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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From my FB page - The real Obama and why it matters.

This afternoon (November 17, 2012) I heard Richard Epstein talk on the implications of the recent election for the economy. He gave the annual distinguished scholar lecture as the SEA meetings. To hear Epstein talk is awe-inspiring. Hard to describe. Always without notes, he delivers intricate, clever, funny, insightful prose without hesitation, seamlessly weaving his web of logic, backwards and forward, while making knockdown points.

What he said today reinforced my conviction that Obama is by far the worse of the two candidates we faced in this election - though both were pretty bad. Epstein's knowledge of the details of each and every Obama program, the law, the economics, the bureaucracy, ... left me with little doubt on this score - and pretty pessimistic for what lies ahead. In addition Epstein has the rather unique advantage of knowing Obama personally from his University of Chicago days.

This is a situation where personality matters a lot. According to Epstein, Obama is the exact opposite of his convivial exterior. He is someone who is unlikely to change his mind on anything and who takes criticism extremely badly. He brings to the White House not your standard self-serving, but flexible politician. He is, rather, someone who is a principled and stubborn believer in policies and values antithetical to the health of the American economy and its civil society. His serious agenda is not the "liberal" agenda of the 1960's which focused on civil rights; rather it is the agenda of the Progressive era in America, wherein social planning politician sought, by the power of government, to redesign society from top to bottom. And you see this in every part of the various programs he has already addressed.

Healthcare, financial regulation, environmental policy, protectionism in international trade, trade unionism, education, and more. In every case Obama has skillfully constructed a powerful regulatory apparatus. Where he has been able to use Congress he has obtained the legislation he wanted (and designed), legislation deliberately vague, so as to leave as much discretion for the bureaucracy as possible. Where legislation was unnecessary, or unobtainable, he has resorted to administrative discretion, issuing decrees often without the necessary Congressional approval. He knows that the regulated companies and organizations have the option of either obeying or taking the government to court, and that the latter is costly inconvenient and risky, so they almost always comply. In this way, little by little, our freedoms are regulated away.

Epstein pointed out that the accumulating regulations act like taxes to sap the creative power of private economic initiatives and when combined with macro tax and spend policies can only have one outcome. The prospect for the future is one of dwindling growth, smaller technological advances, less capital investment in America and slowly declining standards of living, not only for or mostly for the 1%.

I wish I could do his analysis justice. I can't even come close. But he has expressed this in parts in various places available on the internet and I will be looking for them so as to be able to share more specific detail.

Foreign policy and the LALA doctrine.

The name of this blog Against the Current is accurate. But I don’t relish it. It saddens me. My latest disappointment comes upon finding that many with whom I agree on a great variety of issues, hold views that I consider to be untenable and even offensive when it comes to foreign policy.  

I have said on this blog and elsewhere that foreign policy is out of my comfort zone – not my area of expertise. So now, provoked by my discomfort, I am taking the plunge. I don’t think I can avoid it any longer. Please accept these thoughts as very much the ruminations of an amateur with much to learn. 

For clarity of exposition, permit me the inaccurate extensive use of the terms “we,” “us,” “they,” and “them”.  Many of my friends take the L A L A approach – “leave them alone and they will leave us alone.” I think in many (most) cases, they may be right. But surely not in all cases. In most cases it may not matter. The default position should be “leave them alone.” We should not, without overwhelming evidence, assume that they are a real threat to us, one that justifies the kind of interventions that have occurred. I would argue our best position is mostly to wait and see and respond when absolutely necessary. Preemption may be indicated, but it needs to be very carefully justified. 

I cannot but condemn much of the past and present actions of our international agencies and special forces who violate the freedoms and rights of domestic and foreign citizens sometimes with massive and enduring humanitarian consequences. The lack of success of almost all of our foreign invasions should give us pause as to what we can and should try to achieve. These “war actions” are types of central-planning and, as such, are doomed to fail. They face impossible knowledge problems in trying to build or rebuild societies and they face impossible incentive problems that prevent proper oversight, the detection and prevention of enormous waste and corruption. They are a very big part of our overgrown government and runaway fiscal problems, and are serious threats to the cause of freedom. Much more could, should and has been said about this – for example. 

But, sometimes the threat IS real and significant. The tricky part is knowing when it is and (just as important) what to do about it. In these cases the LALA principle may not work. 

The LALA principle rests on the assumption that it is OUR actions, our interventions, that are responsible for the hatred directed against us. The attack of 9/11 would not have occurred but for the cumulative affect of our provocative actions. This type of assertion meets with a very hostile reception. It seems to carry unpalatable moral implications, excusing acts of terror. And its proponents mostly poison the chances of it receiving adequate consideration by the contemptuous and patronizing way in which they present it. It may, however, be true. The traction and support that terrorists receive may be a result of the groundswell of resentment that we have created. The problem is, this is impossible to prove either way. And appeals to the history yield conflicting interpretations. This is no more evident that in the case of Israel vis a vis its enemies. In many ways the Israel-Palestinian situation is a microcosm of the bigger picture. 

Some have asserted that (radical Islam) Islamism is a creature of our making and did not exist as a force until recently. But this is very contentious. Pan-Arabism, and the commitment to a unified Arabia cleansed of foreign influence, had strong affinities to Islamism. And the early Muslim Brotherhood, through its sister organization led by Haj Amin al-Husseini, the grand mufti of Jerusalem (an active Nazi propagandist), effectively disrupted any attempt at the establishment a peaceful two-state solution as conceived by the British partition plan and as embraced by many Jews and Arabs alike in 1948. Everything that has transpired since then is basically an unfolding of this initial fateful turn of events.   

Applying the LALA principle to Israel in light of the history from 1948 till today, makes little sense to me. There the threat is real. And it is an existential threat. There is a fundamental asymmetry of goals. “Leave them alone” will not suffice to placate them, because they don’t want Israel there – see here. It is not what Israel does that is the problem – though it may aggravate the problem. It is where and what Israel is. 

So my LALA friends who seem to think that all that needs to be done is to force the parties to sit down and talk, are sadly and dangerously deluded. Any attempt to achieve real peaceful coexistence has to begin with a plan to get acceptance of Israel’s right to exist by those who have power in the Arab world. Clearly some of my LALA friends understand this. So, they conclude maybe it is for the best if Israel did not exist. It is this kind of cavalier conclusion that shuts down any type of civil discourse. It stinks of anti-Semitism. See also here. 

But this really has little to do with American foreign policy fundamentals. LALAs should refrain from statements that indicate how little they understand or appreciate the threats that Israel faces. Their position opposing government foreign aid and military intervention does NOT imply an anti-Israel position. It does not imply the need to vilify Israel or call for its demise. It does not imply denying the right of Israelis to defend themselves. 

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), we cannot, in good conscience, require of Israel to 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 1948, 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, are the fundamental problems. The LALA principle does not apply. 

On the matter of foreign policy more generally, I am much less confident. When considering the state of the Muslim world in general, and especially the ubiquity and nature of Islamic fundamentalism, I find it difficult to believe that all of the resentment we face can be attributed to our actions. There is a definite chicken-egg problem. But this may be no obstacle to a the achievement of a much smaller foreign footprint. Careful, but sensible and effective diligence may be called for rather than grand interventions. 

The case of Iran is very problematic because we cannot be sure we are dealing with a “rational” opponent, one that can be deterred. The LALAs are confident that we are, that even if Iran were to get the bomb, they would be no more dangerous than Pakistan (not much comfort there) and would never use it for fear of the kind of retaliation it would provoke. Distorted news reporting on both sides make a good assessment very difficult. 

War with Iran is becoming more likely. The trumpets are sounding. I think it would be a big mistake – a worse proposition than Iraq or Afghanistan. But what is the correct response short of the LALA position? Netanyahu wants to draw a red line around the processing of final-stage enriched uranium. I guess what he means is that if Iran should proceed past that step, its facilities – which are big and visible – should be bombed or otherwise destroyed. Not a full-scale war, but a terrifying prospect nevertheless – where would it lead? 

This is as far as my amateur ruminations take me. 

Israel, Obama and the Western tradition

HT: Lawrence Rosenbloom.

It’s hard for me to understand how so many Jews continue to think that Obama is a friend of Israel. The inimitable Melanie Phillips provides ample evidence (albeit just the tip of the iceberg) to show exactly the opposite.

My biggest problem with Obama is not his attitude towards Israel. It’s much more fundamental than this. Obama is quite simply un-American at his core – in everything he stands for and does. By this I mean he is totally out of sympathy with what America has meant to many from its inception – standing for the values of constitutionalized individual freedom and responsibility. He is ashamed of these core values and he has done and will do his best to sabotage them – in socializing medicine, vilifying the profit motive and the achievement of commercial success, regulating financial markets out of existence, solidifying the power of the incredibly destructive public labor unions (being heavily in their debt), destroying the power and incentive to produce cheap energy, and generally expanding the power of government and the structure of taxation to create a European nanny state. The devastation of the last four years is manifest. Everywhere you look you see the establishment of open-ended bureaucracies, empowered by pages and pages of yet-to-be specified rules and regulations handed down by small committees with enormous discretion to control prices and dictate the terms of private transactions. It is impossible to overstate the danger he poses for the long-term freedom and financial stability of each and every American.  And the dangers are all the more daunting because of their insidious nature, hiding as they are beneath the voluminous padding of verbose sweeping regulatory documentation. Obama is, among his other multiple personas, the consummate bureaucratic saboteur, ably assisted by a talented team of like-minded arrogants. The prospect of another four years of this keeps me awake at night.

His stance on Israel is really only a corollary of his general mind-set. He is a European-style universalist and apologist for all the virtues of Western civilization and he regards Israel as a manifestation of that tradition of “Western oppression.” It is just ridiculous to think that Obama represents the party that is in Israel’s interest. It is only because of the powerful Christian bias toward Israel that Obama’s anti-Israel agenda is likely to be ineffective.

For the record: I am not an expert on foreign policy. I have big problems with the policy stance of both major parties – with Romney and Obama, and with the general presumption of the responsibility of America as the world’s policeman. I believe a much less-involved America, would be stronger, would be better both for America and for democracies like Israel. But that is beside the point to what I say above.

________________________________________________________________________________

Melanie Phillips 

http://melaniephillips.com/ 

Into my inbox last week popped an email from Michelle Obama. "Thank you for an amazing week... Can you chip in $5 or more to stand with Barack today?"

For some reason, I have been on the Obama campaign mailing list for the past four years -- which is a hoot since, from the get-go, I have warned about Obama's extremist, Black-Power, Israel-hating background and circle, and that he would be a disaster for Israel and the west.

So it has proved. Yet astoundingly there are Jews who believe he has been the most Israel-friendly US president in history.

Which only goes to show the propensity of the liberal mind to outright hallucination when faced with the implosion of its shibboleths. The passion for Israel in the Bible-believing "red states" guarantees a level of support that not even the most virulent White House anti-Zionist could overturn.

But that doesn't mean a president can't undermine Israel by more circuitous means - as Obama has done. He has put Israel at grievous risk by his view of the world, which has neutralised America's power abroad and strengthened its enemies.  

Although we are told he wants to stop Iran from developing nuclear weapons, his limp dealings have allowed it to continue inexorably with its nuclear programme (despite reports of sabotage) and extend its power in the region.

Last week, Secretary of State Hillary Clinton refused to issue a "red line" threat of ultimate force on the grounds that "negotiations are the best approach". But as Bibi protested in the row with Obama that boiled over this week, that allows Iran a clear run to the bomb. By the time the US decides Iran has to be forcibly stopped, it will be too late. It will already have the bomb.

Second, the Obama administration has consistently distanced America from Israel and cosied up instead to its Arab and Muslim attackers. Thus it backed the 2010 nuclear non-proliferation summit that singled out Israel for condemnation while excluding Iran from criticism - and has worked behind the scenes to neutralise Israel's nuclear deterrent, its ultimate defence against genocide.

It went ahead with a special operations exercise with 19 Arab and Muslim countries, while excluding Israel from a counter-terrorism conference at Turkey's insistence.  

Last July, it invited the UN Commissioner for Human Rights and notorious Israel- critic Navi Pillay to "brief" the Security Council on Israel's supposed crimes - and in the process drew an effective moral equivalence between the behaviour of Israel and Syria.

Obama tried to bounce Israel into withdrawing to its 1949 "Auschwitz borders", pressured it over settlement building, which merely hardened Palestinian rejectionism, and failed to hold Mahmoud Abbas responsible for repeatedly declaring he would never accept Israel as a Jewish state. 

Meanwhile, last week's Democratic convention descended into farce when its panicky attempt to restore references deleted from the party's programme to God, and to Jerusalem as Israel's capital, was booed.  

Whether they were booing God, Jerusalem or the clearly out-of-order chairman is irrelevant. There was not even a two-thirds majority to put both deletions back into that Obama-centric programme - which still left out the party's previous rejection of Hamas, the Palestinian demand for unlimited immigration to Israel and any return to the 1949 borders.

This is a shocking way to treat an ally. When that ally is facing existential attack, it is unspeakable.  

Obama is a menace to the security of Israel and the west and an American tragedy. What is astounding is that so many Jews refuse to see this and continue to support both him and his morally bankrupt Democratic Party. That is the Jewish tragedy.

(Complex?) Thoughts on Heterogeneity and Complexity; Quality and Quantity

Considering the concept of heterogeneity throws light on the relationship between quantity and quality.

All observation and explanation proceeds on the basis of classification (categorization). Phenomena are grouped into categories according to our perception of their essential similarity (homogeneity). The elements of any category (class) might be different in some respects, but in all respects that ‘matter’ to us they are identical. Items within a particular category can be counted, quantified. The ability to quantify is crucially dependent on being able to count items in this manner. The number and type of categories (variables) is known and fixed. Thus, the arrival of a new category cannot be accommodated within a scheme of simple quantitative variation and must be considered to be a change in quality. Qualitative differences are categorical differences.

All quantitative modeling proceeds on the basis of the assumption that the individual elements of any given quantifiable variable are identical (homogeneous) and are different in some important respect from those of another variable. Variables are essentially distinguishable categories. In addition the elements of a quantifiable category do not interact with each other – else they could not be simply counted. Each element is an independent, identical instance of the class. (Most obvious is the case of ‘identical randomly distributed variables’). This does not preclude the elements themselves being complex – being the result of lower-level interactions, like identical molecules or biological cells, which are incredibly complex phenomena.

We may think of this in terms of structure. Structure implies connections/interactions. A structure is composed of heterogeneous items that are more than simply a list of those items. There is a sense of how the heterogeneous items work together to ‘produce’ something. (We see here how a capital-structure is both a metaphor for and a particular case of the phenomenon of complex structures in the world.) A structure is an ‘order’ in Hayek’s sense, in which it is possible to know something about the whole by observing the types and the ways in which they are related, without having to observe a totality of the elements. Structures are relational. Elements are defined not only by their individual characteristics but also by the manner in which they relate to other elements. These interactions are, in effect, additional variables.

Thus, though the elements of a quantifiable category may be unstructured, these elements may be composed of structured sub-elements. This is the basis of the phenomenon of modularity. Self-contained (possibly complex) modules may be quantified. This dramatically simplifies the organization of complex phenomena, as has been noted in a fast growing literature on the subject. Modularity is a ubiquitous phenomenon in both nature and in social organizations. It is an indispensable principle of hierarchically structured complex systems. The benefits of modularity in social settings include the facilitation of adjustment to change, and of product design, and the reaping of large economies in the use and management of knowledge (see for example work by Baldwin and Clark 2000, Langlois 2002, 2012) and it is clearly an aspect, perhaps the key aspect, of Lachmannian capital-structures. Capital-goods themselves are modules, which are creatively grouped into capital-combinations which constitute the modules of the (non-quantifiable) capital-structure.

Returning to the theme of the relationship between quantity and quality, quantitative modeling works when both the independent and dependent variables are meaningful, identifiable quantifiable categories that can be causally related. The model ‘works’ then in the sense of providing quantitative predictions. The inputs and outputs can be described in quantitative terms. But, when the outcome of the process described by the model is a new (novel) category of things, no such quantitative prediction is possible. Ambiguity in the type and number of categories in any system destroys the ability to meaningfully describe that system exclusively in terms of quantities. We have a sense then of the effects of heterogeneity. Variation applies to quantitative range.Heterogeneity (variety) applies to qualitative (categorical) range.Diversity incorporates both, but they are significantly different. Heterogeneity may not be necessary for complexity, but heterogeneity does militate in its favor. For example, compound interaction betweenquantitative variables (categories) can be an important characteristic of complex systems, but complex systems are likely to result from substantial heterogeneity, especially where heterogeneity is open-ended, in the sense that the set of all possible categories of things is unknown and unknowable.  

Heterogeneity rules out aggregation, which, in turn, rules out quantitative prediction and control, but certainly does not rule out the type of ‘pattern prediction’ of which Hayek spoke. In fact, erroneously treating heterogeneous capital as though it were a quantifiable magnitude has led to misunderstandings and policy-errors, such as the those associated with the connection between investment and interest rates - errors that could have been avoided with a better understanding of capital heterogeneity and its effects. The capital-structure is complex, but it is intelligible. We can understand and describe in qualitative (abstract) terms how it works and render judgment on economic policies that affect it. And, as a result of Hayek’s insights into complex phenomena, we have an enhanced appreciation of what is involved.

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Baldwin, C. Y and K. B. Clark (2000), Design Rules (Cambridge, Mass.: MIT Press).

Langlois, Richard N. (2002), ‘Modularity in Technology and Organization,’ in Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization, N. J. Foss and P. G. Klein, 24-47. Aldershot: Edward Elgar,.

Langlois, Richard N. (2012), ‘The Austrian Theory of the Firm: Retrospect and Prospect,’ Review of Austrian Economics, forthcoming.