Why don’t we learn from history?

If life were a seemingly random sequence of unrelated events, it would not be life as we know it, and many of the blessings we now enjoy would be impossible. We see patterns and we categorize. We follow routines day to day. Even over long periods, spanning generations, we are often struck by what we see as situations bearing similarity to what came before. We talk metaphorically of “history repeating itself.” 

For me, as for many of my like-minded friends and colleagues, this Great Recession from which we are struggling to recover, came as no surprise. Nor did the fact that it has been so deep and lingered so long. We see it as a repetition of an old and avoidable folly. We see it as the predictable result of irresponsible monetary and fiscal policies, very reminiscent of the 1920’s, and to some extent also of the 1970’s (see here or here). So the question “why don’t we learn from history?”

I have an answer, a theory [theories are cheap to produce, you will have to decide its market value.]  There are three reasons: Social situations do not provide controlled experiments; memory is very imperfectly transmitted across people and especially across generations; the study of history is neglected.

1.   Social science does not proceed on the basis of controlled experiments that yield unambiguous answers. History does not speak with one voice. This is no surprise. Everyone thinks he is an historian. Multiple interpretations of events and episodes abound. We can neither dispense with, nor feel completely confident in our interpretations. We are dealing with very complex, multiple cause, multiple effect, multiple-multi-layered-multi-directional interactions. Still, when we live through something we get a sense of it – not always accurate, but sometimes (occasionally) the “evidence” is compelling enough to produce a narrowing of interpretations. Such an episode occurred in the 1970’s and 1980’s, leading to the election and reelection of Ronald Reagan (and Margaret Thatcher in Britain). Widespread disillusionment with the preceding decades of Keynesian economics emerged from the experience of “stagflation” – inflation and unemployment simultaneously  – as predicted by the likes of Milton Friedman and before him Friederich Hayek.  I lived through that, and I never imagined that Keynesian economics could ever again gain traction in academe or in policy circles. This is where memory comes in.

2.     Those who were not "there” – indeed were removed from it by a generation or more – did not feel the same sense of conviction that I did. How could they? They learned about it, if at all, from books, or from their parents, or from their grandparents. No matter how much one tries – and probably not many tried very hard – one cannot communicate the sense of what it was like to actually “be there.” In any case, the young tend to discount whatever their parents tell them. It is part of the declaration of independence that accompanies the transition from youth to adulthood. By 2007, not many people actually remembered the excesses of the 1970’s and the stagflation that occurred. We are doomed to have to relearn the lessons of our parents and grandparents by our own experience.

3.     Finally, as unreliable as history (and memory) may be, it is still valuable. The study of history used to be a highly valued component of what was regarded as a well-rounded education, indispensable for good citizenship. It was a proving-ground for critical thinking, for a sense of perspective about the world in which we live. Sadly, the study of history has been devalued at all levels of education, not least, and most significantly, at the college level. [And at the graduate level too – my first year in the Ph.D. program at Chicago they abolished the economic history requirement.] Today’s high school and college graduates are illiterate in historical knowledge. No wonder they are doomed to repeat the mistakes of history.

And being ignorant of our ignorance makes it ever so much more difficult to regain what we have lost. Against the odds, however, with faith in the abiding curiosity of human beings, I remain hopeful.

Conflicting Visions - how do we have a conversation?

Some time ago Thomas Sowell wrote a book entitled A Conflict of Visions in which he contrasts, in broad strokes, two fundamentally opposed conceptual frameworks for viewing the world – a utopian social engineer’s view in which human nature and the world can be designed and molded to achieve a type of perfection; and a “constrained” view in which we are constrained by our limitations as fallible human beings, doing the best we can to cultivate our social, political and natural environments to achieve, not perfection, but progress and improvement.

I thought of this while perusing this month’s New York Review of Books, my reliable guide to what the left-wing intellectual establishment is thinking. I was struck particularly by two articles. The first, by Robert Kutner, is a Krugmanesque analysis of the public debt (“The Debt We Shouldn’t Pay”).  I reproduce here just one sentence. Reading this was like receiving a slap in the face. Here is an example of how conflicting visions produce perceptions in direct opposition, totally exclusive of one another.

Public debt was not implicated in the collapse of 2008, nor is it retarding the recovery today. Enlarged government deficits were the consequence of the financial crash, not the cause.

This was written by a respected public intellectual. In order to believe what he does, you have to see no connection between central bank interest rate policy, the funding of Barney Frank’s vigorous push to expand home ownership in America, the buildup of the public debt and the final arrival of crisis. You also have to be able to quickly dismiss any concerns about the burden of the debt on future generations – which he does by arguing that to reduce the debt and the deficit would destroy the economy, which would be worse for our children than saddling them with the debt-burden. It is truly mind-boggling.

The second article is by Marcia Angell, on the subject of a good life, from the vantage point of someone, like her and like myself, in our later years (“What Is a Good Life?” ). The final paragraph in the article reads:

Nearly everyone over a certain age observes that time seems to pass much more quickly, and I am no exception. So extreme is the acceleration that I wonder whether it isn’t a result of some physical law, not just a perception. Maybe it’s akin to Einstein’s discovery that as speed increases, time slows. Perhaps this is the reverse—as our bodies slow, time speeds up. In any case, the rush of my days is in stark contrast to the magically endless days of my girlhood. I also find it hard to remember that I’m no longer young, despite the physical signs, since I’m the same person and in many ways have the same feelings. It’s particularly disquieting to recall that many people and places I knew no longer exist, except in my memories. Still, although I dislike the fact that my days are going so quickly, that’s the way it is, and I’ve had a good run.

Exactly. I can relate. She and I are on the same page. Well-written, poignant. Makes me sad and contemplative. Yet, the paragraph immediately preceding this reads:

But even though my microcosm is in pretty good shape, I have become much more pessimistic about the macrocosm—the state of the world. We face unsustainable population growth, potentially disastrous climate change, depletion of natural resources, pollution of the oceans, increasing inequality, both within and across countries, and violent tribalism of all forms, national and religious. Dealing with these problems will take a lot more than marginal reforms, and I don’t see that coming. Particularly in the United States, but also in the rest of the world, big money calls the shots, and it is most concerned with the next quarter’s profits. Although I’ve spent much of my life writing and speaking in opposition to the corrupting influence of money on medicine, I find doing so increasingly pointless because it seems futile. Worrying about the world my daughters and grandsons will inhabit is what I like least about aging.

Reading this made me angry, frustrated. The conflict of visions again. Astounding. Every one of the concerns she so passionately nurses is wrong, is based on a flawed understanding of the world, every one. The world’s population is not unsustainable. That is not what poverty is about. And, in any case, population growth has dramatically slowed, to the point that many societies now face a worrying “fertility crisis.”I wanted to yell, “where the hell have you been?” Our natural resources are not being depleted – quite the opposite, we are, every day, discovering new, cheaper ways to produce energy and other things – that is what humans do in market economies. Increasing inequality is not a problem – lingering poverty is the problem. And there are more people living out of poverty now than ever before, and there are signs that parts of the developing world may finally have turned the corner toward development. Violent tribalism is not new and it is not any more of a problem than it has ever been – she also seems confused when she refers to tribalism as religious and national. At best this is a metaphorical extension of tribalism to non-tribal contexts. Religious and national identities are distinct rivals to tribal identities in important and subtle ways. Not to understand this is not to understand much of the social dynamics of our world. But, to be fair, perhaps she meant by “tribalism” only to point to implacable divisions. And finally, there is that tired, old complaint about money and profits ruling the world - if only we could force people to be less greedy and more compassionate and generous. 

How does someone like me even begin to have a conversation with these people? That is what bothers me in my later years as time speeds up. 

Minimum-wages - Ivry Man (IM) asks Dr. Know (DK) for his Opinion

Ivry Man encounters Dr. Know sitting on his usual park bench, feeding the pigeons.
DK	Hello Ivry, how nice to see you again.
IM	You too, Dr. Know, particularly since there is something I wish to discuss with you, to get your estimable opinion on.
DK	Of course there is; why else would Lewin be writing this?
IM	I am sorry, I don’t understand.
DK	Never mind. What did you want to discuss with me?
IM	Well, as you probably know, our president is proposing that Congress enact an increase in the minimum-wage from $7.25 an hour to $9 an hour.
DK	Indeed, I am very much aware of this.
IM	It seems to me this is a very worthwhile initiative, wouldn’t you agree?
DK	Why do you think so Ivry?
IM	Well, there is the recession you know, many workers at the bottom of the pay spectrum are suffering. It seems to me it is tough to live even on $9, never mind $7.25.
DK	You are assuming that poor, low paid workers will benefit from this law?
IM	Yes, of course. That is whom the law is meant to help, isn’t it?
DK	I am not so sure.
IM	(now getting visibly agitated). I might have known you would have an annoyingly contrary opinion. What is your problem with this law?
DK	Well, how is it that you help someone by making it more difficult for them to sell their labor?
IM	What do you mean?
DK	Look, someone who has a job and is being paid $8 an hour, is regarded by the employer as worth at least $8 an hour to him. In other words, the employer judges that the worker adds at least $8 an hour to the revenue of the firm. Otherwise the worker would not be paid that amount. In general, a worker will not be paid more than the amount he is estimated to add to the revenue of the firm. Now if you come along and say to the employer, “if you want to employ this guy, you have to pay him at least $9 an hour,” the employer may not consider the worker worth $9 an hour – so he will have to fire him. How have you helped this poor worker? He had a job that paid $8 and now he has no job.
IM	Oh, Dr. Know that is just silly. I am surprised at you. The worker won’t be fired. The employer needs him in order to produce the product.
DK	Hmm, well yes. Maybe it is silly of me. But I still don’t see it. You say he needs the worker to produce the product. But, Ivry, have you not forgotten that the worker is employed at a loss. He is now paid $9 an hour yet he adds less than this to revenue, say $8 an hour. So the employer is losing $1 an hour by employing him.
IM	Maybe not. Maybe he was always adding even more than $9 to the revenue of the firm and because of competition he was paid less than he was worth.
DK	Ok, that is a possibility. But surely not for all of the workers. Do you want to argue that all those workers currently earning the minimum-wage, $7.25, are really worth $9 or more?
IM	Certainly. Everybody knows how workers are exploited.
DK	This borders on the absurd my friend. But for the sake of the discussion, let me grant this. Still, as a result of imposing the higher minimum-wage, the cost of producing the product has now gone up. Surely the employer-producer cannot afford to produce the same number of units of the product. Less will be produced and fewer people will be employed.
IM	No, not at all. The price of the produce may go up a bit. No big deal.
DK	A higher price means less will be sold, so less will be produced and fewer people will be employed.
IM	No, no, this is just an excuse. Consumers need these products.
DK	Really? So consumers will just pay the higher price induced by the increase in cost of production (as a result of the increase in wage costs)?
IM	Yes.
DK	Does this not mean they will be spending less on something else? So someone else’s production will come down? So employment will fall somewhere else?
IM	No, wages are higher now so they can afford to pay more.
DK	My dear Ivry you are arguing in a circle. You can’t deduce an increase in expenditure as a result of a mandated increase in wages paid. They have to be paid by someone who will have less to spend on something else. You can’t manufacture more spending by mandating an increase in wages paid. This is like squeezing a balloon and arguing that there will be more air in the balloon as a result.
IM	Whatever you say Dr. Know. But anyway, even if consumers will spend less on something else as you say, the main point is that these rich companies can take the increase out of their substantial profits, right? Then we don’t have to worry about a decline in demand. The price of the product can remain the same.
DK	Not at all Ivry, not at all. Let me make three important observations. Firstly, it is not at all clear that firms that employ many workers at or near the minimum-wage are high profit firms. Most are probably not. Many firms may go out of business. Many will not be started. Who knows how many lost jobs this represents? Actually no one knows. It may be very large.  Secondly, even for those companies that have large profits, and, somehow, elect to reduce their profits while keeps their production the same at the same product price (most unlikely!), even for them there are consequences. The reduction in profits means a reduction in the rate of return for investors in these companies, and, over time, this means that funds going to them will decline relative to other investment prospects. So, one way or another, those companies intensive in the employment of minimum-wage level workers will decline relative to those who employ more highly-paid workers. Thirdly, you are dramatically underestimating the effect of an increase in the lowest paid workers. To increase the minimum-wage from $7.25 to $9 an hour is a more than a 20% increase! To argue that this will not seriously affect production is highly implausible, especially if the number of workers earning this wage is significant. But, even if this is a small proportion of the workforce, it will have a wider impact. All firms employing hourly workers have a wage-structure based on seniority, experience, qualifications, etc. Someone already paid $9 an hour, before the minimum-wage increase comes into effect, would need to be bumped up to reflect their relative position on the wage structure once those paid less are brought up to the $9 by the minimum-wage hike. This effect will concertina all the way up the wage-scale. Everyone on the scale would have to have their wages increased! The implication is a very much larger increase in the payroll, and, therefore, in the costs of production.  Bottom line – if the firm does not employ low-wage workers there will be little or no effect. If the firm employs a significant proportion of low-wage workers it will raise the cost of production and result in a decline in size and employment for those firms. You cannot get water out of a stone Ivry. Changing the law to mandate a higher wage does not change the reality of who is productive and who is not and why people are poor in the first place. All it does is take away the power of the least productive workers to compete for jobs by offering to work for less.
IM	As always Dr. Know, your logic is compelling and disturbing. If what you say is true why do we have minimum wages? And what are we to do? Does this mean that there is nothing that can be done to help low-paid workers and poor people in general?
DK	We have minimum-wages, and continue to increase them, probably because the public at large does not know what they really do, and the members of those groups that do know how they work, like labor-unions, use minimum wages as a way of ensuring that workers cannot compete with them by offering to work for less. it is a form of protection for those who already have jobs, and whose wages are higher as a result of minimum-wages and the concertina effect I described.  What can we do about poverty? Look, people are poor in the first place because they lack productive resources, usually human resources – qualifications, production-skills, language-skills, etc. They are not poor because employers capriciously refuse to pay them their worth. Employers will tend to pay as little as they can get away with in a competitive labor market. What protects workers is competition for their productive services, not minimum-wages. Workers will tend to be paid their opportunity cost – what they could earn elsewhere. So the best way to help them is to improve their productive skills.  The best way to help workers – and to generally alleviate poverty, is to create employment opportunities for workers. Thus, economic growth is the key to a long-term cure for poverty. Most discussions about this are not about poverty, they are about inequality of earnings, and one should not confuse the two issues. The best route to increasing earnings of everyone remains economic growth – though this may not satisfy some social engineers who are more concerned about gaps in earnings between people. Some people feel strongly about the existence of a safety-net – providing a minimum-income for poor families. The best way to do this is through a negative income tax. This is a policy that would guarantee a minimum income to families (the details would depend on what tax-revenue could generate and what policy-makers decide is desirable). This minimum would be unaffected by decisions to work – it would be guaranteed no matter how much or how little the family members worked. This is the simplest, least intrusive way to provide a safety-net.
IM	But wait a minute. Does this not provide a disincentive to work? Why work if you are guaranteed a minimum whatever you do?
DK	Yes, indeed. The greatest incentive to work is starvation. So make up your mind. Are we willing to let people starve? If not, a negative income tax has the least disincentive to work, because you do not lose your subsidy by working - you get to keep your net-of-tax earnings over and above the subsidy. (This policy would face the problems that all state policies face - trusting the bureaucrats who administer it to do the right thing and know what to do. I am not optimistic about that. But it would be preferable to the many corrupt and ineffective entitlement programs we now have). I suppose you could strengthen the incentive to work by tying welfare to work as well. President Clinton’s welfare reforms did some of this. Now President Obama is trying to abolish this.  (looks at his watch) One final point Ivry – before I have to go. In the absence of state anti-poverty initiatives there would be many more private charitable initiatives – like there used to be in the past. We should not discount the benefits of this. Now I have to go.
IM	So soon? I wanted to ask you more about tax policy.
DK	No doubt a subject for another day, always a pleasure my friend. Be well, be happy – he rises and walks off in the direction of the … .

What is the debt-ceiling really about?

An interesting public choice question facing us (America) at this time, is the apparent inability to reverse course and undo the establishment of multiple voting and lobbying constituencies once they have been created - many of whose members do not pay taxes (example many entitlement recipients). This is what Romney was referring to in his 47% comment. Once these power groups have been created and receive benefits in excess of the (perceived and actual) payments they make, the likelihood of their members voting to cut expenditures for these benefits diminishes over time. Crudely expressed, when a majority receives benefits from a paying minority (in power terms, if not in numbers), there appears to be no going back if we are to rely on the normal majoritarian democratic process. The article reproduced below from today’s WSJ, suggests something may be missed in the above analysis. It prompted me to think things through to the ultimate implications. 

In essence, a welfare-dependent-majority situation is one that is not static; it gets worse over time and the growing costs, and the hardships imposed on a growing number of taxpayers, must eventually cause some kind of reform – either that or a complete fiscal collapse. To be sure, a welfare majority does make expenditure reform much more difficult. At the very least, it suggests that things have to get pretty bad before any kind of reform initiative is likely to have any traction. Current events in Europe bear witness to this. It is a  consideration of the constitutional status of the debt-servicing, expenditure-appropriation process that clarifies the situation we face.

Contrary to popular conception, entitlement expenditures are not constitutionally entrenched. They can be cut anytime Congress decides to pass legislation to that effect, or anytime Congress fails to appropriate money for them. On the other hand, as explained by the article below, government debt payments (principle and interest) are so entrenched by the 14 Amendment, Section 4 of the Constitution. This means that if Congress fails to raise the debt ceiling, thus preventing new government borrowing, the existing debt still has to be paid. In the absence of being able to borrow in order to pay for its expenditures, the government would then have to prioritize and decide what to cut in order to pay interest and principle due on the debt or increase revenue by raising taxes. So the question becomes, will the Congress continue to approve debt-ceiling increases ad infinitum? If not, then the government will have to face its budget constraint and make cuts or consider even more tax increases – one can imagine the blood that will flow in that debate. Of course, using tax increases to solve this problem also has a limited range of effectiveness. At some point the Laffer curve will kick in – higher tax rates will bring in less revenue as tax-constrained incomes put a crimp in income generation through value-creation. At that point expenditure cuts have to be relied on.

On the other hand, if Congress simply continues to raise the debt-ceiling, the economic consequences will be dire, and bad things will start to happen at an accelerating rate. The deficit and the debit will become a larger and larger multiple of the revenue coming in. A number of things are likely to happen, though the timing and the sequence cannot be predicted. With a greater portion of the debt being financed by the Federal Reserve, bank reserves will continue to rise (even though they stand at unimaginably high levels already). As the economy continues to recover (in spite of the dysfunctional polices of the last four years), the banks will begin making loans, market interest rates will rise, and the money-supply will rise. This, in turn, implies an exploding increase in the interest payment due on newly borrowed debt, and widespread price inflation. Americans are historically very antagonistic to both interest rate increases (which will wallop the stock markets) and, even moreso, high levels of inflation. 

At that point, who knows? Will we have a Carter to Reagan type situation again? Or will it have to get much worse before any pendulum swing-back can be expected? I guess we will find out.

OPINION

Updated January 10, 2013, 7:12 p.m. ET

Rivkin and Casey: The Myth of Government Default

The Constitution commands that public debts be repaid. There is no such obligation to fund entitlement programs.

By DAVID B. RIVKIN JR.
AND LEE A. CASEY

Three false arguments, pushed hard by the Obama administration and accepted on faith by the media and much of the political establishment, must be laid to rest if the American people are to understand the issues at stake in the federal "debt ceiling" debate.

The first is that Congress's failure to raise the debt ceiling—the amount of money the federal government is authorized to borrow at any given time—will cause a default on the national debt. The second is that federal entitlement programs are constitutionally protected from spending cuts. The third is that the president can raise the debt ceiling on his own authority.

To take up the first canard: Contrary to White House claims, Congress's refusal to permit new borrowing by raising the debt ceiling limit will not trigger a default on America's outstanding public debt, with calamitous consequences for our credit rating and the world's financial system. Section 4 of the 14th Amendment provides that "the validity of the public debt of the United States, authorized by law . . . shall not be questioned"; this prevents Congress from repudiating the federal government's lawfully incurred debts.

The original concern of this provision was to guarantee the integrity of federal debts incurred during and immediately after the Civil War (while the debts of the Confederacy were nullified permanently), and to ensure that a newly "reconstructed" Congress—to which the Southern states were readmitted—would not reverse these decisions. However, the amendment's language was not limited to the Civil War-related debts. In Perry v. United States (1935), the Supreme Court made clear that the provision "indicates a broader connotation" protecting the nation's debts as a whole.

This means that a failure to raise the debt ceiling—to prevent new borrowing—does not and cannot put America's current creditors at risk. So long as this government exists, and barring a further constitutional amendment, those creditors must be paid.

Nor are they at risk in practice, since the federal government's roughly $200 billion in tax revenue per month is more than sufficient to service existing debts. If the executive chose to act irresponsibly and unconstitutionally and failed to make any debt payments when they come due, debt-holders would be able to go to the Court of Federal Claims and promptly obtain a money judgment.

These basic facts should inform any credible decisions by credit-rating agencies in establishing the government's creditworthiness. Significantly, these agencies have traditionally acted favorably when heavily indebted countries have not defaulted on their debt but cut deeply their public spending.

Second, despite White House claims that Congress must raise the debt ceiling to pay the bills it has incurred, the obligations protected as "debts" by the 14th Amendment do not include entitlement programs such as Medicare and Social Security. These programs are not part of the "public debt," which consist of loans that are made to the federal government through bonds and similar financial instruments. Entitlement programs are instead political measures that are fully subject to the general rule that one Congress cannot, by simple legislation, prevent a future Congress from making cuts.

This fundamental and vital distinction is clear from both the text and the drafting history of the 14th Amendment's Section 4. The wording of the section was revised before its enactment and ratification to replace the term federal "obligations" with that of "debts," a far more narrow (and manageable) category.

The distinction was recognized by the Supreme Court in Flemming v. Nestor (1960), which involved the power of Congress to modify Social Security benefits. The court noted that entitlements and "contractual arrangements, including those to which a sovereign itself is a party, remain subject to subsequent legislation by the sovereign."

Congress can reduce a wide range of payments to various beneficiaries at any time by amending the statutes that authorize them or simply by failing to appropriate sufficient funds to pay for them. Nor does Congress have any legal or constitutional obligation to borrow money to pay for entitlements.

Third, assertions, most recently made by Nancy Pelosi, that the president can rely on Section 4 as a pretext for raising the debt ceiling by himself are manifestly incorrect and constitutionally dangerous. Section 4 grants no power whatsoever to the president—instead, the 14th Amendment grants Congress the "power to enforce, by appropriate legislation, the provisions of this article."

More fundamentally, this argument—which has been tentatively advanced and then tentatively withdrawn by the White House, both during the 2011 debt-ceiling battle and in the last several weeks—is contrary to the language, structure and history of the Constitution.

Like the British Parliament before it, Congress controls the power of the purse—the authority to raise taxes, borrow money and direct how revenues are spent. In particular, Article I, Section 2, grants to Congress the power "to borrow money on the credit of the United States." There is no similar grant to the president. Any effort by the chief executive to borrow money without congressional action would be every bit as injurious to our constitutional system as presidentially ordered taxation.

True enough, the "debt ceiling" is not a constitutional requirement. Congress could choose instead—as used to be the case during most of our history—to vote separately on the issuance of each federal debt instrument. However, nowhere in the Constitution is the president authorized to borrow or spend money without congressional action, except insofar Congress itself may permit.

Once these false arguments are cleared away, the real issue in the debt-ceiling debate becomes clear: the proper level of federal spending. Should Congress fail to increase the debt ceiling as much as the president wants, the effective result would be major government spending cuts, with payments on public debt excluded.

This is tough medicine and not to be administered lightly. If Republicans are serious about winning this debate, they must strive to convince the American people that such spending cuts are necessary, given President Obama's openly articulated unwillingness to implement any meaningful spending cuts other than defense and his clear preference for limitless borrowing.

Whether they can succeed in this task is unclear. But the public must at least be allowed to ponder these vital issues without being misled by false claims involving debt default, the nature of federal obligations, and which branch of government is in charge of the public fisc.

Messrs. Rivkin and Casey are partners in the Washington, D.C., office of Baker Hostetler LLP and served in the White House and Justice Department during the Ronald Reagan and George H.W. Bush administrations.

A version of this article appeared January 11, 2013, on page A13 in the U.S. edition of The Wall Street Journal, with the headline: The Myth of Government Default.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

Taxation, fairness, inequality, poverty and the confusion of language in modern discourse.

NPR debate: Are The Rich Taxed Enough?

At the link above there is a broadcast of a debate I heard today that prompted this post.

Robert Reich is insufferably smug, though he is smart. He has these rock-solid views on economic policy and he is not even a trained economist - though, goodness knows, that may be an advantage these days - but not in his case. And on the other side they have two ineffective spokesmen in Art Laffer and Glen Hubbard. Mark Zandy, arguing against the proposition, is fair and intelligent, but, in my opinion, sadly wrong where it counts. So frustrating.

Everyone tries to use history (historical statistics) to support his case. The problem (I repeat again) is the irremediable uncertainty that attaches to the attribution of cause and effect in the interpretation of historical events and eras. I see the economic growth that occurred during the Clinton administration resulting from the momentum of the Reagan era reforms (as limited as they were), and in spite of the increase in taxation that occurred. Reich opines confidently that raising taxes did no harm to economic growth and value creation and may have done some good. There is no way to resolve this kind of disagreement. One can offer coherent theories for each - and other interpretations besides.

So what's left? Well faced with this uncertainty one has to appeal to values! We have to decide where, in our ignorance, we want to put the burden of proof. Who should bear the burden of proof - those advocating an activist economic policy or those opposing it? In the former case, it would have to be shown beyond a high level of doubt that higher taxes on the rich DO NOT harm economic growth, productivity, etc. In the latter case, to effectively oppose it, it would have to be shown that higher taxes DO so harm these things. The policy adopted absolutely depends on where you put the burden. So how to decide?

A couple of things that could have been mentioned in this debate.

1.       At the very top it should be clearly stated that taxation is an inherently coercive act. There is no escaping this. Taxes are compelled under the threat of forcible extraction or incarceration. Taxes are an aberration in a free and peaceful society. This should dramatically color the burden of proof requirement. Those who favor more and higher taxes, on anyone rich or poor, should have to overcome a fundamental moral objection to coercion. If taxes are a necessary evil, then they should be kept to a minimum, continually examined and increased only under the weight of a powerful argument to do so. Absent the ability to prove the absolute necessity of increased taxes such a proposal should fail, just as any proposal to further increase coercion should fail unless some very compelling overriding purpose can be discerned.

2.       Why this preoccupation with inequality of earnings? All these misleading numbers about how it has increased? Why is inequality a problem? Surely poverty is the problem, not inequality. Anti-poverty programs are not the same thing as anti-inequality programs. We need to get this straight before we can discuss policy. If everyone in America earned a minimum of $1million in today's purchasing power, and the richest earned $1billion, would that be a problem? If the answer is Yes, then what is the norm, the value, that is informing that answer? Envy, resentment? How does one defend distribution policies without bringing in resentment, albeit dressed up in respectable terms? These are unworthy norms, destructive values, for which we chastise our children. How have they become part of respectable national policy?

3.       So, inequality should not have been part of this debate. Maybe poverty, but not inequality of earnings. That being said, the focus then shifts to how best to tackle the question of poverty and one has to note the grossly ineffective anti-poverty programs of the last sixty years and the fact that there is now a “poverty industry” in the US – a huge sector of the economy devoted simply to serving the poor, and thus maintaining poverty. There is simply no denying that there is a huge public sector constituency that has a vested interest in the maintenance of poverty. (They have achieved a lot of mileage simply by continually redefining it).

4.       What the hell does "fairness" mean? Why on earth would anyone consider it fair that someone with greater earnings which they came by in a legitimate way, should pay a higher proportion in tax. If I earn $100 and pay 10% in tax, I pay $10. If I earn $200 and pay 10% in tax, I pay $20. I earn more I pay more, in direct proportion to my increased earnings. Seems very fair to me. Fairness, as justice, is about treating people equally regardless of who they are, rich or poor. (The Talmud teaches that the rich are entitled to equal justice and should not be victimized because of their advantages.)

Armchair second-guessing is easy. I probably could not have come up with all of this spontaneously. But given preparation time, surely Hubbard and Laffer could have done better. I can think of a number of “Austrian types” who would have. 

G and T for me.

Let’s Talk Fundamentals: Israel is Not The Problem and Israel Does Not Have The Solution

This is a guest blog-post that appeared here:

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The recent post by John Glaser began in a manner that gave me hope. He seemed to be prepared to focus clearly on issues of foreign policy or strategic choices, without resort to the ill-informed judgments that plague discussions on the tragic conflict we are now witnessing. That hope evaporated instantly when I read his fourth paragraph. Said judgments then followed thick and fast. Too bad.

I would like to try and deal with this tangled web of legitimate concerns and ugly mischaracterizations by first stipulating some points on which we might find substantial agreement, or at least recognition that more than one opinion is legitimate given the uncertainties involved.

I imagine all libertarians agree that foreign military aid ought to be ended. This includes the annual $3 billion to Israel and the $6 billion to its enemies and neighbors, and it includes as well the $1 billion plus that makes its way to the Palestinian politicians through the permanent UN agency created for the Palestinians 65 years ago, UNRWA (about which I shall have more to say). So, yes let’s pull the money from Israel, but let’s pull it from everyone else as well, and let’s not pretend that this funding occurs in a vacuum. Mr. Glaser talks about this funding of other countries in the region in a different context, but I assume he agrees in principle.

Having said this, there is always the practical question of how you get from here to there. Are we to remain silent on how this is to be done or do we have an opinion on whose funding we should cut first? Presumably, my readers will identify a first-best solution as the cutting of all such aid at once. I agree. But this is not likely to happen. So, in its absence, is it to be taken for granted that we should support cutting Israel’s funding and not the other’s, on the premise that any cut is better than none? We should not pretend it does not make a difference. If it is true, as I firmly believe that Israel (i.e. the Israelis) faces a real existential threat, then to pull her military support without pulling those of her enemies and would-be killers, would be to risk indirectly precipitating a genocide. I would argue strongly that doing it the other way round (cutting aid to Israel’s opponents first) would more likely bring a deescalating of hostilities.

I expect we will disagree about this. But it is not a disagreement about principle, it is a disagreement about the correct strategy to take in pursuit of principle in an imperfect world. Absent the immediate cessation of foreign military aid, what half-measures should we support if any? Let’s not be self-righteous about this; this kind of choice cannot be avoided. (I put aside the observation that if the U.S. got out of the business entirely, the enemies of Israel would find other sponsors to fill the gap. It is probably true, but acting on this line of thinking that leads down the black hole of we are now in. I trust Israel will be able to fend for itself).

The second area of potential agreement in principle is the question of the tragedy itself. No one considers the terrible loss of life and injury currently suffered by innocents in Gaza as anything but awful and tragic. The question is, why it is occurring? If we grant Israel the right of self-defense, is there a better, more humane, response, especially given the practice of Hamas of putting civilians in harm’s way (there is ample evidence that this has been a deliberate strategy – though probably not in every case)? I am open to real suggestions about what Israel might do to deter the rocket attacks on its citizens. Mr. Glaser wants to minimize the importance of the rockets, but, I am not sure on what basis and what he advises as an appropriate response.

This third topic concerns the settlements. As I said earlier in a comment, the settlements are a mixed bag. Those that are part of the state-agenda, and are state financed, are simply coercive and ought to be clearly condemned. There is room for reasonable disagreement about how the state of Israel should respond to private settlements, on land bought with private money. And there is also the practical question of what to consider a settlement. Mr. Glaser throws in East Jerusalem. This is an unjustified rush to judgment. Jews have lived in East Jerusalem continuously for thousands of years.  Many were expelled in 1949. There are claims on both sides. What libertarian principle would allow us to so easily call this unjustified settlement?

I think this is about as far as we can go in a reasonable discussion without getting into the inflammatory areas of disputed facts, motives, and consequences. To appeal to fellow libertarians about the need to cut funding to Israel, because we should cut funding to everyone, is one thing. But to then proceed to gratuitously vilify Israel on the basis of incorrect and incomplete information is something else entirely.

Mr. Glaser starts his story in 1967, and seems to suggest that that the war occurred because Israel wanted the land. This is crazy. The occupation is a headache and a long-term liability. Most Israelis would trade land for a real secure peace in a heartbeat. The war was about survival and defensible borders. I expect this to be received with skepticism by some, but I urge a careful examination of the history, looking at all the arguments,  and not only those of the revisionist Israeli historians, that I personally consider to be discredited. Mr. Glaser then goes on to claim, incredibly, that it is Israel that is intransigent in not accepting offers of peace. He refers to the Arab League as having endorsed a so-called deal, and even suggests that Hamas has. Really? (here?)  Where is the actual text. Where is the textual evidence of the Arab League, Hamas, or the PLO, having recognized the State of Israel and its right to exist as a Jewish state. Why a Jewish state? Because all of the other states in the region exist as Moslem states. We may wish for separation of church and state, we may moreover wish for the abolition of all states, but this is not the context we are talking about in the choices we face to minimize violence and save lives.

The truth is exactly the reverse of what Mr. Glaser claims. It is the PLO and the Arab leaders that have walked away from all and any reasonable peace proposal, most notably the one at Camp David hosted by President Clinton, but others as well. Israel risked much with the Oslo Accords and paid a very heavy price in lives and casualties. Hamas has never recognized Israel at all, in any form, and its charter specifies and emphasizes commitment to the destruction of Israel as a political entity and it has never wavered from this. You can’t just ignore these things! It is also clear that you cannot trust any momentary accommodation. There is strong reason to believe that Hamas, and for that matter the PLO, will make concessions for strategic proposes that they have no intention of maintaining. Any serious proposal must ensure some credible, verifiable commitment to Israel’s security.

Mr. Glaser goes on to tackle the case of the settlements. I have already indicated where I think this may be a legitimate area of criticism against the Israeli government. But, having said this, one thing is clear to me; even if all settlement activity ceased tomorrow, this would do nothing to solve the fundamental problem. The problem long predates the settlements and will endure beyond it. It is not what Israel does that matters for the achievement of peace, it is where and what Israel is. If we are talking about the big questions here, we should be under no illusions that this conflict is about land. This is the fundamental mistake in Mr. Glaser’s whole analysis, and it is a common mistake. It was never about land. Israel is to greater Arabia as a postage stamp (or a sheet of paper) is to a football field – think about that image. Withdrawing to 1967 borders will not solve the problem.  To make that suggestion is to betray an ignorance of the history. The period between 1948 and 1967  was an unending struggle for survival, in a country less than fifty miles across in its middle, and therefore extremely vulnerable. Suggesting that the Israelis should withdraw back to that situation and trust the Arabs to honor a commitment to peace ignores the question of the burden of proof.  What evidence is there that Israel’s neighbors would honor such a commitment, given their past actions? Surely the history bears on this. No, emphatically, this is not really about land or settlements.

The rest of Mr. Glaser’s piece is about Israel’s cruelty and the “illegal” blockade (he is not able to resist an  obscene reference to the Nazis in the context of Israeli actions). Again he argues in a vacuum. I want to hear what he would have Israel do. He seems to fault them for their superior technology to neutralize the rockets, suggesting that this means they should simply tolerate the rocket barrage. He resorts to the oft-repeated notion that because the number and severity of Palestinian casualties is greater than the Israelis’, this somehow bears on the merits of the case. Israel suffered horribly before it was able to stem the tide of unending terrorist attacks on its cities. Intentions matter. Hamas deliberately targets civilians. The IDF takes risks and pays a price to try to avoid civilian casualties. As for the story about the embargo not allowing essentials, even children’s toys, through to Gaza, I have to say I am highly skeptical. The Arab press is completely unreliable and the European press is not much better when it comes to Israel. The Israeli press is often critical of its government and is much more reliable.

Mr. Glaser throws in a few comments about how anti-Arab racist Israelis are. Examine the popular press in the territories, in Egypt or anywhere in the Arab world to see the anti-Semitic cartoons and vicious anti-Jewish propaganda. In Israel’s vigorously free press there is, by contrast, ample evidence of sensitivity to Arab minority rights and concerns. On what evidence would Mr. Glaser base his claim of the dangers of anti-Arab racism? Surely it is relevant to note in this context that Israeli Arabs have more rights, freedoms and opportunities than the vast majority of Arabs do throughout the Middle East, and certainly more than any Jews living under Arab rule .

Any discussion of how to achieve peace must take account of the history and nature of the “Palestinian problem.” If one is really concerned about their suffering, it behooves one to look carefully at this. Why has this particular refugee problem, dating from 1949, persisted – especially when so many millions of other displaced persons from that era are no longer a matter of international concern? What makes the Palestinian refugee problem so different from the other refugee problems? The answer involves the political agendas of many of our corrupt allies in the region in a manner that savvy libertarians should easily be able to relate to.

The origin of this problem is the war of 1949 which followed the attempt by Britain to establish a partition of the land between Jews and Arabs (the term “Palestinian” arrived much later) – a two-state solution. The Jews accepted it and so did many of the Arabs. Absent the efforts of the nascent Muslim Brotherhood, under the Palestinian leadership of Haj Amin al Husseini, a Nazi propagandist during WWII, there arguably would have been a two-state solution (here). Everything that has followed since is the result of those fateful events, from which time the refusal to recognize the right of Israel to exist became written in stone.

In the months following the onset of the war roughly 750,000 Arab residents were displaced in one way or another. At the same time about 850,000 Jews were forcibly, often violently, expelled from the Arab countries of the region – communities that had lived there for generations. These were “absorbed” into the new state of Israel. But the displaced Arabs and their children and grandchildren were left to linger until this day. A special UN agency was created to deal with them, UNRWA, The United Nations Relief Works Agency, which today has an annual budget in excess of $1.1 billion. UNRWA must stand as the most perniciously destructive and counterproductive of the agencies of the UN. The “achievements” of the UN in the world have been rightly criticized and even vilified. But this must be the worst of them. It may be a case mostly of unintended harms, but that is no mitigation to those millions whose lives it has affected. The Arab states for their part have continued to treat the Palestinians as second class citizens and have refused to allow them to immigrate and become citizens or permanent residents.

Those who rise to condemn Israel pointing to the injustice of the displacement in 1949 of the Arabs whose descendants became today’s Palestinians, should consider the balancing of evils over the years that have attended all of the many millions of refugees from that awful period in history. Absent the dependency enabling (nay producing) role of UNRWA, the refugee status of the Palestinians would not have endured. In the meantime, UNRWA has evolved into a Palestinian controlled, terrorist sponsoring, paramilitary organization that is also an all-encompassing welfare-state perpetuating refugeeism. Remember, this is an agency of the United Nations. And, as such, it receives most of its financing from the taxpayers of the United States! The foundationally pathological structure of the Palestinian situation is at the root of it. If this is not fixed, the problem quite simply will never go away and will probably get steadily worse. (here)

The ensuing fate of the Palestinians being condemned to be perpetual refugees is the predictable result of political opportunism and the racism of fundamentalists and ultra-nationalists. The Arab states have cynically used the Palestinians as pawns in their political agendas – either to divert attention from their corrupt dictatorial domestic oppression, or as a motivating factor in the Islamist agenda. Had the original 750,000 refugees been settled like the rest of the millions of refugees in various countries around the region, and the world, including Israel, the current horror would not exist. Quite simply, the Palestinian situation was not of Israel’s making and is not in Israel’s power to solve. On the other hand, a real honest to goodness desire to solve it, by the Arab states, especially the Saudis, could do so, though the longer it lingers the more difficult it becomes. State oppression in one way or another is at the root of it and real progress toward peaceful coexistence through many cultural, trade and investment initiatives has been squashed by the local leaders, with the support of their foreign sponsors.

Thus while we might oppose any government funding of settlements and any coercive displacement of Palestinians to facilitate the establishment of settlements (as I do), and while we may reasonably  debate Israeli’s defense strategies, we cannot, in good conscience, require of Israel to dismantle its embargo, dismantle its checkpoints, dismantle its fence, and generally stand down in its attempt to combat acts of terror. That makes no sense. These measures have proven incredibly effective in keeping Israel’s population safe after suffering for years a horrendous barrage of attacks directed specifically against civilians, where they live, shop, learn, and play. These measures create great hardships, but, in the final analysis, they are effectively imposed on Israel as much as they are imposed on the Palestinians, by the presence of a real, credible, significant, terrifying danger. Similarly, calls for Israel to withdraw to 1967 borders, or beyond, make no sense. The same threats that exist now, existed before 1967 all the way back to 1949, except that Israel was defending less secure borders. The settlements are not the fundamental obstacle to peace. Nor is the “occupation.” The refusal to recognize Israel’s legitimacy, and actions taken in support of that, and the cynical use of the “Palestinian problem”  – these are the fundamental problems.

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