Stromata Blog

A Worrisome Gap

John J. Miller calls attention to an omission from the newly announced Obama economic team: no U.S. Trade Representative. Maybe the lacuna means nothing and will be filled promptly, or maybe “expanding foreign markets for American products isn’t part of the game plan”. One can’t help wondering whether the candidate who was going to “get on the phone to the president of Canada” to demand a protectionist recasting of NAFTA pays much heed to Larry Summers’ free trade proclivities.

“Some Balance to Our Tax Code”

Yes, the Obama economic team is reassuring, that is, in comparison to Barney Frank. Less reassuring is what the President-elect has to say about taxes. Let’s focus on just one part of what he said at today’s press conference:

[W]e’ve got to restore some balance to our tax code. And the Bush tax cuts were disproportionately targeted towards the very wealthiest Americans. Those who are making more than a quarter million dollars a year can afford to pay a little bit more.

And it is important, if we’re going to help pay for some of these expenditures that are absolutely necessary to get our economy back on track, that those who are in a position to pay a little bit more do so.

What does “balance” involve? Let’s look at the data.

In 2000, before President Bush’s tax cuts, the richest five percent of the population paid 56½ percent of all income taxes. In 2006 (the latest year for which statistics are available), they paid 60 percent. Looked at another way, the ratio of their share of taxes to their share of adjusted gross income rose from 1.60 to 1.64 during that period.

To “restore balance” would entail, if one uses words in their ordinary sense, reducing the upper tax brackets, or raising taxes on everybody else. Obviously, Mr. Obama has a different idea. My guess is that his egalitarian sensibilities are upset by the fact that the average income tax rate for the upper five percent of taxpayers declined from 24.4 percent in 2000 to 20.7 percent in 2006. The average fell even faster for everybody else (e. g., from 4.6 to 3.0 percent for the bottom 50 percent), but that apparently doesn’t matter. “Balance”, it seems, involves getting average tax rates for “the very wealthiest Americans” back to where they were during the Clinton years.

If that’s our new leader’s standard of fairness, he’s entitled to argue for it. He isn’t candid, though, when he talks about paying “a little bit more”. To return to the Clinton average would require almost a 20 percent tax increase (and a much bigger jump in marginal rates) for “the rich”, which is pretty drastic by any standards. Nonetheless, the resulting revenues (about $100 billion a year, blithely disregarding all disincentive effects) wouldn’t do much “to help pay for” expenditures on the level that the President-elect has proposed. His initial “stimulus” package – $700 billion over two years – is over three times as large. To extract the entire tab from the targeted twentieth would take roughly a 60 percent tax hike.

Can we take comfort in the expectation that the Geithner-Summers-Romer trio will tell their boss that his concept of “tax balance” is economically suicidal? Maybe. On the other hand, he has never hidden his personal faith in the infallibility of his own “judgment”, regardless of whether he knows much about what he is judging. Let’s not count on three economists to overawe The One. We could yet see the day when Americans will migrate to Sweden in search of a tax haven.

Orphaned Victory

For once, it isn’t true that “Victory has a hundred fathers; defeat is an orphan”. Oh, in the dexterosphere, for which today is V-I Day, praise will be ladled out to General Petraeus and even to the President who made the decision to put him in command, but the consensus of bien-pensants is that (a) the Iraqi campaign wasn’t an American victory and (b) it wasn’t won by anything America did.

The Obama Version falls into the mainstream of conventional wisdom: The Sunnis in Anbar province spontaneously rose up against al-Qa’eda, motivated by revulsion against its harsh treatment of their tribes. American and allied forces were bystanders, and the “surge” that began shortly after the first stirring in Anbar was a coincidence rather than a cause. According to this “narrative” (hereafter, NINNY, the “New Iraq Nattering Nabobs Yarn”), the Anbar Awakening would have taken place even had there been no U.S. Marines at hand to lend it firepower and expertise.

The vision of the “people’s revolution” against oppression is dear to the Left, for two reasons: First, it casts a warm glow over left-wing revolutions, such as the French and the Russian and the Cuban, that ushered in regimes far more vicious than what they replaced. Second, it provides a handy excuse for passivity in foreign affairs. Hostile tyrants will be overthrown without our having to act – and it they aren’t, their continuance in power demonstrates that they are not really tyrants.

Hence, resolute leftists opposed doing anything about Saddam Hussein. The irresolute were swept along with the post-9/11 tide, then, when the fighting continued, regressed to their mean and called for acquiescence in defeat. The principal motive for the NINNY is to justify their position by stripping victory of its paternity and blurring the distinction between success and failure.

How closely the NINNY corresponds to reality isn’t of interest to historians only. History, in the hands of polemicists, is a form of propaganda. That’s why, for instance, pro-communist A. J. P. Taylor and anti-American Pat Buchanan, two advocates of a wholly passive U.S. foreign policy, have zealously promoted the canard that Adolf Hitler had only moderate, realistic ambitions for Nazi Germany. The canard at the heart of the NINNY likewise leads to passivity.

The NINNY’s fundamental flaw lies in its axiom that Islamofascist terrorism will inevitably inspire revolt. That is not what history shows. The tactics of al-Qa’eda in Iraq and the Taliban in Afghanistan are, in fact, based not on a mere taste for brutality but on what has worked for similar movements in the past.

The first great success of Moslem arms against a Western nation was the Algerian revolt against France. There the rebels’ treatment of the local population featured “the systematic and gruesome slaughter of large numbers of Muslims to show everybody, French and Muslims, who was boss”. Terrorization “was a permanent and systematic modus operandi”. [Laurent Murawiec, The Mind of Jihad (2008), pp. 297–8]. The effect was not, as the NINNY would have predicted, an “Algerian Awakening”. Perhaps (indeed, probably) something of the sort could have been incited by a French counterpart to General Petraeus. Malhereusement pour la belle France, its commanders relied on counter-terror, which “worked” in the narrow sense of keeping the Moslem majority in a state of perpetual fear but didn’t gain allies and eventually, fatally lost support in the mother country.

In Iraq and Afghanistan (and elsewhere), the mufsidun have emulated the tactics that triumphed in Algeria. There is no strong reason to think that the NINNY strategy of leaving it to the victims to help themselves will be, or would have been, an effective countermeasure.

Before the NINNY becomes immovably entrenched, the real history of the Iraqi campaign needs to be told. Like the history of any other war, it contains a fair share of folly and blunder. Those are what the media’s “zeroth draft of history” highlights, reflecting the preposterous notion that making a plan in advance and adhering to it faithfully are the benchmarks of military competence, but they proved unimportant. What’s remarkable – nay, astonishing – about the American performance in Iraq is the speed and skill with which our civilian and military leaders adapted to the unexpected and overcame the friction of war. Consider this short list of feats that were declared impossible until they were accomplished (after which they were instantly taken for granted):

• The thorough defeat, in scarcely three weeks and with trivial American and allied casualties, of an Iraqi army larger than the invading force and supposedly (the MSM told us repeatedly) “battle-hardened”;

• the capture of Baghdad by a coup de main, without the Stalingrad-like siege that the “experts” had predicted;

• the organization of successful elections, notwithstanding a determined terrorist campaign to disrupt them (recall that John Kerry promised, if elected, to cancel the one scheduled for January 2005, declaring that it was bound to be a fiasco);

• and, finally, the eradication of a powerful terrorist apparatus in a period of less than a year and a half, counting from the beginning of the “surge” (comparable achievements elsewhere have taken years or decades).

The Second Gulf War has the highest ratio of controversy to casualties of any in our country’s history. Once contemporary passions subside, however, there can be little doubt that Iraq will be the case study of how to win an anti-insurgent campaign. Names like Rumsfeld and Petraeus will sit comfortably beside Grant and Lee, while George W. Bush will gain the reputation of a wartime President on a par with Roosevelt, if not Lincoln. In a century or so, the fathers of victory will be acknowledged. I hope, though, that their just due doesn’t have to wait quite that long.

A Simple Test

Here is a simple economic literacy test, directed particularly to those who believe that we can get rich by “greening” the American economy.

Jonah Goldberg has proposed “scrapping much of the interstate highway system, replacing it with a massive series of tunnels”. The benefits of this program would include –

• gainful employment for millions of Americans. . . .
• the wholesale scrubbing of auto-generated car exhaust from the air (I’d have someone create really cool air filters for every tunnel). . . .
• the aesthetic improvement of the landscape as there would be fewer highways cutting across America's vistas

. . . as well as some others that may not have been intended with absolute seriousness (such as “a new existential enemy — the morlocks and/or molemen — to help galvanize our civilization and help us find common cause with our current surface enemies”).

The test question is this: If the idea of abandoning the present highway system and constructing a new one from scratch is economically preposterous, would it not remain preposterous if one substituted “existing power plants” for “interstate highway system” and “windmills and solar power collectors” for “tunnels”?

Those who are perplexed by this conundrum may find hints in the famous Petition of the Candlemakers.

Seven of Nine!

For the past fortnight, I’ve been distracted by science fiction, specifically by Windycon, a Chicago area SF convention of which I’ve been treasurer for the past three years. Last weekend, the con finally arrived, and this afternoon I deposited the proceeds, after which I naturally took a peek at how my investments have been doing lately – and stumbled upon a skiffy theme.

Nine sessions since the election, and the averages have been down for seven of them. (If you don’t get the SF reference, your life will be none the worse for it.) Put another way, the Dow has lost an average of 1½ percent per day since America elected a President who will stop the oceans (and other things, it seems) from rising. At that rate, the average will be back to its all-time low (28.48 in 1896) before the next Congressional election.

I’d naively thought that an Obama victory was fully discounted by November 4th. Evidently, The One’s vague demeanor, calming as it may be to reporters, leaves investors still wondering who was elected: The radical community organizer? The go-along soldier of the Illinois Democratic machine? The soaring rhetorician of unity and post-partisan politics? The manager whose underlings set up an insecure, fraud-prone on-line credit card operation? The assembler of a third Clinton Administration?

To date, the President Elect, whoever he may be, has made one firm economic decision: to throw another $25 billion (on top of $25 billion already pledged) into the quicksand of the Big Three auto makers. As GM, Ford and Chrysler toward a cliff, the chief effect of the federal subvention will be to discourage them from swerving or slamming on the brakes. Detroit’s plan continues to be, sell at a loss and make up for it with volume. That Senator Obama thinks that’s just dandy may explain why Messrs. Dow and Jones are skittish.

Room for India Under That Bus?

This year we have the largest ideological shift in the Presidency since Ronald Reagan was elected in 1980. A striking difference between then and now is that everybody had a reasonably clear idea of what President Reagan was going to do. He had not only run on a platform of “change”; he had specified what changes he had in mind: lower taxes, less government regulation, sound money, tough anticommunism. President-Elect Obama remains comparatively a riddle. What we saw during the past two years isn’t necessarily what we’re going to get.

Quite a few conservatives have been heartened by Obamindeterminacy. Given how far to the Left he campaigned, any uncollapsed quantum waves are almost bound to scatter to the Right of what we anticipated. But before we get our hopes too high. . . .

Immediately after being elected, Senator Obama started making phone calls to foreign heads of government. There is obvious symbolism to the order of these chit-chats. Hence, it is probably not happenstance that the Prime Minister of India was not an early recipient is almost certainly not happenstance. The omission has caused a stir in Asia.

Among the world’s democracies, India is first in population and third in gross domestic product. Though not formally an ally, it is one of America’s best friends in the Far East and a front line target of the mufsidun. It recently signed a nuclear cooperation treaty with the U.S., which is awaiting Senate ratification. Yet it didn’t even make the top fifteen on the President-Elect’s list. Asked about the “oversight”, one of Prime Minister Singh’s aides sounded, to my ears, just a little testy: “Of course, we are not in the same league as South Korea, Australia and New Zealand, and we are happy not to be.”

David Frum suggests, not implausibly, that this cosmetic downgrading of India is a prelude to more substantive slights:

The US wants fuller Pakistani cooperation against the Taliban in Afghanistan. The more motivated the Pakistani military is to help, the more successful (and less costly!) anti-Taliban operations will be.

Now what one thing could the US offer that would most strongly motive the Pakistani military? Answer: a pro-Pakistani tilt on Kashmir.

Such a tilt would compromise the important US long-term goal of developing a closer relationship with India. It would reward Pakistan for decades of state sponsorship of anti-India terrorism. But it could deliver some immediate results in Afghanistan – and that might be a trade that an administration that wishes to wriggle away from a campaign promise to send more troops to Afghanistan might be willing to make.

If so, it would be unsurprising that India would not receive an early call.

Before the election, the Indo-Asian News Service published an interview with the Democratic candidate, in which he waxed loftily about the importance of India as a “strategic partner”. But that may have been “just words”. His record brims with positions that could quickly cool relations with New Delhi, most notably his know-nothing denunciations of outsourcing. He was also an early critic of the U.S.-India nuclear pact, though he eventually came down in its favor. Perhaps, then, he ignored Mr. Singh simply because closer relations with India don’t fit the his vision of the ideal world.

Or perhaps he wasn’t thinking about anything in particular and this misstep is what we can expect from a President whose limitless confidence in his own abilities is founded on a slender base of knowledge and experience.

As with much else about our leader-to-be, we shall have to wait to find out.

Good News from Denvention 3

In an e-mail to the convention staff, chairman Kent Bloom announces that Denvention 3, the 66th World Science Fiction Convention, finished with a surplus and will be able to reimburse staff memberships in accordance with custom. Not many Worldcons have faced such severe challenges or been forced to improvise so adroitly. When I chaired Chicon 2000, there were rough moments, but they were mirror-placid seas compared to what Kent and his concomm went through. My congratulations to them all.

Saving Detroit in Order to Destroy It

From the point of view of the American economy as a whole, shoveling 50 billion tax dollars into the coffers of American auto companies is an obvious bad idea. If there were a reasonable prospect that Detroit’s Big Three would use that money to make more money, the government wouldn’t have to furnish the funds. By diverting capital to less profitable uses than it would otherwise find, the bailout will make us all poorer even if the loans are repaid in full and on time.

Still, a bad idea can be made worse. Henry Payne, a Detroit News editorial writer who follows the auto industry, observes that Congressional Democrats are already demanding that Detroit repay not just in cash but in changes to its operations that will please people who, at heart, don’t really like automobiles.

A Democratic Green Industrial Policy was already gaining speed Thursday as American automakers groveled for money before the most openly hostile-to-auto Congress in U.S. history. . . .

Imagine Pelosi’s surprise, wrote Detroit News columnist Daniel Howes, “that she and her like-minded colleagues are in a position to dictate the future of an industry they’ve shown repeatedly to dislike.”

It is, of course, no coincidence that the Big Three arrived at Washington’s doorstep together. All three have labored under “pattern bargaining” union contracts — Democrat-supported unions — that made their wage and pension costs unsustainable against non-union foreign automakers.

And all three paid discriminatory costs on federal fuel-mileage rules — Democrat-drafted fuel-mileage rules — that put them at a compliance disadvantage relative to foreign competitors’ smaller lineups.

A Democratic bailout of Detroit’s auto industry is a Faustian bargain if there ever was one. And the price will be steep.

The terms of the bargain are predictable: product lines top-heavy with low-profit, unsaleable, “environmentally responsible” cars; cost-boosting “American content” standards; the continuation of unsustainable labor contracts; executive compensation limits that make it impossible to compete for top management talent.

The outcome is predictable, too. The auto makers will burn through the Treasury’s “investment”, will remain unable to compete with lower cost foreign competitors, and will return to Washington to beg another round of subsidies. By degrees, the government will become the industry’s effective owner, at which point the debate will, I imagine, pit those who want to maximize the value of Auto-U.S. by barring foreign competition against advocates of phasing out production as UAW members retire, thus opening the way for a future of bicycles and mass transit.

Addendum: In related news, Mr. Payne takes note of one early sign of the Obama Administration’s economic direction:

The change we need? President-elect Barack Obama has just named Michigan governor Jennifer Granholm to his 17-member economic advisory panel. . . .

But Granholm has presided over the worst state economy in the United States since her election in 2003. Just last year, in the teeth of a gaping budget deficit and galloping unemployment now at 8.7 percent, she raised personal income taxes 17 percent. Her energy legislation passed this year further taxed Michigan ratepayers by hiking their utility bills an estimated 12 percent while gutting Michigan’s energy market deregulation. . . .

With her popularity ratings hovering in the mid-30s, respected state political analyst Bill Ballenger has called her “the worst governor in Michigan history.” Obviously, she has much to teach the president of the United States.

Why Red China Won’t Rule the World

Now and then even the Wealth Spreader hints that he may shrink from raising taxes during a recession à la Herbert Hoover. Elsewhere followers of wealth-spreading economics aren’t so timid about applying their philosophy ruat caelum. Here is a bulletin that I received this morning from my firm’s international tax group about communist China’s strategy for coping with hard times:

In recognition of the global economic downturn and the anticipated slowing down of domestic growth, the State Administration of Taxation (SAT) has issued an “urgent notice” [Circular Te Ji Guo Shui Fa 2008/97] towards the end of October 2008 to all the State Tax Bureaus and the Local Tax Bureaus at provincial and municipal levels, urging them to intensify tax collection for the 4th quarter of 2008 and step up anti-avoidance efforts. The Circular has been marked “URGENT” for immediate actions by the various tax bureaus. . . .

SAT has outlined the following enforcement activities in the coming months:

• Stepping up on anti-avoidance activities, including intensified monitoring of cross-border transactions conducted by individuals;
• Strengthen tax audit activities, including random audits on selected companies by the end of 2008, thereby closing tax loopholes;
• Increasing scrutiny on annual filing and taking  punitive action against  non-compliance offenders;
• Increasing scrutiny on non-employment income and intensify collection of income from transfer of equity, dividends, accidental income, etc.

May we now shelve the idea that the “dynamic” People’s Republic knows the secret of perpetual economic growth?

Getting to Know You, Getting to Know All About You

Barack Obama may be an enigma to many, but Mr. Dow and Mr. Jones have given us their first impression of his Presidency, with the most impressive two-day stock market decline in 21 years. Why would anyone think, in the heady aftermath of his election triumph that the first Democrat since Jimmy Carter to gain a majority of the popular vote is likely to be a Presidential proof of the Peter Principle? Well, his record and rhetoric could lead an only mildly jaundiced observer to impressions like these:

1. He is an unimaginative “get-along, go-along” politician rather than an innovative leader. As a community organizer in Hyde Park, he hung out with radicals. In the Illinois legislature, he faithfully served the Chicago machine. In the U.S. Senate, he voted the party line. If he has ever had an audacious thought, he hasn’t uttered it. He shows only a tepid interest in public policy and a feeble knowledge of history. He appears reluctant to make decisions. In sum, he has so far been an oddly passive figure, “wafted by a favoring gale/ As one sometimes is in trances”, an actor who has mastered the lines given to him instead of the auteur of his own Presidency.

2. His perspective on foreign affairs is Panglossian, as diversely illustrated by his reduction of the Berlin Airlift to an example of the peoples of the world coming together to deal with a crisis, his insistence that we can hold fruitful negotiations with the Iranian mullarchy, and his tepid initial reaction to the Russian invasion of Georgia. The War on Terror, too, is no more than a limited conflict with al-Qa’eda, which exists only in Afghanistan and the nearby parts of Pakistan. Our other adversaries can be mollified by sincere diplomacy. At the same time, he expects other countries to act more in accord with their sentiments than their interests. Thus it is very important to close our prison at Guantanamo Bay, because foreign public opinion doesn’t like it, yet adopting protectionist policies won’t have any impact on relations with the neighbors we’re trying to beggar.

3. His notion of how the economy works is naively demand-sided. Putting money into the hands of poor and middle income consumers will create prosperity, because they’ll then buy more goods and services. Alas, goods and services must be produced before they can be bought with redistributed dollars. As Rudyard Kipling, a better economist than this acolyte of Saul Alinsky, put it:

   In the Carboniferous Epoch we were promised abundance for all,
   By robbing selected Peter to pay for collective Paul;
   But, though we had plenty of money, there was nothing our money could buy. . . .

   To fund its beneficence, the government has to either take more from producers or manufacture money out of nothing. The latter course of action defeats itself through inflation. The former leaves the “rich” with less incentive to produce, less capital to invest in other productive enterprises and, for that matter, less wherewithal to spend on their own consumption. Unless one believes that the country is full of Uncle Scrooges hoarding their cash in money bins, it is absurd to think that dollars gain vigor by being shuffled from A to B. Nor is this just a matter of theory: For the past quarter century, the United States has practiced supply side, and Europe demand side, economics. Our economy has grown vigorously, modulated only by the inevitable business cycle. Europe has stagnated.

4. Side by side with demand side economics, he nourishes a contradictory readiness to reduce ordinary Americans’ purchasing power through a sharp rise in energy prices. As I noted in my last post, the natural outcome of his policies – an outcome that he half acknowledges – will be a lower standard of living and recession in perpetuity. That he is unfazed by that prospect suggests to me that his economic philosophy is, like that of many men who have given little attention to such matters, a vague jumble within which all varieties of delusion can readily find a place.

What these factors point to is a President who is by nature a party loyalist and Beltway insider, the sort who will drift along with liberal orthodoxies. The latest sign that he is no harbinger of innovative policymaking or a new kind of politics lies in his first two appointments: John Podesta to head his transition team, Rahm Emanuel as White House chief of staff: two Clinton retreads, one a left-wing ideologue, the other a classic “war room” politician.

No wonder Messrs. Dow and Jones are gloomy. It would be nice – and good for my portfolio – for them to be proven wrong, and I can fuzzily imagine a scenario in which President Obama, newly sworn in, throws off the mask and announces that he has long been a secret disciple of Milton Friedman. Now, that would be quite a denouement for this bizarre election cycle.

Obamausterity

The idea of economic stagnation as a desirable policy is still only a whisper on the fringe of the environmental movement. That isn’t a reason to ignore it. All ideas start out being thought by only a few. Sometimes – anyone over 25 can call up examples – the conventional wisdom about them moves from “Preposterous!” to “Oh, but of course” in an astonishingly short time.

So let’s not presume that prosperity will remain one of our government’s goals. Let’s especially not presume it when the man who, according to the polls, is likely to become our President-elect next Tuesday speaks thus:

There is no better potential driver that pervades all aspects of our economy than a new energy economy.

I was just reading an article in the New York Times by Michael Pollen about food and the fact that our entire agricultural system is built on cheap oil. As a consequence, our agriculture sector actually is contributing more greenhouse gases than our transportation sector. And in the mean time, it’s creating monocultures that are vulnerable to national security threats, are now vulnerable to sky-high food prices or crashes in food prices, huge swings in commodity prices, and are partly responsible for the explosion in our healthcare costs because they’re contributing to type 2 diabetes, stroke and heart disease, obesity, all the things that are driving our huge explosion in healthcare costs. That’s just one sector of the economy. You think about the same thing is true on transportation. The same thing is true on how we construct our buildings. The same is true across the board.

For us to say we are just going to completely revamp how we use energy in a way that deals with climate change, deals with national security and drives our economy, that’s going to be my number one priority when I get into office. . . .

The “new energy economy” may be a hazy dream, but one element is absolutely clear: It will be an economy where energy is more expensive than today, not because less costly alternatives don’t exist but because the government prefers to force factories and farms and transportation systems to forgo them. Senator Obama seems to understand that higher energy prices mean a lower standard of living. How is American agriculture “contributing to type 2 diabetes, stroke and heart disease, obesity”? By taking advantage of “cheap oil”, our farms grow food that even the poorest can afford in abundance. Up the price of energy, as happened during the oil price bubble earlier this year, and people will perforce eat less.

They will also drive less, dress less well, live in smaller homes with fewer comforts, have fewer choices of goods and services, and so on. Changing to a way of life “that deals with climate change” will indeed “drive our economy” – but not forward. The Wealth-Spreader doesn’t mind. His slogan in 2012 may well be, “Recession is good for you!”

Further reading: David A. Ridenour, “Limiting C02 Emissions Hurts Poor Most”