Lowering The Flag And Leaving Iraq

So, the US military has lowered the battle flag and the last official military have now left Iraq, although there will still be some engaged in advising and protecting the mammoth US embassy in Baghdad. Time for a reconsideration.

On the day that Saddam's last stronghold, his hometown of Tikrit, fell to US troops in April, 2003, I wrote a column published in my local paper, portions of which I posted on the old maxspeak. This was the moment of the highest US triumph, with the looting in Baghdad just starting and before the US stupidly disbanded the Iraqi army and fired all the Ba'athist civil servants, thus triggering the rebellion that eventually became the Sunni-Shi'i civil war, which seems to be picking up as the US leaves rather than tailing off. In that essay, I noted three positives and three negatives of the war, emphasizing that I thought the last of the negatives weighed more heavily than anything else. All six have come to pass.

The positives were that Saddam would no longer be violating human rights, that economic sanctions against Iraq would be ended, and that US troops would be reduced in Saudi Arabia, which had been a leading propaganda point of Osama bin Laden. Yes, despite the apparently tightening of authoritarianism of the Maliki regime and reports of ongoing torture, the human rights situation in Iraq is better today than under Saddam in general. Yes, economic sanctions were ended, but the benefits of that have been far overwhelmed by the subsequent economic collapse engendered by the ongoing war, with the effects of that still not ended. And the removal of US troops from Saudi was a strictly minor event, also overwhelmed by other events.

The negatives were that womens' rights would be worsened in the country as Shi'i fundamentalists would come to power, that the situation of Christians would also be worsened, and finally and most importantly, that this invasion would give al Qaeda a major propaganda gain. Womens' rights have not worsened as badly as I thought they might, but they have worsened. The situation of the Christians has been catastrophic, with more than half of their population having fled the country, not that this has registered one blip on the radar of the US fundamentalists backing the war. And, not only did al Qaeda get a propaganda boost, but as the civil war erupted al Qaeda gained a major foothold and became a major player in that war. More generally, the standing of the US in the Muslim world and more broadly was severey damaged by the entire episode and remains so.

Needless to say, I did not foresee the civil war or the scale of death and destructiont that followed. But then, just about nobody else did either, not at that point in time anyway.

One clear winner from the war has been the Kurdish population, who were under particular repression from the Saddam regime. They have won a virtual autonomy, now guaranteed as they remain power breakers in the federal government in Baghdad, and have been independently developing their oil industry with help of various minor oil companies from places like Norway and Canada. While not perfect, governance in autonomous Kurdistan seems to be reasonably competent, and the economic and social and political situation is almost certainly far improved over the previous period, something that cannot be said about the rest of Iraq.

Finally, I would like to comment on the whole issue of the role that oil played in the war, and here I shall largely be reiterating arguments I made long ago, although not in that original essay in April, 2003. While many thought and continue to think that the war was "mostly about oil," I have never accepted this. Yes, the first Gulf War was. Bush, Sr. clearly would not have bothered undoing Saddam's invasion of Kuwait if there were no oil there or if there was none in neighboring Saudi Arabia. As it was, it was the Saudis, satisfied that Saddam was contained, who held Bush Sr. back from rolling to Baghdad out of fear that this would lead to a pro-Iran, Shi'i-dominated government in Baghdad, which has indeed been an outcome of Bush Jr.'s invasion.

No, it was mostly about Bush Jr. trying to prove that he was a bigger man than his dad, a neo-Ronald Reagan, and many of the other backers of the war in the administration were neocons like Wolfowitz whose big concern was Israel and how Saddam's paying the families of Palestinian suicide bombers was an affront, not to mention the Israeli fear of the nonexistent weapons of mass destruction. As it is, the interests of Israel have basically never been in line with those of the US oil majors in the Middle East.

There was one player for whom oil was important: VP Dick Cheney, certainly a not inconsequential figure, and possibly the one who most effectively played on Bush Jr.'s inferiority complex vis a vis his dad to get him going on the whole thing. At a minimum, Cheney's own company, Halliburton, made money hand over fist, and there is a clear case of oil playing a role, if a minor one. It is also true that Cheney apparently semi-secretly plotted with various US majors about "getting back into Iraq" as a result of the war, although the CEOs of these companies were not enthusiastic about the idea of disruptions of oil production and transportation that might arise from the war and were not at all public supporters of it.

As it is, of course, the oil companies did make money as the price of oil rose with the disuptions that did occur, although these were not supposed to occur. Indeed, not only Cheney but Wolfie as well were fully under the delusion that we were going to be welcomed with flowers, and the drive to secure the Oil Ministry first in Baghdad was driven by the even more ridiculous delusion that as did Kuwait, Iraq would actually pay for the war itself out of their overwhelming gratitude. It is really astounding to think how such actually intelligent people (Paul Wolfowitz, whom I know personally, is in fact brilliant) could be so completely out of touch with reality.

In any case, the ultimate irony of this is that in the end, the US majors were probably right not to get too excited about all these prospects. They never came to pass. The Kurdish production is being handled by oddball small companies from around the world, although with a couple of minor US ones in there as well. And in the rest of Iraq, oil production has only barely gotten going again due to the ongoing problems of pipelines being blown up and so on, and the companies that have made contracts to do anything have been overwhelmingly non-US ones, with Chinese and Russian ones much more active than any US major. Cheney may have had getting the US majors into Iraq as a major goal of his own efforts, but this may have been the ultimate failure of the many that he was responsible for as VP of the US.

George W. Bush's Second Biggest Foreign Policy Mistake Revisited

Of course the first would be invading Iraq. But a close second not often remembered or even realized occurred two months into his term of office. It was the humiliation inflicted on then South Korean President Kim Dae-Jung, a Nobel Peace Prize winner and former torture victim of earlier military dictatorships in that country, when he arrived to visit the US. Secretary of State, Colin Powell, had planned on a continuation of the warming policies between the two Koreas and a friendly meeting with Bush and support for Kim. As it was, the "Vulcans" led by Cheney and Rumsfeld intervened to torpedo this and leave Kim not meeting in the cold and without his long-running policy. This also ended that round of negotiations with North Korea on nuclear weapons, with the Vulcans arguing that the US should pursue "regime change" in North Korea, which, hack cough, did not happen.

Instead what happened was that the nuclear negotiations came to and end and US-South Korean relations tanked until a more conservative government took over there. Not long after the end of the negotiations, the DPRK withdrew from the Nuclear Non-Proliferation Treaty and restarted its plutonium-based drive for nuclear weapons, which led to its successful acquisition of such not too long later. This is fish soup that cannot now be turned back into fish or spilled milk that cannot be returned to its container, a disastrous development that we might not now have to be dealing with at this time of leadership transition in North Korea, if Bush and his
Vulcans had not pulled this enormously stupid blunder.

KimJung Un should have such problems!

He doesn't have principles students telling him, on a final exam, that, for instance, the "shoe-leather costs" of inflation stem from "the rising price of leather" Or that hoary and hardy perennial, that the alternative to monetary policy is "physical policy" - carried out, no doubt, by the President's Council on Physical Fitness.

Why was I born?

How North Korea Became So Isolated

North Korea (DPRK) officially follows an ideology developed by its founder, Kim Il Sung, known as KimIlSungism (really), which his just deceased son continued to follow, and which it is likely will continue to be followed at least for awhile by his grandson, the Great Successor, Kim Jong Un. Besides generally following the Stalinist version of strict command planned socialism, somewhat loosened in recent years, the most famous aspect of KimIlSungism has been its doctrine of self-reliance, or juche (also transliterated as chuch'e). While some of the poverty of the DPRK is clearly due to its overemphasis on military production (fourth largest military in the world, and check out those nukes) and the typical stagnation of command planning, much is almost certainly due to the nearly autarkic approach due to KimIlSungism. Where did it come from? I see at least five sources.

The first is the Stalinist model itself. In the great struggle with Trotskyism, Stalin advocated "socialism in one country," although, of course, the Soviet Union was the largest nation in the world by far in land area. However, after WW II, this would be less emphasized as Eastern Europe went officially command socialist with the assistance of the Red Army in place. But in the DPRK, Kim Il Sung would cling to the older model.

Second is that after the death of Stalin, Kim would find fault even before Mao did to the moves towards thawing and loosening of the model that was going on in the Soviet Union. The first recorded speech of Kim supporting juche occurred in late 1955, prior to Khrushchev's 1956 deStalinization speech that reportedly upset Mao (according to official DPRK histories, Kim Il Sung gave his first pro-juche speech in 1930 at age 18, but no independent evidence supports this). With the failure of North Korea to conquer South Korea, and truce without official peace treaty after Stalin's death in 1953, the new leaders would go even softer with the Geneva summit in 1955, accepting the reunification of Austria, guaranteed to be neutral, a model possibly there for Korea that Kim rejected.

Third was the emergence of the Sino-Soviet conflict after 1956, although it would be a few years before this would become open and a problem for the DPRK, caught between the two. While Kim tended to side with Mao's critique of Khrushchev's ideological and policy deviations from Stalinism, he also disagreed with the more decentralized and agriculturally oriented version of socialism that Mao followed in China. As the conflict worsened, he wished to keep independent from both of them, which encouraged the idea of self-reliance. He also did not wish to go the capitalist road or fall into dependence on the capitalist West (or worse yet, Japan), so self-reliant juche became the way to go and was gradually developed over a long period.

Fourth was the emergence of his desire for a socialist monarchy, with his son to succeed him. Having a distinct ideology of self-reliant socialism fit in with this (and it is curious that some other dictatorships have followed the same path of de facto monarchy even if officially socialist republican, see Syria). Curiously, this is also consistent with traditional Confucian values of respect for family.

And the fifth involves the DPRK also falling back on traditional Korean attitudes and practices. Not only has Korea long been described as the most Confucianist nation, but prior to the Japanese conquest in 1910, it was also the most isolated, known as the Hermit Kingdom. In this it had long imitated Japan, but continued to resist being "opened up" even after Japan was by Commodore Perry's black ships in the 1850s, leaving it to the Japanese themselves to do the opening. Kim, of course, presented himself as the national hero of the anti-Japanese resistance, and this return to a traditional Korean practice burnished his credentials as the truly genuine national Korean leader who deserved to lead the unified nation.

Dear Leader Dead, Long Live Great Successor

While all had known that Kim Jong Il had long been seriously ill, his death on Saturday of a heart attack in a train has taken many by surprise, with citizens of the DPRK (North Korea) showing the same sort of hysterical grief they did when his father, Kim Il Sung (Dear Leader) died in 1994, which in turn repeated the sort of reaction seen in the Soviet Union on the death of Joseph Stalin.

In contrast with the long delay of reporting Kim Il Sung's death, it has taken only 48 hours for Kim Jong Il's death to be reported, with DPRK media reporting that his third son, Kim Jong Un, is to be called the Great Successor. Kim Jong Un had been reported to have been favored by his father and to have been groomed for acceptance by the family and military elites that rule the nation. Pretty clearly this ruling group has decided that he is to be the front man for continuing their dominance, although it is almost certain that it will be some time before he will be able to asert anything like the dominance his father and grandfather would come to have.

So, in the intermediate term the prospect is for stability, even as the South Korean stock market dropped 5% on the news before rebounding some, along with a drop in the ROK won as well, and various military maneuvers have been reported near the DMZ. Inter-Korean relations have been particularly bad during the past year, since military attacks by the North, thought by many to have been made to impress the DPRK military with Kim Jong Un on his appointment at a four star general.

Even as the near term seems to augur continuation of the system that has produced five straight years of GDP decline and ongoing malnourishment of large parts of the rural population, particularly in the nation's northeast. However, underneath this apparent stasis, many changes seem to be going on. Cell phones have spread widely, as have informal markets in various goods, towards which the government has oscillated in attitude. Chinese pressure to follow their model has steadily increased, and in recent months there have been reports of negotiations with the US. Kim Jong Un studied in Switzerland. So, there may be major changes down the road, if not immediately, particularly as the Great Successor may need to imitate in economic policy what was done in military policy this last year to assert his legitimacy to be officially on top of the nation's system. But this death and succession does mean the further future becomes much less clear.

President Gingrich Would Ignore The Humphrey-Hawkins Full Employment Act

I was scratching my head as to why any Presidential candidate would say Ben Bernanke should be fired until I read this:

"I would, first of all, demand a thorough audit [of the Fed]. Second, publish all the decision documents for 2008, 2009, 2010. Third, I would prepare legislation to eliminate the Humphrey-Hawkins Full Employment Act, which has totally confused the Fed," Gingrich said. The former House speaker went on to say that he would demand the Fed to hold "hard" money

There are lots of reasons why Newt should never be allowed near the White House again but this one has to go to the top of the list.

The Exegesis of Deceit

One of the steadiest hums of our time is liberal indignation at the dishonesty of the Right.  On any given day, you can hear the shock and disbelief: How can they say that?  Don’t they care about getting the facts right?  Don’t they realize they are being inconsistent?  Last week it was the Romney campaign ad that deliberately and even crudely misquoted Obama.  This morning I wake up to Krugman “truly amazed” at the way Paul Ryan would cite commodity prices on the way up and ignore them on the way down.  May I suggest that there is a method to this deceit and that being shocked is not an adequate response?

Obama's Payroll Tax Cut

When the cut was first announced, I wrote that it seemed to pose a threat to Social Security. Now, a few of the Democrats, especially Bernie Sanders, seem to be picking up on the risk to Social Security. What would have stopped Obama from making it a tax rebate in which the treasury would not have to leave the fingerprint on the Social Security system. Besides, it could be targeted to people who made under x millions of dollars a year. Of course, really smart CEOs do not have to pay the tax. They can take a one dollar salary, then cash in stock options instead.

The Brussels Agreement: Why it will Fail

One response would be to point out the irrationality of the agreement itself—the minimal role that fiscal profligacy played in bringing on the fiscal crisis, the lack of any mechanism for rebalancing between surplus and deficit countries, and the unchanged charter of the ECB, which prevents it from behaving like a normal central bank.  Those arguments have been made, are being made and will continue to be made, and will apparently have no effect on the course taken by European politics.

So let’s look at the realpolitik, past and future.

First of all, it is important to bear in mind that this is an agreement of the European right.  The economic collapse of 2008 resulted in an electoral rout of social democrats throughout the continent (and in the UK).  That’s a story that needs more explanation, but for now the point is simply that conservative parties have absolute control over Europe, and the agreement just reached represents their priorities.  It is for hard money, austerity in the face of recession, full guarantees for creditors, and implicitly for reining in the costs of the welfare state, which must happen if the deficit targets are to be met under foreseeable conditions.  This is why politics matters, after all.

Not liking a political program is not the same as predicting its failure, however.  It could happen that the conservatives get their way and a socially regressive stability takes hold.  Under this scenario, the fiscal crisis recedes and Europe enters a long period of slow growth which is favorable for those who acquired wealth during the go-go years: the value of their assets is protected, and labor is mortally weakened.  For those who designed the Brussels agreement, and for those who bankrolled them, this would look like victory.

A clear-eyed view of the situation suggests, for me at least, that this outcome is unlikely.  I believe that the fiscal pledge will buy time—at most a year—for German support for peripheral finances.  It is essentially a quid pro quo: the countries of Europe make a (foolish) promise to bind themselves to a 3% deficit rule, and in return the main creditor country, Germany, softens its stance toward transfers.  How much softer?  From first appearances, it looks like about €250B net, with some financing moved forward from 2013 to 2012.  (This assumes that the €200B directed to the IMF is returned to Europe without leveraging Chinese or other commitments.)  Is that enough?  It depends on whether the market response is favorable.  If interest rates come down in Italy, Spain and the rest, debt can be rolled over until the economy subsides.  This means something like a quarter or two.  If interest rates shoot back up, the money is not sufficient.  In that case, everything depends on the ECB and whether Draghi now has implicit German forbearance to monetize a portion of euro-denominated sovereign debt.

But this about whether the plan can make it through the next few months.  I believe it is simply impossible for it to survive much more than this.  Absent a miracle, Europe is sliding into a recession.  This will affect Germany as much as the weaker countries, even more considering its dependence on Eurozone exports.  (Germany suffered an exceptionally sharp contraction post-Lehman too.)  The result will be a risk of debt deflation in all markets.  The sovereign debtors will again face default as public revenue dries up.  Speculative assets like real estate will resume their decline.  Overleveraged financial institutions—and Europe is the world leader in overleveraged finance—will need to be bailed out.  Of course, a rise in unemployment will trigger automatic stabilizers and increase the pressures for discretionary fiscal deficits as well.  It is likely that there will be a wave of elections in which center-left parties take revenge for their defeats of the past few years—Germany could lead the way, in fact.

When it comes to whether European economies will simply collapse into a deflationary spiral, or whether the Brussels commitments will be abrogated, I’ll put my money on abrogation.  This agreement has a ticking clock, and when the time winds down, it will be history.

The Meme that Refuses to Die: Government Debt Must Be Paid Back

No it doesn’t.  It almost never is.  To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt.  But don’t take it from me, look at the record.

The story is unmistakable: the US jacked up its public debt to finance WWII and increased it further in almost every year since then.  We are not paying off the debt left by our parents and grandparents, and our children and grandchildren will not pay off ours.

The debt burden depends on the ratio of debt to GDP as well as the interest cost in servicing it.  The way to reduce this burden is to have a combination of real economic growth, inflation and modest interest rates.  If you want to show your solicitude for the well-being of future generations, demand macroeconomic policies that will boost demand and raise inflation a bit, consistent with continued low interest rates.

What to avoid: nonsense like this excerpt from today’s column by Catherine Rampell of the New York Times:

Total debt for the United States — that is, also including corporate and government debt — hit another all-time high because government borrowing is still outpacing the rate at which households shed debt.

 Guess who will ultimately pay back that government debt: American households.

A Theory About Polish Politics

This morning’s New York Times has a piece about Polish PM Tusk’s avid support for Germany’s stance in EU bargaining.  The article plays up Tusk’s pan-Europeanism and leaves out his equally passionate attachment to fiscal orthodoxy à la Merkel/Schäuble.  Putting both together, you have the classical liberal position, one that can still be found in every European country, although seldom with as much backing as in Poland.

I don’t have a detailed understanding of Polish politics, and I welcome comments from readers who can set me right, but here is my tentative explanation:

More on Teaching Intro

Peter started a discussion here. And Nick Rowe at Worthwhile Canadian Initiative, under the title "God and Man at Yale" has another one, with hundreds of comments. I'll add my two cents. This is a comment I sent to WCI actually.

I want an Intro. Course to show students "how to think like an economist," but I also want some time devoted to the limitations of such thinking. I used to teach the course with David Friedman's *Hidden Order* and Robert Frank's *Choosing the Right Pond*, so they could see how the same methodology - rationality plus equilibrium - could give you very different political-economic visions. But the methodology itself -whether wielded in support of libertarian or left-liberal politics - ought not to be accepted uncritically. So I would assign Dickens' *Hard Times*. The students hated the Dickens, so I dropped it and substituted Amartya Sen's "Rational Fools." I wanted them to understand how the phenomenon of "commitment", as Sen uses it, by which he means "counter-preferential choice" is a deep critique of the conception of rationality that economists use. Unlike the behavioral critique, which simply documents all the ways people make mistakes in maximizing, a Senian critique says that human beings are more than utility maximizers. As the late lamented David Foster Wallace puts the point in a discussion of Dostoevsky, "[Dostoevsky’s] concern was always with what it is to be a human being—that is, how to be an actual person, someone whose life is informed by values and principles, instead of just an especially shrewd kind of self-preserving animal." I don't think this deep critique cuts either right or left, but I think we do a disservice to our students by not exposing them to it. The fact is that most of them when they come to us are already "thinking like economists" in important and pernicious respects: they are cynical about the possibility of principled behavior, they are sure that behind every alleged "value" lies a preference, they are nihilistic about normative authority. The have been brought up, after all, in the age of "sophisters, calculators and economists."

At an AEA meeting one year long ago, there was a session on "Teaching the Principles Course" I attended, which was really just advertising for two new texts by the presenters, one of whom was Robert Frank. (The text he was introducing is the one I have used in the Micro split ever since - it's a great book.) Frank talked about how the book encouraged the students to be economic naturalists, and to apply the economic way of thinking to everything they came across. I asked a question: suppose a student comes to your office hours and thanks you for teaching him the EWT. He was in a long-term relationship and felt that he owed his partner loyalty, but that after learning that sunk costs shouldn't play any part in guiding one's choices, he decided - given that the net benefit of the relationship going forward was negative- that he owed his partner nothing, and consequently was dis-loyal. Frank seemed genuinely at a loss for a response and after the session sought me out to talk more about it.

John Taylor Clarifies His Summary

John Taylor is not happy with a critic from Paul Krugman. His most recent summary states:

Krugman says my conference summary suggested that “Bloom, Baker and Davis had showed that fear of Obama was holding the economy down.” No, my summary said or implied no such thing; there is no mention of Obama, Bush, or any politician in my summary. It simply says that these authors “presented their empirical measures of policy uncertainty and showed that they were negatively correlated with economic growth.” … As part of his presentation Bob said that now and going forward we should assume “no chance of conventional fiscal expansion; rather, possible cutbacks motivated by excessive federal debt.”

Contrast this to what Taylor originally wrote:

In sum there was considerable agreement that (1) policy uncertainty was a major problem in the slow recovery, (2) short run stimulus packages were not the answer going forward

Wow – I read (1) as saying a lot more than simply negatively correlated. I also read (2) as asserting fiscal policy was ineffective but now we know that Dr. Taylor meant fiscal stimulus was never tried and will not be tried. I’m so glad he cleared this up!

Climate Change Proposal

If a large number of countries wish to band together to limit climate change, could they impose a tariff on imports from countries that do not limit CO2 production, accusing the non-compliant of taking advantage of an unfair trade practice?

John Taylor May Have One Thing Right

Paul Krugman provides us with the summary of a conference at the Hoover Institute provided by John Taylor. Paul notes that Taylor’s summary misrepresented what Bob Hall said:

Taylor makes it seem as if Bob Hall showed that fiscal expansion is ineffective. Yet if you have actually been following Hall — which I have, carefully — you’d know that he has been producing extensive evidence that fiscal expansion does, indeed, work; he argues that the Obama stimulus made the slump considerably less severe. His complaint is that the stimulus wasn’t big enough — which is the same argument I made from the beginning.

For a more fair and balanced summary – see Noahpinion. But let’s also note the following from Taylor’s summary:

I presented research with John Cogan on fiscal policy showing that it had not been successful in raising government purchases and was ineffective regardless of the size of the multiplier.

In other words – we really did not try fiscal stimulus after all. Isn’t that also been what Paul has been saying for quite a while!