.

And time changes perceptions. Had a vote been taken within a few months after the refinery closed down—while the pain of job losses was still fresh—no doubt attitudes would have been different and senators now inclined to vote "no" would have viewed things differently.

This week, those voting "no" may well look at the show of hands at the public and expect that he or she will be rewarded come election time for doing so. But only time will tell. Public attitudes evolve and the pendulum of public opinion may well swing back, and those who voted "no" may not be rewarded for their vote. But perhaps they won't be rewarded for that "no" vote. If at the end of the day the Territorial legislature turns its back on the prospect of reopening the refinery, the day may come when the people will wake up economic hardship of the path they have chosen. On that sunny Caribbean morning, they will look at the economic devastation around them and wonder, who let this happen? How did they let it come to this?

Note: Since the publication of this piece, the Senate of the U.S. Virgin Islands voted 11-3 to reject the agreement with the owners of the HOVENSA refinery on the island of St. Croix.

Teddy's legacy.

The decline of America’s K-12 education system has been a source of angst for generations. Yet through the past half-century or more, from the Soviet launching of Sputnik to the present, America has led the world in the assimilation of new immigrants, the invention of new industries, and the expansion of the world’s imagination. Somehow, as has often been noted, the same nation whose students who are decried as failures through their elementary and high school years for their performance on international tests are somehow transformed through our—now-decried—higher education system to become the most inventive, adaptable and entrepreneurial workforce in the world.

The most recent of many educational reforms has been No Child Left Behind. The political legacy of two men—George W. Bush and Ted Kennedy—concerned for the plight of those children who were being left behind, No Child Left Behind has done much to undermine the quality of public education for the middle three quintiles of students, while little or nothing doing nothing to uplift the lives students in the most dire and impoverished circumstances. (Those in the top quintile, of course, have always had and will continue to have, the resources and social capital to come out ok, and are the least vulnerable to the predations of the destructive force of federal policies.)

By imposing outcomes on standardized tests as the singular measure of our educational system, No Child Left Behind has done much to usurp classroom time from traditional activities to an ongoing focus on test preparation. Testing that might once have been viewed as one of many means of assessing the volume or quality of learning in a benign context has become the goal in and of itself. And in the process, the underlying values of a national education system that once reflected the diverse priorities of local school boards and parents, have become captive of federal dictates.

The power of the federal government to assert its will, despite only providing a fraction of the funding for K-12 education, should be a cautionary tale in and of itself. In the absence of meaningful data suggesting that outcomes on now-ubiquitous tests are correlated with those attributes that might be seen as essential in a modern workforce—Curiosity, adaptability, inter-personal effectiveness—testing has now been accepted as a valid measure of our success. In essence, by focusing on what, students are being deprived of the more existentially critical why and how. Gone from our educational lexicon are the notions of experiential education. Gone are the insights of John Dewey or Alfred North Whitehead. In their place are hedge fund managers and titans of technology who suggest easy solutions through assuming away the elegantly human complexities inherent in the education of our children.

To this new generation of reformers, evidence of our failure can be seen in the lack the type of productivity growth that has been realized across other sectors of the economy. Unlike the transformation of American industry that has been enabled by technological change and globalization, and process improvement modalities such as business process reengineering and Six Sigma, the essential production function of K-12 education remains essentially as it was a half-century ago: one teacher stands in front of a class of 20 to 35 students—depending on the resilience of property values and taxes in the local community.

The fundamental problem is that at its most basic level, K-12 education is a human system, involving variables ranging from social context, psychological issues and the family systems, to brain science, each interacting differently in each child. It is not a mechanical system and is not amenable to process metaphors as Atul Gawande has so effectively developed to suggest paths to both outcome improvements and cost reduction in the practice of medicine.

The irony is that most of those who decry the state of our educational system, and would push us further down the NCLB rabbit hole, were quite happy with their own elementary school, and with teachers they had along the way. Their advocacy of Teach For America and narrowing the elementary school curriculum to scripted learning and test preparation belies their own experience with teachers whose competencies improved over time with experience and a deepening understanding of the mix of inspiration, discipline and motivation that each child needs.

Voices on the left and the right continue to emphasize the fundamental failure of NCLB. Consider these two rebuttals to the status quo. First, from Geoffrey Willis, of Thinking Right:

One major flaw with using standardized testing to measure the success or failure of an educational system is that it measures neither creativity or work ethic both huge factors in societal and economic success.  America has been a huge immigration draw as people recognize that with creativity and hard work the sky is the limit and America has benefitted from the huge influx of talent that has been drawn to this country.  What draws the world to the United States?  A free market economy that attracts these immigrants from all over the world and the lack of any traditional class or other societal structures that restrains success in other parts of the world.  These are both things that America has had a huge international advantage for more than a century but which it is now turning its back on in an effort increase its world standing “in the rankings.

Fortunately, these tests are misleading and not really indicative of the quality of education in the United States.  Unfortunately, these tests have become the life-blood of school administrators to show the “success” of their school driving more and more time into preparation for standardized testing at the expense of real education.  Studying for the test has become the norm while real learning, expression and creativity have taken a major hit.  This educational wrong turn was magnified by the horrible “No Child Left Behind” policy which played to the lowest common denominator rather than allow educational flexibility.  This soul crushing policy really should have been named “No Kid Can Get Ahead Or Be Creative” policy.

And from Diane Ravich on the other side:

I came to the conclusion ... that No Child Left Behind has turned into a timetable for the destruction of American public education. I had never imagined that the test would someday be turned into a blunt instrument to close schools — or to say whether teachers are good teachers or not — because I always knew children's test scores are far more complicated than the way they're being received today.

But in just ten years, No Child Left Behind has become an institutional presence in Washington, DC. NCLB has spawned new industries that now each have their own line items in the federal budget, and before our eyes, we have witnessed the emergence of a new “iron triangle” of these new industries, their lobbyists and an entrenched bureaucracy that has made the permanence of the NCLB paradigm all but a foregone conclusion.

This should not be. No Child Left Behind was a mistake, and as rare as it might be in Washington, the conclusion should not be to amend it and reform it, but rather to end it. Just this once, our leaders in Washington should admit a mistake and return to the status quo ante. If the issue is teachers unions, have that fight in the open. If the issue is diversification of the control over local funding, take that on that issue. But just this once, in the face of a failed concept—one whose failure will stay with us for decades—one we should prove our ability to admit our mistakes and move on. Let the states and school districts tackle the challenges of educational reform, and admit that the federal hand has little, if any, value to add to that process.

As Senators deliberate the reauthorization of No Child Left Behind, perhaps they should reflect on three questions:

When did America become great by diminishing aspirations rather than enobling them. 

When did America become great by narrowing fields of learning rather than expanding them.

When did America become great by reducing our expectations of our children rather than raising them.

Finally, they should ask themselves which of them would have preferred the education that we are now creating over that of their own childhood experience. And the answer to that question should be self-evident. 

The stuff that dreams are made of.

I never tire of the ceremony of a college graduation. This past week, attending my daughter's graduation from Johns Hopkins University, I watched a thousand young men and women begin the next step of their life journeys. A thousand students, from literally every corner of the globe, walked across the stage, their faces beaming, while in the audience parents, siblings, relatives and friends watched in pride.

Graduating from college is a threshold step in the American dream. Not just for students, but for their families, and for past and future generations. When we focus our attention only on the students, we tend to lose sight of the trans-generational significance of higher education.  We lose sight of the toil and sweat of grandparents, of the diligent support and financial commitment of parents, and of the generations to come whose opportunities will be transformed.

An African American friend and colleague of mine once remarked that his completing college--to say nothing of his law degree and doctorate--would have a greater impact on the wealth of subsequent generations than if had made the NBA. An NBA star can make millions, but dollars alone can easily dissipate. But by graduating from college, the family culture and expectations around education would be forever altered, and with it the life opportunities of his children and of generations to come.

And his observation is more true now than it was a decade or so ago when he made it. The growing issue of income inequality is in large measure a product of the growing premium that competitive globalized labor markets place on educational attainment. The data are well known. On average, high school graduates earn about half of what college graduates earn, and the greater the level of educational attainment, the more stark the comparison. In a similar vein, the economic collapse of 2008 had minimal impact on those with at least a bachelor's degree, while the economic opportunities for others were devastated, and they have yet to recover.

In this economic landscape, improving educational attainment outcomes has become a primary goal of public policy. In light of this goal, two key metrics have come to define--in public policy as well as in US News rankings--the quality and effectiveness of individual higher educational institutions: student persistance--the percentage of students who return to school for their second year--and graduation rates. Accordingly, colleges invest an increasing share in limited resources to providing support to struggling students--as well as seeking "better" students--to improve their outcomes along these metrics, and thereby demonstrate their increasing quality and effectiveness to potential students, alumni donors, accrediting bodies, and the political establishment.

However, as much as we prefer simple measures of complex problems, equating success with persistance and graduation rates may obscure a more nuanced story. Over the past several decades, we have doubled the college participation rate--the share of the high school graduates who go on to college--to over 70%, and along the way a higher share of college matriculents are first generation students. For these students, whose parents did not attend college, the definition of success is often more complicated.

Even as my wife and I flew to Johns Hopkins--an elite university where student persistance rates are nearly 100%, and well over 90% graduate--she told me about a student of hers--call her Marielle--who will not be coming back for her sophomore year at Mills College, the small, liberal arts college where she works. Marielle comes from a rural family, is the first in her family to go to college, and did well in her first year. But she will go home because her mother told her the she and Marielle's brother "need her to be home." Perhaps she will continue to take classes at the local community college next year.

Marielle's is not an unusual story. Unlike Johns Hopkins, almost one-third of Mills College students are the first in their family to attend college. The most recently published data suggest that 77% of students return for their second year, and 63% graduate. Marielle will go home, and she may or may not return to school.

But Marielle's departure should not be viewed--as statistically it will be--as evidence of failure by Mills College. In our higher educational marketplace, schools play different roles and take on different challenges. Johns Hopkins is a world-renowned research institution, while Mills is an excellent undergraduate college that takes pride in admitting students like Marielle, and supporting them to go as far as they can. And each school defines success differently and official statistics should reflect these differences. By finishing a year of college, Marielle has embarked on a transformative pathway that will continue in her family. She may accede to her mother's wishes, but one thing is clear: she has taken the important first step and her own children will likely go to college. They will have the opportunity to complete the journey that Marielle started. In the world of first generation college students, Marielle is a story of success.

Marielle's story made me appreciate all the more the majesty of the commencement at Johns Hopkins. This was the moment that one imagines Marielle will dream about, and those dreams will uplift generations to come. Just as my grandfather--like so many others--brought his family across the ocean for opportunities that would never be his, Marielle has become the spark that will lift up her own future family. Thus, those who may pronounce Marielle a failure when she heads home miss the point. Whether Marielle ultimately completes her degree or not, she has begun the process of changing her family's culture and expectations around education--and the economic possibilities attendant with that change--for generations to come.

For all of our fretting about the cost of higher education, we should never lose sight of its transcendent power and purpose. Stories of how Governor Rick Perry wants to take apart the university system in Texas--as his advisors suggest that it could better meet the needs of industry and workers if it is restructured closer to the community college model--miss the point. Higher education in America today is not simply about meeting the labor force needs of industry today; it is about the elevation of the human spirit and the potential created for generations to come. It is not even simply about meeting the needs of students today, but it is where the work of families from one generation to the next bears fruit, and the historical trendlines of economic determinism are broken down.

Walking across the stage at Johns Hopkins along with my daughter were students from across the globe. Parents from China and India and Iran and Brazil sent their children to Baltimore, carrying their hopes and dreams--as well as those of their ancestors and of generations yet to come. They came because the American higher education system--itself born in imitation of the great universities of England and Italy and Germany--is now the envy of the world, and their children will graduate not just with skills, but empowered to remake the world and reimagine the future.

Based on data from the National Center for Economic Statistics, Marielle's story is the same story that first generation college students have faced for decades. The integration into the academic life and the social life of college is harder for them than for those whose parents went to college. But first generation college students like Marielle are the torchbearers of the American Dream. They are driven not by what a college education offers them, but what it will do for their children. Their dream is not simply of wealth or security, it is to sit in the seats as my wife and I did, and see the fulfillment of their own dreams in their children.

Globalization and its discontents.

Apple Computer issued bonds last week. Issuing $17 billion of bonds to buy back stock and pay dividends might seem odd for a company that is sitting on an estimated $145 billion of cash, but much of this money was earned overseas and Apple, like many other transnational U.S. corporations, is refusing to repatriate foreign profits because of the tax obligations that would be triggered under the US tax code. Issuing bonds to satisfy shareholder demands was an intuitively illogical, but ultimately financially rational, solution.

The situation is a classic example of moral hazard. Having offered transnational corporations a tax repatriation holiday in 2005--a "one-time" opportunity to bring foreign profits back home for a special, low 5.25% tax rate--corporate America is now holding out for a second bite at the apple, with as much as $2 trillion held hostage in offshore accounts. Cisco Systems CEO John Chambers, whose company's offshore profits approximate $40 billion, threw down the gauntlet recently, stating that Cisco would create no new jobs in the United States until they get their tax holiday.

China has been the largest beneficiary of the offshoring of jobs by U.S. corporations that have produced the trillions of dollars in question. Yet despite seeing millions of workers lives lifted out of extreme poverty, the Chinese are not happy. They believe that they--like the U.S. treasury--should be entitled to a cut of those profits. After all, if Chinese workers actually owned the means of production, much of that lucre would belong to them. Instead, China's take has been limited to the jobs that have been created, along with whatever amounts were skimmed off along the way for the personal nest eggs of Chinese officials.

The Apple bond sale came just two weeks after the spring meeting of the International Monetary Fund, a gathering that focused on the eradication of extreme poverty and where, as reported by Annie Lowery in the New York Times Magazine, World Bank President Jim Yong Kim pronounced 2030 as "the global target to end poverty." Kim's optimism comes on the heels of the success of the world community in cutting the share of the world population living in extreme poverty by fifty percent, five years ahead of the target date of 2015 establish a quarter century ago, as the rate fell to an estimated 21 percent in 2010, from 43 percent in 1990.

The linkages between the two events--profits earned by U.S. corporations overseas and the amelioration of extreme poverty as defined in official statistics--is not something that is widely embraced in the development community. Indeed, the New York Times article is quite revealing in its conclusions. "For much of the improvement, the world can thank one country: China, which alone accounts for about half of the decline in the extreme poverty rate worldwide. It has also driven significant gains across the region. In the early 1980s, East Asia had the highest extreme-poverty rate in the world, with more than three in four people living on less than $1.25 a day. By 2010, just one in eight were."

China? The rise of the Asian Tigers--Singapore, Taiwan, Korea, and Hong Kong (then still a British colony) from destitute poverty to affluence came long before China decamped from its faith in the Little Red Book and began its journey down the capitalist road. It is striking that the same newspaper that won Pulitzer Prizes for its reporting on the offshoring of American jobs to and related corruption in China could showcase a piece on the global decline in extreme poverty without even a nod to the American middle class that made it all possible, and paid the dearest price.

Neither the Time's article--nor for that matter the communique published in the wake of the IMF meeting--ever once mention the word "trade", yet it has been one of the driving forces in global economic development over the past several decades. The alleviation of poverty in China and India--the countries that data suggest have seen the greatest alleviation of extreme poverty--is in particular a direct result of the U.S. embrace of free trade. The rise of the Asian Tigers was based on the export-driven development model that raised Japan up out of the ashes of World War II, and that was subsequently replicated across much of the rest of Asia. The Times article cites the population migration in Cambodia as an example of where extreme poverty has been reduced. "Cities bolster access to health services and public resources; infant-mortality rates, for instance, are 40 percent lower in urban Cambodia than in rural Cambodia. And workers themselves become more productive, often by making the switch from labor-intensive work like farming to capital-intensive work like manufacturing." Yet there is no suggestion of the global economic changes that enabled that transformation.

A national export-driven economic development strategy requires two essential elements. First, one or more trade partners willing to accept trade imbalances--to import more from than they export to the country in question. And second, a stable, if not pegged, currency relationship, which is necessary to ensure that the intentional trade imbalances do not result in the appreciation of the export country's currency, thereby increasing the cost of their exports and undermining the export strategy. But for the willingness of trade partners to support large trade imbalances with Chinese--and tolerate the attendant destruction of domestic employment--China's dramatic economic growth would not have been possible. Indeed the relationship described by the New York Times article is inverted: The world need not thank China. Rather, China should thank the world.

U.S. leadership in the promotion and support of global trade has been essential to the alleviation of extreme poverty. While Europeans have for years evinced a deep disdain for American capitalism and imagine their system to be more compassionate, the European polity has steadfastly resisted the national sacrifice that stronger measures in support of open trade with developing nations would require. The French continue to resist opening their agricultural markets to Portugal and Greece, much less to African nations, while Germany has shown no appetite to undermine its own manufacturing export machine that other nations might benefit. Only in America would politicians forsake their middle class constituents and vote for free trade agreements to the benefit of their industry contributors--and the developing economies of the world.

In 1992, Ross Perot famously described the giant sucking sound of American middle class jobs that would be lost in the wake of free trade. And he was correct: In the two decades that ensued, millions of American jobs were lost as entire industries shifted production offshore. But over the same period, as celebrated at the IMF summit, hundreds of millions of people across the globe have seen their lives lifted up  out of extreme poverty.

Companies such as Apple and Cisco Systems, and nations such as China, that have benefited from free trade are part of a closed system that has been built in large measure on the strength and confidence of the U.S. consumer. Yet those beneficiaries have been largely indifferent to the plight of the American middle class--whose economic well-being and confidence in the future has been undermined by the expansion of free trade--focusing instead on their own self-interest and entitlement to the benefits of trade. The leaders of Apple and Cisco gripe about tax rates, while the leaders of China disdain American concerns for their predatory trade practices.

If the world is to sustain the momentum of economic development that is essential to Jim Yong Kim's optimism, the companies and countries that have benefitted from expanding free trade have a collective stake in figuring out a path forward that stanches the downward spiral of the American middle class. Failing that, the political coalition that has promoted free trade to date will ultimately unravel, as an increasing number of Americans adopt the stance of the leaders of Apple and Cisco and China, and decide that it is time to ignore the interests of the rest of the world and just pay attention to their own self-interest.

Our enemy.

When I sat down to write this morning, I did not want to write about the Boston bombing and the ensuing manhunt. What was there left to be said? And yet, we know next to nothing.

I badly want to hear Dzhokhar's story. He was a classmate and friend of a close family friend in my native Boston, and by all accounts, did not "come across as someone who would do anything like this."

But who does? In the recent debate over gun control, people spoke with ease about denying purchases to the mentally ill, but is that so easy to define? Growing up in a family of psychotherapists, I found that debate somewhere between ludicrous and horrifying, as the mentally ill were presumed to be a new category of the "others" that have long been the source of so many of our ills. The conflation of despicable acts with mental illness, and the ensuing belief that if we identify mental illness we can limit atrocities is somewhere between wishful thinking and utter denial of a much more threatening reality.

I do not want to hear Dzhokhar's story to understand it, or to feel empathy, or forgiveness. The events at the end of the Boston Marathon were horrific. In a way, the magnitude of the maiming--runners who came to run a race and left with no legs--outstripped even the death. Scores left with limbs lost and lives forever changed. There is nothing he can say to make us understand the wanton cruelty of his and his brother's act, no personal story nor political rationale that will make us sit up and say, "Yes, I get that."

In his essay Inventing the Enemy, Italian essayist Umberto Eco describes the need for defining the other as the enemy as an enduring part of what binds societies and peoples together. His is not a judgement, but an observation.

"Trying to understand other people means destroying the stereotype without denying or ignoring the otherness. But let us be realistic, these ways of understanding the enemy are the prerogative of poets, saints and traitors. Our innermost impulses are of quite another kind."

Growing up in Boston was to feel the constant animus between communities that together comprised what to the outside world was a great cultural and intellectual capital. To paraphrase Tom Lehrer, the great Harvard mathematician and humorist, the white folk hated the black folk, the Irish hated the Italians, the Catholics hated the Protestants, and everyone hated the Jews.

The hatreds in Boston were very real, and the rage lay just beneath the surface. And they boiled over in moments such as when Louise Day Hicks led her community of the white working class to protest the racial integration of public schools. It was the Other that bound us together. We all hated the Yankees, the Canadians (the team, not the people), and the Lakers.

Despite the years since 9/11, and despite the years of watching Palestinian bombs killing indiscriminately on buses and in cafes in Israel, the bombing in my hometown last week gave me a visceral understanding of British national anger at the Boston Irish community--led by the Kennedy family--lending financial and moral support to the IRA, whose bombs were as indiscriminate in their slaughter and maiming. It gave me an understanding of a Russian friend's anti-Chechen animus for years of similarly indiscriminate bombings in Moscow.

I want to hear Dzhokhar's story because of the rage that I grew up with, that I inherited from my father as literally as DNA is passed down from one generation to the next. My father's rage was more consuming of his life than mine. For me it comes only in moments, and it passes, but it is consuming in those moments. I have experienced it as a vestige of the immigrant experience. His parents came from Russia, 1,000 miles north and a bit west of Dzhokhar's family home. I have often commented that the dislocation of that migration took four generations to dissipate, as I imagine that my children finally and fully experience life without the rage I experience.

Eco's fundamental observation is that we define ourselves by who our enemies are, that civil society relies upon the presence of the other as a central organizing principle. A week ago, before Boston dislocated my thinking, it occurred to me how much easier it was to be President during wartime. Bill Clinton was the first President of my lifetime who governed without a significant war, and since the collapse of the Evil Empire, the need for a new enemy has been tangible in our politics. Eco talks about the millennial anticipation of the Anti-Christ as an animating force in Christendom and Europe's slow evolution to its modern form, and we watched over the past two decades the labeling of our adversaries as the Anti-christ, including Saddam Hussein and Mahmoud Ahmadinejad.

In the absence of definable enemies, as I learned in Boston, we turn on each other. Perhaps it is only with the waning of the wars of my youth that this has become so apparent in our national politics. Now, Democrats and Republicans have turned on each other in the absence of a common enemy, with new permutations of class warfare where it is the wealthy who resent the poor, and where our President is the Anti-christ. We have taken the art of cultivating resentments and channeling hatreds to new heights, across multiple new platforms.

I want to hear Dzhokhar's story because his and his brother's assault was so deeply personal, in a way that was obscured in 9/11 by the large scale nature of that tragedy. He chose to place bombs in crowded places. His action was both personal and impersonal. His life story as written across the web and in the words of those who knew him lacks a sense of animating rage.

I want to know how he took the step that so few take, to turn on one's enemy and in a deeply personal act inflict horror upon them. Defining this as the action of the Other--one more Muslim Salafist driven by religious rage against modernity--is not enough. This was a personal act. I have to believe that there is something there that makes Dzhokhar different, because it is too threatening to think that there isn't.

Ben's choice.

When former Reagan OMB Director David Stockman charged Ben Bernanke with  “exploding the Fed balance sheet” in his recent New York Times op-ed piece and in various interviews on his book tour, he was tapping into a topic rife with controversy and skepticism. Few areas of our politics are as rich with conspiracy theory in the public imagination as the workings of the Federal Reserve Bank.

Ben Bernanke has been a stalwart of federal economic policy since the 2008 collapse. While most of the original crafters of TARP and the bailouts of the banks are off writing their memoirs, Bernanke has soldiered on. Someday, perhaps, history will credit him with guiding the U.S. economy—and in its wake the rest of the world—through a treacherous time, but that time has not yet come.

From a certain perspective, Bernanke has done an admirable job. After all, while the rest of the advanced industrialized world—notably Europe and Japan—continue to struggle to find a path to growth, the U.S. economy is growing—albeit at a slower rate than in prior recoveries. And for all the continuing anger at the financial sector, the U.S. banking system has returned to viability, while European banks in particular continue to navigate a precarious path forward. Every month we see new evidence of the long, slow implosion of the Eurozone, while Japan’s failure to escape its long-running recession is now the stuff of legend. Meanwhile, flight capital from the rest of the world’s continues to strengthen the dollar as the reserve currency of the global economy and push U.S. Treasury yields to historic lows.

There are two particularly crimes that Stockton and others lay at Bernanke’s feet. The first is the impact of keeping short-term interest rates near zero. Facing the disinclination of the Congress and the U.S. public to recapitalize the banking system directly, Bernanke has used monetary policy to achieve this outcome. It is now (somewhat) widely understood that one of the primary objectives in keeping interest rates low has been to allow a “carry trade” whereby banks borrow funds from the Fed at near zero cost and purchase higher yielding U.S. Treasury securities, and earn a spread that flows through their earnings to rebuild bank assets that were destroyed with the collapse of housing bond values.

The consequence of this, as Stockman and many others have pointed out, is that it has enriched the banks while impoverishing the elderly, worker retirement systems and other savers across the economy. Our parents and grandparents who live off their savings have seen interest earnings on certificates of deposit decline from the range of four or five percent to below one percent. Similarly, the now-critical underfunding of public pension systems—which were universally fully funded a decade ago—is in part a direct result of Federal Reserve interest rate policy.

Bernanke, as Fed chairman, had to make a choice, and he did. Keeping the Fed Funds rate at near zero has had little to do with stimulating bank lending—and indeed the lack of lending is a major criticism of the banking system—but rather it has been to rebuild bank balance sheets that were destroyed with the 2008 collapse.

This focus on rebuilding the balance sheets of our largest banks parallels the second charge leveled at Bernanke. The Federal Reserve Bank balance sheet has grown significantly since the 2008 collapse. At the end of August 2008, just before the ensuing September crash, the Fed balance sheet showed assets and liabilities (which are equal in the language of Fed accounting) of $909 billion. Four and one-half years later, as of March 27th, Fed assets and liabilities had more than tripled, to $3.2 trillion. During this time, bank deposits with the Fed (shown as liabilities on the Fed balance sheet, because the they are assets of the depositing banks) grew from a negligible $19 billion to over $1.8 trillion.

For most people in the world, the previous paragraph is largely incomprehensible, so a few comments on monetary economics is in order.

As the U.S. central bank, the primary role of the Federal Reserve Bank is to regulate the money supply. That is to say it literally manages the amount of money that is in circulation. At the upper edge of every U.S. dollar bill are the words “Federal Reserve Note,” indicating that the dollar is “fiat” (or paper) currency issued by the Fed. Historically, the primary objective of the Fed has been to control inflation, though in recent decades it has been charged as well with keeping unemployment at acceptable levels. An essential premise of monetary economics is that a rapid increase in the money supply will necessarily lead to an increase in inflation, based on the very simple notion that if there are more dollars floating around purchasing the same amount of stuff, the price of stuff will rise as people throw more dollars at it.

Traditionally, one of the primary ways that the Fed increases the money supply is to lend money to the banks that are members of the Fed system, which they would then lend out to private borrowers. This has the effect of putting that money into circulation in the economy, and by lowering the cost of money (the Fed Funds rate) the Fed can increase the amount of lending. But as an alternative, when there is little borrowing going on at any price--such as during the current period of massive private sector de-leveraging--the Fed can put new money into the economy is by purchasing securities from banks.

This practice, generally referred to as quantitative easing, allows the Fed to put new money into circulation even if there is little private lending going on. Here is how it works: If a bank owns a bond and sells that bond to the Fed, the Fed literally pays for that bond by creating currency that it gives to the bank in exchange for the bond. One day, the bank owns $1 million in bonds, the next day it has $1 billion in cash. After that transaction, the Fed has a new $1 million in assets (the bonds it purchased) while the bank has newly minted money. On the liability side of the Fed balance sheet, the Fed shows that $1 million as either bank deposits, if the bank is not planning on lending that money out in the near future, or bank notes, similar to those in your wallet. (Just to close the circle, should the Fed want to slow down economic activity and inflation, it would do the opposite, selling securities to banks, effectively taking cash out of circulation and reducing the liquid resources available to the banks for new lending.)

Based on the Fed balance sheet numbers noted above, in the post-2008 period, the Federal Reserve has “inflated” the money supply by around $2.3 trillion. According to Bernanke detractors, this growth in the money supply must necessarily portend disaster. The accusation is that Bernanke is pumping up the money supply in order to “monetize” or devalue, the debt of the government. The monetization of debt constitutes nothing less than the expropriation of savings from the virtuous, and Bernanke’s actions will ultimately result in the impoverishment of America, suggesting images of Weimar-era Germany.

But there is an alternate perspective.

Back in the spring of 2008, I happened to be in the offices of Bear Stearns the day that its sale to J.P. Morgan was announced. The collapse of Bear Stearns marked the beginning of public discussions of the magnitude of bank losses in bad housing bonds that would ultimately lead to the passage of the $700 billion Toxic Asset Relief Program, or TARP. A colleague of mine, a very bright guy named Andre, made the casual, yet prophetic, observation, that aggregate losses across the U.S. banking system in bad housing bonds was far greater than the hundreds of billions of dollars then being discussed, and would ultimately be in the range of $2 to 4 trillion dollars. (I remember the conversation well because it was the first time I heard the word “trillion” used in casual conversation).

Andre’s casual prediction that Spring day has turned out to be an accurate demarcation of the range of bank losses in the 2008 collapse. These were real losses in real dollars from the asset side of the U.S. banking system. In some cases, U.S. banks have recognized (an accounting term that loosely translates into “admitted to”) these losses, while to a great extent accounting rules have allowed banks to defer loss recognition, so these bonds remain on the books. The TARP program, incidentally, was a complete failure specifically because it would have required banks to recognize the magnitude of their losses.

Ultimately, Andre’s $2 to 4 trillion dollar estimation of losses mirrors the amount of value that Bernanke is seeking to restore to bank balance sheets. Bernanke has essentially broadened the role of the Fed from managing inflation to assuring the viability of the banking system. His primary tool for doing this has been “quantitative easing,” a practice widely viewed as a means of managing the money supply in a period of low loan demand, but which is being used by Bernanke as a means to recapitalize banks, increase their liquidity and restructure the risk profile of their balance sheets.

The extent of Bernanke’s success to date can be seen in the $1.8 trillion of bank deposits referenced above. According to this perspective, what detractors view as excess money supply creation can be seen from Bernanke’s view new money channeled onto bank balance sheets necessary to replace the assets that were lost in the 2008 collapse and thereby restore solvency to the national banking system. In this view, the $2.5 trillion growth in securities held by the Fed reflects its success in converting long-term assets on the books of private banks to cash, and thereby reducing the aggregate duration of bank assets and further increasing bank liquidity.

Bernanke detractors are unarguably correct on one score: Fed policy of keeping the Fed Funds rate near zero was a policy choice between the interests of the banks and the interests of savers across the economy. The destruction of the solvency of senior citizens and pension funds was deemed by Bernanke to be acceptable collateral damage of policies designed to save the nation's largest banks.

Bernanke faced a dilemma of the sort that few public officials are ever forced to confront. Neither the banks nor the political system were prepared to take the steps necessary to stabilize the banking and economic system. The banks that held the toxic assets that effectively made them insolvent steadfastly refused to sell those assets as envisioned by the creators of the TARP program, while our politics made the nationalization of those insolvent banks a non-starter. Bernanke was clearly of the view that a collapse of several major banks was for all involved the worse outcome than the destruction of the savings of millions of people across the economy, and he acted accordingly.

David Stockman blames Bernanke specifically for making a choice that destroyed the virtuous at the expense of the profligate, and so he did. But the predictions after the fact by Stockman and so many others about how much better off we would be today if instead the banks had been allowed to fail are easy to make but impossible to prove.

But the “exploding the Fed balance sheet” debate is one for which we ultimately will have an answer. If Bernanke’s strategy of recapitalizing the banking is ultimately successful, the $2 trillion or so of new currency created under his watch will ultimately come to replace bank assets lost in the 2008 collapse, restoring solvency to the banking system but resulting in little material net increase in the supply of money in circulation. If Bernanke’s detractors are correct, those trillions of dollars will instead become the source of new and uncontrollable inflation. This is an empirical question, and the answer will largely determine how history judges Ben Bernanke.

Handmaidens of our sorrows.

The New York Times published op-eds last weekend by David Stockman and Jeffrey Sachs, each once luminaries on the national and international stage. Both wrote with a passion that befitted their once lofty status, and yet each seemed to demand our attention, beseeching us to heed his unique wisdom, perplexed that we pay him such little regard.

David Stockman wrote of the irreversible decline of America like a man possessed. In what surely must be a précis of his recently published book, Stockman goes on for 2,700 words about the collapse of America. It is a historical ramble, going back to the New Deal, cataloging the criminal failings of monetary policy and the bi-partisan destruction that our politicians have unleashed on everything that once made America great. Don't get me wrong, I have my moments of being a schoolmarmish debt scold and find in Stockman a soul mate of sorts in his understanding of the deep-seated corruption that has aided and abetted the financialization of our economy to the detriment of the common weal. But his is the writing of a man on the verge of a nervous breakdown.

Sitting at the opposite end of the political spectrum, Jeffrey Sachs makes observations that are very similar to those made by Stockman. He too sees an economy in decline, one that has failed the middle class and that is systemically unable to compete with the rising global economic powers. But unlike Stockman--who concludes that America has reached "end-stage metastasis" and with despondency concludes that there is nothing to be done because "the way out would be so radical it can’t happen"--Sachs mirrors Stockman in his litany of the ills that afflict us, but then offers up surprisingly small bore solutions. Where Stockman would undo the corrosive intertwining of politics and commerce that have characterized western civilization at least since Niccolò Machiavelli was the advisor the Medici family, Sachs proposes a prescription of increased investment in transportation infrastructure, solar and wind power, and job skills training. Where Stockman is unrelenting, Sachs is decidedly unconvincing.

Stockman and Sachs are not strangers to charting the course of radical economic change. Stockman was a leading figure in the Reagan Revolution--where he served as Reagan's Director of the Office of Management and Budget--implementing the supply-side economics and "deficits don't matter" policies that are now the target of his critique. Indeed, in the midst of a rant that casts the net of blame widely, Stockman excuses only himself, offering his version of Captain Louis Renault's apologia--I am shocked, shocked to find that gambling is going on in here--telling us that he resigned as OMB Director when he perceived the "destruction of fiscal rectitude under Ronald Reagan." But he offers this with no sense of irony that the policies that he eagerly embraced in his 30s are the very ones that three decades later he now sees as central to our national decline.

Jeffrey Sachs’ revolutionary moment came almost a decade after Stockman. Like Stockman, Sachs was in his mid-30s when, as a Harvard economist, he served as an advisor to Mikhail Gorbachev and then Boris Yeltsin during the end stage of the collapse of the Soviet Union. While Sachs has denied his complicity in the massive theft of Russian natural resource wealth that ensued, the privatization of Russian industry that was central to the Yeltsin-era economic program became the engendered the rise of the Russian oligarchs.

The death of Boris Berezovsky last month in the wake of legal battles with Roman Abramovich was a stark reminder of the enduring fortunes that were created in the chaotic end of the Soviet Union. While Bloomberg News describes Berezovsky as a self-made billionaire, this is a charitable description. Berezovsky and Abramovich together acquired Russian state-owned oil assets that then comprised one of the world's largest oil companies for literally pennies on the dollar, an opportunity made possible only by the tragic mix of the deep corruption of the Russian state and the intellectual firepower of the Boris Yeltsin's advisory team, of which Jeffrey Sachs was a prominent member.  Using words that evoke Stockman’s, Sachs resigned from Russia after a few years, having "found corruption to be growing and out of control."

In a way, Stockman and Sachs were each naifs whose intellectual capabilities fell prey to the political will to power. Jeffrey Sachs engaged in the world of international economics at a unique moment and crafted strategies for the complex restructuring of failed socialist economies. But where Sachs saw a theoretical path to recapitalizing a bankrupt economy, the Boris Yeltsin’s coterie of kleptocrats found a means to amass unimaginable personal wealth. No doubt Sachs was shaken to see how well intended advice on how to bring new capital into the failing Russian economy could be turned to personal and political avarice.

For his part, when David Stockman was at the height of his power, he was wont to say that he understood how the world worked. It was a notion that was central to his youthful arrogance. But like Sachs, Stockman did not understand the world he was in as much as he thought, and in large measure, the destruction of fiscal rectitude that he so decries came on his watch. Stockman failed to see how legitimizing unbalanced budgets would completely transform our politics, how it relieved Congress of the singular duty for which they are elected: the duty to make choices. Henceforth, they would not have to choose between cutting services or raising taxes, they could have it all, and increase services and entitlements even as they cut taxes.

As a young man in his 30s, David Stockman offered the intellectual rationale for the fiscal profligacy that he now decries as the source of our demise. As a young man in his 30s, Sachs became an intellectual superstar on an international stage, only to be humiliated as the co-creator of the greatest theft in world history. They each write with a passion about the problems facing our country today, yet each seems to wonder why no one seems to be listening. Perhaps it is because neither talks honestly about the role he played in what each clearly sees as a tragic moment in our history.

Stockman and Sachs each helped to set in motion historical forces that plague the United States and Russia to this day, and in each case it was because of the unintended consequences of making large scale changes in highly complex economic and social systems. Our economy today has been beset by the consequences of a number of deliberate public policy initiatives, including free trade, financial services deregulation, and education reform, that each have had and continue to have dramatic and adverse impacts on our society and our economy that were not intended by those who supported those changes.

The deep pain and tragedy of unintended consequences are experiences that Stockman and Sachs share, and that they each carry with them to this day. We need them to write about that, because that is where they have the greatest insight to offer, and the side of their stories that people most need to understand.

The oldest story in our Republic.

March was an big month for the big banks. Little by little, the tragedy of Sandy Hook Elementary School is fading into memory, and the NRA and the gun lobby are proving themselves more than capable of staving off legislative reforms that according to public opinion polls enjoy broad public support. With the withering of gun reforms, the power of political money and the ability of special interests strategists to drive wedges between Red America and Blue America is once again proving out.

And why do the banks care? Because slowly but surely, people are coming around to the understanding that there is no solution to the concentration of risk in our financial system that does not begin with reducing the size and market share of our largest institutions. And only the political muscle of the financial industry lobby--manifest in political contributions and lobbying prowess--can continue to thwart this emerging consensus.

Two weeks ago, the President of the Dallas Federal Reserve Bank, Richard Fisher, spoke his mind as he said that the time has come to dramatically reduce the size and market power of our largest banks:

"Here are the facts," Fisher said. "A dozen megabanks today control almost 70 percent of the assets in the U.S. banking industry. The concentration of assets has been ongoing, but it intensified during the 2008–09 financial crisis, when several failing giants were absorbed by larger, presumably healthier ones. The result is a lopsided financial system. Today, these megabanks—a mere 0.2 percent of banks, deemed candidates to be considered “too big to fail”—are treated differently from the other 99.8% and differently from other businesses. Implicit government policy has made the megabank institutions exempt from the normal processes of bankruptcy and creative destruction. Without fear of failure, these banks and their counterparties can take excessive risks." 

Fisher went on to cite the estimated $50 to $100 billion in annual subsidies reaped by these largest institutions, to the detriment of the 5,570 other banks across our economy upon whom our economy relies for the depository services and lending that is so critical to a healthy private sector and economic growth.

Richard Fisher's speech came on the heels of a report issued a week earlier by Democrat Senator Carl Levin and Republican Senator John McCain on the "London Whale" trading losses at J.P. Morgan. The Levin-McCain Permanent Subcommittee on Investigations report suggested the need "to tighten oversight of banks’ derivative trading activities, including through better valuation techniques, more effective hedging documentation, stronger enforcement of risk limits, more accurate risk models, and improved regulatory oversight." The report, however, documented the practical impossibility of implementing the needed reforms as J.P. Morgan traders had proven their ability to hide losses from internal monitoring for months at a time, to breach bank-imposed risk limits, to manipulate risk evaluation models, and to "dodge or stonewall" regulatory oversight.

The imperviousness of large financial institutions to effective risk regulation is not news, and was argued persuasively by Greenlight Capital President David Einhorn in the months before the 2008 meltdown, yet a half a decade has passed and next to nothing has been done to mitigate trading risk and temper the unchecked derivatives exposure that continues to threaten the commercial banking system.

The conflict between the interests of the banks and the public interest is as old as the Republic. Popular distrust of Wall Street runs deep, and historically has been a conviction held across the political spectrum. In his speech, Fisher highlighted bi-partisan concerns over the issue, citing the McCain-Levin partnership as well as such odd Senate bedfellows as Democrat Sharrod Brown and Republican David Vitter finding common cause in asking the Government Accountability Office to quantify the hidden subsidies to our largest financial institutions.

To date, however, the industry has been effective in deflecting concerns over the growing concentration of financial risk and power. After the initial public anger in the wake of the 2008 collapse, the narratives that have survived the financial crisis are strongly partisan. While there continues to be periodic public clamor over how it is that no one went to jail related to the 2008 financial collapse, public debate about bank system risk has now been effectively subsumed into our larger political wars, essentially derailing any significant discussion of financial restructuring as Richard Fisher suggests.

But even as each side has their own narrative assigning blame for the 2008 collapse, no one can seriously argue two basic facts. First, as Richard Fisher points out, the size of our largest banks means that they are--financially and politically--to big to fail. Should J.P. Morgan or Goldman Sachs teeter on the brink, threatening the collapse of the globally interdependent financial system, the governments of the world will demand action, and the central bankers will take all necessary measures to prevent massive bank failure. Second, no regulatory regime can hope to monitor and control bank risk-taking to the extent recommended by the Levin-McCain Report. The only prudent path to mitigating systemic risk is to reduce the size of our largest banks, as Fisher has argued.

For all the power of the financial industry, parallels with the anti-gun lobby may lack salience, as financial reform is a fundamentally different issue from gun control. While there are real differences in public attitudes about gun ownership and government regulation, there are fewer such differences on matters of bank size and derivatives risks among the general public. Few at any point on the political spectrum believe that there is any inherent public benefit in continuing to increase the market share of our largest banks, and fewer still argue the essentiality of the $639 trillion of financial derivatives to our economic recovery. Rather, critics on the right and the left have consistently argued that the concentration of power in a few large banks constitutes a threat to the vibrancy of our commercial banking system, and the growing profitability of the financial sector over the past decade or more has created a very real brain drain from the productive sectors of the economy to a non-productive sector.

The bulwark against bi-partisan action to address the continuing threat of concentration in the financial sector is money, specifically the $1 billion of annual spending by the financial services industry in lobbying and political contributions. The contributions of the financial industry exceed any other industry, and the names of the largest donors come from that same subset of banks that are working hard to protect the deposit insurance, the unregulated derivatives trading, and the scale that combine to produce implied federal protection that reduces their cost of capital, increases their potential leverage, and enhances their profitability and executive compensation.

Distrust of Wall Street has long been an issue of equal passion on the left and on the right, but one that has been obfuscated successfully by the consensus of senators of both parties whose votes have been bought and paid for. While it is popular to decry analysis that blames both parties for the problems we face, this is an issue on which neither party can claim the moral high ground. The Republican Party has historically been the party of Wall Street, but it was Bill Clinton who did the most damage as he promoted financial deregulation at the end of his term.

While a majority of Senate has been bought and paid for, the left and the right, and specifically the Occupy Movement and the Tea Party, have much in common on this issue. Pundits on the left were too quick to ignore the anti-corporatist strain within the original Tea Party movement, which was in its inception anti-banking and anti-corporate power. Charles Koch's 2011 editorial in the Wall Street Journal said as much, but was quickly dismissed because it had the Koch name on it. But Koch's message--that corporate power over federal spending and regulation is damaging to the public interest--could have equally been delivered by an activist on the left as on the right. But instead of finding common ground, each side weakened themselves by ignoring the potential for uniting around common instrests.

Perhaps the greatest success of the bank lobby has been its success in pitting the right and the left against each other to undermine a broader understanding that the status quo is neither in the public interest nor necessary for an effective financial system. Richard Fisher's speech made an argument that is essentially non-partisan and rational. The problem is that the banking industry strategy has been effectively bi-partisan and politically masterful. They have bought the center, and can watch contentedly as pundits of the left and the right scream at each other on MSNBC and Fox even as the concentration of financial power and risk grows largely unabated.

The end of the Age of Bush?

The Supreme Court arguments regarding California's Proposition 8 and the Defense of Marriage Act has been a remarkable moment for our society to recognize the degree of movement in social attitudes on a once highly contentious issue. In a manner unimaginable just a decade ago, leading Republicans have spoken out in support of gay marriage. 

Two of the protagonists of the culture wars of the 1990s, Bill Clinton and former RNC Chair and W. aid Ken Mehlman have each expressed their regret for their past actions, Clinton for signing DOMA and Mehlman for participating in gay baiting political tactics. Both framed their prior actions as the price of pursuit of victory over principle.

Jeb Bush, an erstwhile 2016 contender, is struggling to locate himself on the principle vs. politics scale. Clearly rusty after a layoff of almost a decade since his last campaign, he has re-emerged into a Republican Party that has lost its bearings. Jeb's father, George H. W. Bush, grew up in a New England Republican political family, and represented a GOP that is almost unrecognizable today. Poppy signed on to the Revolution, but was never a true believer, and was ultimately dispatched to an early retirement by the supply-siders and the Reaganites. By the time Jeb's brother W. seized the torch, the GOP was the domain of the self-styled "values" voters, whose visceral clinging to their religion and guns created a dominant political force. Jeb seems to want to be his Dad, a prudent, cautious Republican of the old school, but the Republican landscape is no longer welcoming of his father's softer demeanor. Jeb needs an edge, but it is not coming easily.

A few weeks after stumbling over the immigration issue, changing his stance several times within a day or two, Jeb Bush apparently decided to hunker down on the issue of gay marriage, declining to join the parade of Republican heavyweights signing up in support of a more tolerant nation. Speaking this week about gay marriage and gun control, a visibly chastened Bush retreated from taking any positions on anything, providing instead a magnificent formulation of political non-speak: "The effort ought to be to find consensus, that there should be rewards politically for a consensus-oriented approach that solves problems. On the other hand, passing legislation that doesn't solve the problem isn't going to solve any problems, either. I'd be wary of simple solutions to complex problems. This is a complicated issue." 

Some issues are complicated. But often they only become complicated only when politicians are forced to choose between their own sensibilities and fears of political consequences. If Jeb wanted to seize the incrementalist center, and claim some kind of Yoda-like mantle of wisdom, he might have referred back to Justice Ginsberg's reflection on Roe v. Wade having been decided too soon, and the importance of letting a national consensus grow prior to the Court asserting itself. Not exactly a Lincolnesque strategy, but it would beat the vacuous response he came up with.


In the wake of the Conservative Political Action Committee convention, it has become conventional wisdom that the Republican Party now rests in the hands of Rand Paul and Marco Rubio. Rand Paul jumped to the fore on the issue of domestic use of drones, taking a stance that would have ignited the political left were an earlier Bush still in the White House. Republican fascination with Rubio seems somewhat overdone, as he has yet to deliver a notable speech or show particular leadership, beyond the issue of immigration where his leadership remains to be validated by visible evidence of followership across the party he purports to lead.


The depth of the animus that divides Ds and Rs has been remarkable in the effective censoring of cross-party alliances, even where there should be strong affinities, whether of politics or principle. Ron Wyden's support of Paul's filibuster should have found broad support on the left, as nothing could offer a more daunting foreshadowing of an encroaching national security state than the image of drones policing first our borders and then our cities. The President's casual response "Not yet" to Senator Paul's question about whether he had authorized the domestic use of drones may have sounded like the tongue-in-cheek remark of a man enjoying baiting an adversary, but seemed misplaced given the gravity of the topic.


But if Paul and Rubio were the stars of the party, Sarah Palin's reemergence as the belle of the CPAC ball was a stark reminder of how far the GOP has fallen. This was once the party of laws and order. Candidates waited their turn and did not show up the central command. The battles between the right and the farther right--Goldwater and Rockefeller, Reagan and Ford--were largely resolved out of the public eye. By contrast, today's Republican Party is in uncharted waters, and for the first time in decades, there is no simple template. For the first time since Ronald Reagan trounced Poppy Bush, the shibboleths that emerged in Reagan's name are withering.


Jeb Bush is supposed to be the grownup. He is governor with gravitas and substance in a party now deeply in need of both. Marco Rubio and Rand Paul make for good copy, but neither is going to be the GOP candidate three years from now. The Republican Party bench is in disarray, and Jeb may well be the Party's most viable candidate.


After a bad first month, Jeb Bush may decide that he does not have the fire anymore, that he is not willing to take on the peasants with pitchforks that undid his father or bother with the lunacy of Sarah Palin's act or entourage. But he has a real opportunity. For the first time in decades--perhaps since his father denounced Ronald Reagan's voodoo economics in the 1980 primaries--the old Republican playbook has run its course. In the chaos of today's GOP, Jeb Bush can actually write his own script, he can say what he really believes. But so far, that possibility has not sunk in. Because so far, he has not said anything at all.

Measures of economic performance.

There is a debate raging of sorts in the economics community. Are we in a recession? On one side--claiming that economic data does not suggest that we are in a recession--is a large swath of the economics community. On the other side, feeling the slings and arrows of his colleagues derision, is Economic Cycle Research Institute founder Lakshman Achuthan. Achuthan suggests that the U.S. job growth is in decline, a stance that may be contradicted by official data but reflects the real world experience of many Americans.

Debates within the dismal science are usually quiet affairs, but this one has gone public, complete with a Youtube Hitler parody of Achuthan. But even as Achuthan has been increasingly ridiculed for his unwillingness to back off his contention that the U.S. economy is in a recession, the debate has raised a more fundamental question about the nature of economic measurement and the effectiveness of the current economic model in meeting a primary objective of producing the greatest good for the greatest number of people.

The problem of measurement is most dramatically apparent in Europe, where the return to recession was generally recognized three months ago. While recent projections suggest a deepening recession in Europe, the official data are nonetheless a stark contrast with the facts on the ground. This is particularly apparent in Spain, where projections of a 0.7% annualized rate of contraction would seem to dramatically understate the severity of the economic problems in a country with an official unemployment of 26%, where youth unemployment exceeds 50%, and where in the words of Citigroup chief economist Willem Buiter, the primary practical job seeking strategy for young Spaniards has become to leave their own country.

In the years since the 2008 economic collapse, by all measures, the United States has fared far better than Europe, where the inherent tensions between monetary integration and political independence have led to a dysfunctional polity, and labor market rigidity has created undermined economic adaptability. Yet since the collapse of the housing bubble five years ago the dichotomies within the post-Cold War U.S. economic model have become increasingly apparent.

At the same time as Europe has fallen back into recession, U.S. corporate profits have hit record highs as a share of GDP and this past week the Dow Jones hit a new high, each of which are supposed to be predictors of current and future economic vitality. But as in Europe, where mildly recessionary economic indicators in Spain stand in stark contrast to clear evidence of an economy in free fall, U.S. economic data seem to miss the central point. Simply stated, even if economists are correct that we are not officially in a recession, it is hard to argue against Achuthan's larger point that for a large share of the American workforce the U.S. economy is not working. If the U.S. economy is performing acceptably according to the standard metrics, perhaps the problem is in the metrics themselves.

If one looks at the performance of the U.S. economy over the past forty years, the record is not good for the average worker. Since 1973, wages and salaries have declined steadily as a share of GDP, from 54% to 45%. And the decline has been across sectors, as private wages declined from 43% to 37% and governmental wages declined from 11.4% to 8.5%.

This decline can be attributed to several factors. Technology has dramatically increased labor productivity (output per hour worked) even as  labor market pressures from free trade and capital mobility have suppressed real wages that might otherwise have increased with productivity growth. Globalization has created an economy in which growing productivity and wage competition have created great benefits to to investors in the form of increasing corporate profits and equity prices, while depressing real wages as a share of GDP and real family incomes in the United States.

And, as in Europe, economic pressures on real income levels in the United States have been and will continue to be exacerbated by the accelerating intergenerational transfer of resources from the young to the old. Even as wages and salaries are declining as a share of GDP, the retirement benefits of the Greatest Generation and Boomers are growing as a share of GDP, and will be funded by debts and taxes that will diminish the incomes and standard of living of their children and grandchildren for decades to come.

If globalization and free trade have contributed to declining returns to labor in the U.S., they have contributed to the elevation of upwards of a billion people out of poverty across the globe. But even regions such as India, China and east Asia that have benefitted from globalization--and the gutting of the American middle class--have seen the rise of their own plutocratic classes and the societally destabilizing impact of resulting inequalities.

The solutions are not readily apparent. To those on the left, higher corporate and income taxes are the essence of a redistributive strategy to correct increasing income inequality. Yet redistributive tax strategies do little or nothing to cure the underlying problem of work force adaptability. To those on the right, deregulation remains the key to avoiding the stagnation and constriction that handcuff the youth of Europe. It is notable that post-2008 protest movements on the left and the right each pointed to the problem of political corruption at the federal level resulting in special treatment for powerful industries.

Like many debates these days, the attacks on Lakshman Achuthan is missing the larger point. If according to the rules of the dismal science we not in a recession, it is our standard of measurement that is broken.  For most people, the definition of a recession is simple: a recession is a crappy economy. And by any measure, for the large proportion of the American workforce, that is what we have.

But the larger question since the 2008 financial collapse has been whether the underlying U.S. economic model is itself broken. If our economic model is working for a decreasing share of the population over time, democratic pressures will ultimately demand not just changes to the system of measurement, but to the system itself. 

The politics of sequester.

My school district client faces a $5 million reduction in federal funding for educational programs if the sequester goes through. That amount represents just under 1% of the total district budget, but of course a far larger share of their annual federal funding.

What will they do? Most programs will be continued with funding backfilled from reserves or other budget reductions, while some will be eliminated. They could provide no estimate of the "body count" impact.

In contrast, the Obama administration has fought the public relations war against sequestration--and in support of tax increases and "loophole closing"--not by planning for how to most effectively deliver services with fewer resources, but instead by painting a picture of the devastation to come. Recently departed Secretary of Defense Leon Panetta boldly asserted that any cuts at all to the Defense budget would necessarily reduce national security. This was an odd and disappointing stance from a man who has spent his life managing the federal budget--as Chairman of the House Budget Committee, Director of the Office of Management and Budget, White House Chief of Staff, and Defense Secretary--and who better than most understands that budgets are choices, and that the Department of Defense budget in particular has been famously larded with programs and systems the Generals themselves have opposed.

The Pentagon and its contractors have famously played politics to great budgetary effect over the years, making sure that each House district feels the benefits of Defense spending. So perhaps it was no surprise that the reaction to sequester was to play the same game. The first thing Panetta and his team propose to do is announce plans to furlough all of the 800,000 civilians working for the Department of Defense, who represent approximately 25% of total DOD workforce. This is not a strategy to manage the proposed 10% cuts seriously, but rather to maximize the political effect.

It would appear to an outside observer that this is the Administration battle plan: Unlike local governments across the country who are making plans to manage for a smaller funding level, demonstrate instead the chaos that will come if Congress does not bend to the Administration wishes.

This is an unfortunate strategy. The sequester may not be a smart way to manage the federal budget, but it may be proving to be the only way to manage the federal budget.

The Department of Defense is the case in point. Over the past decade, the DOD budget has grown by 60% as a share of GDP, from 3.0% to 4.7% of GDP. And this growth has been bipartisan, growing 43% under W. and a further 10% under Obama, and Congress has famously appropriated more than requested in the executive budget. Democrat activists in particular should support the sequester, as the mandated 10% cut in Defense appropriations marks the first reduction in Defense spending since the fall of the Berlin Wall.

It is not conceivable that within the massive DOD planning apparatus, there has not been significant work done to imagine a range of differing spending levels, force deployment configurations and alternative threat response strategies. Simply stated, it is irrational to suggest, as Secretary Panetta has, and as Administration response to sequester implies, that current funding levels are inherently optimal. The historical failure to have any serious management of the Pentagon budget by Congress--with any suggestion for reform or reductions met by charges of appeasement of surrender--makes a mockery of claims that nothing can be cut.

The current situation illustrates why Chuck Hegel was a poor choice for Defense Secretary, rather than former Undersecretary of Defense for Policy Michele Flournoy. The original notion may have been that nominating the Republican Hegel would ease difficult budget discussions with a Republican Congress, but clearly that notion was proven wrong by Hegel's ability to only win four Republican votes for his Senate confirmation. Flournoy, now at the Boston Consulting Group, is a specialist in budget strategies and can talk eloquently about the alternative strategic deployment futures and attendant spending reductions that should be on the table in world of limited resources.

President Obama's sequester strategy may be good politics in the short term, but it is likely bad politics in the long term. The greatest risk to the Democratic Party in 2014 and 2016 is that it fails to demonstrate its ability to manage the federal budget effectively as the economy recovers. Federal impact aid and other stimulus spending efforts were important to filling the void of the deep private sector recession post-2008. However, the stabilization of public sector employment and continued increases in public sector salaries during a period of private sector retrenchment has led to an imbalance that is now hard to reverse. Public sector budgets are now under great pressure as tax receipts in many jurisdictions remain below 2008 levels, while public employees--who were protected by the stimulus program from feeling the deep pain of the 2008-2010 recession felt in the private sector and whose salaries for the first time exceed those of comparable private sector workers--are loath to accept the need for budget cuts as economic growth is returning.

At election time, convincing the voters that your party is best able to manage the economy and the public enterprise remains a critical factor in the ultimate choices made by undecided voters, who tend to be fiscally conservative. For long, historical reasons--that may not be defensible given the disdain of both Ronald Reagan and W. for balanced budgets--this has been part of the Republican advantage in presidential elections. In 2012 this was not as salient a factor, both because the Republicans made an art of offending as many voting groups as possible, and because voters suspended their traditional criterial for assessing economic and fiscal performance in the wake of the deep post-2008 collapse.

By 2016, 2008 will have receded into memory, and once again fiscal administration will be fair game. Last year, the Pentagon spent more money on military bands than the nation spent on public broadcasting. Yet the President and Secretary Panetta continue to suggest that the military budget should essentially be considered untouchable, even as former Undersecretary Michele Flournoy has ably demonstrated that money alone is not the measure of our defense. With the sequester now reality, the Administration strategy should expand beyond escalating political rhetoric to get the funding reinstated, to demonstrating the Administration's ability to manage in an environment of reduced resources. When the next presidential year roles around, Democrats seeking the votes of those undecided voters in the center will need to be able to demonstrate their ability to manage in world of limited resources.

The day the music died.

Behind the ongoing political drama surrounding the sequester this week, we may have witnessed the withering denouement of Reagan Revolution. Riven by factional infighting since the November election, the Republican Party has come together to take a stand. It is not in defense of its no-tax pledge, which fell by the wayside last year. Nor is it to defend the Pentagon from deep cuts in spending, as the GOP has indicated that it intends to accept the sequester cuts that will take the largest bite from the Defense budget. And it is not in opposition to gay marriage, as this week dozens of GOP leaders signed on to an amicus brief in support of the constitutional right to marry for gay Americans.

The anti-tax, anti-gay and pro-defense positions have been among the cornerstones of the modern Republican Party, birthed in Barry Goldwater's campaign against Nelson Rockefeller, and brought to full flower under Ronald Reagan. And for a quarter century, the electoral coalition of single-issue voting groups--anti-tax, pro-life, anti-gay, pro-defense, among others--nurtured by Grover Norquist as the steel tip of the Republican spear thrived and vanquished Democrat dreams, pushing Republicans to the right and Democrats to the center.

The irony is that while Ronald Reagan remains the godhead of the modern Republican Party, it is not on his principles that the GOP today is standing its ground, but instead it is on the older conservative roots that Reagan pushed aside, the fiscal conservatism of Calvin Coolidge. For a quarter century, the Republican Party turned its back on its roots. Ronald Reagan's advocacy of tax cuts when marginal tax rates were 70% or higher was transformed into the embrace of tax cuts as a morally self-justifying good, without regard to fiscal consequences. The Party orthodoxy became captive to the unholy alliance of big spenders and tax cutters in its big tent, all the while giving lip service to the old school fiscal conservatives who sat marginalized in the corner. And it shunned, as well, the Party's historic standard of liberty writ large as it embraced a social conservatism that was quick to claim the mantle of freedom and liberty even as it denied the liberty interest of gays and women, among others, by redefining liberty along narrow, parochial lines.

The elections of 2010 and 2012 conspired to expose the deep internal contradictions of Reaganism. The Tea Partiers of 2010 drove a wedge between the tax cutters and big spenders by placing the notion of fiscal prudence back in center stage. They might have imagined that they were acting in the spirit of Ronald Reagan, but in their disdain for deficits their rhetoric was more aligned with Reagan's 1980 adversary, George H. W. Bush--the scion of a powerful traditional Republican family--who famously castigated Reagan's supply side jargon as voodoo economics.

If the 2010 election laid bare the long-simmering disconnect of Reaganomics and traditional conservative economics, the 2012 election confronted the GOP with the hypocrisy of letting social conservatives alone define the meaning of liberty in America. Faced with the new diversity of the American electorate this past November, the Grand Old Party that was created on the principle of liberty for all found itself standing instead for the economic and liberty interests of a shrinking share of the electorate.

The Reagan Revolution of the 1980s marked the end of a quarter century battle for control of the Republican Party. It began with Barry Goldwater's victory for populist, western conservatism over the New England and New York traditionalists. It continued with Richard Nixon's conversion of southern Democrats, who brought with them to the GOP the seething resentments of the post-reconstruction south. And its victory was complete when Ronald Reagan vanquished George H. W. Bush. Reagan's defeat of Bush--and traditional conservatism--was total. Bush prostrated himself before the victors. He ate his words belittling supply side economics, resigned his membership in Planned Parenthood, reversed his moderate stances on social issues, claimed pork rinds to be his snack food of choice, and retreated in humility after one presidential term, banished by Reagan's Maoist progeny for the cardinal sin of raising taxes to balance the federal budget.

Bush's banishment evolved into Shakespearean form with the elevation of his errant first born son from alcoholic playboy to the White House where he would systematically tear down all his father stood for. He would cut taxes and squander budget surpluses to prove his allegiance to his father's bete noire. He would take the country to wars against his father's tempered advice. All to grind into the dirt his father's legacy and his family's conservative principles.

Now, with few years left, George H. W. Bush may yet find redemption. If the destruction of traditional Republicanism took a quarter century to become complete with Reagan's triumph, a quarter century later we are seeing the waning and just decomposition of that movement. The Republican Party--the Party of Lincoln and the party of Coolidge--has a long legacy and a deep brand. And it may be that both the legacy and the brand can survive its half-century of revolutionary foment. If the core tenets of Republican conservatism are limited government and maximizing individual liberty, it may yet emerge from the ashes of its own death as a central force in our politics.

The notion of limited government remains the challenge in the face of budget and constituent realities. Tea Partiers motivated to reanimate the principle of fiscal prudence have never successfully articulated what its constituents are prepared to give up. The great failing of Paul Ryan's budget is that it proposed deep cuts in spending, but would not say from where, and when real programs have been put on the table, there has been no Party consensus on what should go. The stubborn fact remains that small rural red states are the disproportionate beneficiaries of federal spending, and at the end of the day that man who famously cried out at a Sarah Palin rally, "Don't let the government get its hands on my Medicare," willfully missed the point. Increasingly the federal government is Medicare--and national defense. And thus we have come to the Republican embrace of the sequester. Left with no agreement on what to cut, the sequester became the only path forward--and fiscal conservatism the last principle on which the GOP could make its stand.

Fiscal conservatism--the notion that resources are limited and choices must be made, choices between services and revenues, what we want and what we are willing to pay for--was always in conflict with Reaganism as it came to be. Grover Norquist's world was never a construct of moral truths, but rather of electoral strategy. And the core of that strategy--the notion that the no-tax pledge was a morally self-justifying principle--was in direct conflict with the quintessentially conservative notion that governance is about limits and tradeoffs and choices.

Despite the sense of demographic determinism that Democrats celebrated in the wake of the 2012 election, the majorities that turned out for Barack Obama among women, Latinos and Asian Americans are unlikely to be sustained. The graphic below presents a voter matrix reflecting four quadrants across liberal and conservative social and economic voter preferences. Historically--and 2012 was no different--while primary voters are dominated by the upper left and lower right quadrants, the core of the undecided electorate has been in the category of social liberal and economically conservative voters. That was once the sweet spot of New England Republicanism, back when fiscal conservatism was a core Republican value and the definition of liberty was not proscribed by religious conservatives.

Chaos within the Republican Party is not Barack Obama's doing, as John Boehner oddly suggested a few weeks ago. Rather, the last two election cycles have laid bare the untenable contradictions long buried within Republican ranks. With the withering of the old shibboleths, Republicans are struggling to find the common ground upon which they will stand, even as they recognize that it may be years before the Tea Party dominance in the House and right wing control over the presidential nominating process wanes.

There is no small irony that the Party's great hope may rest with Jeb Bush. Jeb, the former Florida Governor and W's younger brother, was always supposed to be the one who would run for president. He may be recalcitrant about the titanic Bush-Clinton clash that looms in 2016, but Jeb Bush is probably the only Republican candidate looming on the horizon who could successfully run the primary election gauntlet, and then as Richard Nixon proscribed, move back to the center--where the votes are--bring his party with him, the Reagan Revolution finally buried in the past.