The Other "Nuclear Option"

November 24, 2013

This week, the Senate passed a bill so labelled by some. It simply reduced the number of Senators required to prevent filibusters, or to require an “up-down” vote without delay, from 60 to 51. At the present time, this assures the Democratic majority in the 100 member Senate, that if the Democratic party holds together on such matters as appointments to judgeships, there will be a positive vote–i.e. Democrats will be able to fill critically important judgeships with judges of their liking–presumably of a more liberal persuasion.

This is a proper bill to pass. It is a proper step toward reducing partisan gridlock in our Congress.

There can be little doubt about its value–both parties have argued for such a measure when in majority and both have argued against it when in minority position. It simply cannot be imagined that the Republicans would not have done the same, had they the Senate majority at this time–and similarly, it cannot be imagined they have such “principle” around this rule of order that they will reverse it when they next have the majority.

The main argument is that this allows the majority (in the Senate) to decide, that this will result in a swing, like a pendulum, for whichever party has the majority. That is true, but isn’t that the way many other democracies in the world work–essentially a government is “formed” after election, such that there is a majority of votes to enact most important legislation around which this elected and “formed” majority can reach agreement. This enables action to be taken, movement, hopefully progress, and if not, the next government can change it.

For example, many of us did not agree with the austerity measures enacted by the the combined majority of David Cameron’s Conservatives and Nick Klegg’s Liberal Democrats. This may have been a pendulum swing to the right, and it may be swung back by the next majority party or combined formed majority. However, it is not gridlock, as we have seen in the US, where it seems nothing can be done. Our Federal Reserve has been the main engine of the economic recovery here, with fiscal policy (after a few crisis measures–bailouts and one stimulus program) being sidelined over inability to agree on tax reductions and spending reductions.  The debate between the Keynesians and the Friedmans, et. al., has resulted in no action.

So, this bill is both fair and is good.

What’s most interesting about the aftermath of it is that the politicians on the right have reacted vehemently, as if some capital crime has been created, as if they forget they wanted this when last in power, but couldn’t get it done. The have threatened retaliation.

This is both insulting to the intelligence of the American people, and disgusting. Insulting because we are smart enough to know both parties want this if they have the power to get it. It’s not some kind of sacrosanct rule. Filibustering? How can that be defended? Ted Cruz would want this bill if he had a majority in the Senate–God forbid!

Disgusting because the threats issued by some of the most senior Republicans exposes the worst element of our political system–if I can’t have it my way, I’ll do everything I can to prevent any progress. This attitude has been consistently apparent in the attack on “Obamacare.” Why not join with Democrats in constructive ways to alter and fix the health care system? The answer appears to be that you’d rather see it fail than be fixed–you’d rather avoid being somehow “tarnished” by joining in to support something. And/or you’re just too beholden to the ultraconservative factions that have arisen in the Republican party.

John McCain, who deserves great appreciation for his service to our country, lowers himself when he threatens “a heavy, heavy price” to be levied as punishment to the Democrats for exercising this privilege of their majority vote. And, he insults us by saying “I don’t think Americans understand it very well.”

We understand this very well. It’s abundantly clear.

Nuclear Deal with Iran

November 24, 2013

Late last night, an interim nuclear deal was signed between the P5+1 (US, Britain, Russia, China and France, plus Germany) and Iran. The build-up to it, and now the announcement, has been met with polar opinions. Some claim Iran has deceived the West, falsely claiming they never intended a nuclear weapon capability (just nuclear power), cleverly buying time without much conceded, and that Iran will determinedly continue to use any means to develop nuclear weapon capability. They argue that while Ahmadinajed was clearly a threat to world order, Iran is simply putting forward Rouhani (a wolf in sheeps clothing) to try an opposite end-run.

Others feel this deal is a major positive development in the pursuit of peace in the Middle East and the world, and has strong potential to result in resolution of the Iranian nuclear threat in six months when the target date is reached for full resolution.

An opinion highly critical of the deal comes from the respected political commentator Charles Krauthammer, writing in the Washington Post on November 21, “Sucker’s Deal.” His argument makes sense, as does most of what Krauthammer says: Sanctions have brought Iran to the table, but what Iran concedes in the interim deal is little (as it relates to ultimate nuclear capability) and it would be far more effective to just double down with more sanctions until they concede every element of nuclear weapon capability–now–do not trust them to keep their word, and definitely do not give them an extra six months with relaxed sanctions.

An opposite view comes from Fareed Zakaria, in his “GPS” program of today. His best argument is that sanctions imposed on Iran across the last decade have done little to stymie the nation’s nuclear development. The number of centrifuges to process nuclear material has grown from 164 in 2003 to 19,000 today, as more and more sanctions have been imposed. Zakaria asks, “what would have happened without a deal?”

As an aside before continuing, wouldn’t it be great if all Americans, all world citizens, could take a little time and examine the issues and take a stand on such major world issues as this? Wouldn’t that make democracy and world governance work better? Our American legislators are supposed to be responsive to our wishes, but too often we don’t take the time to develop and express opinions clearly and thus, legislators are left to operate on their own prejudices and convictions or to hedge. Former Senators Scott Brown and Evan Bayh were interviewed this morning on TV, and honestly, while they are very competent politicians, I felt they both hedged their positions–seemingly to accommodate the supporters of Israel’s concerns, stated well by Krauthammer.

And this is one where the outcome can perhaps be judged in a relatively short period of time–six months, unlike the matter of climate change or world population growth. So, it will be an interesting test–like betting on the winner of the Superbowl, something many Americans take the time to understand and predict–but far more important to the world.

In setting about to take a stand, it’s best to start by recognizing the existence of biases. No one can be free of them entirely, even with the best of intentions toward objectivity.  There are those of understandable sympathy to the state of Israel, a tiny nation surrounded by threats to its existence. There are those who are hawks and have a bias in favor of use of force to resolve such matters.

And, there are those among whom I fall, who feel too much life, opportunity, and prosperity has been lost to war in recent decades and that we need to make every effort to avoid it. I do recognize that the hawks would claim that force of sanctions or threat of military attack is the best way to achieve peace, but I do not hold with that–at least not in most cases.

To illustrate the element of bias and also the difficulty of reaching an opinion on matters such as this, consider how Krauthammer and Zakaria each describe what the deal concedes in the way of sanctions during this interim period. Krauthammer: “It widens permissible trade in oil, gold and auto parts. It releases frozen Iranian assets, increasing Iran’s foreign-exchange reserves by 25 percent while doubling its fully accessible foreign-exchange reserves. Such a massive infusion of cash would be a godsend for its staggering economy, lowering inflation, reducing shortages and halting the country’s growing demoralization. The prospective deal is already changing economic expectations. Foreign oil and other interests are reportedly preparing to reopen negotiations for a resumption of trade in anticipation of the full lifting of sanctions.” Zakaria: “In return, Iran gets about $7 billion of sanctions relief, a fraction of what is in place against it. The main sanctions – against its oil and banking sectors – stay fully in place.”

Similarly, they express polar opposite views on their individual interpretation of what Iran has conceded for the interim in regard to uranium enrichment.

My sympathy is with the Zakaria opinion–sanctions have not worked, threats have not worked, and it’s wise to give an entirely different approach a solid try. This is essentially the major contribution (in my opinion) of the Obama Presidency–that he has assiduously avoided actions which would prolong our existing wars or expose us to engagement in other wars. Relatively little has been conceded in the sanctions for the interim deal–only about $7 billion in frozen assets, while the sanctions on trade privileges, far more damaging to Iran, remain in place until we reach the full deal in six months.

The best tally of gain or exposure in the deal would involve reading the agreement and then researching key elements–e.g., what sanctions remain in place, and what limits on enrichment have been conceded and what rights retained.  I have not done that yet, but will set about to do so.

Because there is significant opposition to the negotiated approach in the American Congress, interim sanctions relief could only be limited–what the President alone is empowered to authorize. Most of it requires the approval of Congress, suggesting that this concession is indeed modest–Iran will need and want far more to achieve their goal of economic freedom and renewed economic growth.

We now have Iranian approval to daily inspection by IAEA personnel. It is highly unlikely that any hidden enrichment facilities can be sustained with all the inspections and all the eyes of the world on Iran.

More on this major world event, as the details and opinions unfold.

Contrary Argument to Robert Samuelson’s "Government is not Beholden to the Rich"

In a Washington Post article of November 19 (http://www.washingtonpost.com/opinions/robert-samuelson-lobbyists-for-the-rich-do-not-own-government/2013/11/19/8e47d8f0-513e-11e3-a7f0-b790929232e1_story.html), Robert Samuelson makes this argument.

To try to prove his point, he simply explains how the federal budget is spent, showing that a majority of our social support spending (a huge part of our budget) goes (one way or another) to provide for the elderly in our nation–individual benefits, health care, veterans benefits, etc.

The information Samuelson uses come from the Congressional Budget Office, and we trust it is accurate.

Nevertheless, this does not prove Samuelson’s point: “Democracy’s problem is not the influence of money. It’s the influence of people. As the CBO report shows, so many Americans have become dependent on government that consensual change is difficult and, perhaps, impossible.”

It is certainly true that Americans resist giving up Medicare and Social Security entitlements, and it is also true that we have to make some adjustments in these to preserve the financial integrity of our federal finances.  It is also true that consensual change is difficult in this country–we are legislatively gridlocked.

However, if the rest of Samuelson’s argument were true–essentially that the people (we assume he is referring to the “99%”)–control what happens in our federal budget, then how could he explain these developments:

Have a look at the Piketty and Saez 2004 study “Income Inequality in the US 1913-2002” (http://elsa.berkeley.edu/~saez/piketty-saezOUP04US.pdf) or look at Real World Economics Review Blog’s (http://rwer.wordpress.com/2011/02/25/25-graphics-showing-upward-redistribution-of-income-and-wealth-in-usa-since-1979/) showing the dramatic increase in the degree of US inequality across the last 3-4 decades.

Piketty and Saez found that the top decile’s share of wage income in the US rose from about 25% in 1957 to about 34% in 2002. Real income of the 99% was about the same in 2002 as it was in 1972, inflation adjusted–i.e., about the same buying power–no improvement. However, the top 1% saw real income double across that period.  If all types of transfers are included, real income of the 99% has grown by 40%, but real income of the 1% has grown by 3.3X.

WordPress reports that the top tax rate for millionaires in 1945 was 66%, and in 2010, that rate was 32%. In 2007, the bottom 50% of the US owns 2.5% of total US wealth. The top 50% owns the remainder, with the top 10% owning 71%, and the top 1% owning 35%.

No matter how the government’s social welfare system is configured (Samuelson’s focus), it is irrefutably true that in almost any social breakdown (by income, by skin color, by educational achievement, etc.), the US has markedly worsened in terms of increased inequality since the 1970s.

So, how can one fail to recognize that the income and wealth and power of the country is increasingly with the wealthy and connected?

If we don’t concern ourselves with ways in which to remedy this trend, we are likely to experience great instability in our country in the future. There are practical answers we should galvanize around.

More on the Problem of Power and Influence between Government and Industry

The Washington Post article of today (Nov 16, 2013) entitled “Capital Gains: spending on contracts and lobbying propels a wave of new wealth in D.C.” is worth reading (http://www.washingtonpost.com/national/capital-gains-spending-on-contracts-and-lobbying-propels-a-wave-of-new-wealth-in-d-c/2013/11/17/6bd938aa-3c25-11e3-a94f-b58017bfee6c_story.html)

As in the previous post in this blog, there is a problem with how the wealthy elite of our country are enabled to enjoy privileges which other qualified businesses without these connections (guanxi, as it is called in China) cannot access. A related problem is how certain “connected” individuals are able to personally benefit, thus enlarging the dangerous inequality gap which has dramatically risen in the US since around 1980.

We have no rules preventing government employees moving into positions in private industry or in lobbying firms, where they then work the connections they developed in their work inside government agencies, securing favorable legislation for their new employers.

The ramifications of this are numerous and mostly negative:

Many qualified vendors to government and many companies with legitimate interests in legislation under consideration do not have access to these privileged channels. Thus, they suffer a disadvantage in competing for equal consideration.

Second, this system feeds on itself. Undoubtedly, there are many federal employees who clearly have in mind a future long and lucrative career–and are simply in those key (and relatively modestly paying) federal jobs only as long as it takes to build up those contacts and knowledge of just how things are done–how new drugs are evaluated, just who is key to those decisions, what his/her personal perspectives, preferences, weaknesses are, what are their phone numbers, cell phone numbers, e mail addresses. Before leaving the agency, they can learn who likes what brand of whisky, wine, who loves which particular restaurant or sports event. They learn whose children go to which private school, and what that school needs in the way of support–etc., etc., etc.

This is how relationships work, how they ARE worked, and how business is done in Washington.

I am not here to contend that everyone in lobbying or everyone who leaves government to serve business which they previous oversaw, is dishonest. That’s clearly not true. There is a lesser issue of honesty and corruption which this system enables, but the main issue is one of unfair advantage, and resulting legislative decisions which are not based on facts and objective judgments, but based on privilege and personal favors.

As Americans, we need to ask ourselves why we want this “system” to continue, with the obvious tendency to prejudice the judgment of government decisions to the favor of the few. Is there any possible positive to it?

We certainly cannot deny that this system adds to the problem of growing inequality in our country.
Those privileged few described in the article are enjoying benefits which are being denied to the large majority of hard working Americans.

Who would be harmed if we had prohibitions on government officials going to work for businesses in industries they supervised in their government roles, or going to work for affiliated lobbyists?  It’s hard to make a good argument in favor of allowing this system to continue.

Federal Officials and Lucrative Jobs

Timothy Geithner has taken a lucrative job in the top ranks of Warburg Pincus, a big name in the private equity arena.

Speaking only of Geithner, it’s not fair to blame him for accepting such an offer. After all, he seems to have been an honest and effective servant of government for us for many years. In those roles, he certainly sacrificed the opportunity to potentially make a great deal more money working for firms such as Goldman Sachs or Warburg Pincus.

So, what’s wrong with the type of development?

It is my opinion that we should have a “cooling off” period of at least 5 years between anyone working in key government positions and their taking positions in entities which they essentially supervised or governed in their previous roles. It would be hard to argue that a large private equity fund was not a matter of concern for the head of the NY Fed or the Treasury Secretary. If he took a job as head of a wind power firm, that would be another matter, as an example.

Why is this important? Because the cozy relationship between our government and and the powerful business entities they presume to govern is dangerous. We need an “arms length” assurance that there will not be any favoritism given any such entities, such as to potentially lead to powerful jobs later offered to those who are beneficial to their interests while in key government positions.

Similarly, those who occupy high positions in private industry should not be considered for positions in government involving oversight to those same industries, until after a cooling off period of perhaps 5 years. That’s because they can’t generally be considered to be impartial in their oversight.

Even more so, this kind of rule should apply to the lobbying industry–too many of our government officials leave and join a lobbying firm focused on the same area they governed. These former officials have strong relationships inside the agency they supervised and have the ability to influence in favor of the industry when they leave. This is inappropriate. In fact, in the case of government officials going to lobbying firms which were among those under the federal jurisdiction of the official, I believe this should simply be prohibited. A cooling off period is not enough in such cases.

It’s not the job of the American public to determine whether either of these situations indeed results in favoritism. That’s pretty hard to determine, anyway. We need rules like this just to assure that there is not the temptation of such between government and business.

These are not new ideas–this is just a reminder to all of us that we need them enacted. Resistance from powerful interest groups is strong. This type of cronyism is a piece of the big picture which has exacerbated inequality in our country across the last 30 years.

Xi’s 3rd Plenum of the 18th Central Committee

November 9, 2013

November 9 begins a major conference of Chinese leaders, with focus on reform. The world of economics followers is focused on this conference, to determine what changes will truly emerge.

The Economist, a rather neoliberal publication, argues largely for more liberalization: less protection and support for State Owned Enterprises (SOE’s), ideally privatize the remainder of them (still representing more than 25% of China’s GDP); further liberalize interest rates, exchange rates, and capital flows (“Go on, bet the farm,” Nov 2, 2013). This focus fails to recognize that the controls China exercised over its economy are the primary reason for China’s extraordinary success across the last 35 years. What other major economy avoided every financial crisis across that period of time? As one (major) example, if the free hand of financial capitalists had been at play in Chinese capital and financial markets across the time of the E Asian or the 2008 World financial crises, without doubt China would have fallen prey to the same damage as did its SE Asian neighbors in 1997 or the US and the rest of the world in 2008.

However, The Economist is right to identify land reform as a major area needing significant reform. Peasants in the countryside are not allowed to own or sell the land they farm, and the land which is useful for further expanding China’s industrial and services economy or its infrastructure, is frequently appropriated by local governments and sold off to developers at bargain prices. This is the main source of revenue to local governments, since the income tax system is very weak and there are no property taxes as a result of no land ownership. The current system of land sales is also considered by many to be the largest factor leading to corruption between local officials and real estate developers. Peasants have essentially no rights of preventing what we know in the West as eminent domain–which in the West involves a difficult labyrinth for authorities to navigate in order to take your land–and a good chance for you to get fair compensation.

Solving this problem will be slow and painful. A property tax will be needed to provide a replacement source of revenue for the local governments, which have been asked to shoulder an increasing share of the expense burden of the range of services to be provided by governments. The federal government will probably have to take some of that burden back, and the property tax system will undoubtedly take years to be brought to a level of effectiveness. Much of the land has not been properly mapped and there will be much controversy as to who gets the benefit.

Another key area is the need to continue progress toward equivalency in the rights of holders of urban and rural “houkou’s.” The latter include about 300 million who moved to the cities to work in factories, but who are denied equivalent access to health care and to education for their children, as well as other social services. Some city governments claim they cannot find the revenue to meet those needs.

China’s level of corruption and inequality are major concerns. It’s not clear whether either is increasing across the last few years, but it is very clear to Chinese leadership that both have risen rapidly across the reform period (since 1980) to very high levels, and are the focus of increasing protests in China.

Other major problems China must address include water, perhaps the greatest economic sustainability challenge, but also pollution and the need to continue progress to move the economy to reduced reliance on exports and greater reliance on internal consumption.

I do not agree that the problem loans of the state owned banks will result in a financial crisis. China has bailed out the banks one way or another in periods of past excess and has the capacity to do so again.

China is likely to make its way through these challenges.

One reason is that China has the type of government and institutional system that can direct resources where it needs them, without the interference of democratic processes, such as we have seen in the US or India. Admittedly, such powers are diminished by China’s accession to the WTO with the attendant acceptance of many Washington Consensus liberalizations. Also, there is clear evidence that the growth of entrenched wealth interests in China provides significant resistance to any form of redistribution.

Nevertheless, we must remember that those who have forecasted the demise of China since 1980 have been consistently proven wrong–and careful analysis suggests there are possible solutions to all these problems. Steady and gradual progress is what we hope for–not overnight miracles.

Let’s Clarify the Need for Redistribution

November 9, 2013

First, we need to demonstrate the need for redistribution, then discuss the wide variety of ways in which it can be accomplished.

Can there be any question that there has been significant divergence of incomes between countries and within most countries, since about 1980? In fact, if India and China are excluded, there has been little reduction in poverty worldwide, and significant increase in inequality. Inequality has increased, not only between countries, but within countries.  While the US and China were both egalitarian in 1950, in 2013 both are recording record levels of inequality.  Some fear we could be exposed to the possibility of revolution.  There does not yet seem to be sufficient evidence to suggest that risk in the immediate future–at least not in China, and not in the US, but there have been rumblings in Brazil, in Egypt and other countries.

While China does not seem likely to suffer a significant reduction in growth rate, if such were to happen for an extended period of time, the danger of such would rise significantly there. There are still more than 300 million people in China living below the poverty line of $1.25 per day.  Hirschman’s “tunnel effect” states that if you are in the slow lane in the tunnel, you are not disturbed for a while–thinking that you will also experience the improvement soon. But, if your lane doesn’t move for a considerable period of time, you become increasingly discontent.

It does appear that in both China and the US, Hirschman’s tunnel effect is still in the first of two stages: there is an abundance of citizens, while not enjoying much in the way of benefits, who don’t yet want to overthrow the system because they expect to be able to capitalize soon, like those in the fast lane. In fact, it’s perplexing, particularly in the US, to consider that there are many in our blue collar population who continue to support the ideology of the Republican right and even the Tea Party, while those are just the principles which assure that few of those will enjoy the benefits of the privileged.  More and more, in order to get onto that train, one needs private high schools and expensive prestigious universities. Real wages of America’s blue collar workers have hardly moved across the last 30 years, while the share of GDP to the to 10 percent has risen dramatically, as have CEO salaries, the cost of higher education, the cost of health care, etc.  The Right has done an amazing job of brainwashing America’s underprivileged.

The methodology of such persuasion takes the form of arguing that those without jobs are lazy, on drugs, and only want government handouts. Further argument goes that economic growth depends on the wealthy to garner the profits and invest them in productive capacity, creating jobs.  And who can argue that those who work harder or are smarter should not reap the benefits of their superior contribution?

It turns out that most of those without jobs are anxious to work, and the liberals do not want to cavalierly bestow benefits on the small few who do not want to try. It also turns out that much of the wealth garnered by the owners of capital is simply invested in financial assets and not in productive capacity, thus not creating jobs for others.  And, if the opportunity to succeed is unfairly limited to children of wealthy, is it really fair to say none of that should be shared to better balance the equation?

Finally, the mention of “redistribution” has been tortured by the right to suggest that we would take land and property from the wealthy and give it to the poor. In fact, there are many ways to try to achieve better balance without doing that. A gradual and modest adjustment in a wide variety of types of taxes can enable significant adjustment over a period of say 10 years.  Assuring improvement in access to equivalent high quality education can enable significant adjustment across a generation. There are many other levers.

If we don’t address the dramatic increase in inequality, we face a world of increasing conflict, and that conflict will certainly come to our gated communities. Revolution will become a real risk, in time. Furthermore, if we enable the poor to improve their lot, they will become the great consumers of the future and economic growth will be enhanced. There are many prominent economists who hold the proposition that increased inequality slows growth, improved inequality improves growth–and this is a promise of improved wealth for the wealthy–with improved life for all.