Considering "We stand Divided" by Daniel Gordis

In his most recent book, We stand Divided: The Rift between American Jews and Israel (New York: Harper Collins, 2019), Daniel Gordis writes in his concluding chapter: “In 1880, the combined Jewish population of the United States and Palestine totaled 275,000 people. As the world’s Jewish population at that point was approximately 7.8 million, these two communities represented a mere 3 percent of the world’s Jews. Today the United States and Israel account for 85 percent of the world’s Jews.” (page 231). The remaining 15 percent of the world’s Jews are scattered in small communities around the world, mainly the developed world. So, the U.S. and Israel constitute the two arms of the body of world Jewry today. Israel is the center and America is the center of the diaspora. Sadly, Gordis notes, these two communities are, in many ways, even while existing in a crucial synergistic relationship, at odds with one another. It is the purpose of this book to explain this rift and, hopefully, by providing insight, contribute to its repair.

I highly recommend We stand Divided. It is beautifully written, carefully researched, and provides much food for thought, not to mention important information for all those wishing to understand the nature and historical development of Jewish thought up to the present time. On the nature of Zionism it is particularly useful. I will not provide here a comprehensive book review. Rather, I want just to address a limited set of points that underlie Gordis’s comprehensive analysis. I want to address those aspects of his analysis that disturbed me most, not least because of the degree of intractability I see involved in them.

In successive chapters Gordis analyzes various reasons for the divide between American and Israeli Jews in general, namely, the incessant conflict with the Palestinians and how Israel approaches that, the particularist (as opposed to universalist) nature of Israeli nationalism (Zionism), the contrast between Judaism in America as a religious identity and Jewishness in Israel as a national/cultural identity, the mixing of church and state in Israel’s legal regulatory system, and the “historically embedded” lives of Israelis as opposed to the detached lives of Americans. It seems to me that running through each of these is a common theme, one that Gordis treats in passing, one that is peripheral to him but is central to me, and that is, in a nutshell, the issue of the relationship between nationalism and individual rights.

Americans in general and traditionally (much less so those adhering these days to ‘identity politics’) think in terms in individual rights as the basis of their freedom. Their freedom is individual freedom. They hold those “truths to be self-evident” that all people (regardless of their ethnicity, race, background or group affiliation) are entitled to equal freedom, everywhere. America is a country (perhaps the only country in history) founded on the basis of universal individual rights. To be American is not be of a particular blood line or race or ethnicity. To be American is to embrace American ideals (notwithstanding the departures in our history that have tarnished this). America is, as it were, a universalist project. The ideals to which Americans at their best stand committed are applicable to everyone, everywhere. Historical pronouncements are replete with exhortations to the world in general to join in the American project to build a society in which individuals are free and live peacefully together. With some accuracy we may call this a commitment to liberal democracy (though it does not, as is commonly assumed, necessarily imply a political democracy of any particular kind).

By contrast, while it is true that a large proportion, if not a majority, of Israelis also feel and profess a general commitment to liberal democracy broadly conceived, this is not as absolute for them as it is for Americans. In particular Israelis face the persistent question of whether there is a tradeoff between Israel being a Jewish state and being, at the same time, a liberal democracy, where everyone has equal individual freedom. Gordis thinks there is such a tradeoff, and that Israelis in general answer it by compromising on liberal democracy. But, far from this being a criticism, he presents it as an inevitable difference between two peoples who have experienced very different histories. It is not, according to him, that either view is more moral or correct than the other. America aspires to be a liberal democracy, Israel does not, because to be one would require sacrificing the Jewishness of Israel. He asks us to think of Israel as an “ethnic democracy”.

It is when one considers the implications of this that the nature of the divide becomes most apparent. For example, Israel has laws that restrict the residence of Arabs (even Israeli Arabs) in certain areas on the basis of preserving the Jewish nature of that area. For Americans this is anathema, what they call “red-lining”. It is legalized racism. And there are other similar restrictive laws. In fact almost 100% of the land of Israel is governed by government agencies, the most prominent being the ILA - Israel Lands Agency - that clearly, often overtly, discriminate against Israel's Arab citizens. It is ubiquitous and it is debilitating,

Then there is the monopoly of funerals, weddings, and conversions that the orthodox Israeli Jewish establishment has. This implies for example that marriages between Jews and non-Jews cannot take place in Israel. Again this is anathema to Americans. Gordis’s attempt to explain this in terms of understanding Israel’s origin and ongoing raison d’etre to provide a safe haven for the Jews of the world facing current or future oppression will strike many American readers as simple apologetics.

Gordis’s argument, shared by many, is that these compromises to liberal democracy are necessary to preserve the cultural identity of Israel. In addition to the very real physical threats that Israelis face (the truth that they face a persistent overriding existential threat to their physical being), they also face, according to this argument, a threat to their culture that can only be resisted if the Jewish nature of the state is preserved, and this requires ensuring, among other things, that Jews remain the controlling majority of the population. It is an argument that proceeds from the idea of the right to “national self-determination” not individual rights.

In this light, the contrast could not be more stark. A principled individual rights approach, sees rights adhering solely to individuals. There is no coherence to the notion of collective rights, as in “the rights of the nation”. The latter is simply a set of weasel words used often to justify violations of individual rights for the “greater good” or some mythical national purpose. Gordis gets this right, but understates the coherence of the individual rights approach. He is, not surprisingly, no libertarian/classical liberal, though he is very appreciatively aware of its teachings, notably through the ideas of America's founders like Thomas Jefferson.

I don’t want to minimize the problem. Israel was founded at a time of unimaginable upheaval, for the world and for the Jews in particular. After WWII millions of “displaced persons” streamed across borders into new countries and many were held in refugee camps for long periods. One third of the Jewish people had been murdered. European Jewry had been destroyed in a matter of five years. In a few more years the age-old Jewish communities of the Arab world were also destroyed as the Jews were expelled. The Jewish population of Israel doubled. And this was but the culmination of centuries of Jewish life across Europe in which the “Jewish question” festered persistently. "The Jewish question" was a well-known phrase, the most graphic illustration of which was, of course, the Dreyfus affair. Particularly in Eastern Europe by the eve of WWII matters had become precarious for the Jews. For decades Jewish leaders had worked for the establishment of a home for the Jewish people where they could be “normal”. Israel is seen as the very embodiment of that project. And its current policies are informed by that historical experience. Even now, as anti-Jewish sentiment endures and emerges afresh in diverse places, Israel is seen by Israelis and others as the necessary safe-haven, insurance policy, for the Jews of the world.

Furthermore, given the historical circumstance of its birth, in the dying days of the British Empire and of colonialism in general, a certain cynical realpolitik was necessary to combat the efforts of the mercurial British and their newfound Arab extremist allies who objected to the settlement of Jews in Palestine because they were Jews, non-Muslims. A deep seated ethnicity indeed permeates the neighborhood. This too is clear in the minds of Israelis today.

And while it is true that Israel does possess a legal system that is in many respects ethnically-based, it is also true that by comparison to its neighbors, or, indeed, to any other country in the Middle East, it shines supreme in the degree to which it is a liberal democracy and in the way in which, notwithstanding its restrictionist laws, it treats its minorities, including women and gays. There is simply no excuse, in this regard, to hold Israel to a double standard, waxing belligerent condemnation of Israeli policy while staying silent on the horrors occurring in the rest of her neighborhood. On that I have harped persistently.

But having said all this, it still remains that American Jews, contrary to what Gordis seems to hope, will never be able to get comfortable with ethnically based social policies of the kind that Israel has. In truth, they smack of the very impetus that propelled the opposition to Jewish settlement in the first place. In American eyes, in my eyes, these are not two morally equivalent worldviews. That is the sin of multi-culturalism.  If the principles of classical liberalism are valid, they are universally valid. Sad to say, the use of the phrase “apartheid state” has its explanation in this, though, based on what apartheid really was, I firmly reject that phrase as applied to Israel.

I think, in the end, Gordis would be better advised not to defend these laws as necessary evils in their current form, including finding a rationale for the religious monopoly and its intrusion into private decisions. I think of it differently. From an individual rights perspective, people have a right to affiliate in groups in any way they see fit as long as they act peacefully. It is the role of the state that is problematic. Israelis look to the state to design and enforce their national/ethnic aspirations and that is a problem. If the top priority is to preserve a Jewish homeland, a safe haven for Jews, one need not do this from the very top. The notion of a free republic in which “minority rights” are guaranteed is not unreasonable. Minority rights means the rights of individuals to express themselves religiously, culturally, educationally, etc. Some “situational” conditions may have to be incorporated in the governance structure, as was attempted, sadly unsuccessfully in the end, in Lebanon, with its arrangement to share governance between Christians and Moslems. Perhaps some sort of federal arrangement might work to prevent ethnic violence. But, in the end, I would maintain, to deny equal freedom to the residents of any country on the basis of their ethnicity remains unacceptable and that the desire to preserve cultural identity and traditions (as opposed to physical safety) does not override this.

I am not an expert. These are my armchair reactions to this excellent book.

Don't pave the road to hell with good intentions - From my FB page

Peter Lewin This is an ominous development and reflects a deepening ubiquitous confusion. Compliments to Michael Bordo who said: "the Business Roundtable’s new stance would have corporate executives behave like regulators". Anything peaceful agreed to between shareholders and management is fine, but when third parties, like the Roundtable, react to popular, and populist, agitation by trying to force extraneous criteria into that agreement, this signals a very dangerous turn - underlined by the fact that so many CEO's felt constrained to sign the declaration. To think that large scale social benefits come from the good intentions of wealthy businesses is not only untrue, it is in most cases the very opposite of the truth. These "good intentions", insofar as they divert effort away from the creation of value for consumers and thereby shareholder value, contribute to the lack of success of business and reduce long term social benefits. We learned long ago from Adam Smith and others that it is not from the benevolence of the butcher that we get our meat, but from his attention to his own self interest in making a profit (that he might use for his daughter's college, or his favorite charity, or his extravagant vacation); and to require the butcher to act in a compassionate, community-based manner will, indeed, reduce his capacity to give us our meat - in the extreme it will drive him out of business. It is bewildering that this lesson has so thoroughly been forgotten, misunderstood and dismissed by otherwise intelligent people. Our very continued existence as a free and prosperous society depends on it. ·        To think we can produce good results by mandating good intentions is the epitome of what F.A. Hayek called the fatal conceit. -PL MARKETS Move Over, Shareholders: Top CEOs Say Companies Have Obligations to Society Business Roundtable urges firms to take into account employees, customers and community By David Benoit Updated Aug. 19, 2019 6:55 pm ET The leaders of some of America’s biggest companies are chipping away at the long-held notion that corporate decision-making should revolve around what is best for shareholders. The Business Roundtable on Monday changed its statement of “the purpose of a corporation.” No longer should decisions be based solely on whether they will yield higher profits for shareholders, the group said. Rather, corporate leaders should take into account “all stakeholders”—that is, employees, customers and society writ large. It is a major philosophical shift for the association, which counts the chief executives of dozens of the biggest U.S. companies as its members. The group, led by JPMorgan Chase & Co. CEO James Dimon, is a powerful voice in Washington for U.S. business interests. It represents a broad swath of American industry, counting among its members the leaders of technology giants and manufacturing companies, airlines and institutional investors, to name a few. The Business Roundtable’s old statement of purpose espoused economist Milton Friedman’s decades-old theory that companies’ only obligation is to maximize value for shareholders. “Each of our stakeholders is essential,” the new statement says. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.” A company’s position on the question of corporate purpose can influence issues as diverse as worker pay and environmental impact. It plays a central role in discussions about stock buybacks, corporate spending and how companies respond to activist investors agitating for moves meant to boost returns. The change doesn’t, and can’t, require companies to change how they do business. Corporate boards have a legal obligation to protect the interests of shareholders. But companies have a lot of leeway on matters that could affect their shareholders. Courts have given directors and executives substantial latitude to exercise their business judgment. The new statement of purpose was endorsed by 181 of the Business Roundtable’s 188 CEO members, including the leaders of two of the world’s biggest investors: BlackRock Inc. and Vanguard Group Inc. The Council of Institutional Investors, however, said the statement gives CEOs cover to dodge shareholder oversight. BlackRock and Vanguard are among the council’s members. “There’s no mechanism of accountability to anyone else,” said Ken Bertsch, the council’s leader. “This is CEOs who like to be in control and don’t like to be subject to the market demands.” Seven CEOs declined to endorse the statement, including Larry Culp of General Electric Co.and Stephen Schwarzman of Blackstone Group Inc. The private-equity giant had concerns about its own investor clients and the potential impact of such a broad statement, a person familiar with its decision said. The statement says companies should work to deliver value to customers, invest in employees, deal fairly with suppliers and support communities, as well as generate long-term shareholder value. It formalizes a stance taken individually by a number of executives in recent years. Mr. Dimon, for example, has challenged the shareholder-profit focus as too narrow and an impediment to executives’ ability to focus on long-term goals. The leader of the nation’s biggest bank writes shareholder letters that touch on a range of topics, from corporate governance to politics to economic inequality. In 2016, Mr. Dimon, along with BlackRock CEO Laurence Fink, Berkshire Hathaway Inc. ’s Warren Buffett and other executives, pledged to follow a set of “common sense” corporate principles meant, in part, to redirect the focus from short-term gains. Democratic presidential candidate Elizabeth Warren has argued that the primacy of shareholder returns has worsened economic inequality, enriching wealthy investors at the expense of workers. Last year, she proposed legislation that would require the directors of big companies to consider stakeholders beyond the shareholder when making decisions. Martin Lipton, a Wall Street lawyer who has long said executives should have broad authority to make decisions about what is best for the long-term health of a company, praised the announcement as repealing a policy he believes increased inequality because it was based on statistical analysis that failed to take people into account. “To the extent shareholders were benefiting, the employees were suffering a very severe detriment and society was suffering,” Mr. Lipton said. Still, the idea that companies have an obligation to society isn’t universally popular. Some activist investors and academics have said encouraging companies to focus on a range of stakeholders amounts to grandstanding that misdirects resources. They argue that shareholders, not CEOs, should be the ones influencing society. “A pronouncement that attempts to change things shouldn’t be coming from the CEOs; it should be coming from investors,” said William Goetzmann, a professor at Yale’s School of Management. In 1970, Mr. Friedman’s article “The Social Responsibility of Business is to Increase its Profits” set the standard that has long been followed. “The businessmen believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends; that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers.” Mr. Friedman wrote. “In fact they are—or would be if they or anyone else took them seriously—preaching pure and unadulterated socialism.” Michael Bordo, a Rutgers University economics professor and former student of Mr. Friedman, said the Business Roundtable’s new stance would have corporate executives behave like regulators. “That’s not what business is; that’s what government is,” he said. “I still think Friedman was right.” Write to David Benoit at david.benoit@wsj.com [Also this]               OPINION              REVIEW & OUTLOOK The ‘Stakeholder’ CEOs Executives who abandon shareholders won’t appease the socialists. By The Editorial Board Updated Aug. 19, 2019 5:09 pm ET YOU MAY ALSO LIKE Today’s corporate CEO is a politician as much as business leader, and for proof look no further than the statement Monday from the Business Roundtable ostentatiously redefining its mission to serve “stakeholders” in addition to the shareholders who own the company. A close reading shows there’s less substance here than meets the media spin, but it’s still notable that the CEOs for America’s biggest companies feel the need to distance themselves from their owners. “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,’” says the headline over a press release Monday. “Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders.” And sure enough, the 300-word “Statement on the Purpose of a Corporation” doesn’t get around to mentioning “shareholders” until the second-to-last paragraph. The statement instead stresses “a fundamental commitment to all of our stakeholders,” which it defines in listed order as customers, employees, suppliers and “the communities in which we work.” Shareholders ride the caboose in this new code of corporate purpose. At a practical level this is largely symbolic, at least for now. To be successful, any company must serve its customers, adequately reward its employees, cultivate the loyalty of suppliers, and maintain good relations with the communities where it operates. At the Business Roundtable’s level of high-toned generality, who could disagree? There is also more than a whiff of pre-emptive politics here. The executives—the Business Roundtable is led by JPMorgan CEO Jamie Dimon —know they are political targets. They see socialism on the rise, with Senator Elizabeth Warren proposing to redefine corporate governance in law with explicit direction to serve “stakeholders.” Her goal is to redirect corporate capital to serve political goals favored by unions, environmentalists and trial lawyers. The CEOs no doubt want to get out in front of this by showing what splendid corporate citizens they are. Yet these CEOs are fooling themselves if they think this new rhetoric will buy off Ms. Warren and the socialist left. It may even embolden them by implying that corporate rules that require a focus on achieving value for shareholders are somehow morally insufficient. The Roundtable CEOs may be selling Ms. Warren the political rope to hang them. Politics aside, the moral and practical superiority of the stakeholder model is hardly clear. CEOs are themselves employees hired by directors who are supposed to be stewards of the capital that shareholders have invested. One virtue of the shareholder model is that it focuses the corporate mission on measurable financial results. An ill-defined stakeholder model can quickly become a license for CEOs to waste capital on projects that might make them local or political heroes but ill-serve those same stakeholders if the business falters. Students of corporate governance have devoted years to analyzing the “agency problem” of holding CEOs accountable to the business owners. So-called activist investors who challenge underperforming managers are one market response. Consider the long, slow decline of General Electric , which for decades helped mom-and-pop shareholders provide for their retirement. Former CEO Jeffrey Immelt was the model of the stakeholder executive, posing in Vanity Fair as a spokesman against climate change, issuing pronouncements after the 2008 panic about the failures of capitalism. Yet Mr. Immelt failed in his core duty to find a post-panic business model that enhanced profits and shareholder value. That failure served neither customers, employees, suppliers, communities nor shareholders. From a moral point of view, GE did far more social and economic good when it was wildly profitable and its shareholder retirees could sleep better at night confident in its dividend. *** CEOs aren’t popular these days, and it isn’t easy to defend profits. By all means CEOs should talk about the broad benefits that flow throughout society if their companies succeed. But sooner or later they will also have to defend the morality of free markets as the greatest source of prosperity for the most people in human history. Platitudes about stakeholders won’t stop President Warren from lining them up first for the gallows.

An inconvenient truth about Islam and its critics.

Judaism has some atavistic doctrines that are repugnant but long discarded, if indeed they were ever enacted, and many other doctrines that classical liberals might condemn. But, it is not an evangelizing religion and certainly not one that preaches violence against unbelievers for being infidels. 

Christianity has doctrines more tolerant, but historical practice more brutal, also abandoned for want of power to enforce. 

Islam remains the only one of the Abrahamic religions that has not discarded its conquering totalitarian impulses, and in many places retains the power to enforce these doctrines. This is not to say anything about individual Muslims, many of whom have made their own adaptations to the religion for the modern world in which it is a lifestyle choice and not a system of obligatory laws. But the fact that many have not is cause for alarm given the numbers involved.

And yet to say this is to risk being branded Islamophobic because the multiculturalists have been seduced into thinking that the notions of individual rights and equality of individuals (notably men and women) do not apply to other cultures.

The Case Against Taxing Capital-gains

Taxing capital-gains is a bad idea, and taxing unrealized capital-gains is much worse.

Capital is not income. It is an estimate of future income. So taxing capital-gains is, in fact, triple taxation - income is taxed 3 times: when a company earns a profit, when it gives dividends, and when its stock price rises and is sold. And taxes, especially capital-gains taxes, discourage effort, innovation and value-creation. Now Oregon Senator Ron Wyden wants to rub salt on the wounds by taxing unrealized capital-gains – this in addition to raising the tax rate on capital-gains to the higher rate at which ordinary income is taxed. If his proposal ever became law the  destructive consequences would be extreme. 

The value of a business’s capital is  always based someone’s (perhaps an accountant’s) best estimate of the business’s future earnings (less all relevant expenses) over the remaining life of the business. This remains true for the value of a public company whose daily share price is a reflection of people’s expectations about the company’s future earnings. When a business or a share of stock on the stock market is sold for more than the buyer paid for it, this indicates that the buyer believes that the future earnings that the company justify the price that he paid. This is true whether the buyer intends to hold onto the purchased asset or not. If he intends to resell it after a short time he must believe that whoever buys it from him will pay him a higher price still and thus either intends to hold onto to it as the earnings materialize or will sell it again in the near future. Somewhere along the line the price paid for the asset will have to be justified by actual earnings, that is, income, or its value will fall and whoever holds it at that point will suffer a capital loss. Any capital-gains along the way will be offset by the capital loss. And although the gains are currently taxed, relief from tax for the losses is severely limited. This is yet another unjust aspect of the way capital-gains are taxed.

Income is the stream that flows from capital if capital is to maintain its value. So taxes based on income should apply only to income and not to gains in capital-value. In fact the capital value of an asset at any point of time already reflects the anticipated taxes that will be paid on the anticipated income.

Yet, Ron Wyden wants to go even further. He has a scheme to tax capital-gains even before they are realized, that is, before the asset is sold at a higher price than its purchase price. This is what is meant by unrealized capital-gains. He wants to tax the value of business assets according to their “market values” on an ongoing basis. Common sense reveals that the market value of any asset is a speculative matter. It is a guess about what price the asset could be sold for in the market. At any one time the estimated market valuation of all business assets taken together exceeds by a wide margin the actual prices at which all those assets could all be sold. This is because in a competitive market such valuations rest upon expectations that are mutually inconsistent. The dreams of some entrepreneurs conflict with those of others. The competitive process rewards the more accurate expectations and punishes the less accurate ones. Thus taxing all assets according to the gains they would hypothetically earn if they were to be sold would be taxing many values that will be proved in the event to have been based on incorrect expectations.

Senator Wyden has tried to anticipate such objections and to imagine a formidable set of rules and a bureaucracy to deal with them. Not least, the so-called “mark to market” exercise that would be necessary for his scheme, to provide an estimate of the momentary value of any asset were it to be sold, would create a nightmare for those trying to evaluate the real value of any business and having to estimate the ongoing capital-gains taxes that will accrue going forward.

Financial markets in which assets are routinely valued and revalued over time according to the estimates of real live buyers and sellers are absolutely indispensable for the creation of economic value in a dynamic, innovative growing economy. Senator Wyden’s scheme would severely compromise this spontaneous market process. Let us hope it suffers an early and permanent demise.

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Peter Lewin is a clinical professor of finance and managerial economics and Director of the Colloquium for the Advancement of Free-Enterprise Education at the University of Texas at Dallas.

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A new look at the intellectuals and socialism

Some years ago I wrote a short article for FEE (The Foundation for Economic Education) entitled Recycling Discredited Ideas. I was referring then, in 2009, to the renewed embrace by economists and others of discredited Keynesian ideas for dealing with the recession. I had naively thought that the overwhelming evidence against the efficacy of these ideas was sufficient to establish their permanent demise. Not so. Clearly we are doomed by the re-embrace of failed ideas to repeat the mistakes of history. The Keynesians were reborn and are alive and well.

Even worse, however, is the resilience of the idea of socialism. If ever in the history of human affairs there was decisive evidence against something, it is the evidence against socialism, especially as compared with the history of capitalism. Yet, somehow, the faithful refuse to be deterred by the facts and remain undeterred by the mounting dismal failures of socialism and the absence of even one single example of success. Meantime  the benefits of competitive capitalism are spectacularly obvious for anyone who cares to see them. The resilience of the belief in the virtues of socialism is nothing short of miraculous, a testament to the capacity of human beings to create their own reality, a major refutation of the assumption that the scientific method will always win out in an argument involving intelligent, well-meaning individuals. It is not stupidity or meanness that is to blame. It is something much deeper and more insidious; it is the power of hard-wired human presumptions to endure in the face of massive evidence to the contrary.

The presumptions of socialism are intuitive and appealing. The logic of capitalism is counterintuitive and harsh (at least harsh-sounding). In the course of modern human history they bounce against each other and wax and wane. Just a little while ago very few politicians would have been prepared to adopt the label ‘socialist’. To call someone a socialist was widely regarded as an insult, an accusation of untenable extremism. Suddenly it is completely different. While self-proclaimed socialists have all the while continued their prominence in our academic institutions, hardly diminishing over the years, socialism’s cause has most recently been taken up by our youngest, most ignorant and inexperienced voters, with the result that young politicians and other demagogues, sniffing the opportunity, have risen to national prominence on the socialist banner. The young cannot remember the horrors of socialisms past, they were not alive. And they pay no attention to the lessons of history because studying history takes effort and we have told them it is unnecessary and all wrong anyway. So, in part, it is a failure of collective memory and the downgrading of knowledge about history that is to blame. These, indeed, it seems to me, are important explanations in the re-embrace of Keynesian doctrines as well. But, they cannot be all there is to it when it comes to socialism. Those intellectuals who cling to socialist dreams are neither short on memory nor ignorant of history. Quite the contrary, some of our most intelligent and well-informed intellectuals are among them.  

Now, every day, we get news reports on self-identifying socialist politicians proposing to collectivize aspects of our economy – from healthcare to the environment and in between. How then does one explain this disturbing development?

A new book from the Institute for Economic Affairs (in London) provides an illuminating explanation and I highly recommend reading it. It is Socialism: The Failed Idea That Never Dies, by Kristian Niemietz, which can be downloaded for free from here. An informative subtitle for this book may have been The Intellectuals and Socialism were this not associated with F. A. Hayek’s famous article by that name. “Over the past hundred years, there have been more than two dozen attempts to build a socialist society” (p. 21). Niemietz provides chapters on seven of them – the Soviet Union, Maoist China, Cuba, North Korea, West Germany (the GDR, perhaps the most informative chapter), Albania and Venezuela.  Each chapter provides a brief outline of the history, followed by detailed evidence of the predictable pattern of intellectual assessments that were published at the time. That pattern starts with praise and optimism about the new attempt to create a ‘true socialism’, followed by disillusionment at what actually transpires after the honeymoon period, for which various explanations and excuses are offered, usually suggesting that those in charge failed to follow through, and this in turn is followed, once failure is abundantly evident and abuses are impossible to deny, with condemnation and explanation that this particular historical case was clearly not one of ‘real socialism’, so socialism as such cannot be condemned by it. It was driven by the wrong people or by people who were not able and willing to stay the course. It could have and should have been different. Commonly they point to the absence of democracy that seems to characterize all these cases.

This pattern is repeated over again, with variations, in each case of actual socialist experimentation. First the euphoria, encouragement and praise that accompanied pilgrimages to the new promised land by the intellectuals, including some of the western world’s most prominent intellectuals, then the backtracking by degrees and the making of excuses, followed finally by disillusionment and disavowal – although this last phase is also characterized by a remnant of unrepentants who continue to defend the integrity and the achievements of the experiment, its blemishes notwithstanding. For example, Jeremy Corbyn, who features in just about every chapter, continues to defend the Soviet Union in spite of the extermination of around 20 million people and the brutalizing and abuse of many more, as a noble experiment that was largely successful. According to him nothing good would come from the collapse of the Soviet Union (p. 88).

These case studies are found in chapters 2 through 9 and make up the heart of the book, a valuable source for those seeking an overview of each of these historical experiments. Bracketing these chapters are chapters 1 and 10 which can be profitably read even if the reader reads nothing else in the book. Chapter 1 lays out the problem. Socialist ideas are pervasive. There is a strong knee jerk reaction toward fixing things by putting the government in charge, nationalizing it, especially in vital areas like education, healthcare, and the environment, but in other areas as well. Zero-sum thinking appears to be the default. By contrast, a general understanding of how competitive capitalism works is seriously lacking. The contrast between the miserable failures of tried socialism and the achievements of actual capitalism have somehow produced the opposite of what might be expected, namely, a dissatisfaction with the latter and a hankering after the promises of the former. This, in spite of the fact that, as explained, socialism has been tried over and over again and always ends in disappointment and often disaster.

Some people point to the Scandinavian countries as examples of successful socialism. This borders on the absurd. In fact, apart from the fact that these countries have high levels of taxation and high levels of government involvement in basic services they are very capitalist in nature. There is no widespread state ownership of property. Private property and the pursuit of profit is the norm. Sweden experimented briefly with socialist style tax and regulate policies but abandoned them when they failed. It is now one of the fastest growing economies in the world and one of the most capitalist judging by the rules of production.

Chapter 10 explains this curious situation by indulging in a bit of social psychology, borrowing ideas from the work of Jonathan Haidt and Bryan Caplan.  The common brain evidently sees in the aims of socialism – equality of outcomes, comradery, compassion, the absence of scarcity, financial security, …, - a ‘cure’ for all the ills plaguing our society. And this perception gets insulated against refutation by various (conscious and unconscious) stratagems. For example, the intellectual case for socialism never actually spells out in concrete terms the specific social institutions that will have to be put in place in order to achieve the socialist nirvana and exactly how this is to be done. The blueprints are confined to the articulation of highly abstract outcomes. And then, with the failure of every ‘new’ attempt to achieve these socialist ideals, the attempt is declared not to be what socialism really is. At bottom every socialist experiment is judged to be socialist or not by its outcomes not by its objectives. So, the fact that there has never been a successful attempt to establish the objectives of a satisfactory socialism is not seen as a shortcoming of socialism as a set of ideas or policies, but rather as evidence that the attempt cannot be labelled as real socialism. It is a perfect strategy for keeping the faith in the face of a challenging reality.

The final chapter (Epilogue) catalogues the pronouncements over the decades of the newspaper The Guardian on matters socialist and makes for fascinating reading as to just how wrong you can be and yet keep going.

There is much more, read the book.

UBI and Brexit some thoughts.

Morning musings.
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UBI - universal basic income, is the latest fresh new idea emanating from the new-new-left, the new-Progressives. Heavy irony here - this idea was first posited by none other than Milton Friedman and was called a negative income tax. Needless to say, he is not getting any acknowledgement for it. As it is being discussed, for example as a solution to poverty in India, there are two important elements being neglected.

1. It was never intended to be, and can never be, a policy for obtaining economic growth. It is not an instrument for growth. One proponent on the BBC suggested that with everyone having a basic income, increased spending would stimulate the economy and make it grow. Ugh. Rather ii is a scheme for alleviating poverty as a safety net. It is expensive and it will inhibit growth compared to no welfare policy. But

2. It was originally proposed by Friedman as a *replacement* for ALL of the welfare programs now in place at all levels of government. It implies a massive downsizing of bureaucracy, waist and inefficiency, and in that sense it would be cheaper and more conducive to growth. There seems to be a vague realization that it should replace current programs. But this implies that it should not carry any increase in taxation. The income subsidy should be limited to the amount that can be afforded under current conditions. This is not recognized and there is talk of dramatically increasing taxes (in India!!) to implement it. That would be a disaster.
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Not all no-deal Brexits are alike. There are good and bad ones in various degrees. The best, IMHO, would be one where the UK makes is very easy for those already in the country under EU laws to stay and continue what they are doing. A simple streamlined registration for example. Relatedly they should unilaterally extend to the EU the same conditions as are now in place for cross border workers in the future. An issue in the separation was immigration, so the UK could modify cross border rules to meet its concerns. This should not affect migrants with European job-market skills. Similar accommodations should be extended to investments and banking - this is very important. And border arrangements in Ireland should be establishment to be as close as possible to the current situation. A key element in the separation is the cost to the British taxpayer of subsidies to Europe and these would be abolished. The EU should be invited to match the UK's unilateral accommodations. I suspect eventually officially or unofficially they would. But maybe not. So be it.

My two cents. I suspect my advice will not be followed and we will get an unnecessary botch-up to some degree.

The ‘cure’ for the trade deficit is in the budget deficit.

In light of current Trump trade policy, it is perhaps worthwhile to review some common sense principles about international trade.

The first, most basic and most important principle is that countries do not trade, only individuals trade. The U.S. does not trade with China. Such a statement is meaningless. Rather, some individuals residing in America buy valuable things (goods and services) from individuals residing in China. These are imports from China. At the same time other individuals resident in America sell valuable goods and services to other individuals resident in China. These are exports to China. (Often these individual actions are expressed through the legal fiction of companies, but the essential units of trade are individual people). There is absolutely no reason why the total dollar value of the first set of transactions (American imports from China) should exactly match the dollar value of the second set of transactions (American exports to China). Such a zero trade balance would be a very strange coincidence indeed, and not a very satisfactory one. In the normal course of trade we expect to import more from some places in the world (for example where manufactured goods are cheapest) than from others, and those places are likely not the places where the demand for our exports highest.

The matter is no different from what happens when people in Texas trade with people in New York. No one expects the balance of trade between Texas and New York to be zero. In fact, almost no one knows or cares what that balance is. Residents in Texas would not be surprised to learn that the trade balance between Texas and other US states varies considerably, some being negative and some being positive and probably none being zero. Negative trade balances are paid for by capital inflows – investments or trade credit. If people in New York as a whole sell more to people in Texas than people in Texas as a whole buy from people in New York, then it must be true that funds to pay for those sales must be flowing from New York and other places to Texas in the form of investments or extensions of credit. These financial transactions are private transactions that automatically ensure that payments always balance. Any aggregate negative (or positive) trade balance is equaled by an aggregate positive (or negative) capital account balance. It happens automatically through the market process. People work it out voluntarily in the routine actions of purchase and sale, investing and granting credit. Prices and quantities adjust to achieve the balance.

By the same token, the balance of trade with China should be of no concern. Logically it should be balanced by a favorable aggregate capital account balance with our trading partners including China. And, yes, it is. And that would be the end of the matter but for one important fact, namely, government involvement. In cases involving trade across national borders, often involving the conversion of currencies, governments are involved. One might say that governments have polluted the situation by insinuating themselves into what would otherwise be self-adjusting private trade in goods and finance. For this reason, trade balances have become intimately involved in domestic government spending. Government budget deficits are financed in large part by foreign capital inflows.

For example, when Chinese exporters receive dollars from American buyers the Chinese government takes those dollars in return for local yuan currency. For many years these accumulated dollars have been invested in U.S. treasuries. In other words, the U.S. has borrowed from the trade surplus earned by Chinese sellers, to finance its spending in the U.S. This is facilitated by the Chinese government in effect appropriating that surplus. Essentially the U.S. government has obligated its citizens to pay the extent of the debt owed to Chinese citizens who have been obligated by their government to lend money to the U.S. government. The same is true for our other large trading partners.

In October 2018, the Chinese government held $1.14 trillion of U.S. debt. It's the largest foreign holder of U.S. Treasury securities. The second largest holder is Japan at $1.023 trillion. The impetus for this policy has been a Chinese government fear that if it did not ‘neutralize’ the inflow of dollars by buying them, thus increasing the supply of domestic currency, the price of dollars (the exchange value in terms of yuan) would fall. This would mean Chinese exports to the U.S. would become more expensive and imports from the U.S. to China less expensive. In other words, the Chinese government has for many years been motivated by the same disastrous export-led, protectionist goals as the Trump administration now is. Each country wants to limit imports and boost exports by not only imposing tariffs, but also by countering natural flows of goods and finance with inhibiting monetary and fiscal policy. Despite the Chinese government's occasional threats to sell its holdings, it apparently continues to be happy to be America's biggest foreign banker.

At the same time, the U.S. government has become dependent on these foreign sources of finance. And as the debt keeps mounting up, the interest on the debt increases with it. With each passing day babies born in America inherit an increasing debt to our foreign bankers.

Is that a legitimate reason to be concerned about the large trade deficit with China (and other nations) that is fueling the current Trump protectionist trade strategy? No, not really. It is not the trade deficit that is the real problem. It is the U.S. government budget deficit that should receive our attention. Quite simply our government should not be borrowing so much money. The best way to fix this is to reduce government expenditure, not to increase taxes. The latter will hurt the economy and may not even result in a significant increase in revenue; in fact, it may reduce revenue. It is the overall size of the federal government that is the overarching problem of both foreign and domestic economic policy.

If the Treasury borrowed less, and/or if China decided to lend less (buy fewer U.S. bonds, or no bonds), what would happen? The dollar exchange rate would fall, imports would become more expensive, and exports would become cheaper and more attractive. Ironically that is what Trump says he wants. But it would happen automatically and it would mean downsizing the government, so don’t hold your breath.

A shorter version of this was published on January 2, 2018 in the Dallas Morning News.

https://www.dallasnews.com/opinion/commentary/2019/01/02/reducing-deficit-solve-trumps-china-trade-imbalance-problem