Liberalism and the Rise of China

"Liberalism" is a word with sometimes contradictory meanings. In international relations, it refers to a school of thought that supports internationalism: free trade, international institutions and laws, and, by association, the decline of realism, with its concepts of power, national interests, and the nation-state in a world of anarchy. The United States, many or most European states, and other "western" countries like Canada and Australia are, more or less, liberal powers (though all of them bow to the exigencies of realpolitik when they deem it necessary). China, too, is liberal, at least in the sense of free trade. It was quick to understand the benefits and reap the rewards of free trade. On foreign relations, however, China is decidedly realist.

While the EU and the U.S. often make trade and aid agreements contingent on certain human rights standards being met, China relates with other states as it suits it, largely ignoring what is going on within those states. Pakistan and Sri Lanka are two excellent examples. China has helped Pakistan build several nuclear reactors, even though China's membership of the nuclear Non-Proliferation Treaty (NPT) means it has a responsibility to prevent the proliferation of nuclear technology that could be used in weapons and is barred from providing nuclear assistance of any kind to non-members of the treaty (such as Pakistan). Admittedly, this is partly a response to America's bending of the rules (nonetheless the "proper way," by getting a legal exception to them passed) to do the same for India, Pakistan's arch rival and also a non-member of the NPT. (America did this largely because it sees China as a counterweight to India in the Indian Ocean and in the world.)

In Sri Lanka, China has been selling weapons at low prices and donating handsomely to infrastructure investment programs there, no strings attached. The U.S. and the EU had halted such activity after concerns arose about alleged war crimes being committed by government forces when fighting (and finally, after decades) defeating the Tamil Tigers, a separatist militia group. China's generosity has more than made up for the West's cutoff, so Sri Lanka was unconcerned about the West's threats. Will the West have any influence anymore?

The difficulty with liberalism is that it requires worldwide cooperation (at least until a world authority, replete with legislative, executive, and judicial institutions arises to run and enforce things, a simultaneously Utopian- and somewhat frightening-sounding idea). Even one systemically important straggler can bring the liberal system to its knees. During the world's brief "unipolar moment," in which the fall of the USSR has left the United States the world's only "hyperpower," this has been less problematic. The U.S. has had the resources and the lack of opposition necessary to push for such cooperation. However, this has never been a complete success, and unipolarity is ending (aided in part by a broad interpretation of U.S. goals leading to overstretch of its resources). China is on the rise, India and Brazil are possible future Great Powers, and Russia is insistent on not being forgotten. Economically, the EU is a Great Power, but it lacks the political, foreign policy, and military unity to have a real enforcement-related presence in the world. As the center of economic and military gravity shifts away from the U.S. and the EU (in relative terms), it will be increasingly harder for the West to make sanctions stick if other powers do not cooperate. It will also become ever harder to cajole them into cooperation.

The question that presents itself is: how much longer will it make sense to attach strings to aid and trade? If the strings mean both are turned down, and the presence of generous, no-strings-attached opportunities from elsewhere means the deals are not effective in shaping the world, then what is the point? The passed-over deals would benefit China and other realist opportunists and hurt the U.S. and the EU. At some point, concern about this loss of influence, and about China's rising military and economic might, will cause a shift to more realism in foreign and economic policy.

Realists are not prescriptive. It's not that they think things should be this way, it's that they assess that they are, whether or not we like it. In such circumstances, unfortunately, sometimes looking out for one's own interests, narrowly defined, is the best anyone can do. This will likely be the future of the world in the coming decades.

The Road to a PhD Program: One Step Forward...

I took the airport bus from Vienna Erdberg to Bratislava Airport (€20 round-trip) to take the GRE on Tuesday. The good news: the GRE is finally over. The bad news: my score was not what I'd hoped for. My verbal score had been much higher on the practice test I took, which lulled me into a false sense of security. Had it not been for that, maybe I would have studied more vocabulary and taken more time preparing. There's always more you can do and also more you can blame yourself for not having done.

There were also a couple of pleasant surprises, however. The first was that the experimental section of the GRE, which is usually hidden among the others, was stated explicitly and was optional. I found that fantastic. It came at the end, so I didn't have to worry about my score being dragged down by having the math section that counted come at the end of a three-hour test when I was worn out and ready to melt into the drain on the floor like that one Star Trek character from the show I obviously only watched once or twice. No really.

The other surprise was my math score: it was 90 points higher than on the practice test, which brought it up to where I thought I ought to be according to my own assessment of my math skills (nothing spectacular, but decent).

Overall, the total score was 20 points higher than the practice test score, but 450% of that gain was the math section. The actual verbal test seemed easier than the practice test, too! I was shocked when I saw the result.

For me, interested in a line of study/career that would involve a lot of analytical writing, the analytical writing section of the test is probably the most important. That has to be graded by a human, so I won't know about that score for another two weeks, probably. I am hoping essentially for a perfect score. That may be a little over-the-top, but that would save the rest of the GRE for me so... why not? I've aimed high and I'm hoping I've hit the target. If not, well, one of my favorite expressions is: "we'll cross that bridge when we come to it." You can't control everything (but you are free to try as much as you like ;-) ).

The North Korea Standoff: China's Moment?

After North Korea's alleged torpedo attack on its southern neighbor, it seems likely that tensions will increase between the two Koreas, which is likely to draw in China, Japan, the US, and Russia as well. This is the moment to encourage China to take on a more active role in maintaining stability in the world. China has not yet really demonstrated that it is willing or capable of doing this, but this is a situation in which I think the US ought to try to leave much of the work up to China. For one thing, China often uses North Korea as a bargaining chip in relations with the US and South Korea. You want to be responsible for North Korea? Fine, have at it!

There is more to this than cynicism, however. With the US still guaranteeing the security of South Korea, increasing its partnership if necessary, China will have even more riding on the North's stability than it does now. China dislikes having a nuclear-armed neighbor. Sure, the US and Russia have nukes too and may be too close for comfort, but they have shown themselves so far to be relatively responsible and predictable custodians. Not so the erratic Kim Jong Il. China also worries about the streams of refugees that might result from a collapse of the North Korean regime. Make this China's responsibility, and it might just take up the initiative and begin to act strongly, with US backing (as well as the backing of the rest of the Security Council, presumably).

Of course, the US should lay out a few clear conditions first, the main one being that, should the North Korean regime collapse (whether sooner or later), the people there will be guaranteed their right to democratic self-determination. They must be given the choice to become an independent state or to unite with the South, should the South agree to this as well. In such a situation, international aid, particularly from China, the US, and Japan, would be helpful in assisting South Korea in absorbing the devastatingly impoverished North.

With this foundational agreement set, the US could leave most of the footwork up to China. China is a major power, striving to Great or even Super Power status, at least economically. For the moment, it has shied away from pushing for these goals politically and militarily, content to simply make deals wherever the money is good and leave the US responsible for maintaining order and allow the free trade from which China (and everyone else, the US included, of course) so greatly benefits. It may be unsettling to some to imagine China as a Great Power (this author included), but there is an air of near inevitability about the progression. It is therefore better that China start practicing the work aspect that its weight brings with it. The US can help it do that while benefiting itself. Stepping back and letting China in would do nothing to reduce the relative distance between the two states in capabilities. Perceptions to this effect arising out of the appearance of a concession to China would be irrelevant and wrong. After all, how would it be a concession to nudge China to do more?

The Japanese-American Military Relationship: Call the Divorce Lawyer?

At the end of the Second World War, Japan was disarmed. Non-aggression clauses were even written into its constitution. Japan had no need of a large military because the United States vowed to protect it. At that time, the US was probably also the only force that would have been capable of attacking Japan in East Asia. Today, things look a bit different. Although China is rising and has been increasing military spending, Japan nonetheless remains a military lightweight, assured by security guarantees from the United States, much as Western Europe has been since the end of WWII.

Recently, however, there have been squabbles over American military bases in Japan, particularly in Okinawa. The previous government told the Americans the base could expand in size. Local residents, however, would rather see the base disappear altogether. Japan's new government at first agreed to review the case, putting off the Americans (though it has now reneged on this promise and plans to keep the base as previously planned). Is this a sign of further tensions down the road and the erosion of the Japanese-American security arrangement? In short: probably not. The Japanese know that the Americans insure not only their security, but the stability of the entire region. They are unlikely to kick them out any time soon, as evidenced by their eventual decision to let them stay, albeit possibly at a more remote location on the island. Even China has reason to wish for a US presence there. The strategic relationship is likely to recover and to remain at least as strong for the next two decades at a minimum. Whether the arrangement itself will be enough to stop an arms build-up and further tensions in the region, however, is in the stars.

America's presence in the Japanese archipelago is a central element in the area's security, part of the architecture of the modern "Pax Americana." Not only does it serve to protect Japan from outside attack, it also obviates Japan's need to build up its own defenses, which in turn makes other states in the region (notably both Koreas and China) feel less insecure and therefore less inclined toward military buildup themselves. South Korea's shipping lanes pass close to or through Japanese territorial waters and it is reliant on its trade links to the rest of the world.

It is not competition between Japan and South Korea, however, that is most worrisome. The elephant in the room is China. If the US were to depart from Japanese shores, is there any real doubt that the Japanese would start to feel nervous about their much larger neighbor to the west? The logical reaction to this insecurity would be a military buildup, of which Japan is certainly capable: it has the population (127 million), technology, and economic power. Japan's pursuit of security, however defensive its nature, would serve to make other countries in the region, namely China, but also both Koreas, feel less secure. Further insecurity in North Korea would make South Korea nervous. It is easy to see the chain reaction that would likely ensue.

Taiwan also relies almost exclusively on the United States to ensure that any change in its current status (in limbo between an independent state and a province of China) is not determined solely by the mainland Chinese. If Taiwan were to be wholly incorporated into the mainland, whether peaceably or not, this would extend China's reach into Japanese territorial waters near Okinawa (which in our extended scenario is no longer shielded by American forces). Leaving aside for a moment the worry that a democratic and open Taiwan might become an autocratic and oppressive Chinese province, this would be a serious destabilizing factor for the entire region.

Last but not least, China itself would not necessarily benefit from a US withdrawal. Although the Chinese would almost certainly rejoice if America removed its airbase from Taiwan and stopped supplying it with weapons, China, too, benefits from the Pax Americana. China would be faced with heightened diplomatic and military challenges if the region destabilized and Japan and the Koreas began building up their militaries. It would have to be very cautious not to drive on an arms race by becoming anxious and building its military might as well. The prospects for this restraint are not good. The security dilemma means tensions and even war would be hard to avoid in the absence of America's stabilizing power.

For all these reasons and more (habit, history, and cultural aspects), the Japanese-American connection is likely to remain strong as long as there are no truly severe (and foolish) diplomatic screw-ups. The only question then is: as America's (and Japan's) relative power declines in relation to China (assuming things continue to go well for China), how long will America's security guarantee remain credible? How long can America prevent a buildup and destabilization of East Asia? The continuation of strategic ties to the region may only delay the inevitable. The Pax Americana, like other paces before it (Britannica, Romana), will not last forever. The real issue is: what will replace it? Pax or bellum?

Rating Agencies: Why the Fuss Is Overdone

Ever since the financial crisis hit in 2008, the issue of the rating agencies has come up again and again. And yet: there has been little in the way of reform. This is for two reasons: one, there has been a lack of promising suggestions for replacing the current setup; and two, much of the hullabaloo has been overdone. The reason: the structure of the rating market itself is its most attractive attribute.

It's true: rating agencies are paid by the very people they rate. If this seems like an area for a potential conflict of interest, it's because it most certainly is. Producers and providers in competitive markets have to compete for customers by giving the customers what they want. There's just one catch here: the rating market is uncompetitive. It is, in fact, an oligopoly.


Oligopolies represent one of the three market failures (cure: anti-cartel authorities). The other two are one-sided information (cure: laws requiring transparency and information sharing) and externalities, which are goods or services that are either enjoyed by many but paid for by few or vice versa (cure: usage restrictions/regulations and externality charges). The rating market is oligopolistic, which is bad for consumers of its products. The good news: the direct consumers of its products are banks and its products are ratings, used by everyone and paid for only by the banks (a positive externality it makes sense to maintain).

Standard and Poors (S&P), Moodys, and Fitch, the big three ratings oligarchs, do not really have to compete very much for customers. Securities almost have to be rated by at least one of them in order for them to even have a chance of being traded, and many or most are rated by two or more, especially by S&P and Moodys. This puts the Big Three in a position of power. They do not have to offer better ratings for higher prices. In fact, doing so would be pretty much the only thing that could damage them because it would damage their credibility.

So why is their credibility already so damaged? Their ratings were horrendously inadequate and had not been adjusted to the new instruments that have been coming to the market over the last 15-20 years. They failed because of poor modeling and a system in need of updating (ratings are based mostly on past credit performance), not (or at least, not usually) because of collusion with the banks they were supposed to rate. The agencies now have every incentive to reform because their most valuable asset, their credibility, is at risk.

The rating agencies are likely to last, however, because there is no real alternative! Out of disgust over "speculative attacks" on Greece and Portugal after rating agencies downgraded both countries' debt (due to very real fears the countries may not be able to pay lenders back), European leaders recently stated their intention to create a European rating agency. As Austrian commentator Eric Frey put it, "That a European rating agency is called for in this particular situation illustrates that such an agency would be stillborn. If a rating agency has to first ask (French President) Sarkozy and (German Chancellor) Merkel before lowering a rating, no one will ever take it seriously."¹ It's not like government agencies did such a bang-up job protecting the economy from the crisis, nor did most experts anticipate the full extent of the crisis. Why should we expect some new goverment-run agency to do better, especially one that is politically compromised?

Is there scope for reform? Probably, on the micro scale. Perhaps agencies responsible for giving ratings could steadily rotate and other things could be done to prevent cronyism, etc. (author's note: I just saw that a proposal for rotation has actually been made that would include a provision for using the accuracy of agencies' ratings to decide how many future ratings they give. Has someone in Washington been reading my blog?). Still, even this is no guarantee - ratings work well until they don't, as this crisis has shown all too well. Our greatest comfort is still that the ratings market is so uncompetitive. Perhaps we could do with a less competitive baking sector as well? Or at least one that values debt and risk less highly for systemic, not personal, reasons?

1. Eric Frey, "Zynischer Kampf gegen Windmühlen," Krisenfrey (blog), 8 May 2010, http://derstandard.at/1271376262183/Blog-KrisenFrey-Zynischer-Kampf-gegen-Windmuehlen.

The Next Financial Crisis: the European Chapter?

European leaders have had it relatively easy in the recent crisis. The events that sparked the crisis occurred in America, and many of the effects of the crisis have been more severe there (big exceptions in smaller countries like Ireland, Latvia, and Greece, but also Spain). That the housing bubble triggered the crisis has made it easy to blame the entire crisis on America. Increasingly, though, Europe is beginning to look very weak. These problems, though, are homegrown.

Everyone is aware of Greece's current liquidity issues. It now appears that European leaders will head off a crisis in Greece by bailing the country out. Although many political and legal problems remain unresolved in doing this, it does look like it will be done. As The Economist argues, Greece will then have about three years to resolve its budget issues.

It also points out, however, that even with help from the EU and severe budget tightening (of which the actual application is questionable), Greece's debt will stabilize at around 150% of GDP, a huge amount by any standards (except Japan's, which is a different case, however, with lots of domestic savings, domestic financial repression, and assets abroad). Even assuming Greece manages to cut its deficit from something around 12% of GDP to under 3% in the next three years (a highly questionable assumption given the country's economic and political prospects), there is still every possibility the country could decide not paying back its debts was a better option. Indeed, that might even be true for Greece. Such a massive debt burden would hinder growth and spread economic and social malaise for years to come. In a country where social unrest bubbles beneath the surface, such austerity measures might simply be too unpalatable.

So why not let Greece default now and save ourselves the trouble (and extra money) of bailing it out? EU law stipulates that bailouts are illegal, and Germany has been opposed to them until recently. Why the change of heart? Cold calculation. Germany's Chancellor, Angela Merkel, has realized that a Greek default could sweep other countries with it, most notably Portugal, but possibly Ireland, Spain, or even Italy. Assuming that did not happen, though, the damages would be bad enough. European banks hold a lot of Greek bonds, and German banks are among the largest holders. If Greece goes down, bank bailouts may be necessary instead of a country bailout.

So a homegrown banking crisis could hit Europe. Apparently, Europe's banks are even more leveraged than American ones and even more thinly capitalized. Several banks would be unlikely to withstand a large-scale Greek default, never mind one involving several Euro-area countries. It seems the Europeans are not invulnerable to bad investment decisions, either.

Of course, this is no time for schadenfreude; such a disaster would ripple throughout the globe, nailing already weak economies and overly stretched government budgets. It was a couple of years after the 1929 crash before the Great Depression hit its deepest point. Let us hope that we are not about to repeat the false optimism that prevailed into 1930 again...

Time to Recognize Hamas

An article from this week's edition of The Economist provides a startling look into Hamas's success at providing the Gaza Strip with just about everything it needs. Prices have fallen, businesses have flourished, cafés and universities have re-opened. This adds yet another reason to the list of why the "West," insofar as it has not already done so (I believe Norway already has, for example), should recognize Hamas as the legitimate government of the Gaza Strip. It exercises de facto control over the territory and has apparently succeeded in bringing security and a degree of economic prosperity (when compared with the past few years) to the area. No other group (including the UN and the Israelis) could make this claim. These accomplishments have also made Hamas popular in the Gaza Strip, further diminishing prospects that Fatah could ever enjoy any real influence there again without serious (and deleterious) changes to conditions in Gaza. What are the other reasons Hamas should be recognized and worked with?

• It has moved away from the West and relies on other contacts for its stability and prosperity. This is working (comparatively speaking). While economic and personal security in Gaza are certainly to be welcomed, from a western political standpoint, this indicates that western influence in Gaza has waned even more than it had previously. If the Israelis and the US hope to have more influence in Gaza, they must engage with Hamas, which has effective control there. Furthermore, trying to force influence by removing Hamas would be transparent (i.e. Gazans would know what was going on and resent the action, making it counterproductive) and would lead to chaos and suffering, while carrying a very high risk of ultimate failure. Keeping Hamas in isolation would only further push it into the arms of other actors the West would rather it not deal with (e.g. Iran).
• Terrorists and extremest organizations become more moderate when they achieve real power. This could be seen with the PLO as well, which was also initially shunned by the West but was later accepted (albeit too late, I would argue, as its acceptance among the people it claimed to represent was already in decline). Hamas is now responsible for providing not just physical protection for the residents of Gaza, but also for their economic welfare. The constraints of power are already moderating its actions, if not its rhetoric.
• As The Economist mentions, Hamas may soon be embroiled in competition with Muslim extremist groups in Gaza. This implies that Hamas is a relatively moderate force there now (as would be expected from the logic of the point above). Denying recognition to Hamas will make it more likely that extremer forces will take hold in Gaza, making the situation there even worse for the people of Gaza and further harming any chance at cooperation with Israel and/or the US and their allies. As mentioned, this was the case with the PLO as well.

In conclusion, I am arguing to recognize Hamas not because I am an idealist and believe in the good of all people. On the contrary, I am a realist and believe that recognizing Hamas is in everyone's interests. It's a win-win situation, and Israel, the US, the UK, France, etc. would be fools not to take advantage of it. It is sure to be a short-lived opportunity in an ever-unstable Middle East. True, it is by no means a guarantee of success, but letting idealistic notions like "we don't negotiate with terrorists" get in the way of what is, granted, only a shimmer of hope for progress, would be reckless and unconscionable.

Waltz on Nuclear Defenses

"The best one can say about missile defenses is that they won't work. (If they did, an offense-defense race would result, with all too familiar consequences). Missile defenses are easily thwarted. In the nuclear business, offensive weapons are much cheaper than defensive ones. Other states can multiply their warheads; they can confound defenses by deploying decoys and spreading chaff; they can outflank defenses by delivering warheads in any of many different ways - by plane, by ships, by cruise missiles, by missiles fired on depressed trajectories. Missile defenses would be the most complicated system ever mounted, and the system would have to work with near perfection in meeting its first realistic test - the test of enemy fire. Some warheads may get through, and both the attacked and the attacker will know that. No president will rely on such a system but instead will avoid actions that might provoke an attack. With or without defenses, the restraints on American policy are the same."¹

So what could the point of the current missile defense shield in Europe be, including Obama's new plans for a primarily sea-based one? My guess is that it is purely a political gamble:

• Domestically: voters in the US like the idea of being "protected" from incoming nukes.
• Internationally: Bush and Obama might hope that Iran will scrap its nuclear ambitions if they can be made to believe that their weapons would be ineffective.

 This second idea seems unlikely. After all, Iran has nuclear ambitions because it feels insecure, not because it necessarily hopes to use the bomb. Anyway, it would be more likely to use its nukes against another Middle Eastern country (probably even excluding Israel!) than against the United States or Europe.

Conclusion? The "defense shield" is domestic political pandering for electoral gain. "But Bush couldn't get re-elected again after 2004, but continued to push the shield" you say? No problem, the shield was an aid to his party, and can still be used as evidence the republicans are tougher protectors of American safety than democrats (regardless of the fact that Obama's plans would eventually be more costly, but also more effective, than the land-based Bush plan).

Say "no" to "missile defense!" Say "yes" to arms control!

1. Waltz, Kenneth. "The Continuity of International Politics." In Realism and International Politics, 246-250. New York: Routledge, 2008.

Epidemiologists, Hyman Minsky, and Forest Fires in Yellowstone

Why do crises happen, and how can we stop them? This is the question asked in many a field, from economics, to epidemiology, to research on forest fires. The problem is, as Minsky has explained, epidemiologists fear, and forest fires in Yellowstone Park have illustrated: the safer we make things, the worse potential they have for damage.

The best way to illustrate this is with a very visual (and uncontroversial) example: forest fires in Yellowstone. In the early part of the 20th century, officials in national parks began to suppress any and all forest fires that developed. This seemed to make sense, since forest fires could be very destructive to the forest and dangerous for people visiting it or living nearby, as well as for some endangered species living in the park. For years, every small fire was extinguished. The problem, we now know, is that this led to a buildup of dry, dead wood in the forest -- an enormous pile of fuel waiting to be ignited. The fires soon became harder and harder to control until a fire in 1988 destroyed 36% of the park's forested land. With that much fuel, it was just a matter of time before a drought (like the one in 1988) and other environmental conditions set the stage for a nearly unstoppable fire. Eradicating small fires over years made a really big one not only possible, but essentially inevitable.

Epidemiologists have the same fears. They know that the first time a disease strikes a "virgin population" (i.e. one that has never been exposed to the disease before), the effects are devastating. This effect contributed in no small part to Europeans' success in conquering the Americas: diseases like smallpox, brought by Europeans who were resistant to it, killed and weakened vast proportions of the native populations there.

Throughout human history, infectious diseases have been among the leading causes of death. Cities, in fact, were unsustainable because so many people died of diseases there; they required a steady stream of immigrants from the countryside to persist. By the middle of the 20th century, scientists in America and Europe began to declare that infectious diseases would soon be a thing of the past. They were wrong. Just as humans can build up a resistance to disease (actually largely via natural selection: those who have no resistance die), diseases can adapt to various treatments such as antibiotics, insecticides (for Malaria), etc. Last year, for the first time, a larger proportion of the world's population lived in cities than in rural areas. As mentioned above, cities are a great place for pathogens to live. On top of this, the lack of infectious diseases over the past 60 years means that our bodies may be "out of shape" when it comes to combating disease. The question, then, is if we will be able to stay ahead of diseases with vaccines and other measures. We must constantly adapt and must not allow a virgin, non-resistant population to build up.

This brings us to Minsky. He posited that free markets would always be prone to financial crises because long periods of stability would lead investors to take on higher risks (as their memories of past crises fade or as new generations with no memories come onto the scene). Eventually, debts would pile up to an unsustainable level, requiring only a trigger to set off something akin to a financial forest fire. He believed government regulation was the key.

I will take this one step further, combining with theories of evolution and epidemiology, and say that regulation will probably be unsuccessful in the end as well. For example, one reason the recent crisis has been so bad is that central banks have done such a good job at smoothing the business cycle. Securitization seemed to be doing a good job at spreading, assessing, and pricing risk, and government guarantees, whether explicit (FDIC) or implicit (Fannie Mae and Freddie Mac) seemed to take care of the rest. This lowered people's perception of risk and raised their appetites for it. It can therefore be argued that by hauling out the fire hose and stopping all the previous fires (like the dot-com crash of 2000-2001), the Federal Reserve allowed a pile of "dead wood" to accumulate that needed only a trigger (declining house prices coupled with rising commodity prices) to ignite it. Voilà! Financial meltdown!

But don't stop here, these lessons can be applied to many other areas as well. This is just a hypothesis, but I bet Americans do more foolhardy things abroad than some other people because they are so used to everything being safe back home (e.g. "do not place house pets in your microwave"). The drive, often via lawsuits, to make everything safe in America could very well lead Americans to walk brain dead into dangers they no longer see. Here in Austria, I have another example. Austrians are so used to waiting for the light to turn green before walking across the street, and to cars stopping when the light is red (something I also expect in America), that they also no longer bother to look before crossing the street as long as the light is green. The typical response is "well, they have to stop. If they don't they'll go to prison." My response? A nice thought for you in the afterlife, I imagine.

The challenge now seems to be to control risks that are harder for individuals to see coming, while returning personal responsibility to those slammed by risks they really ought to have seen coming. What does this mean for the Viennese? Nothing, really, I'm certainly not advocating letting people who drive through red lights and kill people off easy. What does it mean for Americans? If you injure yourself by sitting on your folding chair after opening it incorrectly, it's your problem. What does this mean for the financial system? Look to Yellowstone. We need more small forest fires (recessions) and fewer explicit and implicit guarantees that give false security. Where guarantees are given, conservatism (as in low risk and low returns) needs to be enforced.

I'm sure there are more lessons. If you think of some, please comment.

The Road to a PhD Program: Update 1

All right, just a quick progress report: moving along on steps one and two. I've gotten the latest Cracking the GRE from the Princeton Review and have begun reading it. I also downloaded the program CueCard, which is a program that allows you to make computerized flash-cards. I'll be using it to study vocabulary, as that's a big part of the verbal test.

I took the online practice test today to get a baseline score, which I'm not going to share with you. Suffice it to say I didn't realize what I was supposed to be doing (the directions weren't displayed, which I think was a program error) and was trying to associate words rather than find their antonyms. First question (the most heavily weighted one) was therefore wrong! I also suck at basic math even though I can do calculus, apparently. So I'll be studying up on all that and now have minimum score goals in mind to work towards.

I've also already talked to a professor about Chicago. He suggested asking the admissions depts. there if there's a PhD student I could talk to. I should ask him/her about the experience there, then consider talking to my possible future professors as well. He also had some personal opinions about the schools, but I'll be keeping those to myself.

In sum: I've been making progress.

Next step: make an appointment to take the GRE in mid June.

Also: starting to fish around for a thesis adviser and make serious thoughts about my proposal, which must be turned in by July.

That's all for now. Glad to have a plan with goals and steps along the way!

Goodnight!

Soon to come: thinking about entries on Iran's nuclear program (already started a draft on that) and on East Jerusalem (Israel's facts on the ground). Stay tuned!

The Road to a PhD Program

Hi everybody (both of you). Today it's time for a "real issue" of a different variety: my real-life road to a PhD program. I'll be finishing up my coursework for my master's in international relations this spring, finishing the thesis this fall. In December, my applications for PhD programs are due. Even though that seems like a long way away, I'm still a bit overwhelmed. So I decided to start writing about the experience, because perhaps some others out there will find it beneficial (unlikely) and because it has a calming function for me to get this mapped out and "out there" (the real reason).

I'm looking at applying to PhD programs in political science at the University of Chicago and Northwestern, perhaps also at Illinois University at Chicago. I have a rather unusual restriction in that I'm not applying all over the place and then just going where I get in (which would be wise). Instead, because my partner and I are probably moving to Chicago next year, and because he has to go there because he'll have a visa to work for only that company, I'm applying only to schools in Chicago. That limits my options. Thank god for antacids and Valium, right? Just kidding. Fatty foods and alcohol suffice as well. JK again.

So here's my plan:

1. Start practicing for the GRE (it wasn't required for my master's program because this is Europe)
2. Talk to my professors here and ask them for advice and if they know anything about Chicago universities specifically (like, am I fooling myself thinking I can get in there?)
3. Take the GRE sometime this summer (there's a test center in Bratislava, apparently, which is a mere hour away by train).
4. Talk to program directors at the University of Chicago and Northwestern and ask them about the program and what they're looking for in a candidate. This seems like a suicide mission to me, but I think I read it was actually a good idea. It's probably true that having made contact with them, they might remember you when they look at your application, which might make them more likely to say yes. Unless or course you made a complete ass of yourself on the phone, in which case I heard that Wendy's is hiring -- in Canada.
5. Turn in my applications in December (U of Chicago is due on Dec. 28th, not sure about Northwestern).
6. Find religion.
7. Hopefully get accepted in the spring
8. Move to Chicago (one way or the other)
9. Hopefully start the grueling, several year task that is getting a PhD. Hopefully also transferring in as many classes from my master's as possible (the programs in Chicago are combined master/PhD programs).

So that's "it." Luckily, I've already ordered a GRE book from the Princeton Review on Amazon. Just 8 simple steps to go, on top of finishing my last master's class and writing my thesis.

Ahh, I feel more relaxed now, just as expected. No, wait, I feel worse...

To be continued...

Fixing America, Part IV

All right folks, as promised, here's part IV. I'm going to try to keep this one short, because I'm also writing a paper on organized begging and human trafficking in Vienna, which you'll soon be able to view online by clicking the link to "grad school papers" on the sidebar.

This section is supposed to cover a lot: budget and current account deficits, debt, and America's labyrinthine tax system. Luckily, all of these issues are related (isn't it funny how they all ended up on my part IV?). Once again, I will suggest some unpopular changes that probably would not be implemented, but hey, my job's to point out realistic solutions (in the sense that they are completely doable) to problems, it's the politicians' job to get it done.

So here we go: introduce a federal value-added tax system (VAT) like the ones seen in almost every other developed country in the world. Much of deficit-reduction will be tackled by measures mentioned in previous installments (individual private health accounts, later retirement age, paying social security benefits only to those who actually need them, etc.). A VAT is a tax that is applied to goods and services every step of the way. Sounds like it would accumulate, but it doesn't. Look at it like a chain: Producer A sells raw materials to producer B. Producer B pays a 10% VAT to producer A, who is obligated to deliver that amount to the IRS. HOWEVER, it will probably end up getting to keep much or most of the money. Everything producer A spends money on, from machinery, to contractors, to services, requires producer A to pay a VAT. Producer A simply writes down all that it has paid in VAT for business purposes and gets to keep that amount from the  VAT it has collected from sales. It sounds complicated, but it's actually much easier to manage than a system of tax-exemptions, which all have to be approved, revised, etc. What a headache!

Producer B then sells its finished goods to the retailer. The retailer pays VAT to producer B, who gets to keep whatever VAT from those sales that it has also spent doing business. The same applies to goods sold by the retailer. In this way, only additional value added at any given stage is taxed, so the effect is not cumulative.

OK, fine, by why is this good? It's good for two reasons. The main one is that studies show that taxes on consumption slow growth less than taxes on income because taxes on income reduce your incentive to work and earn more. The second reason is that a company has to pay VAT to keep VAT, it has an incentive to pay VAT and report this, which makes fraud a bit more difficult.

There are always a few problems, and the main one here is this: consumption taxes are regressive, meaning they tax the poor at a higher rate (as a percentage of their total incomes) than the rich. This, by the way, is another way America is more "liberal" than much of Europe: America's tax system is actually more progressive! In any case, addressing this problem is fairly simple: exempt certain necessities from the VAT, like necessary food items (not potato chips, soft drinks, and TV dinners), clothing items under $50 apiece, prescription medications, etc.

This would allow America's income tax rate to be cut and/or exceptions to it to be removed, making the system simpler (it's one of the most complex and frustrating in the world at the moment, costing individuals and businesses a lot in tax consulting services and wasted time). At the same time, this would help encourage growth and wouldn't be overly regressive.

The other issue to be addressed is also addressed with this tax: America's current account deficit. A current account is made up largely of a country's trade balance. America imports quite a bit more than it exports. This could be due partly to the fact that America taxes income too much and consumption too little when compared to other countries. True, America is likely on the road to rebalancing as we speak, since consumers have no scope to boost consumption in the near future, but this might be a pleasant side-effect of a tax that would otherwise be beneficial anyway.

Nancy Pelosi had indicated last year that a VAT was "on the table." Since then, the discussion has been dropped. It's unpopular because it contains the word "tax," particularly hated by conservatives, and because it's regressive, which makes it unpopular with the left. If combined with income tax cuts, tax simplification, and exceptions to protect those who would be most adversely affected, I think the tax could appeal to a broad base of legislators... if they could explain it to the public. Maybe we can give it some ridiculously long name that excludes the word tax? Those plans are usually stupid, but Congress seems to like them anyway...

Who knows Ronald Reagan?

I am starting to become frustrated with the Right's persistent attempts to drag Ronald Reagan's policies back onto the main political stage. The McCain/Palin ticket resurrected the idea of Ronald Reagan to energize their base during an election year, and now the Republicans and Tea Party Movement continue to carry the torch, insisting that we need to return to the Reagan years. President Reagan had a lot of fascinating accomplishments during his Presidency. His foreign policy was a remarkable step forward. His economic policy, however, was much more controversial, and if we are just looking at some hard numbers, it baffles me why we are even bringing up the Reagan name if we are debating the Country's most crucial issue: fiscal deficits. I think we are at the point where no one really remembers what Ronald Reagan actually did during his presidency, which is the perfect storm for meaningless political rhetoric.

Most people remember Reagan's top-down approach to the economy with steep tax cuts, but he also oversaw one of the first real expansions of the deficit, which should cause us to shun his policies in light of today's issues. The Reagan legacy brought such phrases as "supply side economics" and "trickle down" to the national political conversation. This approach is centered on cutting taxes and government spending so individuals can reinvest in the economy. Similar to George H.W. Bush, Reagan was successful in cutting taxes dramatically, especially for the most wealthy Americans, but his true failure was the hard part: cutting spending. We often talk about the unprecedented growth in the national deficit from the Bush Jr. years, but rarely do Republican spinsters mention Reagan's inability to control federal spending. The deficit more than tripled under Reagan's watch, an unintended reality, but still a result of his leadership. Choosing a President that served more than TWENTY years ago may allow Republicans to augment reality, but it cannot escape a simple fact check. At the very least, they should shy away from a politician that made many of the same mistakes that led us to where we are today.

I would like to end with an entertaining video from last week:

Sure Pamela Geller is making a total idiot of herself, and, sadly enough, this interview sparked an embellished controversy about this non-issue, but there is a bigger point here. I think this exchange really drives home how difficult it is to put words in the mouth of a deceased President. It doesn't matter where you land on the political spectrum, if you thought Reagan was a great President or single handedly destroyed our economy, his policies from days ago are really no longer relevant. We shouldn't be asking what would Reagan do, or care about what he would think. We have today's problems, today's leaders, and today's America. We should start coming up with solutions that are tailored to the present instead of trying to turn back the hands of time... Or at the very least, if we are going to look back, can we at least pick a President who actually DID cut the deficit?!?

Blue Dogs and Tea Parties, Will New Forces Be For Good?

President Obama made a promise to the American people: a new era of political compromise. With the rise of splintered factions of Democrats and Republicans, I bet the President is now wishing for an old era of bipartisanship. The Blue Dog Democrats and the Tea Party Movement have accumulated massive power to taker control of progress (or lack there of) in Washington. As we look at the potential of these two movements, we can begin to see if they will they be a positive influence of compromise, or a paralyzing force of roadblocks.

President Obama made the following comments during his presidential acceptance speech, his promise to America.

“Let us resist the temptation to fall back on the same partisanship and pettiness and immaturity that has poisoned our politics for so long. Let us remember that it was a man from this state who first carried the banner of the Republican Party to the White House - a party founded on the values of self-reliance, individual liberty, and national unity. Those are values we all share, and while the Democratic Party has won a great victory tonight, we do so with a measure of humility and determination to heal the divides that have held back our progress. As Lincoln said to a nation far more divided than ours, "We are not enemies, but friends...though passion may have strained it must not break our bonds of affection." And to those Americans whose support I have yet to earn - I may not have won your vote, but I hear your voices, I need your help, and I will be your President too[1].” (Emphasis added)

I do not think the new President could have ever expected what would happen during his next 12 months in office. Not only did he experience the entrenched factions within his own volatile party, but triggered the rise of a new, powerful, faction within the GOP.

The President made a few mistakes within his first year that triggered a rapid deterioration in the fragile cohesion within congress. It all comes down to the two emphasized words in his speech, “humility” and “determination,” with not enough of the former and too much of the later. I have been working within local government for a few years now. If nothing else, I have learned to manage my own expectations and set achievable goals. Obama thought he could reverse the course of the Country's hardest issues at breakneck speed. His determination to meet an unrealistic timeline was his own trap. As deadlines slipped, he lost his momentum and became vulnerable to a strong wave of attack from the right (and the left, I might add - IPE pundit). This past summer, he should have shown some humility issuing from this rookie mistake, set a new pace for his agenda, and taken a moment to readjust his priorities. Instead, he isolated the party on healthcare, pushing hard on a Democrat-centric solution, far from the Obama we knew from the campaign.

The State of the Union was a good attempt to reset the agenda, but the tone has already been set; and his speech was far from showing any humility. The President has lost a year without any real progress on his agenda and the political backlash from his first year in office may have changed the political landscape for a long time. Both major parties are now splintered. Blue Dog Democrats gained significant power from the healthcare debate, representing a less liberal, more centrist approach to spending. Representing a more extreme end of the political spectrum, the rise of the Tea Party Movement seems to be a growing force in America, and even has the potential to give birth to a new political party.

The Blue Dogs have the potential to bring balance to legislation as long as they bring reasonable compromise to the debate. If played correctly, the more center-leaning legislation can create a more moderate view of the Democratic Party. This is effective only if the Blue Dogs can be seen as part of a united front supporting certain legislation, instead of eating each other alive for political gain. If this new power is of true compromise, bringing legitimate objections WITH legitimate solutions to the table, they can be a strong force for good, centrist legislation. I have yet to really see this positive influence, but the possibility is there.

Unlike the Blue Dogs, which I think are a short term reaction to Obama's missteps, the Tea Party has some staying power. Now unofficially led by my favorite master of misdirection and rhetoric, Sarah Palin, new polls show the Tea Party brand is more valuable than the GOP. Still loyal to her party, Sarah resisted the idea of a Tea Party separation in her keynote speech at the Tea Party Convention last night, but I think this view can definitely change based on Sarah's future political ambitions. For whatever insane reason, Sarah is able to control her political/celebrity persona so well that she could definitely develop the Tea Party Movement into the Tea Party... Party! If she continues to lose support within the GOP this could be a platform to spring into a larger political career. Given the Movement's current distance from the center, and its choice of spokeswoman, I think this this new party has the potential of being a strongly polarizing force. Is the Rogue Maverick even capable of compromise?

Our Country seems to do best when we head down the center of the road. I see the Blue Dogs as a potential force for good, keeping the extreme liberal side of the Democratic Party in check, as long as they keep their own egos in check along the way. Unfortunately, if the Tea Party Movement is going to step in line behind Sarah Palin, I can only see that as a decisive, destructive force. Without compromise, I cannot see the potential for any real progress in this country, but let's hope I am wrong.

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[1] “Barack Obama's US Election victory speech: full text” http://www.telegraph.co.uk/news/worldnews/northamerica/usa/barackobama/3383629/Barack-Obamas-US-Election-victory-speech-full-text.html

Liberal Europe?

It doesn't matter who you talk to: Europe is considered to be "liberal." Republicans dislike it for that reasons, democrats plan trips there for that reason. But is Europe really so liberal? Before we begin, it's important to note that there is no "Europe" as a single concept. It seems most people seem to be referring to France when they speak of it. There are a lot of countries over there though.

My first example: 2nd and co-parent adoption laws regarding same-sex couples. As far as I know, there is no country in Europe where they are legal. Yet in my home region of the US, legislation passed almost uncontroversially around a decade ago in numerous states allowing gays to adopt children together as a couple. Even in the few countries that have allowed same-sex marriages (like the Netherlands and Spain), adoptions are not part of the deal. "Separate but equal?"

Then let's take religious expression. France has been a bastion of illiberalism in this regard for a while. Recently, a committee recommended banning the burqa in many public spaces in France. Supporters contend that this is merely an assertion of France's long-standing separation of church and state. I like separating church and state and don't feel that any religion should have anything to do with any government decisions. I am disturbed when political candidates talk about their faith (or even go so far as to say they talk to god themselves). But banning freedom of religious expression takes this too far. After all, the result might be that the women are then not permitted to leave the house by their ultra-conservative husbands. The problem is a spread of fundamental Islamic ideas. It makes absolutely no sense to fight illiberalism with illiberalism!

The next point is racism, integration, and acceptance of other people. Here, Europe scores poorly once again. True, this is mostly for historical reasons ("French" and "German" are nationalities, not just citizenships). Europeans claim they are not used to immigration. There is some truth to this, but it is no excuse for the xenophobia immigrants can experience there. Immigrants living in Germany and France take a much longer time to feel at home in their host countries than those in the United States, and many of them never feel at home at all, stuck instead between two worlds. This is largely the source of unrest among immigrant communities in Europe (think of burning cars on the outskirts of Paris or increasing criminal difficulties in Neukölln in Berlin).

Finally, there are inheritance laws. In most, if not all, of continental Europe, you have to bequeath property to all your children. You could not, say, decide to leave all your possessions to your best friend, who had looked after you better than your deadbeat kids. You HAVE to give your property to your kids. This is in the name of "fairness" and was originally intended to break up aristocracies by splitting land into smaller pieces. This may have made sense in the past, but it seems alarmingly un-free now. And yet: there is no desire to change these laws. Continental Europeans are content with them.

Keeping all this in mind, perhaps you ought to be careful next time you talk about Europe being a "liberal" place. Just because there may be bare breasts in some advertisements there does NOT make it "liberal"!

Fixing America, Part III

Point three on our list is energy dependence. This can and must be addressed on multiple levels and from multiple angles. Much of this is related to one particular type of so-called market failure, a situation in which markets do not provide optimal results. Even staunch believers in markets (like the writers of this blog) know these exist. The type in question here are called externalities. These are costs of doing something that are not paid by the person doing it. Pollution is the prime example. It is much cheaper for a factory to dump its waste into a nearby river than to pay to dispose of it properly. This does not mean that dumping waste in the river has no cost. On the contrary, the costs are extreme. The pollution may kill fish and poison water supplies downstream, killing people and making them sick. When the overall cost of dumping waste into a river is seen, one notices that the costs to everyone in total of properly disposing of the waste are actually very small by comparison. If the factory owner had to pay the costs in both situations, he or she would choose to properly dispose of the waste, as it is much cheaper.

In the above situation, the best method is probably regulation. Dumping is forbidden, the river is tested for pollution, anyone caught dumping waste is punished with severe fines or jail time. This works well when there are only a few polluters who are easy to monitor. In the absence of any regulation, non-polluting companies would go out of business because they would have to spend more to dispose of their waste, putting them an a disadvantage. This is the reason regulation in necessary. Calls for "morality" are pointless: without government help (e.g. via regulation or externality charges), the "moral" business owners are put out of business. Competition then selects the "immoral" ones for survival. This, by the way, is the same reason politicians lie: the ones who tell is like it is are never elected. Voters don't want to hear the truth, they vote for liars and then are shocked when lied to. My point is: analyze incentives. Do politicians have an incentive to lie? Do businesses have the incentive to cheat and pollute? If the answer is yes, you can rest assured that all these things are happening. Furthermore, you should think about how to change the incentives. Regulation and enforcement are often the answer for industry, a free press is the best solution for government (and certainly also helps for industry).

But why are we talking about pollution when we should be discussing energy dependence? Well, the two are linked. Much of the imported oil used in the US goes to transportation. Driving a car has a number of negative externalities, among them: pollution, noise, congestion, and increased danger of accidents. All of these things become worse the more people are driving on a given road. Charging for these externalities would increase efficiency (this is also discussed in Harford's book). Charging for congestion in areas where it is a problem would increase the costs to the drivers directly, who might then decide that public transport, biking, carpooling, etc. would be a better option. The money collected could be used to improve roads, rails, and public transit. This would reduce travel times to work for those willing to pay the congestion fees, it would reduce transit times for deliveries, etc. This, along with charges for other externalities like CO2, a fee for SUV drivers, whose large cars endanger other drivers, etc., would also reduce fuel consumption. An increased carbon price (via auctioned cap and trade credits, not given away, as currently planned) would encourage industries to cut carbon in whatever way is sensible for them, or to buy additional credits if that makes no sense for them. This allows each individual to decide what makes the most sense for her, and ensures that those who cause problems also pay for them. This would reduce oil imports and promote energy independence. Not only that, it would reduce waste from cars in traffic jams, cut delivery times, and generally increase efficiency in congested cities. It would also serve to increase the commercial viability of public transit (even if it is not subsidized, which would still make sense).

Why should we subsidize mass transit? Because we already subsidize private transit. Who pays for the roads everyone uses? Taxpayers! Yes, some of this comes from fuel and automobile taxes, meaning the people who use the roads pay for them, but much of it also comes from general taxes. This is a form of subsidy for car drivers.

Who pays for the rails and train cars? In most cases, only those who use them. This is obviously an unfair disadvantage.

All of this would make America a more efficient place, not to mention making driving there less frustrating. However, it would alsp admittedly make driving more expensive in previously congested areas. This sounds unfair for the poor, right? Yet another reason the funds should flow into improving public transit. Don't forget that no one is forced to use the roads as long as there is an alternative. If public transit gets better as a result, people who decide they cannot afford to drive to work will have much better alternative ways to get there.

OK, this is all well and good, but what does it have to do with energy dependency? Obviously this would serve to reduce fuel consumption or at least slow its growth. But we sense intuitively that this cannot be enough. After all, the US imports more than half its oil.

Here's part II: we expect electric cars to start arriving in the coming decades. If this does happen, America will probably need more electrical generation capacity, or a huge increase in the efficiency with which our current supplies are used. Either way, one huge part of this solution is a better power transmission network, capable of transport power around the country from where it is abundant to where it is not with little loss of energy. Could the private sector take care of this? It would be nice, but the answer is no. Here's why: there are 50 states, all with different regulations and processes for building new transmission lines. This bureaucratic red tape insures that federal assistance, oversight, and legislative harmonization are needed to give the project and chance of working. The second reason is that there are a number of regional providers. Who should pay for the network? True, they could form a consortium to build it together, but all of them would have an incentive to cut corners and free ride. Fights would ensue as soon as a project started to cost more than it was supposed to. The project is best managed centrally by an authority that has the power to change laws as necessary to move things forward. That means the federal government. Sorry.

How would this network help? Different parts of the country, across 4 time zones in the Lower 48 alone have different energy needs at different times and seasons. If power plants are not interconnected, each has to have enough capacity to cover an area's maximum energy needs. If they are connected, power can be re-routed to where its needed.

This all would be useful as things are, but it gets really beneficial if more renewables are used. Solar power could be generated very efficiently in the American Southwest. In fact, the majority of the land in Arizona is owned by the state government and could be leased for sold for energy production. With a good direct-current transmission network, this energy could then be shipped around the country. At the same time, the Midwest is a great place for windfarms. This energy, too, could be sent to where it is needed. Chances are, most of the time that it's cloudy in the Southwest or quiet in the Midwest, generation in another place can make up for the loss. Otherwise, natural gas or even coal plants (less polluting because they are only used as backup) could be used to make up the difference. All this is only possible with a transmission network. (See link to Scientific American article on the subject).

All these things combined would reduce our dependency on foreign energy sources, cut CO2 emissions, and even make America a more economically-efficient place. How about off-shore drilling? I'm concerned about the environment, but I'm even more concerned about dependency. Maybe it's time to take a closer look at drilling on US territory...

Fixing America, Part II

Now for part two on our list of problems to be fixed in America: inequality. I'm a believer in equality of opportunity, not overall equality. Everyone should get similar chances in life. The outcome, then, is up to each individual. I would consider inequalities that then form to be "fair."

That said, we are far from this in the US. We like to believe that anyone can do anything (and there's certainly truth to that), and complete equality of opportunity is not possible, nor is it really desirable. Nonetheless, some find it much harder to reach their potential than others. Being born in a wealthy family and going to a good school increase your chances of success dramatically.

This is why education reform is so important. Education is strongly correlated with income. The current system is unfair, for obvious reasons, but it's also economically inefficient: talent is wasted. Kids with potential who live in bad neighborhoods are much less likely to reach that potential. More charter schools and federal funding for poor schools are needed, as well as more teacher and school accountability. Some of this is happening, but teachers' unions are standing in the way of more sweeping reforms. This is shameful.

Fixing America (and the rest, really)

There are four problems in America right now that, if solved, would restore a great deal of America's strength:

1. Exorbitantly priced, patchy healthcare
2. Inequality of opportunity resulting in an undesirably high level of income inequality
3. Energy dependence
   
4. Budget and current account deficits, debt, and America's labyrinthine tax system.
   

These problems all seem nearly intractable, but they're not! Let's start today with the seemingly most incurable of them all: healthcare. The current healthcare bill would solve some of the patchy coverage problem, but it is a band-aid at best and does nothing to address the underlying problems with the system. Part of the problem is that we have been presented with two false options: private health insurance, or one managed by the government. These are NOT the only two options, however. The economist Tim Harford calls attention in his book The Undercover Economist¹ to a system that has been in use in Singapore for two decades. It would cut costs hugely, give control of most of healthcare to individuals, not government OR insurers, would ensure a high standard of care, and would be universal. Sound impossible? It would be if we remained inside of the private/public health insurance box we've been stuck in.

Here's how it works:
Instead of buying health insurance, individual health accounts are set up. Every person in the US gets a $1,500 per year tax break (roughly the amount paid in taxes to public healthcare in the US already) that is deposited into an individual health account. The deposit is obligatory, but the use of the money is optional and at the individual's discretion (as long as it's for healthcare). Those who do not earn enough to pay over $1,500 a year in taxes will be given a subsidy in that amount. Two things will happen here: younger people, who often avoid health insurance because they (usually rightly) think they can save money by betting they won't get sick, can leave the money untouched. Deposited in a high-rate bank account, this money will grow over the years and can be used for health problems later in life. The other thing that happens is that each individual can decide what types of care she would like. Homeopathy? Flu shots? Massage therapy? No one would have to worry about whether insurance would cover it: there's no health insurance!

There's a third effect, and this one is huge: currently, government and private health insurance companies spend unbelievable sums of money on administration (risk assessment, lawyers, etc.) to attempt to provide low-cost coverage to healthy people and predict who will need more care. These costs disappear under this system.

Finally, the point of this personal responsibility is that, when people see how much things cost, they will make decisions about whether to get treatment or not. That is currently not the case in America's employer-based insurance system. Rationing currently occurs by who can pay the most (insurance companies and employers decide who gets what). In a government-run system (think Britain), the government decides who gets what. In this system, the individual decides what he would like. I think we can all see why this is attractive.

I know, I know, I can already hear the objections: a single MRI or a round of cancer treatment can cost significantly more than $1,500! You're right, of course. That was only one part of the picture, although this plan would likely bring those costs more in line with treatment costs in other developed countries because people would choose less treatment knowing the real costs. The other two are catastrophe insurance and government aid for the unfortunate, along with changes to liability laws, which currently lead to high legal and insurance fees for doctors and to doctors prescribing every treatment in the book, making all treatments more expensive.

Catastrophe insurance is cheap, as only really serious events are covered. In addition, there would be some co-pay (maybe $500). This would provide some encouragement for people not to put themselves in dangerous situations or to run down their personal accounts with frivolous spending.

The government aid is for people who don't suffer catastrophes, but rather who are born with bad genes and need to spend more on healthcare. Here, to be fair, the government would simply have to help out.

There's another result not mentioned in Harford's book: this would all serve to increase wages and tax revenues, making the system more than pay for itself. Studies have shown that much of the cause of wage stagnation in the US in the past decades has been due to healthcare cost inflation. Workers' wages were rising, they just didn't know it because the money was flowing into healthcare. With that system eliminated, employees would receive more cash. They would also then pay more in taxes.

In this system, the benefits for nearly all are obvious. The only ones who would not benefit are the insurance companies. For this reason, you can expect this plan to never come up and, if it did, to be heavily lobbied against. The other problem: it takes a while to explain - voters don't like policies that seem complicated up front (although this one would be much simpler in reality than the current healthcare bill!).

That said, something will have to happen eventually. Americans will not be able to afford their healthcare system indefinitely, unless they want to trade everything else. Let's hope they make the right choice...

1. Tim Harford, The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor - and Why You Can Never Buy a Decent Used Car! (New York: Oxford University Press, 2006), 130-135.
   

Do Terrorists Get Frequent Flyer Miles?

The news is currently dominated by the "Christmas Day Bomber". Missed signs, missed cues, and missed opportunities on behalf of the U.S. Government. It is all very interesting, and frankly sad that we couldn't prevent this man from boarding an airplane after his own father warned the CIA of radical behavior. Outside of the obvious story highlighting our vulnerability, I found the continued fixation on airline terrorism very interesting. Why, in attacks on American civilians, are foreign terrorists so focused on airplanes?
After watching all the intense coverage of this latest terrorist act, I have to admit the underwear bomb is pretty clever, but I can’t help but wonder why a terrorist would put in the extra effort, risking failure, to attack a relatively difficult target. Having a bomb shaped and positioned in an anatomically sensitive area is a pretty sure way to get through airport security, even with a pat down body search. A passenger would be required to strip completely naked to even have a chance of finding this bomb. I have never seen such enthusiasm for a search in airport security (although it may exist for someone who should have been on a terrorist watch list) so I am not surprised it was successful. Anyone can admit (except for John Stewart) this was a creative method, one which fortunately has not been perfected. I am thankful for the concentration on a single target, but why do foreign terrorists employ these extraordinary efforts to attack an airplane? Living in New York City I may have a unique perspective but I see crowds of more than 200 (roughly the number of people on the flight) everyday. There are probably many more than 200 people in the subway I am currently riding in, which required far less than a metal detector to enter, all you need is $2.25. With so many soft targets there must be some x-factor gained by attacking an airplane, otherwise it doesn't make any sense.
In other countries the car bomb seems to be the weapon of choice for a terrorist plot, but in America I suppose planes have been iconic foreign terrorist targets for years[1]. My first real image of terrorism comes from watching footage of the hijacking of TWA flight 847 in Lebanon. There was also the more recent rehashing of the bombing of Pan Am flight 103 in 1988, which was brought back to the world stage this year with the release of the "Lockerbie Bomber". Americans are no strangers to airline terror, I was too young to really comprehend what was happening at the time but my very concept of terrorism starts with these images which I viewed years after they happened on the History Channel. These events stayed with me with the unrealistic comfort that they occurred in "another time" in the past. This all, of course, abruptly changed by the real time horrific images on September 11, 2001. A plane to me, and maybe many Americans, are a symbol of terrorism, and that might be why they are an ideal target.
I suppose it is possible that the symbol of terrorism is much stronger than the actual act of terrorism, hence the concentrated focus on airlines. This is an attack on our psyche. If the self proclaimed strongest military in the world can't keep its citizens safe from even a repeat target what hope do any of us have from being safe in our daily lives, when we ride the subway, go to school, to work.
Oddly enough, in the face of all the hysteria I have a strange feeling of indifference. I feel like the odds of stopping a determined terrorist are so low that I would be overwhelmed if I was constantly concerned with it, so I choose not to be. Instead I am personally vigilant and hope others are as well. I will take a page out of the book of the guy who apprehended the latest terrorist suspect as he attempted to set off his bomb. I vow that if someone tries to set off a bomb on the next plane I take I am going to throw down! But I am still going to fly without thinking twice. Is that arrogance or the American way?

Sent from my iPod

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[1] The U.S. has also had experience with car bombs but it does not seem strongly connected with foreign terrorism. The Oklahoma City bombing was unfortunately the largest successful car bomb by size and impact, but this was a domestic act of terrorism. I would also be remiss not to also mention the 1993 bombing of the World Trade Center, which was an act of foreign terrorism, but it does not seem to carry the same scale of impact relative to other more recent terrorist acts.

Add Credit Suisse to the Axis of Evil

I hope everyone has read the articles this week in the Times and WSJ reporting on the half-billion dollar settlement with Credit Suisse for laundering money for Iran. I am truly overwhelmed by this story, and was even more shocked when I read the terms of the settlement. I cannot understand why the U.S. Government has not treated this issue with more severity.

The basic story is that Credit Suisse has settled a case accusing the Bank of purposefully facilitating illegal wire transfers to the U.S. from Iran and other sanctioned countries by disguising the country code in the routing numbers. The case was brought by New York City District Attorney, Robert Morgenthau, after a decade-long investigation. The plea levies a hefty fine on the second-largest bank in Switzerland in exchange for admitting fault and promising not to do it again. The only thing more disturbing than the idea of a bank actively circumventing a strict US sanction are the specific clients they had been doing it for: the Times reports that the Atomic Energy Organization of Iran and the Aerospace Industries Organization were two of the Bank's direct clients. Should it even be considered conjecture to assume this money was for materials related to nuclear weapons?

The biggest shocker about this story is the reaction of the U.S. Government. First, without making any assumptions, the Bank clearly violated economic sanctions that have been in effect for the better part of two decades. These sanctions are our only current resource to curb Iran's nuclear ambitions. They are recognized, and may soon be matched by the international community, through the United Nations. How can this Bank even begin to justify ignoring this policy?

Secondly, to add insult to injury, it seems likely the Bank facilitated Iran's ability to purchase nuclear related goods and/or services. Does this Suisse have a shred of moral fiber? I understand this is a private, profit-driven institution, but at what cost? Keeping nuclear weapons out of Iran may actually be the only thing the majority of this world agrees on!

This plea deal is nothing short of lunacy. The U.S. is involved in a simmering conflict with Iran, a country with nuclear ambitions that funds and supports terrorism throughout the world. With sanctions, we are waging a war of economics and Suisse is aiding the enemy. At the very least I think the Treasury should be freezing the Bank's U.S. assets and bar the Bank from any U.S. operation. Credit Suisse clearly has total disregard for U.S. law and interests, and should see real ramifications for its actions. If a bank will do all this for money, I think it sends a pretty clear message when your company is now barred from doing business in the largest economy in the world.

President Obama, Hilary Clinton, you want more effective sanctions? I can't think of a better gift, use it.

As a final point for this story. Where are the FBI, the Treasury, and Homeland Security in all this? How on earth did the little old NYC District Attorney Robert Morgenthau (literally old: he is in his 90s) nail this case down? Is anyone watching these things? Is it really as simple as disguising a routing number? No wonder this has been completely ineffective foreign policy. Someone better be stepping it up soon because Morgenthau is set to retire January first. Who will watch out for money laundering from the "evil doers" once he is gone?

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Is There Any Value in Education?

I read a disturbing article in the Wall Street Journal today talking about how difficult it has become to obtain a school loan. I could swear I have read this story before, but this article was particularly striking because it also discussed a rise in tuition for both public and private colleges, 6% and 4% respectively. The article simply states that the once-lucrative business of school loans has dried up and students are feeling the pinch, especially in an economy where many parents are out of work. The article made me really think about how the value of education may change in a post recession America.

The article headline, “Students Rely on Federal Loans to Pay Rising Tuition,” reminded me of a conversation I had with a close friend almost a year ago. We were sitting discussing the state of the world over a cup of coffee. At the time, he was a first-year med student at a state university. The school had just raised his tuition and we were discussing how this fit into the broader economic disaster that seemed to have no end in sight. Last year in New York, state schools raised tuition as a money generator for the State. With a dwindling tax base stemming from high unemployment, the State was trying to be creative with generating additional funding. At the time I thought this was brilliant from a public policy perspective. During a recession, as unemployment rises, tax revenue falls. But the last thing you want to do is add an additional tax burden onto the fragile bones of an economy. Solution? Cash in now on students who can defer the tax payment to a later date by taking out a larger school loan! My student friend listened politely, even agreed with me, but he didn't like it.

Yesterday’s article flipped my thinking on this whole issue. I am now more honed in on the scary fact that students can no longer leverage future income to meet their rise in tuition. By putting both tuition hikes and loan problems in the same article, a much larger issue seemed to appear (even though the article did not make the link). The value of the college grad in a post recession economy does not look good.

The credit issues our students are facing means our lending institutions do not believe a degree is as economically realistic as it used to be. What if a degree no longer guarantees students will make enough money after graduation to afford their debt service? The answer is what we are seeing in the market: the loans are drying up. A student in 2009 is becoming a bad business deal.

Making the business deal even worse is the rise in tuition. Schools (and governments) are hurting for money. Endowments took a hit but professors still need to be paid. It is making a degree with seemingly depreciating value more risky because of a higher cost. The conclusion one could draw is that we have reached the tipping point of risk/return. It no longer makes sense to lend additional funds to meet the rise in tuition because the long term return just isn't there.

Have we past the time when a college student could simply leverage their future potential to secure a loan?

It seems this market phenomenon is the recognition of a new risk factor related to future wages. I considered, but dismissed, the possibility that the currently high unemployment rate is an influencing these loan decisions. Unemployment trends are relatively quick, short term problems; the loans we are discussing are medium term with a minimum 14 year time horizon from issuance, since a student doesn't begin paying back until they graduate and I believe a typical payback term is 10 years. If we dismiss the short term unemployment factor, the alarming new risk is probably an anticipated drop in lifetime wages of a degree-holding worker, a really important medium- to long-term risk factor. In this case, loans are not made because the investment no longer creates an income (wages) that support the debt service. In short, the college degree is no longer worth its price tag.

How scary is that possibility?!