Tuesday, September 30, 2008

The Pirate Life

So, updating my earlier post on the Somali pirates, it now appears that the pirate life is not as romantic as one might think. Apparently, the pirates who seized the Ukrainian ship filled with tanks are having disagreements about what to do, now that they're surrounded by warships from the US that are threatening to attack them if they attempt to off-load their booty. Moderates among the pirates wanted to give up and avoid being stormed by commandos, while the more radical pirates argued for staying the course and waiting for their demanded $20 million ransom. Sadly, this disagreement ended badly, as three pirates were killed in a gunfight. The pirates are denying any such gun battle...but they're pirates, so I don't know that they can really be trusted.

Pirates fighting among themselves over what to do with their booty...as one of my students said in this morning's Global Security class: "That's just SO pirate!"

Monday, September 29, 2008

An Open Letter on the Financial Crisis and the Bailout

No, it's not a letter from me. I don't understand this stuff all that well. This is from Steven Horowitz, a professor in the department of Economics at St. Lawrence University. It's long, but excellent, and deserves a careful read (one note: he addresses this to his "friends of the left" but given the sad record of the right on fiscal responsibility the letter should be directed to the Republicans as well):

An Open Letter to my Friends on the Left

Steven Horwitz
Department of Economics
St. Lawrence University

September 28, 2008

My friends,

In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken.

Consider instead that the problems of this mess were caused by the very kinds of government regulation that you now propose. Consider instead that effects of the profit motive that you decry depend upon the incentives that institutions, regulations, and policies create, which in this case led profit-seekers to do great damage. Consider instead that the regulations that may have been the cause were supported by, as they have often been throughout US history, the very firms being regulated, mostly because they worked to said firms' benefit, even as they screwed the rest of us. Consider all of this as you ask for more of the same in the name of fixing the problem. And finally, consider why you would ever imagine that those with wealth and power wouldn't rig a new regulatory process in their favor.

One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn't there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don't stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.

Many of you have rightly criticized the ethanol mandate, which made it profitable for corn growers to switch from growing corn for food to corn for fuel, leading to higher food prices worldwide. What's interesting is that you rightly blamed the policy and did not blame greed and the profit motive! The current financial mess is precisely analogous.

No free market economist thinks "greed is always good." What we think is good are institutions that play to the self-interest of private actors by rewarding them for serving the public, not just themselves. We believe that's what genuinely free markets do. Market exchanges are mutually beneficial. When the law messes up by either poorly defining the rules of the game or trying to override them through regulation, self-interested behavior is no longer economically mutually beneficial. The private sector then profits by serving narrow political ends rather than serving the public. In such cases, greed leads to bad consequences. But it's bad not because it's greed/self-interest rather because the institutional context within which it operates channels self-interest in socially unproductive ways.

This, my friends, is exactly what has brought us to the mess we are now in.

To call the housing and credit crisis a failure of the free market or the product of unregulated greed is to overlook the myriad government regulations, policies, and political pronouncements that have both reduced the "freedom" of this market and channeled self-interest in ways that have produced disastrous consequences, both intended and unintended. Let me briefly recap goverment's starring role in our little drama.

For starters, Fannie Mae and Freddie Mac are "government sponsored enterprises". Though technically privately owned, they have particular privileges granted by the government, they are overseen by Congress, and, most importantly, they have operated with a clear promise that if they failed, they would be bailed out. Hardly a "free market." All the players in the mortgage market knew this from early on. In the early 1990s, Congress eased Fannie and Freddie's lending requirements (to 1/4th the capital required by regular commercial banks) so as to increase their ability to lend to poor areas. Congress also created a regulatory agency to oversee them, but this agency also had to reapply to Congress for its budget each year (no other financial regulator must do so), assuring that it would tell Congress exactly what it wanted to hear: "things are fine." In 1995, Fannie and Freddie were given permission to enter the subprime market and regulators began to crack down on banks who were not lending enough to distressed areas. Several attempts were made to rein in Fannie and Freddie, but Congress didn't have the votes to do so, especially with both organizations making significant campaign contributions to members of both parties. Even the New York Times as far back as 1999 saw exactly what might happen thanks to this very unfree market, warning of a need to bailout Fannie and Freddie if the housing market dropped.

Complicating matters further was the 1994 renewal/revision of the Community Reinvestment Act of 1977. The CRA requires banks to to make a certain percentage of their loans within their local communities, especially when those communities are economically disadvantaged. In addition, Congress explicitly directed Fannie and Freddie to expand their lending to borrowers with marginal credit as a way of expanding homeownership. What all of these did together was to create an enormous profit and political incentives for banks and Fannie and Freddie to lend more to riskier low-income borrowers. However well-intentioned the attempts were to extend homeownership to more Americans, forcing banks to do so and artificially lowering the costs of doing so are a huge part of the problem we now find ourselves in.

At the same time, home prices were rising making those who had taken on large mortgages with small down payments feel as though they could handle them and inspiring a whole variety of new mortagage instruments. What's interesting is that the rise in prices affected most strongly cities with stricter land-use regulations, which also explains the fact that not every city was affected to the same degree by the rising home values. These regulations prevented certain kinds of land from being used for homes, pushing the rising demand for housing (fueled by the considerations above) into a slowly responding supply of land. The result was rapidly rising prices. In those areas with less stringent land-use regulations, the housing price boom's effect was much smaller. Again, it was regulation, not free markets, that drove the search for profits and was a key contributor to the rising home prices that fueled the lending spree.

While all of this was happpening, the Federal Reserve, nominally private but granted enormous monopoly privileges by government, was pumping in the credit and driving interest rates lower and lower. This influx of credit further fueled the borrowing binge. With plenty of funds available, thanks to your friendly monopoly central bank (hardly the free market at work), banks could afford to continue to lend riskier and riskier.

The final chapter of the story is that in 2004 and 2005, following the accounting scandals at Freddie, both Freddie and Fannie paid penance to Congress by agreeing to expand their lending to low-income customers. Both agreed to acquire greater amounts of subprime and Alt-A loans, sending the green light to banks to originate them. From 2004 to 2006, the percentage of loans in those riskier categories grew from 8% to 20% of all US mortgage originations. And the quality of these loans were dropping too: downpayments were getting progressively smaller and more and more loans carried low starter interest rates that would adjust upward later on. The banks were taking on riskier borrowers, but knew they had a guaranteed buyer for those loans in Fannie and Freddie, back, of course, by us taxpayers. Yes, banks were "greedy" for new customers and riskier loans, but they were responding to incentives created by well-intentioned but misguided government interventions. It is these interventions that are ultimately responsible for the risky loans gone bad that are at the center of the current crisis, not the "free market."

The current mess is thus clearly shot through and through with government meddling with free markets, from the Fed-provided fuel to the CRA and land-use regulations to Fannie and Freddie creating an artificial market for risky mortgages in order to meet Congress's demands for more home-ownership opportunities for low-income families. Thanks to that intervention, many of those families have not only lost their homes, but also the savings they could have held onto for a few more years and perhaps used to acquire a less risky mortgage on a cheaper house. All of these interventions into the market created the incentive and the means for banks to profit by originating loans that never would have taken place in a genuinely free market.

It is worth noting that these regulations, policies, and interventions were often gladly supported by the private interests involved. Fannie and Freddie made billions while home prices rose, and their CEOs got paid lavishly. The same was true of the various banks and other mortgage market intermediaries who helped spread and price the risk that was in play, including those who developed all kinds of fancy new financial instruments all designed to deal with the heightened risk of default the intervention brought with it. This was a wonderful game they were playing and the financial markets were happy to have Fannie and Freddie as voracious buyers of their risky loans, knowing that US taxpayer dollars were always there if needed. The history of business regulation in the US is the history of firms using regulation for their own purposes, regardless of the public interest patina over the top of them. This is precisely what happened in the housing market. And it's also why calls for more regulation and more intervention are so misguided: they have failed before and will fail again because those with the profits on the line are the ones who have the resources and access to power to ensure that the game is rigged in their favor.

I know, my friends, that you are concerned about corporate power. So am I. So are many of my free-market economist colleagues. We simply believe, and we think history is on our side, that the best check against corporate power is the competitve marketplace and the power of the consumer dollar (framed, of course, by legal prohibitions on force and fraud). Competition plays mean, nasty corporations off against each other in a contest to serve us. Yes, they still have power, but its negative effects are lessened. It is when corporations can use the state to rig the rules in their favor that the negative effects of their power become magnified, precisely because it has the force of the state behind it. The current mess shows this as well as anything ever has, once you realize just what a large role the state played. If you really want to reduce the power of corporations, don't give them access to the state by expanding the state's regulatory powers. That's precisely what they want, as the current battle over the $700 billion booty amply demonstrates.

This is why so many of us committed to free markets oppose the bailout. It is yet another example of the long history of the private sector attempting to enrich itself via the state. When it does so, there are no benefits to the rest of us, unlike what happens when firms try to get rich in a competitive market. Moreover, these same firms benefited enormously from the regulatory interventions they supported and that harmed so many of us. The eventual bursting of the bubble and their subsequent losses are, to many of us, their just desserts for rigging the game and eventually getting caught. To reward them again for their rigging of the game is not just morally unconscionable, it is very bad econonmic policy, given that it sends a message to other would-be riggers that they too will get rewarded for wreaking havoc on the US economy. There will be short-term pain if we don't bailout these firms, but that is the hangover price we pay for 15 years or more of binge lending. The proposed bailout cannot prevent the pain of the hangover; it can only conceal it by shifting and dispersing it among the taxpayers and an economy weakened by the borrowing, taxing, and/or inflation needed to pay for that $700 billion. Better we should take our short-term pain straight up and clean out the mistakes of our binge and then get back to the business of free markets without creating an unchecked Executive branch monstrosity trying to "save" those who profited most from the binge and harming innocent taxpayers in the process.

What I ask of you my friends on the left is to not only continue to work with us to oppose this or any similar bailout, but to consider carefully whether you really want to entrust the same entity who is the predominant cause of this crisis with the power to attempt to cure it. New regulatory powers may look like the solution, but that's what people said when the CRA was passed, or when Fannie and Freddie were given new mandates. And the very firms who are going to be regulated will be first in line to determine how those regulations get written and enforced. You can bet which way that game is going to get rigged.

I know you are tempted to think that the problems with these regulations are the fault of the individuals doing the regulating. If only, you think, Obama can win and we can clean out the corrupt Republicans and put ethical, well-meaning folks in place. Think again. For one thing, almost every government intervention at the root of this crisis took place with a Democratic president or a Democratic-controlled Congress in place. Even when the Republicans controlled Congress, President Clinton worked around it to change the rules to allow Fannie and Freddie into the higher-risk loan market. My point here is not to pin the blame for the current crisis on the Democrats. That blame goes around equally. My point is that hoping that having the "right people" in power will avoid these problems is both naive and historically blind. As much as corporate interests were relevant, they were aided and abetted, if unintentionally, by well-meaning attempts by basically good people to do good things.The problem is that there were a large number of undesirable unintended consequences, most of which were predictable and predicted. It doesn't matter which party is captaining the ship: regulations come with unintended consequences and will always tend to be captured by the private interests with the most at stake. And history is full of cases where those with a moral or ideological agenda find themselves in political fellowship with those whose material interests are on the line, even if the two groups are usually on opposite sides. This is the famous "Baptists and Bootleggers" phenomenon.

If you've made it this far, I am most grateful. Whether or not you accept the whole argument I've laid out here, I do ask one thing of you: the story I told at the start of the role of government intervention in this mess is true, whatever your grander conclusions about the causes and cures are. Even if you don't buy my argument that more regulation isn't the cure, to blame this mess on "the free market" should now strike you as an obvious falsehood and I would hope, in the spirit of fair play, that you would stop making that claim as you speak and write about the ongoing events of the last two weeks. We can disagree in good faith about what to do next, and we can disagree in good faith about the degree to which government intervention caused the problems, but blaming a non-existent free market for a crisis that clearly was to some extent the result of government's extensive interventions in that market is unfair. So if I have persuaded you of nothing else, I hope deeply that I have persuaded you of that.

In the end, all I can ask of you is that you continue to think this through. Explaining this crisis by greed won't get you far as greed, like gravity, is a constant in our world. Explaining it as a failure of free markets faces the obvious truth that these markets were far from free of government. Consider that you may be mistaken. Consider that perhaps government intervention, not free markets, caused profit-seekers to undertake activities that harmed the economy. Consider that government intervention might have led banks and other organizations to take on risks that they never should have. Consider that government central banks are the only organizations capable of fueling this fire with excess credit. And consider that various regulations might have forced banks into bad loans and artificially pushed up home prices. Lastly, consider that private sector actors are quite happpy to support such intervention and regulation because it is profitable.

Those of us who support free markets are not your enemies right now. The real problem here is the marriage of corporate and state power. That is the corporatism we both oppose. I ask of you only that you consider whether such corporatism isn't the real cause of this mess and that therefore you reconsider whether free markets are the cause and whether increased regulation is the solution.

Thanks for reading.


I've Been Set Straight on Sarah Palin

A few days back, I wrote about VP candidate Sarah Palin's humiliating interview with Katie Couric, and wrote that Palin is truly a foreign policy moron. I also wrote that McCain's selection of such a pathetic fool was disgraceful and throws doubt on his claim to always put "country first."

Well, today I take it all back. Sarah Palin is obviously ready to be vice president.

How do I know?

Her mommy and daddy said so.

In an interview on the CBS Early Show, Sally and Chuck Heath told CBS's Harry Smith that their daughter is indeed ready for the second most important job in the country:

When asked by Smith about rumblings that Palin isn't ready to be vice president and a heartbeat away from the presidency, Chuck replied, "She's ready to do anything she wants to be. And she perseveres, she works so hard, she learns so fast. Yeah, she -- I -- I don't worry about that at all. That's what I'll tell 'em. Yeah. ... You want some honesty, yeah -- yeah, not a typical politician, get her. Yeah. Yeah."

Sally added, "She's got that ability to relate to people. She's diplomatic. She can get her point across."
Such a thoughtful and eloquent answer to a question they had to know was coming. At least we see where Palin gets it.

It may be true that she has good organizational experience from being a mayor and a governor. And it's generally true that governors have made better presidents than have senators or congressmen. It may be better for the country to have a vice president who is about as far from being a Washington outsider as possible. But that's not enough to qualify anyone to be president, let alone vice president. So far, Palin has not demonstrated the ability to think on her feet, to be capable of any kind of creative analysis of issues, or any kind of dynamic intelligence that would indicate she's ready to be involved in high-level policy making or negotiations.

Things aren't looking so good for McCain's campaign now any way. Today's Intrade market odds have Obama at 58 to McCain's 40.4. If McCain somehow manages to turn this thing around and win, it will be a sad day for the country. But even if he loses, McCain will have sullied his reputation as a true patriot who always puts his country before himself. The selection of Sarah Palin is nothing more than a transparent ploy to win the presidency. And that is unbecoming of McCain.

PS: To the two anonymous commentators on my first Palin post who asked whether it's not more relevant that Obama, as the presidential candidate, is inexperienced. Yes, it matters. But Obama is smart, analytic, and thoughtful. Even if I preferred McCain to Obama (and I'm not saying whether I do), I don't doubt that Obama's foreign policy would be intelligent and careful. It is simply unimaginable to me that Palin, if she became president, could negotiate a peace deal between the Israelis and the Palestinians, or could face down Medvedev over Georgia, or engage in tough diplomacy over free trade. It's not even so much her appalling ignorance of the issues (although that's still shocking. Given that I'm sure she's being force-fed basic understandings of foreign policy, she should be at least able to speak coherently about what's going on in the world). Rather, what scares me is her total inability to think analytically. She cannot be allowed anywhere near the Oval Office.

Friday, September 26, 2008

Now They've Got Tanks?

Piracy has long been a problem off of the Horn of Africa. More than 50 ships have been hijacked this year already, and million dollar ransoms are being paid out. Currently, about a dozen ships and more than 200 crew members are being held, and the International Maritime Bureau has issued warnings that the level of piracy now threatens global commerce.

But events took a drastic turn for the worse today. Somali pirates have captured a Ukrainian ship carrying 33 T-72 tanks that were on their way to Kenya. Not only were tanks seized, but the pirates also got away with grenade launchers and ammunition.

It's not entirely clear what a rag-tag bunch of pirates who operate on the high seas are going to do with tanks. Perhaps they'll try to sell them to interested parties in Africa, a development would could easily worsen many of the on-going civil wars raging across Africa.

Piracy is one of the clearest examples of jus cogens, a preemptory norm that creates a crime for which there is no possible justification and for which there is universal jurisdiction. Thus, anyone who wishes to act against the pirates is legally allowed to do so. However, that creates a problem -- in the absence of a specific jurisdiction, no one has the responsibility or strong incentive to act (why should one state bear the cost of enforcement when the cost of piracy falls on many?).

Interestingly, Russia has announced that it is dispatching a warship to the Horn of Africa to deal with piracy. This is a smart move by Russia, which has recently been looking for ways to burnish its image and to build ties to Africa. The US and/or NATO should do the same. Not only is there a fair amount of soft power to be gained by acting against pirates, but the US needs international shipping lines to remain open and unmolested. In days past, the British navy would have moved to deal with the pirates; today, that task should be taken up by the US.

The Disgrace of John McCain

I very rarely write about issues of domestic politics, and in the rare instances that I do, I never write anything that looks like an endorsement of one candidate or party over another.

But I'm going to break that policy now.

John McCain has absolutely disgraced himself in the selection of Sarah Palin as his vice presidential candidate.

The woman is, to put it mildly, a moron when it comes to foreign policy. I'm sorry to be so harsh and unprofessional, but it is to be expected when one is nominated for the second-highest position in the land, if not the world.

Her interview with Charles Gibson was bad enough. That was the one in which Palin, when asked about the Bush Doctrine, had absolutely no idea about what Gibson was asking her. Many pundits have rushed to her defense, arguing that there are many definitions of the Bush Doctrine, and thus by not stating which one he meant, the error was Gibson's.

This is sheer idiocy. If Palin had the faintest clue what the Bush Doctrine was, or even that it existed, she would have either asked which one Gibson meant, or provided a definition of one incarnation. I am confident that my students could have done so. But Palin responded by asking if Gibson was referring to Bush's "world view." Pathetic.

But her interview with Katie Couric was even more pathetic. At this point, one would have thought that Palin was meeting round-the-clock with McCain's foreign policy team, working on basic understandings of foreign policy. Instead, we get this:

Katie Couric: You've cited Alaska's proximity to Russia as part of your foreign policy experience. What did you mean by that?

Sarah Palin: That Alaska has a very narrow maritime border between a foreign country, Russia, and, on our other side, the land-boundry that we have with Canada. It's funny that a comment like that was kinda made to … I don't know, you know … reporters.

Couric: Mocked?

Palin: Yeah, mocked, I guess that's the word, yeah.

Couric: Well, explain to me why that enhances your foreign-policy credentials.

Palin: Well, it certainly does, because our, our next-door neighbors are foreign countries, there in the state that I am the executive of. And there…

Couric: Have you ever been involved in any negotiations, for example, with the Russians?

Palin: We have trade missions back and forth, we do. It's very important when you consider even national-security issues with Russia. As Putin rears his head and comes into the air space of the United States of America, where do they go? It's Alaska. It's just right over the border. It is from Alaska that we send those out to make sure that an eye is being kept on this very powerful nation, Russia, because they are right next to, they are right next to our state.
Again, it's not on its face implausible that being governor of Alaska would involve some interactions with Russia or Canada that could be touted as foreign policy experience. But all Palin can do is say that there are trade missions back and forth. Was she involved with them? Did she meet anyone or influence the outcomes to any degree? We don't know.

What we do know is that if Putin rears his head and flies across the Bering Strait into the US (what does that mean anyway?), he'll enter Alaska first. Again, no discussion of why that fact matters. At this point, one would think that Palin could have at least spit out something that she would have memorized about something. But no.

I have always hated domestic politics. And this is exactly why. McCain should be ashamed of himself for picking a foreign policy moron as his running mate. The vice president need not be a foreign policy expert. In fact, given McCain's experience, perhaps his VP didn't need any foreign policy chops at all. But anyone serving at the level of government, and certainly one with a high probability of becoming president, needs to at least have a rudimentary understanding of foreign policy. McCain has disgraced himself and his claims of "country first" with this pick.

Friday, September 19, 2008

Collective Action Problems and Fish

One of the things I find most interesting about the analytic study of international politics is how the problems of collective decision making interfere with achieving desirable outcomes. All too often, even when actors have a common interest, the enforcement problems inherent in the anarchic nature of the international system prevent them from reaching that common interest (what we would call the "optimal" outcome). Rather, fears of defection and mistrust forces each actor to pursue its own interest, at the expense of the collective, thereby ensuring that each actor is ultimately worse off than if they had cooperated (what we call the "suboptimal" outcome). The most common models of such behaviors are the "prisoners' dilemma" and the "tragedy of the commons." The latter is most relevant in questions of environmental regulation, which almost by definition, involves the attempted regulation of public goods (goods which are available to all and which cannot be denied to someone who refuses to pay for its use, like oxygen).

The problem of the depletion of fishing stocks is a quintessential tragedy of the commons problem. The fish in the ocean are owned by no one, and available for use by all. The collective interest would be to manage the fish stocks so that the fish removed from the ocean are replaced by those remaining reproducing. However, each individual fisherman has a personal incentive to fish as much as possible, and no one can be sure that anyone else will agree to limit their own fishing, much less comply with any such agreement. Thus, international agreements to limit commercial fishing in efforts to preserve fish stocks are exceedingly difficult to reach and even harder to enforce.

The solution to the general problem is either the creation of property rights (whereby each actor now owns a share of the common, and can do whatever he wants to with it, which connects the individual incentive to the collective) or government regulation (forcing the actors to limit their usage). Regulation is difficult, if not impossible, under international anarchy. But what about property rights?

As this article makes clear, property rights are now being seen as a potential solution to the problem of overfishing. In this case:

In a catch share system, individual fishermen, or fishing cooperatives, are allocated a share of the catch based on what they have caught over a prior period, say five or 10 years, explained Christopher Costello of the University of California, Santa Barbara.

For example, if someone averaged 1.5 percent of the catch in a fishery in the past, they would be guaranteed 1.5 percent of the total in the future — regardless of what the total take is.

Thus, a healthy fish stock allowing for a larger total catch means each share is larger, Costello said, so fishermen tend to protect the stock by using less damaging methods.

Using catch shares to manage fisheries is common in some parts of the world and is currently under consideration for some U.S. fisheries also.

Brilliant! Each fisherman now has an incentive to restrain his behavior so as to increase the size of the fishing stock, thereby increasing his future haul and guaranteeing it as well.

Sadly, environmental groups are often opposed to the introduction of market conditions and incentives into environmental issues. One only need consider the oppositon to the creation of pollution markets to see this. However, at least one important environmental NGO is behind this idea:

The finding was welcomed by the Environmental Defense Fund.

"The trend around the world has been to fish the oceans until the fish are gone," said David Festa, vice president and oceans director at EDF. "The scientific data presented today shows we can turn this pattern on its head. Anyone who cares about saving fisheries and fishing jobs will find this study highly motivating."

With any luck, this catch-share system will be broadly implemented, both by national governments regulating their own fishermen and between countries sharing common stocks.

Monday, September 15, 2008

What is NATO Thinking?

NATO Secretary-General Jaap de Hoop Scheffer is in Georgia today, trying to patch together a coherent European (and NATO) response to Russia's recent aggression. De Hoop Scheffer told announced that "Despite the crisis, despite the very difficult political situation Georgia is facing today, NATO ambassadors and I have come to support Georgia, to show Georgia that we are interested in its ambition for Euro-Atlantic integration." Furthermore, "the European Commission announced 500 million euros ($700 million) over two years in aid to help Georgia rebuild after its brief war with Russia last month, and EU foreign ministers rubber-stamped the deployment of at least 200 EU ceasefire monitors to Georgia." However, the NATO head offered no promises of Georgia's accession to NATO or even whether Georgia would be given a Membership Action Plan at the December NATO summit.

I fail to understand what NATO and the Europeans are doing here. This kind of half-hearted overture to Georgia is exactly what produced the situation that resulted in the Russian invasion. Cozying up to Georgia and vaguely promising eventual NATO membership emboldened the former Soviet republic to the point where it felt comfortable antagonizing Russia over the separatist republics of South Ossetia and Abkhazia. Russia, accurately not believing that NATO would go to war over Georga, chose to punish that behavior in an effort to maintain some degree of influence over its immediate neighbors and hoping to prevent NATO from reaching Russia's borders.

So what has changed? Why is NATO making more vague and unclear commitments to Georgia? Either concretely declare that Georgia will, eventually, enter NATO, or leave it under Russia's sphere of influence. The middle road only creates more ambiguities, which could prompt Georgia to try again to retake its lost provinces, or could cause Russia to, once againt doubting NATO's commitment to Georgia, act so as to end western influence all together. Deterrence requires communication to firmly and establish the rules and limits, while vagueness only leads to mistakes and unnecessary conflict. The US has made clear its intentions to push for Georgian membership in NATO. Now it is time for the Europeans to either do the same, or to leave Georgia to its fate.

A Smart Move in Israel

Lately, things haven't been going so well on the peace front in Israel. Talks with Syria over the Golan Heights have been called off as Israel is roiled by domestic political turmoil, with the looming indictment of Prime Minister Olmert and the impending party elections on Wednesday. Meanwhile, nothing seems to be happening in the negotiations between Israel and Fatah, with both sides expressing pessimism that a deal is possible before the end of the year.

However, yesterday a ray of light may have burst through the clouds. Haim Ramon, the vice prime minister and one of Olmert's closest advisers, presented a plan to buyout Israeli settlers living in the occupied territory of the West Bank. Stating that dreams of "Greater Israel" are dead, Ramon's plan would pay approximately $300,000 to each family to leave the West Bank and relocate inside of Israel proper. According to Ramon, survey data indicates that 11,000 of the 61,000 Israelis -- or 18% -- who live beyond the security fence would accept the buyout.

Even if this plan goes nowhere, it is still a fairly important breakthrough. First, it is always good to hear high ranking Israeli officials acknowledge that there is no way Israel can keep all of the West Bank. Doing so would continue to waste Israeli resources and lives, perpetuate the misery of the Palestinians, continue to alienate world opinion, and eventually turn Israel into an apartheid state, as the Palestinian population will soon surpass the number of Jews in Israel. Second, I believe that many more people would accept the money than the poll data indicates. Many people predicted that the forced withdrawal from Gaza would go badly, but the resistance that occurred was more or less token with settlers making a visible protest but little actual violence. When I was in Israel last year, I spoke with many settlers, and many of them were of the very hard-core variety. All of them acknowledged that the writing was on the wall, literally. The security fence being built by Israel meant, they knew, that the lands on the other side of the fence would eventually be abandoned by Israel. Certainly the prospects of that much money will encourage many others to accept the inevitable.

I'm not in any way saying that this plan will succeed, or even pass. But even if it gets 20% of the settlers out, it's a step in the right direction. Israel needs to recognize that its occupation of the West Bank is no longer sustainable and is too costly for all concerned parties.

Tuesday, September 09, 2008

The 10 Worst Ideas From Obama and McCain

Foreign Policy.com has published two fascinating articles detailing what are, in its opinion, the 10 worst policy proposals advanced by Obama and McCain.

First, Obama's worst:

Renegotiating the North American Free Trade Agreement

What he said: “I will make sure that we renegotiate. … I think we should use the hammer of a potential opt-out as leverage to ensure that we actually get labor and environmental standards that are enforced.” Democratic primary debate in Cleveland, Feb. 26, 2008

Why it’s a bad idea: Trade agreements take years to negotiate, and Mexico and Canada would almost certainly seek new concessions of their own in a new round. Obama is right to argue that more economic development in Mexico will lower illegal immigration; he’s wrong to think that bashing NAFTA is the right way to address the Rust Belt’s economic woes. Happily, since the Ohio primary, Obama has backed off his harshest criticisms of the agreement.

Opposing the U.S.-Colombia Free Trade Agreement

What he said: “And I’ll also oppose the Colombia Free Trade Agreement if President Bush insists on sending it to Congress because the violence against unions in Colombia would make a mockery of the very labor protections that we have insisted be included in these kinds of agreements.” Speech to Philadelphia AFL-CIO, April 2, 2008

Why it’s a bad idea: Although Obama cited antilabor violence, the murder rate for union members in Colombia last year was 4 per 100,000, well below the rate for the general population. The deal carries little to no cost for the United States; economists actually predict modest increases in U.S. exports. The upshot for an important ally in the war on drugs, however, is high, and consolidating Colombia’s commitment to open trade with the United States is a worthy goal.

Talking Openly About Bombing Pakistan

What he said: “If we have actionable intelligence about high-value terrorist targets and President Musharraf won’t act, we will.” Speech at the Woodrow Wilson International Center, Washington, D.C., Aug. 1, 2007

Why it’s a bad idea: Engaging in military strikes in Pakistan happens to be established policy. But, as none other than Joe Biden pointed out last August, “It’s not something you talk about. … The last thing you want to do is telegraph to the folks in Pakistan that we are about to violate their sovereignty.”

Sitting Down with Mahmoud Ahmadinejad

What he said: Asked if he’d be “willing to meet separately, without precondition, during the first year of your administration, in Washington or anywhere else, with the leaders of Iran, Syria, Venezuela, Cuba, and North Korea,” Obama replied: “I would.” Democratic primary debate, Charleston, S.C., July 23, 2007

Why it’s a bad idea: Engaging rogue states can be a savvy move, and even the Bush administration has negotiated with Pyongyang and sent envoys to meetings with Iran. But sitting down with heads of state without precondition? That’s another thing entirely, especially when it comes to Iranian President Mahmoud Ahmadinejad. As Carnegie Endowment expert Karim Sadjadpour told the Wall Street Journal, “Only two things can rehabilitate Ahmadinejad politically: bombing Iran or major efforts to engage.” No wonder Obama’s foreign-policy team has walked back its candidate’s off-the-cuff remarks.

Pushing the Patriot Employer Act

What he said: “When I am president … I’ll pass the Patriot Employer Act that I’ve been fighting for ever since I ran for the Senate—we will end the tax breaks for companies who ship our jobs overseas, and we will give those breaks to companies who create good jobs with decent wages right here in America.” Speech in Janesville, Wis., Feb. 13, 2008

Why it’s a bad idea: British economists Willem Buiter and Anne Sibert slam the bill as, “reactionary, populist, xenophobic and just plain silly.” That’s a bit much. A little populist pandering is hardly a threat to the global economic order—the bill offers employers a small tax credit if they meet six conditions, including the probably unworkable provision that they keep their headquarters in the United States. It’s never smart economic policy to reward companies for placing limitations on their own profitable activities, but as The Economist put it, “Obama deserves a slap on the wrist” for this one, not a full-throated indictment.

Promoting Coal-to-Liquid Fuels

What he said: “The people I meet in town hall meetings back home would rather fill their cars with fuel made from coal reserves in Southern Illinois than with fuel made from crude reserves in Saudi Arabia. We already have the technology to do this in a way that’s both clean and efficient. What we’ve been lacking is the political will.” Statement introducing the Coal-to-Liquid Fuel Promotion Act of 2006, June 7, 2006

Why it’s a bad idea: Obama’s energy policy has much to commend it. But borrowing an idea from World War II Germany and apartheid South Africa? Bad move. Coal-to-liquid fuels produce nearly twice the greenhouse gases of ordinary petroleum, experts say, and it’s foolish to subsidize an industry that easily could go under if oil prices fall. Under withering fire from environmentalists, the Obama camp clarified his position in June 2007 as, “[U]nless and until this technology is perfected, Senator Obama will not support the development of any coal-to-liquid fuels unless they emit at least 20% less life-cycle carbon than conventional fuels.” It’s since been dropped from campaign materials.

Eliminating Income Taxes for Seniors Making Under $50,000

What he said: “I’ll make retirement more secure for America’s seniors by eliminating income taxes for any retiree making less than $50,000 per year.” Speech on Nov. 7, 2007, in Bettendorf, Iowa

Why it’s a bad idea: Most seniors already pay no income taxes. That’s because they already get preferential treatment in the tax code. Plus, why are seniors more deserving of tax relief than struggling young families? The Tax Policy Center—run by the Brookings Institution and the Urban Institute—criticized the idea in a recent report, saying that because government spending on seniors is already set to balloon due to retiring baby boomers, “it seems inappropriate to target special income tax breaks to this group.”

Boosting Ethanol Subsidies

What he said: “[Ethanol] ultimately helps our national security, because right now we’re sending billions of dollars to some of the most hostile nations on earth.” Statement at the opening of a VeraSun Energy ethanol processing plant in Charles City, Iowa, August 2007

Why it’s a bad idea: As economist Paul Krugman has written, corn-based ethanol is “bad for the economy, bad for consumers, bad for the planet—what’s not to love?” World Bank economist Daniel Mitchell blames biofuels, including ethanol, for a 75 percent increase in global food prices since 2002 that has led to economic distress and rioting in such countries as Haiti, Egypt, and Somalia. There’s also little evidence that they do much to prevent global warming. A recent study published in Science demonstrated that the farmland needed to grow corn for ethanol results in deforestation on a massive scale, negating any benefit the reduction in carbon emissions might have. So why does the senator support such a wasteful and damaging subsidy, even voting for the recent farm bill’s billions in pork for ethanol producers? “[B]ecause Illinois … is a major corn producer,” he said in April. At least he’s honest.

Taxing Oil Companies Extra

What he said: “I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills.” Speech in Raleigh, N.C., June 9, 2008

Why it’s a bad idea: He’s attacking the symptom, not the disease. It’s certainly hard to defend oil companies making record profits while consumers are struggling to fill their tanks, but Big Oil has very little control over day-to-day gas prices, which are set by global supply and demand and, of course, OPEC. By discouraging oil companies from making big profits, such a tax could potentially discourage them from making investments in new refineries and finding new oil sources, resulting in fewer jobs and even higher prices at the pump. Jimmy Carter tried this in 1980, and it only increased U.S. dependence on foreign oil. Singling out one particular industry for punishment because it is politically unpopular doesn’t make much economic sense, either.

Opening the Strategic Petroleum Reserve

What he said: “We should sell 70 million barrels of oil from our Strategic Petroleum Reserve for less-expensive crude, which in the past has lowered gas prices within two weeks.” Speech in Lansing, Mich., Aug. 4, 2008

Why it’s a bad idea: Obama was right in July when he said that the strategic oil reserve “has to be reserved for a genuine emergency.” Selling oil from the 700 million barrel reserve would increase domestic supply and could drive down prices in the short term, but encouraging consumers to use more oil isn’t going to fix anything. And depleting the reserve would leave the United States vulnerable to a supply disruption caused by a natural disaster or further unrest in the Middle East. Obama swapped common sense for this dangerous boondoggle in August after McCain started to hammer him on offshore drilling. So much for tough truths.

And here are McCain's worst:

Creating a League of Democracies

What he said:“We have to strengthen our global alliances as the core of a new global compact—a League of Democracies—that can harness the vast influence of the more than one hundred democratic nations around the world to advance our values and defend our shared interests.” Speech at the Los Angeles World Affairs Council, March 26, 2008

Why it’s a bad idea: As Thomas Carothers argues in the July/August issue of FP, “[T]he idea that democracies naturally align is only half right and risks being a dangerous oversimplification.” Carothers and other critics have noted that such a league might further weaken the United Nations. For the most part, world leaders have been cool to the idea, and rightfully so. A previous iteration, the little-known Community of Democracies, founded in 2000, has stumbled into irrelevance.

Calling for a Gas-Tax Holiday

What he said: “I propose that the federal government suspend all taxes on gasoline now paid by the American people—from Memorial Day to Labor Day of this year. The effect will be an immediate economic stimulus—taking a few dollars off the price of a tank of gas every time a family, a farmer, or trucker stops to fill up.” Speech at Carnegie Mellon University, Pittsburgh, Pa., April 15, 2008

Why it’s a bad idea: Pick your poison. Many (including Dick Cheney) predict that such a “holiday” would have little effect, as oil companies would just pocket the difference. Ditching the 18.4-cents-a-gallon gas tax and 24.4-cents-a-gallon diesel tax would deprive the already-strapped Highway Trust Fund, which relies on gas-tax revenues to fund transportation projects, of cash. Economists and environmentalists also widely deride the proposal, which would boost demand and therefore quickly drive prices back up. When you’re in a hole, it’s best to stop digging.

Requiring a Three-Fifths Majority to Raise Taxes

What he said: “John McCain believes it should require a 3/5 majority vote in Congress to raise taxes.” Press release, Dec. 18, 2007

Why it’s a bad idea: States that have enacted supermajority requirements for tax increases haven’t exactly entered the pantheon of budgetary glory. Take California, which requires approval from two thirds of the state legislature to raise taxes. The Golden State has recently struggled to raise revenues—and has witnessed an increase in taxes disguised as “fees” as a result. Raising taxes should be like the use of force in foreign policy—the last resort, yes, but you never want to take any option off the table.

Flip-flopping on Immigration

What he said: “I understand why you would call it a, quote, shift. I say it is a lesson learned about what the American people’s priorities are. And their priority is to secure the borders.” Remarks to reporters in Simpsonville, S.C., Nov. 3, 2007

Why it’s a bad idea: Immigration was once an issue where McCain could justifiably claim to be a “maverick,” unafraid to buck party orthodoxy and popular opinion. The Arizona senator even partnered with Democratic Massachusetts Sen. Ted Kennedy in 2005 to craft a bipartisan bill that would both give illegal immigrants a chance at citizenship and boost security at the U.S.-Mexico border. But with his poll numbers plummeting during the Republican primary, McCain began trumpeting the party line of “securing the borders first.” The problem is, without providing more opportunities for legal immigration or taking steps to build up the Mexican economy, taller fences and more guards will only address the symptoms, not the ultimate causes of illegal immigration.

Drilling Our Way Out of the Oil Crisis

What he said: “Gas prices are through the roof. Energy costs have seeped into our grocery bills, making it more expensive to feed our families. ... It is time for America to get serious about energy independence, and that means we need to start drilling offshore at advanced oil rigs like this.” Press conference on an oil platform in the Gulf of Mexico, Aug. 19, 2008

Why it’s a bad idea: Even ignoring potential environmental impacts, lifting the moratorium on offshore drilling would make little difference for consumers. According to the government’s own Energy Information Administration, production of the new supplies would not even begin until 2017 and would have little effect on what Americans pay at the pump anyway—just a few cents a gallon by 2030 under the best-case scenario. More to the point, it’s a strategy of yesteryear. As columnist Thomas Friedman put it in a recent interview with FP, “When I hear McCain pounding the table for ‘drill, drill, drill,’ it reminds me of someone pounding the table for IBM Selectric typewriters on the eve of the IT revolution.”

Balancing the Budget through Victory in the War on Terror

What he said: “The McCain administration would reserve all savings from victory in the Iraq and Afghanistan operations in the fight against Islamic extremists for reducing the deficit. Since all their costs were financed with deficit spending, all their savings must go to deficit reduction.” Jobs for America: The McCain Economic Plan, released July 7, 2008

Why it’s a bad idea: The yearly bill for the wars in Iraq and Afghanistan is certainly enormous. Yet it still covers less than half of the United States’ projected $490 billion deficit for 2009. Given the massive tax cuts that McCain also supports, it’s unclear how his debt-reduction math adds up. McCain opposes a timetable for withdrawal from Iraq, yet he feels confident enough to budget for victory by the end of his first term. Afghanistan is getting worse, not better. And as for “the fight against Islamic extremists,” how does one even define victory? Don’t try asking McCain: He doesn’t have an answer.

Making the Bush Tax Cuts Permanent

What he said: “We’ve got to make these tax cuts permanent. We have to, otherwise I think it’ll have a negative impact on our economy.” NBC’s Meet the Press, Jan. 27, 2008

Why it’s a bad idea: You might say McCain was against the $1.35 trillion Bush tax cuts before he was for them. In 2004, he said he opposed them “because of the disproportional amount that went to the wealthiest Americans.” Now, he says he supports them because the economy is weakening. Yet “the tax cuts are more likely to reduce long-term growth than to increase it,” according to the Center on Budget and Policy Priorities. McCain insists he will restrain spending and eliminate the budget deficit. But McCain’s budget numbers simply don’t add up, and the senator’s constant hammering on congressional earmarks misses the big picture: Defense and entitlement programs are where most of the fat lies, not in relatively small pork projects such as Alaska’s infamous “Bridge to Nowhere.”

Supporting Abstinence-Only Education and the Global Gag Rule

What he said: Asked on the campaign trail if he thought grants for sex education should include instruction on contraception, McCain turned to an aide for help, saying, “Brian, would you find out what my position is on contraception—I’m sure I’m opposed to government spending on it, I’m sure I support the president’s policies on it.” The reporter asked, “Do you think contraceptives help stop the spread of HIV?” After a long pause, McCain replied, “You’ve stumped me.” Town hall meeting, Iowa, Mar. 16, 2007

Why it’s a bad idea: A landmark, 10-year study sponsored by Congress found in 2007 that students in sexual-abstinence programs “were just as likely to have sex as those who did not, reported having similar numbers of sexual partners, and first had sex at about the same age,” the Chicago Tribune reported. Abstinence-only education is one of the core principles guiding the so-called global gag rule, an executive order passed by President George W. Bush in 2001 that prohibits giving foreign aid to NGOs that offer any kind of counseling on abortion as family planning. McCain voted against repealing the measure in 2005. Critics of the gag rule point to reports showing a shortage of contraceptives, clinic closings, loss of funds for HIV/AIDS education, and a rise in unsafe abortions since it was instituted.

Calling for 45 Nuclear Power Plants

What he said: “If I am elected president, I will set this nation on a course to building 45 new reactors by the year 2030, with the ultimate goal of 100 new plants to power the homes and factories and cities of America.” Speech in Springfield, Mo., June 18, 2008

Why it’s a bad idea: There are many good reasons to be skeptical of the widespread new enthusiasm for nuclear power, including its high-and-rising costs, but perhaps the best one is that, as experts Charles Ferguson and Sharon Squassoni explained in 2007, “a nuclear renaissance will take too long to have a significant effect” on climate change. Moreover, how do we know that 45 is the right number? A drop in the price of alternative fuels could “make nuclear plants look like white elephants,” the Wall Street Journal noted in May. For someone who likes to extol the virtues of the free market, McCain’s target sure smacks of socialist planning.

Backing Cap-and-Trade Without a 100 Percent Auction

What he said: “We will cap emissions according to specific goals, measuring progress by reference to past carbon emissions. … Over time, an increasing fraction of permits for emissions could be supplied by auction, yielding federal revenues that can be put to good use.” Speech in Portland, Ore., May 12, 2008

Why it’s a bad idea: McCain’s gotten credit for supporting a cap-and-trade system, but his specific proposal is pretty weak. Cap-and-trade systems work by putting a ceiling on carbon emissions, and then allocating permits that give companies the right to pollute a given amount. From an environmental standpoint, it doesn’t much matter how you initially distribute the permits, as long as the cap is stringent enough. But most economists think that, unless you first auction these off in a transparent process, you’re basically enabling a massive corporate giveaway, raising the likelihood that well-connected corporations or industries will get sweetheart deals, and failing to capture revenue that can pay for other priorities.

Now, I'm on record as supporting the attempt to create a league of democracies. And I find the rationale against it presented here monumentally unconvincing. No one assumes that all democracies think alike or will automatically cooperate on all issues. But there certainly are more commonalities between democracies than between non-, and those commonalities might be exploited. I really don't see this critique as being a reason not to try...maybe a reason it won't work, but not not to try.

The scariest of these bad ideas are, in my opinion, Obama's opposition to free trade. It may be that that opposition was a political ploy, and that Obama will, in the end, support the expansion of free trade. But if he meant what he said, Obama's policies threaten to undermine the global trade regime and squander American goodwill and leadership in a way George Bush couldn't even have dreamed of doing. Re-opening ratified trade treaties, or refusing to push for new ones, will have disastrous consequences for this country, and for the larger international community. Let's hope that, if he wins, Obama quickly disassociates himself from the anti-trade wing of the Democratic Party.

As for McCain's ideas, most of them are simply stupid, as opposed to dangerous. However, restricting immigration is the worst and most potentially dangerous of them all. Restricting immigration would put massive demographic and economic strains on countries like Mexico, by stopping unemployed and disaffected peoples from finding gainful employment. It would also depress the domestic economy by raising the cost of labor. This is one of the worst and most shameful of McCain's reversals. Again, as with Obama's trade statements, let's hope that if McCain wins he can move away from the neo-isolationists and anti-immigrants in the Republican Party and adopt the more sensible policies he espoused in the past.

Monday, September 08, 2008

Peace and Justice in Darfur

In the wake of the announcement back in July by the chief prosecutor of the International Criminal Court that he intended to seek indictments against the Sudanese President Omar Hassan al-Bashir, I have blogged my general inclination that such a move would be counter-productive. I am on record in several different places that, when there is a tension between the two, I tend to favor efforts to achieve peace than those aimed at creating justice. Today, the chair of the African Union, Tanzanian President Jakaya Kikwete, seems to agree with me, "Justice has to be done. Justice must be seen to be done. What the AU is simply saying is that what is critical, what is the priority, is peace. That is priority number one now...We should do the first thing first. On this basis, the AU supports deferral of the indictment." While I agree with Mr. Kikwete's final assessment, I am not encouraged by his support.

Sadly, the African Union hasn't demonstrated either the willingness or the ability to stand up for what is right. If I honestly believed that the AU was going to be involved in creating peace in Darfur, it would be appropriate for the AU to discuss easing off the pressure on Sudan. But given the AU's record (or lack of record) in standing up to Mugabe in Zimbabwe, not to mention its dismal performace in Darfur, one cannot have any faith in the AU to advance anything but its own weakness and blind support of any African dictator. It's one thing to contemplate giving up on justice in order to achieve peace; it's another thing entirely to give up on justice because one is too weak or scared to challenge the miscreant. Sudan's efforts to destroy the Fur people must be stopped, and if the price of that is letting al-Bashir walk free of international charges, so be it. But if peace is not to be achieved, then let justice be done.