Money for nothing.

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

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

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

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

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

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

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

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

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

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

Twitter revolution.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

American failures.

It was two years ago this month that President Barack Obama pronounced that Syrian President Bashir Assad must step down. "Lead," the President said. "Or get out of the way." Needless to say, President Assad chose not to heed the words of the American President.

A friend of mine, a Lebanese scholar of Middle East politics, commented a few months ago that regardless of what the outcomes are in the region, America will bear the blame. The simple reality, he commented, is that America--along with its ally Israel--orchestrates the events on the ground. This is not a matter of suspicion or conspiracy theory, he assured me--reflecting a common refrain in the Arab world--we know this to be true.

Even as my friend admonished me for American failures across the region, he asserted that the one place America got it right was Egypt. The Muslim Brotherhood was in power, and the peace treaties would not be abrogated. Realpolitik reigned, and it was good.

Two weeks later, General Sisi moved against Egyptian President Morsi.

When President Obama admonished Bashir Assad to step down. One had to imagine he had a plan in mind. One had to imagine that his national security team had gamed out a range potential responses by the Syrian President, including the most likely, that Assad would decline to acquiesce to American demands. After watching the predations suffered by leaders in the region pushed out of office by Arab Spring uprisings, Assad understood that giving up power was a path to public humiliation, if not death.

It remains unclear what our strategy has been in Syria and what President Obama's intentions were when he uttered those words. The President's ambitions in the region have been constrained by what he sees as the lessons of Afghanistan. He has been determined to not set the wheels in motion that would lead to American involvement in another war on Muslim soil, and he has been determined as well to not send American arms to support a Sunni insurgency that could ultimately become captive of anti-democratic Islamists and Jihadis.  

Against that backdrop, the coherence of our Syria policy remains opaque. Constrained by a reluctance to act, did we sanction Saudi Arabia to provide support to the Syrian opposition in our stead? If so, did we cede our influence over pro-democratic events in Syria to the least democratic force in the region, and effectively open the door for the Saudis and their Wahhabi allies to recruit non-Syrian, Sunni Islamist fighters and broaden the Syrian civil war into a regional sectarian conflict? The alternative may not be any better. If we did not sanction the Saudi actions in Syria, then we sat by and allowed the Saudis to pursue their own ambitions in the region without our go ahead, an even worse indictment of American power and leadership in the region.

Even if one knew then what one knows today, it is not clear what an ideal policy would have been. In the wake of his description of American failures in the region, I asked my friend what we should have done. His response was vague, he referenced support for democratic elements and civil society, but did not seem to have an answer that was equal to the magnitude of the challenge. But the challenges in Syria today are vastly different than they were early on, when the conflict seemed localized and filled with real possibilities. Even as the administration wants to point to others to blame for the evolution of events there, my friend's words are haunting, and we may bear far greater responsibility that we care to acknowledge.

The deteriorating situation in Syria bears directly on the President's decision to cancel his meeting with Russian President Vladimir Putin. Our recent disagreements with Russia have focused on two very public issues, Russia's continued support for the Assad regime and its unwillingness to extradite former NSA contractor Edward Snowden. As the President suggested in his press conference this week, if Russia was not going to "cooperate" on these issues, there was nothing to talk about.

Over the past several months, the public rhetoric surrounding these disputes escalated as the Obama administration alternately berated the Russians for not falling in line with our demands and pleading with them to acquiesce to our requests. Yet there was no reason to expect Russian President Vladimir Putin to accede to our demands in either case. The Assad regime is one of Russia's few remaining allies in the region and the opposition in Syria is increasingly under the influence of Islamist groups that Russia feels can destabilize its own southern border and restive Muslim minority. With respect to the Snowden affair, Russia has never had an extradition treaty with the United States, and protection of our national security secrets is our problem, not theirs.

Both of these responses were both rational on the part of the Russians and predictable, which made the decision to try to jawbone Putin in public rather than negotiate in private so implausible. Absent a deal on issues that matter to the Russians, Putin had little reason to fall in line.

Nonetheless, in each case, the Russians remained unperturbed, and appeared to make efforts to find alternative paths forward. In Syria, President Assad proposed that he would stay through the end of his current term in May of 2014--a path that aligned with the Russian preference for resolutions within a legal framework--leaving open the prospect that the United States could respond by insisting on internationally supervised elections next year. This alternative may well have been be the only path forward that, if accepted, could have deescalated the conflict and forced foreign fighters--Sunni jihadists and Shia Hezbollah--to leave the country and returned the conflict to the control of the Syrian people. When this was rejected by the Syrian opposition and the United States, one had to wonder what alternative we had in mind that offered the prospect of an end of the conflict within the next nine months.

With respect to the Snowden case, the Russians were quite clear from the beginning that they had no intention of simply putting Snowden on a plane home. However, Putin essentially offered to silence him in deference to the interest of his American "partner." But as each day passed with new administration protestations of their "disappointment" with Putin, the chances to make a deal withered and the public embarrassment of the administration increased.

President Obama's decision last week to cancel his meeting with President Putin reeked of petulance. At his press conference this week, President Obama continued to publicly rebuke Putin for not cooperating with American requests. He chastised Putin for thinking "backward" on issues rather than "forward," and for opposing things just because we were for them. But in all his comments, he never seemed to recognize that Putin is a national leader in his own right, with positions on issues grounded in his country's own priorities and interests.

If the President wants to reset our relationship with Russia, as he has suggested, a good starting point might be to pay a little bit less attention to our own words, and a bit more to theirs. Negotiations begin with knowing what matters to the person on the other side of the table. If you are only paying attention to yourself, you will never get anywhere. 

Dreams of a summer night.

I would like President Obama to nominate Larry Summers to be the new head of the Federal Reserve Bank.

I do not know anything about Janet Yellen. And truth be told, I really do not know who would be the best candidate for the job.

I can already hear the howls of protest. I know Larry's history, the warts and all. I have read the diatribes of those outraged by the prospect of his selection, and the fawning commentaries of those lobbying for him. And I have marveled at the fact that this is about the position of Chairman (sic) of the Board of Governors of the Federal Reserve Bank. This is not a position that generally garners much commentary outside of Wall Street and the financial community. And if Larry Summers were not a prospective nominee, no doubt the topic would once again recede to the back pages of the New York Times, if not the front pages of the Journal.

My motivation is different. I just want to watch the confirmation hearings.

It is now a half a decade since the 2008 financial crisis shook the world economy, and a half a decade since the head of the U.S. Federal Reserve Bank effectively became the central banker for the world. Perhaps that is why more people should care about who is appointed to lead the Fed this time around. In a world where DC politics have ground to a dysfunctional halt, where the Euro continues to struggle on the precipice of failure,  and where the growth rate of China is grinding downward, the head of the Fed has become a figure of global importance. Perhaps in some respects eclipsing that of the President.

And surely no person views himself as more prepared to step out onto that stage, and lead the world through a precarious financial future than Larry Summers.

But it is not the future that concerns me, but rather the past.

A half a decade after the global financial collapse, the causes and the lessons remain opaque. This week, the Securities and Exchange Commission succeeded in winning a guilty verdict of fraud against Fabrice Tourre, a mid-level mortgage trader at Goldman Sachs. By all accounts, M. Tourre is the first employee of a major Wall Street firm found culpable of any crime related to the financial collapse. Even as the SEC is now pursuing a charge of "Failure to Supervise" against hedge fund trader extraordinaire Steve Cohen, no such charge has been brought against any of the doyens of Wall Street who were driving the train at the time it drove off the tracks. Neither the CEO nor members of the Board of Directors of AIG were sanctioned, much less prosecuted, for their lack of considered oversight of that firm's massive unhedged and unreserved credit default swap business. No doubt some of the urgency suggested by SEC comments reflected public frustration that no senior executives on Wall Street have been prosecuted for culpability in the events that transpired over the course of the 2008 collapse.

M. Tourre did not present a defense. His attorneys felt the onus was on the SEC to prove culpability, and that it would have a difficult time doing so. In essence M. Tourre's was a modern spin on the Nurenberg defense. Not that he was ordered to defraud investors, but rather that to do so was part of the business, that trading by definition involves two parties with diametrically opposed interests, and that the culture and purpose of his job was to win at that game.

That the jury found against M. Tourre was not as notable as the comments of the jurors afterward. M. Tourre was, in their minds, a pawn of sorts, a scapegoat that was the focus of SEC attention because getting him was the best they could do. After all, Goldman Sachs had already settled with the SEC for its corporate culpability for the tidy sum of $550 million, a payment made contingent on no admission of guilt. Essentially, and to the chagrin of Tourre's counsel, the juror's overlooked the trees and focused on the forest. The decision of the jury, it seems, revolved around revulsion at what they saw when they looked under the hood at the engine that drives Wall Street and the financial markets: Greed.

Of course, that is the way it is supposed to work. Going back to Adam Smith's Wealth of Nations, the central force that drives the efficient allocation of scarce resources in a capitalist economy is the collective actions of self-interested participants coming together in free markets. Or it is supposed to work. But in the words of one juror, He [M. Tourre] is what Wall Street is all about and it scared me.

Which brings us back to Larry Summers.

In the wake of the 2008 collapse, many books have been published about what happened, about who did what to whom, and about who was at fault. But within the public square we have made little or no progress in coming to grips with the significant changes that have taken place in the structure and regulation of our financial markets. By and large, people have taken sides and gone to their corners. For Democrats, deregulation was the culprit, Goldman Sachs was the face of the villain, and Dodd-Frank was the solution. For Republicans, regulation was the culprit, Fannie and Freddie were the faces of the villains, and getting rid of Dodd-Frank is the solution. Both sides say they are opposed to further bailouts. Both sides say they oppose too big to fail.

And both sides take massive amounts of money from the financial services industry to fund their political campaigns.

Right now, things are not working. We have taken few lessons from the turmoil of the past few years, and we still face significant challenges. We need a very public airing of the events of the past quarter century, of the massive expansion and deregulation of our financial markets, and of the nuances of what has evolved. We need to look at both the forest and the trees. We need an open discussion of the rationale behind financial deregulation in the 1990s. We need an open discussion of the cost and benefits of the evolution of the derivatives markets. We need a reasoned debate over the implications of the events of the past several decades before we can hope to set rational policies and chart a path forward. And we need to have Republicans and Democrats debate their perspectives in a forum that will not allow unsupported statements to be held forth as facts.

The traditional confirmation hearings for a new Fed Chairman would involve Senators putting on their erudite best as they asked questions prepared for them by their staff. And if Janet Yellen is nominated, I expect that is what we will get. Senators will pointedly ask how and when quantitative easing would wind down, and smartly throw out the term tapering. Democrats would press her on the conflicting priorities of controlling inflation and stemming unemployment. Republicans would ask her about the inflationary implications of the Fed balance sheet. And Rand Paul and Ted Cruz would throw out derisive and conspiratorial questions about fiat currency.

But in my imagination, confirmation hearings for Chairman Summers would take on a different tone and tack. Unlike Alan Greenspan, whose comments were unintelligible to the average American, or Ben Bernanke whose demeanor is polite and deferential, Larry Summers has never been inclined to shy away from intellectual debate or political combat. He was a central figure in the course of events that got us to where we are today, and all of the questions that need to be asked would be asked. Like the Clarence Thomas nomination hearings, the Summers nomination would be a prime time event, and America would tune in.

Conservative Fed Governor Richard Fisher would participate, and a present his arguments for the urgency of downsizing the largest banks. MIT professor and former IMF chief economist Simon Johnson would present data suggesting that a $300 billion annual subsidy is now being provided to the largest banks in the world. Former Fed Chairman Paul Volcker would make his case that the innovations spurred by deregulation have produced little of material value to the real economy and undermined the essential functions of the commercial banking system. And Jamie Dimon and Lloyd Blankfein would present the case that too much was already being done, that complex derivatives have already been eliminated, and that if anything the regulatory shackles and new capital requirements are dangerously holding back our economic recovery.

And in the center of it all would sit Larry Summers, uniquely qualified to engage each argument, in the role of a lifetime. Playing on the biggest stage of his life, he would separate fact from fiction, real argument from politics, and data from distortion. He would ask for data to support arguments, from whatever direction. He would engage the arguments of economists and lobbyists, of conservatives and liberals and conspiracy theorists alike, and perhaps, finally, we could have a real and vibrant discussion based on real historical data to illuminate our collective path forward. 

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.