Thursday, July 29, 2010

The Afghan Files

Some 90,000 military and diplomatic files have been posted on and summarized in leading media outlets. Regardless of who leaked the documents, or how they were leaked, what does this portend about the prospects that the U.S. government will be able to maintain the confidentiality of individual medical records?

Wednesday, July 28, 2010

Intramural Warfare Among Economists

The most important issue affecting the American economy and this November’s mid-term elections is jobs. The administration has been desperately trying to increase jobs and lower unemployment. The one tool it has most directly deployed is stimulus spending, i.e., big deficits.

Economists disagree strongly on the effects of the previous $787 billion stimulus, and whether additional stimulus would help or harm the economy. The two camps are well defined.

Prominent members of the “big stimulus” camp include Nobel prize winners Paul Krugman and Joe Stiglitz. They are joined by such outspoken economists as Brad DeLong, Alan Blinder, and the Financial Times Martin Wolf. The “deficit reduction” camp includes Nobel winner Vernon Smith, Niall Ferguson, Ken Rogoff, John Taylor and Jean-Claude Trichet. (Apologies to other prominent economists and universities omitted; the two camps are meant to be illustrative.) We might call the first Princeton-Berkeley and the other Harvard-Stanford. These universities have top-flight graduate programs in economics (ranking 1, 3, 5, 6 in the U.S. News list).

Little is expected from Congress until after the November election and the new Congress is seated next January. Most forecasters project continued high unemployment in the New Year and the new Congress will be called upon to take action. What should it do based on the recommendations of the rival camps?

The disagreement cannot be settled by an experiment in which the patient, the U.S. economy, is sliced in half and given two different remedies to test for their effectiveness. It is a contest of theories and analyses of historical data, with each side claiming the other is wrong, misguided, sloppy in the analysis of data, and other harsher terms.

Which camp has the better solution to fix the economy? Can someone develop “objective” criteria which helps voters choose politicians that pledge to follow the “correct” advice. If not, then what...? (Are economists overpaid for their advice? Would flipping a coin would be just as good on how to address the most important economic problem of the day?)

Monday, July 26, 2010

Democratic Stability in Iraq: World Court Ruling in Kosovo

A likely cheer went up in Kurdistan on July 22, 2010, when the World Court in the Hague ruled that Kosovo’s Declaration of Independence in 2008 was legal. (So, too, in Catalonia, breakaway regions in Azerbaijan and Armenia, and elsewhere.)

I expect to see political movement in the direction of Kurdish independence after the U.S. completes its current reduction in troop strength to about 50,000 by the end of August, which is to be followed next year with removal of all remaining combat troops in Iraq. If a Kurdistan independence movement gains traction, Sunnis may begin to agitate for an independent Sunni state. This outcome would give traction to Vice-President Biden’s previous position on dividing Iraq into three nations.

Prognosticating one step further, a unified Afghanistan as the objective of U.S. policy will need rethinking. All future interventions will require serious study of the problems posed by ethnic, racial, religious, linguistic, tribal, and other divisions to the goals and success of any effort.

Thursday, July 22, 2010

Après d’ Montée, then What...?

Four score and forty-nine days ago, a great election was brought forth in Iraq on March 7, 2010, conceived and made possible by the military surge of General David Petraeus. Iraqi civilian casualties are way down from 23,500 in December 2007 to 3,000 in December 2009, and running at a current annualized total of less than 2,000. Weekly attacks against U.S. troops are down by almost 90%. Other indicators show similar improvement. Now we are engaged in a long wait testing whether the surge succeeded beyond its military objective in laying a foundation for stable democratic rule.

The number of U.S. troops has been drawn down from its peak of 170,000 (of a total of 182,698 coalition troops) at the end of October 2007 to 85,000 (only U.S. troops remain in Iraq) at the end of June 2010, with plans to draw down to about 50,000 at the end of August. Altogether, there have been 4,413 total U.S. fatalities, with 31,874 wounded between March 19, 2003, through June 30, 2010. Estimates of U.S. costs, if long-term postwar medical treatment of veterans is included, is well in excess of a trillion dollars.

Where do coalition negotiations stand? Hard to say. Muqtada al-Sadr, who wants all U.S. troops out of Iraq unconditionally, appears to be back in the game, having met with one of the contenders for prime minister, Ayad Allawi, in Syria. With August typically a vacation month in Iraq, any deal that produces a majority coalition may not happen until September. At that time, U.S. troop presence in Iraq will be too small to do much more than protect American interests in the country.

When the bulk of U.S. fighting forces are gone from Iraq, will the country hold together or breakup into three (as in Gaul) or more major parts? Will more than a millennium of hostility between Sunnis, Shiites, and Kurds have been resolved in just the three years since the surge? The difficulty of forming a government raises serious doubts. And whatever government is formed will not command the support of a great majority of the population. It’s too soon to render judgement, but the omens are not bright. And if large-scale violence breaks out, will the loss of American life, limb, and money have been in vain?

Wednesday, July 21, 2010

The Great Binge is Over

From the bust in 2000 to the Great Financial Crisis of 2007-09, Americans of all stripes engaged in a great financial binge. Private individuals bought homes and ran up credit card bills they couldn’t afford. Not to be outdone, the federal government turned a series of federal budget surpluses into a string of burgeoning deficits. State and local governments issued bonds, taxed, and spent like drunken sailors, falling deeper and deeper into a black hole. The Great Binge was aided and abetted by the Federal Reserve Board which strained the limits of ink and paper in producing an endless bounty of virtually free money. Think of it as counterfeit currency. The entire country was chronically drunk on fiscal alcoholism.

Then one day the Fed began to burn counterfeit notes. Homeowners couldn’t refinance to meet their mortgage payments. More than forty books on the Great Financial Crisis chronicled how sub-prime mortgages brought down the entire financial house of cards. Unlike Humpty-Dumpty, the Fed and the government have been trying to put it all back together again. Spending in the trillions and new bursts of free money are trying, but with limited success, to ease the withdrawal pains of the Great Binge.

Now there is engaged a tug of war between the stimulators and the debt reducers. The stimulators worry about the creation of a semi-permanent unemployed class that loses job skills. The debt reducers worry that the economy will crumble under a further loss of confidence and an intolerable burden of debt.

There is a great moral lesson to be learned. Sobering up requires painful rehabilitation. Easing the pain makes it more, not less, likely that “The Great Lesson” will not be learned. Taking on debt requires understanding the golden mean: not too little, not too much, just right. Burning into the synapses of the American brain the consequences of reckless debt and spending will do wonders for a future of sense and sensibility. Three years of economic misery, however painful, could be worth several decades of prudence and greater stability. The claim that more free money can cure the addiction brought about by free money seems, on its face, a dubious economic and moral proposition.

Tuesday, July 13, 2010

Business Cash Hoarding

Companies are sitting on a record almost $1.8 trillion in cash and liquid assets.  Why won't they invest that money in expansion and hiring?  The standard answer is that business fears the uncertainty of higher taxes, new medical rules, and burdensome regulations.  Is this true?

The following chart shows that cash hoarding has been steadily rising since 1983, undergoing temporary downturns in the late 1980s and 2005-08.  During these these 27 years, uncertainty fluctuated, but the trend line remained upward.  (HT:  Barry Ritholtz)

Monday, July 12, 2010

Democratic Stability in Iraq: Spain’s Fissiparous Tendencies

More than four months hav gone by since the March 7, 2010, election in Iraq and no sign of a government is in place. Moreover, there is speculation that Moqtada al-Sadr could be the kingmaker of the new government.

More than a million people took to the streets in Barcelona on July 11, 2011, to protest a Spanish court ruling. While it granted Catalonia greater rights in the status of its language and other powers of self-rule, it stated that the constitution recognizes Spain as the only country, denying the Catalans the status of nation. Catalonia is home to 7 million people out of Spain’s 47 million, but represents a greater 25% of its GDP. This display of Catalan nationality with the waving of Catalan flags took place on the day of Spain’s quest for the World Cup.

The autonomous regions of Basque and Galicia have also been seeking much greater autonomy. Many Basques, in particular, have resorted to violence in the quest for their independence.

Spain has been governed as a unified country since the Moors were defeated in 1492 and subsequently expelled. But that has not resulted in effectual unity. Spain today remains on the brink of a potential dissolution into four constituent parts. It may only be a matter of time until full regional autonomy results in independence.

Tuesday, July 6, 2010

Who Did the Jobs?

It is repeatedly said by politicians, members of the business community, pro-immigration groups, and think tank thinkers that illegal immigrants (undocumented aliens, unauthorized aliens, unauthorized workers) contribute to the United States because they do the jobs Americans don’t want to do. The current high unemployment and underemployment have not changed their public statements. Doing jobs Americans won’t do is the argument for comprehensive immigration reform, which includes amnesty and a path toward citizenship for the estimated 12 million or so illegal immigrants, disproportionately from Mexico, currently in the United States.

The Bureau of the Census, Current Population Survey 2005, reported that 31% of unauthorized workers were employed in service occupations, compared with 16% of native workers. Specific fields were construction and extractive occupations (19%), production, installation, and repair (15%), farming (24%), cleaning (17%), and food preparation (12%), and were a more significant presence within these categories (e.g., butchers, insulation workers, roofers). They are disproportionally present in leisure and hospitality.

The number of unauthorized immigrants living in the U.S. stood at about 3 million in 1980. That number rose to 4 million in 1986, but fell to 2.5 million in 1989. From that date the number increased sharply to 3.9 million in 1992, 5 million in 1996, 8.4 million in 2000, 11.1 million in 2005, and somewhere in the neighborhood of 12 million in 2009. Between 1989 and 2009, the number quadrupled.

Twenty years ago, as a resident homeowner in California, I had no difficulty finding workers to paint my house, landscape my yard, and complete other repairs and installations. I had no trouble finding what I wanted to eat (meat, dairy products, grain foodstuffs, fruits, vegetables) in supermarkets. I had no trouble getting served in restaurants. I had no trouble getting my hotel rooms cleaned in any place I traveled in the United States. If so, who did these jobs? Why were an additional 9 million illegal immigrants required to provide these services two decades later? If there were only 3 million illegal immigrants in the U.S. today would we go without food, shelter, and other services? How do other countries acquire these services without large numbers of illegal immigrants?