Pendulum Politics

New Blog: Real Diplomacy

2009-06-17T17:16:00.003-06:00

We've started a new blog. We enjoyed PP, but we got busy. Further, the scope of PP - politics - was quite broad.

The new blog is called Real Diplomacy. Our focus is limited to foreign policy. We hope to use short, concise posts to analyze current events through the lens of realpolitik. We're avoiding the trap of nasty domestic politics. Most posts will be 3 paragraphs or less.

Get yourself a Wordpress ID and start commenting.

On the stimulus: Economists vs. Obama

2009-02-06T11:03:00.005-07:00

The Obama administration continues to push the "stimulus" bill with the same lines we've heard all along.

Joe Biden: "Every economist, as I've said, from conservative to liberal, acknowledges that direct government spending on a direct program now is the best way to infuse economic growth and create jobs" (December, link).

Obama: "There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy" (January 9, link)

Obama: "Economists from across the political spectrum agree that if we don't act swiftly and boldly, we could see a much deeper economic downturn that could lead to double-digit unemployment and the American dream slipping further and further out of reach" (January 3, link)

Rahm Emmanuel: "Everybody, I think, from economists on the left to economists on the right realize that we must make critical investments at this time" (January 18, link).

Obama: "Every economist, even those who may quibble with the details in the makeup of the package will agree that if you’ve got a trillion dollars in lost demand this year and a trillion dollars in lost demand next year then you’ve got to have a big enough recovery package to actually make up for all those lost jobs and lost demand" (February 5, link).

During this entire time, economists "from across the political spectrum" have been voicing their disagreement, but His Hopeness keeps pushing the same line. Even many economists who favor the theory of fiscal stimulus (Feldstein, Sachs, etc.) are against this one because it is not a fiscal stimulus. It is a $1 trillion manifestation of long-time Democrat agendas being called a "stimulus" by its disingenuous proponents.

The word for this is dishonesty. In case Obama's disciples are still, after all this time, believing the lies coming out of his mouth, here are just a few of the economists who disagree with him:

- Hundreds of economists signed the CATO manifesto declaring their disagreement with the President (link).

- Of the IDEAS world's top 20 economists, 6 have opined against the stimulus and only 2 in favor (link).

- Greg Mankiw has been keeping a list, which includes himself, Burt Malkiel, Alberto Alesina, Robert Barro, Gary Becker, John Cochrane, Eugene Fama, Robert Lucas, Kevin Murphy, Thomas Sargent, Harald Uhlig, and Luigi Zingales (link), Martin Feldstein, Alice Rivlin, Harold Cole, Lee Ohanion, and Doug Irwin (I'm sure I've missed some).

- Other's I've noticed: Arnold Kling, James Hamilton, Nouriel Roubini, Jeffrey Sachs, and William Easterly (anyone familiar with the development literature knows that a Sachs/Easterly agreement is a big deal).

So, as it turns out, not "every economist" agrees with the Pork Plan, and Obama knows it. So why does he keep being dishonest? Is this Change We Can Believe In?

Limbaugh, Chinn, Feldstein, and PP on the stimulus

2009-02-04T11:22:00.004-07:00

One of the most intelligent statements Obama has ever made was when he urged Republicans to stop listening to Rush Limbaugh. Today I came across economist Menzie Chinn's rebuttal to a recent WSJ article by Limbaugh which contained some pretty embarrassingly faulty economics. Said Limbaugh:

Keynesian economists believe government spending on "shovel-ready" infrastructure projects -- schools, roads, bridges -- is the best way to stimulate our staggering economy. Supply-side economists make an equally persuasive case that tax cuts are the surest and quickest way to create permanent jobs and cause an economy to rebound. That happened under JFK, Ronald Reagan and George W. Bush. We know that when tax rates are cut in a recession, it brings an economy back.

Of course, long-time PP readers know that the case of supply-side economics (as the term is usually understood) is anything but persuasive. Chinn deals with Limbaugh's ridiculous assertions:

I know that proof by repeated assertion without data is a time honored tradition by some individuals, but Mr. Limbaugh's first assertion is truly an amazing. In terms of aggregate demand, while tax cuts might get to the individual households quickly, actual spending will be spread out over time. This is illustrated in the dynamic multipliers from the OECD's macro model.

My take: the problem here isn't about the debate between tax cuts and government spending. The issue is that the Left wants to argue that spending of any kind is necessary as an urgent fix to the recession, even though their proposals will spend the bulk of the money years from now and there is no indication that they are spending in the right places. The Right wants to argue that cutting taxes everywhere and all the time is a solution to every problem. Both proposals will add dramatically to our debt without really solving the problem. The real solution:

1. The "stimulus" package needs to be broken up into two parts: a stimulus, and a long-term Obama Improves America package. Each should be subject to their own, separate debate.

2. For the stimulus portion, we need to have a conversation about the best way to get the economy going. It will likely need to have a combination of temporary, carefully targeted spending and carefully targeted tax cuts. It should have a minimal, temporary effect on deficit spending. I believe that, at this point, Martin Feldstein has the best ideas. He criticizes both the tax cut portion and the spending portion of the current "stimulus."

3. For the long-term portion, Obama needs to give America the conversation it deserves. Future generations will be paying for his plans, so pushing them through under the banner of urgent recession treatment is deceptive and irresponsible. We need to talk about how to really fix our problems - a good list is in my last post - and Obama needs to keep his promises about listening to the experts. Most of all, this plan should be made parallel to a plan for reducing the national debt. No permanent expansions of government should be considered unless we have a binding plan for how to pay for them.

Obama can prove to us that he really is about Change. End the partisan games and listen to the experts to devise a plan that will actually work with minimal collateral damage.

Porter on America's weaknesses

2009-02-04T08:47:00.003-07:00

Last week on Tom Keene's show, HBS professor Michael Porter:

America has some very important weaknesses; we all know what they are: they're public education, they're unnecessary complexity in costs of doing business, they're lack of a credible safety net that helps people through transitions in terms of pensions and healthcare. And we have not made any headway in dealing with those fundamental problems. . . .

Washington is fundamentally broken. There's literally no strategic thinking. There's no capacity to take coordinated long-term action... The stimulus is giving us one more reason not to address the real problems in America. . . .

We're making almost zero progress on all these issues, and yet there's this massive amount of talk and activity going on and all this money is being spent.

Other countries do a better job at this... They think strategically and they have long-term plans. We don't do that.

(transcribed by yours truly; emphasis mine)

Porter also gives the Obama/Dem "stimulus" a C-, and he discusses the weaknesses caused by MBA's not being able to do math.

If you aren't listening to Tom Keene's Bloomberg on the Economy podcast, start now.

short-term vs. long-term

2009-02-02T12:20:00.003-07:00

H/t Greg Mankiw, from a former CBO chief's testimony on the "stimulus":

I believe an important distinction should be made between a short-term “anti-recession package” (aka “stimulus”) and a more permanent shift of resources into public investment in future growth.

This is what I've been saying all along. The current Obama/Dems "stimulus" plan is not a recession package. It is a combination of (1) massive pork projects from its time in Congress (which Yes We Can Man promised wouldn't happen), (2) the realization of decades of Democratic government expansion agendas, and (3) a small amount of long-term growth investment and a smaller amount of actual STIMULUS. Obama's attempt to pass all this junk in the name of fighting the recession is (1) bad for the economy, because we have no chance to talk about the massive increase in US debt and its effects on interest rates and confidence, and the projects haven't met tests of efficiency; and (2) a confirmation that Mr. Changemaster is not the new-kind-of-politician he promised to be, since he is selling us a porkfest but calling it "stimulus."

Black on Obama foreign policy

2009-02-02T08:28:00.002-07:00

I knew the imprisoned Nixon biographer Conrad Black was a fabulous and witty writer (read paragraph #2 of this), but until now I didn't know of his foreign policy analysis skills. In this article, he offers several approaches to Bush's Axis of Evil - basically North Korea and Iran - and suggests, brilliantly, that while Obama and his disciples think the Changemaker is Lincoln reincarnated, emulating Lincoln will not help Obama solve our current problems.

Barack Obama, who quotes Washington and Lincoln with the insight of an historian and not just a leader who has good researchers, could profitably borrow a few pages from Richard Nixon’s playbook. The Father of the Nation and the Saviour of the Union, for all their travails and distinction, never had to deal with such unfeasible characters as Ahmedinejad and Kim Jong-Il.

Black suggests using some linkage politics to persuade Russia and China to put more pressure on Iran. Read the article.

h/t Zach.

Buy American = bad foreign policy

2009-01-30T16:28:00.003-07:00

Big Obama and "Stimulus"* supporter Brad Delong has a major concern with Obama's Porkfest: the "Buy American" content.

In addition to being bad economics, demonstrating in his first month that the Obama Administration's word is not good--that it will keep treaties only when it feels like doing so--would be a very bad start for the foreign policy of the Obama administration.

This should not surprise any PP readers. During the campaign, I consistently complained that Obama's shady NAFTA promises, which contributed substantially to his support in the Midwest, were bad foreign policy. The Canadians agreed, which is why they met with Obama's econ guy (which Obama denied until he was caught).

It's all part of the Obama game. He intentionally got elected by promising everything to everyone, regardless of costs to US economic and foreign policy standing. Now he has to find some way to keep everyone happy, even though he knows he was lying 90% of the time. Change We Can Believe In.

* From now on, I'll refer to the "Stimulus" in quotes, since evidence continues to mount indicating that it is not stimulus, but simply legislation of long-time Democrat agendas being disingenuously sold as "stimulus" by the Changemaker &co. I adopt this notation from David Henderson, who says that the bill "is likely to destroy wealth." Incidentally, he voices concern over the Buy American provision in the same post.

538 Update: top economists on the stimulus

2009-01-29T16:42:00.003-07:00

Several weeks ago, 538 published a list of top 20 economists (give or take) and their positions on the current stimulus bill. The list needs updating, both because many have opined since then and also because Silver wasn't entirely honest. A new list, as best I can tell, is below (though I preserve unchanged elements from Silver's list). Stimulus proponents are in blue; opponents are in red; and green are hard to tell:

1. Joseph E. Stiglitz. Favors big/bigger stimulus, but the current bill doesn't meet his criteria (link).
2. Andrei Schleifer. I'll call him against it, since he says Obama is "weak on economic understanding, is not listening to his economic team, or his economic team is not providing solid advice." (link).
3. Robert J. Barro (link).
4. James Heckman
5. Robert Lucas. Skeptical, thinks monetary tools still exist (link).
6. Peter C.B. Phillips
7. Edward Prescott (link).
8. Martin Feldstein (link).
9. Jean Tirole
10. Daron Acemoglu. Supports idea of stimulus, but is leaning against the specific bill for fear of adverse effects on innovation, growth, and attitudes towards markets (link).
11. Larry Summers. Member of Obama economic team, favors stimulus (link).
12. John Y. Campbell
13. Oliver Blanchard. No direct support, but insinuates such (link).
14. Mark Gertler
15. Paul Krugman. Thinks action is needed drastically, worried stimulus won't be large enough. (no specific link; see daily tirades at NYT)
16. Christopher F. Baum
17. Thomas Sargent. Skeptical, thinks stimulus math is based on outmoded economic models (link)
18. Maurice Obstfeld
19. Stephen Turnovsky
20. Nicholas Cox

This makes the current score six against, three for, and two who are uncertain (but their leanings are split, for/against). I have suspicions about several others (having read their academic work), but I can't draw conclusions yet. If anyone finds links to any others, let me know.

Feldstein, and me, on the stimulus

2009-01-29T16:26:00.004-07:00

Martin Feldstein still has considerable political credibility. He argues that the tax cuts in the bill won't increase consumption, and the spending won't increase employment (in other words, why are we doing it?). Other items he discusses:

It would be better for the Senate to delay legislation for a month, or even two, if that's what it takes to produce a much better bill. We cannot afford an $800 billion mistake. . . .

On the spending side, the stimulus package is full of well-intended items that, unfortunately, are not likely to do much for employment... Has anyone gone through the (long) list of proposed appropriations and asked how many jobs each would create per dollar of increased national debt? . . .

The plan to finance health insurance premiums for the unemployed would actually increase unemployment by giving employers an incentive to lay off workers rather than pay health premiums during a time of weak demand. And this supposedly two-year program would create a precedent that could be hard to reverse. . . .

All new spending and tax changes should have explicit time limits that prevent ever-increasing additions to the national debt. Similarly, spending programs should not create political dynamics that will make them hard to end.

The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.

This is essentially the position I've arrived at. This is a bill that (1) will not cause meaningful increases in consumption or employment, (2) is loaded with pork and long-time democratic agendas rather than targeted fiscal response, (3) is a massive increase in debt which will undermine confidence in government and put future policymakers in a fiscal straitjacket, and (4) is nearly certain, due to political capture, to mean a permanent expansion of government that hasn't been properly advertised or vetted as such by its proponents. Much like Bush used the 9/11 crisis to slide unrelated projects past the American people (like Iraq), Obama and the Dems are now using this crisis to impose massive unrelated liberal agendas which will be paid for by me and my unborn children. These permanent changes to the structure of government deserve a debate on their own merits, not a hasty, disingenuous defense using, inaccurately, the financial crisis as an excuse for immediate action. Mr. Obama's administration has even made claims that all economists agree about this stimulus.

This isn't what we were promised from Mr. Obama. He has replaced a partisan, right-wing government with a partisan, left-wing government, when we were promised a consensus-based, Change We Can Believe In government.

The Cold War Lite Thaw

2009-01-28T17:35:00.004-07:00

According to a Russian official, “The new US Administration is not pushing ahead with the plans to deploy the US missile defence system in Poland and the Czech Republic. Russia does not need to deploy Iskanders in Kaliningrad if the US does not install missile defence facilities in Eastern Europe.”

After a phone call between Presidents Obama and Medvedev, the White House yesterday released this statement, “The presidents agreed that, as they were both new leaders from a post-Cold War generation, they have a unique opportunity to establish a fundamentally different kind of relationship between our two countries.”

Serious rapprochement with Russia would be smart of Obama. He has nothing to gain from continued antagonism with Russia and will need their help to deter Iran's nuclear ambitions, reform the UN Security Council, and (who better?) help turn the tide in Afghanistan. Cozying up to Russia would also silence gadflies like Chavez and Castro, and give credibility to Obama's efforts to recast the US as a friendly nation willing to "extend a hand if you are willing to unclench your fist."

What would Obama have to give up for better relations? For one, NATO expansion into Georgia and Ukraine would probably be off the table. Additionally, relations with Eastern Europe, and by extension, Brussels, would likely take a hit. Lastly, it might have to tone down criticisms of Russia's continued autocratic tendencies. But these are small costs for the US to persuade Russia to become a reasonably reliable international ally.

On Stimulus: Kling, Hamilton, Sachs, the Angry Bear, and the Times

2009-01-28T09:57:00.006-07:00

I know my readers (both of you) are now tired of stimulus discussion, but I'm not. So on we go.

Arnold Kling juxtaposes the famous Larry Summers dictum that fiscal stimulus should be "timely, targeted, and temporary" with a description of the current stimulus efforts: partisan, pandering, and permanent. He channels sources indicating that (1) the unemployment we're facing is in sectors that won't really be affected by the stimulus bill; (2) though he doesn't use the word, political capture will ensure that the spending increases are permanent, and (3) the government will now have dramatically increased involvement in education.

James Hamilton says that no lawmaker should vote yes on a bill they haven't read. The current stimulus bill is 647 pages (I think his econometrics textbook is about the same length). Hamilton proposes an alternative bill, two paragraphs long, which simply gives money to states.

In FT (remember it's free, just sign up), Jeff Sachs opines:

The US debate over the fiscal stimulus is remarkable in its neglect of the medium term – that is, the budgetary challenges over a period of five to 10 years. Neither the White House nor Congress has offered the public a scenario of how the proposed mega-deficits will affect the budget and government programmes beyond the next 12 to 24 months. Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package. . .

What we need is a medium-term fiscal framework, one that lays out an anticipated schedule of taxes and spending consistent with the needs of the economy and government functions. Rather than soundbites about ending pork-barrel projects or scouring the budget for waste, or about the relative multipliers of tax cuts versus spending increases (both of which depend on expectations about the future, a point mostly overlooked in the debate), we should be reflecting on certain basic fiscal facts, the most important of which is that the US government faces huge and potentially debilitating structural deficits as far as the eye can see.

Lest you think it's all negative, Angry Bear describes the economics profession as being divided between freshwater and saltwater economists. He argues that the freshwater group (think laissez-faire) is noncredible. Keep in mind, however, that he lists among the saltwater economists Greg Mankiw, a moderate stimulus skeptic.

Finally, the NYT econ guy David Leonhardt:

First of all, the package really is stimulus. It will quickly give money to the people who have been hardest hit by the recession and who, not coincidentally, will be most likely to spend that money soon.

This is a funny claim to make so cavalierly, considering the huge debate surrounding the stimulus (proof by deity, I guess, since it's Obama's plan). But then again, the NY Times is not famous for its unbiased political credibility.

In the news today - economics and foreign policy

2009-01-28T08:40:00.005-07:00

Economy

Today's NY Times was full of stories that will make libertarians and deficit hawks cringe. The stimulus bill is including large increases in health care: people currently receiving unemployment benefits can now qualify for Medicaid, regardless of income.

Republicans wanted to deny the premium subsidies to people who had annual incomes of more than $100,000 or assets of more than $1 million. They also wanted to prevent people with more than $1 million of family income from taking advantage of the Medicaid option for the unemployed.

Democrats voted down those proposals.

Meanwhile, in a commendable move, Obama met with Republican lawmakers to discuss the stimulus. Unfortunately, he continued the old fallacy he and Dems have been using all along: “The statistics every day underscore the urgency of the economic situation,” he said, which has been his only defense of his stimulus plan. But as I've written before (here and here), there is considerable debate about whether the stimulus will be worth its massive cost in political capture and deficit spending. While everyone agrees we have an "urgent economic situation," Obama and the Dems still haven't made the case for their particular plan, which seems to be turning into a pork fest (and the timing is not consistent with Obama's promises, according to the Congressional Budget Office).

Part of the plan is supposed to improve our failing infrastructure, a worthwhile goal. Of course, this is not the greatest time to be worrying about this: Clinton and Bush both dropped the ball on using budget surpluses for public investment. Since it will be financed entirely by deficit spending, which will be paid for by the unborn in terms of higher taxes and lost growth, I think the infrastructure issue merits more national dialog. Also included in the stimulus is a more than doubling of the federal education budget.

My bottom line is this: to keep his promises about consensus politics (and Change), Obama must separate economic stimulus from permanent government expansion (Bill Clinton's budget director agrees with me). Pushing through long-time Democrat agendas in the name of economic relief is disingenuous. The economics of fiscal stimulus themselves are subject to enough disagreement already - and Obama has yet to defend that plan - so permanent changes to entitlements or other spending should be a separate discussion.

Foreign Policy

As a background note, readers should remember that, despite his reputation, the vast majority of Bush's foreign policy was not unilateral. His approaches to Russia, Iran, North Korea, Israel/Palestine, and Afghanistan were all multilateral.

That said, Obama is taking a good look at Afghanistan, with Robert Gates having "openly criticized the United States' NATO allies for not fulfilling their promises." During the campaign, amidst Obama's promises of a new, cooperative United States, nobody forced him to explain what made him think our partners would suddenly want to help us despite decades of expecting us to shoulder the burdens of world peacemaking.

For Iran and North Korea, we have more evidence that Bush was already doing the multilateral thing, and that the Obama administration plans to continue the same agenda. "Mrs. Clinton did not disclose the options under consideration for reaching out to Iran, beyond mentioning the existing multilateral talks," says the Times. Translation: Iran will proliferate on Obama's watch, because Iran sees proliferation as a national interest, and talking does not deter states from pursuing their interests. From the same article, "As for North Korea, Mrs. Clinton said the administration was committed to existing multilateral talks over its nuclear program." Change we can believe in.

I've before discussed the catch-22 Obama made for himself by promising to dramatically change the US international image. This week, he spoke to the Islamic world community. The Times and Obama people would like us to think that this "signaled a shift... from the Bush Administration." Wouldn't that be nice; but anyone who has been alive since 2001 will remember that Bush made similar statements about the US not being an enemy of Islam. Currently, it seems that a large portion of the Islamic world believes Obama, but this cannot last: (1) Leaders in radical Islam have incentives to make Obama look like Bush, so they will try their best to do so; and (2) every time Obama pursues a US interest that runs counter to Arab or Persian interests, the radicals will score PR points - and Jihad will continue. Failing to understand this might be Obama's biggest foreign policy mistake.

Some random other thoughts: in a strange statement, Hillary Clinton has implied that Bush's econ-central approach to US-China relations was somehow flawed. Newsflash, Hillary: China sees virtually all of its national interests in terms of economics. If we want to do diplomatic business with China, we must do so based on economics. There will be no change in policy here. Also: there is some talk of Russia suspending plans to deploy missiles in Kaliningrad. I've before discussed Obama's tricky catch-22 with missile defense and Russia.

(1) While Russia has announced a 27% increase in defense spending for this year, falling oil revenues will limit such plans, especially for things that aren't central to Russian security. Since Russia internally knows that American BMD in Europe is not a real threat, the missile plans might have to be axed.
(2) Putin continues to use Obama's promises as a way to force the hand of the US. This is yet another incentive for Obama to reverse Bush's BMD policies; but once he does so, as Putin hopes he will, Putin scores major domestic points and makes the US look like a Russian pawn. Such behavior will incent Russia to push for more US concessions in Eastern Europe.

If Obama is smart (he is) and as pragmatic as he claims (I doubt it), he will recognize that the key to US-Russia relations is lower oil prices, which can only be effectively achieved with a gas tax.

In summary, it is looking like the Obama policy will be little different from Bush's. Multilateral delegation on Afghanistan, North Korean, and Iran; attempts to balance our image in Islam with national security; continued withdrawal from Iraq made possible by the Surge and political progress (which Obama predicted would never happen).

More stimulus debate

2009-01-27T11:36:00.003-07:00

The blogosphere debate about the stimulus continues. At least among the economists I read, since Tyler Cowen's scolding there has been a noticeable decline in name-calling polemics.

Regardless, there are some good explanations out now. The best comparison of views I've seen today comes from Arnold Kling. He explains the debate between Kevin Murphy and Brad DeLong, breaking down their assumptions in "plain english." You can judge for yourself who is using better assumptions.

Greg Mankiw posted the CBO's breakdown of the spending timeline, which might surprise you (unless you share my cynical view of Congress). The amount that will actually be spent this year is very, very small, considering the sense of urgency that stimulus proponents want to instill in us. This certainly violates Larry Summers' argument that government interventions should be "timely, targeted, and temporary." Of course, Krugman defends the lags here, but I just don't buy it. Despite its urgency, most of the effects of the stimulus will certainly not be felt for years. This will continue to stoke fears of a permanently expanded government, which is not something Obama wants to do so early in his tenure (considering his promises of consensus politics).

Menzie Chinn is one of my favorite economists. He discusses (and criticizes) five key reasons to believe the stimulus won't work here. Be sure to read the comments; he's a pretty fair observer.

Guest Contributor, review of Arabs: Journeys Beyond the Mirage

2009-01-26T09:23:00.001-07:00

Reader Matt K. recently returned from Egypt and agreed to write a book review with insights from his visit.

Arabs: Journey Beyond the mirage
by David Lamb

The best travelers are those who have prepared for a journey by learning about their destination and the people who live there. Read a book, watch a movie, talk to friends, family, acquaintances, do some research; all of these are great ways to prepare for a trip. In the hope of learning about Egypt before my arrival, I read several journal articles, followed the country through the papers and the television news, and upon arrival in early December, I began reading this book: “The Arabs: Journeys Beyond the Mirage” by journalist David Lamb. The book was originally written in 1987 (during a particularly bad time between Israel and Palestine), and was revised and updated in 2002 following the 9/11 attacks. Lamb notes that, in rereading and updating, he is struck by how much remains the same. That was in 2002. I can attest to the fact that its truth remains these 7 years later, even as time lessens the horrors of the latest Arab-Israeli conflict in the Gaza Strip...

Lamb is a premier journalist (a thorough bio is to be found in the book) and a tremendous writer. His illustration of the Middle East (plus Egypt), and the Arab people and their culture is intimate and informative. He is skeptical while being optimistic, and deeply acquainted with a culture that is so different than ours. Equally helpful is his understanding of the way that many Americans feel about Middle Easterners (not particularly well, to be exact), and his surprising reassurance which goes something along the lines of “hey, these people are actually very much like you and me.” Let’s get into a couple of the discussions that the Lamb’s “Arabs” has to offer.

Lamb starts by speaking of that very problem: two very different cultures caught in an ever-shrinking world more homogenous and material by each passing day. To religiously conservative Arabs, he explains, this is simply not a priority. In truth, it is uncomfortable to them, and threatening to the Godly existence that they seek for themselves and their families. Religiously, Lamb reminds us that, when compared to American societal norms, Arabs are starkly different- women are to remain covered in public, are to avoid eye contact with men, and up until recently have been limited to only certain roles in society. The Koran, says Lamb, describes every activity in life, and prescribes exactly how it should be dealt with or performed. Unfortunately, as one can tell, this often produces problems. In much the same way that a prescriptive religion can turn lives around, it can also spawn groups of individuals who take those principles to an extreme. Forced into a corner through a variety of struggles- troubled childhoods, financial problems, or the need to feel acceptance and righteousness- many youth have turned to extremist groups. Some percentage of these teens are convinced that their lives would be best spent killing infidels.

It is important to dig deeper into this religious/cultural collision, however, and this is exactly what Lamb proceeds to do. How about considering the history of our respective countries and regions? Egypt, for one, is the Nile. That is to say, Egyptian civilization would not exist were it not for the Nile. In fact, 99% of the population lives on 4% of the land (that which is in proximity to the Nile). The population of Egypt is growing so fast that the country is experiencing growing problems, even while maintaining a net export of its people (about 4% of its population leaves every year, I believe). Egypt is in all likelihood the cradle of civilization (despite what they say about the Fertile Crescent). As far as I can tell, the Greeks learned about architecture from the Egyptians, the Romans about warfare. In some areas, ancient Egypt came close to stages of development that modern day “developed” countries have only recently achieved. Considering the history of the Middle East alone, one can understand why the people are so proud of their heritage. If Egyptian civilization as we comprehend it was a blip in the screen of the earth’s history, then American history (post colonization) is imperceptibly small. Even North America’s “ancients” like the Cliff Dwellers, the Mayans, the Aztecs, etc, simply pale in comparison.

This strong sense of identity can explain the guardedness with which the Arabs approach Westernization. When coupled with the unabashed hostility that America has shown over the last century to Arab nations, one can see why some of the more extremist organizations are able to justify escalations of violence. It is a fact- America has often meddled in the dealings of the Middle East, and at a high cost (of money, and life). Lamb discusses a few of these circumstances, many of which will be familiar. In the 70’s, hoping to stem the expansion of the Soviet Union, America supplied weapons to the Afghans. At the same time, Egypt, in dire need of agricultural productivity (just as it remains today), was bidding out a major construction project – the High Dam at Aswan, which was soon to create the vast Lake Nasr. America jousted, while maintaining a “Cold” distance, with the Soviets on these and many other issues. But if one goes back to the end of World War II, probably the most divisive issue is revealed- the creation of Israel. As it is literally carved from within Palestine, the abhorrence of Israel among Middle Easterners is well publicized, and no matter what they say or do, one can assume that “true” Middle Easterner Muslims will always feel betrayed by the US for our support of the Israelis.

Lamb describes it all in detail, and with surprising deftness. US support for Israel has continued to this day. Egypt was the victim in the US-Israeli collaboration in the 1967 Six Days War, referred to by Egyptians as “an-Naksah” (The Setback), when an armed Israel proceeded to obliterate the Egyptian forces on the Sinai Peninsula. Egyptian President Abdul Nasser would publicly hope that America would “choke on its own pride” shortly after the Egyptians were routed from the Sinai Peninsula.

In my travels in Egypt, I spoke with a cabbie who drove a truck in the second war with Israel on October 6, 1973, as Egypt fought to regain the Peninsula in a surprise attack. His mission was to drive a semi truck with a tank on a trailer behind it to the battle front for delivery to Egyptian forces. In a scene that I imagine playing out like something from an Indiana Jones movie, Madi saved his own life by diving from his truck to avoid the bullets of an Israeli jet as they destroyed his vehicle, heroically ran to another truck, pulled a dead compatriot from the driver’s seat, and fulfilled his mission to deliver a tank to the battle front. Americans miss out on these kinds of stories from the eyes of the Arabs.

Luckily, Lamb provides many of them. Whether it be through his description of the vivid sectarian violence between Palestinians during an Israeli invasion, or his sketch of the warring factions of Saudis as a result of oil and its influence, or even his assessment of the dramatic societal upheavals that Arabs are subjected to as a result of violent fluctuations in the oil markets, Lamb’s reader is led into a world that can at once terrify, uplift, reassure, and puzzle. If you have any hope of travelling to the Middle East in the future, or even if you want to develop a mature perspective on the situation, this one should be required reading. Compared to many books on the subject, should you be required to read it, consider yourself blessed. The book, obviously does not cover the post-2002 conflicts in the region. What may or may not surprise readers is how little has changed even since the first iteration of Lamb’s book was written in the late 1980’s.

Glenn Beck plays team politics

2009-01-26T08:32:00.003-07:00

Sadly, yesterday I caught a few minutes of Glenn Beck's new show on Fox (pictured above with Rush Limbaugh, who admitted that he wants President Obama to fail - so much for all that support the president stuff we heard 8 years ago). He was railing on Obama's pick for Treasury Secretary, Tim Geithner. One of Beck's arguments against the pick is that since Geithner employed an illegal immigrant in his home, he has "bad judgment" and is, therefore, a bad choice for the job. I can't find the actual video - he went on and on and on about this - but here's another source from last week saying the same thing.

Beck supported Mitt Romney in the Republican primaries. His support was so dogmatic that he was one of the people who promised to vote for a Democrat if John McCain was nominated. But readers may recall that at a debate in Florida on November 28, 2007, it was revealed that Romney employed illegal immigrants as landscapers. Did Beck consider this a sign of bad judgment which should disqualify Romney? The very next day, Beck had Romney on his show and only asked him one question about the issue. Read the text here. Glenn asked him one kid-gloves question then let the matter rest, supporting Romney throughout the rest of the primaries.

If you didn't know already, you do now. In addition to being ignorant and ridiculous, Beck is a hypocrite who plays team politics. He's not interested in whether the new Treasury pick is qualified for the job - Beck admits that he is - but only cares that he was chosen by a Democrat - the other team.

Lewis on Wall Street

2009-01-24T11:13:00.003-07:00

Michael Lewis, author of Liar's Poker (the book that made me decide against going into I-banking), on the demise of Wall Street:

In the two decades since then [Liar's Poker], I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces? . . .

There was an umbilical cord running from the belly of the exploded beast back to the financial 1980s. A friend of mine created the first mortgage derivative in 1986, a year after we left the Salomon Brothers trading program. (“The problem isn’t the tools,” he likes to say. “It’s who is using the tools. Derivatives are like guns.”). . .

The public lynchings of Gutfreund and junk-bond king Michael Milken were excuses not to deal with the disturbing forces underpinning their rise. Ditto the cleaning up of Wall Street’s trading culture. The surface rippled, but down below, in the depths, the bonus pool remained undisturbed. . . The changes were camouflage. They helped distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture. . .

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?

Anyone remotely familiar with the world of investment banking knows that it is a culture of greed. As such, it attracts bright (but greedy) minds away from professions that might have actually provided some social benefit. One would hope that the current disaster will cause some to change their minds.

h/t J Lybbert

Czech Art Breeds EU controversy

2009-01-23T17:52:00.003-07:00

Some art on display at the European Council in Brussels is breeding quite the controversy. The art by the Czech Artist David Cerny lampoons each of the EU member states national stereotypes. Some of the highlights:

* France is portrayed as a country on habitual strike.
* Italy as a football pitch.
* Romania as a Dracula styled theme-park.
* Luxembourg as a piece of small lump of gold for sale.
* Bulgaria as a toilet.
* the Netherlands as a series of minarets submerged by a flood.

See this BBC article for more.

h/t Steven Stakland

UPDATED TWICE: The stimulus debate and "proof by deity"

2009-01-23T10:49:00.017-07:00

Tyler Cowen at MR:

Matt Yglesias has a very good post on Robert Barro's latest. Brad DeLong seems to agree with Matt. Paul Krugman uses the word "boneheaded" to describe the Barro piece.

This exchange is a good micro-cosm of how the stimulus debate has proceeded. A highly respected anti-stimulus economist puts up some anti-stimulus evidence in a highly imperfect test (in Barro's defense, he did cover more than just WWII). The anti-stimulus economist is attacked by pro-stimulus economists. But the pro-stimulus proponents are focused on attack. They are not putting up comparable empirical evidence of their own for the efficacy of fiscal policy and there is a reason for that, namely that the evidence isn't really there.

(Emphasis mine). Cowen, like me, seems concerned but undecided on the debate, calling it a "hail Mary pass" - but whether he is or not, he does not agree with the ridiculous accusations of the Krugman crowd. Ditto for Arnold Kling:

I don't think that the proponents of a stimulus can claim superior intellectual firepower. . .

Huizinga, Krugman, Bernanke and I took the same macro courses from the same professors. I spent a year as "forecast co-ordinator" for the staff of the Federal Reserve, which gives me the most experience of anyone in this debate with what Greg Mankiw calls the engineering approach to macro. The engineering approach is what is being implicitly adopted by stimulus advocates.

We also have several U Chicago economists opining, including Kevin Murphy (via David Henderson):

He laid out an equation that everyone could agree to so as to see if increases in government spending could have a good effect. The disagreements, he noted, would be on the various magnitudes and on one sign. . . Bottom line: if you share Kevin's view about the magnitudes, you will conclude that this Obama fiscal policy will be horrible. And you have to have a pretty extreme view of the magnitudes of the parameters to conclude that it will be on net good.

Would you like another? Ian Bremmer (I've mentioned him before - brilliant) and Nouriel Roubini (ditto) with a great (but worrying) piece in the WSJ:

Politics will make matters worse, primarily because governments in both the rich and the developing worlds are intervening in their economies more broadly and deeply than at any time since the end of World War II. Policy makers around the world are hard at work crafting stimulus packages filled with subsidies and protections they hope will breathe new life into their domestic economies, and preparing to rewrite the rules and regulations that govern global markets.

Why is this dangerous? At the G-20 summit a few weeks ago, world leaders pledged to address the crisis by coordinating their economic policy responses. That's not going to happen, because politicians design stimulus packages with political motives -- to satisfy the needs of their constituents -- not to address imbalances in the global economy. This is as true in Washington as in Beijing. That's why politics will drive the global economy more directly (and less efficiently) in 2009 than at any point in decades. Its politics that is creating the biggest risk for markets this year. . . .

New York, once the financial capital of the world, is no longer even the financial capital of the U.S. That honor falls on Washington, where lawmakers are now injecting populist politics into economics decisions.

Emphasis mine; keep in mind that both Bremmer and Roubini have jobs that require them to accurately assess market and political risks (Bremmer at Eurasia Group and Roubini at RGE Monitor). This is what they do.

Nate Silver (not an economist, but Krugman isn't really anymore either) asks, is there a serious conservative argument against the stimulus? The question Cowen, Kling, and Barro seem to be asking is, is there a Team Obama argument that includes something other than accusations without evidence (or content newer than Keynes' 1936 book)? The difference is that Cowen really wants to know, while the Silver people are asking the question rhetorically: how could anyone dare disagree with His Hopeness!?! Obama's disciples seem now to think that their assertions are backed up by what math people would call "proof by deity" - no need to provide evidence for arguments if Obama Omnipotent is on your side. After all, anything Bush would have done must be flawed!

The problem here is that this has become a team issue - in this case, the Church of the Changemaker wants to label any skeptics as Republican partisans. A better approach would be for all the sides to present evidence, and for Obama to make his decisionmaking process transparent. He hasn't done that, so careful thinkers are still unconvinced.

UPDATE: Mark Thoma responds to Cowen's request for evidence by quoting the Murray econometrics text, which references David Aschauer's findings:

Aschauer finds no evidence of public military capital raising output or productivity, nor does he find the flow of spending goods to have any effect on output or productivity.. Public spending raises private sector productivity to the extent that public sector spending is on nonmilitary capital goods. How government spends its money matters! It is not government spending, as such, that spurs private productivity, but rather specific government investments in capital goods that makes the private sector more productive.

So, as I have argued before, this partly depends on the government's ability to spend money efficiently.

UPDATE II: on the subject of efficient government spending, David Brooks discusses the pork process for Obama's precious bill:

The bill marked up Wednesday in the Appropriations Committee is a muddled mixture of short-term stimulus haste and long-term spending commitments. It is an unholy marriage that manages to combine the worst of each approach — rushed short-term planning with expensive long-term fiscal impact. . .

A study by the Congressional Budget Office found that less than half of the money for infrastructure and discretionary programs would be spent by Oct. 1, 2010. . .

President Obama is clearly going to have to show the hard way that he meant what he said about bringing change. He didn’t run for president just to sign whatever bills the Old Bulls put on his desk.

It should surprise nobody that the stimulus bill is turning into a porkfest - nobody, that is, except the Obama disciples who drank the Yes We Can Kool-aid about his ability to fix government and pass the bill via, as Brooks once said, Immaculate Conception. It turns out that, like we were saying all along, Washington isn't as easily changed as Obama wanted his minions to believe. His supporters will defend his actions by saying, it's not his fault that Washington is so corrupt. But not only was he part of the corruption before; his critics (like me) were saying all along that his promises of change were unrealistic. We were rebuffed with chants of Yes We Can (and Bill Clinton was even accused of racism for calling the whole fairy tale a fairy tale).

More importantly, the chances of getting an effective stimulus bill through Congress are, as I've been saying all along, basically zero - even if Keynesian economics were 100% accurate. Hence Roubini's assertions about government involvement (by the way, in case you think Roubini is a crazy right-winger, recall some of my old posts quoting him). It seems my skepticism of Obama-style Keynesianism is warranted.

Obama is in a fix now; all his promises of big changes can now be put to the test, starting with his promises about greater government transparency and changing Washington.

Barro also not a Believer

2009-01-22T16:20:00.004-07:00

World famous and highly respected macroeconomist Robert Barro today opines on the stimulus. Barro confirms my assertion that the issue of the stimulus, and pop Keynesian economics in general, is not nearly as accepted as Obama's disciples want to believe. Perhaps the most damaging argument he makes is his comparison between this Krugman-esque multiplier talk in support of Obama and the now discredited conservative fad of supply-side economics.

If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases.

Thus, the annoying free-lunch rhetoric of the supply-siders is now matched by the free-lunch rhetoric of the Church of the Holy Changemaker. Barro uses my previous arguments about belief in government efficiency (emphasis mine):

What's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. . . .

But, in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes's 1936 "General Theory of Employment, Interest and Money." The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936.

Barro estimates the multiplier to be 0.8 during wartime and lower during peacetime. Paul Krugman, as expected, accuses Barro of being intellectually dishonest due to his political leanings (as if NY Times partisan columnist Paul Krugman has room to talk). He argues that Barro's estimates are too low due to rationing during WWII; but he ignores Barro's arguments about Vietnam and other wars. Brad DeLong also responds (sort of), but nobody seems to have an answer to arguments about government inefficiency.

In summary, I think it's safe to say that not all the experts agree with the stimulus. Obama still hasn't made an adequate case for it.

Racial (dis)harmony so soon!?

2009-01-21T14:32:00.005-07:00

How's this for ushering in Obama's unity and harmony? From Rev. Lowery's Inaugural Benediction:

Lord, in the memory of all the saints who from their labors rest, and in the joy of a new beginning, we ask you to help us work for that day when black will not be asked to get back, when brown can stick around -- (laughter) -- when yellow will be mellow -- (laughter) -- when the red man can get ahead, man -- (laughter) -- and when white will embrace what is right.

Back to reverend white bashing. Already?! WTF?

The Politics of Trade Policy

2009-01-21T11:31:00.004-07:00

Painful indeed. Politics permeates trade policy.

There are those exceptions when these political permeations are beneficial. Entering into Free Trade Agreements (FTAs), for example, can reward an ally for economic and democratic liberalization and punish an enemy for hostilities. Perhaps even more significant, trade relations can grow and embolden the middle-class in closed, authoritarian states. In generally, trade policy is a strong tool for advancing American interests abroad.

However, the politics that permeates trade policy often has less to do with overseas interests than domestic politics. Republicans protect certain industries; Democrats protect labor unions.

An example of this would be the US' refusal to enter into an FTA with Columbia to reward Columbia's democratic and economic advancements, firmly grounding the nation as a free-market democracy in the surrounding sea of socialism. The reasoning: domestic political considerations for US labor unions.

The domestic political influences on trade policy is a shame, especially considering even the most well respected of economists (Mankiw, Krugman) swallow their science to accommodate political dogma.

Welcome to the White House President Obama.

2009-01-20T16:33:00.002-07:00

Its not easy being President of the indispensable nation with a domestic economic crisis, two wars, a proliferating Middle-Eastern hegemon, a variety of radical non-state arch nemesis bent on your nation's demise, unstable long-term energy policy, a widening 9 trillion dollar deficit, and a variety of other global interests. Good luck President Obama. You need it. And so do we.

Holbrooke saves Colbert

2009-01-19T17:52:00.002-07:00

We've argued in the past that Richard Holbrooke should have been Obama's choice for Secretary of State. In the end, politics trumped competence, and Hillary was chosen. For those who doubted us, we provide this video of Holbrooke's diplomatic skills in action.

The Colbert ReportMon - Thurs 11:30pm / 10:30c

Willie Nelson

Colbert at Christmas
Colbert Christmas DVD

Green Screen
Bill O'Reilly Interview

Silver on Palin and media bias

2009-01-14T10:18:00.003-07:00

This is what Nate Silver does best (not arguing with people much smarter than him):

I think we can acknowledge that Palin had a rough go of things with the media... Complaining about the media is not a media strategy... People weren't turned off by Palin because of the questions about her wardrobe or baby Trig. They were turned off because -- fairly or not -- they couldn't become comfortable with the idea of her sitting in the White House. Giving interviews to the likes of John Ziegler or exchanging nastygrams with the Anchorage Daily News isn't going to get her to be taken more seriously.

Emphasis mine. They might have also been turned off by her inability to name a daily newspaper or her inability to articulate her views on international affairs without looking like a 5th grader. Again, can't really blame the media.

Obama's political appointments

2009-01-14T08:40:00.004-07:00

From Bloomberg on the Economy, Stanford economist Thomas Sowell on Obama and politics:

His recent appointment of Leon Panetta to head the CIA shows that he is far more interested in having politically savvy people around him than in having people who are professionally qualified.

Obama's focus on politics instead of qualifications is not limited to the CIA. I've lamented before the fact that Obama's appointment for our top diplomat, Hillary Clinton, is a corporate lawyer with limited experience in the Senate but no experience as a diplomat (but she provides domestic political benefits); his choice to oversee healthcare, Tom Daschle, has no training in healthcare economics (but, like many politicians, he has written a book!). Only in government can people get top jobs for which they have no training or experience; in the private sector, as a general rule, people have to be qualified for jobs.

He has made a few selections who are qualified, but their previous opinions have been silenced by the Obama agenda - confirming my suspicions that, just as on the campaign trail, Obama listens more to his political advisers than the actual experts. Christina Romer has already modified her landmark findings about taxes to conform with Obama's stimulus plan, and his choice for Energy Secretary has abandoned his previous support for Pigovian gas taxes.

Supporters of Obama who, after all the campaign posturing and rhetoric and these political appointments, still believe that he will rise above politics as he promised will not be deterred by evidence. But, for the rest of us, hopes that Obama would keep any promises are falling apart.

Not much of a Change

2009-01-12T08:34:00.003-07:00

Kristol on Obama and "change":

So: After talks with Iran (if they happen) fail to curb Iran’s nuclear program, but (perhaps) impress other nations with our good faith, we’ll presumably get greater international support for sanctions. That will also (unfortunately) fail to deter Iran. “Engagement is the place to start,” Obama said, but it’s not likely to be the place Obama ends. He’ll end up where Bush is — with the choice of using force or acquiescing to the idea of a nuclear Iran.

For some time I've suspected that Obama's policies will be little different from those of his competitors. By the end of the campaign, he had abandoned his early rhetoric opposing the Surge and pushing for speedy withdrawal. Of course, the whole point of the Surge was to provide an opportunity for withdrawal. Now his Iraq policy is barely different from McCain's or Bush's.

What we are seeing, and will continue to see, is that Obama's Yes We Can promises were, as he admits (despite promises of a New Kind of Politics), "campaign rhetoric." His supporters will ignore his flip-flopping, or defend it by saying things like "that's what you have to do to survive politically." But remember, the entire appeal of the Obama campaign was that Yes He Can achieve his promises regardless of political constraints. This rhetoric is how he beat Hillary, whose ultimate policies would have been indistinguishable from the ones that Obama will now pursue.

As I've said before, America has been duped. Obama will probably be a great president. But he will not rise above the constraints of politics and US interests as he promised. His policies will be very different from his promises - which is sad, since the only reason we elected him was that he promised to transcend old politics.

Russian Energy Politics

2009-01-09T09:45:00.003-07:00

Russia and Ukraine are at it again. As usual Russia is accusing Ukraine of siphoning gas supplies headed for Europe while Ukraine is accusing Russia of restricting gas supplies. Ostensibly the conflict is over a dispute in gas prices. However, there may be more to it than that. There are two prominent opinions by experts.

The first perspective is that Russia is manufacturing this dispute (and supply restriction) in order to garner support for the Nord and South stream pipeline projects. Those pipelines would increase and diversify Russia’s ability to provide energy to Western Europe. More importantly, these pipelines would render the Ukrainian pipeline obsolete, allowing Russia to gain valuable leverage over Ukraine—monopolizing a major source of revenue for Kiev—without restricting supplies to Western Europe. This would effectively increase Russia’s influence over Eastern European countries previously benefited by transporting Russian gas to Western Europe.

The second perspective is that Ukraine is siphoning off gas to guarantee a lower gas price. Russia—pressured by Western Europe for restricting gas supplies and in need of revenue—will feel compelled to negotiate a lower gas price to Ukraine in order to end their dispute, and increase gas supplies.

Regardless of which perspective proves correct, the message to Europe is to wake up and smell the burning oil—Russia is not a reliable supplier of energy. Politics heavily influences its supply decisions. Developing energy alternatives is paramount to Europe’s long-term economic prosperity and continental security.

Fiscal tools not the only option; and the New Kind of Politician isn't so different after all

2009-01-09T08:34:00.006-07:00

Despite his refusal to discuss tricky international affairs, which he defends by saying that there's only one president at a a time, yesterday Obama gave a speech on the economic crisis. He correctly said, "If nothing is done, this recession could linger for years" (transcript). However, through a logical fallacy, he then announced a massive fiscal stimulus plan and argued that it is the only path to recovery. Most Americans probably agree with him that this is the only option, but voters should know that economists disagree about this, and that fiscal stimulus is not the only path to recovery.

The NY Times lists some big name economists that disagree with the notion that fiscal stimulus is our only and best option. Some of the reasons they may disagree are the way it will increase the debt (by more than $1 trillion), the way government has shown to be inefficient in the allocation of resources, and the analysis of some economic historians (including Obama's own Mrs. Romer) suggesting that fiscal stimulus has never been really effective in fighting recessions. Other problems can be found, like Obama's promise to "double the production of alternative energy" on the assumption that the government is the best organization to make important market-actor decisions .He doesn't explain specifically what alternative energy he plans to develop (perhaps he will throw more money at the corn ethanol lobby, as Mr. Free From Special Interests has done in the past).

Many of these economists believe that more monetary options (like quantitative easing) can be employed which will be more effective and avoid some of the long-term costs (debt, political capture, corruption, etc.) of fiscal intervention. Others just fear that Washington's club of mostly lawyers-turned-politicians lack the tools to make big economic decisions without causing bigger problems and would rather let the market decide.

Conspicuously missing from Obama's plans was any indication that he would keep the promises he made in the Midwest about trade protectionism (Click here to read about Obama's trade catch-22). At the time, his complaints about NAFTA and other agreements were key to his arguments about US job losses. I applaud his willingness to abandon such irrational rhetoric; but I hope his huge following will recognize that such posturing was simply a ploy to get votes - behavior Obama promised to avoid as the New Kind of Politician. As he himself once wrote, "Say one thing during the campaign and do another thing once in office, and you're a typical, two-faced politician" (Audacity of Hope, 117). It's too late to un-elect a man who was elected solely for his promises to avoid just this kind of behavior, but one would hope that his current actions would serve to bring some of his more irrational supporters to their senses. Above all, this should remind us that we have a responsibility to hold him accountable once in office.

The solution to the economic crisis must not be based on political posturing. Obama knows that the people want fiscal stimulus, so he'll give it to them. He fails to provide a real discussion of the costs of such an intervention, assuming a priori that fiscal stimulus is the only solution. The crisis is more nuanced than that. He must be held accountable, since he has already demonstrated, by his own standard, that he is "a typical, two-faced politician." Americans must not give Obama a free pass in his approach to the economic situation.

By way of explanation...

2009-01-09T08:13:00.002-07:00

Many readers have noticed that our rate of posting has declined substantially in recent weeks. We're in the process of planning and making major changes to PP. We think you'll like our new format and content, but it may be a little while in coming. Stay tuned.

UPDATED - Israel/Palestine: the Latest Obama-22

2009-01-02T11:27:00.005-07:00

Despite heavy involvement in economic affairs, Obama has been avoiding difficult questions about international affairs by saying there is only one president at a time. Fair enough, but that defense will be gone soon. In less than three weeks, Obama will be forced to start taking responsibility for his campaign promises.

That will be difficult.

I've written before about the Catch-22 situations Obama put himself in when he decided to campaign on the principle of say-whatever-it-takes-to-get-elected. There are enough of these difficult situations to justify calling them Obama-22's, since they are largely of Obama's own making. Those who criticized him during the campaign (PP included) for making unrealistic claims and contradictory commitments were accused of lacking Hope. We were often rebuked with "Yes we can!", which was supposed to somehow put us in our place. But the truth is becoming more evident: no, you can't keep contradictory promises, despite your Messianic status among millions of naive college students. Some of the Obama-22's I've discussed before have to do with Iran, Russia, and trade.

The newest Obama-22 is in Israel.

As most readers know, the Israeli-Gaza ceasefire, which neither side obeyed (but Hamas was particularly belligerent) recently ended. Israel is now facing major criticism from liberal media for its bombing of Gaza, though that press club has yet to criticize Hamas for never obeying the ceasefire. Regardless, one way the Israelis have justified their actions to the international community has been by quoting US President-elect Obama, who said in a visit to Israel (from WP):

'If somebody was sending rockets into my house where my two daughters sleep at night, I'm going to do everything in my power to stop that,' Obama said at the time. 'And I would expect Israelis to do the same thing.'

Meanwhile, Obama has major support in the Arab world, even having received substantial funding from Palestinian donors. His popularity abroad was a major talking point for his supporters during the campaign. It has also become a problem for state leaders hostile to the US, who lose their whipping boy when Bush leaves office. Such leaders (in places like Russia and Iran) enjoy forcing Obama to make difficult foreign policy decisions. Indeed, radical Islam has major incentives to make Obama look like a typical American imperialist promise-breaker; as such, the Obama administration might prompt greater aggressiveness from terrorist groups like Hamas, since these groups must persuade moderate Muslims to hate America.

Should he move to protect US interests (and, due to domestic politics, protecting Israel is considered a US interest), Obama forfeits his claims to a new, kinder American foreign policy - which gives the leaders of hostile states the new whipping boy they desperately need to maintain domestic power. If he, instead, chooses to make substantive changes to US foreign policy, in this case by supporting the Palestinians, he loses big domestic points for being a weak American president (and supporting a terrorist organization), and he loses even more respect from realpolitik leaders abroad who, despite the American and international public's swooning over Obama, are already beginning to think he may be a pushover.

The Israeli-Palestinian situation is a deathtrap for US presidents. I do not pretend to know the answers there. The Bush administration originally acknowledged it as such, and vowed to avoid it (though changed during the last year, with no progress). Obama knows that the situation is a catch-22 for him as well, which is why he is currently trying to avoid discussing it. Israel/Palestine, like many other situations, will be a litmus test for his ability to balance campaign promises. He will fail this test, just like the other Obama-22's, because he has made too many contradictory promises.

The moral of the story is this: just because a Yes We Can candidate is able to please everyone on the campaign trail does not mean he can do so in office. Rather, consequences actually do exist, yes-we-can slogans notwithstanding.

UPDATE: 7 Jan.
Reader Spikers offers a formidable response:

Essentially, RD claims that Obama's promise of increased diplomacy contradicts his promises of support for Israel. An analysis of Obama's platform and campaign promises reveals, at most, a slight tension, but no direct contraction.

Yes, Obama promised an increased role of diplomacy in American foreign policy—as opposed to the unilateral military action we undertook in Iraq. Specifically, "Obama will pursue tough, direct diplomacy without preconditions to end the threat from Iran." More generally, "Obama and Biden will renew American diplomacy to meet the challenges of the 21st century. They will rebuild our alliances. And they would be willing to meet with all nations, friend and foe, to advance American interests. . . . Obama and Biden are willing to meet with the leaders of all nations, friend and foe. They will do the careful preparation necessary, but will signal that America is ready to come to the table, and that he is willing to lead. And if America is willing to come to the table, the world will be more willing to rally behind American leadership to deal with challenges like terrorism, and Iran and North Korea's nuclear programs."

Obama also promised diplomatic efforts to end the Israeli-Palestinian conflict: "Obama and Biden will make progress on the Israeli-Palestinian conflict a key diplomatic priority. They will make a sustained push – working with Israelis and Palestinians – to achieve the goal of two states, a Jewish state in Israel and a Palestinian state, living side by side in peace and security." "To that end, Senators Obama and Biden are cosponsors of the Palestinian Anti-Terrorism Act of 2006. Introduced in the wake of Hamas' victory in the Palestinian elections, this act outlaws direct assistance to any entity of the Palestinian Authority controlled by Hamas until it meets the conditions of the United States, Russia, the European Union and the United Nations to renounce violence, recognize Israel, and agree to abide by all agreements signed by the Palestinian Authority. Obama signed a letter urging President Bush to make it clear to Palestinian leaders that terrorist groups must either disarm or be barred from the political process. Since the elections, Obama has stated that Israelis must have a true Palestinian partner for peace. He will encourage the strengthening of the Palestinian moderates who seek peace and work to isolate Hamas and other extremists who are committed to Israel's destruction."

However, Obama also recognized Israel's right to defend itself. Obama's platform states: "Barack Obama and Joe Biden strongly support the U.S.-Israel relationship, believe that our first and incontrovertible commitment in the Middle East must be to the security of Israel, America's strongest ally in the Middle East. They support this closeness, stating that that the United States would never distance itself from Israel. . . . During the July 2006 Lebanon war, Barack Obama stood up strongly for Israel's right to defend itself from Hezbollah raids and rocket attacks, cosponsoring a Senate resolution against Iran and Syria's involvement in the war, and insisting that Israel should not be pressured into a ceasefire that did not deal with the threat of Hezbollah missiles. He and Joe Biden believe strongly in Israel's right to protect its citizens.

Moreover, "Obama signed a letter to the European Union pressing the EU to designate Hezbollah as a terrorist organization. Long before the July 2006 conflict, Barack Obama worked to limit Hezbollah's influence in the region, signing a letter urging President Bush to place al-Manar, the official television station of Hezbollah, on the Treasury Department's Specially Designated Global Terrorist Entity list and to aggressively target organizations that aid in its broadcast." In January, "2008, Senator Obama sent a letter to our United Nations Representative urging that any resolution concerning the situation in Gaza should 'clearly and unequivocally condemn the rocket attacks against Israel, and should make clear that Israel has the right to defend itself against such actions.'" [Letter to Amb. Zalmay Khalilzad, 1/22/08].

Did Obama promise increased diplomatic efforts to pursue a 2 state solution? Yes. Did Obama also promise continued to support of Israel and its right to defend itself? Yes. Are these two contradictory? No. America can attempt to resolve the conflict through diplomacy while simultaneously supporting Israel's right to respond to rocket attacks. To suggest otherwise is disingenuous.

Well researched. My position is not so much hung up on tension between Obama's support for Israel and his promise of increased diplomacy. You're thinking too small. While any good lawyer (or sharp law student) can point out small technicalities and soundbites that would refute such a position, I am speaking more generally of the big themes of Obama's campaign and how they may conflict with his ability to protect US interests. More importantly, I'm speaking about how people's diverse perceptions of Obama, which he encouraged, create a difficult catch-22 for him. To get hung up on technicalities and ignore the big picture is disingenuous.

We both know that Obama was elected because of the euphoria and enthusiasm he created as a social movement (he had no record and no training in foreign policy or economics; but great speeches). Additionally, much of his international support, especially among moderate Muslims, was based not on specific soundbites, but on perceptions that he represents a dramatic change in US foreign policy - not simply "increased diplomacy" as you suggest.

Enthusiasm for Obama among Muslims internationally depends on his promises to provide such a dramatic change. He did nothing to quell such perceptions. Additionally, his support among moderate Muslims poses a serious threat to the power of extremists, whether they be governments or terrorist organizations. Reza Aslan has, correctly I think, characterized jihad movements as a struggle between moderates and radicals in Islam. If that is so, extremists will actively work to change the perceptions of moderates by demonstrating that Obama is simply continuing typical US foreign policy. Making statements like the one I quoted above (about his daughters), while probably justified, is just the sort of propaganda the extremists need to paint Obama as another Bush.

Like American liberals, Muslim radicals need someone to blame everything on. For both groups, Bush has served nicely. That excuse is running out. I don't know what the Democrats will do, but terrorists will actively try to create a new whipping boy out of Obama. Carefully selected soundbites aside, Obama did make big promises of a Changed US foreign policy, though in reality he will likely only make slight modifications in the form of increased diplomacy (and decreased "unilitaralism," though your claim that Iraq was unilateral is inaccurate). My point remains that once Obama actually gets into office, his pursuit of US interests will put him at odds with the perceptions people have acquired, and he has encouraged, of his ability to dramatically change US foreign policy.

Jesse Gunther on Afghanistan

2008-12-24T16:42:00.007-07:00

**The following are insights of Jesse Gunther, a media analyst specializing in Afghanistan for a strategic communications firm**

On Meet the Press, Obama made several excellent points regarding Afghanistan but none of them were strong enough or go far enough to improve the situation in Afghanistan (possibly he is saving the more heavy points for when he is in office).

Essentially, Obama has five points on Afghanistan.

(1) The Afghan War Must Include Pakistan

Cross-border attacks by the Taliban have been going on for years, but have increased recently. Without active operations into Pakistan the Taliban can never really be weakened. Now, this does not endear us to Pakistan but reports have circulated about a secret agreement between the Pakistani and US officials to sanction US attacks on Pakistani soil. The Pakistani government would never inform Pakistanis of such an agreement at the risk of appearing weak. While this is a bad arrangement because it only weakens US support in the region, cross border ops need to continue.

(2) Afghanistan Needs Better Development

This point is paramount. Development is really what is going to win the war. The US is never going to get rid of the Taliban and their ideology, so it needs to convince Afghans that the US is not the ‘bad guys.’ Currently, US reconstruction projects are ineffective and left to Afghans only eighty-percent complete. The Afghans do not have the capabilities of finishing the remaining twenty-percent. We also give them trucks that are 40 years old, really old septic tanks painted new, and machinery that is not compatible with their electrical systems!? The most important infrastructural developments are perhaps providing internet connectivity (knowledge is power and the Afghans are smart people who pick things up easily) and electricity. This is not to say, however, that good reconstruction projects are not being pursued. They are. They are just limited by a lot of red tape and senseless laws. Moreover, organizations other than the military must be more robustly involved in the infrastructural development projects, i.e. the military primarily deconstructs.

(3) More Afghan Confidence in their Government

This is essential, but Obama says the US cannot meddle in the Afghan government while simultaneously calling for corruption to end. The US can help the government train officials and set up a better infrastructure, but cannot be seen as attempting to influence the Afghan government beyond normal diplomacy. The key is striking this balance. Obama’s conflicted policy must change if he is to do so.

(4) Winning Hearts and Minds

This will be done through reconstruction and nothing else.

(5) Troop Surge

Lastly, Obama is favorful of a troop surge. This is a good thing, but only in context of a better and more coordinated strategy, especially in terms of reconstruction projects.

Jesse Gunther is a media analyst for a strategic communications firm covering the US military in Afghanistan.

RIP Deep Throat

2008-12-23T23:31:00.006-07:00

Mark Felt (aka 'Deep Throat'), the anonymous source who broke the Watergate scandal to Bob Woodward and Carl Bernstein, passed away this last weekend. We celebrate his courage to blow the whistle notwithstanding the career risks. Too bad no one in the Obama administration was willing to do the same.

RIP Deep Throat. America needs more civil servants like you.

What's Wrong with US' Oil Policy.

2008-12-22T02:00:00.007-07:00

h/t Peter Berg.

Blair on Globalization and Religious Tolerance

2008-12-18T15:37:00.006-07:00

Globalization is breaking down both physical and artificial borders, pushing different cultures, ethnicities, traditions, and religions together. There are some, however, that do not wish the world to globalize and borders to become increasingly more malleable. According to some scholars such as Benjamin Barber, this wave of globalization is stoking the flames of transnational terrorism, and ethnic and religious conflict among those traditionalists who wish to stave off modernity.

In an editorial for the International Herald Tribune, Tony Blair discusses a new economic and foreign policy based on establishing common values across religious networks in order to otherwise persuade those that see the globalizing world as an entrenchment on their way of life. Blair sees religious intolerance and its inability to see common values as central to the challenges brought on by globalization (transnational terrorism, ethnic conflict, etc.).

To defeat the forces of exclusion and division that lead to terrorism, which now has an enormous reach across all areas of the world, we must turn to education as a major component - not a minor effort - of foreign policy. We need to become literate about other faiths and ways of life.

Therefore, in both economic policy and foreign policy, it is clear than we can't make the world safe for interdependence unless we have strong values that guide us. Peaceful co-existence cannot take root unless we have strong alliances not only across nations but across faiths, through values we hold in common.

PP agrees. I don’t know how Blair plans to initiate an education program based on the development of tolerance and mutual respect across ethnic and religious cleavages, but doing so is paramount. One of the primary reasons so many transnational terrorist come from Saudi Arabia and Pakistan is because of their radical religious education systems.

So, whatever remedies Blair proposes—interreligious collective global efforts, Seeds of Peace, etc— religious tolerance and mutual respect will never thrive without restructuring the educational programs in countries like Saudi Arabia and Pakistan. The question is how.

Quote of the day II

2008-12-18T09:34:00.003-07:00

Ok, so there can't really be two quotes of the day. But this one was too good, from Jeff Frankel:

These people are eager for ammunition against someone of a different ideological persuasion and are not sufficiently discriminating about what they use.

He's talking about some of the criticism labeled at Paul Krugman by conservatives, which is often based on faulty information/reasoning. I have been a critic of Krugman as well - his outspoken political views make it difficult to discern when he is applying his vast economic expertise, and when he is just using his repectable reputation to push a political agenda - but I defended his receipt of the Nobel Prize and criticized those who know little about the field of economics and discount his contribution because of his political persuasion.

Frankel's statement is important. In the game of partisan politics, "people are eager for ammunition against" anyone on the other team; therefore, they use often poor evidence and logic to defend their case without critically evaluating its merit. This is the game, and it's one of the biggest reasons the American system has become so dysfunctional.

The root of the problem is what I will call team politics - the notion that people approach politics the way they approach sports: instead of using rational and critical thought to evaluate policies and politicians, they support the one that is on their team. The great theme of the post-partisan movement (the real one - not the one staffed by partisan politicians claiming to be p-p) is that no-team politics is the solution to a lot of our problems.

Quote of the day

2008-12-18T09:23:00.002-07:00

From Greg Mankiw (emphasis mine):

I am more comfortable having the Fed commit itself to modest inflation than having the federal government commit itself to a trillion dollars of new spending. The more we can rely on monetary rather than fiscal policy to return the economy to full employment and sustainable growth, the better off future generations of taxpayers will be.

Also check out his discussion on crisis and the size of government.

Bush: a potential friend to Iraqi Shi'ites?

2008-12-17T15:27:00.003-07:00

So, it turns out the shoe-hurling journalist is a Shiite. So, why chuck the leathers at Bush, then? Granted the US occupation hasn’t been a short-lived nor as effective as it should have been, but it’s far more preferable to Saddam’s Iraq. After all, Bush did liberate this journalist’s ethnic group and has remained committed to Iraqi security to help the country continue its transition from a closed autocracy to a democratic republic (despite the political hit for doing so).

Obama, on the other hand, has always opposed ousting Saddam—who brutally persecuted this journalist's fellow Iraqi Shiites—and remains committed to withdrawing Americans troops from Iraq ASAP to the potential detriment to Iraqi stability and independence from Iranian influence.

Perhaps this journalist should reconsider who he hurls his shoes at.

WSJ wants US to Purchase Pakistan's Nuclear Program

2008-12-16T17:47:00.006-07:00

The out-of-the-box-thinkers over at the Wall Street Journal have an interesting concept for dealing with Pakistan’s nuclear program: buying their nuclear arsenal.

We've discussed Pakistan's nuclear program before. Its a significant concern given Pakistan’s constant economic and political instability. If this instability translates into state disintegration, it could leave Pakistan’s robust nuclear arsenal in the hands of Islamic fundamentalist bent on Jihad. Buying Pakistan’s nuclear program would altogether resolve this concern according to the Wall Street Journal:

This is the deal I have in mind. The government of Pakistan would verifiably eliminate its entire nuclear stockpile and the industrial base that sustains it. In exchange, the U.S. and other Western donors would agree to a $100 billion economic package, administered by an independent authority and disbursed over 10 years, on condition that Pakistan remain a democratic and secular state (no military rulers; no Sharia law). It would supplement that package with military aid similar to what the U.S. provides Israel: F-35 fighters, M-1 tanks, Apache helicopters. The U.S. would also extend its nuclear umbrella to Pakistan, just as Hillary Clinton now proposes to do for Israel.

This concept would be plausible were it not for two shortcomings. One, Pakistan sees its nuclear program as necessary to deter a nuclear India. The value it attaches to this deterrent is far greater than $100 million. Two, purchasing another country's nuclear program would likely set a precedent for nuclear blackmail (i.e. like North Korea's nuclear policy today).

Despite its shortcomings and implausibility, PP appreciates the out-of-the-box-thinking. Though it may be an implausible idea, its aberrance to ineffective, mundane foreign policy is a welcomed one.

Latin American Cuckolding

2008-12-15T19:08:00.001-07:00

Worrying signs for US global influence. Bloomberg reports that for the first time, Latin American and Caribbean leaders are gathering for a region-wide summit that excludes the United States. With Washington focused on the Middle East for the last eight years, other countries have moved in to fill the void left by Latin America's disengaged regional power.

Since November, Russian warships have engaged in joint naval exercises with Venezuela, the first in the Caribbean since the Cold War; Chinese President Hu Jintao signed a free-trade agreement with Peru; and Brazil invited Iranian President Mahmoud Ahmadinejad for a state visit.

“While the U.S. remains aloof from a region it no longer sees as relevant to its strategic interests, other countries are making unprecedented, serious moves to fill the void,” says Luiz Felipe Lampreia, Brazil’s foreign minister from 1995 until 2001. “Countries in the region are more aware than ever that they live in a globalized, post-American world.”

Julia Sweig, director of the Latin America program at the Council of Foreign Relations, argues that the US “is no longer the exclusive go-to power in the region, especially in South America."

The reasons why the US has lost its influence in Latin America are a lot like why any man gets cheated on: 1) Not enough attention. 2) Not enough money. 3) Willing suitors.

1) Not enough attention: Since Reagan tried to counter Soviet influence, there has been a near-complete lack of strategic engagement with Latin America. Obsessed with the Middle East and Asia, the US exerted piddling diplomatic effort, creating an environment where Russia and China could fill the void.

2) Not enough money: With the fall of the Berlin Wall, development money once earmarked for Latin America was shifted over to Eastern Europe which allowed new sugardaddies to move in. In recent years, US aid to the region has been dwarfed by Chavez's extravagant and persuasive giving of cash, gifts, and oil. Even traditionally strong US allies are reluctantly getting in bed with rivals. Honduran President Manuel Zelaya said that after pleading with Washington and getting denied, he accepted $300 million a year from Chavez for agricultural investment to help fight rising food prices.

3) Willing suitors: Like so many other things in international politics, the US took Latin America for granted and assumed she would ever be faithful. But suitors with various designs were ready and willing to move in. China needs trade and resources. China's trade with Latin America jumped from $10 billion in 2000 to $102.6 billion last year and recently bought a tin mine in Bolivia for $2.1 billion. Russia needs the propaganda of conducting naval exercises with Cuba to maintain the image of a resurgent empire. Without the US, Latin America is for sale to the highest bidder.

How does the US woo Latin America back?

1. Abolish the Cuban embargo. There is no better way to undercut the "evil imperialist" Chavista talking point that to normalize relations with Cuba. Polls show that overturning the ban is no longer an electoral liability among Cuban-Americans. It would remake the US image and indicate a less patronizing relationship.

2. Show them the money. Start funding high-profile development projects across the region. With oil cheap, Chavez can't maintain his former generosity.

3. Get rid of farm subsidies and open the US market to Latin American agriculture. This would send a strong signal that the US views LA nations as equal partners.

4. Make Brazil a central and vital partner. According to Goldman Sachs, Brazil is on pace to have one of the top five largest economies by 2050. With a partnership with Brazil, the US can continue to push democratic and market reforms and ensure leftist populism remains merely an annoyance.

For too long, US policy in Latin America has been reactionary and defensive, rather than strategic and offensive. Let's hope the next administration will have a more thoughtful Latin American plan than the last.

The Bush Smirk

2008-12-15T18:49:00.002-07:00

Did you see the smirk on Bush’s face after having dodged the first shoe!! PP may not agree on a lot of Bush’s policies, but we appreciate the cat-quick reflexes and the confident demeanor during the course of battle. Its why W. is among our top choices of US presidents with whom we’d like to hang.

Blagogate: Obama Lied About Talking to the Governor

2008-12-15T08:59:00.000-07:00

Since the surfacing of the Blogojevich scandal, Obama has categorically denied any personal involvement in the affair, even denying ever talking to the Governor on the topic.

However, last month David Axelrod described a conversation between Obama and Blogojevich regarding his open senate seat:

"I know he's talked to the governor and there are a whole range of names, many of which have surfaced, and I think he has a fondness for a lot of them"

For those who are unaware, the Governor of Illinois has been trying to sell the appointment of Obama's vacated senate seat to the highest bidder. According to wiretapped conversations, he allegedly offered the seat to Jarret--a close Chicago associate of Obama's and a current key member of his transition team--in return for a cabinet appointment.

As far as the current information suggests, Obama refused Blogojevich's offer. We applaud him. However, Obama failed to report the incident to law enforcement officials and now he is lying about his knowledge of the scandal. For a politician that built his campaign around lofty rhetoric promising change from Old Washington's corrupt politics, Obama looks quite comfortable dabbling in it.

For more details on Obama's involvement in the Blogojevich scandal, check out Politico's 7 questions for Obama.

Yes We Can? No: Obama must earn respect

2008-12-12T09:24:00.004-07:00

This is what we've been talking about all along: the great question of how Obama keeps all of his unrealistic, and often contradictory, promises, without compromising US interests. His actions will have major national security consequences for the US.

Take, for example, the Middle East. The understatement of the year comes from Shlomo Ben-Ami:

Unfortunately, Obama’s all-encompassing promises might prove to be just as unrealistic.

Obama faces a worsening situation in Israel, where he is loved by the Palestinians but by all indications will be constrained by domestic and international credibility commitments to protect Israel. Iran will proliferate on Obama's watch, which will be a domestic defeat for him; but if he tries to put pressure on the rogue regime he will lose his supporters among moderate Islam for breaking promises of a new American foreign policy. Pakistan will soon enter a democratic crisis, as elected officials try to address terrorism against the US and India while military and intelligence officials continue belligerent terrorist training operations - and this is a nuclear country. Campaign promises aside, Iraq is a US responsibility and Obama knows it; he cannot let it fall into chaos, even if it means breaking promises about speedy withdrawal. Meanwhile, Afghanistan has again descended into chaos and the US military is already overstretched. Add to these dilemmas the fact that the currently friendly Egyptian government's days are numbered; and our OPEC ally Sauid Arabia is facing increasing pressures for the hardliners to take a stronger stance against the US.

As it turns out, simply chanting the phrase "yes we can!" to music does not solve these types of complicated problems. I do not envy Obama's very difficult position, and it is not his fault that he inherits such troubling conditions; but he put himself in this position because he was willing to say anything to get elected, and thus domestic politics again hijack foreign policy. While other candidates were at least partially constrained in their promises because they knew that reality would someday hit (those candidates lost), Obama chose to mislead the masses, perhaps eventually actually believing he was some sort of Messiah who would not have to pay for such promises. Those who questioned the real implications and limitations of his promises were accused of representing Old Washington.

America did not elect Obama for his skillset or his experience. We did not elect him for demonstrating superior decisionmaking skills. He has shown us indications of neither. He did not have to perform; only promise. We elected Obama because he is a cultural movement. No politician could defeat such a movement, for it was not based on rationality. That does not mean those who voted for him were irrational, and it does not mean he will fail. It simply means that he was never fully vetted; he never had to demonstrate his capabilities; and he did not have to be accountable to reality. Those days are over, at least on the international stage. Realpolitik-minded world leaders have demonstrated that they do not respect Obama. Unlike the US domestic scene, on the international stage Obama must earn respect. What does this mean?

Now Obama must perform.

6 Questions on Obama's Nuclear Umbrella for Israel

2008-12-11T18:26:00.008-07:00

A source close to the Obama administration (h/t Jeff D.) said the U.S. President-elect will offer Israel a "nuclear umbrella" against the threat of a nuclear attack by Iran. According to the source, the U.S. will declare that an attack on Israel by Tehran would result in a devastating US nuclear response against Iran.

This has raised a myriad of questions, six of which are worth answering:

(1) Was the leak intentional?

Yes, it was likely intentional. Far too much criticism from political opponents and media speculation is to occur for this not to be (assuming the competency of his administration).

(2) Isn't this already the US' implicit policy - or is it not?

According to the Bush administration official, apparently it isn't:

"Who will convince the citizen in Kansas that the U.S. needs to get mixed up in a nuclear war because Haifa was bombed? And what is the point of an American response, after Israel's cities are destroyed in an Iranian nuclear strike?"

The point of an American response would be to defend the sacrosanct international norm against the use of nuclear weapons. What an enormous incentive it would create if there were no reprisals to an Iranian nuclear strike. The potential precedent combined with the outrage of the international community would require the US, NATO, and other allies to respond with military force.

I would imagine the US would AT LEAST assist in the destruction of Iran's military and economic infrastructure through massive non-nuclear reprisals.

(3) What is the likelihood of us following through?

The likelihood would be contingent on American as well as European sentiment. Does the Atlantic community feel a nuclear reprisal would be warranted? Probably not due to the Iranian democratic deficit as far as lay citizens ability to influence government policy and military action. Moreover, the Atlantic community would likely be afraid of a Jihadist response to a nuclear attack on a Muslim nation.

As I said above in the case that Israel is incapacitated, I think the US would use NATO as a vehicle to bomb the hell out of Iran but without nuclear reprisals.

(4) Is this an implicit message to Iranians that the US is ‘okay’ with a nuclear Iran?

This is what some are speculating, but I don’t think so. Otherwise this alleged policy would have only been disclosed to the Iranians themselves rather than publicly leaked so as to avoid political and media scrutiny.

(5) Is this Obama's way of dealing with the Iran problem - through credible deterrence threats?

PP's hunch is Obama made this statement for two reasons:

To resolve Israeli concerns that question his commitment to Israeli security.
To look strong and confident on foreign policy to Iran (avoiding the Iran catch-22), domestic political opponents, and the international community especially Russia given Obama’s missile-defense embarrassment.

As RD has said, “It seems Obama has calculated that he must support Israel seriously.”

(6) Are there any potential downfalls to this statement?

The potential danger is that this statement is interpreted by Tehran as US complacency towards Iranian proliferation. If Iran interprets this statement as "Obama doesn't care enough to deter us from acquiring nuclear weapons but that he does care about how we use them,” this will result in negative behavior: strengthening the resolve of Iran’s hardliners to continue to proliferate in face of US opposition, real or perceived.

Detroit Bailout: National Security Implications

2008-12-11T16:42:00.000-07:00

This weekend Obama reiterated the importance of bailing out the Big-3 because of the economic implications of allowing an industry that employs so many people (as well as create the necessity for other, additional industries). Obama (and the media) are missing the most pressing danger regarding the Big-3 going under: the national security implications. If the big-3 indeed go under and never resurface from bankruptcy, who will make vehicles for the US Armed Forces? Without a domestic producer of vehicles, the US military will be forced to import vehicles from elsewhere, thus tying US national security to yet another foreign commodity.

That is not to say the government should bailout Detroit. This would be a bad idea for several reasons:

The bailout is more expensive than the $34 billion for which Detroit is currently asking. Estimates suggest GM, Chrysler, and Ford will need $75 to $125 billion to avoid bankruptcy.
The Big-3 can survive w/o taxpayer funds by filing for chapter-11 bankruptcy and restructuring their labor contracts.
Bailing out the Big-3 will only incentivize more mismanagement from Detroit executives. Past government protection of the auto-industry has led to the current market inefficiencies and corporate mismanagement. A bailout out would only perpetuate this.

What this is to say, however, is government's role regarding the Big-3 should be ensuring their safe passage through the transitions into and out of bankruptcy, not protecting them from it.

What's wrong with oil dependency?

2008-12-11T08:25:00.007-07:00

J Lybbert points me to an article by Roger Howard in the WSJ about how oil dependency can be good. The thrust of his argument is twofold: (1) oil producers are just as dependent on the US as the US is on them, and (2) the budgetary and other constraints that oil puts on oil producers gives the US significant foreign policy leverage. Some are using this article as an argument against the Pigovian tax or any other response to the oil problem (funny that some of these people have advocated drilling as a solution to oil dependency, which they now claim is not a problem). My response:

1. Howard uses the worn-out argument that oil producers are just as dependent on us as we are on them. Howard, this kind of thinking "is just too neat and easy." That may have been true 20 years ago, but now, China and India are desperately searching the globe for enough oil to feed their growing economies. Oil producers know that within 10 or 20 years, all of their demand needs can be met by consumers other than the US. The dependency is one-sided; the "leverage" he speaks of will run out within one or two decades. Further, while Howard is right to cite the Saudis as advocates of low price stability, he ignores the debate in OPEC. Several oil producers are democracies, and therefore use a short timespan for making decisions. Iran and Venezuela have disagreed, and will continue to do so, with the Saudis.

2. Howard's arguments about our ability to deter Iran's nuclear program using oil supports the notion of a Pigovian tax (ditto with his arguments about Russia). In fact, in order to use any of the "leverage" Howard claims we have, the US would have to implement a policy which systematically reduces, or credibly threatens to reduce, US oil consumption. Without such a policy, we have no leverage, so Howard's point becomes moot. I have used this argument many times before: we should use oil consumption as a foreign policy tool.

So, the first argument of the Howard article is false because it ignores changes in the developing world. The second Howard argument fully confirms the need for some sort of systematic oil demand reducer. The only remaining question is, what is the optimal policy to achieve such an end?

We have two options. First, we can go the route most discussed by politicians and pundits: have the government invest in alternative energy, or provide tax incentives for specific alternatives. This was the idea behind corn ethanol. This is a bad policy, since the government has to make decisions about what the most viable alternatives are. Government decisions are driven by politics, so such decisions are likely to be wrong. Further, the government does not have the ability to fix mistakes. We are still subsidizing corn ethanol.

The other option is to provide market incentives for the private sector to develop alternatives. This way, government doesn't have to make any decisions. The private sector can use creative destruction to develop the best alternative. Ideally, this policy would entail a Pigovian tax on gasoline. The main argument against this is that it hurts the poor; however, even a politician can figure out that government revenues would be substantial and could be given back to the people in the form of immediate income tax reductions. A majority of economists support this plan.

Opponents of the idea often cite the ethanol debacle as reasons to keep the government from intervening; this is just poor logic. The ethanol problem occurred not because the government got involved in a market, but because the government attempted to make specific market decisions. The only decision a government must make for a Pigovian tax is admitting that oil dependence limits our foreign policy options and hijacks our economy.

Those who argue that dependency isn't a problem have to ignore the way it affects our foreign policy, the way it affects the environment, and the way it affects our economy. Those who argue that the dependency goes both ways have to ignore the geopolitical and demographic changes happening in the world. And those who argue that we still have some sort of oil leverage must accept the need for strategic oil policy.

The truth is that opponents of a Pigovian tax have yet to develop a substantive rebuttal for these arguments. The opposition is ideologically based, not factually, logically, or scientifically based.

Chinn on Change

2008-12-10T15:40:00.003-07:00

Economist Menzie Chinn (of Chinn and Frankel fame):

The "change" we need is not so much ideological in nature, but the return to policy authority of people who have expertise, and are willing to look to past experience and (most importantly to me) analysis to make their judgments about how best to proceed -- in economics as well as in issues of war and peace. . . .

In other words, just like it probably takes more than a hundred thousand troops to stabilize a country the size of Iraq, it probably is true that the elasticity of labor supply and capital is insufficient to yield a tax revenue increase that yields a net tax receipts gain, in response to a permanent tax rate cut holding all else constant (in other words, extreme supply side nostrums [4] belong in the trashbin along with the Rumsfeld doctrine).

Obama will prove that he really does believe in change, despite the posturing of his campaign, if he makes decisions based on analysis and the advice of experts (like his economic team) instead of politics and ideology (like his Clinton and Daschle selections).

Say No To Chinese Schadenfreude

2008-12-10T10:41:00.008-07:00

The Economist reports on dismal new trade data from China. The latest figures show that "exports fell by 2.2% last month from a year ago; imports plummeted by an astonishing 17.9%."

The World Bank’s latest growth predictions were released on Tuesday. These predict that the Chinese economy will expand by 7.5% in 2009, well under its own calculation of 9.5% growth that it reckons China needs to keep unemployment stable. But even these calculations may prove to be overly optimistic. The Bank’s prediction rests in part on the expectation that China’s exports will rise by 4.2% next year. In fact many analysts expect the slump in trade to continue and possibly worsen; UBS, a Swiss bank, predicts that Chinese exports will not grow at all in 2009.

Chinese workers, who are already restive, may find the new year increasingly difficult. Labour disputes almost doubled in the first ten months of 2008 and sacked workers from closed toy factories rioted. If export growth ceases entirely, and jobs are threatened, social responses could be more severe. An estimated 130m people have moved from the countryside to the cities, many for jobs in factories that make goods for export. Zhang Ping, the country’s top planner, has given warning of the risk of social instability arising from massive unemployment.

Observers of China have for years warned that a severe economic downturn could lead to massive riots and dissatisfaction with the government. Some Westerners may be inclined to feel a certain schadenfreude at the looming social unrest that will undoubtedly come, and hope that the Communist Party is discredited. But wishing the Chinese well may be in the West's best interest. This current economic downturn will be longer and deeper without a strong Chinese economy to prop up the global economy. Envy and fear at China's growth is unwarranted since America benefits substantially through lower goods prices and a larger market for US exports. Although political development is to be welcomed as soon as possible, violent social upheaval is in nobody's best interest.

On Pakistan: Obama defers to Clinton

2008-12-09T15:30:00.006-07:00

On the Meet the Press Sunday night when asked if India has the right to pursue terrorist into Pakistan, Obama had this to say:

Well, I'm not going to comment on that. What, what I'm going to restate is a basic principle. Number one, if a country is attacked, it has the right to defend itself. I think that's universally acknowledged. The second thing is that we need a strategic partnership with all the parties in the region--Pakistan and India and the Afghan government--to stamp out the kind of militant, violent, terrorist extremists that have set up base camps and that are operating in ways that threaten the security of everybody in the international community.

This open ambiguity towards India's (and the US') right to unilaterally intervene in Pakistan to apprehend al Qaeda operatives represents a shift from Obama’s to H. Clinton's campaign foreign policy.

During the Democratic primary this issue of unilaterally intervention into the sovereign affairs of Pakistan was a point of disagreement between Clinton and Obama. To Obama, the US is justified in acting unilaterally along the Afghani/Pakistani border in those instances in which the US had actionable intelligence about high-level al Qaeda operatives and the Pakistani government was either incapable or unwilling to act on it. Specifically, Obama had this to say:

“It was a terrible mistake to fail to act when we had a chance to take out an al Qaeda leadership meeting in 2005. If we have actionable intelligence about high-value terrorist targets and President Musharraf [or Pakistan] won’t act, we will.”

While Clinton was not opposed to intervening in Pakistan to apprehend high-level al Qaeda operatives, she disagreed with Obama making that policy public:

“It is a very big mistake to telegraph that and to destabilize the Musharraf regime, which is fighting for its life against the Islamist extremists who are in bed with al Qaeda and the Taliban.”

Now as President-Elect, Obama is deferring to Clinton's better judgment. Yes, the US will act unilaterally on intelligence that promises the apprehension of high-level Jihadists; however, he has realized the destabilizing nature that occurs when one makes such policies public.

Publicly disclosing a US policy of unilateral intervention in Pakistan's internal affairs risks:

weakening the moderates within the Pakistani government while empowering the Islamic radicals.

increasing the likelihood of nuclear warfare between India and Pakistan.

More specifically, such statements can

provide a rallying point for Pakistani Islamic fundamentalists: fighting the US government and those that collude with it, the moderates within the Pakistani government.

incentivize al Qaeda to provide false intelligence to induce a US invasion into Pakistan in order to incite public out roar against and an ousting of the moderates in the Pakistani government who associate with/support the US government.

provide India with legitimate arguments to intervene in Pakistan, increasing the likelihood of open warfare between two nuclear states who have multiple points of contention.

These scenarios seem extreme but are all wholly plausible. In the least, disclosing the US intent to intervene in Pakistan forces Pakistani moderates to distance themselves from the US government, which in turn decreases the US' influence and ability to send aid to (a) ensure the security of Pakistan's nuclear weapons and (b) support the economic liberalization of Pakistani society, empowering the middle-class and thereby creating an engine for further democratization and de-radicalization.

Thus, regardless of the US intentions towards Northwest Pakistan's Jihadist safe havens, it is imperative that Obama and his adviser's rhetoric support Pakistani moderates and decrease the tension between India and Pakistan.

Obama's "energy strategy"

2008-12-09T08:17:00.006-07:00

Mr. New Politics doesn't have the guts to implement a Pigovian tax. Instead, according to his Meet the Press interview, Obama's long-term plan is:

What we have to do long term is make sure that we have an energy strategy that focuses on fuel-efficient cars; that focuses on providing incentives for fuel efficient cars.

The Pigovian tax would do both of those things. But what does Obama suggest as a way to accomplish that plan? Well, in addition to having politicians decide what "alternatives" to "invest" in (yeah, government has proven really good at that), says Greg Mankiw,

Mr. Obama's emphasis on weatherization and alternative lighting reminds me of President Carter's admonition to turn down the thermostat and wear cardigan sweaters. Maybe it works as a short-term sound bite, but it is not much of a long-term policy.

Obama has the political capital to implement a real solution. Will he do it? It depends: is he really a new kind of politician, or is he just like all the others? If this is the best he's got, we might as well go with drilling.

Global Government: Not Just For the Illuminati

2008-12-08T17:44:00.003-07:00

Despite stoking fear into the hearts of legions of conspiracy-theorizing Ron Paulites, support for global governance is gaining traction. Gideon Rachman of the Financial Times notes that:

A “world government” would involve much more than co-operation between nations. It would be an entity with state-like characteristics, backed by a body of laws. The European Union has already set up a continental government for 27 countries, which could be a model. The EU has a supreme court, a currency, thousands of pages of law, a large civil service and the ability to deploy military force.
So could the European model go global? There are three reasons for thinking that it might.
First, it is increasingly clear that the most difficult issues facing national governments are international in nature: there is global warming, a global financial crisis and a “global war on terror”.
Second, it could be done. The transport and communications revolutions have shrunk the world so that, as Geoffrey Blainey, an eminent Australian historian, has written: “For the first time in human history, world government of some sort is now possible.” Mr Blainey foresees an attempt to form a world government at some point in the next two centuries, which is an unusually long time horizon for the average newspaper column.
But – the third point – a change in the political atmosphere suggests that “global governance” could come much sooner than that. The financial crisis and climate change are pushing national governments towards global solutions, even in countries such as China and the US that are traditionally fierce guardians of national sovereignty.

Because most people are more fearful of world government than death, the 200 year time-horizon seems appropriate. The more pressing question is how the world can cooperate enough to solve common problems without a credible enforcement mechanism, especially now that the world's ostensible policeman has been so hobbled. Its possible that a strong and united West could create enough leverage to drag other countries along with initiatives. But far more likely is that competition between the US and China will prevent substantial global cooperation in the foreseeable future.

Obama's Iran Catch-22

2008-12-08T12:44:00.006-07:00

As with any new president, Obama's campaign promises were full of contradictions and will produce difficult catch-22's during his term. For Obama, this problem is larger than usual. The gap between expectations and realistic possibilities is larger for Obama than probably any other president in history - which is largely his own fault. Soon he, and the US, will have to deal with the consequences of such posturing.

The next catch-22: Iran.

A central tenet of the Obama campaign was his promise to conduct a softer, less belligerent foreign policy. I've already discussed how his trade promises contradict this. With Iran, the problem is equally disconcerting. Obama has repeatedly argued that Iran cannot become a nuclear power. He has also criticized the Bush administration's handling of the Iran situation for being too rigid. The question many of us were asking was, do you have a better idea? More specifically, do you have a better idea for disarming Iran while keeping promises about softer, more diplomatic foreign policy?

The only coercive foreign policy tools we have are military action and economic sanctions. This week, Obama has again endorsed the sanction route - as he should. But Iran, like Russia, has picked up on this opportunity to put Obama in a bind.

Reports the Times:

Iran said Monday that it would not abandon its nuclear program and urged President-elect Barack Obama to change America’s carrot-and-stick policy toward Iran, the official IRNA news agency reported. . . .

He added that Iran expected Mr. Obama to stick to his campaign promise to change the previous administration’s policy.

“What Mr. Obama said is the same old carrot-and-stick approach,” he said. “He must be able to change this policy based on his slogan of ‘change.’ ” Mr. Ghashghavi spokesman said that the carrot-and-stick approach “is a failed policy” and that Iran expected Mr. Obama to change the “confrontational policy to one based on interaction.”

This is bad news for Obama. By folding to Iranian demands, he will look weak and encourage more proliferation. By sticking to the carrot-and-stick approach and forbidding Iran to proliferate, he gives the Iranians and other regimes a PR victory by proving that he doesn't represent Change as he promised. This is the exact same problem he is having with Russia (see Russia link above). It won't be long before international public opinion of Obama, probably his greatest FP asset, is manipulated by the accusations of autocracies. Watch for similar situations with North Korea, Venezuela, China (not until after the recession), and even some of our more difficult allies.

This is the danger of the Obama campaign. He has now become a tool for autocracies. They can use his promises of Change against him, forcing him to choose between keeping promises and protecting US interests. Obama was warned about this on the campaign (by people like Hillary and Biden!), but he ignored it and labeled them as Old Washington Elites, etc. The lesson: the strategy of saying anything to be elected has consequences.

Can the EU Survive the New Generation?

2008-12-06T02:10:00.003-07:00

In the Financial Times, European scholar Michael Grant argues that Germany's commitment to the European Union is beginning to wane, and that the Franco-German relationship is suffering because of it.

In Brussels, Paris, Washington and other capitals, one increasingly hears the same complaint: Germany is acting unilaterally. On a broad range of issues, the Germans seem to think the European Union no longer advances their interests and are more prone to go their own way.

There is perhaps less trust between the France and Germany than at any time in the past 20 years. Chancellor Angela Merkel and President Sarkozy irritate each other.

He cites financial coordination, climate change policy, relations with Russia and Iran, and EU defense as areas where Germany has forged its own policies in opposition to the EU and France. While most of these are driven by Germany's economic interests, Grant mentions that current EU fissures may be rooted in emotion.

There has also been a generational shift. The politicians who grew up in the shadow of the second world war, emotionally attached to the cause of European integration, have retired. Today’s leaders tend to treat the EU as a tool that delivers results, which is how most European leaders treat it. Germany has become more unilateral in an incremental and unconscious way rather than as a result of any plan.

This generational shift could profoundly affect the EU's ability to ever become something more than a partnership of convenience, disposable when interests diverge too much. Without the fear of Continental war or a Russian bogeyman, it is unlikely that the strength of common European identity will be robust enough to overcome the incentives for individual member-states to defect. This is bad news for the US. Without a united Europe, the US will have a much more difficult time sustaining the Western system in the face of a revisionist Asia.

A word on Joseph Stiglitz

2008-12-05T15:35:00.004-07:00

Newsweek's Michael Hirsh argues that economist Joe Stiglitz was the great prophet of the current crisis. No doubt, if you ask Stiglitz he'll tell you the same thing. Hirsh's worship is misplaced. Stiglitz has provided a crucial voice of warning for the excesses of free markets. However, he was not the only one (Nouriel Roubini certainly deserves more credit, as well as many others who saw it coming).

I've read two Stiglitz books and many of his academic publications. His books are informative, insightful, and required reading for those who wish to understand the shortfalls of global financial institutions. His academic work on information asymmetry won him a Nobel Prize. The online journal he edits, The Economist's Voice, is an excellent resource for those who seek sophisticated economic knowledge but lack the tools or motivation to get steeped in the literature. However, his recent writings are being increasingly criticized for two reasons: his serious commitment to partisan politics renders him unable to maintain credibility among many economists (similar to Krugman), and because he is incredibly arrogant. For two opinions of his arrogance, see comments by respected economists Bryan Caplan and Ken Rogoff. The Rogoff letter is particularly important because, in many ways, Rogoff became the scapegoat that propelled Stiglitz into fame in non-academic culture.

Obama was wise not to include hyper-partisans like Stiglitz on his economic team. What we need now are widely respected, non-partisan economists without the Stiglitz baggage and axes to grind.

Is progressive economics being set up for failure?

2008-12-05T15:24:00.003-07:00

Economist Tyler Cowen thinks so:

I believe the Obama years will cause a crisis for progressivism roughly comparable to what the Bush years have brought upon libertarianism.

I believe it will depend on who Obama chooses to listen to, and how much he is swayed by the populist pendulum of public opinion during and after the crisis.

The Current State of the Economy: Man Submits Drawing of Spider Instead of Payment for Overdue Account

2008-12-05T12:06:00.007-07:00

So, this is what our economy has come to?!

H/T Josh Hart

Obama's "Trade Catch-22"

2008-12-05T08:48:00.007-07:00

The Times:

[Xavier Becerra] has emerged as the leading candidate to become United States trade representative in the Obama administration, [and] is known as a defender of workers’ rights and as a skeptic of trade agreements. That would please union backers of Mr. Obama, who spoke in the campaign about reopening the North American Free Trade Agreement. . . .

Mr. Becerra, who entered Congress in 1992 and serves a district in Los Angeles, voted in favor of Nafta but now says he regrets it.

Ah, the story of the current Democratic Party. In the primaries, the Dems were falling all over each other to prove who was more protectionist, thus repudiating Bill Clinton's most courageous and pragmatic policy.

As it turns out, pandering trade policies are not the only thing Becerra has in common with some of Obama's other administration selections. Like Holder, Becerra was involved in some shady dealings during the Clinton administration, like petitioning for the pardon of a drug-connected criminal in exchange for $14,000. Obama would do well to look outside Washington to fill positions; politicians are typically not qualified for these sorts of jobs anyway, and it would allow him to get people who haven't been playing in the political mud for decades (which is what he promised to do).

Obama's trade catch-22 is that he promised to (1) be more protectionist (except in San Francisco) while also promising to (2) be above Washington politics and special interests and to (3) pursue a less-belligerent foreign policy. However, trade protectionism is almost always driven by Washington politics and special interests (typically unions or agriculture), and bad trade policy is belligerent foreign policy, so it will be impossible for Obama to keep all three promises. Since he has already effectively broken the promise about DC politics and special interests, I'm hoping, for the sake of our economy and international relations, that Obama will forget about (1) and keep (3).

Islamic Cleric to Obama: Convert to Islam or Else...

2008-12-04T22:22:00.003-07:00

Apparently, Obama was elected president by the will of Allah in order to remove US troops and interests from the Middle-East!? I wonder if that includes removing our financial interests?

At any rate, lets hope speculation that Obama will give his first big foreign policy speech in a major Arab city (Indonesia) remains just that: speculation.

Watch the video here.

H/T Little Green Footballs

Iraq, politics, and reality

2008-12-04T09:03:00.007-07:00

The brilliance of the Obama campaign is that he successfully created a personality and agenda on which his broad spectrum of supporters could project their own ideas. Now that reality has hit, there are questions about how his supporters will respond when he doesn't deliver what they had hoped. Some will be disappointed, as buruboi describes many of his Left-leaning supporters. But many (or most) are so converted to the idea of Obama that they won't even recognize his breakage of promises.

In a surprisingly balanced article, the Times analyzes Obama's plan for Iraq in light of campaign promises:

There always was a tension, if not a bit of a contradiction, in the two parts of Mr. Obama’s campaign platform to “end the war” by withdrawing all combat troops by May 2010. To be sure, Mr. Obama was careful to say that the drawdowns he was promising included only combat troops. But supporters who keyed on the language of ending the war might be forgiven if they thought that would mean bringing home all of the troops.

One could also be forgiven for accusing Obama of being somewhat disingenuous about the Iraq situation. The recognition that "non-combat" troops must stay in Iraq for an undisclosed period of time, while not technically a breach of promises, will likely remind many of Obama's attacks on John McCain's speculation that American troops could be in Iraq for 100 years. McCain obviously meant something similar to our situations in Japan or Germany, but Obama successfully (and dishonestly) convinced people that this meant an indefinite continuation of the current Iraq status. Now he is pursuing basically the same policy.

Additionally, back in January I argued that Obama's Iraq rhetoric put him in a dangerous catch-22 position:

Democrats have an interest in us losing the war, both for the presidential elections and to salvage Congress' reputation. But they need the war to get better around January '09 so when a Dem president pulls out, he/she won't look like an idiot leaving a big mess. Unfortunately for them, the surge worked too soon. Now the best they can do is try to convince the public that it isn’t working, while letting it do its job in the background so that when they enter office, they can begin a careful pullout without looking stupid.

What makes Obama's current actions bothersome is the fact that withdrawing combat troops would be absolutely out of the question if it weren't for the "Surge" which Obama opposed. Meanwhile, his admission of the need for "between 30,000 and 50,000 — and some say as high as 70,000" non-combat troops remaining in Iraq is an admission that McCain and others were correct to criticize Obama's detached-from-facts platform.

What happened on the campaign trail was an exercise in irrationality. Obama's criticism of McCain's Iraq plan was not based on current needs or the advice of Iraq experts; he once said that "he would not hesitate to overrule American commanders," despite his current claims that "I’ve said consistently, I will listen to the recommendations of my commanders." Rather, his platform was based on whether we should have gone to Iraq in the first place. That question was irrelevant, however, since rational actors should make decisions at the margin.

This situation has four implications.

1. As with many other issues, this one will be a test of the media's trustworthiness and the American people's intelligence; Obama must be held accountable when his actions diverge from his promises. Allowing any president immunity from criticism is not healthy democracy.

2. Obama must use his considerable political skill and capital to pursue US interests in the international relations arena. While he is supported by much of the world, he must use the skills he has employed thus far to get commitments from our allies and detente with our enemies. Those skills of manipulation will be useful with foreign leaders.

3. One hopes this kind of behavior towards the American people will not continue. Obama has tremendous power over the hearts (and, therefore, minds) of many Americans. He must not continue to abuse it by shifting positions on issues without substantive cause. America needs the president Obama promised to be: honest with the American people and detached from Washington political games. I think we'll be willing to cut him some slack on promises made as a candidate; but he mustn't expect the same indulgence for promises made as president.

4. President Obama must start making decisions rationally. Opposing the peaceful conclusion of a war simply because the war itself was a bad decision is irrational. America is probably engaged in many situations which were bad ideas to start out with, but decisions about current and future policy must be based on cost/benefit analysis.

I applaud Obama's pragmatism on Iraq and economic issues, despite its subtle dishonesty. But from now on, I expect him to make promises based on the constraints of reality instead of potential political benefits.

Concerns from the Left on the Direction of Obama's Agenda

2008-12-03T17:16:00.007-07:00

Throughout his campaign PP constantly questioned the seemingly contradictory claims/actions of Obama—he was both a centrist and a leftist, a multilateralist and a unilateralist, a candidate of change and a bastion of Washington , an anti-lobbyist and yet a huge beneficiary of them, and so on. The tug-and-pull rhetoric/record of Obama left reflective voters wondering what they would get with an Obamian presidency.

Now with Obama acting as President-Elect, this question still remains: what can we expect of Obama’s administration? Surprisingly, this question is not coming from the Right as much as it is from the Left!

Obama's cabinet and staff appointments are providing a few hints which are raising concern among his most fervent supporters on the Left. For example, the appointment of Gates as Secretary of Defense indicates an understanding of the importance of Afghanistan (which Gates has deeply improved) and at least a nominal show of bipartisanship. But to Obama’s most fervent supporters, Gates' appointment along with Clinton’s (Secretary of State) signals a departure from Obama's dovish views on American foreign policy and a hedging on his promise to end the war in Iraq.

Obama’s economic team has been praised by many (especially us), and specifically by conservatives who feel the team is well poised to continue to support free-market as well as resuscitate America’s financial market. To his leftist supporters, however, these appointments are hinting at a hedging on his campaign promises to redistribute wealth, repeal the Bush tax cuts, and protect domestic markets from FTAs.

Keep in mind, however, these appointments are just hints given the restrictions the recessive economy is placing on Obama’s ideal agenda. So, it will be sometime before we have any answers.

Regardless, PP can’t help but enjoy the humor of the recent concerns among Obama’s strongest supporters regarding the direction of his agenda . Couldn’t they see the signs in the divergence of his record and campaign rhetoric? From Tony Blankley:

It is a pity the conversation about what Obama might actually do as president didn't begin in the media until after the election. But not to worry. As Emma Goldman, a 20th-century anarchist and Marxist, is reputed to have said: "In America, elections are the opium of the people." Well, we have had our fix, no matter how uninformed we were during the injection.

Exactly.

On principles and bailouts

2008-12-03T13:57:00.008-07:00

In a comical decision, Big Three executives have decided to drive to Washington with more requests and, supposedly, substantive restructuring plans. SrananBuru wrote a piece detailing, essentially, what led them to do this. In desperate need to appeal to Congressional leaders, the automakers are taking drastic measures to get a handout. But, even with such demonstration of contrition, should we give it them?

Ultimately, it should be pragmatism that decides the outcome - not ideology. On net, what will be the effects of this decision?

On one end of the ideological spectrum, we have Chicago economists opining today that
economists (which, to these writers, seems to include politicians, curiously) have "abandoned their principles. There used to be a consensus that selective intervention in the economy was bad. In the last 12 months this belief has been shattered."

Zingales and Hart fail to provide evidence for such a consensus. True to usual American form, Conservatives will probably swallow this without investigating the claim. Even if such a consensus did exist, what good are "principles" if they prove to be unhelpful in solving problems? But, regardless, the writers argue persuasively that the dangers of bankruptcy just aren't that bad.

Bankruptcy is an opportunity for a company (or individual) to make a fresh start. A company in financial distress faces the danger that creditors will try to seize its assets. Bankruptcy gives it some respite. It also provides an opportunity for claimants to figure out whether the company's financial trouble was the result of bad luck or bad management, and to decide what should be done. Short-cutting this process through a government bailout is dangerous. Does the government really know whether a company should be saved?

I agree that governments aren't good at making market decisions. But is bankruptcy really as benign as the authors would argue? No, says economist Thomas Palley, author of Post-Keynesian Economics (from the sound of it, Hart and Zingales seem to have forgotten about Keynes):

The Big Three and their auto finance associates (such as GMAC) are huge debtors whose liabilities are held throughout the financial system. If they go bankrupt, the insurance industry, which is likely a large holder of these debts, would quickly enter a spiral of collapse. Pension funds would also be hit, imposing further costs on the PBGC.

But the greatest damage may come from the credit default swaps (CDS) market that brought down AIG. Huge bets have undoubtedly been placed on the bonds of GM, Ford, Chrysler, and GMAC, and bankruptcy will be a CDS triggering event requiring repayment of these bonds. Moreover, a Big Three bankruptcy will bankrupt other companies, risking a cascade of financial damage as their bonds and equities fall in value and further CDS events are triggered. This is the nightmare outcome that risks replicating the Crash of 1929.

This, argues Palley, is in addition to job losses "by the automakers, but also jobs with parts suppliers, auto dealers, and in the transport and advertising industries." It seems like a pretty grim scenario.

My analysis is this:

Both sides of the argument oversimplify considerably. Conservatives, as always, have irrationally extreme trust in markets. They fail to recognize the political damage of economic disasters, and they fail to recognize that assumptions about market efficiency are false. Liberals believe, despite all historical evidence to the contrary, that politicians are equipped to make serious economic and business decisions when they aren't.
This is not the first time the automakers have come with hat in hand. American automakers have demonstrated an inability to compete with foreign manufacturers. True, this is due partly to labor costs. But this is also due to refusal to make cars people can afford to drive. To compete, fuel-efficiency must become a bigger priority. Giving a bailout now encourages the companies to further avoid reform, thus maintaining their lack of competitiveness. Now is the time to end it. The government could go a long way towards forcing such changes by imposing a Pigovian tax on gas.
The bailout is bad foreign policy, as I have argued before. This is no time to anger our allies and undermine foreign trust in the fairness of our economic policies.
It is better to deal with the victims of the bankruptcy than to continue the problem. Say Zingales and Hart: "the best way to proceed is to help third parties rather than the distressed company itself." The government can guarantee debts and take care of job losses. Conservatives take note: you will be inclined to seize upon the Zingales/Hart argument about principles, but you mustn't ignore their argument about dealing with third-party victims.

At this point, the best option is for the government to begin formulating a damage-control plan for the bankruptcy of the Big Three. This must include a safety net for lost jobs and guarantees on debts to contain systemic risk to the financial sector. This can also provide a blueprint for later big bankruptcies which are bound to occur.

Adjusting Bush's Flawed Grand Strategy

2008-12-02T12:30:00.004-07:00

Fareed Zakaria argues that the US needs a New Grand Strategy to cope with the "rise of the rest" and that Obama is the right man at the right time to forge one.

Sometimes a crisis provides an opportunity. The Washington G20 meeting, for instance, was an interesting portent of a future "post-American" world. Every previous financial crisis had been handled by the IMF, the World Bank or the G7 (or G8). This time, the emerging nations were fully represented. At the same time, the meeting was held in Washington, and George W. Bush presided. The United States retains a unique role in the emerging world order. It remains the single global power. It has enormous convening, agenda-setting and leadership powers, although they must be properly managed and shared with all the world's major players, old and new, in order to be effective.
This is a rare moment in history. A more responsive America, better attuned to the rest of the world, could help create a new set of ideas and institutions—an architecture of peace for the 21st century that would bring stability, prosperity and dignity to the lives of billions of people. Ten years from now, the world will have moved on; the rising powers will have become unwilling to accept an agenda conceived in Washington or London or Brussels. But at this time, there is a unique opportunity to use American power to reshape the world.

But before we start calling for new Grand Strategies, we should identify what was wrong with the old one. Although it was clumsily prosecuted, the Bush Grand Strategy was essentially democracy promotion. Democracy was perceived to be the solution to the world's myriad ills, most notably terrorism, poverty, and failed states. Unfortunately, research suggests that democracy can actually just make a lot of those things worse. There is no evidence that democracy reduces terrorism, and it can even can put terrorist groups in power (Hamas). There is also little evidence that democracy directly causes faster economic growth, and some studies suggest it can even be detrimental for very poor nations struggling to develop. Finally, foisting democracy on failed states can simply destablize things more.

In short, democracy promotion is not a particularly effective instrument in promoting US interests in these key areas. The US seems to be taking notice. David Brooks today mentioned that "Robert Gates does not talk about spreading democracy, at least in the short run. He talks about using integrated federal agencies to help locals improve the quality and responsiveness of governments in trouble spots around the world."

This is a good idea. US Grand Strategy should change from simple democracy promotion to a focus on improving good governance, in whatever form it exists. We should still encourage representation and accountability, but be less dogmatic about the power of democracy to cure every world problem. Even more important, and as Zakaria argues, US Grand Strategy must prioritize the need to make the existing liberal world order more flexible and accomodating for rising powers.

Germany's Russia non-interdependence

2008-12-02T09:24:00.003-07:00

Today, the Times partially analyzes Germany's role in West/Russia relations. As most readers know by now, Germany gets around 40% of its energy needs from Russia. Additionally, German has a long history of finding the West/Russia middle ground (think Ostpolitik). But Germany faces a careful balance: protect energy and economic interests during Russia's resurgence, while protecting longer-run interests by containing that resurgence. During the past year, this careful dance has produced little more than appeasement. The Times (and Germans) would argue that the Germany/Russia relationship is one of "interdependence." But they're wrong.

While Germany needs Russia’s raw materials and covets the significant market there for its precision machine tools, Russia is equally dependent on European investment to diversify its economy, a fact driven home all too clearly for Russians now that the financial crisis has sent energy prices plunging.

This assessment fails to recognize two things: (1) Putin has demonstrated that power politics trumps economic necessities, as demonstrated by his willingness to invade Georgia and make threats, despite their effects on investor confidence; and (2) at this point, energy dependence is one-sided. With guaranteed growing demand from China and India, energy producers are no longer dependent upon their current customers. Germany needs Russia's fuel; but Russia can always find customers elsewhere (the US has this same problem with the Middle East).

This is why Germany is walking a very fine line. They must work with the EU to diversify energy sources so that they don't remain hostage to Russia; but in the meantime, Germany will appease Russia. US policymakers must recognize that, as recent events demonstrate, US interests and the interests of our East European allies currently clash with the interests of our militarily weak and energy dependent West European allies. We should not expect Europe to assist in containing the medium-term rise of Russia. We obviously cannot exercise military options. The only viable approach will be the oil weapon.

Posner on ideologies

2008-12-01T17:50:00.007-07:00

For a long time I've wanted to post something from the Becker-Posner blog. Gary Becker is a Chicago economist; Richard Posner is a Chicago law & econ professor. Both are highly intelligent and deliver very sophisticated analysis and opinion. From Posner's latest, "The Future of Conservatism":

I would like to see us enter a post-ideological era in which policies are based on pragmatic considerations rather than on conformity to a set of preconceptions rooted in a rapidly vanishing past. We have accumulated a substantial history of liberal and conservative failures. The liberal failures include underestimating the cost of egalitarianism and of social engineering by judges (the Warren Court, Roe v. Wade, the near abolition of capital punishment), and the benefits of discipline, of punishment, of enforcing principles of personal responsibility, and of military force. The conservative failures include overestimating the efficiency of unregulated markets, the efficacy of military force, and the beneficent effects of religiosity. Liberals are wrong to promote unions (described by one wag, albeit with some exaggeration, as the parasites that kill their hosts) and conservatives to promote abstinence as a substitute for condoms in preventing teenage pregnancy. . . .

We should be skeptical of world views rooted in emotion that insulate people against inquiry into the foundations of their beliefs. Concretely, there is a range of perfectly respectable economic theorizing, at one end (the interventionist) typified by Paul Samuelson and at the other end (the libertarian) by Milton Friedman, but it would be a mistake to commit to one or the other end since neither can be proved to be correct.

(emphasis mine)

Things Are Heating Up Fast

2008-12-01T17:42:00.004-07:00

Its been predicted for a while, but it looks like Zimbabwe is about to spiral out of control very soon. When dictators begin to lose the support of soldiers, the end is near. According to the BBC:

Dozens of troops have run amok in the Zimbabwean capital Harare after losing their temper while queuing up to withdraw cash at a bank. Riot police used tear gas to disperse about 40 soldiers and a number of civilians who joined the protest.

Unfortunately, as we've seen from the farcical election and "power sharing" deal this year, Mugabe is unlikely to lay down quietly. We can only hope that Mugabe's fall will be as swift and peaceful as possible.

Obama's free-market team

2008-12-01T15:38:00.002-07:00

I've lamented before the fact that Obama has had great economic advisers to whom he didn't listen. It turns out that if he does decide to listen, his economic policies will be very different from his populist promises. From Mankiw:

What would you call a group of economists who are skeptical of regulating mortgage markets, who think unemployment insurance and unions increase unemployment, who say that tax hikes retard economic growth, and who believe that the recovery from the Great Depression was a monetary phenomenon rather than the result of New Deal fiscal policy?

No, it is not a right-wing cabal. It's Team Obama.

In other words, his team is the exact opposite of his economic platform. Lucky for him, his kool-aid disciples don't seem to have noticed that he is selling them down the river. For the evidence, read here.

Recession: now it's official

2008-12-01T14:25:00.003-07:00

Today the National Bureau of Economic Research announced that we are officially in a recession, and that it started in December 2007. Many are thinking, "duh." Well, it's not that simple. Jeff Frankel, member of the dating committee, explains why simple rules of thumb (like the 2-quarter rule) and claims by pundits are not sufficient for the NBER to make it official:

We sometimes hear the question “Who needs the NBER Committee anyway?” This question most often comes in one of two forms:

1. Everyone in the real world has known that the economy has been in a serious recession for some time. In past cycles, media reports have sometimes taken the line “Ivy Tower Eggheads Finally Figure Out What Everybody Else Has Known All Along.” The implicit critique is that the committee takes too long after the event – typically almost a year — to make its declaration. One short answer is that our job is to be definitive, not fast. GDP and other government statistics are often revised after the fact, for example. We don’t want to have to revise our dating of the peaks and troughs later, in part because it would sow confusion among those who rely on them (from econometric researchers to political speechwriters). We leave it to others –pundits, forecasters, consulting companies, financial newsletters, and so on – to try to get there first. We deliberately get there last.

2. The other form taken by the question “Who needs the NBER committee?” runs as follows: “The rule of thumb is simple: two consecutive negative quarters of GDP growth. Why complicate things?” The Frequently Asked Questions segment of the BCDC announcement answers this in detail. For now, observe simply that questions (1) and (2) are inconsistent with each other. As of December 1, 2008, the US economy has not yet experienced two consecutive negative quarters. So an argument that we should wait for two consecutive quarters (critique 2) is the opposite of the critique that we should have acknowledged a recession before now (critique 1).

If you don't feel like reading the NBER's jargon-laden explanation for the December 2007 timing, read Frankel's.

We Need the UN More Than Ever

2008-12-01T09:41:00.005-07:00

One of the biggest questions in international politics is whether existing international institutions such as the UN, IMF, and WTO will be able to accommodate the Chinese ascent. As China continues to gain power and influence, it will likely seek to reshape the rules and structure of the international system to better serve its interests. China's response to the financial crisis is evidence that it now expects to be a full partner in any future adjustments to the world system. Since the US obviously has an interest in perpetuating the Western liberal world order it created after WWII, it should be doing everything it can to strengthen the institutions and organizations that sustain it. One of Bush's worst foreign policy mistakes was to weaken the very institutions that extend America's international influence and instead pursue isolated unilateralism. This is a recipe for strategic decline. As John Ikenberry notes, "If the defining struggle of the twenty-first century is between China and the United States, China will have the advantage. If the defining struggle is between China and a revived Western system, the West will triumph."

So it is a good sign that Obama seems determined not to make the same error. In his announcement of his national security team this morning, Obama emphasized his commitment to multilateralism and to strengthening existing international structures, particularly with his appointment of Susan Rice as UN ambassador and the restoration of the post to Cabinet rank.

Susan knows that the global challenges we face demand global institutions that work. She shares my belief that the UN is an indispensable - and imperfect - forum. She will carry the message that our commitment to multilateral action must be coupled with a commitment to reform. We need the UN to be more effective as a venue for collective action - against terror and proliferation; climate change and genocide; poverty and disease.

I'm glad Obama understands that more than ever the US needs to strengthen the Western order if it wants to preserve a world system made in its image.

Economics by... Economists! Brilliant.

2008-11-27T21:08:00.004-07:00

Be sure to read The Economist's article on Obama's economic team. Most notable is this graphic comparing background/training of Bush's team to Obama's:

This is good stuff. The best line:

Consider the Office of Management and Budget director, who as overseer of $3 trillion in federal spending plays a pivotal role in setting economic priorities. Mr Bush has had four: one was a pharmaceuticals executive, one did government relations for an investment bank, and two were congressmen. All four trained as lawyers. Mr Obama’s nominee, Peter Orszag, the outgoing director of the non-partisan Congressional Budget Office, is a professional economist known for such page-turners as “Saving Social Security”, a 300-page tome boasting 37 pages of footnotes and eight appendices.

Imagine that! People trained/experienced in economics making decisions about economics! Kudos to Mr. Obama for putting qualifications above politics for his economics team. Too bad he did the opposite for the rest of the cabinet. What if we actually had people trained in foreign policy making decisions about foreign policy!

One note, however: the creation of a new body, the Economic Recovery Advisory Board, headed by the well-respected but ancient Paul Volcker, is likely a political stunt. This extra bureaucratic layer will have almost 100% overlap with the NEC and the CEA, and will likely just cause inefficiencies.

Obama and China

2008-11-27T10:18:00.005-07:00

Yet another potential casualty of Obama's belligerent foreign policy on the campaign trail - trade protectionism - could be the US-China relationship. Today, British historian and IR expert Timothy Garton Ash writes that thinkers in China are not as lovestruck for Obama as others around the world.

While Obama promised in his campaign to create more jobs, the cries for protectionism in the US are sure to get louder. If these come in the form of demands for higher standards of labour and environmental protection in trade agreements, they can expect a sympathetic hearing from the new president. Those are two things he cares about. And if Hillary Clinton is named secretary of state after the Thanksgiving holiday, Chinese concerns will go up another notch, for on this subject her presidential campaign was tougher than Obama's.

For Mr. Post-Washington Politics to get elected, he felt he had to risk our relationship with India, China, Canada, Mexico, Columbia, South Korea, and others (not to mention that this thoroughly embarrassed America). Not only is this deeply hypocritical for a candidate who relentlessly attacked the unilateral foreign policy belligerence of the GOP, but it also puts him in a pickle. He will be facing major domestic pressure to keep his promises.

How do we move forward with China? Garton Ash recommends deep engagement:

Start work with China on a strategic partnership including four major projects of what I call visionary realism: a reformed and strengthened global economic order, a multilateral and multidimensional approach to development (including trade, aid, good governance, transparency, democracy and the rule of law), energy and the environment (a central plank of the Obama campaign) and, last but not least, reversing nuclear proliferation.

But he also points out the weakness of his own ideas:

There are some here who say China is not yet able or willing to engage strategically, beyond securing the direct external requirements for its own domestic development. There are some who say Europe is incapable of getting its act together. There are not a few who suspect that even Obama's America will be preoccupied with a checklist of more urgent concerns.

It's time for Obama (and Clinton) to wake up. Stop the domestic pandering. Reintroduce America to realpolitik. The truth is, liberal internationalism is a myth. Europe acts as if they are part of, and seek, a happy order of international norms and cooperation. But Europe and China, just like America, simply pursue their interests. China is engaged in a massive effort to secure resources and guarantee markets for their exports. Their rivalry with India will intensify as they compete for these resources and markets. China is not interested in the environment; it's not interested in democracy or human rights; China is not interested in multilateralism. The Chinese government's domestic legitimacy depends completely on export-led growth and the military ability to protect Chinese interests abroad. US-China relations must be based on these. We can cooperate economically - by avoiding dangerous Obama-esque trade wars. We can deal with the security threat through linkage politics and triangular diplomacy.

Ultimately, the way to deal with the rising Chinese star is for the EU and the US to create a world framework that will maintain our mutual interests once we lose the power to do so on our own. If those interests include poverty alleviation and democracy, we must recognize two basic facts: working with China is futile because they will stonewall those efforts, and working through the UN is futile because it is toothless. Obama's rejection of a coalition of democracies and America's recognition that unilateralism is expensive means that these issues will just not be on the agenda.

From Europe with Love—Gay and Straight Unions!

2008-11-26T17:27:00.003-07:00

In RD’s excellent analysis of voter trends towards gay marriage, he concluded that conservatives must seek some sort of political compromise involving civil unions that would limit the possibility of further expanding the definition of marriage. His conclusion raises the questions of how these civil unions might work in relation to current marriage rights.

Europe has some ideas on the matter. There some governments don’t marry individuals; they unionize them, regardless of gender dynamics. Individuals can then opt to be married by a private institution. In this way, religions maintain the private sanctity of their marriages (private institutions can choose whether to marry same gender couples), same gender couples are on the same legal grounds as heterosexual couples, and the separate/equal dilemma inherent to the marriage/union debate is avoided.

This compromise is certainly not ideal among conservatives, but it could include certain key concessions—parental consent in education, right of refusal for private adoption centers, in-vitro fertilization, etc.—marriage proponents value.

The question is if it’s feasible. So much government tax code would have to be rewritten given the extensive benefits granted to married couples, replacing marriage with unions may be too taxing a project. Either way, this is a policy idea worth flirting with.

The Clinton - I mean Obama Administration

2008-11-26T08:59:00.004-07:00

Don't get me wrong - I think Obama's choice to staff his cabinet with Clinton Admin people is a good idea. Better than the friends he used to hang out with. But everyone should admit that there is something very funny about Obama - who in the primaries claimed Hillary and her Clinton Admin cronies represent Old Washington and that he represents Change - bringing back Clinton Admin II. OL&L points out this hilarious bit from Iowahawk:

WASHINGTON DC - Ending weeks of speculation and rumors, President-Elect Barack Obama today named Bill Clinton to join his incoming administration as President of the United States, where he will head the federal government's executive branch.

"I am pleased that Bill Clinton has agreed to come out of retirement to head up this crucial post in my administration," said Obama. "He brings a lifetime of previous executive experience as Governor of Arkansas and President of the United States, and has worked closely with most of the members of my Cabinet."

Clinton said he was "excited and honored" by the appointment, and would work "day and night" to defeat all the key policy objectives proposed by Mr. Obama during the campaign. . . .

The long anticipated naming of Clinton to head Obama's Oval Office team comes after a week that saw Obama appoint dozens of Clinton associates to his transition team including John Podesta, Rahm Emanuel, Eric Holder, Larry Summers, and Hillary Rodham Clinton. Hundreds of other Clinton Administration holdovers are rumored to be in line for remaining appointments, including Bill Richardson, Janet Reno, Webb Hubbell, Chelsea Clinton, zombie Vince Foster, and zombie Socks the cat.

"Let's face it, it's obvious I'm in way over my head here," explained Obama.

Now you're asking, "I don't get it - what will Obama do?"

Obama also announced that he had accepted his own appointment of himself as an Assistant Undersecretary in the Department of Housing and Urban Development.

"It's a fairly low-stress job that I'm reasonably qualified for," said Obama. "I really can't do much damage there, and it will give me plenty of free time for Oprah specials. Plus work on my next autobiography and re-election campaign."

Autobiography #3. Not bad for a guy his age.

Analysis of Proposition 8

2008-11-25T15:40:00.000-07:00

Now that California's Proposition 8 is cooling down (for now), I'll make some analytic comments. This is a hot issue on which Pendulum Politics has purposely avoided opining. The analysis here is not meant to be normative conclusions about homosexuality, legislation of morality, or anything related.

Both groups - for and against - could probably benefit from a more data-driven approach. According to Wikipedia, the winning coalition spent $35.8 million; the losing coalition spent more, at $37.6 million. While anger on both sides is understandable - and you know what I'm talking about - obviously money was not the key factor. It was the voter who decided this issue. Both sides should recognize that.

The best data we have (though it's not ideal) is exit poll data (I'll go with CNN). Since I don't have raw data, I can't use econometrics to tease out results (but I can do so with some other data - below). From the polls, we learn that African-Americans, Latinos, and "other races" voted for Prop 8 more than whites by margins of 19%, 4%, and 2%. Compare these values to the Obama support margins: African-Americans supported Obama more than whites by a margin of 42%, Latinos by 22%, and "other races" by 3%.

What does this tell us? When broken down by race, the same people who voted for Obama voted for Prop 8. Considering the massive Obama efforts to get out the vote, the notion that Obama's candidacy is more responsible than interest groups for Prop 8's passage is not improbable (see data below; also see discussion of Nate Silver below). This means that the pro-8 coalition has less to be proud of, and the anti-8 coalition needs to think about the target of their anger. For both groups, recognizing what drove the vote will be crucial to victory in future tests of this issue.

Data and Analysis

If this stuff bores you, scroll down to the Conclusion.

I've obtained survey data from the General Social Survey (hat tip Jeff D. for the idea, early figures, and the data for this project). The set has 25,000 respondents spanning from 1971 to the present. Below are the results of a probit regression. If you're new to regression interpretation, I'll try to explain what's going on. I've examined the data based on gender, religion, race, region, and age. The base model is for a white, nonreligious, female, under age 60 from the Pacific region, which the data shows is the most tolerant demographic for homosexuality. These are raw probit coefficients - which means you shouldn't interpret their direct effect on attitudes towards homosexualty; instead, they are meant to be compared to each other. The larger the number, the more a person disapproves of homosexuals.

For people familiar with this stuff: standard errors are in parentheses; the Chi sq. likelihood ratio was significant; and all coefficients are significant at the 0.001 level (actually they were all 0.000). I also ran a model with year dummies, but the results were basically the same.

male: 0.156
(0.017)

protestant: 0.999
(0.028)
catholic: 0.723
(0.030)
other religion: 0.230
(0.042)

black: 0.273
(0.026)
other race: 0.232
(0.042)

midwest: 0.255
(0.027)
south : 0.607
(0.032)
mountain : 0.140
(0.040)
east coast: 0.175
(0.0254)

over 60: 0.559
(0.022)

What do we learn from the data? It confirms our conclusions about the influence of race on Prop 8's passage. It also confirms the Nate Silver explanation for the passage of 8: older voters. He doesn't want to blame Obama for the passage of Prop 8 (he's a big Obama fan), so he rejects the racial demographics explanation. The data also confirms his claim, with over-60 voters being about twice as disapproving as blacks. Ultimately, the data supports Silver's claim but also supports mine.

Conclusion

What does this mean? Aside from making political statements, pro-gay marriage groups targeting churches is probably ineffective. It does nothing to help their problem with racial and age demographics, and it exacerbates their problems with religious demographics (and could lead to stronger opposing coalitions in the future - see Lybbert's take). In other words, the net effect of such protests is probably to decrease the likelihood of pro-gay legislation in the near future. A big effort to improve the image of the gay community among religious people and non-whites is probably the best way to further the cause of pro-gay rights groups - better than protesting at places of worship, which makes a bad impression on many religious people.

As for the winning coalition: this analysis attributes a huge part of the passage of Prop 8 to racial and age demographics. If the Obama turnout effect among non-whites does not come back, passage of pro-gay legislation is likely to increase. The generational issue will strengthen this trend substantially. Additionally, the previous referendum to ban gay marriage passed by a margin of more than 20%, while Prop 8 passed by a margin of only 4.2%. The implications of this trend continuing are obvious. Opponents of Prop 8 are on the losing side in the long term. At this point, pro-8 types are better off seeking political compromises, like some form of civil unions (supported by some key backers of Prop 8) that would limit the possibility of further liberalization. In other words, conservatives will probably have to be politically flexible or nothing will go their way in the future.

Hannity, alone

2008-11-25T11:48:00.002-07:00

Conservative talking head Sean Hannity will lose his co-host Alan Colmes at the end of the year, reports the NY Times.

He had a co-host?

Hannity's show was a feeble attempt by Fox to look balanced: get a raving conservative and a timid liberal to duke it out. Hannity dominated the show with his predictably partisan ranting, and Colmes got paid to say what you expect liberals to say.

The show won't be different without Colmes. But maybe this time Fox will get someone with a personality to match Hannity's. If they're going to have a debate show, at least give the liberals a fair shake by putting someone who can argue with Hannity.

Hoover and Obama (a longer post)

2008-11-25T09:33:00.008-07:00

I have talked before about Obama's fantastic economic team. I have also discussed the dangers of his campaign promises. Whether he believes his protectionist rhetoric or not - I believe he does not - it will still have an effect on his administration. The most striking thing about his campaign is its similarity to the election of 1928: economic downturn, populist president elect whose party controls Congress, the debt he owes to powerful interests who elected him (in Obama's case, labor unions), and on and on. The crack economic team he has chosen will do him little good if he ignores them as much as he did on the campaign trail.

This has concerned me so much that I have decided to post selections from a paper I wrote last winter on the Smoot-Hawley tariff. The paper is not an economic analysis (no jargon; no technical stuff). It is a discussion of the domestic political factors that led to the most damaging piece of economic legislation in American history (it was very, very bad foreign policy as well). My concern is that these factors exist today. Note especially the four factors I list in the fourth paragraph (and their explanations later in the paper).

I obviously don't think Obama will pass a relative of the Smoot-Hawley, but I do believe there is a chance for the pendulum of regulation and market intervention to swing opposite from the Bush admin's mindset, which could lead to serious constraints on future growth.

The paper will be worth your time if you look for similarities to the current situation. Click the Keep Reading link for the full text. Bold in the text was added to the paper specifically for this post.

Pandering and Promises

It was an election year. The economy seemed strong, but problems in a few sectors provided turf on which Republicans and Democrats could scramble for votes. Candidates sought to balance their platforms, making cases for good economics while promising protection to those vulnerable to global forces. In a letter to a potential supporter, one candidate promised to “protect American workmen, farmers, and business men alike from competition arising out of the lower standards of living abroad, foster individual initiative, [and] insure stability of business and employment.” Protectionist promises were sure to get votes. This may sound familiar in the 2008 election year; but this description is of the 1928 presidential contest, the problem was agriculture instead of housing, and the letter was written from Herbert Hoover to the chairman of the Republican National Committee (Hoover 1952, 196).

What makes the 1928 election worth discussing? Economics and politics have always been inextricably linked. The economic policies of the United States are heavily influenced by the political process, with its strong institutions and influence of competing interests. Trade, specifically, has often been a crucial part of the platforms of candidates for office. A comparison of the rhetoric of Barack Obama or Hillary Clinton with that of Herbert Hoover reveals that the defense of protectionism has changed little in the last eighty years. The America of 1928 was very different from the America of 2008, but the potentially damaging effects of protectionist legislation make the issue of protectionism as relevant today as it was then. Politicians still use the same rhetorical defense for it, and the process and institutions that create it have changed little. The Smoot-Hawley Tariff Act of 1930 provides a candid portrayal of the politics of protectionism.

The Smoot-Hawley Tariff Act was signed by President Herbert Hoover on June 17, 1930. It included tariff increases on fifteen categories of goods. The largest increases were in agriculture, which was Hoover’s original intent for the bill, but nearly every other imported good received protection as well (see table on page 7 for specific tariff rates). “The final bill included specific tariff schedules for over twenty thousand items, almost all of them increases. Under Smoot-Hawley, the average ad valorem rate on dutiable imports was 52.8 percent, the highest American tariffs in the twentieth century” (Pastor 1980, 78). Smoot-Hawley was the first major tariff legislation since the Fordney-McCumber Tariff of 1922.

Considered by many to be one of the most damaging acts of economic legislation in the history of the United States, the Smoot-Hawley Tariff was the product of a complex political process extending over a year. Four main domestic political factors contributed to its form and passage: (1) Powerful economic interest groups formed unlikely coalitions that successfully applied significant pressure on legislators to expand the tariff beyond their campaign promises; (2) loyalty to party doctrine required that legislators conform despite possible misgivings; (3) congressional institutions and procedures facilitated deal-making and the proliferation of rate-increasing amendments; and (4) campaign promises by Hoover and Republican congressmen obligated policy makers to protect American producers from foreign competition.

The Legislative Process

Hoover made protection an important part of his platform, noting on several occasions “that the tariff was a dominant issue between the Democratic candidate [Alfred Smith] and himself—that the Republicans would protect the nation’s property from unfair competition” (Fausold 1985, 29). Hoover promised voters that he would request a special session of Congress to address the tariff issue, focusing on protection for agriculture. He hoped it would be a quick process, allowing him to move on to other issues during his presidency.

On election day, not only did Hoover win the White House, but the Republicans were also successful in Congress. In the House of Representatives, Republicans gained thirty seats for a total of 267; in the Senate, Republicans gained seven seats for a total of fifty-six. This gave the Republicans control of both houses of Congress and the White House—ample opportunity to further the protectionist agenda. In meetings with congressional leaders, Hoover carefully specified that the tariff should be flexible, allowing the bipartisan Tariff Commission to make future rate changes. He also expressed his desire for the tariff to be mostly agricultural.

The Ways and Means hearings began on January 7, 1929. Congress advertised the hearings, inviting concerned parties to submit briefs and, if necessary, testify. Congress did not seek out groups that would have an interest in the tariff; rather, it assumed that affected groups would find out about the hearings and attend. The nature of the process meant that well-organized and well-funded groups were able to have good representation in the hearings, while many other groups went unrepresented. The agenda of the hearings lacked structure. “To an amazing degree the hearings were permitted to take whatever direction was given to them by the witnesses themselves” (Schattschneider 1935, 38). The hearings were crucial because they would shape the initial drafting and debate over the bill in the House. This gave the attending interest groups significant influence over the information Congress received, and, therefore, the shaping of the tariff.

The hearings gave disproportionate voice to those interests in favor of protection at the expense of interests against protection. They also expanded beyond Hoover’s desire for agricultural protection. Says Martin Fausold:

Eastern interests . . . were as much for tariff revision as westerners were for agricultural legislation. The farm interests also wanted tariff revisions, although confined only to farm schedules. But powerful industrialists would not hear of that. Therefore, both farm and tariff legislation would be in the congressional hopper after March 4. (1985, 37)

Barry Eichengreen argues that interests for protectionism had gained power for several reasons. The powerful forces for protectionism were a well organized, unlikely coalition, much like Bismarck’s ‘iron and rye’ coalition. Agricultural interests along the Canadian border and on the East Coast were the most vulnerable to foreign competition. The nascent Depression had decreased these interests’ ability to compete with imports. Meanwhile, light industry involved in market-tailored production subject to European competition was also vulnerable to the effects of the Depression. These two interests formed a coalition due to mutual self interest. The organization of this coalition was sufficient to overpower the fragmented industries that would not benefit from protectionism (Eichengreen 2000).

The Ways and Means hearings were held until February 27, 1929, the last brief actually being submitted in April. The Committee then worked out the details of the bill. The process here was significantly shaped by the somewhat dubious hearings. Further, Frank Taussig comments that committees like Ways and Means “are ideal for log-rolling. . . . There could scarcely be a more effective device for trading” (1931, 491-492). When the bill reached the House floor, it was subject to many amendments, allowing for a “distribution of favors all around” (Tuassig 1931, 495). Legislators were heavily influenced by economic conditions in their districts, which contributed to the substantial increase in tariff rates while the bill was on the House floor. The final result did not make significant provisions for a flexible tariff, nor was it chiefly agricultural in nature.

The House of Representatives passed the bill on May 28 and referred it to the Senate Finance Committee the following day. This committee conducted hearings from June 12 to July 18, and Schattschneider argues that these hearings were conducted in similar fashion to the Ways and Means hearings. The Finance Committee made slight reductions in industrial tariffs then forwarded the bill to the Senate committee of the whole. This committee “permitted open-ended debate in which any Senator could offer amendments and request votes of the entire Senate on tariff rates for specific goods” (Irwin and Kroszner 1996, 7). Further reductions were made on industrial tariffs, angering advocates of protection for industry. Committee of the whole deliberations went from September 4, 1929 to March 24, 1930; despite Hoover’s prediction that the tariff would be a quick accomplishment, the issue had been in Congress for over a year.

Advocates of protection for industrial production regrouped when the bill was referred to the Senate floor on March 4.

A different coalition of voting emerged, one not based on broad agriculture versus industrial interests but on vote-trading among unrelated goods. Such log-rolling was noted at the time, and this effort succeeded in reversing several of the tariff reductions that had been voted upon in the committee of the whole. (Irwin and Kroszner 1996, 8)

A key aspect of this new Senate strategy was the log-rolling coalition described by Eichengreen. Senators representing unrelated areas worked together to push industrial tariff rates back up after the committee reductions. This coalition was successful in restoring some of the industrial tariff rates. The final Senate bill still had slightly lower rate increases than the House bill, but “the value of imports on the increases was more than ten times those on the decreases” (Irwin and Kroszner 1996, 9). On March 24, the Senate passed the bill, and the Senate and House conference committees began discussion on April 3. These committees worked to resolve differences between the House and Senate bills.

The final bill was passed by the Senate on June 13 with a vote of forty-four to forty-two; the House passed it on June 14 with a vote of 222 to 153. Republicans overwhelmingly approved the bill and Democrats disapproved in both houses; however, five Democrats in the Senate and fourteen in the House voted for the bill, and eleven Republicans in the Senate and twenty in the House voted against it.

The bill was then sent to the White House for Hoover’s signature. It had largely failed to meet his desires; it contained large increases in industrial tariffs and little provision for future flexibility in rates. Hoover received pleas from many interests to veto the bill. He also received a petition signed by 1,028 economists urging him to consider the economic and political consequences of the protectionist legislation (New York Times 1930). Other opponents of the bill included powerful banking interests and western farmers. “No tariff bill has ever been enacted or ever will be enacted under the present system, that will be perfect,” said Hoover, but he still felt obligated to sign it into law. He had made protectionist promises during his campaign. “When the bill finally came to him, he could hardly do otherwise than approve. His party could not go before the country stultified by having nothing whatever to show for a year’s prolonged and conspicuous labor” (Taussig 1931, 500). President Herbert Hoover signed the Smoot-Hawley Tariff Act on June 17, 1930.

Causal Factors

Since the passage of Smoot-Hawley, politicians and scholars have studied and debated the causal forces behind the legislation. The discussion of these factors is still highly relevant to political economy. As politicians continue to use protectionism as a tool to attract voters, what principles should they learn from Smoot-Hawley?

The first major treatment of Smoot-Hawley politics was Politics, Pressures and the Tariff by E. E. Schattschneider in 1935. He argues that the tariff was a result of powerful economic interest groups. These groups were able to shape the bill due to the haphazard way in which the congressional committees formed the legislation. The influence of these groups on members of the committees was substantial and led to log-rolling. Politicians traded favors, promising not to block each others’ amendments. One senator from Massachusetts remarked that the result was “an absurdity and partly a partisan fraud to cover what the tariff really is—namely a mass of private legislation” (Pastor 1980, 80). This discontent among some legislators due to the heavy influence of interest groups supports Schattschneider’s hypothesis.

Barry Eichengreen further elaborated on this interest-influence argument. Rural interests were overrepresented in Congress, and the Republicans were strong in rural areas. The increasing pressures of the nascent Great Depression changed the incentives for light industry and agriculture along the northern border and eastern seaboard. These groups formed a powerful coalition and pushed their representative legislatures for protection. The result, argues Eichengreen, was less a result of partisan politics than it was a unique coalition of interests (2000, 45).

Schattschneider and Eichengreen are supported in this view by Douglas Irwin and Randall Kroszner. They use quantitative analysis of roll-call votes to determine the extent that the economic interests of senators’ constituents influenced their voting behavior. Their findings indicate two types of influence. First, the voting behavior on individual goods reflects the benefits to producers within senators’ constituencies, controlling for party affiliation. Second, “Senators with unrelated constituency interests formed log-rolling coalitions in order to increase tariff rates on specific goods” (1996, 21). The combination of constituency-based voting and vote trading indicates significant interest-driven legislating.

Robert Pastor has argued that the legislation simply reflected strict party-line voting. The Republican Party’s history of protectionism and its promises during the 1928 elections demonstrate that such party conformity was to be expected. While often disputed, this claim is supported quantitatively in a study by Callahan, McDonald, and O’Brien:

Our evidence would appear to provide significant new support for Robert Pastor’s emphasis on the strongly partisan nature of the voting on Smoot-Hawley. In most cases, taking into account a representative’s party affiliation and the unemployment rate in his or her state is adequate to explain his or her vote. Taking into account the specific economic interests in the representative’s district makes surprisingly little difference. (Callahan, et al 1994, 690)

These authors view their results as a powerful contradiction to Eichengreen’s analysis.

A forthcoming study bridges these arguments based on institutional determination. Economists Alan Dye and Richard Sicotte argue that while the final passage of the bill does indicate party-line voting, the process of shaping the legislation through deal-making and, most importantly, amendments reflects the power of special interest influence due to congressional institutions. “The extent to which the deal was kept within the majority party depended on the institutions that governed the amendment process” (2001, 34-35). Republican-dominated congressional committees facilitated an atmosphere of deal-making, and floor debates allowed for the proliferation of additions to the bill and log-rolling, especially for the majority party. Dye and Sicotte’s quantitative analysis confirms this hypothesis. The study, however, is not yet concrete: the article is pending revision at the Journal of Law, Economics and Organization.

Scholars do agree, however, that despite his early desires, Herbert Hoover lost control of the legislative process. “No American president has come into office with a more detailed conception of what he wanted to accomplish in economic policy and of the way to go about it than did Herbert Hoover in 1929” (Barber 1985, 65). He wanted the law to be a quick, simple upward revision of agricultural tariff rates which would allow future flexibility. However, “The president fell into the same trap that many other presidents have fallen into. Once the hearings had opened, Congress, particularly the Senate, proceeded to logroll increases in tariffs on nonfarm as well as farm commodities” (Fausold 1985, 53). Hoover was loath to exert significant influence over congressional decision making, and the bill was in Congress for over a year—so it turned into something that nobody had originally anticipated. When the bill finally reached his desk, the year-long process in Congress and his obligations to keep his campaign promises made the issue seem almost like a fait accompli to Hoover.

Relevant Lessons

Most scholars agree that solid scientific advice was not a major factor in the congressional decisionmaking process. The presentation of data in the hearings was prone to poor selection procedures. All interests were not adequately represented. When deliberation began, the construction of the bill and later amendments were a product of interest group influence, logrolling, and partisan politics instead of careful analysis of economic and international political effects. “The history of the American tariff is the story of a dubious economic policy turned into a great political success,” comments Schattschneider, and Smoot-Hawley was no different (1935, 283). The advice of over a thousand economists, in addition to important banking leaders, went unheeded by first Congress then the president. Little has changed since 1928; the protectionist efforts of politicians are often criticized by economists.

The ability of powerful economic interest groups to influence legislation through coalitions, connections, and log-rolling still exists. Loyalty to party still often requires legislators to endorse faulty ideas. Congressional institutions and procedures may still catalyze the passage of legislation shaped by interpersonal deal-making and log-rolling. Finally, presidential candidates are still in the business of using protectionist promises to garner support. This problematic combination of factors has changed little since 1928, so the lessons of Smoot-Hawley are valid for modern politicians. Presidential candidates should be aware of the potential of any legislative endeavor to expand beyond their expectations.

Sources

Barber, William. 1985. From new era to New Deal: Herbert Hoover, the economists, and American economic policy, 1921-1933. New York: Cambridge University Press.

Callahan, Collen, Judith McDonald, and Anthony O’Brien. 1994. "Who voted for Smoot-Hawley?" The Journal of Economic History 54 no. 3: 683-690.

Dye, Alan and Richard Sicotte. 2001. The institutional determinants of the Hawley-Smoot Tariff. At . 19 March 2008.

Eichengreen, Barry. 2000. "The political economy of the Smoot-Hawley Tariff". In International political economy, eds. Jeffry Frieden and David Lake, 37-46. Belmont, CA: Wadsworth/Thomson Learning.

Fausold, Martin. 1985. The presidency of Herbert C. Hoover. Lawrence, Kansas: University Press of Kansas.

Hoover, Herbert. 1952. The memoirs of Herbert Hoover. Vol. 2, The cabinet and the presidency 1920-1933. New York: The Macmillan Company.

Irwin, Douglas and Randall Kroszner. 1996. Log-rolling and economic interests in the passage of the Smoot-Hawley Tariff. National Bureau of Economic Research Working Paper Series, no. 5510.

Lichtman, Allan. 1979. Prejudice and the old politics: The presidential election of 1928. Chapel Hill: The University of North Carolina Press.

New York Times. 1930. "1,028 economists ask Hoover to veto pending tariff bill". 5 May.

Pastor, Robert. 1980. Congress and the politics of U.S. foreign economic policy 1929-1976. Berkeley: University of California Press.

Schattschneider, E. E. 1935. Politics, pressures and the tariff. New York: Prentice-Hall.

Taussig, Frank. 1931. The tariff history of the United States, 8th ed. New York: G. P. Putnam’s Sons.

Bernanke, Romer

2008-11-25T09:15:00.004-07:00

The New Yorker has a great profile of Ben Bernanke. I would add that the US is lucky to have him in the hot seat - he's a world expert on the Great Depression. Be sure to read it.

Another expert on the Great Depression, Christina Romer, has been added to Obama's economic team. This is really a great team. Romer is well respected; I've had to read several items from her (and her husband David, who is also a famous economist. I've been struggling through his textbook this semester). If you've had one of Mankiw's textbooks, you've probably read his little example about Romer's reevaluation of Depression and Fed data. She's very smart.

Unlike other cabinet positions, the Obama economic team is stacked with proven, competent experts. If Obama actually listens to them, we're in very good hands. But even with a team like this, it will be difficult for a president who was elected partly on populist, protectionist promises to conduct sensible policy.

Latin America: Trade and Foreign Policy

2008-11-24T15:14:00.003-07:00

Brookings released a report today urging the Obama administration to pay more attention to relations in Latin America. I concur. I have previously advocated triangular diplomacy with Cuba to balance Venezuela; additionally, PP has repeatedly pushed for better US-Columbia relations through the passage of the Columbian free trade agreement. Says the Brookings report:

The report advocates lifting all restrictions on travel by Americans, promoting more contacts with Cuban diplomats and taking Cuba off the State Department’s list of state sponsors of terrorism. . . .

Congress needed to pass the Colombia trade deal to maintain the credibility of the United States. Then, it said, the United States should de-emphasize bilateral deals in favor of reviving the moribund trade negotiations known as the Doha Round.

I couldn't agree more. For a good discussion of the foreign policy and economic implications of trade, see Lybbert's excellent write-ups here and here. The populist candidacy of Obama was not only embarrassing for him; it was also belligerent foreign policy, as I have argued before.

Protectionist sentiment is likely to intensify because of the economic crisis, Mr. Talbott said. The crisis has already hit Brazil and Mexico hard, though Mr. Zedillo noted that they were better equipped to bounce back than during previous upheavals because of sounder economic policies.

If the Colombia deal dies, trade experts said, it will mainly penalize American exporters, since Colombian exports to the United States already enjoy favorable terms. But the experts said it could undermine Colombia’s president, Álvaro Uribe, one of the region’s most pro-American leaders.

I have discussed this problem before. While most evidence indicates that Obama doesn't actually believe his ridiculous protectionist rhetoric, campaign pledges matter. Herbert Hoover learned the consequences of such rhetoric when he watched his platitudes turn into the biggest trade disaster in US history. Add to the economic problems a foreign policy disaster if we lose our only Latin American ally just to win rust-belt votes for Obama.

Looking forward to that post-Washington politics president we just elected.

No Mention of Tax Hikes! (Obama's Econ Policy)

2008-11-24T13:49:00.004-07:00

The top tier of Obama’s economic team has been assembled. Timothy Geither will be his Treasury Secretary and Lawrence Summers his director of the National Economic Council. PP likes both picks. They are well-respected veterans of past financial crisis; particularly Summers who helped navigate the US through past economic crisis.

The important question is—as we discussed here—whether Obama will listen to his economic advisers, and, if so, to what extent.

According to statements made this morning it seems Obama is already distancing himself from his campaign trade and tax policy. While unveiling his economic recovery plan, Obama discussed middle-class tax cuts without making mention of tax hikes on those earning $250,000 plus.

What does this mean? Perhaps Obama is hedging on his (imprudent) campaign promises because he’s listening to his economic advisers. This would be a wise decision. PP likes it when economics rather than politics (corporate or union demands) dictate economic policy. Raising income taxes would deepen the recession. PP has even greater concerns regarding Obama’s campaign pledge to increase the capital gains tax from 15 to 20%. With unemployment at a 14 year high, taking yet more of the capital gains of the wealthy (cutting investment and therefore job growth) would be horrendous tax policy for someone promising 2.5 million new jobs by the end of 2010. Which promise is Obama planning on keeping, job growth or higher capital gains tax? He can't have both (PP prefers job growth).

Let’s hope Obama continues to hedge on his campaign promises and instead keeps listening to his economic advisers. The economy would stand to benefit from it.

Huntsman bad for Mitt

2008-11-22T18:43:00.009-07:00

I have a theory that there can only be one Mormon presidential candidate at a time. There are only so many networks that will rally around and support such a candidate. These networks can't possibly bear the burden of supporting two.

So, would Huntsman’s appointment to Secretary of Energy endanger Mitt’s run in 2012 (we got the inside scoop on Mitt’s skeletal campaign here)?

As the GOP wanders in the wilderness these coming years they’ll likely come to realize that America’s populace lies in the center-right (the raw data is discussed here). And as the GOP shifts to the center of the Right’s political paradigm, moderate Republicans like Jon Huntsman—fiscally conservative, domestically centrist (immigration, health care, environment, education), socially center-right—will increase in popularity. Appointing Huntsman to Secretary of Energy would provide a platform to facilitate his rise in popularity as well as solidify his burgeoning reputation as a bipartisan, moderate Republican.

So, if and when Huntsman’s star rises, Mitt’s descends.

"Alternative Energy"

2008-11-22T10:29:00.002-07:00

Obama, from the Times:

“We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead.”

These are good ideas. But what does he mean by "alternative energy technologies that can free us from our dependence on foreign oil"? Who, exactly, will decide which alternatives will accomplish that goal? The government? The same people who thought corn ethanol could do it?

The government should not make these kinds of decisions. The chances of being wrong are high - and the costs are even higher. Instead of market actors making these decisions based on market forces, legislators make them based on lobbyist money. Corn ethanol is not significantly better for the environment (or more efficient) than regular gas. It also led to higher food prices which sent millions into extreme poverty. But the government now subsidizes it, and political capture means that will never change (Obama supported the farm bill that continued to subsidies). We're stuck. The markets, on the other hand, have the ability to correct mistakes.

What will be the next mistake? How much will it cost us? Why not, instead, create incentives for markets to make these decisions?

Kiwis win rugby league World Cup, 34-20

2008-11-22T09:54:00.002-07:00

From the NZ Herald:

Hail Stephen Kearney, hail Wayne Bennett, hail Nathan Cayless. And if you're Australian, hail a cab because you're going home with nothing. . . .

Australia was looking for its 10th World Cup victory in 13 attempts, New Zealand were going for their first. The odds probably couldn't have been weighed greater against a finalist. Certainly, you thought the Kiwis would have had a better shot on Eden Park in 1988, or 12 years later at Old Trafford.

Always good to see the little guy win - and beat those Aussies. Probably related to improving US-NZ relations and weakened Australian-US relations.

Another good economic pick - but will he listen?

2008-11-21T20:27:00.004-07:00

Reports surfaced today that Obama will bring Tim Geithner in as Secretary of the Treasury. I applaud this decision - Geithner has been my top pick all along (here and here). As I have said before, Obama is picking a fantastic economic team - mostly nonpartisan people with skills and experience relevant to the job. Unfortunately, the same cannot be said for his other posts.

In one of its more comical articles of late, the NY Times argues that the selection of Hillary Clinton as Secretary of State represents Obama's promised shift to the center. WHAT? Since when was Hillary Clinton a "pragmatist rather than ideologue"? Was it when she was bashing her husbands record on NAFTA? Was it when she was playing the I'm-more-liberal-than-you game in the primaries? This is NY Times in-the-tank-for-Obama at its best. Not only does Hillary have a liberal record, but she is very polarizing to a big chunk of Americans. Obama, his media friends, and his kool-aid drinking supporters will try to pitch this and other selections (like Tom Daschle) as qualified, bipartisan choices. Clear-thinking people will laugh at such attempts. Clinton has no training and little experience in foreign affairs (she's a corporate lawyer turned politician), and is obviously a politically motivated selection and an indication that Obama is abandoning his bipartisan promises.

The NY Times article's title even invites laughs - "inviting a clash of ideas." Yes, we all remember the clash of ideas during the primaries. Hillary Clinton and Obama had identical platforms, and spent considerable time trying to exaggerate their differences. This is no team of rivals, people. This is a very Democratic Congress with a very Democratic executive who was elected based on dishonest promises about bipartisan unity and change to Washington politics. Are there still Obama supporters who can defend such promise breaking with a straight face?

Tom Daschle (married to an airline industry lobbyist - what happened to that promise, Obama?) is another polarizing figure - hardly a centrist - without experience in healthcare economics.

As I said, the Geither choice (and other economic team selections) is a good one. The question is: will Obama listen to his economic advisers or his political advisers? Based on history, we must assume he will do that latter. After spouting pages of embarrassingly stupid populist rhetoric on the campaign trail, we have no basis to assume that Obama will listen to his highly qualified economic team. He has promised to be a leader who does listen - but in light of other broken promises (think campaign finance), we have no reason to believe he'll keep any others.

So, for bipartisanship and qualifications, we're left with one Republican - Robert Gates. How much power will he have in an administration with Hillary and Obama making foreign policy calls? This is a joke. Obama lovers, spare yourself the embarrassment and don't try to argue that this fulfills Obama's promise of a bipartisan cabinet.

Obama supporters - who have never had the integrity to scrutinize his promises - will buy the NY Times line and somehow believe that Clinton is a bipartisan selection. In fact, Obama will spend the next eight years breaking promise after promise (only God could keep the lofty promises he has made), and his swooning disciples will ignore the whole charade.

More lawyers

2008-11-21T15:00:00.000-07:00

I've written before about the funny American habit of thinking lawyers are qualified to make policy about economics, healthcare, foreign policy, and everything else. Harvard economist Dani Rodrik agrees:

What is striking in this list [Obama appointments] is the predominance of law school graduates, even though law schools make no claim to teach you policy and politics--unlike, say, the Harvard Kennedy School. . . .

HKS graduates figure prominently among political leaders abroad: the presidents of both Liberia and Mexico are HKS graduates.

But in the U.S., the situation seems quite different. If you are bright and are contemplating a potential career in American politics, you go to a top law school--not a public policy school. This does not seem to have changed much in recent decades despite everything HKS has done to make itself visible and relevant. Why?

Answer? Politics. Mr. Change Washington Politics would rather have Democratic support than solid policy, because, after all, he is just another politician (but a Messiah to his supporters). Yes, it would make more sense to choose people who are actually qualified for their jobs, but this is America. How embarrassing.

Obama jettisons bipartisanship

2008-11-21T09:27:00.004-07:00

After what have doubtless been careful political calculations, Obama has decided that he doesn't need conservative and centrist support to accomplish his goals. With a reasonable majority in Congress and plenty of political capital, he has decided that shoring up his Democratic support is more important than keeping his promises of bipartisanship.

Hillary Clinton and Tom Daschle have a lot in common. They have both been leaders in the party with strong voices and solid supporters. As such, Obama has given them posts (State and Health, respectively) for which they are under-qualified but which will solidify his support among Democrats. This gives Obama some political benefits: Hillary's potential drag in the Senate is neutralized, as is her outspoken husband. They have to get on board now, for real.

All Obama needs to do now to make his kool-aid drinking fans think he keeps promises is have one token Republican in his cabinet - probably the moderate Robert Gates at Defense. Critics who say that Obama has jettisoned promises of bipartisanship will be rebuked with references to Gates with his important post.

At this point, the only selections that seem to have been made based on qualifications are in Obama's economic camp. How well these choices serve the country's interests will depend on who Obama listens to more: political advisers or economic advisers. On the campaign trail, his political advisers won at the expense of Obama's judgment.

He might just make the same mistake Clinton originally made. Politicize the executive too much early in office, and you just might have a new Contract with America.

The politically motivated selections of Daschle and Clinton demonstrate that, as reader Matt K said, the Obama that America elected - the bipartisan, post-politics, change Washington Obama - is a scam.

Holbrooke CV: Secretary of State

2008-11-21T01:40:00.004-07:00

Richard Holbrooke seems to be slipping through the cracks of consideration for Secretary of State. It’s a shame. He’s significantly more qualified than any of the frontrunners. If the fact that Holbrooke has advised two of three frontrunners isn't a strong enough hint to appoint him, his CV certainly is:

• US ambassador to the UN – brokered a historic agreement between the isolationist-controlled Republican Majority and the UN on the US outstanding debts.

• US ambassador to Germany – shaped US-German relations during reunification; key proponent for NATO enlargement as a tool of democratization and economic liberalization.

• Assistant Secretary of State to East Asian and Pacific Affairs (Carter Administration) – normalization of relations with China; heavily involved in helping Indochinese refugees seek asylum in the US.

• Assistant Secretary of State for European and Canadian Affairs (Clinton Administration) – chief architect of the Dayton Peace Accords; architect of NATO enlargement.

• Managing Editor of Foreign Policy.

In other words, Holbrooke is Henry Kissinger—shrewd, intelligent, and decisive—with a moral compass.

This pick will indicate Obama’s decision-making paradigm: political expediency (Clinton, Richardson) or policy practicality (Holbrooke). Let’s hope Obama’s paradigm leans towards the latter.

Auto Bailout = bad foreign, economic policy

2008-11-20T08:23:00.004-07:00

Dartmouth economist and foreign policy expert Matthew Slaughter on three ways the auto bailout hurts America:

The first global cost of a bailout could be less foreign direct investment (FDI) coming into the United States. On Sunday, President-elect Barack Obama asked, "What does a sustainable U.S. auto industry look like?"

Well, it looks a lot like the automotive industry run by "foreign" car companies that insource jobs into the U.S. In 2006 these foreign auto makers (multinational auto or auto-parts companies that are headquartered outside of the U.S.) employed 402,800 Americans. The average annual compensation for these employees was $63,538. . . .

Across all industries in 2006, insourcing companies registered $2.8 trillion in U.S. sales while employing 5.3 million Americans and paying them $364 billion in compensation. But as the world has grown smaller, today the U.S. faces increasingly stiff competition to attract and retain insourcing companies. Indeed, the U.S. share of global FDI inflows has already fallen. From 2003-2005 the U.S. received 16% of global FDI. That's down from 31.5% it received in 1988-1990. . . .

Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here.

The second way the bailout hurts the US, says Slaughter, is by strengthening protectionist politics abroad:

Will a U.S.-government bailout go ignored by policy makers abroad?

No. A bailout will likely entrench and expand protectionist practices across the globe, and thus erode the foreign sales and competitiveness of U.S. multinationals. And that would reduce these companies' U.S. employment, R&D and related activities.

The third negative effect of the bailout could be on the US dollar:

America runs the risk of creating the kind of "political-risk premium" that investors have long placed on other countries -- and that would reduce demand for U.S. assets and thereby the value of the U.S. dollar.

Reduced foreign demand for U.S. assets would be troubling at any time. Its prospect is especially troubling now, when the federal government's fiscal 2009 deficit is widely forecast to reach something near or exceeding $1 trillion -- up from $456 billion last year. With net saving still near zero for U.S. households and falling profits for U.S. companies, financing that deficit will require attracting foreign capital.

Now is a chance for President-elect Obama to prove that he supports change. Protect the American economy; oppose the Detroit bailout.

h/t Greg Mankiw

Wolves in Sheep's Clothing?

2008-11-19T18:19:00.010-07:00

The CEOs of the Big Three automobile manufactures, together with the auto workers unions, appeared before Congress today to seek a portion of the $700 billion appropriated for the economic bailout. Democratic congressmen Gary Ackerman, D-NY, and Brad Sherman, D-CA, members of the House Financial Services Committee, blasted the chiefs of Ford, GM, and Chrysler for failing to recognize the thin ice upon which they, and their companies, are treading. The point of conflict, as reported by CNN.com here, arose as a result of the travel accommodations of the CEOs-- they each traveled from Detroit to Washington by private jet. Estimates provided by CNN sources place the price tag for this flight around $20,000, contrasted by a $500 commercial flight. Rep. Ackerman incredulously commented,

There is a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hand, saying that they're going to be trimming down and streamlining their businesses . . . it makes you a bit suspicious.

Spokespeople for the Big Three defended their decision by claiming it as industry practice for traveling CEOs as a safety provision and that, obviously, they have had to cut back on traveling.

The debate to bailout the Detroit automakers hinges largely on whether or not Congress can be convinced that the Big Three have learned their lesson and that, if left to their own devices, bankruptcy will levy a blow felt by the entire nation. Congressmen, no strangers themselves to luxury and indulgence, had no expectation of a bourgeois to proletariat conversion of the upper crust. But what is particularly galling here, is the thickness of these men to not even make intonations of contrition and change when the primary argument against the automakers receiving federal funds is the perpetuation of the speculation compacted with the dismissal of calls from the market for change in emissions standards and fuel efficiency, among other things. With Chrysler, GM, and Ford arriving in Washington ushered in on their tailor-made red carpet, focus is shifted away from the potential damage to these communities in Detroit and the resuscitation of the domestic automobile manufacturing industry to the careless, often whimsical, behavior of large corporate CEOs.

Ackerman's comments possibly bordered on the juvenile but his outrage at the cavalier attitude exhibited by the CEOs is justified. To come to Washington, request $45 billion of taxpayer funds and argue that the funds are necessary, not because of inept management and irresponsible spending but because of an unfortunate downturn of the economy is not just arrogant but insulting. Ackerman and the other members of his committee have every right to expect Detroit to at least act like they are making the changes the American public requires. Thomas Schatz, president of a consumer advocate group, succinctly sums up the amazement felt by much of the Congressional committee: "They're coming to Washington to beg the taxpayers to help them. It's unseemly to be running around on a $20,000 flight versus a $500 round trip,"

India vs. the Pirates: A threat to the US?

2008-11-19T18:00:00.003-07:00

This is really interesting stuff (NYT):

The Indian Navy said on Wednesday that one of its warships fought a battle at sea with would-be hijackers in the Gulf of Aden, sinking one suspect vessel and forcing the pirates to abandon a second as they fled.

It's interesting not just because pirate stuff is cool, but also because it reveals something about India's geopolitical aspirations. The US has a strict policy of sea (and space) dominance. Hence, the US Navy responds to incidents (like piracy) in international waters. The Russian Navy has made a point of responding to recent pirate incidents (but, notably, was slower in responding than the US).

India is the newcomer. For some time it has been clear that, for obvious reasons, India wants to dominate the Indian Ocean and its vicinity. Handling this piracy incident is India's way of claiming responsibility for the high seas.

The timing is especially interesting, since last week India announced the success of its first lunar probe - a possible challenge to US space dominance, another US national security goal. One hopes that the US will use triangular diplomacy to balance Indian power (for which task Richard Holbrooke would be particularly apt, with his nickname of "Kissinger with a moral compass").

Mitt Blasts the Detroit Bailout

2008-11-19T15:46:00.011-07:00

In an NY Times editorial, Mitt Romney trashed the idea of bailing out Detroit.

IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

Agreed. Mitt is speaking candidly. The auto-industry should not be bailed out. If it is, it would set a bad precedent and an open invitation to poorly run, troubled companies everywhere to apply for public funds in order to survive the recession.

Why then bailout Wall Street and not Detroit some ask?

Because the American economy's survival is contingent upon the financial and banking system. The entire economy depends upon banking and financial services. This is not the case with the Auto-Industry. If Detroit does indeed go under it won't carry industry after industry with it. A lot of people are going to get laid off and factory towns abandoned, but that's the cost of demanding labor unions and overly speculative executives.

Mitt is right-on with his prescription for the Auto-industry. By filing a Chapter11 Bankruptcy, Labor Union contracts can be restructured until they're competitive with European and Japanese ones, and, yes, the executives that have mismanaged can and SHOULD be let go (read more on the adverse affects of overly speculative executives here).

Moreover, by restructuring now Detroit can better prepare for expansion into emerging markets in China, India, and other developing nations which expect a substantial increase in cars per capita. From the Economist:

China has fewer than three cars for every 100 people and India fewer still. Once people have a roof over their heads, meat on the table and a good job, the next thing they want is a set of wheels. In the next 40 years, the world’s fleet of cars is expected to increase from around 700m today to nearly 3 billion.

My only disagreement with Mitt is his call for an increase in government investment in alternative energy. While its paramount that Detroit carve its niche in greater fuel efficiency, government determining which energy alternatives to invest in would be disastrous. We could do without another ethanol/corn debacle. The market determines economic viability, not the political process.

An ideal energy policy would be a higher gasoline tax at the point of price elasticity -- i.e. when people stop driving and start biking. A comparable reduction in income tax would compensate drivers as well as pass the burden of the tax on to oil-exporting nations (OPEC). PP have constantly stressed the wisdom of a Pigovian gasoline tax. Read here for more.

The irony in this editorial is how substantially it contrasts from Mitt's campaign rhetoric. On the campaign trail, Mitt flipped and he flopped to avoid offending any possible constituent. And what does he have to show for it? He's writing editorials for the NY Times.

We are happy for Mitt, however. He found a profession he's honest in!

Lithuania Energy Policy is Foreign Policy Unrestrained

2008-11-19T12:51:00.004-07:00

Yesterday Lithuania threatened to block talks on a new partnership and cooperation agreement between Russia and the EU. The re-opening of the talks was supposed to be contingent on Russia's complete troop removal from Georgia. Despite Russia continued troop presence in Abkhazia and South Ossetia, all EU member-states have agreed to meet December 2 to re-open pact negotiations except Lithuania .

Why is Lithuania holding Russia to its demands when the rest of the EU is not? Because Lithuania is used to Russian aggression and have the energy independence to stand up to it. Lithuania obtains 80% of its energy from nuclear power.

The point -- Energy independence allows states to pursue national interests unrestrained by the ball-and-chain of securing an expensive, limited, highly demanded commodity, oil, which happens to be produced in some of the world's most volatile regions.

HINT HINT.

... And another

2008-11-18T14:22:00.003-07:00

Fortune Magazine senior editor Allan Sloan joins the Pigou club (h/t Greg Mankiw):

Yes, a big gas tax would cause economic hardship, especially to people who are barely making ends meet. But we could refund the money to those needy people through the income tax. We could also refund the gas tax to those of us who aren't particularly needy, or else use it for energy research-and-development or public works or - dare I say it - for deficit reduction.

The idea of this tax isn't to inflict pain or get people out of cars - it's to make gasoline prices predictable so that automakers and consumers could make rational, long-term decisions rather than being subject to the rollercoaster ride we've taken in the past year.

A high tax would hold down gas consumption, making it more difficult for oil-producing countries to gouge us again when the world economy recovers. Even though we'd be paying more than we're paying now, we'd be paying much less than the $4-plus we paid this summer.

Having permanently high gas prices would let the market, rather than incomprehensible, loophole-ridden Corporate Average Fuel Economy regulations, make the decisions on what kind of vehicles Americans get to drive.

It's all about using the power of markets as a tool to achieve environmental, economic, and national security goals.

The Expert Who Advises the 'Experts'

2008-11-18T12:22:00.005-07:00

Hillary Clinton and John Kerry are the foremost candidates for Secretary of State. Who advised John Kerry on foreign policy during his 2004 presidential campaign? Richard Holbrooke.

And who advised Hillary during her 2008 presidential campaign? Richard Holbrooke.

Maybe Obama should appoint the expert who advises the 'experts.'

Feldstein on Detroit

2008-11-18T08:33:00.002-07:00

In today's WSJ, Harvard economist Martin Feldstein:

The Big Three U.S. automakers need more than an injection of $25 billion from the federal government. Because of their ongoing losses, they would burn through that money in less than a year and would soon be back for more. . . .

The simplest solution is to allow GM and the others to file for bankruptcy. If the companies file under Chapter 11, they would be able to continue producing cars, and the workforce would remain employed while the firms reorganized. The firms would also be able to get short-term credit under bankruptcy protection.

Detroit will always come back for more. It's time for Washington to do Detroit a favor by letting them fail.

If politicians in Washington cannot live with the thought of the auto industry in bankruptcy and decide that some cash must be delivered, this should be done as part of a fundamental restructuring plan imposed by the government in exchange for those funds.

The goal of that restructuring should not just be to require the companies to make cars that are fuel-efficient and more environmentally sound, as President-elect Barack Obama has said, although that can be included in the government's list of requirements. The goal should be to put the companies on a course that will allow them to survive for the long term, producing cars and creating jobs. . . .

Of course, with a Pigovian tax the government wouldn't have to regulate the fuel efficiency and environmental standards of car companies - the market would do that, relieving lawyers with no economic training of the duty.

Russia: Perpetuating the bluff

2008-11-17T12:37:00.002-07:00

At PP we have written extensively about the short-term danger of Russia's growing aggression. However, these warnings should be placed in the context of Russia's long-term outlook. Demographic trends - health, mortality, sex ratios, birth rates - in Russia indicate that in the long run, the country lacks the capacity to be a world power. What we see now is a prolonged bluff by Putin and the Kremlin: a bluff which seeks to frighten the West into providing a positive world order for Russian expansion while pacifying Russian citizens into thinking that Russia's long-term outlook is good. From the Daily Telegraph (h/t Zach D.):

Obeying orders from the top, Russian television has banned the use of words such as "crisis", "decline" and "devaluation". Coverage of the mayhem in the country's stock market, where shares have fallen by 75 per cent since August, is scant.

Instead, just as in Soviet times, Russians are told how bad everything is in the West. The US, Russians are told, is in irreversible decline, while desperate Britons are throwing themselves into the Thames. The Queen, facing imminent penury, has been forced to pawn her diamonds and, according to one tabloid front page, we can no longer afford to bury our dead.

It has fallen to Russia, one television commentator gravely intoned, to come to the rescue of Europe. Russia, another newspaper declared, was set to become the continent's lender of last resort.

Russian public perception is far from the truth:

Russia's own stock markets have been the world's worst performers, with share prices falling by 75 per cent since the summer. The rouble is under heavy pressure, and the central bank has had to spend a fifth of its currency reserves to stop it going into freefall.

Russia's instability has led to massive capital flight and the undermining of investor confidence in the Russian economy and currency. In the long term, the outlook for Russia is not good. Putin will mimic Soviet leaders by domestically perpetuating the myth that Russia is in better condition than the West while internationally expanding and threatening its neighbors (and the US). We learned from the Cold War that such a myth can indeed last many years, but will eventually crumble.

For now, the US must take steps to limit the damage of a medium-term resurgent Russia - then wait. The management of Indian and Chinese power is a much more important task for the West.

Foreign Policy's oil burden (Not France)

2008-11-17T01:31:00.002-07:00

Yesterday French President Nicolas Sarkozy demanded that Russia halt any missile deployment plans on the Polish border until it was collectively discussed.

Why is it that France stands up to Russia’s threat when the rest of Europe doesn’t?

Because France’s energy policy isn’t connected to its foreign policy. Instead of importing Russian oil to run its economy, France domestically produces nuclear energy. As a result, Russia cannot use its oil policy as leverage against them as they do other European nations. Having disconnected its energy needs from its foreign policy, France is free to more actively pursue its interests in ways that oil importing states cannot.

America should take a cue from France. Until its energy needs are met via domestic resources, US foreign policy will forever be tied to and plagued by Middle-Eastern politics, culture, and policy.

For some good ideas on how to wean the US off oil, read the post below.

Pigovian tax: More supporters

2008-11-16T21:04:00.003-07:00

For those who continue to doubt the political feasibility of the Pigovian tax, add two more op-ed pages to the huge list of Pigovian supporters: Daniel Sperling and Deborah Gordon at the NY Times, and the editorial board at the Washington Post.

It's getting around. At least 64% of economists; conservatives like Charles Krauthammer; centrists like Thomas Friedman; and the editorial boards of liberal newspapers. Coupled with income tax reductions, it's difficult to rationalize opposition to such a plan due to its benefits for the environment, the economy, and national security. The only reason it isn't more popular is that the Right is too obsessed with drilling, and the Left thinks Washington politicians are better at choosing cost-effective products than are markets.

For newcomers to Pendulum Politics, get a full explanation and defense of the Pigovian tax idea from Harvard economist Greg Mankiw (he probably wrote your textbook).

Expectations and reality

2008-11-16T19:11:00.004-07:00

Obama is still a blank slate, on which supporters of all persuasions - protectionists and free traders, hawks and doves, etc. - project what they think he is. His lack of record has enabled him to play this game thus far. How long can it last? From the Times:

But it was Mr. Obama who set the expectations so high among so many different constituency groups. His advertising during the primaries urged Democrats to vote for him because he would do nothing less than “save the planet,” which as campaign promises go certainly beats a chicken in every pot.

“There’s going to be enormous pressure on him to produce, to meet these expectations,” said Tom Andrews, a former Democratic congressman from Maine who is now national director of the activist group Win Without War.

How will the public respond once Obama makes decisions? Will he be like Nixon, who was immediately called out for his failure to deliver promises? Or will he be more like Kennedy, who was never taken to task for failures in Berlin, Cuba, and on the civil rights front? Pleasing his diversity of supporters will be a difficult task.

The Next Secretary of State?

2008-11-15T23:53:00.004-07:00

Clinton

Why this makes sense: Clinton’s appointment would add to Obama’s political capital by easing Hillary supporters who felt she deserved the vice presidential post. It would illustrate his ability to co-opt with political rivals at least within Democratic circles. Additionally, Hillary’s appointment would add a well-spoken stateswoman to his cabinet, whose hawkish tendencies would compensate for Obama’s perceived dovetailed foreign policy.

And why it doesn’t: Appointing someone Obama himself labeled as a Washington insider to the position of Secretary of State would dilute his promise for change. Moreover, Clinton doesn’t have significant, formal foreign policy experience (a mere 8 years on various committees), and she could present a personality conflict for Obama. Lastly, Hillary’s appointment would be to the chagrin of Joe Biden who would fear a reduced role in forming the administrations foreign policy.

Bill Richardson

Why this makes sense: Richardson’s appointment would increase Obama’s popularity among Latinos and other minorities for granting such a high-post. In addition, it would please pacifists as Richardson is dovetailed.

And why it doesn’t: Richardson’s dovetail doesn’t fly with America’s interventionalist foreign policy. It simply wouldn’t work. Moreover, as this video shows, Richardson is far from well spoken on foreign policy matters. It certainly begs the question, why is he even being considered?

John Kerry

Why this makes sense: Kerry was a strong supporter of Obama providing him with a key endorsement in the aftermath of Obama’s New Hampshire loss. Kerry is not exactly dovetailed but he is not a proponent for aggressive foreign policy either. In other words, he would fit well into Obama’s emphasis on ‘multilateralism’ and willingness to talk to anyone, anywhere.

And why it doesn’t: Kerry is forever marred with his inability to beat Bush in the 2004 election. The main reason, the lack of confidence voters placed in Kerry’s foreign policy acumen. He does not exude confidence and like Richardson may be too dovetailed for the typical interventionalist foreign policy inherent to America.

Richard Holbrooke

Why this makes sense: Experience. Holbrooke has LOTS of it. He brings a practical centrism to US interventionism, has an acute understanding of the complexities of foreign policy, and his successes have proven him to be a masterful diplomat and peace broker. What’s more, Holbrooke understands how to work with the disreputable of the international community. In a lot of ways, he’s Henry Kissinger with a more accurate moral compass.

His vast reservoir of experience coupled with his friendship with Joe Biden would free up Obama to concentrate on other policy areas. Moreover, his appointment would please Republican and Democrats alike as he is well liked on both sides of the aisle.

And why it doesn’t: Holbrooke’s appointment would alienate the left-wing pacifist disenchanted with Holbrooke shrewd, hawkish foreign policy. Moreover, some within the Obama team question Holbrooke’s loyalty since he endorsed Hillary.

At the end of the day, Obama will have to choose between short-term political expediency and policy expertise. Let’s hope he chooses the later. Holbrooke is an asset an inexperienced President simply cannot pass up.

Obama and India

2008-11-15T16:44:00.002-07:00

As Bush leaves office, clear-thinking observers will give him credit for things he has done right. Some of these are progress on human trafficking and AIDS efforts in Africa. Additionally, Bush has had big geostrategic success in the US relationship with the world's largest democracy, India. Indian public opinion of the US has increased during the Bush administration, and Bush recently achieved a major nuclear initiative with India.

Why should we care about India? The most obvious reason is that a healthy balance of power in Asia is in US interests. Triangular diplomacy with India and China, both nuclear powers, is crucial to our ability to manage their rising power. The difficulty is that our other ally in the region, Pakistan, is India's worst enemy (and they're both nuclear powers). Navigating this situation will require Nixonian skill (of course, Nixon chose Pakistan over India, which provided his desired access to China).

President Obama should continue courting India. I've argued before that Obama's trade rhetoric is belligerent foreign policy (and hypocritical in light of his criticisms of Bushist unilateralism). Says Pramit Pal Chaudhuri,

Obama has attacked the outsourcing of service jobs to places like India and the offshoring of manufacturing jobs to Asia as a whole. His advisors also indicate that they will seek to incorporate social provisions, like labor standards, into future international trade negotiations. Though candidates tend to rollback from protectionist stances once they come to power, the Democrats’ control of both houses of Congress may not give Obama that leeway.

Obama may find himself in a similar position to Herbert Hoover, who, despite knowing better, found that his campaign promises and his party's control of Congress made protectionism a fait accompli. Similar actions by Obama would result in immediate disillusionment with his internationalist foreign policy promises among those in the developing world. It's in Obama's interests to build on Bush's progress, despite the temptation to repudiate everything Bush.

The issue of nuclear proliferation will be even more difficult. Our nuclear deal with India is seen by most as an exemption to the Non-Proliferation Treaty. Obama's best option is probably to leave it alone for now and focus on other areas of cooperation.

Trade with Columbia, damn it!

2008-11-15T15:21:00.010-07:00

Ten years ago Colombia was, as IBD puts it, a drug hellhole with over 30,000 murders per year. Today it’s a bastion of democracy and a testament to the fruits of economic liberalization. In South America the ideological struggle between open and closed markets wages on. Colombia plays a central role in this ongoing struggle, and pressures mounting from within (FARC) and without (Venezuela, Bolivia) are hungry for Colombia’s economic experiment to fail.

It is essentially that the US support Colombia as its success as a free-market democracy may spawn additional, self-sustaining movements. The US has already heavily invested in Colombia’s development, investing $5.8 billion in military, police, economic, and social aid over the last decade. Moreover, the US involvement in Colombia represents our greatest, most prudent state-building project in recent US history -- why this is never touted is beyond me!

Yet, Congress continues to refuse to reward US and Colombian efforts by entering into a free-trade agreement (b/c Dems want to protect US labor unions). As a result, Europe, who just signed a free-trade agreement with Colombia, is the beneficiary of Colombia’s new, attractive markets, not us.

The US is abandoning its most successful attempt at democratization since Germany and Japan at a key moment in Colombia's democratic development--free-trade with the world's biggest economies (US and Europe).

That’s no way to reward our efforts nor the efforts of our Colombian allies. Congress needs to sign the free-trade pact, or the US might as well watch Columbia drift off to South America's sea of socialism.

UPDATE: A formal FTA with Columbia would be a huge boost to the struggling economy in the port city of New Orleans.

Oil: Make policy match the facts

2008-11-15T11:53:00.003-07:00

The Financial Times publishes some really great stuff, like this interactive oil map. You have to look at this.

As PP has written before, the oil map indicates that the USA is the world's third largest oil producer (which, surprisingly, surprises a lot of people). We produce more than Venezuela, Mexico, Canada, and even Iran (we're behind Saudi Arabia and Russia). Every time I think of this, I think of how pathetic it is that our economy and foreign policy are so hijacked by Iran and the Middle East.

Keeping production figures in mind, the map lets you see countries with the highest proven reserves. The US is not even in the top 10.

And, of course, we're the number 1 consumer.

What does this all mean? We're producing furiously, with the Right pushing for even more production, though we are far outmatched in proven reserves. In other words, we're on track to run out sooner than anybody else. Meanwhile, we consume furiously, with those same Rightist elements refusing to push for reduction in consumption.

It's only going to get worse for the US unless we take steps now to fix the problem. We must recognize that we shouldn't be a huge producer (lack of reserves) or a huge consumer (economics and foreign policy), and make policies accordingly.