Taiwan's Fate Is Sealed

Taiwan will become a de facto (and not just de jure) part of China--the only question is how

Taiwan's chances of becoming a fully independent state are essentially nill. The island is currently only recognized by a very few countries as an independent state. For most of the world, then, Taiwan is already a de jure (by law) part of China. Taiwan is de facto sovereign, however, deciding over all its own affairs. The United States has taken it upon itself to protect this state of affairs. In a series of communiques during the 1970s, the United States agreed that there was only one China and that Taiwan was part of China. The catch for China is that both it and the US agreed that neither Taiwan nor China was to decide on a change in the status quo between Taiwan and China unilaterally or by force. This means that the US cannot support Taiwanese de jure independence, but that China would theoretically be barred from "reunifying" Taiwan with the mainland by force. As long as everyone sticks to the bargain, things are OK, even if they are quite messy from an international relations or international law viewpoint.

The thing is, China expects unification with Taiwan to occur eventually and does not seem willing to wait forever for this to happen: "In 2005 China passed the Taiwan Anti-Secession Law, which commits it to a military response should Taiwan ever declare independence or even if the government in Beijing thinks all possibility of peaceful unification has been lost" (The Economist, Apr 7 2012). This seems to be rather close to violating those communiques, since the latter part, at least, would be a unilateral Chinese move toward unification. On the other hand, the US was supposed to slowly reduce its arms sales to Taiwan over time--it has not. As is distressingly often the case in international politics, a tiny political entity has the power to set a frightening chain of events into motion.

What if Taiwan were to declare independence? This came close to happening under Taiwan's President Chen in 2002, when he declared that there was "one country on either side of the Taiwan Strait."¹ Disaster was averted, however, when US President Bush began to reign Chen in, making it clear that the US's stance on unilateral changes to Taiwan's status applied to Taiwan as well as China.

The people of Taiwan eventually voted Chen out, partly out of fear that his loose talk could prompt a Chinese attack. Fear that China would attack and clear signals from Washington that the US would not back Taiwan if it declared independence should be enough to prevent it from doing so. (At least, I hope those signals from Washington are clear!)

But what happens if China decides that "all possibility of peaceful unification has been lost" and decides to forcefully annex Taiwan? At the moment, this still seems unlikely due to the US's power in the region. But China is increasing its capabilities in its backyard quite quickly. It's not a case of China needing to achieve military parity with the US. It's only a case of being able to defend itself against a US attack on its immediate coastal area including Taiwan. That is considerably easier than achieving parity. Would the US really be able, or willing, to stand up against China for the sake of Taiwan?

The US policy on the topic is "strategic ambiguity," which basically means it says it could get pissed off about a number of things, it just won't tell anyone what things would lead to which responses. The advantage of this is flexibility and the belief that this uncertainty will make the Chinese wary of provoking the US. What it actually is, in my view, is a way for the US to prevent admitting that it could not stop China from taking Taiwan if the former really wanted to, especially if China decides to do this in, say, 10 years or so when its capabilities will have grown much greater. The US is a long way from Taiwan, but China's entire military force could easily and quickly be brought to bear on the island. Over the medium to long term, there is little the US could do to stop such an occurrence. "Strategic ambiguity" is a sponginess that allows the US to convince all parties that they will get what they want and deserve, while knowing full well that this is impossible.

1.Dumbaugh, Kerry. “CRS Report for Congress.” Federation of American Scientists. 20 April 2007. 14 Jun. 2008 <http://ftp.fas.org/sgp/crs/row/RL33684.pdf> cited in Kirchofer, Charles. “U.S. Foreign Policy and Interests Reharding Tensions in the Taiwan Strait”. Webster University, Vienna, July 10, 2008. http://www.english4you.biz/papers/taiwan.pdf.

Would Energy Independence Insulate the US from Oil Price Spikes and Reduce Wars in the Middle East?

What energy independence would mean--and what it wouldn't

The US's dependence on foreign oil is often cited as the root of several evils. The two most prominent are the ones in the title. The short answer to the first one is "probably not, but potentially." The answer to the second is "no."

Let's put aside the shear difficulties involved in becoming energy independent for a moment to concentrate on this hypothetical situation. In an apolitical and amoral world, an energy independent United States could halt oil exports and insulate itself from rising prices by cutting off the excess demand for US oil and using it exclusively for the domestic market, for which there would be enough oil to go around (hence prices would not rise). We don't live in an apolitical and amoral world however. Here's why that matters: cutting off exports is known as a beggar-thy-neighbor policy. The reason is that it would benefit American oil consumers while harming consumers in the rest of the world. That is because some additional supply would be removed from world markets, driving up the oil price still further.

Not only does this rub against our moral sensibilities, the political (and economic) backlash would be huge. And it wouldn't just be about higher oil prices. The US has encouraged free trade for decades and built up a global economic system based upon that idea. A move like that would be hypocritical and seriously undermine the US's credibility. The result could be a trade war, with other countries erecting trade barriers as well, slowing global trade, driving up consumer prices, and killing the world economy. In other words, the result could very well be worse than higher energy prices themselves would have been. So it would be better if the US didn't use its (fictional) energy independence in this way to keep its own prices low.

On to war in the Middle East (ME). Hasn't US involvement there been based on its thirst for the region's oil? Hasn't this led to wars? This is unfair. US involvement in the Middle East is due in no small part to the region's oil. To deny this would be a bald-faced lie. But I think many people assume that US involvement would somehow be proportional to the amount of its oil it gets from the region. This is a misunderstanding of economics. The US imports less than 25% of its oil from the Middle East (that's including the entire "rest of the world" statistic as being all from the Middle East, which surely drastically overstates things). But this is completely irrelevant. The oil price is determined by global supply and global demand. It doesn't matter if your traditional suppliers still have the same amount of oil. If another supplier doesn't, demand for oil from your suppliers will rise, and so will the price. Even if the US didn't import any oil from the ME, that region would still be among the world's most important suppliers, if not the most important one. It could therefore never be ignored.

This means that the US and every oil consuming country in the world has an interest in ensuring that ME oil keeps flowing. The US, however, is one of the few countries with the power to do so--so it does. Does this cause wars? I actually don't really think so. The US is guilty of promoting "stability" in the region over the years, which has often meant doing business with, and at times outright supporting, Arab dictators. As I've explained in other posts, though, these were marriages of convenience. As the Arab Spring has shown, if all other things are equal, the US will support democracy. Usually all other things are NOT equal, however. The alternative to doing business with dictators is not doing business with dictators, who will then do business with others and stay in power. This would mean the US would also have little influence on those countries (influence it could use for good) and would be more beholden to a smaller number of suppliers, putting its energy supplies at risk and artificially raising its oil prices, damaging its economy. In short, everyone would be worse off. I personally think following rigid and allegedly moral principles to the point that everyone suffers is a false, and facile, morality.

So energy independence doesn't make sense? Well, that's not entirely true, either. In an emergency, it would mean the US could ban exports as detailed above, or threaten to do so, giving it more leverage. That's the sort of "political dark arts" side of it. More cheerfully, energy independence would probably have to mean more green technology--efficiency improvements, renewables, etc., which are a good thing in their own right because of climate change, for one. Efficiency gains are also good because they reduce the energy intensity of the US economy. That means the US would require less energy for each dollar of GDP it produces. THAT really would make the US economy more resilient against rises in the oil price. Why? It's like this: if the US requires one barrel of oil for $2,000 of GDP, a rise in the oil price will have a greater effect than if a barrel of oil can generate $4,000 of GDP simply because the oil price will make up a smaller proportion of total costs in the economy. In the end, then, energy independence as a goal in its own right is not so important, which explains why the US hasn't pushed that hard for it. Reducing US dependence on oil by reducing the economy's energy intensity would provide the greatest benefits of all at a reasonable price.

And we're in luck: US oil consumption has fallen since 2005, despite rising GDP and a larger population. That means its oil intensity is falling (and actually, its overall energy intensity has been falling, too). This will make the US economy more resilient to energy price shocks over time. That can only be a good thing, because energy prices don't look set to fall much in the coming decades (except maybe for natural gas, but even that is uncertain). Just don't expect that to bring peace to the Middle East or to reduce US involvement there. Democracy just might, though, you never know...

Sandra Fluke, Rush Limbaugh, Contraception, and Clashing Values

Quite often when I write a post, I get a nervous feeling: I'm about to write something that could potentially piss people off, both on the right and left ends of the spectrum. This is especially acute with such emotionally charged (in the US at least) issues as contraception in all its forms. The antidote to this, to some degree, is to remain respectful and fair, and that's just the solution to the problem, as I will now argue.

Sandra Fluke is a law student at Georgetown, a prestigious catholic university. She testified before Congress in support of mandating that insurance companies pay for contraception for women. In this case, I believe the contraception specifically in question was birth control pills. Her argument centered around the costs of birth control during a student's time in law school (up to $3,000 according to her estimate) and the fact that birth control pills can be used to treat other medical issues, such as ovarian cysts. This condition caused a fellow student of hers to lose an ovary, and the implication was that, had Georgetown been willing to fund birth control pills, she would not have had to suffer that loss. Fluke argued "It's not about church and state, it's about women's health."¹

Rush Limbaugh attacked her on character grounds, saying that asking for others to pay her so she could have sex made her a "slut" and a "prostitute." Don't worry, I'm not about to defend him. Georgetown University President John DeGioia said it best when he called Limbaugh's remarks "misogynistic, vitriolic, and a misrepresentation of the position of our student."²

So where's the controversy? It's that I'm on the fence in this debate, though Obama has apparently already suggested the sensible thing in exempting religious organizations from the rule and putting the onus on insurance companies to offer free contraception.

The thing is: contraception can only cost $3,000 if you're using birth control pills. Why not use condoms? They'd be cheaper unless you're having a lot of sex. If you are, fine by me, but I also am not sure other people should help pay for condoms if you're using so many you can't afford them yourself. But this talk is bringing the debate dangerously toward Limbaugh's position, which is not at all what it's about. Let's bring it back to more likely condom use. One argument would be that condoms can break. Well, then use the morning after pill. Condom failure is really not an issue if women have access to the whole palette of contraceptive options, which they should, in my view. And there's another argument for condoms: only they can prevent the spread of most STDs. Birth control will not, so only using that is a risk to women's (and everyone's) health by itself.

There are other reasons for using birth control. Many may use it for health reasons (like for ovarian cysts). So be it, surely an exception for medical necessity ought not to be the vitriolic debate starter it is.

So what am I arguing? I am NOT arguing against birth control and certainly not against contraception in any of its forms. I AM arguing against mandating that all insurance companies must always pay for one of the more expensive forms of contraception whenever a woman wishes to have it: birth control pills. They might instead be required to cover funding for condoms... or not, they ought to be cheap enough and many organizations give them away for free. Birth control pills ought to be offered by insurance companies in cases of other medical necessity on the recommendation of a doctor.

What would this look like in practice? If you're a woman and want birth control pills, you would be free to choose an insurance provider who would pay for them (or buy them yourself, of course). If the plan is too expensive, you'd have two options: switch to condoms or convince your doctor you need them for health reasons. If you really do, then obviously that would be the route you should take, no questions asked. If you don't really need it for your health, I'd personally recommend the first choice because of my views on honesty.

In short: women should have a right to contraception and be free to choose whatever form of it they wish. However, it does not follow from that line that all forms of contraception must be made available free of charge, regardless of the relative merits and costs of other forms. In an age of rising health care costs and increasing government austerity, we should be looking at ways to save public money where this is feasible and does not cause undo harm. This seems like an okay area to do so. If only we could have a sane conversation about it...

As always, I welcome your comments. I actively encourage everyone to express whatever views they have, but please keep the discourse respectful and stick to the facts.

1: “Obama Calls Student Insulted by Talk Show Host.” Yahoo!, n.d. http://uk.news.yahoo.com/obama-calls-student-insulted-talk-show-host-034907306.html.
2: “Obama Calls Student in Slut Slur.” BBC, March 2, 2012, sec. US & Canada. http://www.bbc.co.uk/news/world-us-canada-17241803.

Lucky Non-Ethnic Nations: Anglo-based Identities

Anyone coming to the UK, especially large cities like London, will notice the mix of cultures, races, and ethnicities there. This has been going on for a long time and has usually been celebrated: In 1933, journalist Glyn Roberts commented "I still think the parade of peoples and colors and tongues just about the best thing in London." Not only are lots of different peoples present in London, they mix. This may seem like nothing extraordinary to an American, Canadian, or Australian (I assume), but it actually is rather unusual and, in my mind, a very good thing. In many places, mixing is a bit more difficult. The reason, I think, has to do with national identities.

What does a German look like? The tall, geeky engineer type, maybe, or the stout beer-drinking Bavarian? The German of Turkish heritage at a kebab shop probably does not come to mind, although he or she is surely an integral part of Germany today. "German" is now changing to include people who don't "look" German, but it is not as easy as "American," or "Canadian," which have always been mixes. Many nation-states are composed of, well, nations, which usually have a common ethnic heritage. This makes it difficult to join the nation just by getting the passport (i.e. citizenship in the country). Countries that have built national identities on things other than ethnic heritage have an easier time integrating newcomers.

Americans and others from outside the UK, who are likely to mix up terms like "English" and "British," may not recognize that the UK has long been a place of (more or less) accepted multiple nations and identities, too. The term "British" can mean anywhere in the British Isles (though calling Ireland, technically a British Isle, "British" would ruffle feathers) but usually means someone belonging to the United Kingdom. Historically, these were white protestants (after Henry VIII and Elizabeth I broke with Rome) living on the island of Great Britain with differing identities: English, Welsh, and eventually Scottish. In much more recent times (in the last 20 years about, according to a recent article in The Economist), immigrants to the UK, unable really to feel part of the English "tribe," for example, have adopted hyphenated identities involving being "British." The nice thing is that the term British, always a wider tent to include more peoples, has more easily expanded to allow immigrants to feel they own the term as well. No one's shocked if a woman with dark skin says she's "British." If she says she's "German," however, we may be a little surprised (though our surprise may, rightly, embarrass us). Now how to make these other national identities more flexible?

Defining Poverty

"Never trust a statistic you didn't fake yourself," Winston Churchill apparently said. And he was right, even if the statistic is "true." One batch of statistics that gets me annoyed is that on poverty. One of the most central difficulties in using statistics is in turning real-world things into numbers. We do that by defining them. The problem: change the definition and you change the numbers. Change the numbers, and your "statistical analysis" can say completely different things. This is why experts often seem to disagree on basic issues.

One of these basic issues is measuring poverty. There is great debate on how to define poverty. The most fundamental question is: is it absolute or relative? Are you poor if you cannot afford any place to live and don't have enough food to keep your Body Mass Index (BMI) up in the healthy range? Certainly. How about if you have 3 children but they have to sleep in one bedroom because a larger apartment would be more expensive? Does a household need a computer (or at least the capacity to buy one) to not be impoverished? This is all certainly tricky and emotive.

To get around this, European countries define poverty in relative terms. This seems reasonable. After all, our perception of poverty is relative: having less than my neighbors often makes me feel I am poor. Germany, for example (I believe), defines someone as impoverished if their income is less than two thirds of the median income for the country.

The problem, though, is that this definition of poverty encroaches on the territory of another term: inequality. I argue they are not the same thing and that poverty is absolute. Why? I'll give you an example. Let's say the median household income in a country is $40,000 per year. The poverty line would be $26,667. Let's say the Smith family earns $30,000. By either definition, they are not poor. Now let's say economic growth over five years lifts the median income to $50,000 per year. With inflation at 2%, that's a rise of nearly $6,000 per year. Let's say the Smiths' income only keeps up with inflation (something nice these days!). Their income would be $33,147. The new relative poverty line, though, will be at $33,333. The Smiths are now (just) poor. Yet in purchasing power, they have not lost anything! Society has become less equal, as others' purchasing power has risen and theirs has not, but they are no worse off than before.

What all this means is that statistics showing "rising poverty" might actually just be showing that rich people are getting richer faster than poor people. In fact, this definition of poverty could even show rises in poverty even if everyone in society were getting richer, adjusted for inflation, if the richest got rich faster and more people joined the rich at the top end. Everyone, including the poorest, is better off, yet poverty has increased? That doesn't seem right.

Poverty is definitely bad. Inequality is more ambiguous (getting into this would require a separate post). I suspect this is why some people like to use the word "poverty" instead--it makes for a stronger argument. This is a twisting of data and terms and is, I would argue, a misrepresentation of facts. People make decisions based on the facts presented (and represented) to them, so misrepresenting data is likely to cause bad decisions. Let's avoid that.

If Countries Can Print as Much Money as They Need, Why Does Debt Even Matter?

Whenever people start to learn about how the monetary system (i.e. central banks, money printing, etc.), there comes a point when they ask themselves or their teacher "so, wait, if a country can print as much money as it wants, how can it ever go bankrupt? Why default on your debts if you can just print more money to cover them?" The instructor (or Smart Alec at the right sort of boring dinner party) will then smile wryly at this allegedly stupid question and brush it off with something involving "inflation." In fact, this is not a stupid question at all. Not only that, the conclusion is, at its heart, correct. Theoretically, a country that prints its own money (not all countries do) cannot go bust! Yet countries throughout history, even those that printed their own money, have defaulted, in effect declaring bankruptcy and refusing to pay back all or some of their debts. Why?

The brisk answer "inflation" is not incorrect. Usually, when a country starts printing money to cover purchases it starts to cause inflation because it spends beyond its means. "How can you have means if you can have as much money as you want?" you may ask. Another good question. The answer is simple: goods and services are not free. If everyone in the world were millionaires, they couldn't all have luxury yachts, penthouse apartments, and helicopters. There is just not enough oil, labor, or space atop tall buildings. Everyone can't have everything. If everyone had millions of dollars to spend, this would not change the fact that there is a limited supply of everything. Prices would just shoot up to adjust to the new status quo. Billionaire would be the new millionaire. "Poor" would be people living on a salary of just $900,000 per year. All the printing, and no better off. I hope that makes sense, as I know it's a tricky concept to wrap your head around.

Still, the inflation answer is incomplete. This is because printing money does not, in itself, cause inflation. Printing and spending too much money does. In other words, having more money in circulation than there are goods and services to be bought will bid up the price. So the key would be not printing too much money, but rather, enough money.

Much of the rich world currently finds itself in an ongoing economic crisis; a slow one, which just feels like a general uneasiness. The world financial system has not yet, at least, collapsed, but unemployment is still high and growth and spending are sluggish. It's become harder for optimism to prevail, even among optimistic Americans. The main reason for the slow growth and high unemployment is too little "demand." That means that consumers, government, and companies together are not buying enough to push growth forward. The reason for that is mainly that households and banks, who obviously cannot print their own money, are busy paying off debts and have become much more cautious about spending even when they have the money. But what about the government, which can print money?

Theoretically, the government could just borrow from itself, printing money to spend on infrastructure, education, housing, whatever. Since the current problem is not enough demand (i.e. people not buying enough), the government could take up the slack. In theory, as long as it didn't take up too much slack and spark inflation as described above, everything would be all right.

So why don't we do it? The main problem is that we would have to trust the government to cut spending and raise taxes to reduce inflation, and do the opposite to drive things on. At the moment, the US Government can't even get the necessary consensus to do things like maintain bridges so they don't collapse. The (justified) fear is: once you have free money, you can't stop the spending. History has borne this out, too: there are many cases of just that sort of thing happening, going back hundreds of years. And let's face it, if you could print as much money as you wanted, would you stop? Yeah, right, keep telling yourself that.

To stop all this happening, central banks are usually permitted to lend only to other banks. They also do not normally purchase government debt. Instead, they borrow it from other banks, never taking on the risk of government default (both the bank and the government would have to go bust for the central bank to lose money... which it could replace by printing more, anyway, if legally permitted to do so). This wall of separation prevents central banks from financing government profligacy. That prevents the dangers of out of control spending and inflation. If savers are concerned that the government is borrowing too much, they stop lending the government money and the rates it has to pay to borrow rise; that usually results in budget tightening.

So really, everything's true: if central banks were willing to lend governments unlimited cash directly, they could never go bust, but the worry is that massive inflation would come as a result, as it has in the past. At the same time, though, central banks could lend directly to governments in times of crisis when inflation is not a big worry. They could continue to lend in order to keep interest rates reasonable, too, no matter how high the debt. They could then still allow rates to rise to stop inflation. So theoretically (how many times have I used that word now?) the Federal Reserve, Bank of England, the European Central Bank, and the Bank of Japan could lend directly to their respective governments during the current crisis, cutting off the supply if inflation threatens to return.

Central banks work on credibility, though. The expectation that inflation will remain stable is part of the reason that it does, in fact, remain so. Unorthodox operations like this by central banks could damage that credibility. Also, and this cannot be underestimated, there is a lot of political opposition (think most of the Republican party, the Tea Party, and followers of Ron Paul, just to name a few). So it's difficult, but theoretically possible, for a central bank to fund a government to push an economy forward after a crisis without sparking inflation -- regardless of how much debt has accrued, or to bail a government in a debt crisis out by lending it the necessary cash. Tricky, but possible.

Iranian Pickles: The Options for Handling Iranian Nukes

Stopping a country from developing nuclear weapons is hard -- and dangerous

Ah, the complexities of today's world. Wouldn't it be nice to go back to when things were simpler: When we only had to worry about Soviet nukes being fired from Cuba; or West Berlin, a city surrounded by communist East Germany, being attacked by Soviet forces thus testing the US commitment to treating Berlin as if it were New York, possibly causing nuclear war? If you haven't gathered this already: this is sarcasm. There may have been only "one" enemy during the Cold War, but it was, especially through the 1960s, a terrifying time for the entire world. Just a bit of perspective on Iranian nukes.

I am neither a hawk nor a dove, so let's address both extremes of the spectrum before we begin. First off, the doves: All signs point to Iran developing nuclear weapons -- even the IAEA, once reluctant to draw conclusions, has now verified this (see in particular point 43 of its report). If it is not developing nuclear weapons, then it is doing everything it can to give that impression, for example by keeping secrets and building underground nuclear facilities. Since Iran would gain little from such a ruse (pretending to already HAVE nukes could prevent countries from attacking you, claiming you are developing them when you're not, ENCOURAGES attacks), we must conclude that it is really doing it. Iran is NOT harmless, and talk from the US and Israel about its dangers is not a pretext for launching wars that both want to get into just for the hell of it, or whatever it is that leftists think is the conspiratorial reasoning for all this. Iran has supported insurgents in Iraq, as well as the terror/militia groups/political parties Hamas and, most notably, Hezbollah, which follows the lead of Iran's supreme leader Ayatollah Ali Khamenei.

The issue against the Hawks, who would bomb Iran's nuclear facilities, is a bit more complex because their line, unlike that of the leftist doves who think Iran's leaders are lovely, peace-loving people, is more credible. The main issue here, though, is that an attack would almost certainly not stop Iran from getting a bomb. For one thing, no one knows if there are additional secret enrichment facilities in Iran like the one discovered in September 2009. Iran is set to transfer production to an alleged number of secret facilities, which are reported to be bomb-proof, even if all of them could be found. Could Iran be bluffing to deter an attack by making it sound futile? Sure, this is international politics and diplomacy after all. Lies abound. But can we afford to assume it's a bluff? No, and that's the problem.

What's more, an attack on Iran carries incredible risks. Unless it were successful in completely wiping out Iran's nuclear development capabilities and killing most of its nuclear scientists, a near miracle if you think about it (and even then: once you've gotten through the complexities once, the second development run ought to be faster), Iran will simply be delayed -- and really angry. Sure, Iran spews hatred for the West and above all Israel, which carried out attacks on its nuclear facilities once before. Increasing its determination further still seems unwise, however.

Dr. Strangelove time
So what can we do? It seems ever more likely that Iran will get the bomb no matter what we do. This does not have to be the end of Israel or civilization as we know it. Keep in mind that only two atom bombs have ever been used in the history of nuclear arms. Further, it's important to note two factors in that case: Japan could not retaliate with nuclear weapons, and Japan and the US were locked in a brutal war and the US stood to bring the war to a quick end, preventing further US casualties and expense, by dropping two bombs. Whatever your feelings about the morality of the Hiroshima and Nagasaki attacks, the US had every incentive to do it, and there was essentially no risk. Iran has nothing to gain by using its nukes first or giving them to terrorist groups -- and everything to lose by doing either.

So what's the point of having the bomb in the first place if it is useless? Careful! I said that it makes no sense to use nukes first in the current situation, but that doesn't mean they're not useful. As Kenneth Waltz, the high priest of international political theory, points out: "the usefulness of force should not be confused with its usability... [that would be] comparable to saying that the police force that seldom if ever employs violence is weak or that a police force is strong only when policemen are shooting their guns... [or] that a man with large assets is not rich if he spends little money or that a man is rich only if he spends a lot of it."¹ The main use for Iran's weapons, when they're finally developed, is deterrence: it becomes much more unlikely that anyone will attack a nuclear-armed Iran, giving Iran greater freedom of political mobility. That is hugely useful.

"You're assuming Iran's leaders aren't nuts." You're right. And what is it about their actions that would lead us to think otherwise? Since I've pointed out that nuclear weapons are quite useful, even if this usefulness is not bound up with their actual use, the mere fact of them pressing on with the project implies paranoia about foreign influence or fear of attack -- but also rationality. Let's also not forget that Iran has been subject to heavy foreign interference in its affairs since the early 19th century, first by Britain and Russia, and later by the United States (the greatest example of which is the toppling of the Iranian government with US (CIA) assistance to re-instate the western-oriented Shah in 1953). So Iran has reason to be "paranoid," if the word can still be used to describe justified fear -- which would be an oxymoron; so no, it can't. Also, if you want to make people uncertain of your next move and encourage them to be extra cautious, it's a good idea to scare the crap out of them by making them think you're crazy. Kim Jong-Il (who has apparently just died!) was a master of this art, and the Iranian leaders may be, too. Note that Kim never really attacked South Korea, an easy target (Kim has tested South Korea's determination by firing at its ships and a small island near the border, but these tests showed South Korea was not just going to be pushed over).

We thought the Soviets were crazy enough to put ideology above reason, too, but they never did anything unreasonable. If Iran were to launch nukes at Israel, it would surely be completely destroyed by Israeli retaliation -- a pointless action. Likewise with an attack on Saudi Arabia, Iran's real arch rival in the region. The US could very well feel the need to launch a nuclear counterattack in that case as well. Or Israel might do it. In that case, too, Iran would have even less sympathy than it already does, for it clearly would be the aggressor. In the end, then, nukes are very useful for Iran in deterring foreign attacks and influence. They are not so useful if they explode, and that includes at the hands of Iran-linked terrorists. The bombs can be traced, and Iran would face a brutal retaliation if any of its bombs went off as a result of it giving them to terrorists. Plus: you have the most destructive weapon known to mankind, you've worked for years to develop it, in spite of tough sanctions and threats of attacks, and you're going to hand them over to a terrorist group over which you do not exercise total control? Not bloody likely!

Is this a happy compromise? No. But the other options are even worse. The world is not safe from nuclear weapons, but Pakistan and India provide further evidence that its destruction is probably not imminent: The countries hate each other, they are right next to each other, Pakistan is unstable and unpredictable, and yet no nukes have gone off. Instead, the conflict has been frozen. Both sides have become more cautious, and neither has been able to make any headway on its agenda. Frozen conflicts aren't great, either, but after a long freeze, future generations might forget what the fuss is all about and finally decide to resolve them peacefully, rather than letting them return to hot war or simply fester in the tundra. Nuclear weapons, then, force something like the Islamic concept of a hudna, or temporary cease-fire. The idea is to stop fighting and let the next generation decide how to take it from there. Strange love indeed.

1. Kenneth Waltz, Theory of International Politics (New York: McGraw-Hill, 1979): 185.

The Difficulties of Deterrence

As my regular readers and friends will know, I am writing a PhD on the use and effectiveness of deterrent policies against terrorism. It's an important subject, because the way a state decides to fight terrorism can protect people from harm, but it can also cost vast sums of money, endanger the lives of soldiers, kill civilians, topple governments, cause global outcries, and quite possibly result in incentives leading to more terrorism, not less. It also might not even protect many people from much harm if the policy is flawed. In other words: it's a matter of life and death.

So what the heck is deterrence, anyway? Deterrence is when I encourage you not to attack me by promising I will attack you back so hard you'll regret it. Sound brutal? Well, let's face it: it's not a happy, "I'm OK you're OK" kind of foreign policy. It has its merits, though. The greatest is that it is inherently defensive in nature, rather than offensive. "I will retaliate if you attack me" is not the same as "I will attack you." So the decision is left to the other party, which is crucial because this distinguishes deterrence from things like preemption and prevention (think of invading Iraq and toppling Saddam so that he can't even think about one day attacking the United States), which seek to control others, rather than simply coerce them.

A second benefit, which further argues for its morality, is that it is also inherently limited, potentially costing less in terms of both blood and treasure, but I will get to this below.

A policy based on threats of violence seems awful to us folks living in countries with the rule of law, where we're taught that violence is never the answer. I agree with that sentiment, by the way. I long considered myself a pacifist and still abhor violence. After all, we have recourse to police, courts, managers, what have you if there's a problem. That's the point of a state, really: to keep its people safe from external threats, and those emanating from its own citizens -- to order society so that it can be run peacefully. Outside of states, though, there is no police force. If a country is attacked and cannot defend itself (yes, this does still happen in today's world!) its only hope is to call another, stronger, country to its rescue. The reason the US has such a big military is that it often is that country and defines its "interests" broadly: Japan not getting freaked out by China and developing nuclear weapons, scaring the whole region into a destabilizing arms race, for example (to prevent this, America promises to protect Japan and mediate disputes in the region, making everyone relax a bit).

OK, so there's my defense of the morality of deterrence. How about the difficulties, as mentioned in the title? Well, there are plenty of them. For one thing, the threat deterrence is based on must be credible. This means I have to have the capability to retaliate and the will to do so. For a country like the US, it is mostly the latter that is problematic. When US troops were attacked in Lebanon and Somalia, the US pulled them out after public outcries. The impression was that the US had no stomach for casualties. In fact, al-Qaeda probably believed this when it launched the 9/11 attacks, hoping that it could encourage the US to pull its troops out of the Middle East. I have recently discovered that Hamas also doubted that Israel would launch a full-scale attack on it when it was launching lots of rockets from Gaza in the run-up to the '08-'09 Gaza War. This was because Israel had been forced out of Lebanon by Hezbollah. Israel was stuck in southern Lebanon and could not crush Hezbollah without re-invading, for which there was no political or diplomatic support, at home or abroad. It eventually had to withdraw.

So deterrence failed to stop rockets coming in from Gaza because Israel's deterrent threat was no longer credible, despite Israel's obvious military capabilities and the large numbers of Hezbollah fighters killed by Israeli forces. This brings me to the most difficult part of maintaining a credible deterrent: preventing getting yourself stuck in quagmires.

Realist theorists are the ones that often stress deterrence. They are also the ones who most advocate only limited intervention to protect core interests and maintain the credibility of a country's deterrent threat. For example: roll into Kuwait to eject Saddam Hussein from the country? Yes. Saddam's presence risked destabilizing the region (Iran and Saudi Arabia were alarmed, and Saudi Arabia asked the US to intervene to protect it), and US inaction would have wholly discredited its deterrent capability and given a green light to would-be invaders everywhere. Invade Iraq when it showed no signs of attacking the US, then overthrow its government and start a new one? No. This is a risky operation likely to be very costly and drawn out, and its effect on deterrent credibility is questionable as it is not in response to any attack. Attack Afghanistan for its role in harboring terrorists? Yes. If the US wished to demonstrate that allowing terrorists to congregate and act in a country is expensive, that's certainly one way to do so. From the perspective of deterrence, setting up a new regime in the country was not strictly necessary and also carried significant risks similar to those in Iraq, which should now be clear.

This brings me back to the second advantage of a deterrent policy: its inherently limited scope and the caution this promotes. Is it nice to leave dictators and regimes like the Taliban in power when we have the capability of removing them? Liberals and neoconservatives (liberals in wolf's clothing) think not. They may sometimes be right: If everything goes well, the people of a country might be freed, and a responsible democracy might set in. Everything doesn't often go right, however, and even if it does, can we be sure it was worth the bloodshed and cost? It should be obvious to anyone right now that the US cannot march against every dictatorship or reviled regime in the world and overthrow it -- it is just too expensive and would bleed the country dry, preventing it from maintaining peace in the rest of the world. Pick your battles. Realism and deterrence policies provide a guide on how to do so.

Immigration and Its (European) Malcontents

I had a discussion with a pair of colleagues recently about immigration and immigrants in the US and various parts of Europe. I wasn't particularly surprised to be representing the most "pro-immigration" line. I put that in quotes because I don't see it that way myself. My view on illegal immigration is pretty hard-line, really. My issue is that the legal sort of immigration is full of difficult barriers and policies that overtly discriminate against the poor and are at base, though perhaps inadvertently, racist. Under such circumstances, it's not surprising that illegal immigration flourishes.

A quick overview of how immigration laws are too strict (if you think they're too lax, bear with me here, because I'll get to the legitimate concerns people have below): in America in particular, businesses complain that they cannot get the skilled workers they need because of immigration problems. We're talking about the bright, young, able, get-up-and-go people that have made America such a dynamic place. The backlash against illegal immigration in America has led to a clamp-down on all forms, including that of people who ought to be let in. This lack of workers for key areas has driven up wages for some people, while they have stagnated for others. This has increased income inequality, contrary to what some people seem to believe about immigration. As a gay man with a foreign partner, I also regularly bemoan the federal government's refusal to recognize us as a couple so that he may immigrate to the the US (he is also a well qualified, hard-working individual). But I recognize that I'm from a small subset of society, so I'll focus on the main things.

I'll move back towards the title topic now: there are "problems" that people have with immigration, and not all of them can be brushed off as racism. In some ways, the social systems of Europe make the problems more acute. They have less illegal immigration (hence the term "Fortress Europe"), but immigrants here are often stereotyped as a drag on the system all the same. One of the main worries goes something like this: A UK citizen from Bangladesh decides to marry a woman from his home village (presumably because UK women are too uppity). He does not make a whole lot of money, and his new bride does not speak English, has few skills, and will not bring money at all. With her and perhaps some children to support, they will rely on social spending. There are therefore laws in Britain that stipulate a minimum income for a sponsor before someone can immigrate as a spouse (the US has them, too). Some people think the bar should be raised higher, though, beyond the level that would get them off social support. They are right to point out that taxes on other people must be higher to support this non-integrated Bangladeshi family.

This is where I, the classic liberal, said "well, so what? He is a UK citizen and, like any other UK citizen, has the right to marry whomever he pleases and has the same rights as any other when it comes to the UK's social system. There are plenty of ethnic Britons who require assistance from the state as well!" I naively thought the argument might end there. It didn't. "Yes, but they're here already. That doesn't mean we have to let in more people knowing that they will be a burden on everyone else, too."

Ahh, here's the racist part: they're South Asian, so they'll be a burden, just like those dirty Eastern Europeans. Well, that comeback was a bit unfair of me, as my colleagues pointed out, because the estimation that a man on a low income would struggle to support a wife unlikely to get a job due to her low skills and lack of English is clearly reasonable! They are right, of course, and that is regardless of race or ethnic origin. Still, I wasn't completely wrong: one colleague insisted that certain people have not proved themselves to be hardworking. That is clearly racist, despite the ensuing arguments, because whatever the truth statistically (and I am unaware of the statistics on this), this fails to look at root causes and, here's the important part: is racist because it lumps an entire race or ethnicity together into one stereotyped class. Sorry guys, that's actually the definition of racism. "It's not racism if it's 'true' " is not how it works! There is a difference between recognizing that African American men are more like to go to prison than white American men, on the one hand, and deciding not to give an African American man a job because he is presumably criminal on the other. The former is not racist, the latter most definitely is -- regardless of whether or not there is some logic at the base of discrimination!

Glossing over the race issue for a moment, which I think (hope?) was just a muddled reaction to conclusions that are correct at base: are we obliged to accept anyone into our country (whichever one that is) even if we believe they'll be a burden on taxpayers? How about this: don't believe -- find out! That was my proposed solution. Make people learn at least a basic level of the country's main language before they immigrate. That seems fair. What? They won't have enough money in their home countries to go to classes? If it's a poor country, chances are classes are cheap. And they're marrying someone with a job from a richer country -- if s/he can't dish out for a few language classes, then I think we really do have a problem.

Once they're in the country, they're presumably not citizens overnight. There is no reason why they must be provided immediate access to social benefits, particularly if they have met minimum income requirements for sponsorship. Maybe there could be a probationary period in which they must show that they can support themselves without benefits before they are granted citizenship and "recourse to public funds" as they say here in the UK. This brings problems of having to deport people after they've lived in the country for a couple years already, which is painful and will always be a bit inhumane. But consider that the alternative may be to deny them access in the first place, simply because we "believe" they're not the sort to go out and get a job or start a successful business themselves upon arrival. The other alternative of just letting all married people in, I fear, ignores real anxieties that people have and opens the social system up to abuse and strain.

My liberal values tell me everyone should be given a chance, regardless of the "true" statistics about their group's traits, whether that group is defined ethnically, geographically, sexually, religiously, etc. As an economic liberal (a "conservative" in American terms), they also tell me that we are not obliged to provide equal outcomes for everyone. Not giving something to someone is not the same as taking something away. This doesn't mean, however, that it's all right to base these decisions on policies designed to appear economic, while looking suspiciously as if they were designed to ensnare specific ethnic groups in response to public pressure -- all while hiding behind "rational racism" based on statistical evidence.

For my next post, I plan to talk about Racism, "Culturalism" (a new term I've just heard that sounds suspiciously like a PC attempt to mask racism or apply the same ideas to a non-racial group), and value-relativism (the idea that everyone's ideas and values are equal, which is where I draw the line as far as being PC goes).

I look forward to any comments on either topic!

Libyan Democracy: The Islamists Aren't the Greatest Threat

The war in Libya has been, as wars go, a great success. A horrendous dictator has been overthrown by his own people, with a bit of help from an international coalition that, for once, has gotten together to do the right thing (though perhaps not entirely for the right reasons, see my earlier post on this). The big question on many people's minds now is: will democracy emerge, or will Islamists take over and refuse to allow any further elections? This may be an oversimplification of the fears, but it's not a gross one, nor is it entirely unjustified. Still, the Islamists are not the greatest threat to Libya's fledgling democracy.

The number one threat is oil. Oil and other natural resources are always a threat to unstable democracies. The reason is that they can generate loads of cash and push up the value of the currency, killing other exports and making the economy lopsided towards oil. This concentrated source of cash means that politicians control (often by government ownership of the oil company, but not necessarily) much of the money the entire country relies on. Even more importantly, it is a source of cash completely "divorced" from the people the government is meant to serve, to borrow a term from Jason Pack and Shashank Joshi's recent article in The World Today. We might all complain about taxes, but at least they create a link between taxpayers and politicians. With natural resources as the main money spinner, citizens become the recipients of whatever politicians in their infinite wisdom decide to give them. This is a recipe for complacency, dependence, and corruption on the highest level. Politicians should be dependent on voters, not the other way around.

Look around the world at any place that has discovered natural resources (especially oil) first before developing a stable, democratic government. See any democracies? I don't. Discovering such resources can be a boon to a country like Norway or Australia, whose state institutions were already solidly in place upon discovery. They are a disaster for places like Nigeria or, I fear, emerging Libya.

There is a second danger as well that functions along similar lines: foreign assistance. As Libyans try to build institutions for the first time (Gaddafi intentionally built none so that no one could compete with his final say in things), international assistance will be a necessity. It's also very dangerous for the same reason that oil is dangerous: it supplies the rulers of a country with a cash supply independent of the country's citizenry (again, I must credit Jason Pack and Shashank Joshi for bringing this so acutely into focus).

It is important to note the other implications of this, too. The citizens of a country generate tax revenue by working in the economy. It's therefore essential to have a working and growing economy to fuel tax revenues. If a government does not require taxes to have cash flow, it has no incentive to power the economy. In addition, if citizens get handouts they have little incentive to push the economy onwards, either. Not only will the political elites be independent of citizens/voters, those voters won't have much in the way of economic clout anyway, unless they become part of the machine themselves. The result is economic stagnation and rampant corruption.

This problem is incredibly hard to solve. In fact, it is hard to see when it has been overcome. Even when outside aid focuses on assisting a local government and tries hard not to be patronizing and not to take the reigns itself, its very presence can push a country away from the very democracy it is trying to promote. Looking at the Balkans, though, we can conclude that this can still be overcome slowly, with vigilance and patience. The "resource curse," as it is known, is harder to surmount.

So what is the solution? If I knew that, I'd be pretty stellar. What I can say is that it is better to tax oil companies than for a government to own them outright. Believe it or not, having foreign-owned oil companies would be a blessing in disguise (still, they can be expropriated at any time -- just look at Venezuela for a recent example).

In the end, the only thing that can protect Libyans from the resource curse is the Libyans themselves. They must be sure that there are laws and institutions in place that can stop elites from enriching themselves with oil money. No easy task. How do you ensure that the courts and institutions that are supposed to make sure everything is done by the book aren't bribed by loads of oil money? One way is to see that they are well paid. Another is to have a free and competitive press to keep the bright light of the public eye shining on shady dealings. The final thing, of course, is that the Libyan people themselves remain vigilant against this threat. They have shown what can happen if they stand up together. They must make sure future governments never think for a second that they are "divorced" from the Libyan people in any way.

Privilege or Curse?

The dollar is still the world's most accepted currency, meaning low interest rates and a high dollar price even with a large trade deficit. But is this good or bad for America?

In the 1960s, the French Finance Minister Valéry Giscard d'Estaing coined the term "exorbitant privilege" to describe the US dollar's position as the world's reserve currency. A reserve currency is one that central banks like to keep in their vaults in case of crises because it may be more widely accepted than the currency they print themselves. I'll first go over how the "exorbitant privilege" works for the US and then discuss whether it really is a privilege -- or whether the costs of this position make up for, or even outweigh, its benefits.

What privileges does the US have in the global economy? To understand this, let's look at what life is like for a smaller, poorer country whose currency is not bought, held, and traded by people around the world. Let's say our country is called Zinj. It's a small country so its economy doesn't carry much weight. It's currency, the zinjoleon, is pretty much only accepted within Zinj itself (this is the way things are for most currencies, really).

If Zinj wants to trade with the rest of the world, or invest outside Zinj, it must convert its currency to another one, very often the dollar. If you run an export business, you will need to exchange currency a lot. Luckily your local banks, as well as the central bank, hold a good deal of foreign currency to facilitate exchanges. Because the dollar is the "gold standard" so to speak, banks have bought US treasury bonds and will have cash on reserve at America's Federal Reserve.

This all works very well, really. You list your goods in dollars so that customers around the world know what they cost (they probably have no idea what a zinjoleon is worth and where to buy one). You ship your goods, receive payment in dollars, and then convert most of them into zinjoleons in order to pay your workers, rent, utilities, etc. You might keep some dollars to buy imports with.

The problem comes when there's a crisis. Maybe when the world economy was doing well, and your economy was too, cash flowed into your country. Zinj citizens and businesses had access to cheap capital from abroad. Then the crisis hit.

Regardless of how things are going in Zinj (maybe Zinj has nothing to do with the crisis), investors panic and pull their cash out of the country, converting zinjoleons to dollars en masse to do so (they do this in part because the dollar is accepted everywhere and is therefore less risky). The price of a zinjeon, euro, dollar, or any other currency is based on supply and demand, just as it is for any other good or service. So what happens when loads of people sell zinjoleons (that few people want to buy) to buy dollars? You probably guessed it: the price of a zinjoleon falls.

Suddenly, 1 zinjoleon no longer buys you $1 worth of goods. Maybe it only buys you $0.80 worth now. That means prices for imported goods (listed in dollars) and goods that rely on imports rise sharply (in zinjoleon terms, the currency that people in Zinj actually earn). At the same time, foreign investment has disappeared, cutting funding for projects. Banks have fewer depositors and creditors, meaning they have to raise interest rates. In addition, the central bank may raise interest rates to stamp out inflation and try to stop the currency's fall. All this means that the economy will most likely stumble, perhaps slipping into a severe recession -- even though there was nothing wrong within Zinj itself! Seem totally unfair?

Would something like that happen in America? If the crisis happens outside of America and the dollar is still the reserve currency, no. In fact, even in 2008, when the crisis WAS in America, this didn't happen. Flip the above scenario on its head: folks are buying dollars all over the place and investing their money in the world's largest, most liquid economy and bond market: America. So what happens? Money flows into the US and the dollar rises in value. These combine to make goods cheaper and lower interest rates, pushing the US economy forward! Does that sound like an exorbitant privilege? Yeah, it kinda does!

But wait, the story doesn't end here. I left out the flip side of both stories. Let's revisit Zinj.

A crisis will generally mean recession -- less investment, less consumption, less money being spread around. If that's happening in the countries you trade with, your exports will fall. Luckily for Zinj, though, its currency has also fallen by 20%, meaning its exports are also up to 20% cheaper. This will make Zinj more competitive in world markets during the crisis, boosting its exports even as world consumption slows. Exports bring money into the economy. They may very well bring in enough to make up for the investment cash flowing out, too. After the initial panic and devaluation, therefore, Zinj's economy may start growing quite quickly again, led by exports, as well as domestic businesses competing more easily with imports that are now more expensive.

Flip that around in America. The cash flowing into the country has made the dollar more expensive. That means America's exports have gotten pricier even as the world economy slows and people are buying less. That really kills American exports. At the same time, imports have gotten cheaper, which turns up the heat on American companies that compete against imported goods to sell to American consumers. So we have cheap credit (loans and whatnot), higher investments in stocks and higher prices for companies (meaning they can buy and pay more even if they aren't necessarily doing better), and investments flowing into all kinds of other things, like housing. At the same time, American exporters are having a heck of a time trying to sell their goods and services abroad and other American companies are having a hard time competing against cheap imports from places like Zinj. Sound familiar?

All those cheap loans, high company valuations, and a higher dollar value mean that American consumers, companies, and its government have tended to spend and borrow more than they should have. It also means that outside of finance, in the world of actually selling goods and services, America has had a hard time -- in no small part due to the "exorbitant privilege" provided by the reserve currency that it controls and prints.

Clearly, this is a knife that cuts both ways. Sure, America may have more time than other countries to sort out its budget issues because investors tend not to lose faith (America's debt was downgraded and investors responded -- by buying even more of it). At the same time, there is constant pressure to borrow more and it is ever harder to sell anything. A country like Zinj may feel itself a victim to the winds of the global economy, unable to influence the global currency or exchange rates in any way. True, and America can do a lot to influence the global currency and its value compared with others. But this privilege is also a curse, as I think I have shown. (And I haven't even mentioned the costs of printing the money and the interest payments the Federal Reserve has to make on all the money foreigners have deposited with it.)

Given this double-edged sword, Americans need not fear the dollar's eventual loss of reserve currency status. It will bring a loss of power and prestige, but it may also lighten America's shoulders a bit.

The Second Great Depression Delayed?

For all the bad economic news out there in the US and Europe (I'll call them, admittedly imprecisely, "the West" or "western countries") these days, most people are at least still relieved that unemployment in most western countries has not reached the levels it reached in the Great Depression and that things are far less dire than they were back then. But are we really out of the woods?

What saved us from Great Depression II was a huge bout of monetary and fiscal stimulus. When the Crash of 1929 happened, people feared that central banks would abandon their commitments to convert paper money to gold at the promised rate. This caused a rush into gold. To attract people away from gold, and to assure them that the dollar, for example, was "as good as gold," the Federal Reserve and other central banks ratcheted up interest rates, offering to pay a lot of interest on paper money -- but obviously not on gold. In order to do this, they also had to demand a lot of interest on loans (the difference between the money a bank receives from loan interest and the interest rate it pays to depositors is how a bank makes money, so it can't raise deposit rates much without raising loan rates).

This meant borrowing money became almost completely unaffordable -- no new business ventures then. It also meant that spending money became less enticing, since you could make money by squirreling it away. This meant money flowed into gold, perhaps other commodities, and various forms of saving. It flowed out of buying stuff and investing in future business. Business that relied on the latter two (that's most business) therefore collapsed. This brought down any other businesses with it.

This "monetary tightening" as it's called was accompanied by fiscal tightening. Governments received less in taxes because people were getting poorer -- so they raised taxes and cut spending, hitting people even harder in their wallets and depressing growth further.

This time around, luckily, the reaction was the opposite. Unhindered by the straitjacket of the gold standard, central banks slashed interest rates to try to make borrowing and spending easier and to discourage saving. That's meant to keep the economy moving. In addition, governments responded to the crisis by spending more and either taxing less or at least just letting tax revenues fall without raising taxes. This is fiscal and monetary stimulus. Disaster averted.

Or at least it was. We're now getting into a sticky situation that is getting governments constrained in ways that have similar effects to those of the 1930s. Governments throughout the "West" are either cutting deficits or talking seriously about it. Fiscal tightening is therefore underway or will begin soon. This is partly because governments can't run deficits forever. At some point, the investors that lend money to governments begin to worry that these governments will not be able to pay them back as agreed. Governments have to offer higher and higher interest rates to make investors willing to take this risk. This makes government spending more expensive and less attractive.

(By the way, "investors" include anyone with a bank account or retirement fund.)

So fiscal stimulus is disappearing, at least we still have the monetary sort, right? Well, this is partly true. The Federal Reserve has said it will keep interest rates at around 0% for as long as is necessary. The Bank of England (the UK's central bank) has just announced another round of what is called "quantitative easing," in which the bank buys government and even corporate bonds to make borrowing and spending cheaper and further discourage saving.

There are some forces working in the opposite direction, too, however. First of all, with inflation lower and therefore less of a worry in the US than in the UK, we might expect the Federal Reserve to follow the Bank of England and embark on a third round of quantitative easing as well. This is unlikely for political reasons: even though core prices in particular have remained stable and are rising only slowly, Republican politicians especially are railing against the Fed for allegedly destroying the dollar. Not only that, international investors in the dollar are also protesting loudly, concerned that a decline in the value of the dollar will destroy their investment. The European Central Bank (ECB) is also constrained from taking more bold measures by similar political pressures, mostly from monetarily conservative Germany.

So central banks are being restrained. At least interest rates are not set to go up, right? The thing is: borrowing is getting more difficult, whether interest rates are rising or not (though often they are). This is because individuals and most corporations cannot deal directly with their central bank. Central banks can print money, other banks can't. This is mostly a problem in Europe. As panic spreads concerning European governments' (in)ability to pay what they owe bond investors (many of whom are banks), investors are also starting to demand higher interest rates from banks, too. The banks, in turn, are scared about what would happen if some European governments (like Greece or Italy) didn't pay them back. Their reaction is to lend less money and to raise rates on loans (remember that a bank must demand higher rates if it also costs it more money to borrow, whether from depositors or investors buying its bonds). This is gumming up the wheels of business in a way not unlike that of the 1930s, though less dramatically.

So lending is partly blocked and governments are cutting spending and raising taxes. Still, lending hasn't stopped, trade barriers haven't gone up (a big 1930s mistake that intensified the Great Depression), and interest rates are very low overall. Plus, much the rest of the world is still growing fast, pushing things forward. All grounds for some guarded optimism. But: things may get worse. If Eurozone countries were to default on (not pay back) their debts or leave the euro (which would result in much the same thing happening), panic could ensue that would be similar to 2008. The difference, though, would be that central banks can't provide much more monetary stimulus (interest rates are already extremely low), and governments are (sometimes severely) constrained in how much additional fiscal stimulus they could provide. Their reaction to round two of "the Great Recession" might be less vigorous than to round one, and this one could end up being worse.

Alarmist? Yes, but this is not ludicrous. It's also far from inevitable, however. If governments in the US and Europe can get ahead of this thing, it can be managed without panic breaking out. Good thing we're all confident in our politicians, right?

The Education Bubble?

A couple years ago, my colleague Mike wrote an entry called something like "Does Education Still Pay?" At the time, I wrote comments stating that graduates still earn more than non-graduates over their lifetimes, plenty enough to pay for the cost of school, and that, as long as it continued to make economic sense, people would still pay. I stick to that analysis, because I find it is pretty hard to argue with it, but nuances can get lost in the general statistics, and bubbles can happen even with continued demand (people still buy houses, after all).

A bubble happens in economic terms when something pushes up demand to unsustainable levels, causing rising prises, the expectation of future rising prices, and investment in expanding supply. The bubble pops when demand suddenly fails to grow as rapidly as supply, and too much of the product or service is being sold to too few people, causing the price to fall precipitously.

The housing bubble, for example, was caused by cheap mortgage rates and banks from areas where no one was building buying mortgages from places where people were, keeping rates in booming places lower than before. (It's not important to understand why or how that all happened, just know that rates, due to myriad factors, even having to do with China's trade surplus, were lower than normal for a long time in booming places.) In addition to low rates, banks, encouraged by the government, were lending money to less credit-worthy people than ever before. This meant that as prices rose, more and more potential home buyers showed up as banks loosened their lending standards. That meant more demand and higher prices.

Well, we know what happened next: at some point, the houses were so expensive that more people decided not to buy. The market slowed, and builders had nothing to do. To get rid of the excess houses, prices were slashed. People who'd bought at the peak of the boom were now sitting in houses worth less than their mortgages. The bubble had burst.

So, is there an education bubble? Let's count:

• Steadily rising demand for places at universities? Check.
• Rapidly rising prices for higher education? Check.
• Steadily rising demand for graduates with specific skills, leading to the expectation that education will continue to become more important? Check.
• Government policies that support demand? Check. (I'll explain in a bit.)
• Education has a finite value, beyond which it would not be worth one's while to buy it? Check (like all goods).
• There is a limited number of potential buyers (students)? Check.

It seems we certainly have the basic ingredients needed to have a bubble. But that's not enough. All this could happen, and then prices and demand could level off smoothly. This does sometimes happen. It's hard to spot a bubble while it's forming, even though it seems obvious after it bursts. There are three ways I see this ending.

The non-bubble scenario: demand increases begin to slow, and the supply of university places begins to come in line with demand. At the same time, more universities put in cost-saving measures, like reducing administrative costs, using technology, etc. Universities begin to have to compete more for students in general, not just the good ones. Their budgets get a bit squeezed, and they begin to compete on price.

Bubble scenario 1: Similar to the above scenario, but supply outstrips demand more rapidly, causing tuition fees to drop fast.

Bubble scenario 2: This is the scarier one, and it could be starting now. Former students with lots of loans to pay find they are unable to get jobs that pay well enough to pay back loans. The government has set up loan forgiveness programs for public sector and non-profit workers and whatnot, so many take advantage of this (my plan for myself, actually). In fact, many more than the government intended. Amid continued economic weakness, budget deficits, and battles in Congress, the cushy student loan provisions are cut. Prospective students are suddenly unable to finance their future studies. Demand falls off precipitously. Tuition fees stabilize or fall. There are more unskilled workers as a result, causing further wage stagnation or even declines in the services and retails sectors. At the same time, the skilled workers companies want are even harder to find, increasing wages in those areas, widening income inequality and sewing unrest.

So, there are at least these three possibilities. The current spiraling prices are in part fueled by government programs to allow students to borrow money on good terms to go to school (much like the cheap mortgages for poorer people that fueled the housing bubble).

When going to college doesn't pay off, or doesn't pay off enough to make the extra work and risk worth it, students will stop going. If this were any other market, this would be no big deal. We would call it a correction and it would mean the price of education had risen to reflect its value to its consumers. There's a problem, though: education has a wider value to society, too, which is not captured entirely by the student. This means that society is better off with more students, and that education is worth more, on the whole, than the additional money or job satisfaction received by those who take it on.

Take one of the most obvious areas: engineering. An engineer may love her job and be paid well. But engineers are also vital to society. If an engineering degree became so expensive that not that many people got one, society as a whole would suffer. We also, of course, benefit from scientists, music majors, linguists, and, of course, international relations specialists, even if its harder to see. This all means that subsidies for education make sense. This is why it's not wrong that government does this, because education is worth more than what the educated get out of it themselves.

But demand-side approaches, like giving students access to cheap loans on nice terms, fuels price increases. These increases may actually negate the effect of the loans. It might be better to act on the supply side of things. State universities already do this, using taxpayer money to reduce tuition fees. I don't know if these are in place, but there should be cheap loans for university expansion, grants for measures that save money, and inducements for offering well-priced, high-quality education.

I will probably end up only paying 1/3 of my student loans back, depending on what Congress decides over the next 100 years while I'm finishing up. That's a big hit the government will take. Multiply that by the loads of others doing it, and it's massive. I wouldn't be able to afford to study without it, though. Nonetheless, the debt pile I'm building causes sleepless nights, something shared by a lot of students out there. So maybe switching things to the supply side to drive down upfront university costs would be more sensible. Then, students would get unforgivable private-sector loans, but have much less debt to pay off. At the same time, the increased supply of places would insure that the country gets the graduates it needs, and that these, with lower debts, can start getting mortgages and things like that earlier on, helping to boost the economy.

Would all this mean higher taxes? Well, probably, a bit. But I'm actually proposing shifting the costs from one place to another, subsidizing the universities (per student, dependent on quality and tuition fees, etc., to create good incentives) rather than subsidizing the students with scary and uncertain loans.

There will only be a bubble when there are too many graduates. From the looks of things, we have quite a ways to go before that happens. The global economy is changing, and rich countries need to change, too. We have the benefit of capital and education, so we need to invest in the latter. That and infrastructure in the US, as I've said before. Overfilled highways, slow trains, patchy internet and cellular connections, and bridges that collapse and kill people from time to time can really crimp business. These are the areas where we should be spending money, not on random tax loopholes and overly expensive health care (my post on what we might start to do about that).

We need to invest in the future (infrastructure and education), not the past. We started doing that in the early 20th century, and rode the boom throughout the rest. Towards the end, gains came from deregulation (much, but not all, of which was a good idea) and more and more debt. That can only go so far. It's time to start at the beginning again.

How to fix America's healthcare system - without nationalizing it.

I'm writing this from my phone to see if the additional annoyance helps me to keep this short. :o)

One of the biggest problems with healthcare in the US is that doctors get paid according to how many procedures and tests they do. This is not the case in countries with national healthcare systems. There, doctors are salaried, like regular workers instead of like lawyers or contractors

I'd argue that this can be done with private insurers, too. Why not pay doctors a set amount for seeing a patient, plus covering 99% of costs arising from additional procedures, plus a bonus for a good outcome?
Good doctors might be willing to switch to such a plan. Indeed, some already have: Kaiser Permanente uses a similar system. Let's try some pilot projects on a more national level. If it works, maybe we can scale it up, requiring insurers and doctors to do it. This would go some way towards cutting down on unnecessary procedures.

I envision doctors getting bonuses according to outcomes AND patient ratings! Insurance companies would set pay amounts in collective bargaining with doctors on their plans. Cheaper plans would attract fewer doctors, but patients would pay less and be ensured good care, in no small part because they get to rate their doctors' performance and this determines a portion of doctors' pay!

A couple more steps would be needed, too. Legislation to protect doctors and hospitals from unreasonable lawsuits would be good. Another step would be to move people off plans provided by employers. This would keep people covered between jobs, encourage them to shop around for the best rates, and make sure they know what it all costs, getting consumers more control over cost-cutting decisions.

These three things combined would help a lot. Other countries pay a fraction of what the US does for healthcare, but for equal and sometimes even better outcomes. Something's gotta change, because that's just not right.

I'm pondering education, too, but this seems tougher. Any good ideas?

UK Riots: An Outsider's Perspective

Lots of people have been writing me asking if I was all right "in London." It's my fault, because I told everyone I was to be studying in London and didn't mention so often the name of the actual town where I was moving -- since no one has ever heard of it anyway. I really like this little town, and am glad I am quite a ways from urban unrest.

I have a trial subscription to The Guardian and Observer, can now watch BBC news shows, and have read private blog pages on the subject as well. There are lots of different perspectives, so I'll give them a run-down here.

1. Police and politicians: A few violent individuals got things going, changing a peaceful protest over a police shooting in Tottenham (in London) into a violent riot. Opportunistic and greedy youngsters drunk on power then used the mayhem to allow them to loot stores and take whatever they wanted. The bottom line: illegitimate, opportunistic criminality -- no excuses.
2. The Guardian, a leftish newspaper: Reports this line, but also asks whether recent government cuts to social programs could be a deeper cause -- without actually answering that question.
3. Leftist bloggers, some people on the streets (though some young people from the affected areas seemed to concur with the first view above): Years of social exclusion, police bigotry, and, now, cuts to social services have pissed people off, and the only way they can get attention is by doing this. It's not nice, but there's no other choice if they don't want to be ignored.

That pretty much covers the viewpoints. I won't comment too much because I'm an outsider, but I will say that, as usual, I think the truth lies somewhere in between. I remember being young and getting swept up in moods and just not giving a damn about what other people thought, like when we had loud parties on weekday nights and our neighbors' small children couldn't sleep. I have no patience for such people today, but I was one of those anti-social assholes just a few years back -- but only when swept up in the moment. I am sure many, probably most, of the looters are just along for the ride and enjoying feeling powerful and being able to steal what they want with impunity.

At the same time: These things don't happen all the time everywhere. One has to ask why all these people can get so swept up and why they care so little about their own communities, which they've set about destroying. There is a disconnect from civil society here that is worrying and real.

So that's my two cents on that.

One last thing: the police. I've heard and read criticism of the police on both sides, but most are angry that they've done too little to stop the mayhem. Coming from America, where police use rubber bullets and tasers with what seems to me like reckless abandon, I find it interesting that the police here are still debating whether to use rubber bullets. This is even after nights of violence have left parts of London and other cities looking literally like war zones! Water canons have been discussed in the media, but they are apparently not under discussion by the police, who reiterate that they do not use them outside Northern Ireland. Even at a small, peaceful protest in (peacenik) Germany I went to, there were armored vehicles with water canons at the ready. Perhaps their mere presence helped deter any would-be rioters. In any case, the Metropolitan (London) Police say rubber bullets are to be used only in extreme situations and the go-ahead can only be given by someone high up in the chain of command. Apparently burned-out shells of buildings are no extreme enough yet.

The British police are actually well-known for their restraint, and this shows it to be true. Rubber bullets can also sometimes kill if you hit the person just right (or wrong). I've been reading reports of hatred towards the police in these poorer districts of London. There's been talk of selective stopping and searching (racial profiling, anyone?). So this violence has partly been just to stick it to the police. The police are in a bind, criticized for being at once too harsh and too soft. I don't envy them.

My personal view: buildings, cars, and shops are being set ablaze and the police did nothing for a long while. It's time for water canons and rubber bullets. This is ridiculous. Afterwards, it's time to think, once again, about the social issues in these places. The problem is: people think about that all the time, and no good solutions seem to come out. What do you think?

A Libyan Ceasefire: What It Would Take

The Libyan conflict continues. The UN has proposed a ceasefire. NATO and the Libyan rebels are dubious: Gaddafi is still there, after all, and is not yet defeated. He could easily take advantage of a ceasefire to stage a comeback. The Economist interprets an announcement by Britain's Foreign Secretary William Hague as meaning that Britain may be open to reconsidering the idea of a ceasefire. Far from looking for a quick exit, Hague asserts that Britain is in it for the long haul.

All of this is actually good news. It seems that everyone's heads are in the right place (except perhaps for the UN's, but this is no news -- at least its heart seems to be in the right place). A ceasefire agreement is possible, and, unless we're ready for a long siege of Tripoli with possible ground troop involvement and loads of casualties, it may be the only realistic way this can all end.  But still: this cannot be cut-and-run, which is why Hague's assurances to the contrary are comforting.

Libya is not Iraq or Afghanistan. NATO is providing air support for a native rebellion. Time is on the coalition's side, not Gaddafi's (I have pointed out previously that time is on the Taliban's side, which is why I have little faith in a positive outcome for Afghanistan). NATO must make use of both of these aspects. Any ceasefire must be on terms decided by the coalition. In particular, these terms must be decided by Libya's National Transitional Council, as representatives, however tentative, of the Libyan people. They must set the guidelines by which this can happen. Compromise may happen in other areas, but these principles are not up for negotiation.

For example, one stipulation would surely be that Gaddafi is removed a long way from any power. A second one, that the West must strongly support for reasons of morality and political credibility, is that Libya holds elections and builds institutions like independent courts all that. The areas where compromise is possible: pardoning Gaddafi and going easy on current members of his regime. Those closest to him must not be allowed near power. Ones lower down may need to be left on for practical reasons -- only they may have experience in civil service.

It sounds awful to let Gaddafi get away scot-free, but let's not lose sight of the goal: getting him out of power and freeing up Libya for a brighter future. If Gaddafi can be enticed to give up the fight, this will save hundreds, possibly thousands of lives through reduced fighting, as well as lots of money, time, and Western leaders' political capital.

And what if Gaddafi doesn't accept? As I said: time is not on his side. Don't negotiate further. Return to the current war of attrition, and wait for him to come around or for the regime to utterly collapse around him. This is not as nice as a quicker ceasefire, but it is the only option. All in all, there is plenty of reason to be optimistic about Libya, at least over the medium term. Kind of refreshing after ages of Middle Eastern quagmire.

America's Debt Deal: Political (and economic) collapse retreats

Just over two months ago, I asserted here that the negativity surrounding America's political system and its ability to function and keep the country going was overblown (see post). The current debt deal, which passed the (more tricky) house yesterday evening, provides more evidence of this. I admit to only having partial details on it, but it thus far looks sensible. The pain is spread evenly and is mostly being delayed until later, allowing time for the economy to recover. These two aspects are very sensible: with divided government, cuts needed to affect parts of the budget both parties hold dear, and with the economy in its current fragile state, cutting too much too soon could have been calamitous. Economists and rating agencies had been calling for a credible deficit reduction plan, not an immediate reduction itself.

OK, fine, so disaster hasn't struck, is that the best we can expect from the US Government these days? This seems like a good point, and sometimes I feel it myself, but it again focuses too much on the negative. Congress over the past few years has passed a revolutionary (for America) health care plan, nationalized student financial assistance programs, changed environmental regulation, and accomplished many other things to boot. This seems to get lost among the noise of insanely partisan politicians screaming at each other (usually figuratively only) and egging groups on who call one side or the other things like "fascist," "Nazi," or "socialist." The absurdity of it all is enough to make the strongest stomach queasy.

But it still works.

American politics is noisy and partisan. That's the way it is. The REASON it is that way is because Americans vote for it to be that way. In particular, republican voters tend to want representatives in government who stick to their guns and don't compromise (see chart). So republicans are loud, obstructive, and stubborn. It's irritating. But that's the way their constituents want them to be. That's a sign that American democracy is working well, not poorly.

The problem, then, is not with America's democracy or even its political system, but rather with Americans themselves. No one likes to hear that they themselves have gotten themselves into a pickle, but they have. Once again, though, let's not be overly negative. I'm a realist, not an optimist by any means, but people on the liberal side of the isle with me tend to be overly negative. It's hard sometimes, I know. But take a closer look at that chart. Not only do most democratic voters prefer compromise to get things done, the majority of ALL voters does, too. As long as that is the case, we ought to be all right, even if compromise comes at the last minute and is a noisy, shameful spectacle every time.

I'm not trying to make all this seem completely harmless: it wastes time and money, and smaller things that need to be done may get lost in the process. What I'm saying, though, is that the system still works. If people start to pay attention to politics more and educate themselves, then people will vote for politicians with sensible policies who are ready to get things done. As long as people are aloof from politics and continue to rely on ideology to provide their compass points, things will be irritating and suboptimal, as they are now. Any suggestions for that systemic problem? Education system?

Can Francis Fukuyama teach us something about corporate governance?

I recently finished reading a fantastic book: Francis Fukuyama's Origins of Political Order. He discusses the ways that political organization has taken place throughout the world, and this got me thinking about organizational structures in business, and their varying levels of quality.

There are several levels of organization from band, to tribal, to chiefdom, to state-level organizations. Building on the work of others before him, he describes such organizations according to three elements: the strength of the (central) state, rule of law, and accountability. A state with the right combination of all three elements is one that will generally function well. There are examples of states that lack one or more elements, and the effects can be seen.

India, for example, has always had a very strong rule of law (this is discrete from elements like corruption as he defines the terms; read the book!), so much so, in fact, that a strong state has never been able to form in India. Even today, a weak central state is one of India's problems. Political accountability, too, leaves something to be desired, though it is more apparent than in China.

China was the world's first modern state in that it had a strongly centralized and meritocratic bureaucracy long before these arose elsewhere. The rule of law and accountability, however, have never been present. Even today, the communist party sees the law only as a tool to be wielded or changed at the party's will, not as something that could ever restrict the party's power (as constitutions and courts in other countries do). Accountability is limited only to long-standing moral ideas about the responsibility of rulers to their people. There is no structure that supports this officially; no path for citizens to address grievances.

Business people often praise how well China (and places like Singapore) are run and may think China's system is preferable to India's. This is only true, however, if the current people in power are doing a good job. You will also only feel this way if you agree with the government. If the government is forcing you out of your home to build a shopping mall with little or no financial compensation, telling you you may not move out of your village to search for work, or restricting your procreation to one child, for example -- and you have no recourse against such actions -- you may feel a bit differently about China's system. Still, India's system is clearly sub-optimal as well. I will avoid holding any system as "just right," because this is hard to say. Heaven knows, America's system seems to have its difficulties as well, even if worries about it are probably overblown (see post), and this is true of everywhere.

So what does all this tell us about corporate governance? Honestly, I see a lot of similarities. Some companies are organized in a very top-down, hierarchical manner akin to China, others, like large conglomerates, may have loads of local fiefdoms and clashing rules and interests, more akin to India. (China's central government has difficulty controlling local governments, too, so this is all a bit oversimplified. Again, read the book!). Structures may also cause a high level of accountability, with clearly defined responsibilities, or a system where no one knows who's responsible, leading to impunity (rogue traders, anyone?). One problem with the "strong state" model, where the CEO and board can basically do what they want is the "Bad Emperor Problem" that China (think of Mao Zedong, whose Cultural Revolution resulted in the death of millions of Chinese peasants as just the most recent example) has had a few times. The safeguard against this is to prevent the concentration of power in one person's hands.

So accountability (and transparency) are good, but must be balanced, together with the rule of law, against central control. Too much "rule of law" could mean CEOs can't change a company. Even too much accountability could be bad news, not allowing leaders any wriggle room to make changes before they are instantly removed from power the moment the mob dislikes an action.

There's one more interesting aspect, though. Fukuyama asserts, quite convincingly, that religions formed the basis of political organization. I think there's something to this in the form of corporate ideologies/identities. What is the role of the CEO? Where are we going? What does the company stand for? What are the roles and duties of managers, workers, and departments? These ideas can form a structure of their own and can also be hard to change, regardless of any structure imposed from the top (a central problem in mergers and acquisitions, in business as well as in politics). If they're good ones, like the central ideas at IBM that have kept the tech company alive and competitive for a century, they are a source of the company's strength. If they're not good, or are too rigid, they may be the company's downfall.

In sum, then, accountability to shareholders and stakeholders balanced off against strong centralized control can be a formula for corporate success, but only if it is underpinned by a strong corporate identity. It's important to note, too, that accountability does not have to take the form of democracy and elections. In the case of public shareholders, this is more or less the case. In the case of most stakeholders, like workers, this is usually not the case. The structures embedded within the company, however, giving power to local "lords" (i.e. managers and vice presidents) and lower-level managers serve some of this function.

Fukuyama also has something to say about this, too. It may make a lot of sense to include regular old workers in the process of corporate governance. Kings were constantly at odds with the vested interests of dukes and local lords, who, through their positions, managed to extract privileges from the central power while reaping the gains of those beneath them. This may sound familiar to anyone who works in a larger company. It therefore makes sense to have ways for "lower" workers to bypass their direct bosses and be able to communicate with higher-ups about problems they see in the lower echelons of management. This decentralization of power can actually lead to a greater centralization, as the CEO and higher managers have a better idea of what's going on. The increased accountability of all levels of management, too, is something to strive for.