Wednesday, November 25, 2009

Whither Iran?

Much like Captain Renault, the Prefect of Police in ‘CASABLANCA,’ I am shocked! that Iran has more nuclear facilities then it admitted, that is it quibbling with the international community over what it is really doing, and it is apparently pursuing the refinement of highly enriched Uranium en route to assembling a nuclear bomb.* I would hope that my ‘shock’ is shared by people around the globe, particularly the vast majority of the leaders of the nations of the world.**

The question now is what does the world do about it? As it turns out, there are only a few paths we can pursue.

1) We can hope the problem simply goes away; the Iranians will wake up and realize that they really shouldn’t pursue nuclear weapons and will stop their program. This is truly naïve. And for the leadership of the nations of the world, hope is not a plan. As private citizens you and I can hope; as leaders, they are responsible for acting, and acting intelligently; and should be held accountable when they don’t.

2) We can apply pressure, through political and economic means. But, making someone change their goals, regardless of the amount and type of pressure that is applied, whether carrots or sticks (or both), requires that the pressure applied results in a change in their mental calculus. Everyone makes decisions based on their own perceptions of the value of each option. Those values may be easily defined: money, for example; or more difficult to define, perceptions of self worth, morals, religious values, etc. In some cases it may even be, for all practical purposes, impossible to change someone’s perceptions. Such is the case of a suicide bomber who is convinced that blowing himself up will result in an instant trip to heaven and eternal paradise.

In Iran, there are several major groups to whom pressure may be applied; each has their own motivations. President Ahmadinejad clearly believes that having a nuclear weapon provides several positive values to Iran, with, I assume, no real negatives. (Remember, we are talking about his perceptions.) A nuclear weapons arsenal, even a small one, will in his estimate provide Iran with a deterrent capability that guarantees a much higher level of security from attack. Further, he would point out that the countries that have nuclear arsenals have not been ostracized by the rest of the world. He is correct on that point, though all the countries with nuclear arsenals, except North Korea, developed their weapons in the shadow of the polarized world of the Cold War and that fact is central to how those countries were accepted into the community of nations after their arsenals were made public.

It would seem that Ahmadinejad believes that a force of nuclear weapons would give Iran, and by extension the Mid East, credibility on the world stage that it lacks and sorely needs, in opposition to Israel, which has a nuclear weapons force.

It needs to be added that Ahmadinejad is by all reports a devout ‘Twelver,’ someone who believes that when the 12th Imam appears, much like the Second Coming in the Christian world, their will be a final great struggle and the world will be set right. For such an individual, the idea of Iran’s pursuit of a nuclear weapon force and the possibility of a cataclysmic war is not necessarily something to be avoided. If that is the case (a big IF), then applying pressure to Ahmadinejad is going to be difficult, as there appears to be little that the US or the West or the UN Security Council has to offer him – whether carrot or stick – that would move him away from a desire to build a nuclear arsenal.

The second major player in Iran, and, in fact the more important player, is the Ayatollah Khameini. The Ayatollah is both the religious leader of Iran as well as the real political power in the country. Little of note takes place without his approval. It is certain that the Ayatollah desires a nuclear capability. It is almost certain that he has let Ahmadinejad act like a braying donkey because it deflects attention from the Ayatollah and allows him to work both local politics and international diplomacy from several angles simultaneously. No position that Ahmadinejad has taken has not been approved – explicitly or implicitly – by the Ayatollah. What that means is that finding some way to ‘work around’ Ahmadinejad would not materially change anything.

In effect, the only reasonable conclusion to the intellectual conflict the West (in particular the US) has with the Iranian government is that the conflict will remain until either the West gives up or the Ayatollah (and any possible successors) is displaced from governing.

There is often talk about making contacts with member of the military, and by appealing to their patriotism and love of country, convincing them to overthrow the current regime and set the stage for democratic reform. While the army remains a major segment of the government, the real power in the army is held by figures who have been appointed to those positions because the Ayatollah and his deputies determined that these men could be trusted.

Furthermore, Iran has two separate militaries (a tactic common to a number of countries). In addition to the regular armed forces, there is the Islamic Revolutionary Guards Corps (IRGC), a group that reports through a separate chain of command that leads directly to the religious leaders of the country. Any possible coup by the regular military would face a very real counter-coup effort from the IRGC.

The final major player in Iran is that block of the population that believes it is time for a change. Does this group constitute a majority? The last elections seemed to suggest as much. However, when the results of the elections were changed by the government and the West failed to at least provide moral support to the demonstrators, the West lost any opportunity for change in the near-term. The overwhelming majority of the Iranian population is below the age of 30, did not live under the Shah, hardly remembers the Iran – Iraq war, and wishes for more open relations with the US and the West. Nevertheless, the West has failed to make support for their effort an element of any meaningful foreign policy effort and there is little likelihood that this avenue of approach is of any value in the near term.

So, if we were to apply political pressure, the only meaningful target at this point would be the Ayatollah, and there seems to be little of note that we could offer him, positive or negative, that would be of interest.

This leaves the use of economic pressure. Alone, the US has little direct economic play with Iran. Any further unilateral tightening of economic restrictions by the US is likely to have no meaningful impact. Any effort to simply get the members of the UN Security Council to pass a Resolution barring most trade with Iran will fail, as Russia and China have both said (and made it clear in deed) they will not approve further sanctions.

The leaves the US with only a few tools; the US could, for example, declare the Iranian government as supporters of terrorists and then, using existing legal powers, seize any funds that we can in the international marketplace. This would have some impact, but, given that the Iranians have already spent years working around US sanctions, it is likely that they would survive this kind of effort without a great deal additional hardship.

One possible option is a ‘third-party embargo,’ in which the US states that it will not trade with anyone who trades with Iran. Third party embargoes are rare, because they are so extreme. But they offer some hope of success, at least when the US is involved, simply because we are the largest economy in the world and the largest importer and exporter in the world. If the US were truly serious about the embargo, Iran could be economically squeezed very quickly.

The objection, of course, is that Iran exports several million barrels of oil per day and any such embargo would cause a dramatic spike in oil prices. Accordingly, no one wants to use this tool.

More limited embargoes however, have proven to be ineffective, which leaves the US little room to effectively maneuver. (Embargoes are difficult even under extreme –wartime – conditions. During World War II Nazi Germany tried and failed to blockade the United Kingdom, a country of 95,000 square miles, using unlimited submarine warfare. Iran, a country of 650,000 square miles (hence substantially more natural resources), and not an island nation, would be substantially more difficult to embargo, even if we were to consider unlimited submarine warfare, which we, of course, are not going to consider.)

3) We can accept Iran possessing a nuclear arsenal and develop a new world view that accepts that new reality.

This seems to be where the West is headed. We know they have the technology (atomic bombs have been around for more than 60 years, the technology isn’t the issue, the highly enriched uranium is the issue), and now we appear to be nearing acceptance that they can’t be stopped. This will involve some necessary political theater or posturing: ‘if the West were going to stop this it would have had to have acted earlier’ (blaming previous world leaders); ‘We have talked to the Iranian leadership and we believe they understand the gravity of the situation and we have made it clear that we will not tolerate any irresponsible behavior’ (hoping that the Iranian leadership won’t do anything during the next 5 to 10 years until the current world leadership is retired); and pursuing ‘confidence building measures’ (policy experts engage in prolonged discussions, and some agreements are signed in which everyone promises to be more ‘open’ to each other in the future).

There might also be multiple rounds of negotiations and even some very specific and public trade restrictions (ones that would look good but have no real impact). But, the fact is that we – the international community – have already showed our hand and there is little reason for Iran to believe that we are suddenly going to develop spines.

Further, none of this changes the fact that they will have nuclear weapons. It will just make us feel better over cocktails.

Which leaves us with one final option:

4) We can attack them.

This isn’t as easy as it seems – if it seems easy at all. Simply put, are you sure you know where all the facilities are? Or how many weapons they have? And where are those weapons? What is the plan if you miss? These are some basic questions you always ask whenever you are conducting a strike on an important target, and I have absolutely no idea what intelligence is available to the decision-makers in Washington or other capital cities. The difference is that we are talking about nuclear weapons. The margin of error is much lower. Given the track-record of intelligence over the past 5, 10 or 20 years, prudence would dictate a higher degree of certainty in regards to any intelligence if we are going to pursue surgical strikes.

The unintended consequences would also be substantial: the impact on US/European – Mid-East relations, the long term political and economic impact on Iran, US bilateral relations with a wide range of partners in the Mid-East and elsewhere, the impact on Israel, the impact on the oil markets and the world economy, etc.

And then there is the political fallout: Is the leadership in Washington (or London and Paris) prepared for the political firestorm that will follow an attack on Iran? Will they be able to offer proof that the Iranians had nuclear weapons? Will they be able to deal with the response from the far-left and the West haters that the West retains nuclear weapons while ‘denying them’ to the Muslim world? Will they be able to struggle through their own moral ambiguity to arrive at a defense for the Western world acting despite the ensuing cries of outrage from a host of duplicitous world leaders?

Which leads to the final thought: will the West wait and delay long enough that Israel, knowing full-well that they are high on the likely target list for any Iranian nuclear weapon, will act on its own to destroy the Iranian nuclear weapon program, giving the Western leaders both the solution that they want and a convenient ‘whipping boy’ on whom to vent their spleen?

A Solution

In the end, this is an issue about the leaders of the Western world recognizing that they are different and that they need to act accordingly. For the last three generations the Western world, led by the US, has acted as has no other civilization in history, not as conquerors but as liberators. There have been mistakes, to be sure, but the motives and intentions have been to better and free mankind. Despite huge advantages over much of the world, we have not exploited those advantages. Despite a huge military disparity, we have used our capabilities to seek to improve the lot of nearly everyone on this planet. We need to recognize that there is a difference between us and others, and that while we have been conscientious guardians of dangerous technology, many others would not be, except for the fact that we retain a technological advantage. The leaders of the West need to recognize that we are different, accept that difference, and accept the responsibility that comes with that difference.

Allowing Iran, and the current Iranian regime, to build nuclear weapons is not an acceptable answer. The fact is that while policy wonks talk of risk, the real issue is the consequences. What are the consequences of failing to stop Iran? Certainly it means there will be more war in the war in the Mid East. Almost as certain is that it will involve nuclear weapons.

The West needs to act, and accept that there will be huge costs no matter what course we take, which is what happens when you wait too long to act. Iran must be forced to give up its nuclear weapon program. A definitive date must be given, the nearer the better. A third party embargo should be initiated by the US immediately to underline our determination. The international community must be told that there is going to be a definitive solution and that they must be prepared for it. After that date, the weapon program would be dismantled, either by the Iranians under close international scrutiny and supervision, or by the West, militarily, and irrespective of concerns about collateral damage. There should be no compromise.

Is this likely? It would seem at this point that it is not. But, the alternative is to stand and watch as first the Iranians, and later others, develop nuclear weapons and build nuclear arsenals. Eventually, perhaps in five years, certainly within 25 years, those weapons will be used, either by the regimes that built them or by others who have acquired the weapons. Hundreds of thousands, perhaps millions, will die. The consequences of failing to stop this program – now - will be greater than the consequences of striking and destroying the program, no matter how great those are. And if the US and the West fail to act, within a generation there will be a nuclear detonation and the world will ‘wonder’ what might have been done to prevent the catastrophe.

* For those who have never watched Casablanca, Inspector Renault (played to perfection by Claude Raines) is a completely amoral policeman who, to please his NAZI minders who want Rick’s Café closed, announces that he is ‘shocked’ to find out that there is gambling going on in the back room. As he announces this, the croupier shows up and hands the Inspector some money with the quiet comment ‘Sir, your winnings.’
** There are only a couple of options: either the leaders of the world are truly shocked and surprised that the Iranians were not fully disclosing their nuclear program, in which case they – the leaders - are incompetent boobs; or they suspected that there were additional secret facilities (and more will be revealed in the future) and they chose to ignore that fact in the expectation that either someone else will address it (hope as a plan) or it will simply not matter to their country (whether that makes them naïve or appeasers is the subject of another discussion.)

Friday, November 13, 2009

Raising Taxes or Raising Revenue?

Ask yourself a simple question: when the price of something – anything – goes up, do you buy more? Or do you buy less? If the filets at the grocery store – the ones you buy once a month for that great Sunday dinner – go from 10.99 per pound to 12.99 per pound, are you going to buy more of those steaks? Or is it possible that you will either ask the butcher for smaller steaks, or switch to rib-eyes, at only 9.99 per pound?

This sort of fundamental concept is necessary to understand why things rarely work the way Congress wants. If a grocery store raises prices of their prime cuts of beef, as a general rule they will sell fewer of those steaks. And when government raises taxes, in the end they will get less revenue.

Now, this isn’t absolutely true, that is, true in all cases. Take the case of a new society, formed out of the wilderness. Every family is responsible for its own security, and people live on a barter system. Then, a society is formed. Some sort of money is created and a small tax is levied to pay for certain services – basic security being the fundamental collective service of all societies, followed by other, basic services (security, governance (setting and maintaining standards for trade and ownership), money supplies and support to trade, infrastructure). The result is that the basic step from living as isolated families to living in a society and paying even a modest tax results in a very short time in a huge increase in economic activity as individuals are free to concentrate their efforts on their particular trade and not have to protect themselves and do all the other things that are provided by even the most basic of societies.

So, the difference between zero tax, with the government having no assets to provide for a basic society, and a society taxed at just a few percent, is massive. The few percent tax will provide enough assets to allow for a range of basic services and overall productivity soars. Now, here’s the important point: as productivity soars, the amount of revenue from taxes also continues to grow.

Simple numbers will suffice: during the first year of taxation there will essentially be no revenue. Money is just starting to circulate, there is no banking system, hence the money supply will actually under-represent the amount of economic activity.

After a couple of years the money is now widely circulated, banks have been established and people are now using money instead of a barter system and the money begins to multiply (I deposit money, the bank loans it out, others spend that money on capital investments, etc.) And so, a 5% tax in year 2 or 3 yields substantially less then a 5% tax or even a 3% tax in year 6 or 7. The economy grows so revenue increases despite tax rates remaining flat or even declining.

Now, let’s jump ahead and imagine a situation in which the rich society, with a tax of let us say 5%, is suddenly seized by a mad king, who inherits the kingdom after his father dies suddenly. The mad king wants more money to build more castles and so he raises the tax rate to 100%. What will happen? The answer is simple: everyone would stop working. What happens if the tax rate is 95%? A few people would work; many - most - would not. And total government revenue would be well below what it was when the tax rate was at 5%.

Now, it is apparent to event the most casual observer that there is a ‘boiling frog’ solution to part of this problem; that is, like boiling the frog, don’t throw the taxpayer in boiling water (high taxes), rather put him into nice, comfortable situation (warm water – low taxes) and slowly turn up the tax rate (heat up the water). Eventually, the government gets what it wants: very high tax rates. Unfortunately, it will also, eventually kill the taxpayer, just as surely it will kill the frog. The only difference is that the death is very gradual, rather than sudden.

It is also apparent that, if the government wanted to maximize revenue, it would play at reducing taxes until it found the ‘sweet spot’ where economic activity and hence total tax revenue is maximized. Estimates from a wide range of economists – led by Milton Friedman – have estimated that the ‘magic number’ is somewhere in the range of 15 percent total taxes for the society. Let me repeat that, the federal government would maximize its total tax revenue if the total tax rate on the country were approximately 15%.

Friedman argued, as have many others, that by reducing the tax rate the overall real economic activity in the nation would increase – the economy would grow – faster than the tax rate was shrinking. In short, lowering the tax rate would result in an increase in total tax revenue. (Think of WalMart: they lower the prices on everything and they have huge amounts of revenue AND profits).

Has this been tried? Yes. President Kennedy tried it, President Reagan tried it, and President Bush tried it. In all three cases the economy grew and government tax revenues increased, even as tax rates decreased. It has also been tried with equal success in other countries, Chile for example.

There are those who will respond that this didn’t happen under Reagan or Bush, but the numbers tell a different story. In fact, the deficits grew during the Reagan and Bush years because government spending actually grew faster than the economy, and the economy was growing very fast indeed. (Only during the period of 1994 to 1999 when the then Speaker of the House insisted on fiscal discipline did federal government spending, though it continued to increase very year, slow below the rate of growth of the economy.)

What does this mean? It means that if the federal government were interested in increasing tax revenue as its primary goal, it would further cut taxes. If it has other interests, such as gaining greater control over the economy (and increasing the number of people who are on the public dole and hence can be manipulated), irrespective of the total revenue, it will continue to raise taxes.

Wednesday, November 11, 2009

Medicare Funding: A Cautionary Tale (or: Trust Me, I’m From the Government)

At the heart of all of the discussions about the healthcare plan is the Congress and the President promising to do something that will result in healthcare costing less. Setting aside all the arguments and numbers produced by each side in the screaming match (it isn’t a debate and I won’t dignify it by calling it so), let’s look at the other large healthcare program the Federal government ‘manages:’ Medicare.

Medicare was started in 1966, and actually started disbursing significant payments in 1967. So that we get the numbers right here, let’s look at the pertinent numbers for that year:

1967
Population of the US: 198 million
US Gross Domestic Product: $833 Billion
Per Capita GDP: $4207
Medicare Coverage: 19 million citizens
Total Distributed: $3.4 Billion (.4% of GDP)
Receipts: $1.1 Billion
Net Cost: $2.3 Billion
Cost per Capita: $11.62
(This cost represents the total amount per person taken from the general tax revenue to pay for the difference in Medicare outlays)
Per Capita Expense (percent of per capita income) .28%

Over the course of the next three decades Congress changed things and the costs increased a bit. Here are the similar numbers from 2003:

2003
Population of the US: 290 million
US Gross Domestic Product: $10,886 Billion
Per Capita GDP: $37,538
Medicare Coverage: 77 million citizens
Total Distributed: $278 Billion (2.5% of GDP)
Receipts: $28.4 Billion
Net Cost: $249.6 Billion
Cost per Capita: $860.69
Per Capita Expense (percent) 2.3%

So, over the course of nearly 4 decades this program grew from less than ½ of 1 percent of GDP to 2.5% of GDP. So what about the government today convinces us that this time they will bring down the cost or control the spending?

When was the last time the federal government managed to control spending? Even during the last 9 months this Congress and this Administration have lost sight of the money that flowed into the banking industry. If they can’t keep track of money over that short a period of time, what makes us think that they will keep track of this money, doled out over a years and years?

More to the point, what is it about government spending that keeps costs under control? The short answer is: nothing. As federal government involvement in healthcare has increased, so has the size of the healthcare industry. Not only has government involvement in healthcare not worked to control the increases in healthcare costs, government involvement has spurred the increased costs in healthcare. Now we are to believe that somehow, mysteriously, that government involvement will reduce costs and improve healthcare.

Let’s just repeat it one more time: healthcare costs will increase until there is an increase in the total quantity of healthcare. If the number of doctors, nurses, clinics, hospital beds, etc., begins to increase faster than the total population, the costs will eventually start to come down. Any plan that does not increase the supply will not, cannot decrease the costs. In fact, any plan that adds more people to the healthcare system without increasing the supply must increase the cost and reduce the availability of healthcare in order to make the ends meet. And all the promises of all the politicians won’t change that.

Monday, November 9, 2009

Why Can't Uncle Sam Get His Budget Right?

In case you missed it, the other day Congress passed a ‘Continuing Resolution.’ Not one of those things covered in our civics classes, a ‘Continuing Resolution’ is a means Congress has of keeping government moving when no budget has been passed for the new fiscal year.

A couple of comments are in order: what is a ‘Continuing Resolution?’ It is the term the Congress uses when they have failed to pass a budget for the fiscal year and so, in order to provide for funding to keep things operating, this ‘resolution’ (which means solution, which seems wrong) is passed that continues funding everything in the government at the same level as the previous year. In short, Congress passes a law that says ‘keep doing what you are doing, and money is authorized and appropriated until the date on the law, as the same rate as we were spending last year. There are other elements to it as well, certain items are funded at only a certain percentage of the previous year, no new programs can be started, etc. But, the long and short of it is that when Congress fails to pass a budget on time, they use this tool to buy some time until they do pass a budget.

So, how often has Congress used continuing resolutions? Well, since 1954 only 3 budgets did NOT require a continuing resolution: 1989, 1995, and 1997 (the last two courtesy of Newt Gingrich). The other 53 budgets (including this year) have each required at least one continuing resolution and many have required several.

Why?

Well, the answer isn’t terribly difficult to arrive at. In practical terms, Congress has one job, and one job only: draft a budget for the year and get it approved. Nearly everything that Congress does is, in the end, is contained in the stack of legislation that is produced each year to, in the language of Congress, authorize and appropriate money. And, every Congressman and Senator, and every staffer, and for that matter nearly everyone in Washington DC, knows that budgets, and control of spending authority, is the be all and end all of life in Washington.

Now, every time that someone bothers to raise a stink that the budgets aren’t being passed on time a large chorus of voices will rise that ‘you don’t understand,’ ‘this is very difficult,’ etc. Yet, every year they finally manage to push something through by December or January. And then it all begins all over again and the following autumn we are back once again to another continuing resolution.

Of course, further souring this whole process is the fact that some Congressmen and their staffers feel quite justified in defending poorly worded, overly complicated and obscure language in the bills that are passed because ‘they were rushed to get them passed before we had to pass another continuing resolution.’

This is sheer lunacy. Passing these bills is there job. So, why can’t they get it done on time, but they always get it done by December or January?

The answer is, unfortunately, all too simple. Congressmen (the term is used generically – Senators and Representatives) spend too much time doing other things and not enough time focused on the key issues. The waste of time that Congress engages in every time there is a hearing on some topic of the day is at the direct expense of their real role, the one we sent them to carry out. I love baseball, but what purpose did it solve to have hearings on steroid use in baseball, besides redirecting Congress’ attention from their central duties? It is important that Congress understand the situation in Iraq and Afghanistan. But how many Congressional junkets are needed to do so? And why must committees other than perhaps the Armed Services and Foreign Relations committees consume time and money on such trips?*

The fact is that the House and Senate lack leadership and they lack discipline. I suppose they could argue otherwise. But, if they are disciplined, why can’t they get their jobs done on time? I think we should all write our Senators and Congressmen and simply insist that either they pass all budgets on time, or they both grant us all a tax holiday – one-day holiday for every day of continuing resolution. And ad that no Congressmen or Senator or staffer gets paid under any more continuing resolutions. I suspect that would help to end the practice.

It is a curious fact that approximately 60% of the Senate (that is, 60 of 100 Senators) are lawyers, at least according to a Wall Street Journal blog of a couple of year ago. Wikianswers gives the number as ‘56 lawyers.’ The ABA claims that 36% of Congressmen are lawyers. What is disturbing about these numbers is that there are roughly 1,250,000 lawyers in the US, or .4% of the population. So, roughly 40% of Congress is lawyers. How representative is that?
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• While I agree with Judge Tucker’s warning that ‘no man’s liberties are safe while the legislature is in session,’ I simply want them to do their basic job.