Archive for December, 2008

Illusions shatter in 2008

Some glimpses at the world in 2008:  In the African country of Zimbabwe almost a third of the population is dying as the country implodes due to the intransigence of Robert Mugabe, a former freedom fighter against white oppression who has become a tyrant willing to sacrifice his own population to protect his ego.  Although this crisis has been building for nearly a decade, with tremendous inflation and injustice, now children are literally wasting away as food scarcity grows and the government denies anything is wrong.

In Gaza a population suffering malnutrition, post-traumatic stress disorder, and chaos now faces an assault from Israel.  The Israelis are angry about rockets being shot at their citizens by a Hamas, an extremist militia.   The situation is complex, but one thing is true on both sides: the people who suffer the most are the innocents who happen to live in the wrong place at the wrong time.

In the US people are reeling from the onset of an economic crisis so severe that 2008 may be remembered alongside 1929 in terms of heralding a deep recession.  Events in September and October led to a financial crisis that has no easy way out.   This crisis is not just about banks or credit, but 30 years of unsustainable economic policies that need to be rebalanced.

2008 was also the year when the US finally recognized that its long term plans for a democratic Iraq as an American ally and model for the region was not achievable, and decided to cut its loses and find a way out.

In Afghanistan the Taliban is resurgent, al qaeda still operative, and most NATO countries are reducing their contribution.   While the US is likely to increase its forces in the country, there is no military solution for Afghanistan, the country is too large and US military options limited.

In 2008 the American public, sensing that things have gone very wrong in recent years, embraced a change in politics, building on the shift to the Democrats and the left started in 2006.  Barack Hussein Obama, a relatively inexperienced Senator from Illinois, a black man with a funny name, was elected President.   His calm, confident and intelligent demeanor inspired trust and hope, something the American people haven’t had for their political leaders for some time.   Obama’s election also surprised much of the world, he is so different from the kind of leader Americans usually embrace.   After President Bush’s earlier “with us or against us” errors of bluster and arrogance (which he himself stepped back from), Obama’s election creates a bit of good will internationally.

Obama’s election was also part of a year of wild political news, ranging from John McCain’s improbable comeback to win the GOP nomination, the long drawn out and sometimes bitter fight between Obama and Hillary Clinton for the Democratic nomination (ending with Clinton as Obama’s choice to be Secretary of State), and the weird but entertaining choice of Sarah Palin to be McCain’s running mate.   To top off all this political drama, disgraced Illinois governor Rod Blagojevich just chose Roland Burris to replace Obama in the Senate, defying Democratic party leaders who did not want him to make a choice.  I think the Senate should seat Burris, who has done nothing wrong, but egos are involved and expect the drama to continue.

2008 saw wild swings in the price of oil.   Production is level, and demand is inelastic.  That means that slight changes in demand not caused by changes in supply can yield rapid and dramatic price fluctuations.   That certainly happened this year!   The high prices earlier put us on notice that oil production cannot rise as fast as demand at stable prices — if the economy grows, oil prices will go up dramatically.   The recession gives us a respite, but it doesn’t make the problem go away.

The year also had it’s share of natural disaster — my first WordPress blog entry was about Nargis, a storm which hit Burma back in May, causing massive death and destruction.

So the year was historic, dramatic, with its share of bad news.  It was the perfect year to start a blog about ‘an era of crisis and transformation.’   The theme of 2008 to me is the shattering of illusions.  To be sure, some of these illusions were dispelled in 2006 and 2007, but in 2008 the process reached its peak, people realize we live in a different world than we thought, and so much of the past 20 years or so has been built on unsustainable practices.  The illusions now shattered:

1) The fundamentals of the economy are strong.  No.  The fundamentals have been wildly out of balance for almost three decades, and rebalancing will be painful and force the US to start producing again, and living within our means;

2) The US is the dominant world power.  No.  The US has had to define success way down in Iraq in order to create the chance for a face saving way out, and in Afghanistan seven years after the war started the Taliban is resurgent and NATO speaks of the possibility of defeat.  Both of these would have been seen as absurdly defeatist if predicted five years ago.  The US has a strong military, but in an era of terrorism and asymmetrical warfare, our capacity to win wars against large armies is overshadowed by the inability of military power to shape political results.   This isn’t anything against our military — they are tremendously effective at what they are trained to do.    But winning wars is different than nation building, and military power is only one dimension of effective counter-terrorism.

Given that and the prominence of economic factors, the world is now multipolar rather than unipolar, and globalization is trumping sovereignty.  Americans are slowly grasping that we can’t hold ourselves aloof from the world or comfort ourselves with myths that we’re better than others and they’re just jealous.  That illusion was dangerous.

3) Americans could never vote for an urbane, intellectual black candidate for President, especially if his name contains “Hussein” and rhymes with Osama.   The American people have never been on the “talk radio right” the way it seemed to many in recent years, nor are they partisan Democrats.  Despite the red-blue map most Americans are purple — centrist and pragmatic.  (And as a Minnesota Vikings fan, I like purple).

For all the drama and turmoil of the last year, 2008 is almost certain to be remembered as the start of a major transformation of US and perhaps world politics.   We have been brought back to reality, we now recognize the limits of our power, and the foolishness of living a debt-based existence beyond our means.  We realize that while our values are strong, we haven’t really being following them, seduced into a hyper-consumerist nationalist orgy of arrogance and denial.

The transition is just beginning.  The left hasn’t quite figured out how to reconcile their ambitious social agenda with a weakened economy.  They need to put interest-group oriented politics aside and work for pragmatic compromises with the right.   The right hasn’t figured out how to let go of the conservative populism of people like Limbaugh and Hannity, and recognize the need for multi-lateralism and pragmatism.  2009 is a year both political parties will need to reconstruct themselves to face reality.

And, though we face a recession, severe foreign policy challenges, and a world still riddled with crisis and instability, there is something cathartic about realizing that we at least started to put misguiding illusions aside and are beginning to understand the challenges ahead.    To solve any problem one first has to admit there is a problem.    Our illusions allowed us to live in denial for far too long.  That time is over.

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Israel’s Dangerous Gamble

Hamas is a brutal, radical terrorist organization whose ideals are contrary to both mainstream Islam and almost all rational conceptions of human rights.  That Israel (as well as Egypt, Saudi Arabia and Jordan) wants to elminate Hamas is understandable.  A Palestine without Hamas would have a better chance at peace and the risk of a Mideast war spiraling out of control would decrease dramatically.

However, massive attacks that kill over 300 so far, including at least 51 civilians according to the UN, is a very dangerous gamble, likely to  fail.  Whether it’s more like the long term failure following the Lebanon invasion of 1982, which led to the rise of Hezbollah, or the catastrophe of the summer of 2006, when Israel was humiliated in its failure to destroy Hezbollah or get kidnapped troops back, is still unclear.

It is important to understand why Israel unleashed such an assault, with a ground invasion likely soon.  Hamas has proven unwilling to moderate its demands or retreat from its threat to try to destroy Israel.  Hamas controls the Gaza strip, and has routinely fired rockets into Israeli territory, killing and wounding some Israeli citizens (though nothing of the magnitude of Palestinians killed in these current attacks).   Israel recognizes that it’s long term security requires a Palestinian state that can be dealt with, and which recognizes Israel’s right to exist.  Israeli officials know that Fatah moderates in the West Bank are willing to try to make that happen.   Moreover, Israel’s experience in the battle against Hezbollah was sobering.  It created existential concerns about the future of the Israeli state, especially with Iran moving forward on trying to produce nuclear weapons.

It boils down to this: long term Israeli security requires building a viable Palestine alongside a secure Israel.   Palestinian leaders outside Hamas want this too, aPalestinian-Israeli peace is not as unthinkable as it might seem.   If they could reach an agreement, they could undercut Hezbollah threats (the Palestinians are not Shi’ites, nor are they religious extremists), and give Arab governments a chance to prop up and help sustain the new Palestinian state.  It can be done, and could even happen quickly.

The one thing standing in the way: Hamas.    With Hamas controlling Gaza, nothing can move forward.  The Israelis are forced to watch Hezbollah strengthen, Iran move forward, and Hamas arm itself, feeling as if the clock is ticking against them.   Moreover, Israelis now feel a certain lack of self-confidence since the 2006 war; they know they are indeed vulnerable.

This could not have been an easy decision for Prime Minister Olmert, whose days as leader of Israel are numbered (he resigned due to a scandal, but stays on because no other coalition could be formed, and elections aren’t due until February).   It’s a gamble likely to have two parts: a) attempt to crush Hamas and destroy its leadership and organizational core; and b) aggressively promote Palestinian statehood through negotiation with moderate Palestinians.

It won’t work.  First of all, the emotion caused on each side by the violence will only embolden the extremists, and Hamas is adept at adapting and surviving.   They’ll lose hundreds, maybe thousands of fighters, but the pool of willing and angry young Palestinians will grow, and anger will increase in the West Bank as well.   Palestinians can count.  They know that the Israeli military is killing far more innocents than Hamas kills, and even if Palestinians don’t like Hamas, their rage will directed at Israel.

One reason this is the case is that these kinds of wars are not traditional military confrontations, or even basic asymmetrical warfare.  It’s also a media event, with the Arab world as the primary audience.  Arab governments relatively friendly to Israel (many unofficially) have breathed a sigh of relief as the Americans gave up their effort to control Iraq.   The pressure on them from below was finally starting to let up.  This new round of violence is certain to bring about anger in the Arab worlds, forcing Arab governments like Egypt’s to become more hostile to Israel, and could increase internal instability in states across the regoin.

Israelis (and Americans) often don’t comprehend how profound and counter productive the killing of large numbers of civilians can be.  Their logic is that Hamas started the attack, Israel must defend its citizens, and the Israeli military is (unlike Hamas) trying to avoid civilian casualties.   But Gaza is densely populated, and people die in war.  Since they started the attacks, Hamas is responsible for those deaths.    That logic is, however, irrelevant.   Whether or not Israel’s response is justified in philosophical or legal terms is also irrelevant.   The emotional response of Palestinians (and many Israelis, to be sure) is one of outrage over the killing of innocents.   Images of bloody and dead children and civilians will be beamed around the world and throughout the Arab world, creating a powerful backlash.  The likely result will be that Hamas will survive, Israel’s internal divisions will increase, and the country will be in a more precarious situation than before.

Obviously, that likelihood must be painfully clear to the Israeli military and Prime Minister Olmert — they aren’t dummies.   No doubt they decided that there is no alternative.  They won’t speak with Hamas until Hamas moderates its demands, and Hamas says it will meet no preconditions before talking with Israel.  And, though Egypt is renewing efforts to try to reconcile Fatah and Hamas, there is no love lost between the two Palestinian organizations either.   The only alternative left seemed to be to use the awesome power of the Israeli military to eliminate the main obstacle to stability in the Mideast.

However, the Israeli-Palestinian conflict can only be exacerbated by continuing the cycle of violence.  Hamas will survive and strike back, peace negotiations with Fatah will be jeopardized, and as the cycle continues, Israel’s very existence could be in question.  Ultimately, Israel needs to find a political way out of this, attacking Gaza plays into the hands of the extremists who find the idea of peace with the other side abhorrent.    Direct or indirect talks with Hamas, starting with a cease fire are necessary.   Hamas can’t be wished away, nor can it simply be crushed.  The PLO and Egypt went from wanting Israel’s destruction to accepting its existence;  Hamas either has to be brought to that same place, or be gradually weakened by waning support.

Many don’t like that kind of approach.   It sounds more concrete to say “destroy Hamas and the main obstacle to peace is gone.”  But while one likes to imagine problems can simply be destroyed with violence, it rarely works that way.   And given the nature of this battle — a powerful military machine fighting an adaptable popular militia in a media age where photos are as powerful as bullets — Israel is likely to end up in a worse situation than before.   True, there is a possibility the gamble will pay off.  But there is the possibility that it will start a spiral into all out, devastating, Mideast war.

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From Fear to Hope

In the movie Bowling for Columbine film maker Michael Moore makes a very interesting, and often missed, argument.  Many see the film as an anti-gun movie, but it really isn’t.  He directly compares the US to Canada and notes that Canada has lots and lots of guns — but few murders.  In fact, here in Maine we are a ‘gun-tooting’ state.  Hunting is prevalent, back when I lived in Augusta more than once I saw hunters with guns walking past my house.  Yet Maine is the safest US state.  We have low crime rates, and murder is extremely rare.

No, Moore argued that the main problem in the US is fear: we are a society gripped in fear, and that leads us to aggression and paranoia.  Consider Y2K, the aftermath of 9-11, and the way some people still seem genuinely afraid that somehow if the US cooperates with the UN or tries to talk with countries like Iran it will cause “our enemies” to gain strength and us to “look weak.”   Often these fearful people seem most afraid about what others will think of us, that we will back down or lose face.  The mark of a fearful person lacking self-esteem is an overarching concern about what others think, rather than ones’ own real situation.  That seems to be a cultural problem here — though it could be changing.

The US spends half the world’s military budget.  No country could possibly invade or conquer the US.  Some say we have to keep trade lanes open with our navy.  Well, who is attacking our trade lanes besides rogue Somali pirates?  And doesn’t everyone in the world have a shared interest in protecting trade, not just the US?   One can point to terrorists, but even there the fear is way out of proportion to the threat.   People imagine all sorts of scenarios, but the fact is that fewer people have been killed in the US by terrorists than are killed in car accidents every few months.   9-11 killed 3000, we have about 12,000 domestic gun murders each year.

While downing the twin towers was a spectacle, our military destroys more property, buildings, and kills more civilians than terrorists ever have.  But, some protest, what about what terrorists might do — one imagines nuclear terror, biological weapons, and other nightmare scenarios.

The irony of fear is that if you act out of fear of something, you increase the chances you will experience it.  Invading Afghanistan and Iraq only made the US more hated and disrespected, and has helped worsen a fundamentally imbalanced economy.  To the rest of the world we look like people who would rather kill than negotiate, who see anything other than ‘our way or no way’ as weakness, and arrogantly mourn our own loses while mocking the loses of others, including those we cause.

Would be terrorists would not target the US because they “hate our freedoms.”  That’s an absurd and dishonest claim, even though some play on the igornace of the population to argue such things.   It’s also not because of Islamic extremism.  In fact, the reverse is true — western and American policies have helped the Muslim extremists gain popularity and support in especially the Arab world.  And when Americans engage in Islamophobia — hatred of Islam bred by fear — it creates ugly images overseas which only exacerbates the problem.  Our fear is our greatest weakness.  It may be trite, but FDR was right: we have nothing to fear but fear itself.

But it’s not just foreign policy or domestic homicides.  It’s also in our every day lives.   In the last election campaign one could see visceral hatred on each side of the spectrum, people tend to ridicule and insult the other side rather than engage.  Democrats fear the right, Republicans consider the left un-American and dangerous.  Fear permeates every aspect of American life.  Another good movie, this one from over 15 years ago, is from Albert Brooks, called Defending Your Life. That movie is set in Judgement City, where people go after their death to determine if they have to go back to earth, where people are bound by their fears, or if they have overcome their fears enough to move on in the universe.  The earth is portrayed as a rather forlorn place of suffering, inhabited by spiritually unadvanced souls.

Regardless of what one thinks of that scenario, the underlying theme is that fear is what holds us down in life — that when we are afraid we don’t take chances, we don’t appreciate the good things as they happen, and we create more problems for ourselves.    Fear makes it impossible to live a truly free and fruitful life.

Still, I sense a change lately.   People had been beaten down by the drumbeat of media inspired fear.   The biggest story before the 9-11 attack had been shark attacks in the southeast.   A sensationalistic media has been playing on fear for decades.  The American people bought it, fearing Saddam, Osama, the Russians, the Iranians, Muslims, Blacks, the MRSA virus and a host of other things out there.  Common media teases are things like “what common food may be a killer lurking in your refrigerator…watch at 11:00 to find out.”   We had to be stronger than every other country (what if every country felt that way?) because we were afraid not to.  We had to attack because we were afraid of being attacked.  We didn’t try to see other perspectives, negotiation was weakness, we were good, they were evil.

But after awhile reality breaks through.  The failure in Iraq, the on going problems in Afghanistan, the reality of what war means, and the lies from political leaders cause people to reconsider what kind of country we are, and realize that fear ultimately is self-defeating.

I believe the reason that Barack Obama was able to come on so strong and take the Presidency was not his oratory, style, policies, ideology, or even campaign tactics.  Rather, the American people are sick of fear, and want to move towards hope.  Instead of lashing out against others, we’re ready to talk, compromise, and recognize that most people are good, and want a peaceful world.  Yes, there are the cases like Israel and Hamas, or al qaeda, where people certainly want to use violence to destroy enemies.  But to many the US looked strangely similar, as we choose massive destruction, rationalized by the fact that due to our technology we could kill more innocents while saying we’re doing more than anyone else to try not to.  Blinded by fear, we didn’t see the hypocrisy or the arrogance in our behavior.

That seems to be changing.  The American spirit is not one of on going fear, but a strong belief in our ability to shape the future and make it better.   We’re at base pragmatists rather than ideologues, we believe there is no contradiction between individualism and concerns about the community and social justice.   Perhaps the current multi-leveled crisis, from foreign policy to economic policy, is an opportunity to go from fear to hope.  That would seem ironic — to have our culture lost in a media inspired fear while times were good, only to overcome that fear when things get bad.   But that’s because fear isn’t really the fundamental American value.  It was stoked by a sensationalist media, talk radio, and politicians who realized fear could get the emotional response that would yield votes.   Hope takes more work than fear.  It requires imagination, confidence, and even some risk taking.  But ultimately fear is self-defeating, and hope leads to greater rewards.

2008 was an historic year.  It might ultimately be remembered as akin to 1929, the year the economy started into a major long term crisis that would end in war.  Or, perhaps, it could be remembered as the year that the American people had enough of the fear mongers, and turned to hope.

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Thoughts on Christmas

If being a Christian were, say, the same as being a Freudian, Keynesian, Hegelian or Kantian, I could call myself a Christian.   In those cases it simply means ones basic outlook on the world in inspired by and close to that of a great thinker.  It doesn’t mean absolute agreement, nor does it mean one treats the words of the great thinker as infallible and sacred.

However, I do not believe Jesus was a unique son of God, nor do I believe one has to believe that he is in order to have eternal life.  Moreover, I find the idea that a loving God would require belief in a particular story line and person in order to judge to be self-contradictory.  That would not be a loving God.  So in a religious sense, I am not a Christian.  Jesus was for me a wise spiritual teacher, comparable to Gandhi and other spiritual thinkers, not supernatural.

Yet on Christmas, I wholeheartedly agree with this as a day to celebrate the birth and life of Jesus Christ.   First, Christianity is one of the world’s great religions, that should be honored.  Just as wishing a Jew “Happy Hanukkah” is not something one must avoid, wishing a Christian “Merry Christmas” is to show that person respect.  However, for me it goes beyond that — I really believe and respect the fundamental moral principles of Christianity as enunciated in the New Testament by Jesus and Paul.

So to me Christmas is to respect Christianity, show my belief in the fundamental moral principles put forth by the person of Jesus Christ, and to enjoy the spirit of the season: love, goodwill, a desire for peace, kindness to others, joy, and a sense of magic.  It is that time of the year we celebrate the best of humanity, and suspend our disbelief enough to know that there is a power to love and a sense of mystery about the world that we cannot know, but can open our hearts to feel.   And, somehow, I think that spirit transcends both the teacher and the faith he started, and can inspire people of all faiths or secular beliefs.

And so, despite the fact that in a religious sense I am not a Christian, I want to honor these teachings from the Sermon on the Mount which ring true to me, and are the spirit of the teachings of Jesus, a spirit that one can honor and grasp even if one doesn’t believe the story that Jesus is the one true and only son of  God.

Blessed are the gentle, for they shall inherit the earth.

Blessed are those who hunger and thirst for righteousness, for they shall be satisfied.

Blessed are the merciful, for they shall receive mercy.

Blessed are the peacemakers, for they shall be called sons of God.

You have heard that it was said, “An eye for an eye, and a tooth for a tooth.”   But I say to you, do not resist an evil person; but whoever slaps you on your right cheek, turn the other to him also.

If anyone wants to sue you and take your shirt, let him have your coat also.

Whoever forces you to go one mile, go with him two.

Give to him who asks of you, and do not turn away from him who wants to borrow from you.

You have heard that it was said, “You shall love your neighbor and hate your enemy.”    But I say to you, love your enemies and pray for those who persecute you, so that you may be sons of your Father who is in heaven; for He causes His sun to rise on the evil and the good, and sends rain on the righteous and the unrighteous.

Do not store up for yourselves treasures on earth, where moth and rust destroy, and where thieves break in and steal.   But store up for yourselves treasures in heaven, where neither moth nor rust destroys, and where thieves do not break in or steal; for where your treasure is, there your heart will be also.

So do not worry about tomorrow; for tomorrow will care for itself. Each day has enough trouble of its own

Do not judge so that you will not be judged. For in the way you judge, you will be judged; and by your standard of measure, it will be measured to you.

Why do you look at the speck that is in your brother’s eye, but do not notice the log that is in your own eye? Or how can you say to your brother, “Let me take the speck out of your eye,” and behold, the log is in your own eye? You hypocrite, first take the log out of your own eye, and then you will see clearly to take the speck out of your brother’s eye.

In everything, therefore, treat people the same way you want them to treat you, for this is the Law and the Prophets.

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A Best Case Scenario

Lately my posts on the economy have been full of gloom and doom, so as a change, why not look at it from the other side — what is a best case scenario?  To be sure, it has to be a realistic best case scenario, simply fantasizing that suddenly all the fundamental problems will go away makes no sense.  It also has to take into account that this is no ordinary recession; not since the 1930s has there been such a global rebalancing of an out of whack economy.  But it need not be like the 1930s.   What can turn things around?

First, it did not have to get this bad.  If the economic fundamentals were dealt with earlier, either after the 1992 recession or more likely after the 2001 recession, we could have rebalanced in an easier manner.  It would have been painful, much like 1979 – 82, but it could have been done.  Instead the bubble economy, built on a stock bubble followed by a property bubble, created a false sense of prosperity alongside a belief that all was well.  Speculative bubbles create their own imbalances which, alongside the current accounts deficit and increasing public and private debt make this a very difficult economic crisis to bounce back from.  What must be done?

Few emphasize that back in the 1930s there was an answer.  If the world had embraced the kind of increased free trade and stable currency markets that were ultimately created after the war in the Bretton Woods system, we might have pulled out of the depression early and avoided World War II.  If Briand and Streseman’s ideas of a kind of European economic bloc had been tried in 1929 instead of 1958, perhaps fascism could have been avoided.  Some say the war ended the depression, but that’s baloney.   If not for the dramatic shift in economic thinking heralded by the Bretton Woods system (fixed exchange rates based on the gold standard — which lasted in some form until 1971 — and a free trade regime, which persists today), the war could have fostered either a return to depression or, more likely, socialist revolutions in the West.

So let’s assume that there is an answer.  The answer is not within our current realm of conventional wisdom, and may not be seen as feasible; a call for a Bretton Woods like system would have been laughed at by most in the 30s as a political pipe dream — we needed a war to get people to move beyond their own thinking.  But it’s a different era than the 30s, the information and technology revolution is real, and globalization is much farther along.  The kind of nationalist wars of conquest promoted by Japan and Germany are obsolete.  Only the US has remotely tried such a thing, and it has proven to be a costly failure.

So maybe we can be forward thinking now.  One thing a solution would have to be is global, and inclusive.  In other words, we would need the kind of shift away from parochial nationalist economic thinking that we had with Bretton Woods.  This means an even more intense embrace of multilaterialist ideas, and a recognition that success has to be more than just success of the West — only an economic system that truly gives hope and prosperity to those in the third world who currently suffer poverty and malnutrition can work.

That means two shifts: go into negotiations without national interests (and interest groups) in mind, and see third world development as necessary for renewed first world growth.    Moreover, the US would have to recognize the unviability of the old “leaving beyond our means.”  Increasing debt and trade deficits made us seem much better off than we were.  We have to accept that the public and government will have to make major concessions in terms of expectations.

Luckily, we have the capacity to do that.  The fake economy of the last 26 years has created pockets of fat that can be trimmed in order to transition to a sustainable system.  That fat is in corporate and financial sectors, and the wealthy need to be taxed far more than they have been, with loop holes cut.  In the past, tax increases on the wealthy have been rejected because that will decrease investment, and we need investment to grow.  But that investment turned out in recent years to be mostly illusary paper gains based on financial speculation, and NOT efforts to build economic capacity and production.  Government will have to take a more active role in making sure investment is directed into productive sectors.  Those sectors should not be government run, but the market left to its own devices ends up serving those few who are able to manipulate information and regulation.

The latter means that Washington will have to do business differently.  Transparency rather than inside deals with lobbyists needs to become the stanard operating procedure.    The budget must be cut even as we try to increase production.  That means redoing the budget from the ground up, completely restructuring the United States governmental bureaucracy to be more efficient and less encompassing.   Most importantly military spending, mislabeled defense spending (we don’t need much to defend ourselves from invasion), needs to be slashed.  This will be politically difficult, but in times of economic crisis things can be done that otherwise would not have been politically possible.  Someone like Obama could pull it off.

So Internationally: a major international agreement designed to increase supranational regulation of credit markets, hold global financial and corporate actors accountable, create rules that transcend borders (to end a race to the bottom and companies shopping for governments who will deregulate and reduce taxes), and emphasize pathways for third world development.  That will require a political aspect to induce effective governance in corrupt third world states.  It won’t be easy, but third world development is a long term project, it only has to begin for the economy to start forward.   This absolutely necessitates the US being willing to compromise on previously unacceptable matters, embracing a level of internationalism that had been anathema to most Americans in the past.

Domestically, a reorganization of government, with a focus of government resources on developing productive capacity, taxing wealtheir folk and ending a regulatory set up based on powerful and wealthy lobbyists is necessary.   At the same time the American people will need to accept a decreased standard of living (since the old standard was built on debt and foreign labor/trade deficits), but one that can be made acceptable by undoing the massive increase in the maldistribution of wealth over the last quarter century.  The recession need not be as painful overall if the cost is paid fairly.  Technology to deal with global climate change and long term energy concerns could be key to helping reshape the American economy.

All that together sounds politically impossible.  Our thinking would have to change dramatically, the break from the past would have to be profound.  But who would have thought that a black man who had a Kenyan father and grew up in Hawaii and Indonesia, with the name Barack Hussein Obama, could be President?   Unlike past politicians, Obama has the capacity to make a major break with the past, and do so in a way that doesn’t lead the old elite to torpedo his changes.  Hence its important to have the Clintons, Jimmy Buffet and other current elites on board.   And the recession and war in Iraq have caused Americans already to question the conventional wisdom of the last 25 years.  I’ve heard many times in conversation and the media that “this is a different world than the one we’re used to.”  That recognition that this is a new world is the first step to embracing a new kind of thinking.

And, if done well, we could find that by the end of Obama’s first administration the global economy could be showing signs of promise few could have imagined in the dark days of late 2008.   And you know, it is possible.  Not just because of Barack Obama, but because of what his election represents: an American public ready for real change.  Remember, things are always darkest before the dawn.

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Worn Out

What a week!  I am chapter President of the faculty union here, and we had five faculty lay offs this week.   It made for a rough week, full of meetings, deliberations on how to respond, and, of course, intense meetings with some of the people affected.  Hard to be in the holiday spirit.  In all, over a dozen people on campus lost their jobs.

50,000 lost their jobs at Citibank, 30,000 at Bank of America, and comparatively the loses here were minor.  Moreover, I was never in any danger, so the tension people felt upon hearing that cuts were coming wasn’t as intense.  My job was more to be there for people, to learn the contract, and try to make sure everyone is treated fairly.

The university is also going to go through “transformational change.”  Although some people are very angry about this, most seem to realize that the world we’re in now is not the same world as a few years ago.  The University of Maine system is unsustainable as it’s currently structured.   In this there is an opportunity to shape the change into something positive; that opportunity doesn’t exist, though, for those who are leaving.

Unemployment is rising, and the cost of this crisis is starting to be felt at every level.   The events of this week give me a taste of what this means in human terms.  Not only those affected, but the entire campus was impacted by the shock of the cuts, plus far more feared they were on “the list” when word came out that cuts were coming.

I know have a stack of papers to grade, a winter course to prepare for, and am worn out by the week.  So I apologize for not posting more.

I’ve been an economic Cassandra for so long that for awhile I got a sense of satisfaction that I was being proven right.  That sense is gone.  This economy hits people in real ways.  One can only feel good about having been right if one can detach oneself from the reality of the conditions around us.  That misplaced detachment is gone.

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From Bad to Worse

This week the federal reserve lowered interest rates to “near zero,” (a range of 0 to .25%) in an effort to stimulate the economy and borrowing.  I think this is a dangerous action since one of the problems of recent years has been unsustainable debt and low levels of savings.   Given the deflationary numbers on consumer prices out (the largest drop in consumer prices ever, I believe), it’s understandable.  But we could be on the verge of this crisis getting yet another level deeper.

In a post last month, “What’s Up with the Dollar” I warned that the dollar was at unsustainable levels.   A dollar collapse isn’t inevitable, but the combination of increased spending and cheap credit in an already debt ridden economy could ultimately cause a loss of confidence in the dollar.   Then the dollar was at about $1.25 per Euro.  It hoovered around there, but after the Fed’s rate reduction  it has plummeted to $1.44 per Euro.  That’s still better than it’s lows earlier this year, and it’s still not a crash, but we may be inching towards the next stage of the crisis.

Most observers believe the dollar will remain reasonably strong because there is no alternative.  The Euro doesn’t have the track record of the dollar, and European economies are also week.  Moreover, the US still dominates the financial markets and most investors have no choice but to put significant amounts of money in US markets.  And while one can imagine an alternative to the dollar being developed, it would take time and for now the dollar will keep value despite and in part because of the slide to global recession.

I believe there may be two flaws to this argument.  First, markets may be unpredictable but they react to demand.  There is a demand for securities and investments that are not dollar based, and more quickly than one can imagine alternate investment possibilities may spread globally, especially in Asia where economies are not in as severe straights at this point.  Second, the fundamentals are against the dollar.  I tend to go with the fundamentals over speculation on what investors are going to do.

If credit is dirt cheap — the Fed is even talking about direct lending to make access to credit easier — the money supply expands.  That should make the dollar less valuable.   Although the trade deficit is finally starting to contract, and we’re off our highs in our current accounts deficit, we still are out of balance, with a dollar artificially high in value.  The collapse of the bubble economy makes it harder to defy those fundamentals.  High debt, cheap credit, high trade deficits are a triple whammy against a currency.

The result could be a contracting economy suffering inflation.  The inflation would come from foreign goods — the kind we’ve been over-consuming — going up in price due to the increasingly less dear dollar.  It also would lead to a tightening of the money supply as the feds would have to battle inflation as well as  a recession.   The practical effect on our society would be a markedly decreased standard of living and rising unemployment.

Believe it or not, if that happens, it may be the start of a recovery.  At a point where foreign goods become expensive, American goods will be able to compete.  The trick will be to find a way to capitalize new production of actual goods that people want.  Here, inflation would be our friend.  There would be lucrative foreign markets that could suddenly use cheap American goods.   As the US starts exporting more the current account would come into balance, and soon the growth in the export sectors would start spreading and the US could begin a real recovery.

It will not be a return to the heady 1990s.  As the global economy rebalances, the US will no longer have the capacity to party at the expense of others.   Rather than consuming far more than we produce, we’ll have to have balance.

Such a rebalancing doesn’t happen overnight.  We could see unemployment hit 15%, be vulnerable to terror attacks by those seduced by the thought of bringing down a wobbling economy, and we’d have to treat China carefully, given its ability to dump American currency and assetts in a manner that would devastate the US.  It would hurt China too, so it’s likely we can convince them not to, but we’d be the weaker party in the relationship.  We could see a recession last long enough that the “D” word becomes more common than the “R” word.

But absent a political crisis that severely destabilizes the planet, this rebalancing is simply necessary — and does give us some respite from potential oil shortfalls and global warming.   US demand for oil was down 12% last year, a record drop.   That also means fewer CO2 emissions, and just as sudden jumps in demand can trigger quick oil price spikes, sudden drops in demand have an opposite effect.  Demand for oil is inelastic, so changes in demand not based on changes of supply  can have a quick and dramatic effect on the price.

However, this is going to very hard on the lives of real people, many of whom never dreamed they’d be facing the kinds of conditions and choices they face.  One question: can we as a society do things, either through policy, volunteering, or in communities to avoid families and lives being destroyed by economic crisis?   This kind of suffering may not be as dramatic as that in a war, but it can a severe psychological shock that scars people and their families even long after the crisis has past.  That will be the subject of future blog entries.

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