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Monthly Archives: October 2011

A hard look at the data explains the polarization of American politics: state and local governments are increasing property taxes even while the housing market crashes, and this is killing the middle class. In many parts of the country prospective homebuyers will pay almost as much in property taxes as in mortgage interest! No wonder the residential real estate market can’t come up for air, and why the American middle class feels that it is fighting for its existence. The only solution will be the kind pioneered by Wisconsin Gov. Scott Walker, one of the real heroes of our time: renegotiate the whole relationship between the government and the government unions. But that would mean the end of the Democratic Party as we know it. That’s why the upcoming presidential election will be the nastiest in living memory.

Crunching the numbers, I was gobsmacked by the way in which the tax burden has trickled down to the state and local level and crushed the middle class. The charts and graphs are available in my “Spengler” essay at Asia Times Online this morning:

Has America become irrational? Not since the 1930s have politics been so polarized, from the Tea Party movement on one side of the spectrum to the Occupy Wall Street protesters on the other. Why does the right object so vehemently to government spending? And why does the left attack private capital with parallel passion? The answer lies not in the American psyche, but in the statistics.

America is engaged in class war, but not of the sort one reads about in the mainstream press. The truly indigent — young African-American men, for example, most of whom are now unemployed — have little to do in this war. Large corporations for the most part are bystanders as well; they will make their peace with the victor. This is a war of survival between the productive middle class on one hand, and the dependents of the state on the other.

The Tea Party’s aversion to government spending is as pure an expression of rational self-interest as we have seen in American history. Like any new movement, it attracts more than its fair share of oddballs. The fact that a movement led by amateurs continues to wield so much power proves that it has good reason to be there.


State and local governments, though, have exhausted their tax base, and the continuous rise in property taxes through the crash in property prices has kept the real estate market more depressed than economic conditions otherwise might indicate. A further increase in tax rates would yield less revenue. In effect, the government would have to proceed from taxing private capital to expropriating it, de facto or de jure — for example, nationalizing banks and directing them to make loans to politically-favored projects, after the fashion of Latin American banana republics.

The alternative is to renegotiate pension and health benefits already promised to public sector unions.

In either case, households that considered themselves comfortably middle class, and looked forward to a comfortable and secure retirement, find themselves on the edge of calamity. During the bubble years of 1998-2007, when America imported $6 trillion of overseas capital, the ride was easy.

When the whole world brought its savings to the United States, people of mediocre skills and slack work habits could afford big houses, expensive vacations, and (at taxpayer expense) generous pensions. Why Americans expected to live well indefinitely on the largesse of foreign investors is a question for the psychiatrists, not the economists.

The crisis has called into being a political movement of the exasperated middle class, namely the Tea Party. It has erased the image of the government unions as champions of progressive causes, and exposed them as an “aristocracy of labor” (in Marx’s phrase) parasitizing the public revenue.

The outcome inherently favors the Republicans. Debt — the catchall name for the crushing tax burden — has become a hot button issue even for many Democrats. But this election will be fought more desperately, and nastily, than any other that comes to mind during the past century. This is an existential struggle, a political war of survival for the American middle class. If the government unions go down in the fight, the Democratic Party of Barack Obama will cease to exist in its present form – and that would be a beneficial outcome for the United States.

That explains why the debt issue raises emotions. Republican consultants report that in focus groups, TV commercials about out-of-control debt prompt strongly positive responses even from Democrats. Even Democrats have to live somewhere and a lot of them own homes. And there are a lot more Democratic taxpayers and homeowners than there are government workers. This is a wedge issue for Republicans that won’t quit.

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At an off-the-record briefing for a conservative think tank this week, a top Republican pollster explained to a frustrated audience why Republican candidates won’t talk about foreign policy. A quarter of Americans, the pollster explained, have lost their jobs in the past year, or have a family member who has lost a job. In the worst-hit cities the proportion is much higher, peaking at 39% in Las Vegas. When you’re five paychecks away from bankruptcy — that’s the median position of American workers — and terrified about losing employment, you don’t want to hear about foreign policy. It’s fine to kill Bin Laden or Gaddafi, but then Americans would like to see our troops come home. They are tired of the Iraq war. It’s not that it hurts Republicans to talk about foreign policy, but their pollsters are telling them that people just don’t care.

I respect the pollster in question, but I think he’s wrong. The electorate doesn’t always know what it wants to hear, until it hears it, and the job of political leadership is to lead. My old mentor in Republican politics, the late supply-side pundit Jude Wanniski, liked to say that the electorate was like a diamond in the rough: there is always an optimal way to cut the diamond, and a political leader has to know just where to place the chisel.

During the past month I’ve been on the talk radio circuit, and if this grass-roots medium is any reflection of the American mood, foreign policy is very much on the minds of voters, particularly Republican primary voters. Talk radio isn’t a bad focus group. It’s not a scientific sample, and I have no pretensions to political forecasting. But Americans are not so insular that they ignore the threat of terrorism under the sponsorship of a nuclear-armed Iran. And Israel’s security is a matter close to the hearts of conservative voters, especially (but not only) the evangelicals, who comprise more than a quarter of all registered voters.

The pollsters’ caution that “it’s the economy stupid” is not entirely misguided — economics clearly is the biggest issue in the election — but Republican reticence on foreign policy can’t be blamed entirely on what the candidates hear from focus groups. In the previous thread  on bombing Iran, one poster — clearly a person very well informed about the workings of the national security establishment — asked why it is that the establishment rejected military action against Iran so vehemently. I referred him to an April 2010 essay for Tablet magazine in which I argued that the security establishment had staked its reputation on stabilizing Iraq, and worried that an attack on Iran would turn the region into a chaotic mess, just as Admiral Mullen warned in his 2009 Charlie Rose interview.

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Dalia Dassa Kaye at the Foreign Policy website argues that bombing Iran is a “bad idea.” She’s absolutely right. It’s a bad idea, except all the others are worse. As Prof. Kaye observes,

The aftermath of an attack could be devastating militarily and politically. It could unleash a wave of Iranian retaliation against U.S. forces, allies, and interests. Iran maintains a wide array of levers across the region, including militia groups it has trained and funded, that it could employ to retaliate against U.S. forces or diplomatic personnel, particularly in countries like Iraq. Iranian missiles have ranges that can reach Israel and all its Gulf Arab neighbors, including those hosting U.S. military forces.

There’s nothing new about this danger. The estimable Adm. Mike Mullen made a similar warning in a March 16, 2009, interview with Charlie Rose.  Mullen said: “What I worry about in terms of an attack on Iran is, in addition to the immediate effect, the effect of the attack, it’s the unintended consequences. It’s the further destabilization in the region. It’s how they would respond. We have lots of Americans who live in that region who are under the threat envelope right now [because of the] capability that Iran has across the Gulf. So, I worry about their responses and I worry about it escalating in ways that we couldn’t predict.”

That’s right: our nation-building campaigns in Iraq and Afghanistan put tens of thousands of American soldiers in places where Iranian-backed terrorists could hurt them. And as Lee Smith wrote last week at the Tablet webzine, Iran has effectively deterred the United States, and America thus has become Iran’s “key ally” in its campaign to acquire nuclear weapons. How about a 9/11 with a nuclear weapon in a major American city? It was misguided to turn American soldiers into potential hostages to Iranian terror. It’s a hundred times MORE misguided now to pull our forces out of Iraq: we need the capacity to deter Iran from swinging its weight in Iraq and turning it into a Persian satrapy. (The Baghdad government might not like this, but if we really want to, we have ways to persuade regimes like this to cooperate.)

Iran has terrorized the United States, and inevitably will acquire nuclear weapons — unless it’s stopped. At that point its terror capacity will multiply a thousand-fold, because its terrorists will operate under a nuclear umbrella. So the argument boils down to this: Iran is a terrorist state ready to murder American citizens and American allies all over the Middle East and around the world. Which means that we had better not stop them from acquiring nuclear weapons, because then they might be mad at us, and hurt us. What does that imply about what a nuclear-armed Iran might do?

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Schedules change, but that’s the plan at present. The subject is Europe.

Chaos or Corruption in Egypt?

October 17th, 2011 - 1:31 pm

Today’s “Spengler” column at Asia Times Online asks whether the generals are stealing Egypt. Applying Occam’s Razor to the welter of contradictory economic reports out of that unfortunate country, the simplest explanation is that the military leadership is complicit in looting what is left of the Egyptian economy. The dismissal of all the outside directors of Egypt’s central bank on Oct. 16 suggests that the Supreme Council of the Armed Forces doesn’t want witnesses.

An excerpt:

Egypt’s trade deficit last year rose to US$26 billion, with exports at $23 billion and imports at $49 billion, according to Mahmoud Abdul Hai, a consultant to Egypt’s National Planning Institute, the news site Youm7 reported on September 26. That would put Egypt’s trade deficit at a stunning 15% of gross domestic product (GDP). The central bank’s website, by contrast, reports that the deficit during the six months through July ran at an annual rate of 9% of GDP.

The central government probably has lost the capacity to count foreign trade flows accurately. A great deal of capital flight occurs through fraudulent invoices for imports as well as black-market exports of tradable commodities. The Egyptian press from time to time runs exposes of smugglers stealing rice, or fertilizer, or diesel fuel for sale to foreign buyers, although aggregates are hard to trace.

If Mahmoud Abdul Hai of the planning institute is correct, his country’s exports have fallen from to $23 billion from $29 billion in 2009. If true, part of the decline probably represents disguised capital flight.

Kleptocracy on this scale implies a social breakdown of Somalian proportions.

The Scandal of the Secular Mind

October 16th, 2011 - 6:15 pm

It speaks volumes for the state of America’s political dialogue that a new book defending nation-building mentions the word “Islam” in passing just twice, not counting footnotes or index. Robert Kagan reviews Prof. Jeremi Suri’s little tome entitled Liberty’s Surest Guardian: Nation-Building From the Founders to Obama in Sunday’s New York Times. Don’t bother to read the book. As Kagan complains, “Suri’s work is marred by some dreadful writing — repetitious, stilted, awkward.”

Kagan nonetheless calls the book “useful”:

“Nation-building” is in bad odor these days, among the foreign policy cognoscenti and the general public alike. Weariness with the long struggles in Afghanistan and Iraq has produced a grand opposition alliance of isolationists, realists, populists and left-liberal anti-interventionists, who all agree it is past time to give up the hopeless dream. As Peggy Noonan recently put it, “We should not occupy their lands, run their governments or try to bribe them into bonhomie.” American soldiers should not be “social workers.” When she visited Afghanistan earlier this year, Noonan asked an American general how the war was going and was appalled to hear his answer: “Great. We just opened a new hospital.” Noonan lamented that the American soldier was no longer allowed to be “a warrior in a warrior army.”

But wasn’t the Reconstruction of the South after the Civil War “nation-building”? And the counterinsurgency in the Philippines? And the many interventions in Central America? And the Marshall Plan in Europe after World War II? Isn’t that what America does? — asks Prof. Suri.

Sometimes yes, sometimes no. “Suri must be in a distinct minority of modern American historians who consider both the rebuilding of the South and the occupation of the Philippines to be successes,” Kagan concedes. But what of the Marshall Plan? We tend to forget that America allied itself with the Catholic Church — with the remnants of political opposition to Hitler in the Catholic Rhineland around Konrad Adenauer, with Italy’s Christian Democrats, and with the bloviating Col. Blimp of Gallic election, Gen. de Gaulle — in order to keep Communism at bay. A dozen years of Nazi rule had not yet eradicated the Catholic Church, and the Vatican party in Italy, for all its flagrant corruption and malfeasance, still had a mass constituency. And these were countries that had enjoyed parliamentary rule prior to fascist victory, and whose cultural affinity to America was powerful.

Yes, we spent lavishly on nation-building in in Germany and Italy, although the long-term outcome is a failure worse than Reconstruction or the Philippines, for the Germans and Italians both are disappearing as peoples. Nonetheless it was the right thing to do.

It is astonishing that Prof. Suri, who holds an important chair at the University of Texas at Austin, could publish a book on the subject without so much as a nod towards the cultural, religious, and sociological issues that make democracy in the Muslim world a vastly different proposition than in Italy. And it is just as lamentable that Robert Kagan would lump the Catholic Philippines of 1900 together with the Muslim Afghanistan of 2011, as if such issues made no difference at all.

To Kagan, Suri, and most of the nation-builders, religion does not make a difference, for they all come out of a school of  ”political philosophy” that believes (with Thomas Hobbes) that religion is useful for socializing the masses but never to be taken seriously, and that what human beings really care about is individual self-preservation.

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Egypt descends into chaos

October 10th, 2011 - 2:30 am

Sunday’s massacre of protesting Copts is heartbreaking; from the initial reports, several thousand Christians marched to protest the military government’s blind eye towards Muslim violence when they were “were attacked by thugs carrying swords and clubs,” according to one Copt. The Egyptian government says that the Christian protesters began firing live ammunition at soldiers. That stretches credibility.

Meanwhile, according to today’s summary of the Egyptian press:

The state-owned [newspaper]  Al-Dostour reports on an “insane” increase in the prices of commodities and services that has left citizens “screaming,” presumably in despair. In its report, Al-Dostour claims that the “current state of lawlessness has left merchants and businesses with no supervision,” giving them free reign to raise prices without fear of repercussion. After a string of powerful metaphors depicting consumers as helpless prey in the grips of some fiercer yet unspecified predator, the report turns into an onslaught of numbers and percentages – food products up 80 percent since January of this year, LE7 for a kilo of sugar and LE13.75 for a liter of vegetable oil, 50 percent increase in the price of flour and LE22 for a kilo of duck meat, and on and on. LE9 for a kilo of humus, too.

No-one appears in charge. Central bank foreign exchange reserves are down to just $19 billion, or four months’ imports, the Financial Times reported last week. “After negotiating a loan from the International Monetary Fund, the military council decided to scrap it, partly on fears of popular criticism – the IMF has a negative reputation in Egypt because of its association with harsh structural adjustment programmes. In addition, only $500m of some $7bn of promised aid from Saudi Arabia and the United Arab Emirates have arrived so far.”

Egypt literally will run out of food. It imports half its caloric consumption, mainly wheat (although Egyptians eat less wheat than Iranians, Moroccans, Canadians, Turks and Russians). Egypt spends $5.5 billion a year on food subsidies. Its social solidarity minister wants to change the system (which subsidizes some people who can afford to pay more than the penny a loaf the government charges), but seems deeply confused. ”‘We need to change consumer habits so that we are not consuming so much bread. In Mexico, for example, they rely more on potatoes. Why can’t we start shifting toward that?’said Saad Nassar, adviser to the agriculture minister.” Mr. Nassar seems unaware that Mexicans eat more corn than wheat or potatoes. This discussion would be comical if not for the fact that Egypt is about to run out of money to pay for any sort of food.

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I will be offline later this afternoon until late Saturday night for the Yom Kippur holiday.

America is the land of opportunity, and never before the great housing bubble has a Ponzi scheme drawn such a wide base of support and benefited so many people. This was the most democratic scam in history, and if you got in on the first half of it, you’re still better off. The big losers were not homeowners, but the bankers. A quick look at the numbers shows how misinformed are the protesters running around Wall Street. Instead of picketing the bankers, they should pair off and picket each other. I ran through the numbers recently in an Asia Times Online essay. Here’s the story of the People’s Ponzi scheme in a nutshell:

Household real estate assets rose nearly two-and-a-half times from around $9 trillion in 1998 to $23 trillion at the peak of the bubble in 2006. Bank stocks (a pretty good proxy for bankers’ net worth, as most of compensation for management is in stock) had a smaller bounce, from around 80 on the KBW index to a 2006 peak of 117, a gain of less than 50%.

That’s not surprising, for households could buy a house with 5% or 10% down, and deduct the mortgage interest from their taxable income. A homeowner who bought a US$100,000 home with a $5,000 down payment doubled his original stake every year as home prices rose 10% per annum. Return on equity of 100% to 200% was common for homeowners; Goldman Sachs’ return on equity never made it above the mid-30% range.

The contrast is clear if we index 1998 to 100 in order to put the two gauges on the same scale.

Bank stocks vs household real estate assets, index 1998 = 100

Source: Federal Reserve Flow of Funds, Yahoo Finance. 

Household real estate wealth remains 70% higher than it was in 1998, even after the crash in home prices. Bank stocks, by contrast, are worth half of what they were in 1998. Many of the big banks are much worse off. Bank of America is trading at less than a third of its 1998 price, and Citigroup is at barely a tenth of its 1998 level.

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The topic covers material discussed in my earlier post, “A Beautiful Mess” and this week’s Spengler essay on Italy as a theme park.