A victory for moral clarity

It’s hard for the West to understand the full scope of the disaster that’s befallen Libya. It’s happened, in part, because no one in or outside Libya bothered to figure out what the country might really look like after the dictator was gone.

BusinessWeek, August 7, 2014

Early this year, the Libyan Investment Authority filed suit against Goldman Sachs. LIA claims that, “Goldman Sachs abused the relationship of trust and confidence with the then newly-formed LIA…The fund suffered significant losses.”

How significant? In 2008, the LIA made a $1.3 billion investment with Goldman. The money evaporated. For their formidable investment advice, Goldman also received $350 million in fees.

Just Goldman doing what Goldman does, perhaps.

The LIA was formed in 2006. After the Qaddafi regime made a clean breast of its chemical and nuclear weapons programs, and paid reparations to the families of Lockerbie victims, Libya was removed from the State Department’s list of states sponsoring terrorism. Moammar Qaddafi’s son Seif drove the establishment of the largest sovereign wealth fund in Africa, seeing it as a way to diversify the Libyan economy away from its dependence on oil. (Although under the table payments from western investment banks may have helped him see the light.)

The Libyans, now able to engage western financial institutions, but not terribly sophisticated, seem to have become the targets of every sharp operator from Société Générale to Goldman Sachs. Which I suppose is just investment banks doing what investment banks do – that is, exploit every asymmetry available to them.

The story might have ended there, with only a slow bleed into the shark pool while Libya learned to swim. But then came Libya’s version of the Arab Spring, only this time with an opposition armed and supported by NATO.

When protesters clashed with Libyan security, western powers decided to take the moral high ground. Libyan government forces had fired on civilians. The Libyan government was therefore evil. The opposition was therefore good. Q.E.D.

With NATO money, weapons, and 26,000 airstrikes, the opposition was, not too surprisingly, victorious. Although you have to stick to a pretty narrow definition of “victory” to appreciate it.

Thousands of heavily armed gangsters daily roaming the streets, kicking down doors and breaking into government ministries, extorting millions on a whim, torturing or killing anyone who crosses them or maybe just looks funny – the victors make Latin American drug cartels look like buttoned-down businessmen doing lunch at the rotary club. You’d rather work for the cartels.

Three years after Qaddafi was killed and nearly everyone involved in running the government either sent packing or summarily executed, virtually nothing in Libya works, except the oil terminals. The one thing the gangsters seem to agree on is to keep the cash coming.

As BusinessWeek put it, “…Libyans who opposed Qaddafi and fought for a more equal and democratic future, have been murdered. Their deaths have passed without any demonstrations…a measure of how irrelevant the causes for which Libyans fought three years ago have become. Libya’s economic future, once touted as the brightest in Africa, looks equally bleak.”

This morass of anarchy is a direct result of “moral clarity” in the west – truly a form of negligence. Focus on one particular ‘evil’, trumpet it long enough and loudly enough, and we can all forget the messy, inconvenient details.

And that is exactly what we have done.

 

 

 

The quagmire deepens

The quagmire of Iraq is merging into the larger morass of the Middle East, the morass growing deeper weekly with the military successes and sensationalized brutality of the Islamic State.

President Obama has taken to describing IS as a ‘cancer’, ordering airstrikes whose objectives are morphing from the humanitarian, i.e. facilitating the escape of persecuted  minorities, to the ostensibly moral, i.e. defeating the ‘cancer’ itself.

Editorials, blogs, and bloviating ‘experts’ made up and mic’ed for TV are ominously warning of the threat to the West. Apparently, jihadists recruited from Europe may go home again and cause trouble there.

The President is wading in deeper, not because he has a plan to fix Iraq, or Syria, or Gaza, or anything else, but because he’s being driven by politics into doing something. Airstrikes are ‘something’; we know how to do it; so we’ll do that. Maybe we’ll be able to kill enough IS fighters that the thing will disintegrate, and we can resume our withdrawal from the region.

Maybe. But the Middle East will not change, because the cancer that eats at that part of the world is not the Islamic State, or even jihadism. It is a cancer that was first planted and cultivated nearly 100 years ago by France and Britain after the First World War, when they carved up the old Ottoman Empire to suit themselves and their thirst for oil.

The cancer is political weakness.

Like many parts of the world, the Middle East is a stew of ethnicities and religions. There is nothing wrong with that. Even disparate peoples who must live together usually learn to get along. They develop commercial and social relationships. They intermarry. But they are also tinder for ambitious political adventurers who are good at striking sparks and fanning flames. (See The Politics of Tinder.) Political power is what keeps the adventurers down and the flames dowsed. Sarajevo, for instance, was once a cosmopolitan European city where Serbs, Croats, and Muslims lived in peace and raised families together. It even hosted the Winter Olympics.

Then the Soviet Union disintegrated, the adventurers came out of the woodwork, and Sarajevo became synonymous with “ethnic cleansing”.

So it is in the Middle East. Autocracies like Saudi Arabia and Egypt understand this all too well, and do whatever it takes to keep the adventurers down, whether it means buying off radical religious leaders or jailing and killing political opponents.

But the fragmentation and weakness of the Middle East go hand in hand with the machinations of Western politicians and security services, who dispense with humanitarian and democratic niceties in pursuit of short term ‘realpolitik’. Like selling anti-air and anti-armor weapons to the revolutionary Islamic Republic of Iran in the 1980s. Like cultivating Saddam Hussein as a covert client when the Islamic Republic used its weapons to invade Iraq as far as Basra. Like acquiescing to Saddam’s plan to cross the border into Kuwait, because he was such a good covert friend (see April Glaspie).

The only way to grow a civil society is for a government to become strong enough to defeat the anarchists, and to become reliant on tax revenue for its continued existence – not oil or Western aid. This is how the virtuous circle is started and maintained, where a government thrives because its people do, and its people thrive because their government ensures civil order. This was appreciated as long ago as William the Conqueror.

Apparently not so today. It is inconceivable that Western democracies are capable of either helping to bring this about in the Middle East, or even refraining from undermining it, were it to begin on its own. Ultimately the cancer of political weakness persists because we in the West want it to – for many reasons, open and covert, not the least of which is competition for oil.

The US military may well defeat the Islamic State, but the morass of humanitarian, political, and economic issues and conflicts will only deepen, principally because the web of Western interests is a Gordian Knot that no one is willing to cut.

We will instead moralize. Throw political darts. Attend conferences. Announce cooperation and reconstruction. Throw money at our ‘friends’. Kill a few people. Moralize some more.

As we have done for a hundred years.

 

Don’t be naive, right?

The government in Beijing has quietly removed a number of Apple devices from its approved purchasing list, including iPads and MacBooks. Some sort of trade sanction? Nope. They believe iOS has been hacked by the NSA.

They have good reason to believe it. We’ve all heard about the PRISM program, about something called Dropout Jeep, and about Shotgiant.

Shotgiant began as a program to hack into Huawei servers and steal information. But it didn’t end there. It morphed into a program to insert backdoors into Huawei communications products:

Rather than stop at simply collecting more information than it could process, however, a NSA special-operations unit bored into the company’s technical data, eventually compromising servers holding source code for the firmware that runs the routers and switches Huawei builds for large corporations and telecommunications companies.

The goal was to build secret backdoors or security flaws into the source code, which Huawei would then build into its own products and distribute to a customer base so large that Huawei boasts that its products connect a third of the world’s population.

EETimes Asia

More of the ‘good fight’, right? They do it to us, so we do it to them.

Maybe. What strikes me is that it’s a long, long way from the hoary notion that a fully interconnected and integrated world will be a peaceful one, because no one wants to upset the shared prosperity. This may in fact be the long term goal of many a statesman, such as those behind the Euro project. But it isn’t the goal of the security services of Russia, China, or the US. Their goal is much simpler: Beat the other guys.

The security services of at least two of these nations are arguably beyond control of their respective civilian governments. I’m not so sure about China. Beijing might possibly be in control, or the PLA may enjoy even more autonomy than it appears.

The UK’s GCHQ seems to be an adjunct of the NSA. This leaves the rest of Europe, which years ago became a battleground in US-Russia tensions.

To me the underlying reality traces back to the ‘military-industrial complex’, made so notorious by President Eisenhower in his farewell address. It’s really a National Security Complex (NatSecCom?), shifting with the latest designated adversary, that uses secrecy and fear to build careers and acquire power. China has one. Russia has one. And so do we.

Russia may implode. And then there will be two, plus possibly another failed state to add to the list of casualties of the war that never ended.

 

But what to do about it?

In a previous post I tried to point out that there are areas in any modern economy where markets don’t operate reliably, or don’t operate at all. Market meaning something that works through supply and demand to optimize society’s allocation of resources.

Sometimes this is because what constitutes supply (let’s say savings) and what constitutes demand (say business investment) don’t actually meet directly in a marketplace,  but go through an intermediary (institutions like banks, etc.) with its own motivations. Sometimes it’s because one side (say skilled labor) can not change rapidly in response to the other (say factories relocating overseas).

Why should we care? Because in a market for coffee sweeteners, for example, all sides can adjust fluidly to the best balance of prices that makes consumers happy and is profitable for business. Which is presumably a good thing for society. Where markets can not accomplish this, the consequences may be very much to the detriment of society. (See the Great Depression.) Waiting for a generation of people to die off is not an acceptable way to optimize the use of resources.

I still don’t like the term income inequality, for reasons I’ve already explained, but fortunately there are people seriously studying the effects of income imbalance. I just discovered this short paper, published earlier this year. From the paper:

[T]here is a strong negative relation between the level of net inequality and growth in income per capita…and there is a weak (if anything, positive) relationship between redistribution and subsequent growth

[T]he things that governments have typically done to redistribute do not seem to have led to bad growth outcomes, unless they were extreme. And the resulting narrowing of inequality helped support faster and more durable growth

It’s a growing consensus. Beyond a certain point, income imbalance hurts the economy. And many economies are beyond that point. The question is, what can we do?

When markets don’t work

Everyone has heard of the law of supply and demand. It’s supposed to be why markets work (whatever ‘work’ is supposed to mean). The price for a product or service is high enough to stimulate enough supply for the market, yet low enough that all of that product or service is consumed. In other words, the market finds its own equilibrium.

Free-market advocates also claim that the law of supply and demand, operating across markets for all goods and services, leads to the most efficient allocation of resources. This is less persuasive. When China was plagued with opium dens, it’s hard to see how this was efficient in any useful sense of the word. It is equally hard to see how a modern economy would benefit from an open market in heroin, tainted food, or half-trained doctors.

While the efficacy of supply and demand in finding an equilibrium price seems indisputable (with exceptions like asset bubbles), there are areas of the modern capitalist economy where it just doesn’t work that way.

Take savings and investment. Some people labor under the impression that savings must always equal investment, but they forget the role of financial intermediaries (or else they are confused as to what ‘investment’ is). Decisions to save and decisions to invest are made by different people, or at least people acting in different roles, and they are often made for contradictory reasons. When the economic horizon looks cloudy, the preference to save increases, but the desire to invest decreases. You might think that interest rates would fall until things are brought back into balance again, but if you’re worried about your job, you don’t save based on the rate of return. You save to have cash available. It won’t matter much if your savings earn 5% or 0.5%. In the same situation, financial intermediaries (e.g. banks) accumulate reserves (or they should), which means they’re happy to accept your deposit, even if they have no plans to lend it out.

This is a source of economic instability. Barring intervention by the authorities (monetary policy or fiscal stimulus), production drifts down until enough people have lost jobs or hours so that they are forced to spend more of what they do make, and their diminished savings falls back into balanced with the diminished need for business investment.

So there’s an equilibrium, but one could hardly call it ‘optimum’.

There is another area. Less explored, but perhaps all the more significant.

Virtually everything produced in a modern economy is the result of a collective effort, meaning it takes an organization to deliver goods and services. The main reason for this is that it takes specialization to produce something of sufficient value in sufficient quantity to be competitive in the market.

So if it takes 100 different jobs and skills sets to produce XYZ widgets, and the sale of those widgets brings in a certain amount of money, how is that money divided among the different jobs, and the return to capital?

In other words, what is the value of any particular kind of labor, versus the owners and managers of capital?

Well, you say, it’s determined by supply and demand. And yet, I respond, the US  economy is awash in capital (starting long before quantitative easing) in the forms of monetary wealth and glutted capacity, while at the same time the returns to capital and its managers absorb a steadily greater portion of national income.

So what is the mechanism supposed to be that brings the distribution of income into equilibrium? Is it stagnation, where low or no inflation combines with low rates of interest, declining growth, and a declining labor force participation? It’s hard to see how this leads to rising wages for those who continue working, without fairly disruptive changes to society. Alternatively, it’s hard to see how the continued stagnation of income for most of the population represents a useful optimum.

The history of the past 20 or 30 years suggests that, if there is an equilibrium process at work, unlike the markets we are familiar with this one may operate over time frames that exceed the normal allotment of working years, if not the human life span. And this is not at all optimal.

Income what?

The phrase “income inequality” has been all the rage. Economists study it. Talking heads rant about it. Politicians debate it. And it has become another litmus test in the Great Liberal-Conservative Theater of the Absurd.

But “income inequality” can not possibly mean what it suggests, that those who think it is a problem believe that all incomes should be equal. I’ve known some Marxist firebrands in my time, and even they would have paused before suggesting such a thing.

So why employ a term that poisons the discussion at it’s start? The usual left-wing laziness, I suppose, abetted by the usual right-wing ambush mentality.

But there is something real here.

For years, economists have thought of such inequality in part as a side effect of policies that fostered the country’s economic dynamism…But economists’ thinking has changed sharply…The concentration of income in the hands of the rich might not just mean a more unequal society…It might mean less stable economic expansions and sluggish growth.

Income Inequality May Take Toll on Growth – NYT 10/16/2012

While the steady or slightly accelerating global growth rates predicted by the IMF is the most likely outcome, it may not be achievable because of three imbalances: social, geographical and demographic. These seem deeply embedded in the structure of global capitalism today. They are weakening demand, creating excess savings and driving the buildup of borrowing and lending that has been both a cause and consequence of the global financial crisis…

If too much of the income created by capitalism’s capacity to increase production flows to people who are already rich and likely to save rather than spend, then crises of under-consumption become almost inevitable…

Karl Marx was right – at least about one thing – Reuters 6/11/2014

Granted that any or all of these opinions may turn out to be wrong (although I am doubtful of that), it is important to distinguish between the technical questions concerning national and global economies, and the political questions surrounding who should get what.

So I propose we stop talking about “income inequality”, because the converse is something no one wants or expects to achieve, and think instead in terms of “income imbalance” — the converse of which at least stands a chance of having meaning.

 

Can democracy survive? – 2

Beginning in the early 1920s, Vladimir Lenin and Joseph Stalin propelled the Soviet Union into a centrally-planned industrial economy, ordering the construction of dozens of power plants and the electrification of industry. After the Wehrmacht invaded in 1941, the planned economy was ready to be re-purposed for war production, without essentially changing its character. After the German surrender, the Soviet Union rose to become the world’s second superpower, but the planners were losing their grip. By the time Ronald Reagan entered office, the planned economy, choking with its own unmanageable complexity, stifling all individual initiative, and falling behind, was crumbling badly.

In a world of increasingly complex technology and increasingly complex interrelationships, where effective private action was becoming increasingly important, the Soviets were committed to a trajectory of failure.

The genius of the capitalist system, such as it is, is to permit thousand of economic actors to ferret out and exploit areas of need, want, and desire, through profit-making business ventures organized to supply products and services as the opportunities arise.

Of course, even capitalists are can be reined in or called to account. Avenues of profitable exploitation, from drugs and prostitution to the convenient disposal of industrial waste in rivers and streams, are cut off by central authorities. And only a few think we would be better off were this not so.

Democracy might be thought of as a system where thousands of political actors are permitted to ferret out and exploit areas of grievance, greed, and zealotry, through office-seeking careers that promise to deliver a voice and recognition, as opportunities arise.

Unlike capitalists, activists and politicians are hardly restrained at all. From the founders of the Ku Klux Klan, to the Students for Democratic Action and the Weathermen, to Richard Mellon Scaife and Karl Rove, political actors very often bring more heat than light, as the saying goes.

But the genius of democracy is in no small part its ability to give every faction, no matter how wrong it is, a voice of some kind, so long as it is a large enough faction to be an electoral factor. And any faction that does not meet that threshold is in any case too small to endanger national stability if ignored.

Absent an existential crisis, democracy as we understand it is a battle of private agendas flying flags of public ideals, the institutions of government the battleground. But multifarious private agendas do not necessarily lead to effective public action.

In a world of competing nation-states, volatile finance, and environmental danger, where effective public action is increasingly important and increasingly difficult, it is right and prudent to think hard about what trajectory the world’s established democracies are on, and whether democracy as we now understand it can, and should, survive.