Iran–and we all should run.

Iranian-American relations haven’t been good since the revolution of 1979 overthrew Shah Reza Pahlevi.[1]  Sometimes they are less-bad.  Right at the moment, they are more-bad.  During the Obama administration, Iran pushed on many fronts that menaced not the United States, but its allies and clients.  All of this put both Israel and Saudi Arabia on edge.  They saw—and still see—Iran as determined to make itself the dominant state in a re-ordered Middle East.  The twin pillars of this dominance would be a series of client states in Iraq, Syria, and Lebanon; and nuclear weapons with the ballistic missiles to deliver them.  The re-ordering might include the annihilation of Israel and the limitation of America’s role in the region.  In the wake of the disastrous Iraq war, the American people clearly didn’t want another big war in the Middle East.  Sensibly, the Obama administration’s diplomacy focused on a successful effort to constrain Iran’s nuclear program.

That left many other issues unresolved.  In May 2018, President Trump chose to leave the nuclear agreement.  He has re-imposed economic sanctions and has sought to coerce other countries to impose an effective embargo on Iranian oil.

On the left, there is a suspicion that the president believes that regime-change in Iran offers the only reasonable solution.[2]  President Trump’s rhetoric both attacks the Iranian ruling elite as corrupt and illegitimate, and celebrates Iranians who protest against that government.  However, the Iranian regime wields powerful tools against dissent.

On the right, there is a hope that confrontation will force the Iranians to make concessions in other areas as well.  Many experts doubt that Iran’s leaders will bend.

Will Iran’s leaders do something stupid?  For its part, Iran has raised the possibility of closing the Straits of Hormuz at the outer end of the Persian Gulf in retaliation for American actions.  Some 40 percent of the world’s oil passes through the Straits in tankers.  They tried this during the long Iran-Iraq War in the Eighties.  The US Navy began convoying tankers.  On 22 July 2018, Iranian President Hassan Rouhani said that President Trump was running the risk of “the mother of all wars.”[3]  Trump responded in kind.  If Iran actually did try to close the Straits of Hormuz, then the possibility of military conflict would become very real.  It seems unlikely that American air and naval forces operating from Saudi Arabia, Afghanistan, and the Arabian Sea would stop at suppressing Iranian forces around the Straits.  Very heavy air attacks could follow on Iran’s nuclear facilities and key regime assets like the Revolutionary Guard.  So, Iran probably will not close the Straits.

It seems equally unlikely that American leaders will do something stupid.  Americans still don’t want a big war in the Middle East.  Iran’s nuclear program can only be constrained voluntarily.  Nuclear weapons are a matter of science, engineering, and money.  Iran has all three.  An attack would not necessarily do more than postpone the Iranian program.  An attack would sent Iran in pursuit of other, indirect ways of striking back at American interests in the Middle East and elsewhere.

Maybe Vladimir Putin will quietly mediate a settlement.

[1] Rick Gladstone, “A War of Words With Iran Risks Spiraling Beyond Control,” NYT, 24 July 2018.

[2] It worked OK from 1954 to 1979.  We’ve had forty years of hostility in return for twenty-five years of cooperation.

[3] Saddam Hussein used the same phrase when faced with an American invasion in 2003.

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My Weekly Reader 23 July 2018.

“Globalization” means the trade in goods and services, the flow of capital, and the movement of workers across national boundaries with little or no national constraints.  This is an old story in human history, but it accelerated dramatically after 1945[1] and it has moved at astonishing speed since 1990.[2]  Globalization has spawned disruptive costs that accompany its immense benefits.  Much attention has focused on some of the costs more than on the benefits.

The political reaction against globalization commands the headlines.[3]  Examples include President Trump’s “America First” policies of tariffs and limits on migration; the British vote to leave the European Union (“Brexit”); and Angela Merkel’s suddenly precarious leadership of Germany.  The most persuasive interpretations see this reaction as rising from two sources.  One is the unequal distribution of both the benefits and costs of globalization.  The other is the resulting discrediting of the elites as leaders in the eyes of everyone else as followers.

One can point to many flaws in democratic governance.  However, part of the current problem is that democracy actually works.  Donald Trump won the 2016 election; a narrow, but real, majority of British voters chose “Brexit”; Italian voters supported the current coalition of anti-immigrant, anti-EU parties that governs the country.  Many of the reforms seem intended to blunt the responsiveness of politicians to the popular will.  These include giving the president of the United States more authority to commit the country to treaties that could not pass the Senate; extending the time between elections to buffer politicians from the public moods; raising the pay of politicians so that a better class of person will go into politics; and instituting civic literacy tests for voters.

Trends that have nothing to do with globalization, but which will rock a globalized world economy get lost in the shuffle.[4]  For example, in Western countries, robots look like a mechanical version of China: low-cost, high-productivity workers.  In developing countries, however, they are just as great a challenge.  Hundreds of millions of people in China, India, and elsewhere have been pulled out of abject poverty by industrialization.  Their jobs, too, are at risk.  Developed countries will have no incentive to off-shore production and developing countries will have to compete with their own robots.

Then soon–but possibly not soon enough–a demographic shift will occur from low birth-low death to low birth-high death.  The United States already depends upon immigration for its population growth (and the financial stability of Social Security).  Japan and many European countries (Germany and Italy for example) are in much worse shape in terms of their young workers-elder retirees ratios.  China will soon enter the ranks of countries this imbalance.  How will different societies pay for their aged, non-working populations?

[1] After the Second World War, the United States led the construction of an open “Free World” economy through institutions like the World Bank (International Bank for Reconstruction and Development), the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT).

[2] The collapse of the Soviet Union discredited centrally-planned, non-market economies in the eyes of previous true believers.  Russia, the former “captive nations” of the Soviet Empire, and the Peoples Republic of China all adopted capitalist market economies.  Many other leftist economies in the developing world (notably India) did the same thing.

[3] Dambisa Moyo, Edge of Chaos (2018).

[4] Ian Bremmer, Us vs. Them: The Failure of Globalism (2018).

The Lafarge Affair.

If you read the papers, it is easy to get the idea that the post-WWII order is breaking down.[1]  However, elements of one era can live on, for a time at least, in a new era.[2]  One part of the post-war order took the form of multi-national corporations operating in the developing world.

What happens when civil war or terrorism breaks out in those countries?  Do companies abandon their often-substantial investments and call the insurance company?  Do they pull out their Western leadership staff and abandon their local employees to their fates?  Alternatively, should they stay and try to continue operating?  In many developing countries, both the regime in power and the opponents willing to take up arms against it are unsavory.  In peacetime, the government can hide a lot of its brutality and oppression.  Once war breaks out, both sides come out into the open with unchecked violence.  If the companies remain, what kind of adaptations might they have to make as war drags on?

As anyone who has read Nevil Shute’s Most Secret (1945) or just walked around Paris knows, the French have long been pioneers in the use of reinforced concrete for construction.  (They call it “beton.”)  Cement is a major component of concrete.[3]  Currently, Lafarge SA is a major force in the business.[4]   It made large investments in Syria before the civil war began in 2011.[5]

The initial stage of the war raised the troubling questions of “should I stay or should I go.”[6]  Lafarge decided to stay.  Then the initial war, the basis of the company’s calculations, went sideways.  In eastern Syria from 2013 to 2015, the Islamic State (ISIS) seized control of territory and proclaimed a caliphate.  (They also videotaped and posted to the internet the burning to death of a captured Jordanian pilot, among other indications of their mind-set.)  ISIS exploited all the economic resources available within its domain.  This included extorting Western companies, as well as selling oil and trafficking in non-iconic antiquities.

Mired in this situation, Lafarge may have made some questionable choices.  Lafarge allegedly paid ISIS and other groups $5 million to insure the safe passage of employees and goods through territory controlled by the caliphate.  Local managers pressed local employees to keep working while the security situation deteriorated.  Critics also cite “lax security” at the Lafarge properties.[7]

Confusing the effect with the cause, a French court has “indicted” Lafarge SA.

[1] And not just because Donald Trump got elected president.  Doesn’t matter what the daily edition of the New Republic (i.e. the New York Times) thinks.

[2] See, for a highly readable example, R. F. Arragon, The Transition from the Ancient to the Medieval World (1936).

[3] On the deeply fascinating subject of Portland cement, see: https://en.wikipedia.org/wiki/Portland_cement

[4] Liz Alderman, “France Indicts Cement Giant on Charge of Aiding Terror Groups in Syria,” NYT, 29 June 2018.

[5] If you look at news photographs of Syrian cities during the war, you will see that a huge market existed for concrete and cement before the war.  Commonly, one sees that artillery fire and aerial bombing blow out the front walls of apartment buildings.  The poured-concrete floors then fall downward like the pages of a book, rather than disintegrating or collapsing straight down.  The back walls and staircases serve as the hinge or binding.  So, the concrete appears to be generally of high quality to the eye of a non-expert.

[6] See https://www.youtube.com/watch?v=xMaE6toi4mk

[7] Without seeking to exculpate the company, it is fair to ask just how Lafarge could have provided adequate security against ISIS when the governments of Syria and Iraq could not defend themselves without foreign military aid.

Migrants 1.

Social scientists posit that people experiencing disturbing social change can seize on particularist identities like ethnicity or nationality.  Demographic change and economic change and shifting social values all can trigger such a response.  On the other hand, cultural and economic elites in Western countries celebrate the free flow of goods and labor.  They also have developed more cosmopolitan views than have many fellow citizens.[1]

Illegal immigration provides a good example of the particularist-cosmopolitan tension.  In recent times, illegal migration has become easier than ever before in history.  In both Europe and America bitter quarrels over immigration rack politics.[2]  These controversies arise not from heavy current immigration, but from heavy prior immigration.  More importantly, the general backlash against elites–who led us to war in Iraq and then into the financial crisis—has ensnared migrants.

Illegal migration to the United States dropped sharply during the Great Recession.  It hasn’t picked up immensely in the past year.  However, that still leaves 10-12 million illegal immigrants in the United States.  Human symbols of elite failure.  Liberals insisting on calling them “undocumented immigrants”—as if there is just some bureaucratic foul-up in Washington—adds fuel to the fire.  President Obama’s skirting of the law angered many people.  Illegal immigration in the European Union is more recent.  There the flood of migrants from various failed states mixes with refugees from war-torn Muslim states.

People leave their “shithole” countries for good reasons and not just on a whim.  Until conditions in those countries improve, there is not likely to be a significant drop in attempts at illegal immigration.  To complicate matters further, while many of the migrants are economic migrants, the law allows them to request asylum as victims of persecution.  This clogs the immigration system and delays repatriation.

In light of this reality, attention has turned to deterring them from reaching American or European soil in the first place.  Europeans have negotiated with pathway countries—Libya, Sudan, and Turkey—to stem the departures for Europe.  The implementation of those agreements involves a good deal of brutality that is much worse than anything suffered by Central American migrants to the United States.  Mexico is unwilling to play that sort of role for the United States.  The “zero tolerance” policy attempted by a Trump administration grown tired of waiting for Congressional approval of a border wall offers another form of deterrence.

Cosmopolitans sometimes phrase the choice in a misleading way: “What sort of society do they wish to be?  Do they wish to be immigrant nations with continual demographic and cultural change?”  First, both the European Union and the United States have long had substantial legal immigration.  Second, it is legitimate to debate what kinds of immigrants best serve the interests of the community.

[1] Benjamin Barber, Jihad and McWorld: How Globalism and Tribalism Are Shaping World Society (1996).  Barber’s analysis remains engaging, but it wasn’t new.  Late-Nineteenth Century sociologists had identified the problem of anomie.  For that matter, historians long ago diagnosed the rise of “mystery” religions as a response to the cosmopolitanism of the Hellenistic kingdoms.

[2] Amanda Taub and Max Fisher, “In U.S. and Europe, Conflict Over Migration Points to Political Problems,” NYT, 30 June 2018.

My Weekly Reader, 10 July 2018.

Russo-American relations had deteriorated under the simultaneous presidencies (2000-2008) of George W. Bush and Vladimir Putin.[1]  However, constitutional term limits meant that Putin could not run for a third consecutive term.  So, he became prime minister while his client, Dmitri Medvedev, became president.  However, all power remained in Putin’s hands.

Barack Obama also became president in 2009.  Obama made one of his campaign advisers on foreign policy, Michael McFaul, head of Russian affairs on the National Security Council.  McFaul then became a principle architect of the Obama administration’s attempt at a “reset” of the relationship with Russia.  The administration hoped to draw Russia toward the American-led international system.

The “reset” began well.  In July 2009, the Russians began allowing the United States to use Russian airspace to airlift supplies to Afghanistan.  In September 2009, the U.S. dropped its plan to build anti-missile defenses in Eastern Europe.   In March 2010, the two countries agreed to reduce their nuclear arsenals. In May 2010, the Russians agreed to impose sanctions on Iran in an effort to get it to end is nuclear weapons program.  The U.S. then lifted sanctions on Russia.

Then things went sour in a hurry.  Why?  There are two answers here.  One answer is that the Libyan Revolution from March to August 2011 began the breakdown.  In this account, the “Arab Spring” spread to Libya; the Gaddafi government set out to suppress it; Libya was a Russian client and Russia had a veto on any Security Council authorization; the Americans got Russia to abstain by limiting the resolution to “protecting civilians,” rather than overthrowing the regime; and then they went ahead and overthrew the regime.[2]

To make matters worse, in Fall 2011, Putin and Medvedev again switched jobs.  This infuriated many Russians.  Demonstrators filled the streets and the unrest continued during the run-up to the March 2012 presidential elections.  It doesn’t seem to have sat too well with Washington either.  In December 2011, Secretary of State  Hillary Clinton declared that “The Russian people, like people everywhere, deserve the right to have their voices heard and their votes counted. “And that means they deserve free, fair, transparent elections and leaders who are accountable to them.”[3]  This amounted to taking sides against Putin.

Michael McFaul, the American ambassador to Russia from 2012 to 2014, prefers another explanation.  He thinks that Putin is “paranoid” and sees the U.S. as “the enemy.”  He is possessed of “fixed and flawed views.”  The Russian people themselves follow Putin because of “a deep societal demand for this kind of autocratic leadership, and this kind of antagonistic relationship with the United States and the West.”

When Secretary of State Clinton made her statement on the Russian elections, the United States had already overthrown the autocratic governments of Afghanistan, Iraq, and Libya, and leaned on the Egyptian military to topple Hosni Mubarak.  The American government-funded National Endowment for Democracy was at work in Russia.  Is it a surprise that Putin is paranoid?  McFaul should have re-read Kennan before he entered government.

[1] Daniel Beer, Does Vladimir Putin Speak for the Russian People?” NYTBR, 8 July 2018, reviewing Michael McFaul, From Cold War to Hot Peace (2018).

[2] See: https://waroftheworldblog.com/2014/09/28/obama-versus-putin/

[3] See: https://www.cnn.com/2011/12/06/world/europe/russia-elections-clinton/index.html

Annals of the Great Recession XVI, Legacies.

In theory, the American economy is doing well.  Unemployment is at the lowest level in this century; corporations are investing, and there are signs of increasing consumer spending.  Fine.  However, there are also reasons to be concerned.  One is the “flattening of the yield curve.”[1]

The United States government borrows money by selling bonds (Treasury notes).  Basically, bonds are IOUs + Interest.  These Treasury notes run for different periods of time and pay different rates of interest.  Long-term bonds run for like 10 years, while short-term bonds run for like 2 years.  The long-term bonds pay higher interest (called “yield”) than do short-term bonds to account for inflation.  When the economy is growing strongly, prices will tend to rise.  The gap between the yield for long-term bonds and the yield for short-term bonds is called the “yield curve.”

If people think the economy will grow, then they will put their money in stocks and the Treasury will have to pay higher interest on its long-term bonds.  If a lot of people want the security of long-term bonds, rather than the risk of stocks and don’t fear inflation, then the Treasury won’t have to pay as much interest.

Then there are the banks.  They borrow money at low short-term rates and lend it at higher long-term rates.  That’s how they make a profit.  If short-term rate approach long-term rates, it pinches their profits.  If short-term rates exceed long-term rates, they actually lose money.  So, they stop borrowing and lending.

Here’s the thing.  The gap between long-term and short-term bonds has been closing.  This is called “the yield curve flattening.”  A year ago the gap was 1 percent; three months ago it was 0.5 percent; in early July it fell below 0.3 percent.  Interest rates for long-term bonds has not been rising much, while the rates for short-term bonds has continued to rise.  This suggests that bond-traders do not expect a lot of inflation, which suggests that they have doubts about future economic growth.  At some point, the yield for short-term bonds could rise above the yield for long-term bonds.  When this happens, the yield curve is said to be “inverted.”  Economists interpret an inverted yield curve as “a powerful signal of recession.”  Inversions have come before every recession and one near-recession since 1955.  However, the time lag between an inversion and a recession can stretch from six months to two years.  So, we aren’t there yet.

The huge number of bonds that central banks acquired to push down long-term rates during the period of “quantitative easing” are continuing to weigh on the long-term rates.  Now the Federal Reserve Bank is raising short-term rates to prevent excessive price rises in a strong economy.  There is mounting concern that policies being pursued by the Federal Reserve Bank could harm the economy by pinching off lending or by pushing banks to pursue riskier strategies.[2]    On the other hand, there is evidence that, in the wake of the “Great Recession,” the yield curve has lost some of its predictive power.  Moreover, a strong American economy coupled with a slowing world economy could push foreigners to buy long-term bonds.  The issue at hand is whether the Fed should continue to raise short-term interest rates as planned.  The stakes are high.

[1] Matt Philips, “A Recession Signal Is Flashing Yellow,” NYT, 27 June 2018.

[2] Nick Timiraos, “Fed Debates Signal From Yield Curve,” WSJ, 9 July 2018.

GPA+.

Ten years ago, 32 percent of graduating seniors received some form of “Latin honors” from the University of Southern California.[1]  This year, 44 percent received “Latin honors.”  Way to go Southern Cal!  Recruiting all those extra smart kids!  I bet the Ivy League schools will be taking their meals standing up after that spanking.  Oh, wait.  Turns out Harvard granted “Latin Honors” to more than half its graduating seniors.[2]

Granting “Latin honors” isn’t based on the subjective direct judgement of individual merit by the faculty members.  It’s based on the more objective quantifiable judgement of Grade Point Average.  So, Southern Cal and all the many other schools granting “Latin honors” to a growing share of graduates is just an artifact of long-term grade inflation.  According on one expert, a 3.7 GPA (on a scale of 4.0) “is just a run-of-the-mill student.”[3]

It starts in the schools.  In 1998, 39 percent of high-school seniors graduated with an “A” average.  In 2016, 47 percent graduated with an “A” average.  Over the same span, the SAT Critical Reading scores fell from an average of 505 to an average of 494; the Math scores fell from an average of 512 to 508.[4]  Students expect to continue their high-school experience in college.  Elite schools claim that they haven’t studied the trend, and don’t know how to explain it.[5]  The situation probably differs at tuition-driven, not-selective schools.  Too many schools pursuing too few students has led the recruiting effort look like feeding time at the shark tank: “Throw in another goat.”  After the admissions office has done what it can, the faculty face a heavy emphasis by their employers on retaining the students who have been admitted.

Grade inflation is like monetary inflation.

It is fueled by a weak authority in charge of controlling the volume of the unit of exchange.   In the case of the schools this could be parental pressure applied through the influence of a school’s reputation on housing prices.  In the case of colleges and universities, it is the desire to attract student dollars.  A strong authority might tell students that they aren’t particularly distinguished, or well-prepared, or hard-working.

It distorts incentives.  Thus, if you can get the same or more money for less work, then you’ll do less work.  If you can’t trust the money to have real value, then you’ll pursue other stores of value.  One form of this could be a flight to non-public schools with a reputation for greater rigor, or to home-schooling.

It favors people, better positioned to exploit the nominal value of a unit of exchange/measure and disfavors people poorly positioned to do so.  Employers, for example, lack any reliable means to evaluate the educational attainment of potential employees.  High GPAs fog over individual differences in both ability and work ethic.

The historical record shows that breaking an inflation is very painful and politically difficult.  People are willing to try this only after conditions have become intolerable.  We aren’t there yet.

[1] That is “cum laude,” magna cum laude,” and “summa cum laude.”

[2] Down from 91 percent in 2001.

[3] Melissa Korn, “You Graduated Cum Laude?  So Did Everyone Else,” WSJ, 3 July 2018.

[4] See: https://blog.prepscholar.com/average-sat-scores-over-time

[5] See “Captain Henri” in “Casablanca.”