The American Scene

An ongoing review of politics and culture


Iron Chef Millman V

You know the drill:

Prelude: Latkes three ways: – topped with goat cheese, melted leeks and smoked salmon – topped with pea and roast garlic puree and roast lemon salsa – topped with persimmon and apple puree and sushi ginger

Soup: a duo of soups: – roast olive and garlic – roast red pepper and carrot – served together with a dollop of herb pesto

Crudo: thin-sliced hamachi topped with slivers of jalapeno, green lemon-infused olive oil, and sea salt

Salad: fennel and apple salad with tarragon and a lemon and olive oil dressing

Pasta: ricotta and swiss chard malfatti (like giant gnocchi) with sage brown butter sauce served over a bed of butternut squash pureed with mandarin orange-infused olive oil

Main: broiled arctic char dusted with ground porcini mushroom and fennel seed, served atop an oven-roasted tomato and a bed of white beans and wild mushrooms

Dessert I: crema fritta, deep-fried breaded cream

Dessert II: Rosemary lemon olive oil cake

Menus from years one, two, three and four also available.

This year we also had a signature cocktail – the maghreb martini. Gin, vermouth and preserved lemon brine, garnished with a wedge of preserved lemon. Color was a bit yellow; I think the brand of preserved lemons I used had saffron in the brine. But the flavor worked wonderfully, and paired very nicely with the latkes.

In fact, this is the first year that I can recall that really every course worked. The only hiccup was that the first batch of malfatti dissolved upon hitting the water. I had formed them in advance and frozen them, but I’ve done that before successfully, so I think either they didn’t have enough flour (I don’t think that was the problem) or the ricotta and chard between them retained too much water (I suspect this was the problem). Anyway, I heated up another pot of water, defrosted another batch quickly and re-formed them (you twirl the dough in a wine glass with a bit of flour to make the football shapes), and the second batch came out fine if a little bit late to the party. But other than that hitch, everything came off well and everything worked, in terms of flavor and presentation. If I had to pick standouts, I’d choose the soup duo, the fish, and the crema fritta.

I really enjoy doing this. I don’t entirely know why. It’s in part because I love to be the entertainer, the provider, the host; I like showing off, but I also like making people happy. And it’s in part because I love to eat. But it’s in part because cooking is one of the very few activities I engage in where I really use my hands. I don’t play a sport; I don’t paint or do woodworking or futz around with motorcycles. But I do cook. And when I cook, I still use my brain, but I use it differently, and I don’t feel so much as if I’m living in it, more like it is living in the world. Which is a very good and too-rare feeling with me.

And it seems to work for my guests.

As always, recipes available upon request – and please, don’t be afraid to email me and pester me if I fail to post something in response to a comment. Sometimes I don’t notice that a new comment has been posted; I can be bad that way. My email is available on the “About” page of the site.

Re: Gene to Phene

John, good to see you posting too, and Merry Christmas!

You say this:

Surely it will not be “the fact of our ignorance in this area” that “is likely to be very important to thinking about public policy in the upcoming decades”: rather it will be our increasing understanding in this area. The fact of our ignorance was, after all, around from the beginning of time up to 1953.

Our understanding of both genetics and the biological basis of behavior is proceeding rapidly, and I assume will continue to do so for some time. This has led to many extravagant claims for knowledge that we do not have, i.e., a “gene for depression.” Such claims have obvious policy relevance, and I think that subjecting such claims to rigorous scrutiny will become increasingly important in future decades, because there will likely be many more of them.

Then you ask the following:

And what does this mean: “We do not have the practical ability to understand why person X has normal psychological make-up Y based on analysis of his or her genome”? Do you mean to say this is a thing we metaphysically cannot understand? What is the evidence for that? The name Auguste Comte mean anything?

I know of no metaphysical reason (that I am certain is true) for why we could not ultimately understand this scientifically. We don’t understand it yet, though.

Comte is a great illustration of several kinds of errors, many of which center on unfounded claims to knowledge. You link to one example of this: his claim that we could never know the chemical composition of stars. But Comte is usually thought of as the founder of sociology: a discipline that he saw as scientifically modeling human social organization based on mathematical laws (per a recent set of Corner exchanges, Hari Seldon anyone?). He and Saint-Simon were called out by Hayek as key intellectual figures in building belief in the current (not possible at some future date) capacity to predict and therefore plan society. A key intellectual task of Hayek, Popper and the other mid-20th century libertarian thinkers was to point out the pseudo-scientific nature of these claims.

It may be that someday we will be able to use knowledge of the genome to predict human social behavior sufficiently to rationally plan our political economy, but we are not there yet. We should rigorously scrutinize claims of the reduction of non-pathological human mental states to scientific phenomena, in part because of the potentially profound political implications of such findings. More precisely, all scientific claims should be subjected to rigorous scrutiny, but we should challenge the sloppy popularization of such claims unless and until they are really scientifically validated, because any such popularization may tend to create an unfounded intellectual climate hospitable to the erosion of political and economic freedom.

(Cross-posted to The Corner)

What a Ron Paul Victory Would Mean

He hasn’t won yet, of course, and if he does we won’t get a terribly accurate picture from his supporters of why they gravitated toward him. But in my own wildly speculative view:

- Contra David Frum, Ron Paul is not the candidate of “indifference” to the economic situation. Indeed, I strongly suspect that the main substantive reason why Paul is getting more traction this time than last time around is precisely the economic crisis, and popular fury about it. Paul’s policy prescriptions are, in my view and in Frum’s (and in Andrew Sullivan’s, for that matter), insanely wrong – certain to badly exacerbate our plight, not to ameliorate it. They are reactionary, anti-modern, rooted in ignorance not knowledge. But they are an authentic response. Paul is not saying everything was fine in 2007. His is a deep and radical critique of business as usual. But a vote for him will not mean “I don’t care about the economic crisis.” It’ll mean, “I am convinced that Washington has no idea how to resolve the economic crisis, and, as a consequence, I am open to extremely radical and dangerous alternatives to the status quo.”

- I also don’t think Paul is getting much support because of his radical opposition to the foreign policy consensus. But I agree with Daniel Larison that if Paul wins, the fact that he will have won in spite of flouting that consensus is significant. Andrew Sullivan says his priority is “remaking” the GOP on foreign policy by opening up debate. Paul himself cannot make that debate happen – because he’s a rigid ideologue and his opponents are mostly behaving like thugs and hysterics. A debate of that sort isn’t really a debate at all. But if Paul wins Iowa, and does well in New Hampshire, he’ll have established that, in a post-9-11 world, there is room not to toe the line on foreign policy questions, room for someone with pragmatic views more like Dick Lugar’s (or Mitch Daniels’s) to run and not do what Romney and Huntsman have been doing. To a much lesser extent, I think the same thing can be said of civil liberties concerns.

- But it probably won’t mean anything at all. Mike Huckabee won in 2008. I haven’t noticed that the GOP field this year has been tripping over itself to win Huckabee’s support. Pat Buchanan nearly tied Bob Dole in 1996, but after that the party moved away from him, not towards him, on basically all his issues. Pat Robertson’s constituency has only gotten more important since 1988, but he himself probably reached the peak of his influence that year, and his constituency has remained important in part because it has proven to be domesticable – they have not demanded a radical change in much of anything in exchange for their votes. If Paul’s voters turn out to be similarly domesticable, one can debate how important they will turn out to have been. If not, I find it doubtful that the GOP will consider changing much to win them over.

Speaking Truth to Power

I see, via Daniel Larison that Bret Stephens has been unsurprisingly busy making the opposite argument to the one I just made:

A proper attitude [toward tyrrany] may not have required physical belligerency, [Havel] believed, and it could easily incorporate diplomacy. But it did require a constant posture of spiritual belligerency—a refusal to accept that a regime like Saddam’s or Kim’s was just a normal fact of life, beyond the reach of moral examination. In the context of Cold War Czechoslovakia, Havel called it a matter of “living in truth.” In the context of countries like North Korea, Russia or Iran, Havel told me it was also a matter of truth-telling. “We can talk to every ruler,” he said, “but first of all it is necessary to tell the truth.”

There’s a very important insight there, an insight Larison should acknowledge even though Stephens does his best to bury it. The insight is that truth, because it cannot be answered honestly and directly, has a corrosive effect on a structure that depends on lies to survive. Speaking truth to power can frustrate and even defeat power. Not always, of course. But sometimes, and to a surprising degree.

But the Iraq War was not “speaking truth” – because it wasn’t “speaking” at all: it was action. Without even going into the issue of the distortions – and self-deceptions – involved in building the case for war (in both of which I participated in my own small way, I should readily admit), action is not speech. Action cannot be truth; action creates truth, in the sense of facts, through the exercise of power.

The article that Vaclav Havel signed in support of the Iraq War was not an instance of speaking truth to power. It was an instance of speaking for power. The principal argument in the article is that unity is strength; that is to say, inasmuch as we want strength – power – it is more important to agree than to debate the truth. A secondary argument is that credibility is strength; that is to say, inasmuch as we want strength – power – it is more important to mean what we say than to debate the truth.

These are not specious arguments. They are entirely legitimate arguments – sometimes, they are persuasive ones. Once you have power, you have to consider these kinds of arguments. And it is juvenile to reject power as such – power is a fact of life, neither to be abjured nor idolized, but to be dealt with like other facts. I’m just pointing out that they are arguments about the accumulation, exercise and preservation of power – not about truth, and certainly not about speaking truth to power.

As a head of state, Vaclav Havel was implicated in power. Moreover, as a Czech, and not an Iraqi, he had only an indirect relationship with the sorts of truth that he might wish to speak were he not so implicated. Those aren’t cop-outs – they’re just more facts of life, things to be dealt with. It’s pleasant to imagine that the moral stature derived from one’s noble actions as a dissident is perfectly fungible, but it isn’t; it’s as context-dependent as everything else. With respect to the Iraq War, Havel wasn’t a dissident – not because he agreed with President Bush and disagreed with President Chirac (had he gone the other way, one could just as easily claim he was being a yes man and a conformist, but a conformist to European expectations rather than American), but because he was a head of state.

Stephens quotes Havel saying in a 2007 interview that “[t]he world . . . could not be indifferent forever to a murderer like Saddam Hussein.” Margaret Thatcher famously said that there is “no such thing as society” – by which she meant not that we are all atomized individuals without communal obligations but that there is no separate entity called “society” that can act. Individuals can act; they can direct institutions to act; but there is no “society” to which one can make an external appeal. Obligations imposed upon “society” turn out to be obligations imposed upon individuals. Similarly, there is no “world” to be indifferent or to take an interest in or to be indifferent to a murderer like Saddam Hussein. There are only the various governments of the various countries, and the various institutions those governments created to work within. We are not, once again, talking about speaking truth to power; we are talking about using power, and Havel was speaking as part of that power structure, not an outsider to it.

In my own view, Havel made the right call on Iraq for the right reasons. He had every reason to be grateful to the United States for its role in opposing the Soviet Union (even though we did essentially nothing to oppose the Soviet Union’s crushing of the Prague Spring – because, prudentially, there really was nothing much we could do), as well for, after the end of the Cold War, cementing Czech membership in the Western club of nations by expanding NATO to include them. He had every reason to trust the United States in its estimation of the Iraqi threat. And he had every reason to believe that the NATO Alliance and the United Nations between them held out the best hope for an international relations structured around simultaneously preserving peace and promoting freedom. One of the many negative consequences of the Iraq War is that, in its wake, people like the Czechs have every reason to feel that those feelings of gratitude and trust were exploited. But the blame for that lies with us, not with them.

What Is a Gene “For”

Analogies or metaphors are often useful for starting to understand a given topic, but in my view, serious engagement requires that we progress from this to a description of what is really going on operationally. (Technically, at some linguistic level, I’m sure it all remains some kind of metaphor, but at least things get much, much more concrete.)

The blog Gene Expression has a recent post which explains why when we read a headline about a “gene for depression” or whatever, this is usually very misleading. It is a model of science writing. It’s not easy to engage seriously with the science, avoid jargon, and keep your eye on the main issue. I think that a broadly educated person in the 21st century should have the level of understanding on this topic that you will get from the post.

I wrote an article for National Review a few years ago in which I argued that the fact of our ignorance in this area – that while intelligence and other mental traits have been understood to be somewhat heritable since at least the time of Homer, we do not have the practical ability to understand why person X has normal psychological make-up Y based on analysis of his or her genome – is likely to be very important to thinking about public policy in the upcoming decades.

(Cross-posted to The Corner)

Hitch, Kim and the Legacy of Eric Blair

What with Christopher Hitchens and Kim Jong Il dying so hard one upon the other, I found myself yesterday reading an essay by Hitchens from a couple of years ago about the Hermit Kingdom. The essay ends thusly:

Unlike previous racist dictatorships, the North Korean one has actually succeeded in producing a sort of new species. Starving and stunted dwarves, living in the dark, kept in perpetual ignorance and fear, brainwashed into the hatred of others, regimented and coerced and inculcated with a death cult: This horror show is in our future, and is so ghastly that our own darling leaders dare not face it and can only peep through their fingers at what is coming.

I read that last sentence over again, two or three times. It’s a well-written sentence, with a rhythm that marches you, the reader, on to its inexorable conclusion. It’s also a sentence that owes something to Hitchens’s own political and literary idol, George Orwell; I thought particularly of the ending of Homage to Catalonia, when Orwell returns to England, more specifically to

. . . the huge peaceful wilderness of outer London, the barges on the miry river, the familiar streets, the posters telling of cricket matches and Royal Weddings, the men in bowler hats, the pigeons in Trafalgar Square, the red buses, the blue policemen — all sleeping the deep, deep sleep of England, from which I sometimes fear that we shall never wake till we are jerked out of it by the roar of bombs.

A magnificent sentence, a famous (and correct) warning urged onward paradoxically by its very soothing cadence. But in the context of the book that precedes it, it’s a bit puzzling what the warning is. Homage is, after all, a book that complicates one’s relationship to the Republican cause in Spain, at least if one goes in with sympathy for it. Orwell went over to fight Fascism. He didn’t change his mind at all about Fascism, nor about the justice of the Republican cause – but he came to lose much hope of success for that cause, not only because of the inept fractiousness of the Republicans but because their own greatest ally, the Soviet Union, apparently preferred the Spanish Left to lose if the alternative was for Moscow to lose the Spanish Left. Orwell was trying to wake England up not simply from the threat of Fascism but from a kind of “it’s a pity they can’t both lose” attitude toward the struggle between Fascism and Communism, when it looked far more likely to Orwell that they would both win.

But the sentence is better remembered than the argument behind it. That is a danger of well-written sentences – a danger that Orwell himself was alive to. Indeed, well-written sentences can obviate the need for argument altogether.

Read that Hitchens sentence again. “This horror show is in our future, and is so ghastly that our own darling leaders dare not face it and can only peep through their fingers at what is coming.” Was he serious? This horror show is in our future? North Korea? A state universally acknowledged – including by its own principal ally – to be not only a terrible place but a colossal failure and a model for nobody? North Korea is a nasty and intractable problem, and could yet prove to be a serious problem, but from the perspective of Olympus it’s an oddity, a curiosity, a freak, not the future. It’s interesting to speculate what Orwell would have made of the persistence of this dystopia that he feared might cover the earth, and what he would make of our world more generally; I feel quite confident, though, that one thing he would not have treated North Korea as is a matter of urgency. But that – the posture of urgency – is all there really is in the Hitchens piece.

Hitchens professed to admire Orwell, and in large part for Orwell’s ability to combine a posture of urgency – of a call to action – with a distaste for propaganda, a commitment to clear-seeing and clear-speaking. But it is past time for us to recognize that this commitment can become a pose, and that, just as Joyce (or Stephen Daedalus, at any rate) felt that all art that moved one to action was, on some level, pornographic, so too all journalism that moves one to action is, on some level, propaganda, and is still propaganda, even if aimed at an obvious evil.

Storytime with Joseph Stiglitz

Arnold Kling points to an article in which famous economist Joseph Stiglitz lays out a theory for a common structure for the causes of the Great Depression and what Stiglitz calls the current Long Slump.

Here is what Stiglitz has to say:

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.

He then goes on to describe how this problem propagated through the rest of the economy.

It’s interesting that in the first paragraph Stiglitz specifies that “more than a fifth” of all Americans worked on farms at the beginning of the depression, and that “2 percent” do today, but makes the non-numerical statement that “a large portion” of the population did so in 1900. I assume this would tend to lead most casual readers to think that most workers were on farms at that time. In fact, about 34% of the American labor force was in agriculture in 1900, and about 21% in 1930.

The proportion of Americans working on farms has been in continuous decline since at least 1800, when about three-quarters of the labor force was in agriculture. The decade with the biggest reduction in this proportion appears to have been the 1840s, when the percentage of the workforce in farming went from 67.2% to 59.7% (a reduction of 7.5 points). The rate of reduction from 1900 to 1960 appears to have been between 4 and 5 points per decade. As far as I can tell, this was roughly the rate of reduction from about 1860 – 1960.

The Great Depression occurred around the middle of a century-long, steady decline in the percentage of the labor force on farms. How could this decline have been the special cause of a spectacular economic collapse that occurred in one of these ten decades, but in none of those before or after?

(Cross-posted to The Corner)

Tipping My Cap To Wyden and Ryan

Ron Wyden and Paul Ryan have teamed up to propose a Medicare reform that, in broad strokes, looks a lot like what I’ve been cheering for as the next step in healthcare reform.

Under the plan, in ten years Medicare would be “voucherized” within the framework of the ACA. However, traditional Medicare would be retained as a public option. And the entire structure would be subject to a budget cap of GDP growth + 1%.

It’s important to recognize that this budget cap is basically doing all the work of controlling costs – and also that such a cap is precisely what American Medicare doesn’t have but that foreign countries’ health care systems do, a point I’ve made repeatedly before. In the absence of such a cap, Medicare costs would continue to be a function of the coverage and reimbursement formulae of Medicare – and the incentives of private insurers would be to game the system so that Medicare costs rose as fast as possible so that they would have the lowest competitive bar to clear. How exactly the system would be gamed would depend on what the rules turn out to be – but that’s where the incentives are. If Medicare is genuinely kept on a budget, the incentives change, and private insurers would have a reason to keep the costs of their plans competitive with the public option (or they’d lose all their customers) while competing on quality. But we should all be clear that it’s the budget that keeps costs down.

That being the case, the real question is whether this plan makes it politically easier to enact and enforce such a budget than past efforts – in other words, would we be treated, in a Wyden-Ryan world, to the annual ritual of raising the Medicare ceiling instead of the annual ritual of enacting the doc fix. The optimistic case here is that interposing an unsympathetic private entity – the private insurer – makes it easier for the government to impose budget rules which, in turn, force that private entity to put the squeeze on providers, rather than having the fight be between evil government bureaucrats and noble health-care professionals. I’m not convinced I should be optimistic, but I think that’s the case.

But I’m pretty convinced that Matt Yglesias’s preference is wrong:

I wish Congress would actually separate this budget issue out from the question of Medicare structure. How large a share of America’s output do we want to allocate to health care services for the elderly is a very important question. What that spending should look like is also a very important question, but it’s a fundamentally separate one.

Yes, but the first question is a zero-sum battle that pits a whole suite of powerful, entrenched interest groups against what Yglesias (and I) see as the national interest. The second question is – at least potentially – a win-win debate that scrambles the interest group alignment. Tying the two together might – might – be a good way to get the first one done. It might not. But separating them strikes me as a sure way to avoid dealing with the first question at all.

In any event, from the right the big win here is that the door is open to “privatizing” Medicare. There’s likely some benefit to innovation from such a move; I also think it’s a small way to hedge possible bureaucratic missteps by the Medicare bureaucracy, since private health insurance bureaucracies might not make identical errors (though, in practice, there’s a huge amount of convergence here). From the left, the wins are that this reform basically can’t work without the ACA, and, moreover, post-reform it’s much easier to argue for expanding the Medicare public option to include people besides the elderly. But the real question, in my mind, is: are these wins big enough to induce left and right to agree on a serious cap in health-care costs? Because that’s the big win for the country.

Operation Victory Denial: A Modest Proposal

Propositions:

- A majority of the electorate is unhappy with the performance of President Barack Obama and would like to remove him from office. Faced with the choice between reelecting President Obama and voting for a blank-slate alternative, the electorate chooses the blank-slate alternative.

- However, a majority of the electorate is also underwhelmed by the actual alternatives to President Obama, deeming none of the Republican contenders to be worthy of their preference. Faced with the choice between reelecting President Obama and voting for any actual opponent from the opposition party, the electorate chooses to reelect the President. Indeed, the more they learn about the alternatives to President Obama, the less they like them.

- Moreover, even the Republican primary electorate cannot bring itself to choose a candidate to run against President Obama. That electorate has been resolutely unwilling to reconcile itself to Mitt Romney as the nominee. Instead, it has swooned for a parade of at-best semi-plausible alternatives – first Perry, then Cain and now Gingrich – in a desperate attempt to find someone – anyone – they might actually want to vote for.

- If the GOP primary electorate picks a “not-Romney,” they will probably be picking a candidate that will perform disastrously in a general election. If they pick Romney, they will be picking a candidate hobbled by tepid support from his own base and not demonstrably effective at winning over the electorate generally.

So: what to do? After all, you’ve got to nominate somebody. You can’t beat somebody with nobody.

Or can you?

Operation Victory Denial is a strategy designed to capitalize on the fact that President Obama is eminently beatable – just not beatable by any individual candidate willing to run against him. Therefore, to beat him, I propose that the GOP not nominate anybody. Let a thousand candidacies bloom – and let the people of the several states register the full panoply of their actual electoral preferences.

Of course, when I say “let a thousand candidacies bloom” I don’t mean let everybody do whatever he or she wants. Far from it. This is, after all, a plan – a plan to deny President Barack Obama a reelection victory. Rather, I’m suggesting the GOP field the best candidate in each state to defeat Barack Obama in that state.

Field Chris Christie in New York, New Jersey and Pennsylvania: a tough-talking no-nonsense former prosecutor who’s a moderate on social issues could make inroads deep into blue territory. Field Mitch Daniels in Indiana, Ohio and Michigan: a successful and conservative but soft-spoken midwestern Governor who favors speaking more softly internationally. Field Marco Rubio in Florida: a rising-star Senator with matinee-idol good looks and a lock on the Cuban vote. And so forth.

What’s that you say? These people aren’t even running in the primary? Of course not – would you want to be a part of that circus? And they won’t be running a national general-election campaign either. They’ll just be asking the people who know them best to choose: would they rather stick with President Obama? Or make a change for someone better – someone like a popular local Governor or Senator.

With the optimal candidate running in each state, the GOP will be free to present itself properly to each segment of the nation. Barack Obama, being only one man, will have a harder time doing this without being vulnerable to the charge of trying to be all things to all people – a charge that Newt Gingrich, who will be the GOP candidate on the ballot in Georgia, Alabama and Mississippi, and Mitt Romney, who will be the GOP candidate on the ballot in Utah, Nevada and Idaho, will be ideally positioned to level at him in massive national ads that, naturally enough, won’t mention the GOP candidates for President in swing states like Ohio or Florida who might suffer if they “went negative.”

If that’s not enough to achieve victory denial, draft Hilary Clinton to run as an Independent in key states – New York, Florida, California, Illinois – to draw support away from Barack Obama. What’s that you say? Hillary Clinton would never run? I didn’t say Hillary Clinton. I said Hilary Clinton – he’s a Republican donor from Buffalo, owns a big chain of supermarkets. Hilary’s his middle name actually – Herbert Hilary Clinton – but we’ve sounded him out and he’d be willing to switch his name around, Eisenhower-style, to help the cause. Particularly if we promised him a cozy ambassadorship after the election. (His wife is asking for Paris, but I bet she’d settle for Luxembourg.)

Having Hilary Clinton on the ballot would give Democrats and Independents the opportunity to express their opposition to Barack Obama, and their regret that they chose him last time around, an opportunity they would not otherwise have in this election. Not to include her (I mean, him) would really be a disservice to democracy, when you think about it.

Of course, after all this effort, it’s still unlikely that any Republican candidate (or Hilary Clinton) would win a majority in the Electoral College. President Obama is relatively popular in some places, after all – Oregon, Rhode Island and Hawaii are probably out of reach no matter what. And the GOP vote, by design, could be split among as many as a dozen candidates. Not only would any GOP candidate be unlikely to win a majority; they would be quite unlikely even to win a plurality.

But this is where the beauty of the Electoral College kicks in.

The strategy is called “victory denial” because that’s what the objective is: not victory for any particular Republican nominee, but denial of victory to President Obama. All we have to do is keep the President under 270 electoral votes.

Why is that? Well, as we learned in the 2000 election, the winner of the Presidential election is not the winner of the popular vote, but the winner of the vote by the electors, who are themselves chosen in state-by-state contests. But what happens if nobody earns a majority of the electors?

In that case, the House of Representatives would choose the President from the top three finishers in the Electoral College. Not on the basis of one vote per representative: on the basis of one vote per state delegation.

The GOP currently controls 33 of 50 state delegations. The Republicans might lose the House in 2012 – though, with favorite sons running in the Presidential election all over the country, down-ballot candidacies should experience an exceptional surge of support, making such a loss less-likely, and pickups in the Senate more likely than would otherwise be the case. But regardless of what happens in the Congressional elections in 2012, it is very likely that the GOP will retain a majority of state delegations. There are just so many reliable little red states.

Therefore, if Operation Victory Denial is a success, the Republican Party’s state delegations in Congress will decide who the next President is.

Now, you might say, wouldn’t they be obliged to pick the winner of the popular vote? I don’t see why they would. They didn’t in 1824. Moreover, they could argue, if President Obama could not get reelected with either a popular vote or an Electoral College majority, would it really express the will of the people to return him to the White House, just because he eked out a plurality?

Clearly, in this scenario, the people will have spoken, and they will have chosen a Republican alternative to succeed President Obama. They just can’t agree on which one.

So: let them vote Obama out. And then, after the votes have been cast, the Party can decide who they’ve elected instead.

Reelection contests are referenda on the incumbent. They have to be – that’s the only way the electoral process can hold incumbents to account. Without that check, with one party deemed the only responsible governing party, and therefore assured of reelection no matter how much they screw up, democracy would deteriorate into a corrupt tyranny. If the Republican Party can’t coalesce around a candidate that can actually beat President Obama, then Operation Victory Denial is all that will stand between America and that grim future.

Operation Victory Denial. It’d be a victory for democracy, really. When you think about it.

Invented People Are Still People

Daniel Larison has been laying into Newt Gingrich for saying the Palestinians are an “invented people” in a way that I think rather misses the most important point.

“Is this a real people?” is the kind of question that colonial powers ask all the time. The French professed that there was no such thing as an “Algerian” – there were Arabs and Berbers and French and other peoples in Algeria, but there was no historic “Algerian” identity.

Which is true as far as it goes. Algerian nationalism was born of the experience of French colonization; in the absence of that experience, it’s hard to know what kind of political entity Algeria might have become. But the salient point about the French in Algeria is that prior to independence the Algerians were not equal citizens of their own country. According to Paris, Algeria was integral part of France. But Algerians were not an integral part of the French nation.

That was the situation that had to be rectified, one way or another. Whether Algerian nationalism was the “right” solution is an unresolvable question, but it clearly wasn’t the only possible solution. The French could have granted full French citizenship to the entire population of Algeria. Algerian nationalism might still have developed – in our world, we have seen Quebecois nationalism and Flemish nationalism and Catalan nationalism and Scottish nationalism, even though citizens of Quebec, Flanders, Catalonia and Scotland are full members of the political communities of Canada, Belgium, Spain and the UK, respectively. But it might not have, or if it did, the character of that nationalism would inevitably be different.

But there was no chance that the French would grant this. And as De Gaulle recognized fairly early on, if France would not grant equality, it would inevitably have to grant independence. There was no third way.

When people say that the Palestinians “are just Arabs” they are on one level correct. In 1900, before Palestinian Arabic could have been influenced by Hebrew, the Arabic spoken by a citizen of Haifa would have been extremely similar to the Arabic spoken by a citizen of Damascus. “Palestinians are just Arabs” is as historically and ethnologically correct as “Palestine is just part of Greater Syria” – which, at various points in history, has in fact been the Syrian perspective on the matter.

And, on another level, it’s obviously incorrect. The Arabs of Palestine had the nationalizing experience of reacting to Jewish colonization of their country – country in the French sense of “native land” rather than “state”. That experience was foreign to the otherwise-similar population in Syria, and resulted in a distinct identity.

But on yet another level, what’s the point of the argument? One can imagine an alternative universe in which the Palestinian refugees of 1948 were accepted by the neighboring Arab countries, welcomed to settle permanently and become citizens. They might have continued to press claims against the State of Israel as individuals (as the Jews expelled by the Arab countries after 1948 might press their claims against those countries), but they would not be stateless. In this counterfactual world, the Palestinian refugees would be analogous to the refugees who fled India for Pakistan (and vice versa), or who fled Turkey for Greece (and vice versa).

And this is basically what happened with respect to the Palestinian Arabs who fled to Jordan, which annexed the West Bank in 1950. But in 1967, Israel conquered the West Bank from Jordan.

The Palestinian refugees living in the region but without citizenship in the state where they live are a collective problem, practical and moral. The most problematic are those who live under effective Israeli rule in the West Bank. (Yes, the Palestinian Authority has responsibility for the overwhelming majority of them, but the P.A. has neither the formal nor the de facto powers of a sovereign state; these Palestinian Arabs are still stateless, formally and substantively.) This problem can only be solved by making them citizens of a sovereign state where they live. That state could have been Jordan – if Israel had managed to achieve a land-for-peace deal with Jordan before 1988, when Jordan renounced all claims to the West Bank. It could be Israel – if Israel were willing to grant the Palestinians in the West Bank equal citizenship, which it isn’t, for entirely understandable reasons. Or it could be an independent, sovereign Palestinian state free from Israeli domination. Those are the choices.

When someone like Gingrich says that the Palestinians have “plenty of places” they could go, I have to wonder what that means. Does he mean that Lebanon is obliged to grant citizenship to the Palestinian refugees (and their descendants) who live there? Does he mean that the Israelis have the right to transfer the Arab population in some part of the territory it controls to some other place where they would rather that population lived? What exactly does he mean – if anything?

The Palestinian “question” is not one that, ultimately, turns on the “reality” of a Palestinian nation. It’s a question that turns, ultimately, on the goals of the State of Israel and of the surrounding Arab states. Neither the State of Israel nor any Arab state will volunteer to accept the Palestinian people who live in Gaza and the West Bank as full and equal citizens. Those are the salient facts. The question of whether the Palestinians are a “real” people bears mostly on the likely prospects of success of any Palestinian state that is created, not on whether such a state is practically and morally necessary.

Protest and Direct Action

I’ve said very little about the “Occupy” movement because I don’t have particularly settled opinions about it. But one thing that struck me from the beginning is that one of the weaknesses of the movement politically was that it had almost no opportunities to engage in “direct action” – that is to say, protesting by actively obstructing an activity that their goal is to end.

The “gold standard” for direct action is the protests against segregation – lunch counter sit-ins and the like. These actions directly broke laws or rules that the protesters were arguing were unjust as such, and therefore forced the authorities either to back up injustice with force or back down. Most protest movements can’t do that. Anti-war protesters, for example, can disrupt military activities, for example, but such actions are generally much more difficult to achieve and, anyway, most such protestors don’t oppose the existence of the military, nor even all its activities, but rather object to a particular war as unjust. So there’s the real risk that such actions would be viewed simply as anti-military or even treasonous by observers. But protests without direct action lack comparable political impact.

Occupy Wall Street struck me from the beginning as more analogous to the latter case than the former. Few of those engaged in the protests believed that Wall Street – finance capitalism – should cease to exist as such (or, to the extent some did, they undoubtedly had incoherent ideas about what the end of finance capitalism would actually look like if it were to happen). The protests were in part aimed at economic developments (the rise of extreme inequality, mass unemployment) blamed, fairly or unfairly, on the operation of finance capitalism in our day, and in part aimed at specific failures of regulation. When I tried to think of possible direct action that the protesters could take, the only thing I could think of was trying to somehow obstruct the operation of servers used for high-frequency trading, which I suspect would be physically impossible without violence and, anyway, would be kind of an obscure target.

But Occupy Homes is a much better direction for the movement to take. While I suspect most people, and even most protestors, would agree that foreclosure as such isn’t unjust, there is a cogent argument to be made that the government should be doing more to prevent foreclosures right now. So obstructing that process would be the kind of direct action that I was wondering about.

Again, not making an argument about whether I agree or disagree. Just saying: from the standpoint of likely political effectiveness of the protests, this strikes me as a wise move on the part of the Occupy movement.

Oscar the Grouch

Others have commented that The Muppets serves as, by embodying or enacting, an answer to the fears fans had about what Disney would do with the Muppets franchise. That is to say: Disney knew fans would be afraid that they would exploit the Muppets and thereby destroy them, and this is exactly what the villain in the movie tries to do – replace the Muppets with the odious “Moopets.” By acknowledging the fear, and refuting it by making a movie that is true to the actual Muppet spirit, Disney has proven that they are not the villain in their own movie.

But has anyone noticed that this means the climactic speech of the movie is delivered in bad faith?

Near the end of the film, the Muppets have failed to raise the money necessary to save their old studio and keep their cherished name and brand from being strip-mined by Chris Cooper. As they file out of the home they’ve lost, Kermit gives a rousing, inspirational speech about how they haven’t failed at all, because they did get back together, they did put on a show, and if they want to make a go of it again, they can do that – and Chris Cooper and his contracts can’t stop them. They don’t need their old name and their old studio. They just need each other.

But if that’s true, then why did Disney buy the franchise?

I have mixed feelings about the movie as a whole. There were things in it that I thought were brilliant – and very true to the original Muppets. Top of the list, from my perspective, were the opening “growing up muppet” sequence of Walter and Gary, and the amazing ballad, “Man or Muppet;” close behind is May (Amy Adams) and Miss Piggy’s song, “Me Party.” And there were a variety of other moments that “clicked” with the original. The “rain” on the window that Mary looks out of that turns out to be water from a hose. Traveling by map. The fact that Mary is reading a thesaurus when she’s waiting for Gary back at the hotel. The verse, “Life’s a filet of fish….yes, it is” from “Life’s a Happy Song.” And so forth.

But precious few of these moments involved the original characters. Indeed, apart from Miss Piggy, I didn’t feel like any of them had their old joie de vivre. It was striking, to me, how easy it was to “get the gang back together.” Also how easy it was to whip the show into shape – we see one rehearsal going badly, and then the show going like clockwork. And none of the acts in the show remotely lived up to the original – Gonzo’s “head bowling” was particularly lame, but even the best act, the chickens singing “Cluck You” was a joke that wasn’t spun out to its full potential (I can’t believe they missed the opportunity to play off the fact that Gonzo, basically, keeps the chickens as a harem, but even if you didn’t want to go there the joke as it was delivered was just a bit of reference humor, because the actual song and dance routine the chickens do wasn’t, itself, funny).

And Kermit’s was the most problematic “reboot” of all. The outline of a character arc was there. Kermit needed Walter to remind him of what he really loved about life, which wasn’t being a star but putting on a show with his friends. Except that, from where I was sitting, it just didn’t happen on screen. In virtually every scene – most especially in his emceeing of the show – Kermit seemed to me to be phoning it in. It’s partly a problem of character – this Kermit is exceptionally passive, never coming up with solutions for problems, always ready to admit defeat. But this could have worked brilliantly if it had built to a big moment of recognition that this is what he was doing, and he finally returned to his true self. (Kermit is the Aragorn figure of the movie, the true king in self-imposed exile because he doesn’t believe he is actually fit to be king.) But that moment of recognition never really came. We got the speech after the moment – the speech about not having really failed and how it doesn’t really matter if they lose the studio or their name. But we didn’t get the moment.

But it was more a problem of performance. Kermit, in his prime, was a great leading man, a blend of Humphrey Bogart’s rumpled integrity and Cary Grant’s barely-suppressed hysteria. (Sorry, I’ve been reading Stanley Cavell again.) This Kermit doesn’t seem like that character grown old – it seems like that performer going through the motions.

There’s one flash of the old Kermit in the movie, in this exchange with Fozzie:

Kermit the Frog: Guys, we can’t kidnap Jack Black. That’s illegal!
bq. Fozzie Bear: What’s more illegal, Kermit: Kidnapping Jack Black, or destroying the Muppet name for good?
bq. Kermit the Frog: Kidnapping Jack Black!

There are plenty snappier and fresher lines in the movie, but this is the only one I remember Kermit delivering as if he were the old Kermit. (Unfortunately, Jack Black doesn’t actually do anything for the show he’s kidnapped to celebrity-host.)

To my mind, most of the best things in the movie involved the new characters: Walter, Gary and Mary. The old characters felt crushed under the weight of nostalgia. Their story was about their recovery of their true selves, but they never actually got to be their true selves. Their telethon show, after a while, started to feel like Mickey Rourke’s nostalgia bout at the end of The Wrestler. I can’t imagine that’s the effect the movie makers were aiming for.

All of which loops back to my original question: why do the reboot? If a reboot was to happen, it is obviously vastly preferable that it not be a Moopets-like desecration, and Disney is to be praised for sparing us that. But I sense that the level of praise this movie has received is partly due to sheer relief. It isn’t a desecration. But it’s a work of nostalgia. And nostalgia is not, in the end, a generative sentiment.

Or maybe it’s just that my son was kind of bored by it.

How Elite Business Recruiting Really Works

There has been a lot of discussion in the blogosphere about a research paper by Lauren Rivera that describes how elite professional service firms (top investment banks, law firms, and management consulting firms) go about hiring. The argument is that it is basically a self-perpetuating old boys’ network. Reading the reactions of smart, well-intentioned people with no first-hand experience of this process, and who therefore take her paper at face value, this seems to be feeding into a meme of “the capitalist game is all rigged.”

I think that there is an element of truth to Rivera’s description, but it is mostly pretty misleading. I’ll focus my comments on management consulting, where I used to work for about ten years. I participated in every stage of the process from job candidate to new junior consultant to hiring partner.

Start with some quick industry background. You can divide management consulting into “strategy consulting” and “other.” Strategy consulting is the elite end of the consulting business. Most of strategy consulting can be sub-divided into two tribes: McKinsey and “Bruce Henderson’s children.” McKinsey is the industry leader. Bruce Henderson founded the Boston Consulting Group (BCG) in the 1960s. A number of BCG spin-offs have occurred since (e.g., Bain, SPA, LEK, etc.), and some of these have created further spin-offs. By far the largest and most important is Bain. Together, McKinsey, Bain and BCG (“MBB”) are the dominant elite recruiters for consulting, though a swarm of smaller strategy firms can compete successfully for the best talent.

There is a lot wrong with Rivera’s picture of how recruiting works, but I’ll focus on three important issues.

Rivera grossly exaggerates the degree to which access is limited to graduates of 4 super-elite schools.

Rivera says that:

Employers formally restricted competition to students at the nation’s most prestigious campuses and, contrary to common sociological assumptions about the role of institutional prestige in occupational attainment, having attended a highly selective school (e.g., top twenty five) was typically not sufficient for access to elite labor markets.

Here are about 40 schools in America where BCG and/or Bain are doing on-campus recruiting this year (meaning not just that they will accept resumes, but that they are doing things like on-campus presentations to get students interested, and then doing on-campus interviews): Duke University; Amherst College; Brigham Young University; Brown University; California Institute of Technology; Claremont Colleges; Columbia University; Cornell University; Dartmouth College; Harvard University; The University of Virginia; Princeton University; Yale University; UCLA; University of Michigan; Northwestern University; University of Chicago; Massachusetts Institute of Technology; New York University; University of Notre Dame; University of Pennsylvania; Emory University; Rice University; Southern Methodist University; Stanford University; University of California at Berkeley; University of Southern California; University of Texas; Georgia Tech; Morehouse College; UNC Chapel Hill; Washington University, St. Louis; University of California at San Francisco; Vanderbilt University; Baylor University; Texas A&M University; Georgetown University; Davidson College.

They also hire a lot of people from these campuses. Consider MBA hiring into the Associate position, which is the most common starting point for the climb to partner. The top MBA programs are usually considered to be Harvard and Stanford (please save your emails, as the point will hold if you move a couple of schools up or down a notch). In the next tier, MBB hired the following numbers of MBAs by campus this year: Northwestern (88), Wharton (85), Chicago (76), Columbia (60), MIT (55), Michigan (40), Duke (36), Dartmouth (24), Berkeley (23), and UVA (20). That’s over 500 hires, or more MBAs than these firms typically hire in a year from Harvard and Stanford.

This is nothing like a random sample of American universities, but it is a much bigger pool than Rivera implies. It’s not the top 4 schools, but more like 40 or 50 highly competitive schools, and 10 or 15 highly competitive MBA programs, that get you access to these firms. Further, while the odds of getting an offer are higher from the most highly-ranked schools, a large fraction of each incoming class normally comes from schools not ranked 1 – 4.

If you get into, for example, Michigan, UCLA, Emory or the University of Texas, work hard to get good grades in a difficult major, and score very well on standardized tests, you will likely be able to get an interview with one of the leading strategy firms.

Which brings me to the next point…

Rivera grossly overestimates the importance of extracurriculars, and grossly underemphasizes the importance of standardized test scores, and especially, case interviews.

Rivera says of elite employers that:

They restricted competition to students with elite affiliations and attributed superior abilities to candidates who had been admitted to super-elite institutions, regardless of their actual performance once there. However, a super-elite university affiliation was insufficient on its own. Importing the logic of university admissions, firms performed a strong secondary screen on candidates’ extracurricular accomplishments, favoring high status, resource-intensive activities that resonated with white, upper-middle class culture.

There will be exceptions to everything I say, but the way the actual selection process usually works is like this.

Interview slots with the best strategy consulting firms are a scarce commodity. Your resume gets you selected for an interview (though in rare cases, the cover letter and any interaction you may have had with the firm at campus recruiting events can matter a little). Take the example of undergraduate resume screening. Candidates are required to submit resumes, complete transcripts, and SAT scores. As an operational matter, the pile of resumes plus supporting materials submitted for all the candidates for school X is assembled, and each of these candidates is scored independently by three members of a school recruiting team (typically consultants who went to that school). These scores are then combined to create an aggregate rank for all candidates in that school. So, school prestige, which looms large in Rivera’s artificial mock resume screens, matters in selecting target schools, but is not usually relevant in real resume screening because you are screening resumes within a school.

In my experience as a resume screener, the logic normally goes something like this.

If you don’t have at least 750 on the math SAT, you’re out. The most common score is 800. Math plus verbal scores should be well over 1500, and typically over 1550. GRE, GMAT and other scores should be scaled similarly.

Then, your degree should be in something hard: math, physics, electrical engineering, analytical philosophy, computer science and so on. It’s OK to major in history or literature, but you better have some really tough quantitative or analytical classes on your transcript, and have done very well in them. If your GPA is below about 3.5, you’re out unless there is some really compelling rationale for why. The average successful candidate has a GPA above 3.7. Everyone understands how bad grade inflation is, and that it’s worst in the most elite schools. Any reasonably smart person with good instincts about course selection can figure out how to get a decent GPA at one of these schools. A GPA-plus-major screen is not about IQ, as much as it is a quick screen to see who is capable of figuring out how to succeed in a new environment, and of doing at least some sustained work. Screeners and interviewers will typically look at the transcript to make judgments about raw candlepower; for example, checking which calculus sequence the candidate completed, and if it was the most difficult track, what grades were achieved.

Prior summer internships at an MBB firm, Goldman, etc. are a strong positive. The reason is not that this means somebody is “clubbable.” The recruiting process for internships has similar resume screen / interviewing steps, and there are even fewer internship slots available each than there are slots for full-time jobs. Therefore, it means that this candidate has succeeded already in a similar, very difficult, selection process.

Finally, extracurriculars matter; but they are marginal compared to these other factors. They are mostly relevant if they show incredible drive. For example, working your way through school in some crap job where you have to deal with people is a big plus.

If you get an interview slot, there are then typically three rounds of interviews. Rivera’s paper claims directly that these are pretty loosey-goosey affairs which people are trying to get a sense of how polished the candidates are:

Interviews – which followed screens – were reported to be highly subjective assessments, where abstract notions of “fit” and “chemistry” routinely drove hiring decisions

Here’s how interviews really work, in my experience.

Interviews begin with first-rounds on campus. Each candidate is given a 45 minute interview, about 44 minutes of which is devoted to presenting the candidate with analytical challenges, and seeing how he or she works through them. The goal is to understand how the candidate can reason analytically – translating an unrehearsed real world problem to a mathematical representation, doing the math, and then translating this back to a real world solution, with awareness of all the simplifications that were necessary – under pressure. This is an attempt to recreate the most challenging part of the job, and is termed a “case” interview. Based on these, a majority of first-round candidates are cut. Second-rounds normally happen the next day on campus. It is a repeat, except that each candidate is normally interviewed twice that day, and each interview is longer. Based on these, a majority of second-round candidates are cut. The remaining candidates are invited back for third-rounds. This takes place at the company’s offices over a full day. Each candidate is subjected to 10 or more additional interviews, most of which are case format, but some of which are more typical “let’s talk about you and us” discussions.

Each candidate is then considered holistically, but because so few people in this final selection group have anything but extremely strong grades and test scores, the interviews are usually the crucial way to try identify the highest potential performers. A small fraction of those who started the interview process are offered jobs.

Which brings me to my third point…

Firms sell into a competitive marketplace.

Almost everybody would love to live in the cozy club atmosphere that Rivera described, and it is always creeping into hiring, promotion and compensation decisions at these firms, as in any human institution. Discipline is maintained only because you have to sell into a competitive commercial market. Unlike how it works in the movies, it is very rare that the COO of a Fortune 500 company hires your case team to do a six month project at $375K per month so that you can sit around and reminisce about rowing crew together at Old Eli. The more vibrant, competitive and open the overall corporate environment is, the more you will see continued emphasis on finding people who can produce, because the corporations will only pay for what creates commercial value for them. The more the corporate environment becomes dominated by crony capitalism, the more you will see the reverse. And to be more precise, you will see the characteristics that define a competitive consultant become more the kind that Rivera describes: fit, smoothness and familiarity with the ruling class.

In an earlier post, Steve Hsu made a useful distinction between what he calls the “soft” elite firms that Rivera profiles (investment banks, law firms and management consultancies) versus “hard” elite firms such as hedge/venture funds, startups and technology companies. He argues that the hard elite firms produce something more measurable, and therefore rely less on prestige in selecting people. This distinction is a useful starting point, but what has been happening over the past 20 years or so is the increasing migration of value from soft to hard; basically, to math, technology and analytics-intensive work. This is happening within firms and industries – the emphasis on math ability was growing within consulting in the period I worked in it, as it was within banking – and across sectors as technology start-ups and math-intensive finance became the most obvious ways to make real money in America. This isn’t random, but is happening because these are huge opportunities to create value. This is in part why I left consulting to start an analytics software company. It became obvious that this was the way to create value for clients. This won’t last forever, but has been true for some time.

This should emphasize that the people selected for these jobs are in no sense a “meritocracy.” Most obviously, it has nothing to do with moral worth, as people don’t earn their genes or parents. But more broadly, what I have described is not a hunt for the “best and brightest” in some general sense, but rather for people who have an incredibly arcane bent of mind and set of ambitions that fit into an environmental niche that they didn’t create. This is as true of “hard” elite firms as “soft” elite firms. Despite all the chest-pounding, 50 years ago most of these people would have clerks; a couple hundred years ago, not especially successful farmers. 50 years from now, for all we know, these will no longer be especially valuable talents.

Ironically, moving away from the idea that firms are looking for “the best” or “most worthy” in some general sense, and simply recognizing that they should look for predictors of success within a given business model relevant to a specific point in economic history, allows not only more effective hiring decisions, but also a little much-needed humility.

(Cross-posted to The Corner)

Wisdom to Know the Difference

Razib Khan has a typically incisive post pointing out that what counts as a “moderate” Islamic political party varies considerably from country to country within the Muslim world. Which is true. But by the same token, it’s worth pointing out that Islamic parties, whether moderate or extreme, quite plainly occupy the center of gravity across the Muslim world. On the spectrum of relative liberalism, the center varies considerably from country to country – but in a burgeoning majority of cases, that center, however liberal or illiberal it is, is Islamic in orientation.

With the ouster of Saddam, the main political forces to emerge in Iraq were a moderate Shiite Islamic party and an extremist Shiite Islamic party. With the ouster of Qaddafi, Libya is also going to be governed by a coalition that is predominantly Islamic in orientation. In Egypt, Morocco and Tunisia, popular protest eventually forced the ruling powers to allow popular elections, all of which were won by Islamic parties; the same was true of the elections in Gaza. I have no doubt that same thing will be true if and when Yemen and Syria follow suit. The same would be true of Saudi Arabia if elections were ever held. The same was true in Algeria in the early 1990s, before the military cancelled the elections. Turkey evolved slowly and relatively peacefully toward its current orientation, governed by a moderate Islamic-oriented party. Pakistan is not governed by explicitly Islamic parties – but it is formally an “Islamic Republic,” Islam has a formal role in the Constitution, and there is a religious test for the Presidency. Iran, of course, is an Islamic Republic of (formally) revolutionary character.

Who knows, of course, what tomorrow may bring; I don’t mean to suggest anything about the “inherent character” of Islam or majority-Muslim societies. But right now, at this historical moment, the advance of democratically accountable government and the advance of Islamic-oriented politics go hand in hand across the Muslim world.

[Short aside: I’m using the clunky phrase, “Islamic-oriented” rather than the almost-as-clunky but more-in-vogue “Islamist” because I think some people use “Islamist” to imply a specific ideological vision of how society should be organized, and I take Razib’s point that there is not a common ideological vision among the various Islamic-oriented parties and movements across the Muslim world.]

The folks who make this point in Western media tend to be arguing one of two things: either that the West should stop promoting democracy in the Muslim world, because doing so will only empower illiberal forces, or that the West needs to (somehow) empower liberals in the Muslim world to make sure that democracy isn’t “hijacked” by “Islamists” and that “real” democracy has a chance to take root. (Or, as Tom Lehrer put it: “They’ve got to be protected / All their rights respected / ‘Til someone we like can be elected.”)

I’m not making either argument; indeed, I would dispute both. The two fundamental claims for democracy are that it provides legitimacy to authority and that it provides some check on that authority via the “accountability moments” of elections. Both of those arguments remain true even if a popular majority is likely to be illiberal to Western eyes. Active opposition to democratic trends in the regions is, therefore, likely to be perceived within the region precisely as you would expect it to be perceived: as hostile to the people of the region. The negative consequences for the Western position and the position of our allies or clients should be obvious. By the same token, inserting ourselves into the emerging politics of the region’s various countries to tilt the scale in favor of parties with the “right” political orientation actually weakens the very orientation we’re trying to encourage. (The history of Russia during the Yeltsin years provides an instructive example of this dynamic.)

I’m just saying that we should be aware of this dynamic as we attempt to understand what is happening across the Muslim world. And we shouldn’t look at elections in this part of the world – or in any part of the world – as referenda on us. Looking at them that way is a relic of a Cold War mindset, a period when we were locked in ideological competition with another superpower actively engaged in trying to “turn” other countries into members of their “camp” (a process in which, I should note, the Soviet Union was not enormously successful – within a dozen years of its revolution, Communist China was pursuing an independent and even anti-Soviet line; Cuba, meanwhile, while annoying to the United States, was more a drain on the Soviet treasury than an asset in pursuing Soviet interests). To the extent that Islamist parties get “outside” support that helps them achieve political success, on the other hand, that support comes from “inside” the region – from Saudi Arabia and/or Iran – and is therefore by definition an expression of political developments within the region, and within Islamic civilization. That development proceeds in some part in reaction to us – but not primarily so, and even to the extent that it is a reaction to us, that doesn’t mean we can reliably shape that reaction by changing our behavior (whether to be more interventionist or more conciliatory or something else entirely).

The original neoconservative insight in foreign policy, gleaned from a study of Nazi and Soviet totalitarianism, is that the character of a regime has an impact on its foreign policy, and that therefore the realist dictum that states always pursue their interests is at best incomplete. The interests of a regime are not identical to the interests of the state, much less the interests of the people, and an ideological regime may pursue a foreign policy for ideological reasons contrary to national interests because the legitimacy of the regime depends on that ideology. The insight is real, and worth grappling with, but has been much over-applied in recent years (and under-applied to the neoconservative ideologists themselves). It is decidedly unclear how it is properly applied to the spread and maturation of Islamic-oriented politics within the Muslim world.

If the United States and other Western states assume that this political development within the Muslim world is inherently inimical to our interests, we are setting ourselves up for the clash of civilizations that Samuel Huntington was actually eager to avoid. If, on the other hand, our interests are finite and comprehensible, then we will need to learn how to pursue them within the context of this ongoing political development in the Muslim world, learning to speak that political language with increasing sophistication as it evolves, rather than demanding they speak our language or be silent.

There was nothing the United States could reasonably do to effect a liberal victory in Egypt’s elections. Nor was there anything the United States could reasonably do to achieve stable, long-term legitimate governance of Egypt by a political coalition unrepresentative of and unaccountable to the Egyptian people. What remains to be seen is not whether Egypt will remain on our “side” or not, but whether the United States and Egypt do have essential interests in common, and whether we can find the language that enables those points in common to predominate in our relationship over the points where we are at odds. I happen to be confident that Egypt has a powerful interest in maintaining the peace treaty with Israel, for example. I’m also confident that Israel has a similar interest. And, needless to say, the United States shares that interest. But I’m not as confident as I’d like to be that the United States will be successful in bringing both parties to a recognition of that shared interest, and how its importance overrides other issues on which they are in conflict. But that’s what diplomacy is about. We’ll see whether we know how to practice it.

Ethics, Politics and Economics

I have really been enjoying the ongoing internet discussion about “morality” and its role in understanding the Euro crisis (which may or may not be coming to a close with the latest proposals – color me skeptical until the ink is dry). To catch up, check out David Brooks and Matt Yglesias and Tyler Cowen and Ryan Avent and Scott Sumner and Kantoos and there’s no doubt a lot of other good stuff I’ve read that I’ve forgotten about.

Here’s one way to look at the whole situation. An individual may get into debt for many reasons. That individual might have borrowed to finance a new business that went belly-up; that business, in turn, might have failed due to incompetence on the part of the entrepreneur or factors that could not possibly have been foreseen, and everything in-between. The individual in question might have borrowed to buy a bigger house because she was expecting triplets, and felt she needed more space – and then, unexpectedly, lost her job because of a change in management. Or maybe she lost her job because she was pilfering from petty cash. The individual might have had a heart attack or other sudden and serious health condition. And might have declined to purchase adequate disability insurance. Or perhaps he couldn’t afford said insurance. Or perhaps his health problems are due to lifestyle decisions that his doctor had been warning him to correct. That individual might have gone into debt to blow it all in Vegas. Or perhaps he’s got an untreated gambling addiction.

Point being: no matter what the reason, the individual in question is going to go bankrupt if he or she can’t service his or her debts, and the bankruptcy process is not going to be focused on unraveling the thread of personal culpability. There is some degree of mutual interest between lender and debtor in a bankruptcy situation – and the law tries to be cognizant of that (and did a better job of being cognizant of that before the last decade’s bankruptcy “reforms”). But there is not a perfect mutuality of interest. And creditors hold the whip hand whether debtors “deserve” their situation or not.

Between nations, there is no similar law governing relations between debtors and creditors, but there is similarly a degree of mutuality of interest between them and a degree of disjunction of interests. And again, in general the credit has the whip hand, and “desert” plays into the question only inasmuch as it bears on the market estimation of the likelihood of being repaid on time and in a currency that hasn’t been substantially depreciated.

If Italy had control of its own currency, and got into the kind of trouble its in now – slowing global growth making it harder to service its debt – it could resort to devaluation to sustain itself. Which is just what Italy used to do on a regular basis back when it had its own currency, and because Italy had a reputation for doing that, it paid much higher interest rates than countries with better reputations did.

You can get moralistic about it and say that Italy “shouldn’t” have followed such a set of policies, but Italy paid the price for its own choices and I don’t see a need to declare that those choices were wrong.

But once Italy joined the Euro – substantially in order to escape its historic reputation as a serial devaluer – the equation changed. There was now no mechanism for Italy to use on its own to get out of a debt-related mess. Neither was there a mechanism for a higher authority to use, one with rules understood by all parties in advance. The right thing to do would have been to set the rules in advance. But that’s water under the bridge. So what’s going on now is that Europe is trying to establish the rules for dealing with a crisis in the midst of a crisis. Which, needless to say, isn’t easy.

And, politics not being beanbag, all parties are pushing their interests as they understand them. The Germans are more worried about the consequences of writing a blank check than are the Italians because the Germans will be the ones writing the check. It’s very easy to say, as Scott Sumner does, that you shouldn’t use threats of bad policy as leverage to get good policy – you should just do the right thing, because at least then you’ve done the right thing. But what constitutes the “right thing” is a function of time scale – and of how the alternatives are presented. If the choice is to dissolve the Euro or write a blank check, the “right thing” from a German perspective might be to dissolve the Euro. If the choice is dissolve the Euro or submit to permanent austerity, the “right thing” from an Italian perspective might be to dissolve the Euro. Yet both Italy and Germany might prefer a compromise that preserves the Euro to dissolution. To come to a compromise, however, each side needs to believe there are things the other side will not accept. And brinkmanship of the sort we’ve seen over the past few weeks is frequently the way political actors try to assess what those things might be.

I happen to be largely sympathetic to the German perspective on union as such – a perspective the German government held well before the current crisis and under both conservative and social democratic governments. That is to say, I think a “federal Europe” is the only real solution, and the main question is how to get there politically, which amounts to saying how to convince France to go there since France has been a consistent advocate of the “Europe of states” understanding of what the EU is or ought to be, an understanding that, I believe, is fundamentally inconsistent with the idea of a currency union, and proving to be so in the current crisis. But that doesn’t mean I think the Germans are “better” than the French or the Italians, or that the Germans should be “rewarded.” I’m not even sure fiscal union would ultimately be that great for German economic interests – it might, in the long term, be more expensive than just letting the Euro die. All it means is that I think their overall approach is more workable in terms of institutional design.

And the terms of that institutional design matter a great deal more than what the Euro-zone growth rate is next quarter. It would be bizarre for Europe’s leaders, faced with an unequivocal and profound design failure of their existing institutional arrangements, to punt on structural questions and simply have the ECB step in to bail out the periphery. Looser money is exactly what Europe’s central government should be delivering. But Europe doesn’t have a central government. It only has a central bank. The ECB is criticized for behaving as if it were the Bundesbank, making monetary policy based on German conditions alone. I fail to see how the situation is improved if the ECB were to behave as if it were Banca d’Italia. The ECB needs to be the central bank of Europe. To be that, there needs to be a European government. That’s what this crisis is about – not about morals and not about monetary policy, but about institutions.

The Beginning of the Ways of God

Rod Dreher asks:

Question: Are there any happy-go-lucky saints? Any great artists who are thoroughgoing optimists? I can’t see that.

I’ll take a pass on the saints, and I’ll take a pass as well on “optimistic” because that’s a very shallow word – as is pessimistic. But Dreher is telling himself a story about the relationship between suffering and meaning, or about the transcendent value of a radical disconnection from ordinary modes of being (manifested by saints and holy fools and such). And I’ll nominate two artists who don’t, I think, fit the picture Dreher paints of the relationship between suffering, meaning and the divine: Henri Matisse and Samuel Beckett.

I like picking Matisse because his career proves you can make profoundly beautiful work that really is about nothing but being happy.

And I like picking Beckett because his career proves you can live what must be accounted a deeply meaningful life while not only staring into the abyss, but setting up house there.

And I like pairing them with each other because their moods could not be more opposite, and yet both are plainly comfortable in the world, this world, the word of sense and feeling that anyone can participate in.

At the end of the Book of Job, God speaks to his faithful servant out of the whirlwind. He does not tell him that his suffering had a transcendent purpose – we know it didn’t; it was inflicted on Job because God made an absurd bet with Satan. Nor does he (contra Archibald Macleish) simply browbeat Job into submission by showing him how much he doesn’t understand, and how much more powerful God is than a puny mortal man. Instead, God calls Behemoth his chief creation and lavishes line after line in praise of the wondrous Leviathan. That’s the climax of God’s message – that these wondrous monsters are what God is most proud of.

Then, of course, God tells Job’s comforters that they were wrong and Job was right, and gives Job back everything he lost – new house, new cattle, new family. But what does Job do? He names his three new daughters Jemima, Kezia and Keren Happuch – roughly, sunshine, perfume and eyeshadow.

Which, when you think about it, is not so far from “luxe, calme et volupte.”

Nobody Ever Went Broke with Money in the Bank

That’s something that one of the smartest venture capitalists I ever knew once told me.

Matt Yglesias and Karl Smith find the fact that Apple is holding a huge cash hoard instead of paying dividends to shareholders to be pretty ridiculous. Felix Salmon finds Yglesias’s argument “trivially wrong.” All three are smart observers with interesting things to say, but I don’t think any of them presents this situation very well.

Yglesias says that this cash hoarding has caused Apple’s declining Price / Earnings (P/E) ratio:

The crux of the matter, as I see it, is Apple’s ever-growing cash horde which went from $70 billion in liquid assets at the end of Q2 to $82 billion in liquid assets at the end of Q3. The company is earning huge profits, which is great, but since it seems determined to neither return those profits to shareholders nor to re-invest them in expanded operations it’s hard to see how investors aren’t going to discount the value of the enterprise.

I’ve started and run a pretty successful enterprise software company, and I generally held a lot of cash on the balance sheet. From the perspective of shareholders, there can be many good reasons for this. First, do you know when cash-on-hand is most important? When nobody else has any. You can buy up the best talent, patents and assets when they are cheap; you can make big technology investments when they are cheaper; you can make big marketing pushes for the resulting new products when competition for customer mindshare is lower, and so on. When times are good (or at least not catastrophic) it seems like you could always get your hands on cash when you needed it, but that’s least true when you most want it. Cash is the option to act decisively at the moment when this can create large advantages for the company. Another example is that Apple is apparently holding the cash outside the U.S., and might be playing for time before repatriating it because they think corporate tax rates might come down. They might be playing any one of a million tax angles. Another example is that a massive cash pile can discourage potential competitors from entering important markets, because they know you can retaliate by either crushing their foray into your territory or by going after their cash cows. The U.S. will hopefully never launch its nuclear weapons, but we use them every day.

There are also not-so-good-for-shareholders reasons for it. There is an armchair psychology theory that because Jobs went through so many close calls in business, he had an irrational desire for cash on hand. That is at least plausible. But even if so, it’s not as simple as the shareholders just ordering Jobs to disburse the cash. If you believe that Jobs had this irrational desire, but part of the package required to get Jobs to continue run the company was to allow this kind of cash build-up, and that he increased shareholder value enough versus the next best alternative CEO to more than offset the impact of holding this much cash, then it still might be rational for shareholders to let him do it. In my experience, exactly this kind of dynamic happens in the real world all the time. More generally, sometimes a very large cash balance is an indicator that there is a principal-agent problem between shareholders (who want to maximize risk-adjusted returns on a portfolio of assets that includes this stock) and management (who want an operational cushion). Though sometimes, a large cash balance is an indicator of a disciplined management team that refuses to make poor investments in acquisitions or fanciful projects.

In short, there are tons of reasons – some good and some bad – why Apple might be holding this much cash. Apple’s P/E is being affected by some combination of their growing cash pile, changing overall market conditions, the death of Steve Jobs, projections of market saturation, beliefs about future Apple investment plans, competitive behavior, and many other factors. I don’t know whether or not Apple’s cash balance is too high or not; but based on this post, neither does Yglesias.

Salmon says of Yglesias’s argument:

This is trivially wrong. If Apple’s cash pile is growing, that will increase its p/e ratio, rather than decrease it.

In simplified terms, Salmon’s argument is the following. Consider stylized company X that has: $2 of earnings today; a market projection of present value of cash returned to shareholders of $10; 10 shares of stock outstanding; and no net cash on hand. In theory, the company should be worth its present value of cash flows, or $10. This would produce a share price of $10 / 10 shares = $1 per share. This implies a P/E of $1 / $2 = 0.5. If nothing else changes except the company has $2 of cash on its balance sheet, then in theory the company should be worth $10 + $2 = $12. This would produce a share price of $12 / 10 = $1.2. This implies a P/E of $1.2 / $2 = 0.6. So, Salmon argues, Apple piling up cash should increase P/E.

But, what this ignores is that the fact that Apple management has decided to retain the cash can rationally influence investor beliefs about the present value of future cash returned to shareholders in relation to current earnings. Yglesias illustrates the size and rate of growth of Apple’s cash balance by citing a quarter-to-quarter change, but his argument refers to a chart of Apple’s P/E over nine quarters. On this kind of timescale, the fact that management has decided to retain this much cash – rather than either invest it in the business, or pay dividends, or buy back shares – could be a signal to outside investors that management believes growth prospects are lower than previously believed, or that management has become irresponsible in its use of cash, or any other of many possible positive or negative signals. Different investors almost certainly read it different ways. Yglesias is not “trivially wrong.” He might even be right. I just don’t think either he or Salmon knows.

Smith is even more scathing than Yglesias about the point that Apple isn’t using the cash to pay dividends to shareholders:

I have a theory.

On the one hand you can buy Apple stock for $375 a share and pay $7 to ScottTrade. On the other hand I also have a trash can in which you can deposit your $375, pay me $5 and I will set it on fire for you.

Clearly, I am offering the better deal as in both cases you have approximately zero probability of getting your money back and I am willing to burn it for $5 whereas you have to pay ScottTrade $7.

Now that’s not quite true. Apple’s stock price is sustained by the fact that if it goes low enough someone will buy the whole company and liquidate it. However, current investors shouldn’t be under any delusions that Apple has any plans whatsoever to provide them with a return on their investment.

I think that Smith’s point is that because Apple has not paid dividends, therefore I never get paid back real cash in return for the cash I pay for a share of Apple stock, and the only thing I can do with it is to sell it on to some greater fool. The only exception is if Apple gets to a sufficiently low value that owners band together and sell off the land, buildings, inventories, desks, patents and so on in an auction, and then divide up the proceeds.

Assuming that’s what he means, I don’t think it makes a lot of sense.

First, big tech companies often don’t pay dividends for a long time, until they do. Sometimes, these dividends are massive and continuing. Second, if there are continuing growth prospects for Apple that require cash (sometimes in ways that aren’t obvious, as per the first part of this post), then it makes sense for me as a shareholder to not want dividends for some time. The present value of the anticipated dividend stream is higher by getting more money later. If, at a future date, I have a desire for liquidity, I can sell my share of stock to another investor at that time. That investor may go through the same cycle, and the person he sells to may go through the same cycle, and so on. As long as the profit growth prospects are real, nobody has been a fool. Ultimately, the purpose of equity is to be converted into cash (or more precisely, consumption); but for a company like Apple, this can take a long time, and not every investor wants to go along for the whole ride. Third, the “exception” of shareholders banding together is not an exception, but something that often happens to companies well before their stock price reaches liquidation value. This is called the market for corporate control.

I don’t believe in anything approaching purely efficient markets. But when a journalist or academic makes claims that some company could just obviously create enormous value by taking some simple action, the obvious question to them is “Why aren’t you a billionaire?”

(Cross-posted to The Corner)

War As Culture War

I think Daniel Larison’s reflections on Dan Drezner’s despair of the condition of foreign policy debate within the GOP need to be understood in the light of Thomas Edsall’s reporting that the Obama campaign is basically resigned to the fact that they will be running against a party following some version of the Sailer Strategy, and is accordingly planning a campaign based on the demographic groups left out of a Sailer Strategy coalition.

That is to say: foreign policy, at least on the GOP side, is now basically a branch of the culture war: a way of convincing the white working class to support a party that is not pursuing their economic interests by flattering them with the implication that, in the memorable words of Edward Wilson, they’ve got he United States of America. The rest of you are just visiting.

Before World War II, foreign policy divisions frequently obtained intra-party as much or more than between the parties, and real divisions in economic interests: between slave states and free; between predominantly industrial and predominantly agricultural states; between groups heavily exposed to international trade and finance and groups less exposed. That’s not to say that ethnic politics – the aversion of Irish immigrants and their descendents for alliance with Britain; the aversion of German immigrants and their descendents for war with Germany – or ideological currents had no bearing on foreign policy debate by any means. But there was foreign policy debate – and it was to a considerable extent based on different conceptions of interest.

Larison says that foreign policy was particularly important to Cold War elections, and that therefore this period was abnormal, but that view should be qualified because with the advent of the Cold War, big-picture foreign policy debate largely ceased. There was an overwhelming bi-partisan ideological consensus in favor of the basic architecture of containment. No major party candidate ever fundamentally repudiated it, and the two major party candidates who deviated most meaningfully from that consensus – Goldwater and McGovern – suffered the most lopsided defeats of the period. In virtually every election, voters either punished manifest incompetence (1968, 1980) or opted for responsible stewardship of the consensus (1952, 1956, 1964, 1972, 1984, 1988). The two exceptions were both close elections, where the question of responsible stewardship was at least somewhat muddled, and only in one of those (1960) was the plainly more bellicose candidate preferred.

I’m not suggesting that during the Cold War foreign policy actually drove elections. I don’t think it did anything of the kind. I’m also not suggesting there was no debate at all – particularly intra-party debate – about which direction to nudge that consensus. Certainly, 1968 and 1972 on the Democratic side, 1976 and 1980 on the Republican side, represented, among other things, intra-party debate about just such a push. But that’s what we’re talking about: a nudge, moving the consensus a bit this way or that, not a repudiation of that consensus. And in the general election, Cold War politics did not feature debate but rather imposed a one-dimensional “fitness test” on candidates with respect to foreign policy. And all this represents a significant change from the pre-war terms of foreign policy debate – a narrowing thereof.

Foreign policy was largely irrelevant to the elections of 1992, 1996 and 2000. No longer was a “fitness test” for stewardship imposed, but neither was there any meaningful debate over the direction of foreign policy, either between or within the parties.

It’s in the last two elections that the trend of foreign policy being treated as part of the culture war – at least by the GOP – has become dominant. Mitt Romney is the exemplar in this regard; his entire foreign policy argument consists of saying that he knows America is exceptional and President Obama does not, and that Obama has been making too many concessions to America’s enemies (without any clear explanation of what those concessions might be). Obama has been a somewhat more belligerent steward of America’s existing posture than I anticipated (I fully expected the escalation in Afghanistan and the tough line on Pakistan, since he ran on both, but the Libyan war came as a modest surprise), but otherwise he’s been pretty much exactly what I expected him to be: a competent and fairly successful steward of America’s position as he inherited it. America has suffered no meaningful foreign policy setbacks during his tenure, and has had some notable successes. The contrast to the economic situation could not be more stark. Why on earth would anyone on the other side spend their time demagoguing on foreign policy? Why would anyone on the other side respond to such demagoguery? That’s not what the Democrats did in 1992, either in the primaries or in the general election.

The reason has everything to do with the culture war. Identity politics on the GOP side of the aisle involves stoking an emotional identification between their core demographic groups, the Republican Party, and the national identity. The white working class is the backbone of the American military. Stoking an identification between the white working class and the military, and between the military and national purpose, provides the emotional fuel for political mobilization. It imbues identity with purpose and connects that purpose to politics.

I expect this dynamic to continue. If Thomas Edsall is correct, both parties have now committed to their respective demographic “sorts” of the electorate. The GOP will be the party of the white working class and of the wealthy. The Democrats will be the party of the professional classes and non-whites of all classes. In a competitive political environment, the median voter theorem should hold true most of the time – which means that neither party can plausibly win a durable majority regardless of its demographic coalition. So the important thing about the sort is what kind of leverage coalition members have within each party to press their group’s interests. A highly successful sort based on identity, which makes it emotionally difficult for demographic groups to shift allegiances, drastically reduces those groups’ leverage. To the very extent that the GOP is able to cement white working class identification of themselves with the “real” America, and both with the GOP, to that same extent the white working class will have surrendered its interests.

In the Long Run, We're All German

I argued last week that the right way to think about what’s going on in Europe is as a game of chicken. The ECB was unwilling to act as a lender of last resort to Italy because it did not want Italy’s chronic indebtedness to drive Europe-wide inflation rates. If it loosened the money spigots and allowed high enough nominal growth for Italy to continue to service and pay down its debts, but there was no European institution capable of enforcing fiscal discipline on Italy, then there was the risk of moral hazard – Italy could operate in a business-as-usual manner, and rely on the ECB to keep it from paying the price, which would instead be paid by northern Europe (preeminently Germany).

Of course, it would be absurd for the ECB to actually destroy the Euro in its efforts to prevent this hypothetical future problem. But it’s not obviously absurd for the ECB to play chicken – to withhold help until the moral hazard problem is resolved, and some mechanism is put in place to, in so many words, give Berlin a veto over Rome’s budget. It’s just a bet that Rome will blink first.

But Ryan Avent makes a good case that the ECB hasn’t just played chicken as the crisis has unfolded, but that the ECB engineered the crisis:

The ECB raised its benchmark interest rate in April of this year. It raised that rate yet again in July. Each move was just 25 basis points, but the signaling power of those moves was significant: the ECB, markets were informed, would not let dormant core inflation, a fragile economy, high unemployment, and an intensifying financial crisis stand in the way of its commitment to low headline inflation. As Paul Krugman and David Beckworth point out, the market impact of the ECB’s actions was dramatic. Inflation expectations tumbled. Nominal output across most of the euro zone switched from expansion to contraction. And as the OECD pointed out today, euro economies are now in recession.

The ECB successfully engineered a collapse in demand (not without assistance from governments, of course). It would be shocking if this didn’t feed into a move from a solvency to an insolvency equilibrium in economies relatively close to the threshold.

The conclusion of his piece points to why the ECB might have wanted to engineer the crisis, and it’s consistent with my views:

Some might argue that responsibility for the crisis must nonetheless sit with the debtors. The Italian economy is a mess, Tyler Cowen says, and though Italy could make a substantial dent in its debts through a large tax on wealth it opts not to. It is broken Italian governance that dooms the euro. Neither Germany or the ECB can be expected to save an Italian economy that won’t take reasonable steps to meet its obligations. But as Mr Cowen is fond of saying in other contexts, the central bank moves last. If the ECB is willing to permit contagion, then no Italian action is a sufficient defence. If the ECB is willing to engineer a recession to wring out inflation, then no Italian reform will generate strong growth.

Some might well argue that responsibility sits with the debtors – more specifically, creditors might argue that. In other words: Germany might argue that. Central banks are generally biased in favor of creditors; the ECB was specifically organized to be biased in favor of Germany. (That was the price for getting Germany to agree to give up the Deutschemark in the first place.) One way of looking at the sequence of events is to say that the ECB was willing to permit contagion in order to wring out inflation. I think a better way of looking at it is to say that the ECB was willing to threaten Italy with insolvency in order to give Germany more formal control over Italy’s finances.

That’s incredibly hard-ball politics, but if you are not accountable to anybody (which the ECB, basically, is not) then you can play really, really hard-ball politics.

And, at a high human cost, the bet seems to be working:

“I will probably be the first Polish foreign minister in history to say this,” he said, “but here it is: I fear German power less than I am beginning to fear its inactivity.”

That’s Radek Sikorski yesterday, calling for new budget procedures that would give European institutions – the Commission, the Council and the Court of Justice – formal veto power over member states’ budgets, and to suspend the voting rights of member states that repeatedly violate the rules. When the Polish foreign minister is begging Germany to turn other European states into quasi-colonies, I’d say you’re getting some traction.

Re: Wealth, Innovation and "Job Creation"

Noah,

Thanks for the, as always, great post. You start by asking:

First, if it’s very uncertain how tax policy is going to affect innovation, why does that imply that taxes on the wealthy should be low?

I did not argue that that premise implies that conclusion. Krugman made an affirmative claim (or, as I went into in the post, he used language that Ozimek showed, I think correctly, could only be interpreted reasonably as implying) that innovators capture materially all of the economic value that they create. Ozimek provided a thought experiment that shows that this seems to violate common sense. Common sense is sometimes wrong, but I think the burden of proof is on those who make an affirmative claim. Krugman doesn’t provide any evidence for his claim beyond waving his hand at “textbook economics,” and Ozimek called him on it. I applauded this.

My only addition was to make an observation. Krugman claimed a contradiction between the belief in free-market principles and the belief that innovators can create material economic value that they do not capture, because the textbook economics that he believes is the foundation for belief in free market principles also claims that workers will capture the economic product of their labor. In fact, at least some people who hold free-market principles (e.g., me) do not ground their beliefs in Krugman’s textbook economics. So I am free to simultaneously hold the beliefs that innovators often cannot capture the full value of their work, and free markets are a good general organizing principle for the economy, without (at least this specific) contradiction.

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