Koch Brothers.

In 1967, Charles (b. 1935) and David (b. 1940) Koch took over the small-time, Kansas-based oil refinery company built from nothing by their father.[1] Since then they have massively expanded the company into a petroleum and related products industrial conglomerate. Each man is now estimated to be worth $42 billion. This gives them a lot of money to play with. Like a lot of other successful Americans, they decided to “give back” by donating to good causes.

What has caused controversy is that their idea of “good causes” isn’t the same as that of Bill and Melinda Gates.[2] The Koch brothers are libertarians who favor a smaller, less intrusive government. They favor legalizing gay marriage (where President Obama’s opinion has evolved to match their own long-standing position) and of marijuana (where President Obama’s position has not yet evolved). They also oppose a minimum wage law, food stamps, the Affordable Care Act (ACA), and environmental legislation. If they had a potato farm in Vermont and sent out a monthly Xeroxed newsletter, that would be OK. However, they are fabulously wealthy and have a range of contacts with other fabulously wealthy people who think in the same fashion. So they can raise a ton of money for campaign contributions and political advocacy. Their various funds supported “Tea Party” candidates in 2010, then spent $400 million on the 2012 election, about $300 million on the 2014 elections, and are hoping to spend about $889 million in 2016.

Nominally, Democrats are outraged because of the flaws that it reveals in American electoral law. Supreme Court decisions have gravely weakened efforts at campaign finance reform introduced back in the 1970s. The “Citizens United” case is a particular “bête noir.” The chief funding arm of the Koch brothers is “Freedom Partners.” Because it is classified as a social welfare organization engaged chiefly in education on public issues, the donors to “Freedom Partners” are allowed to remain anonymous.[3]

Is it permissible to wonder if the source of the Democrats rage—and the complacency of Republicans—is that the Koch brothers’ money is going to Republican candidates? Democrats don’t vocally complain about the money from George Soros or Tom Steyer that flows into the coffers of Democratic candidates or liberal causes. For example, Steyer donated $74 million to Democratic candidates who supported his environmental policies in the 2014 elections.

One puzzle about this spending is whether it actually has any impact. The electorate is pretty much as divided as it was for many decades before the appearance of the Koch brothers.[4] Over the last thirty years the successful presidential candidate has captured an average of 49.74 percent of the popular vote. The best any candidate has done was George H.W. Bush in 1988, who won 53.37 percent. So, at the presidential level, the Kochs seem to be spending an awful lot of money to move a small number of votes. Economists would question the efficiency of this expenditure. At least four of the last seven presidential elections have been won by Democrats.[5]

It is rare to encounter someone who says that “I was a Democrat until I saw those ads the Koch brothers were running.” People commit to political parties for complex reasons related to life experience, fundamental beliefs, and economic interests. Perhaps the Koch brothers’ money has its greatest impact on the bottom lines of media outlets and political consultancies.

[1] “The Koch brothers’ agenda,” The Week, 13 March 2015, p. 11.

[2] You never hear people getting furious about the Gates Foundation giving too much money to fighting malaria.

[3] Why individual voters should be allowed to remain anonymous behind the curtain of a voting booth, but campaign donors should be compelled to reveal themselves is a question not much addressed.

[4] See: http://en.wikipedia.org/wiki/List_of_United_States_presidential_elections_by_popular_vote_margin

[5] There’s no point in going into the whole Gore v. Bush episode.

A note of caution regarding Iran.

In 2003 American intelligence discovered that Iran was conducting a massive nuclear program. International monitoring of Iraq’s program focused on fuel-development because these created a large foot-print that could be tracked by satellites and imports. Meanwhile, a whole series of increasingly-severe international sanctions followed. Eventually, in August 2013, Iran was forced to begin negotiations with six major powers.[1] Currently, the six powers want Iran to greatly reduce its uranium and plutonium production for an extended period. This is intended to block an Iranian “breakout” to possession of a nuclear weapon. Those negotiations are supposed to conclude at the end of March 2015.

Under these conditions, it is useful to consider a recent report in the New York Times.[2] Producing potentially weapons-grade material is one thing. Actually turning that material into a weapon is something else. So, does Iran know how to build a nuclear weapon?

The International Atomic Energy Agency (I.A.E.A.), a UN agency, has accumulated a lag amount of material that shows that Iran has been working hard on warhead design. Iran has dismissed this evidence as forgeries by the Americans and the Israelis. The IAEA claims to have confirmed the American and Israeli material through other sources.

Knowledgeable people assign priority to the nuclear “fuel” over the “knowledge” factor for a good reason. The fuel is the hardest problem to solve and knowing how to build a bomb without the means to make a bomb doesn’t constitute much of a threat. However, the Times correspondents point out that there are both bad actors (North Korea) which possess nuclear fuel that they might be willing to transfer, and a black-market.[3] Between 2007 and 2009, I.A.E.A. inspectors tried to discover what was happening inside certain laboratories. The Iranians stone-walled the inspectors. Since the beginning of negotiations in 2013, the Iranians have continued to rebuff inspectors interested in the “military dimension” of the issue.

The I.A.E.A. has published a list of a dozen critical technologies for building a warhead. Some of them are dual-use technologies that can apply to legitimate civilian purposes. The I.A.E.A.’s file of secret material on Iran’s nuclear program alleges that the Iranians have pursued work on all twelve. However, of the twelve, only one is under discussion. One is electrical detonators. The Iranians have claimed that these were used for civilian purposes (like mining). Two others have been raised, but have not been addressed by the Iranians. The second is “explosive lenses.” The third is computer modeling and calculations of a bomb’s release of subatomic particles. The remaining nine have never even been discussed at all. The fourth is a “neutron initiator,” a sort of spark-plug. The fifth is the technology for a long-distance test-firing. The sixth is a Uranium-235 metal core of a bomb. The seventh is the system for fusing, arming, and firing the weapon when it reaches its target. The eighth is a re-entry vehicle, that is, a capsule that protects the weapon during re-entry into the earth’s atmosphere. The ninth is a fuel compression test run on a mock core. The tenth is a complex program management organization. The eleventh is procurement activities, in this case run through ‘front” companies. The twelfth is the covert acquisition of bomb fuel.

None of these allegations can tell us how far the Iranian may have moved toward being able to build a weapon. The Iranian rejection of transparency creates a terrible dilemma. Keep the sanctions in place and wait? Strike a deal and hope for the best? Bomb them now?

[1] Britain, France, Germany, China, Russia, and the United States.

[2] William J. Broad and David E. Sanger, “What Iran Won’t Say About the Bomb,” NYT, 8 March 2015.

[3] Both some of the former states of the Soviet Union and Pakistan are at least conceivable sources.

Future Election Demographics 2.

This is tedious, but I wanted to know more about it. Back before the November 2014 “deluge,”[1] Nate Cohn foresaw the Republican avalanche and explained why it would happen.[2] The Democrats have won the majority of the popular vote in five of six presidential elections, so they represent the majority of Americans, right? Well, no.

Essentially, the Democrats have conquered the big cities.[3] The Republicans have conquered the outskirts of cities and the rural areas. Thus, big cities in “red” states vote “blue” and far-suburban and rural areas of “blue” states vote “red.” However, the urban voters also are irregular voters, while rural and exurban voters are regular voters. So there are two rival constituencies, one alternately larger and smaller; the other steady and strong.

Cohn argues that “more than ever, the kind of place where Americans live—metropolitan or rural—dictates their political views.” This is comforting to American liberals, who associate the people living outside the cities with the supporters of William Jennings Bryan in the Scopes “Monkey Trial.” (Awkwardly for this analysis, Bryan was a Democrat.) Obviously, the opposite might just as easily be true: that their political views determine where people live. Maybe, some people are fed up with all the negative factors that they associate with great cities and move elsewhere. Well before President Obama took office, traditionally Democratic voters in places like West Texas and West Virginia abandoned the presidential candidate over “social issues.” It isn’t just him. It’s the party.

The traditional Democratic strategy had been to win more than the cities. The party’s embrace of divisive social causes (gay marriage, abortion, gun control, expanded federal powers in many areas) undermined this strategy. President Obama won election in 2008 and 2012 by wagering on urban core populations. He expanded the Democratic vote in 68 urban areas that had gone for Al Gore in 2004, but didn’t dent the Republican vote anywhere else.[4] In the process of building his “Me-Me-Me” coalition of African-American and hipster voters, the President further alienated part of the old Democratic base.[5] In the future, the party will have to figure out whether it needs to walk back away from some of those positions or to just wait for a majority for voters to catch-up with them. (Growing Republican support for gay marriage and government action on climate change suggest that the latter might be the best approach.)

What works at the level of Presidential races isn’t going to work at the level of House races. At the level of the House of Representatives, two things are true. One is that Democrats have massive majorities in a relatively restricted number of urban Congressional districts. A second is that Republicans generally have narrow-to-solid majorities in a majority of Congressional districts. Thus, many of the votes in Democratic districts are “wasted” votes. In sum, the Republicans have a long-term grip on the majority in the House of Representatives.

Are Democratic policies in cities driving out Republicans to the suburbs and exurbs? Is any struggle within the Republican Party the real story in American politics? Is deadlock between legislature and executive the American fate in an age demanding decisions?

 

[1] See: http://en.wikipedia.org/wiki/Deluge_%28history%29 for the way that my Democratic friends and family think about it.

[2] Nate Cohn, “Why Democrats Can’t Win,” NYT, 7 September 2014.

[3] They have won the young and the racial minorities—African-Americans above all.

[4] For example, in 2012, President Obama won 52 percent of the vote in Pennsylvania, but only 28 percent of the Congressional districts; 52 percent of the vote in Virginia, but only 36 percent of the Congressional districts. .

[5] This isn’t the same as saying that he permanently alienated them from the Democratic Party.

Reponomics.

To be fair (See: Demonomics), Josh Barro has savaged Republican tax plans in two recent “Upshot” pieces in recent days.[1] Since the Reagan years Republicans have been in thrall to “Supply Side Economics.” The doctrine behind tax cuts for high-income earners is that the untaxed income will flow to investment; investment leads to economic growth; and America needs both investment and growth. Democrats ridicule this as “trickle-down economics.”[2] Now, however, another school of thought has arisen among some Republican dissidents. They favor cutting taxes on the middle class. For example, some pushed for a substantial tax credit–$2,500—for each child long before President Obama discovered “middle class economics.” They also wanted to leave the top tax rate at 35 percent, and not cut the tax on capital gains.

Some Republican leaders have sought to paper over this feud by suggesting that both types of tax cuts be implemented. Not only would middle-class earners get their tax cut, but the taxes on capital gains and on dividend income would be cut to zero. Furthermore, the plan would offer corporations the option of having their profits taxed as if they are wages (at a lower rate than corporate profits).

Barro lashes this as the “Puppies and Rainbows Tax Plan.” He argues that the combined plan would cost at least $2.4 trillion in lost revenue over a decade.[3] If the Republicans can add the White House to their control of the Congress, they will find themselves responsible for controlling the deficit. Hence, they will have to settle for much smaller tax cuts than they currently envision. Moreover, they may have to choose between giving little dribs and drabs to both types of cuts or getting something noticeable for one type of cut. Which will they choose?

Then Barro found himself crossed by a report from the Tax Foundation that concluded that the combined tax cuts would stimulate so much investment that GDP would rise 15 percent and wages 13 percent over a decade. A wide range of economists quickly derided the forecasts. Barro argues that Republicans like economic analyses that predict high benefits from tax cuts. This matters, because the Congressional Budget Office has just adopted “dynamic scoring”[4] in estimating the impact of different budget plans. He is clearly worried that nonsensical assumptions about growth will be deployed to justify big tax cuts.

Barro comes across as a Democratic partisan, but he’s not alone in seeing the flaws in these plans.[5] A House Republican plan to eliminate deficits within a decade would allow an expansion of military spending beyond the levels set by the “sequester” under the guise of emergency war funds. (President Obama plans the same maneuver.) It also cuts a trillion dollars from entitlement programs (Medicare and Medicaid, Social Security) without specifying how—what with 24 Republican Senators up for re-election in 2016. It assumes a trillion dollars in revenues from taxes levied as part of the Affordable Care Act (ACA) even while proposing to repeal the ACA. Puppies and rainbows indeed.

[1] Josh Barro, “Something for Everyone In a Republican Tax Plan,” NYT, 12 March 2015; Josh Barro, “Under This Plan, Tax Cuts Still don’t Pay for Themselves,” NYT, 17 March 2015.

[2] Republican presidential candidate George H.W. Bush ridiculed it as “voodoo economics.” Bush didn’t inspire much enthusiasm among Republicans. He ended up as Reagan’s Vice President and one-term heir as President.

[3] Barro is silent on the cost in revenue from President Obama having fought hard to make 98 percent of the George W. Bush administration tax cuts permanent. On this score, as on many others, it’s like living during the Cheney Administration.

[4] Basically, assuming that tax cuts or increases will affect the growth rate of the economy. D’uh. Obviously they do. However, the essential question becomes how accurate is the model used to predict the effect.

[5] Nick Timiraos and Kristina Peterson, “House GOP Outlines Plan to End Deficits,” WSJ, 18 March 2015.

Demonomics.

“Liberalism” has always been about freeing people from restraints in order to achieve their full potential as human beings. In the 19th Century, that meant free speech, free markets, representative government, and an end to government regulations that favored protected interests. By the end of the 19th Century, American liberals recognized that their initial plans had failed to foresee the rise of powerful organizations (big business, big labor), the destructive power of prejudices, and inequality of opportunity. What we think of as modern liberalism emerged from this recognition as liberals sought to create a strong state that could hold in check and mediate between powerful organized interests. It then went beyond this mission to attack the racial prejudices and economic disabilities that held back people from reaching their potential. Subsequently, liberals went on to endorse “expressive liberalism” that allowed people to enunciate their core identity (such as being gay) or controversial opinions.

What are we to make of the definition of current liberalism tossed off by Nate Cohn in the New York Times? Cohn defines the Democratic Party’s mission as one of simply “expanding the safety net.”[1] Apparently, there is no philosophy behind this mission, beyond winning elections by spending far more money out of tax revenues than the Koch brothers have at their disposal. In the absence of such a philosophy, Democrats turned to raiding the program of “reform conservatism” for ideas. Health care insurance reform (“RomneyCare”), earned income tax credits, and college tax credits all began as ideas on the right, but were taken over by Democrats without ideas of their own.

Recent efforts to define an agenda for the future have undermined the unity of the party. On the one hand, the Party focused on easing the plight of the poor through the expansion of health insurance to the small minority of Americans who desired it, but could not afford it, and by trying to raise the minimum wage. On the other hand, liberal activists on the left wing of the party have pushed it to embrace causes which—however sensible in the eyes of reasonable people—clash with the interests or values of many Democrats: climate-change, gun control, and amnesty for illegal immigrants. As a result, Cohn remarks, the Democratic Party lacked a “coherent message for the middle class… in 2014 or even 2012.”

The emerging agenda of the Democrats focuses on what Cohn labels the “parent agenda”: In fact, it is best seen as part of response to the “great wage slowdown” of recent decades. Under the banner of fairness and promoting equality, the “parent agenda” will seek to redistribute resources from the wealthy to the middle class. In part this will be accomplished through the tax system: an expanded earned income tax credit (a transfer payment), child tax-credits, universal preschool, and universal precollege. In part it will be done by the state substituting for the decrepit union movement that cannot bargain for employees: paid family leave is the initial idea, but others are likely to follow. It will require higher taxes on upper income groups, The great advantage to the “parent agenda” is that it can be presented as providing opportunities, rather than as outright redistribution. It isn’t liberalism or even redistribution. It’s just retribution.

All this seems to represent an intellectual exhaustion on the part of the Democratic Party. Doubtless it would be thrown into an even more stark relief if not for the intellectual exhaustion of the Republican Party. The Republicans cling to tax cuts and “patriotism” (i.e. high defense spending by the many and military service by the few) in place of creating an “opportunity society” that might liberate those whom the Democrats have abandoned.

[1] Nate Cohn, “The Parent Agenda, The Democrats’ New Focus,” NYT, 10 February 2015.

 

The Struggle for More Workers.

The world’s population currently is about 7.2 billion people. For many years apocalyptic visions inspired by Thomas Malthus haunted the sleep of demographers. Then, fertility rates in many high birth-rate countries began to decline. Current estimates now project that the world’s population will “peak” at about 9 billion people.[1]

However, that consensus has just come under attack. Many countries in South Asia and Africa continue to experience rapidly rising populations. The African fertility rate, in particular, has failed to follow the downward track projected from early statistics. Some population experts now believe that the population of the world may reach a population of 12.3 billion people by 2100.[2] Moreover, their populations are rising without the economic growth to be able to provide them with a decent standard of living. Back to Malthus on steroids.

Conversely, many other countries find themselves with a birthrate below the replacement level. The working age population of Japan began to decline about 1997. There is no sign that it will start to rise again anytime soon. That means a shrinking population of workers will have to support a growing population of retirees. Enhanced productivity can off-set this problem, but—at the moment—it isn’t. Japan’s trade balance has shift from running export surpluses to import surpluses. What’s true of Japan is or soon will be true of many other countries with low birthrates and high life expectancy. Chinese couples will have to juggle running or working in sweat-shops with caring for their aging parents as well as their own children. The Italians find themselves in an even worse boat than do the Chinese.

What’s the solution to this two-headed problem? If one approaches it from a strictly economic perspective, then one solution is to foster the migration of surplus population from Africa and South Asia to population deficient countries. Brilliant! The further triumph of the equilibrium model.[3] Why haven’t we done this already? There are two big stumbling blocks: the educational differences and the cultural differences.

The Educational problem is simply stated: poor countries have poor school systems, but the developed countries need educated workers. Some migrants will need more education.

The Cultural problem is simply stated: immigrant-receiving countries will want the newcomers to adapt swiftly to established culture, rather than to adapt themselves to a foreign culture. To avoid the sort of social problems that have overtaken Britain, France, and Germany, there would have to be some flexibility on both sides.

Is it worth thinking about “Aid to Potential Immigrants” stations abroad? ICE, the Department of Labor, and the Department of Education could maintain offices in places like India, Taiwan, Israel, the Philippines, and South Africa. They could both recruit and evaluate immigrants. Travel costs could be subsidized in whole or in part.

Is it worth thinking about the possible resistance from population-surplus countries? It’s not like someone is going to up-date Emma Lazarus: “Give us your aged, your stupid, your weak of will.” Advanced economies will be trying to cherry-pick the “best and the brightest” people from societies that are struggling to raise their own standard of living. What population-surplus countries prefer to do is to get rid of their problems. That doesn’t mean that things can’t work out. Look at Mariel. Look at Australia.

[1] Tyler Cowan, “Rebalancing the Population Scales,” NYT, 9 November 2014.

[2] I’ll be long dead by then, so you deal with it.

[3] It’s a constant in human thought, like symmetry in ideals of Beauty and Justice. See: http://en.wikipedia.org/wiki/List_of_types_of_equilibrium

CrISIS 2.

In a review-essay in the Wall Street Journal, James Traub makes a number of important points about the Islamic State.[1]

Al Qaeda Classic misunderstood the appeal of ISIS just as much as did Western observers. Western powers at least had the excuse that they were busy with many things and on many fronts. Al Qaeda had much easier contact, but still under-estimated its rival.

Americans have debated whether “nation-building” is possible in places like Iraq and Afghanistan. Billions of dollars already have been lavished on the effort in both countries, yet it would be hard to claim that the effort has been a success. However, ISIS appears to demonstrate that it is possible, and on a shoe-string budget compared to what Americans have spent. Recent reports have suggested that ISIS has begun to encounter al sorts of problems, so they may be presiding over the start of a “nation un-building.” Even that will not solve the problem of nation-building however. Can there be an effective alternative approach formulated by the West?

Former Baath Party members have been venting their rage at the Americans for more than a decade, often in alliance with radical Islamists like Abu Musab al-Zarqawi and now Abu Bakr al-Baghdadi. How long can this alliance between the former supporters of a secular regime and religious extremists survive? By their excesses, the jihadists once drove many Sunnis into alliance with the Americans and—tacitly—with the Shi’ites. Subsequently, the Shi’ites returned to a policy of persecuting the Sunnis. Nouri al-Maliki gets the blame for this in American media, but the reality is that he had wide support among Shi’ites. This makes it difficult to imagine that the Sunnis will readily abandon the Islamists. So long as it is directed against Shi’ites and Americans, the alliance ought to be able to paper over any other divisions. At least neither party will abandon the alliance until after victory has been won.

The Saudis and their Gulf clients see the struggle in Iraq as part of a larger confrontation between Sunnis and Shi’a Islam that has been going on for a long time. The rift has been open for centuries, but it has been particularly acute since the Iranian Revolution toppled the shah. Defeating ISIS so that the Shi’ite majority in Iraq can sleep better at night isn’t at the top of the Saudi agenda. The uncertainties about the negotiations on the Iranian nuclear program will not make the Saudis more committed to opposing ISIS.

Could all this have been avoided had the self-satisfied, moralizing Baby Boomers who have run American foreign policy for the last twenty years or so been content to leave dictators in place? Saddam Hussein did not have to be overthrown. The Syrian rebels did not have to be encouraged to go on resisting after it had become clear that the Bashar Assad regime was going to hold onto power. The Gaddafi regime in Libya did not have to be bombed out of existence.

It has become a common belief that things would have gone differently had the Obama administration been willing to stay on in Iraq. Regardless of the truth of this belief, will the US be willing to stay on after the defeat of ISIS to prevent a return to stupidity? In ceding so much of the active role in opposing Iraq to Iran, is the US preparing the ground for a partition of the country. Will Saudi Arabia and Jordan absorb the Sunni parts of the country?

How serious a danger is ISIS? To the United States and other Western societies, ISIS is not very dangerous. It isn’t Nazi Germany or the Soviet Union. It may be a loathsome ideology, but it does not control a powerful state. So, a sense of proportion is needed. So, too, is patience. “Keep them penned in and wait for the food riots to start,” as one character in William Gibson’s novel Pattern Recognition described America’s Cold War policy of containment.

[1] James Traub, “The Demonic Wellspring,” WSJ, 14-15 March 2015.

Climate of Fear XV.

The “Lima Accord”: Almost 200 countries have agreed to burn less coal, oil, and gas.[1] By the end of March 2015 they will publish national plans to cut emissions after 2020 and will state what laws they will pass to achieve these goals.[2]

How will progress be judged? One solution, proposed by developed countries, would be to establish identical measurements for each country. This would allow easy comparisons between goals and achievements and between one country and another. Developing countries rejected this solution. In order to win the formal adherence of developing countries, the developed countries agreed to scrap the plan. However, economists in developed countries believe that it will be possible to find a way to synthesize disparate information. Countries that fall short of their goals will be identified. Todd Stern, a lead negotiator for the United States, put the best face on this that he could: “We see the sunlight as one of the most important parts of this [agreement].”[3]

How powerful is “peer pressure”? Peer pressure is all that will provide enforcement. The agreement includes neither specific targets nor any enforcement mechanism. It is, in effect, another executive agreement. Like other executive agreements, it is not binding beyond the end of President Obama’s term in office.[4] Countries that submit inadequate plans or which fail to meet their goals will be subjected to the withering moral condescension of foreigners.

The possibility exists that the United States will be one of those defaulters. President Obama’s policies already have the United States on-track toward a substantial reduction in emissions by 2025. Further regulations during his last two years in office can reduce emissions still more. Experts appear to doubt that the targets for 2025—a 28 percent reduction—can be brought within reach without Congressional action.

How have developing countries performed with regard to establishing worker-safety laws? This is another example of developing countries responding to pressure from developed countries—often operating through international organizations like the International Labor Office. Like emissions reduction, the worker safety laws work against existing strategies for international development. To take an extreme example, on 24 April 2013 a five story garment factory in Bangladesh collapsed.[5] The disaster killed 1,137 workers. Most were girls aged between 18 and 20 years. They had been working 12-14 hour shifts for 90-100 hours a week. They had been paid between 12 and 24 cents an hour. Most of the clothes they sewed were for export to developed countries. Naturally, this tragedy led to much international criticism.

Do “Name-and-Shame Campaigns”—peer pressure—work, either in domestic or international contexts? To take an extreme example, on 13 March 2015, a factory in Bangladesh collapsed. Fortunately, the building was still under construction and not full of people. At last report, four people had been killed, forty injured, and about one hundred were still missing.

So, the future is still a little cloudy.

[1] Coral Davenport, “A Climate Accord Based on Global Peer Pressure,” NYT, 15 December 2015.

[2] Countries that miss the 31 March deadlines will have until June to publish their plans. Countries that miss the June deadline will have until the next major climate conference in Paris in December 2015. Countries that miss the December deadline,…

[3] So, another step forward for solar power.

[4] However, since 1939, 94.3 % of all international agreements have been executive agreements, rather than treaties. Most appear to have been regarded as remaining valid after a change of government. See: Michael Crittenden and Byron Tau, “GOP Iran Letter Draws Obama Rebuke,” WSJ, 10 March 2015.

[5] See: http://www.globallabourrights.org/campaigns/factory-collapse-in-bangladesh

Red ink as far as the eye can see.

The US government has been running deficits almost continuously since 1970.[1] So we’re used to them. Things even started to look like they were improving during the late 1990s. Hi-tech industries went through a rapid run-up in value. This produced a lot of extra tax revenue without anyone complaining about it. Bill Clinton left George W. Bush a budget surplus of $236 billion in 2001. By early in 2002 the government was back in deficit by $150 billion.[2]

What we’re not used to are the immense deficits of recent years: the 2009 deficit was $1.4 trillion, the 2010 deficit was $1.56 trillion.

Where did these gigantic deficits come from? They came from a combination of the Bush-era tax cuts with a massive expansion in government spending. Some of the spending could have been avoided: the Iraq war and the Medicare prescription drug benefit proposed by President Bush and passed by Congress in 2003. Some of the spending could not be avoided: enhanced national security after 9/11, the invasion of Afghanistan. However, the biggest source of the deficit is related to the 2007-2008 recession. On the one hand, tax revenues fell during the slow-down by $400 billion (17 percent of revenues). On the other hand, the government pumped money into the economy: $154 billion for the TARP under the Bush administration and $202 billion for the stimulus bill under the Obama administration. That is a total of $756 billion added to the deficit without even counting the lost revenue from years after 2007.

Things got better as the recession ended: government revenue rose while spending fell. Soon, things will get worse again. According to Congressional Budget Office (CBO) forecasts in January 2015, the deficit will start to rise in 2017 as the costs of Social Security, Medicare, and Medicaid increase.[3] The CBO projects that deficits will bottom-out at $467 billion in 2016. Then deficits are projected to rise: $486 billion in 2017; $953 billion in 2023; over a trillion dollars in 2025. The real burden of these rising deficits will depend on the growth of the economy. Here again, the CBO has bad news: projected growth rates for 2014-2018 are at 2.5%, while those for 2020-2025 will fall to 2.2%.

How large a share of the Gross Domestic Product (GDP) will be represented by the deficits? Between 2016 and 2025, Social Security will rise from 4.9% to 5.7% of GDP; health-care spending will rise from 5.3% to 6.2%; and paying the interest on the debt will rise from 1.5% to 3.0%. Discretionary spending—everything else—will fall from 9.2% to 7.4%.

Still, the absolute dollar amounts don’t matter. Ratios between debt and GDP do matter because it is the ability of the underlying economy to support the debt and maintain the credibility of the government’s ability to service the debt that makes deficits supportable. The 2009 deficit amounted to 10% of GDP and the total debt amounted to almost 100% of GDP.

Why does this matter? The government has to borrow the money from private lenders in order to cover a part of our national expenses. IF there is a fixed pool of private savings (capital) from which to borrow, then expanding government borrowing reduces the amount of capital that is available for all other borrowers. (Capital in-flows from the rest of a troubled world can off-set this in large measure–in the US.)  People investing in business or buying homes will compete with the government. The government can and will pay whatever interest rate it needs to in order to not go bankrupt. As a result, interest rates will go up and the total pool of capital available for private investment will go down. Capital is one of the factors of production determining the state of the economy. High interest rates slow down the economy.

[1] “Deficits as far as the eye can see,” The Week, 16 April 2010, p. 11.

[2] So the Bush tax cuts cost the United States Government about $400 billion a year in revenue.

[3] Jonathan Weissman, “Budget Forecast Sees End to Sharp Deficit Decline,” NYT, 27 January 2015.

Yalta.

From 4 to 11 February 1945, Josef Stalin, Winston Churchill, and Franklin D. Roosevelt met at Yalta in Crimea to “decide” the fate of post-war Europe. In fact, Europe’s fate had already been decided by the course of military operations. The agreements reached at Yalta merely tried to paper-over some of the ugly realities.

During 1944 the Red Army had plowed forward from inside the Soviet Union to a position forty miles from Berlin. In the process, the Red Army—three times the size of the combined British and American armies in Europe–had waded through a sea of blood—their own and that of the German army. The Russians had occupied almost all of Eastern and Central Europe. Meanwhile, from mid-1944 on, the British and Americans had occupied France, the Low Countries, much of Italy, and Western Germany. The war itself had divided Europe into spheres of influence.

The three leaders pursued their own agendas at the conference. Stalin wanted the Western powers to acknowledge Soviet power in the East. Churchill hoped to limit the scope of Communization there and to protect the interests of Britain’s Polish ally. Roosevelt wanted Soviet assistance in the war against Japan and Soviet participation in a post-war United Nations. In the end, Stalin got all of what he wanted; Roosevelt got all of what he wanted, but it turned out to be worthless; and Churchill got nothing of what he wanted, beyond fair words and promises.

At Yalta, the three leaders agreed that Poland would be kicked westward from its pre-war borders, yielding the Soviet conquests of September 1939 in return for territory taken from Germany. The Soviet puppet government in Poland would be reconfigured on a “broader democratic basis” by the admission of members of the government-in-exile in London. Stalin agreed to democratic elections in post-war Poland and in the other Eastern European countries at some unspecified date. Stalin agreed to enter the war against Japan within two or three months after the end of the war in Europe. He also agreed that the Soviet Union would join the United Nations. The Soviet Union would receive reparations in kind and in forced labor from Germany. France would receive occupation zones in Germany and in Berlin, but these would have to be carved out of areas previously assigned to Britain or the United States. Soviet citizens found in the West would be repatriated, regardless of their own preferences.

Filled with hatred and distrust of Western capitalist democracies, Stalin had no intention of honoring his weak commitments to democracy in Eastern Europe. Where the Red Army stood, it would remain. Where the Red Army remained, Communist dictatorships would be imposed by any means necessary. A hard-headed pragmatist, Stalin meant to honor his promise to make war on Japan and to take a seat on the Security Council of the United Nations.

Churchill first, and Roosevelt subsequently, came in for considerable criticism and abuse for their failures to achieve the liberation of Eastern Europe. In fact, this liberation depended entirely upon the balance of power in the area. This tipped heavily in favor of the Soviet Union. The best the two men could have hoped for was to encourage future Soviet co-operation on essential issues. No one wanted a further war after so much blood-shed and with more still to come. Nor would the democracies fight for the “rights” of small states.

Yalta, like Roosevelt’s earlier “destroyers-for-bases deal” in 1940 and Richard Nixon’s Vietnam War peace agreement in 1973, was an “executive agreement,” rather than a treaty approved by the Senate.