Shaking Up the West Bank

The paradigm that has been the basis of peace negotiations between the Israelis and Palestinians is fundamentally flawed, and Mahmoud Abbas' quest for statehood is shining a bright light on the fundamental corruption of current Israeli policy.

It has long been my opinion that Israel has not been negotiating with the Palestinians in good faith.  The problem that I see is that Israel holds all the cards, and has within its power to annex the West Bank in its entirety tomorrow and grant the people who live there Israeli citizenship (whether they want it or not), effectively putting an end to this charade.  On the other hand, the Palestinians do not have it within their power to define and defend the borders of their proposed nation in a way that could halt Israeli incursion and settlement building.  Therefore, to posit peace based on the premise that the Israelis and Palestinians can negotiate as equal partners is ludicrous.  Asking this today would have been like asking Czechoslovakia to negotiate with Germany over the annexation of the Sudetenland in 1938.

So, it seems clear that each subsequent peace summit is simply an effort to buy time until Israel finally decides what it is they want to do with the occupied territories.  Within Israel there are conflicting camps and the debate is not just between Israel and the rest of the world, but very much between Israelis.  Many Israelis view it as their right, based on biblical history and by virtue of land gained during the 1967 War, to occupy all the land up to the Jordan River.  Other Israelis believe that the Palestinian people, who were expelled from Israel during the 1948 Arab-Israeli War, deserve to have a land to call their own and not live under Israeli occupation.  In the mean time, each subsequent Israeli government has supported settlement building, so the de facto position of the Israeli government is, and has been since 1967, that the West Bank is theirs to do with as they wish.

However, and this is why I say that the Israeli negotiating position is fundamentally corrupt, no Israeli leader that I can recall has ever stated that it is their intent to annex the West Bank and rewrite the map of Israel to extend to the Jordan River, even while their actions say otherwise.

In a speech he delivered to the U.N. General Assembly today, President Obama painted a beautiful picture of how, in light of the "Arab Spring" that has swept across the region, it is now finally time for the Palestinians to taste freedom, but cynically concluded that this could only be possible in the context of an Israeli/Palestinian peace accord.  In other words, Obama recognizes that the current situation is fundamentally immoral and unjust, but that he is not prepared to abandon the corrupt paradigm that has been a cancer and a source of regional tension for decades.

This is why Mahmoud Abbas is going to the U.N. to seek statehood for the occupied territories: he is taking the decisive political action that Israel has failed to do for over forty years.

Could Trade Protectionism Help Stimulate U.S. Manufacturing?

In ordinary times, trade protectionism is inflationary, discourages the efficient allocation of resources, and should be avoided. However, these are not ordinary times we are living in, and extraordinary times call for extraordinary measures.

The picture above is of the discharge from the Three Gorges Dam in China, which symbolizes the huge trade imbalance with China: manufactured goods flow from China to the U.S., but instead of manufactured goods, we are selling them U.S. debt instruments.  When money was cheap and fixed asset prices were rising fast, it made more economic sense to shutter a U.S. factory, sell the land, and ship the equipment off to China to have the goods manufactured and sold back to us cheaper than we could have bought them if we had made them here.  Initially a trickle, this became a huge flood that drained the lifeblood from the U.S. manufacturing sector and has resulted in high unemployment.

This loss of productive capacity has led to a debt crisis in this country that can only be fixed by getting back to what the U.S. has done better than any other country since the Industrial Revolution: MAKE STUFF.  However, bad domestic policies and government-subsidized manufacturing in China have bent the back of U.S. industry to the breaking point.

Therefore, I think we should seriously consider placing additional import tariffs on non-NAFTA goods to give U.S. manufacturers a fighting chance again.  While this could be inflationary in some sectors (those where we have lost almost all productive capacity), the Federal Reserve has proven that inflation is not currently the biggest short-term risk, but rather that deflation and general economic stagnation are bigger dangers. If we can jump-start the domestic manufacturing base, we can create jobs, allow the Federal Reserve and Federal Government to ratchet back their Keynsian stimulus policies and begin to work on a plan to put our country on a sustainable fiscal trajectory.

S&P Gives Uncle Sam a Crewcut

Standard & Poors on Friday cut the credit rating on U.S. Government debt by one notch from the highest tier.

Since S&P (a company founded in 1860) began rating government bonds, U.S. Treasuries have always merited a AAA rating, so the significance of this event cannot be understated.

Some would argue that this was inevitable, that the U.S. will sooner or later have had no option but to default on its debt, but I do not believe this to be true.  I believe that it was the treasonous actions of the Republican Party who, during the recent budget negotiations, allowed the specter of default to become perilously real that prompted this ratings cut.

In other words, the U.S. is now considered less credit-worthy than France, Germany, Sweden, and Canada, of equal credit worthiness to a the communist dictatorship of the People's Republic of China, and one notch above the Italians.

The fact that the United States' fiscal trajectory is on a collision course with ruin is not in doubt.  But, up to this point, the willingness of the U.S. to make good on its obligations, as spelled out in the 14th Amendment to the Constitution, has not been questioned.  It was the Republican leadership in Congress that openly bandied about the threat of default as a political tool, or perhaps because they would indeed like to squander the good faith and credit of the U.S., that caused the rest of the world to start to question our good faith.

So, what will be the impact of S&P credit cut?  Well, that depends in some part upon Moodys and Fitch.  If these two agencies follow suit, as they commonly do, then governments and funds who only hold AAA debt will be forced to sell U.S. Treasuries and buy the bonds of other governments.  The sale of these bonds will depress the price and raise the yield, forcing the Federal Reserve to increase the note rate on new issuance of debt to attract participants to their auctions.

Since, more or less, all interest rates are linked to the rate on the Treasury Notes, rates such at the Prime Rate and the rate of the 30 year mortgage will go up, thereby exacerbating the fiscal condition of our government and of the economy at large.  A higher prime rate will mean that corporate borrowing rates will increase and that more projects will be delayed or cancelled.  Higher mortgage rates will mean that buyers on the margin will be refused loans resulting in more contract cancellations and pressure on equity values. With fewer corporate deals taking place and further declines in equity values bank balance sheets will be under increased strain, possibly resulting in the collapse or downgrade of one or more major banks.  Since the major banks hold each others debt instruments, the collapse of a major bank could put the reserves of numerous banks below the red line, possibly resulting in FDIC seizure in a cascade that would rapidly exhaust available federal insurance funds.

The Federal Reserve would have no alternative but to print money to cover these deposits, which would further devalue the U.S. dollar and result in an up-tick in interest rates (to combat the perceived inflationary pressure to the underlying currency), which would add fuel to this cascade effect.

Working in the favor of the U.S. is the fact that virtually every country in the world, except Canada, Russia and China, are in the same high debt-to-GDP boat. Therefore, it is not so easy to find alternative currencies to the greenback in which to invest.  Additionally, the Chinese need to buy U.S. debt instruments in order to support the peg they maintain on their currency. But, the impacts will be felt nonetheless. Already, Russia and China are piling on their scorn of our profligate ways and it is only a matter of time before this type of talk is followed by posturing.  How this might play out can only be imagined, but the fuse will be set making a diplomatic solution to the next crisis that much harder to achieve.

What do I advise that the average citizen do?  I advise to vote Democrat in November.  We need a monopoly at the Federal level in order to enact the kind of tough measures that need to be enacted to radically alter our fiscal trajectory.  Divided government is useful most of the time, but now is not one of those times (I would argue that we should vote Republican, in spite of my resentment of their role in the credit downgrade, if I thought the Republicans had a serious chance of controlling both houses and the presidency, but I don't see that happening).  Whether the Democrats have the guts to put a means test on Social Security and Medicare, and cut discretionary spending as they must, we can only hope.  But, as long as they can blame the Republicans they won't take the steps needed.

Many people argue that we should be buying gold in times like these, but I view this as being based on a faulty logic, although the recent rise in the bullion would argue that people richer and perhaps smarter than me believe otherwise.  I suspect that their expectation is that we will return to the pre-1972 period in which our currency was backed by a fixed quantity of gold held in Fort Knox (the so-called Gold Standard).  However, it would be counter-productive for the U.S. to unilaterally return to a gold standard if other major currencies failed to follow because we would be surrendering our ability do devalue our debt while our trading partners devalue theirs.  Also, the application of the gold standard would be hugely complicated.  For example, it would require that all gold held in private accounts be surrendered to the U.S. Government in exchange for currency whose value is fixed to the value of gold.  Secondly, it would require that all U.S. currency currently in circulation be replaced with new currency based on the gold standard; since it is estimated that there is more U.S. currency in circulation outside of the U.S. than here at home, this would pose no small problem.

Therefore, I do not believe that we will return to a gold standard.  I hope, however, that we alter our fiscal course expeditiously so as to reduce our debt level to a more manageable level.  Getting there will be hard, and it will be reminiscent of life in the United States in the 1930s, in which huge swaths of the country literally scratched a living out of the land.  It will be a huge, draconian step backward for many, with personal suffering and possibly even hunger as distinct possibilities, but it will ultimately allow our spending to begin to reflect the realities of our financial condition, from which we can rebuild.

Federal Outlays Per Person vs. Percent of GDP

The conventional methodology to gauge the size of federal spending is to measure it as a percentage of GDP. However, since per capita GDP has grown faster than the population, this methodology tends to mask the extent to which the federal government has ballooned.

For example, the following lists federal spending per person in current dollars in various years:

1960: $7,625
1990: $8,635
2010: $11,442

In other words, our federal government is spending 44% more per person today than they did in 1960, but are we 1.5x better off? Or, if we use 1990 as a basis for comparison, do we feel like we are 1.4x better off today than we were in 1990?

In both cases, the answer is that while improvements in general health and welfare have occurred over this period the magnitude of that improvement is no where near as great as the increase in the government spending.

Currently, the U.S. Government spends over $3.5 trillion per year (over 40% of which it has to borrow, by the way). If our government had capped spending to the 1960 per capita level, current spending would be $2.4 trillion, or 70% of the current spend. Capped at the 1990 level, current spending would be about $2.7 trillion, or less than 80% of current levels. By either measure, it is clear that federal government spending has gotten out of control in recent years.

Therefore, I argue that we should create budgets that are based on per capita spending and target a level significantly lower than the current rate of spending.

Why is per capita spending preferable as a unit of measure to percentage of GDP calculations? For one, the government exists to serve its citizens and if its growth outstrips population growth it starts to beg the question as to why must our government consume so many resources in order to provide a basic service. Secondly, population growth is generally much slower than GDP growth, so generating budgets that track population growth will help cap spending. Thirdly, when productivity is high (i.e. GDP is growing faster than the size of the workforce) we should be running fiscal budget surpluses and reducing the national debt; if government spending rises in lockstep with GDP growth the goal of debt reduction will never be achieved.

Finally, I believe that there is an issue of fairness and constitutionality at play here. The Constitution clearly lays out limits to the role of the federal government, and I don't think that it is right or fair for the federal government to expand beyond the point that is absolutely necessary, especially when measured by how much it spends to provide its services to each and every citizen. In the most basic sense, we as citizens should be getting our money's worth.

I, for one, don't want my government to spend a nickel more on me than it absolutely has to.

Treasonous Tea Partiers

Assuming that Paul Ryan, Eric Cantor and Republican "Tea Partiers" are smart enough to realize that they are committing treason by proposing openly, in direct contravention to Section 4 of the 14th Amendment, that the U.S. defer repayment of its debt may be giving them too much credit. But, the fact is that the 14th Amendment clearly states that the validity of the U.S. debt "SHALL NOT BE QUESTIONED", especially not by those authorized by the Constitution to fund the budget.

Therefore, Congressional Republicans are actively committing treason by proposing that we not increase the debt ceiling in order to continue to service our existing obligations.

SHAME ON YOU, CONGRESSIONAL REPUBLICAN IDEOLOGUES. HOW DARE YOU PLACE ADVANCEMENT OF YOUR CONSERVATIVE AGENDA ABOVE THE U.S. CONSTITUTION AND THE GOOD NAME OF THE UNITED STATES OF AMERICA?

Kudos to Senior Republican Senator Mitch McConnell for trying to shut them down.

Clearly, we are on a fiscal path that is not sustainable, but we must respect our great Constitution and defend the honor of our great Nation. Suggesting, even in the context of a policy debate, that we might be willing to unilaterally defer interest payments or otherwise restructure our debt obligations is foolish and, ultimately, treasonous.

The U.S. Government: Payer of Last Resort?

For the majority of our 235 years since the Declaration of Independence, the U.S. Government has played a limited role in the individual lives of its citizens.

For the first 137 years there was no federal income tax.

For the first 159 years there was no form of social security.

For the first 190 years there was no form of government medical insurance.

Prior to the creation of these government programs, the U.S. public debt in constant dollars was essentially non-existent. Since that time, the public debt has exploded, particularly since the Reagan tax cuts of the 1980's and the Bush tax cuts of this past decade, and now threatens to exceed the current $14.3 trillion debt ceiling.

Of course, this is not sustainable. In fact, since 1940 the U.S. Government has run a surplus only twelve times. Clearly, 59 underfunded budgets out of 71 is not the basis for a prosperous future.

I remember writing letters to the editor in the 1980's complaining about the shocking size of the budget deficits under Ronald Reagan. The argument at that time, which by turn was referred to as "trickle-down economics" or "voodoo economics", was that the deficits were actually "investments in the future" which would yield wild surpluses in future years. However, "trickle-down" or supply-side economics failed to pay the dividends promised and huge deficits continued to be posted until a brief respite in the 1998 - 2000 period, followed by more deficits until today.

The total U.S. public debt is such that our government must constantly refinance a sum equivalent to nearly three quarters of a million dollars per U.S. household in order to avoid default. Where is all that money coming from, and what sort of interest rate are we going to have to pay to attract it in the future? At a 4% interest rate (the long-term average), the amount owed per household is about $30,000 per year. At a 10% interest rate, which has occurred 10% of the time, the amount owed per household per year is $75,000. Is that a wise or sustainable allocation of public resources?

Thankfully, it is not inconceivable for our nation to return to budget surpluses and begin to pay down the national debt to more manageable levels, but it is going to require a radical change in how we view the role of the Federal Government in our lives.

First of all, we must increase taxes, particularly on the highest earners in order to raise revenues.

Secondly, we must raise the Social Security retirement age to reflect increases in life expectancy since the program was created.

Thirdly, we must apply a means test to Social Security to avoid paying out government money to those who don't need it.

Finally, we must apply a means test to Medicare, and require those with the means to do so to secure private insurance and/or pay some form of an annual deductible.

All of these programs were created based on the argument that we are protecting the most vulnerable in our society from poverty, but they somehow came to be viewed "entitlements" owed to the society at large, including the wealthiest among us.

There is a fundamental change that must take place before we can alter our fiscal trajectory: we must stop feeling entitled to receive government transfer payments, and should instead treat those payments as a sort of "welfare check". In other words, if Uncle Sam writes you a check, it darn well better be because you can't live without it.

I recognize that many who have been paying into Social Security for decades will take umbrage to the notion that it no longer be treated as an individual entitlement or pension. However, Social Security was originally created as a plan to keep those who lived beyond their life expectancy out of poverty, and it is time that it go back to being what it was originally designed to be.

These proposals, if managed properly, will still provide for the needs of our elderly even as they force wealthier individuals to dig into their own savings to pay for their needs in their waning years.

However, failure to make these changes will inevitably lead to fiscal disaster and complete collapse of the social safety net.

Neville Chamberlain Would be Proud of Barack Obama

Update 3/19/2011 - Today Obama launched Operation Odyssey Dawn with international support and a U.N. Resolution -- this is excellent news and time will tell if the operation can be successful in shielding Libyan citizens and leading to the ouster of Moammar Gadhafi and his clan.

Those who know their WWII history know that Neville Chamberlain's name is synonymous with the notions of cowardice and appeasement by a national leader. It saddens me to be thinking of Neville Chamberlain when I ponder the Obama Administration's inexplicable lack of a coherent, forceful response to Moammar Gadhafi's slaughter of unarmed protesters, but that has happened.

It is moments like these when the mettle of national leaders is truly tested, when the strength of their belief in core values like freedom and democracy are put to the test. When revolt in North Africa spread to Libya, it became clear that the Obama Administration was completely unprepared.

A pair of very coherent opinion pieces by Slate contributor Christopher Hitchens (here and here) led me to formulate my opinions. Rather than reiterate them here, I am going to cut-and-paste my comments below:

"If Ronald Reagan were still President he would have, at the very least, blocked enough of Gaddafi's offensive capabilities to enable the Libyan Rebels to secure their gains in the eastern half of the country, and would have provided them support so that they might organize and eventually capture the western half of Libya.

Any red-blooded, freedom-loving American understands that it is our moral obligation to undermine tyrants and to support democratic revolutions whenever possible.

All of this moral hand-wringing is shameful and we should be embarrassed by our failure to show leadership. We have squandered a beautiful opportunity to free a country from a tyranny and terror."

"The Libyans want the same thing their North African brothers want: freedom and democracy. Why doubt that? In any event, freedom from Moammar Gaddafi is enough to ask for."


[The following is in response to a poster who suggested that we have no right to get involved in Libya]

"The fact of the matter is that we (the U.S. Government) DO get involved in the internal affairs of sovereign nations routinely on the basis that it is perceived to be in our national interest to do so.

The dilemma that the Obama Administration is facing is that they are not convinced that the crisis in Libya passes muster when judged by that rubric.

My argument is that it DOES pass muster, and therefore justifies limited engagement.

The point that the Obama Administration is missing is that Islamist extremism finds fertile ground in countries with a desperate population. Libyans, after 40 years of tyranny under Gaddafi, are a desperate population. They are now seeking to overthrow Gaddafi and form a new government with greater individual freedoms, and are actively looking to the West for guidance and support. The Western response has been, effectively, to leave these brave men and women hanging out to dry, which is likely to have the effect of radicalizing them against the West faster than anything else I can imagine. And, don't think that the rest of the Arab Street isn't rooting for the Libyan Rebels and growing increasingly bitter over the U.S. inaction.

From their perspective, they see the U.S. as a nation that is more than happy to occupy a Muslim country if it believes there is extremism afoot, but can't lift a finger when a Muslim people tries to liberate itself from tyranny and subjugation because they aren't considered a threat to us.

If the Muslim world ever imagined that we are in Iraq or Afghanistan to help the Iraqis or the Afghans, I think their delusion is over. And it is U.S. interests abroad that are going to suffer as a result.

So, DO WE STILL WANT TO DO NOTHING??"

[The following is a response to a poster who wrung his hands over our failure to come up with a coherent response to the Libyan crisis]

"Glenn, great comment. I, too, feel ashamed and embarrassed at our Administration's apparent moral turpitude. Our oil dollars are enslaving Arabs by supporting the tyrants who are keeping the spigots open and their people in chains.

A few of those slaves momentarily broke free of their chains and we did NOTHING TO HELP THEM.

Shame on us, shame on Europe and shame on those who coddle tyrants.

CIVIL WAR MY A$$ - THE LIBYAN PEOPLE ARE FIGHTING TO BE FREE FROM DICTATORIAL OPPRESSION."