Down with Monotheism

Monotheism amounts to an imperialistic assertion of primacy.  That sounds like one of those wild-eyed slogans from the radical left or right.  But in fact it is a simple statement of what drives quite a lot of policy, both domestic and international.

Let’s start close to home.   In both Britain and the US there is a big problem with past imperial grandeur.  The Brits just can’t get over their lost empire, and they keep doing completely illogical and crazy things (e.g. Brexit) in hopes of getting it back.  The fact that the world has changed since then, with new powers and new bases for strength doesn’t register.  Since the empire is taken to be an expression of British superiority (and of God’s grace raining down on Britain) there is no reason why it can’t just happen again.  There is only one God and he’s ours.

The US has a similar problem, just a little later in time.  We had the 1950’s and even 60’s when in the years following the destruction of the World War II the US was unquestionably the world’s only remaining superpower.  If anything we were more dominant than the British as their peak.  And we’re just as blind in looking back to it.  Our dominance was a result of national superiority and God’s grace.   We are the chosen rulers of the world and there’s nothing that ought to stop that.

The Chinese and the Russians have similar issues.  Having lived in Italy at one point, there’s more than a bit of it (going back several centuries) there too.

The Old Testament (as I understand it) had a more limited notion of monotheism:  each nation had it’s own god or gods and international struggles were also struggles of those gods.  That sounds a little more accurate.  Contemporary monotheism amounts to assertions of primacy.  An astounding percentage of Americans are ready to talk about God’s protective shield over the US and our God-given role in running the rest of the world.  That gets in the way of any notion international cooperation or any workable national objectives.  With God on your side, reality just doesn’t matter.

The Brits have already driven themselves to at least a short-term future of poverty.  It is relevant to notice—although seldom mentioned—that the pre-EO version of Britain was much slower than the continent in recovering from World War II and generally poorer per capita. 

The US is on the brink of doing the same thing.  We’ve got a dictatorial theocracy going, as well as a “we don’t need anyone” ethos on the right that denies any need to interact with the rest of the world except under terms of dominance.  Furthermore the pervasive xenophobia denies the (currently enormous) contribution of foreigners to the economic strength of the US.

However the biggest problems are not even that.  As climate change and also Covid and the Ukraine crisis show us, we have only one world.  All the national gods are going to have to cooperate if we’re going to get out of this mess.  Enough with national monotheism.

Inflation

Inflation is—by common agreement—the primary issue faced by American voters today.  However when you ask people what’s causing inflation, things are quickly not so clear. 

Republicans will say immediately say that it’s all due to overspending by the profligate Democrats. Democrats will talk about worldwide trends that are beyond the scope of what the Biden administration can control.  In neither case do you turn the important issue of inflation into useful steps going forward.  That needs to be done, and we give it a shot here.  The result may be a little different than expected.

First of all inflation necessarily involves both supply and demand, and both are clearly in play here.  The Democrats’ desire to keep people whole at the end of the pandemic did put extra money in the hands of consumers., and that extra money was chasing a limited supply of available products and services.   But it also turned out that as the pandemic eased, we became conscious of all kinds of production bottlenecks that people hadn’t anticipated.  Some of those bottlenecks have gotten a lot of press, integrated circuits required for production of new cars for example.  Other bottlenecks involved consequences of Covid, such as the breakdown of daycare systems. 

The Covid payments certainly had an initial effect. However at this late date, when any Covid benefits are long-gone, the continuing pervasiveness of bottlenecks has got to be viewed as the major issue.  Car prices for example represent a third of measured inflation. What are we to make of bottlenecks persisting even now?  (Gas and food prices are now directly tied to the Ukraine war, so they are their own story.)

The most prevalent reaction has been xenophobia.  We’ve got problems because we’ve let ourselves get too dependent on the Chinese.  Bring it all home and we’ll be fine.  That sounds nice, and we certainly do have continuing problems with Chinese sources, because of their zero-Covid policies today.

But that conclusion is actually wrong. We give two examples.  One example we’ve given before:  the single worst problem during the first stage of the Covid crisis was a lack of testing equipment—because the American manufacturer with a CDC contract to produce the tests had decided they could make more money doing something else.  The second example is active today—the baby formula crisis.  Consolidation in the industry was such that a single vendor’s contaminated equipment led to a massive shortfall in supply. Without rules of fair play “our people” aren’t necessarily going to be so much better than the Chinese. Furthermore the idea that we are somehow going to deliver the best of everything available worldwide to our own businesses is manifestly false.

There are two simple facts to be acknowledged:

1.  Unbridled capitalism is simply NOT robust.  Consolidations, monopolies, and risk-blindness are private sector facts of life.  Even Adam Smith understood that.

2.  The much-expressed desire to decouple from some or all of the rest of the world is both unworkable and unproductive.

There is no substitute for solving both of these problems.  We give examples for each:

1.  The SEC has got to do a better job of making companies confront risk.  Climate change is a good example where work is underway.   Anti-trust activities are also clearly relevant. Then there is the need to limit the power of the consolidated financial sector over the companies they own.  It is established fact that companies today invest less and return more of their profits to their investors—which directly affects robustness.  What all of this comes down to is that today’s inflation is another example of the dangers of unfounded faith in a deregulated private sector.

2.  The world needs a working system of international trade so that international corporations can be transparent and effective.  The Biden administration’s work on international taxation is an important step.  Turning todays moribund WTO into an effective organization is another necessary goal.

It is most important that we stop using inflation as just one more excuse to search for scapegoats.  Even in the near term, we should be looking for more, not less, cooperation with China, as the bottlenecks hurt both countries. And in the longer term, there really are lessons from today’s inflation that can make the world a better place for us and everyone else.

The Climate Argument Against Gas for Europe is Counterproductive Nonsense

There have been many articles about how the plans to provide US natural gas to Europe will undermine progress on climate.  This is a false conflict between climate progress and support to Ukraine.

First of all there is a timeframe difference.  What matters for Ukraine is a show of Western resolve now.  Even a year from now the situation in Ukraine will hopefully be different.  It’s going to take at least that long for much to happen with natural gas terminals here or elsewhere.  There is no reason to undermine the support for Ukraine now.  

Second the argument that anything we build will be used for years afterwards—however frequently it is made—is wrong.  Terminals will be used as long as there is demand for their capacity.   If Europe, for whatever reason, weans itself off natural gas, then those terminals will not be used even if we want them to be.

Third the gas to be provided by the agreement is both insufficient and expensive.  We would only be providing one third of the current demand and the pricing is expected to be twice what is currently paid.  The agreement in fact provides a very strong incentive for the Europeans to get themselves off natural gas.

People who fight this agreement on climate grounds are doing no cause a favor.

Ukraine in Our Future

The dangers in Ukraine are enough to make one wonder about the current world order.  We’d like to believe that it’s beyond the pale for one country to invade and take over another on the flimsiest of pretexts.  Despite some current rhetoric, Crimea was not that:  it had been an essential part of the Russian military infrastructure for centuries.  Ukraine is different—what does it mean?

Regardless of how the Ukraine affair ends, the change it signifies is enormous.  In the wake of the horrors of World War II, the US as remaining unscathed power helped put together a system of rules and organizations aimed at preventing another one.  The idea was to prevent economic collapse and to resolve conflicts before they became wars.  We got a UN, an IMF, and rules to govern international trade.  The result was an extended period of world prosperity.  The communist bloc stood outside all of that, but even in the days of the Cold War overt seizures of other countries were avoided.

Over the intervening years much of that liberal economic system remained, even as the world became much more complicated.   Standards for permitted behavior lived on.   In some sense, the Paris climate agreement was a kind of last hurrah.  There was no enforcement mechanism, but the idea was that unanimity would shame the cheaters into compliance.

Trump broke that idea in a way that only an American President could.  He asserted that there was no reason to obey any of those (US-initiated) international rules, and he got away with it.  Until Trump people cared about WTO trade rules, climate progress, and democracy worldwide.  Now essentially all of that is off the table.  And the powerlessness behind many international institutions has been laid bare.  If Putin decides to invade Ukraine, we’re in a world where the only consequences are the ones we manufacture for the event.  The UN is manifestly irrelevant. Shaming has no force. There are no rules, and your friends can cover for you.  It’s just the way things are. Military threats can be the first not the last of options.

This is a problem generally and for us in particular. Under Trump we developed adversarial relationships with just about everyone, with the view that they were all against us, and we had to show who’s boss. That limits our power. Most serious is what happened with China. Xi may be a megalomaniac and an autocrat, but we empowered Chinese hardliners and contributed to his nationalistic program by delivering threats echoing the imperialist past. When Trump said he would destroy the Chinese economy they took it seriously. The newly-revived alliance with Russia—a thorn in our side for Ukraine—was at least in part our own doing.

We have replaced our successful efforts for peace and stability with a new world view where we need no one, and any constraint on our ability to act is unacceptable. It’s easy to say (and many do say) so much the better. Every country needs to stand up for itself, and all of that international stuff just gets in the way. That’s an appealing slogan. It wasn’t just Trump’s line; it was behind Brexit and all the populist movements of the both the left and the right. However we’re not the only ones playing that game. That “freedom” is a freedom for any country to do anything, and the Ukraine affair is an early indicator of where that goes. We seem to have forgotten World War II and the Depression, and that’s just for starters.

Our own history gives an excellent example of what happens. That ocurred after the American Revolution, under the so-called Articles of Confederation.  It took only a few years for the American states that had fought the British together to be at each other’s throats, torpedoing economic progress for everyone.  Things got so bad that the states had no choice but to give up power to a new Constitution and a national government.  In Europe there were centuries of wars that only ended when cooperation became manditory in the post World War II recovery.

It’s a fact that the liberal economic system has gotten a bad name in this country—”Bill Clinton let China in the WTO and there was nothing we could do about the Chinese assault on American jobs”—but that universally-repeated story is false. (It’s one example of what you might call bipartisan revisionist history—the left and right united against the center!)  The main issue raised with China’s behavior has always been currency manipulation, which was in no way permitted under WTO rules.  And as the following job loss chart makes clear, the loss of American jobs was 100% a phenomenon of the George W. Bush presidency:

That’s no accident.  The radical neocons had us preoccupied with fighting a $3T war, and the same deregulation mania that produced the 2008 crash had us actually encouraging outsourcing abroad.  For the business-friendly Bush people cheap off shore labor was good. All subsequent efforts to help the people hurt by that process were blocked by Congressional Republicans bent on sowing dissatisfaction ahead of the 2016 election.  The liberal order conspiracy is a convenent fiction for both the right (to cover its tracks) and the left (to attack the center).

If we’re going to avoid economic and even potentially military disaster, we’ve got to get past the electoral propaganda and understand what we’ve done right and wrong.  In particular we’ve got to wean ourselves from the siren-call of nationalism.  We’re not going to “win” the future, but we can certainly all lose it.   The real challenge is getting internationalism right, so that everyone has a stake in the action.  We built unprecedented peace and prosperity after World War II.   That job needs to be done again before we give it all up—in a way that has happened many times before. Both prosperity and peace are in question.

One important lesson of history is that economics precedes politics.  The EU, for all its imperfections, is a vast improvement over centuries of status quo.   What got that going was a step-by-step economic union, long before there was anything political on the table.  In that sense, strangely enough, you can argue that the WTO is more important than the UN.  Getting the WTO back on track is going to take considerable doing, but it has to happen. And perhaps climate change can yield an appropriate model.

Climate change is an unusual situation in that practically every country has veto power of the result.  We all share the same atmosphere, and the CO2 concentration is only controlled when everyone cooperates.  So the solution has to get a buy-in from everyone, rich countries and poor.  In fact it can only work when rich countries recognize that—like it or not—they’re going to have to help the poor ones.  Everyone will have to get used to the idea of an international project where the focus is less on who gets the best deal than on whether it delivers the necessary benefit for all.

A functioning WTO is a similar balancing act.  As starting point there is one basic reality to be acknowledged:  self-sufficiency is not a desirable or realizable goal even for large countries.  Despite all the discussion of the evil Chinese, we would be vastly worse off if they just went away.  Just in general, we are not always going to be the best at making everything, and our own industry will be crippled if we can’t build on what’s best.

Furthermore discussions of self-sufficiency tend to include a strong dose of the always-dangerous delusion “my people aren’t like that.”  In fact domestic manufacture does not guarantee availability, quality, price, or appropriate technology.  The single worst problem during the first stage of the Covid crisis was a lack of testing equipment—because the American manufacturer with a CDC contract to produce the tests had decided they could make more money doing something else.  Similarly, self-sufficiency can do little to guarantee the well-being of the national workforce, as there is no substitute for government dealing with all relevant labor issues. Trade is more like climate change than it seems—it’s something we’ve got to make work.

The balancing act is in the many factors that have to be taken into account for fair trade:  labor conditions, environmental rules, government involvement, and so forth.  Those are both impediments and opportunities—they make the negotiations harder, but they are also leverage opportunities for a better world.  Elizabeth Warren in her Presidential campaign made a long list of items she wanted to make as preconditions for trade with the US.  Her standards were very high—it was pointed out at the time that no country met them—but her list was an indication of potential opportunities. Also, it is important that these rules should apply to everyone—including to us.

What this comes down to is that globalization, despite the rhetoric, is only anti-labor if we make it so—which is precisely what happened under George Bush. Instead of using it to establish worldwide labor standards, we used it deliberately to undermine workers everywhere. In other words thus far we’ve had globalization exclusively for the rich. If we don’t step in to control it, it will stay that way—populist movements or not. And if we don’t start learning how to create a world order for the benefit of humanity, no amount of national chest-beating will save us.

The Ukraine affair is dangerous in its own right, but even more dangerous as a symbol of a world out of control.  What the world needs now is neither uncontrolled chaos nor world government, but a set of mutually-agreed rules to forestall a fight to the bottom.  As with climate change, there is no way out other than to acknowledge we are now one interconnected world, and we will all either stand or fall together.

Lessons not Learned in Afghanistan

Much of the blame-seeking around Afghanistan is not only off-base, but damaging to our national interest.  It’s incredible that even the comparisons with Vietnam talk about the final evacuations, not the failed enterprises.  By concentrating all attention on an asserted “manageable” withdrawal, we’ve given the real perpetrators a pass.

In the last couple of days the NY Times has finally published two good articles.  One by Ezra Klein has the apt title: “Let’s Not Pretend That the Way We Withdrew From Afghanistan Was the Problem”.  In it the author goes over the real options we faced and why.  It’s a good job. My only concern is that while he is exhaustive about the options, he stops short of all the conclusions I’d like to draw.

For that, the other article is essential.  That one was by Sami Sadat, commander of the Afghan Army.  His title is “I Commanded Afghan Troops This Year. We Were Betrayed”.  His point—that the loss was not just the Afghan army’s fault—is not the main point here.  What is important is that he gives a detailed description of the reality faced by the Afghan forces, and that says quite a lot about how much had gone wrong.  There are three points to make:

1.  The war was lost the moment Trump signed the Taliban agreement.

Here’s the quote from the general:

“The Trump-Taliban agreement shaped the circumstances for the current situation by essentially curtailing offensive combat operations for U.S. and allied troops. The U.S. air-support rules of engagement for Afghan security forces effectively changed overnight, and the Taliban were emboldened. They could sense victory and knew it was just a matter of waiting out the Americans. Before that deal, the Taliban had not won any significant battles against the Afghan Army. After the agreement? We were losing dozens of soldiers a day”.

The last bit is particularly important.  Defeat is an exponential process—the likelihood of attrition depends on how bad things look, i.e. on the losses of all kinds beforehand.  Once the process starts it accelerates.  It was an astonishing mistake of US intelligence to believe we had many months, a year and a half even, before a Taliban takeover.  There was no stability once defeat took root. Biden’s late withdrawal of 1200 US troops is not even mentioned by the general, as it was never the issue.

2. There was NO exit plan ever.

Again from the general:

“The Afghan forces were trained by the Americans using the U.S. military model based on highly technical special reconnaissance units, helicopters and airstrikes. We lost our superiority to the Taliban when our air support dried up and our ammunition ran out.

“Contractors maintained our bombers and our attack and transport aircraft throughout the war. By July, most of the 17,000 support contractors had left. A technical issue now meant that aircraft — a Black Hawk helicopter, a C-130 transport, a surveillance drone — would be grounded.

“The contractors also took proprietary software and weapons systems with them. They physically removed our helicopter missile-defense system. Access to the software that we relied on to track our vehicles, weapons and personnel also disappeared. Real-time intelligence on targets went out the window, too”.

The key point is that none of these functions are transferable in weeks or even months to the Afghan army.  This is a rebuke of the entire war effort. That this gap existed means that there was no serious attempt to make the Afghan army self-sufficient.   As for the contractors, the general’s language makes clear that they had no intention of making their valuable, proprietary expertise available to anyone.

3. The Afghan government had lost the support of the population

On this the general’s comment is specific to the military:

“… there was only so much the Americans could do when it came to the well-documented corruption that rotted our government and military. That really is our national tragedy. So many of our leaders — including in the military — were installed for their personal ties, not for their credentials. These appointments had a devastating impact on the national army because leaders lacked the military experience to be effective or inspire the confidence and trust of the men being asked to risk their lives. Disruptions to food rations and fuel supplies — a result of skimming and corrupt contract allocations — destroyed the morale of my troops.”

More generally, Fareed Zakaria cites a US government poll of Afghans in 2018 that “showed that Afghan support for U.S. troops was at 55%, down from 90% a decade earlier”. That’s saying almost half the population was ready to choose an unknown Taliban regime as better than what they had.  With the rampant corruption, participation in the last Afghan election dropped to less than 25%.  The Afghan President Ghani reportedly fled through Kabul to the United Arab Emirates with $169 million in cash.

So, with all of that why were we still in Afghanistan?  That answer is not complicated.

Getting out was always going to be some variant of the mess we’ve just seen.  And there was also a moral argument:  leaving was going to hurt a lot of people in Kabul (though fewer elsewhere).  So people in government wanted to believe a fantasy—that there was a solution.  That is, the Afghan military would defend the state against the Taliban, and everyone would live happily ever after.  That fantasy trumped reality all the way down to the end. 

What can you say about Biden? 

There’s no evidence he could have done much to delay the military defeat.  He has gotten more people out thus far than has happened in other comparable situations, but he should have started sooner and that would have reduced some of the chaos.  He has not given in to the many proposals for last-minute military actions that would have undoubtedly made things worse.  (To be clear, there was no Afghan army, the US couldn’t possibly take on that role itself, and any serious military action would have put all evacuees at risk. Talks of retaining a second military airport are particularly fanciful, as the evacuees weren’t there.) He might have gotten some of the military equipment out earlier, but doing so would have undercut the Afghan army even more.  (And the Afghan President Ghani pleaded with him not to do it.) 

So you can give him a B.  It was certainly embarrassing, but it could have been quite a lot worse.

Even more important, all Biden could do was manage the exit from a failed war. You’d never guess it from all the bluster, but there was no hiding the US defeat. For real responsibility it’s worth quoting a succinct recap of US policy failures from former anti-terrorism officer Ali Soufan:

“Every administration made a lot of mistakes in this. The Bush administration made a lot of mistakes in moving much-needed resources to focus on Iraq and then focusing on Iraq. The Obama administration even sent more troops in and, for eight years, was hoping that something miraculous would happen. The Trump administration is responsible for not understanding the situation at all and opening negotiations only with the Taliban and disregarding the Afghan government and releasing 5,000 Taliban fighters without asking the Taliban for anything in exchange. Unbelievable.”

Of that list it is important to recognize that primary responsibility rests with Bush and the Iraq war. In our eagerness for the neocon-inspired invasion of Iraq, we never even tried to take the opportunity to help create a viable state in Afghanistan. Our current media-fed collective amnesia about both Bush and the Iraq war shows how little we’ve learned from our own recent history.

Lessons

1. Don’t believe in “benevolent” colonialism. 

Neither Afghanistan nor Vietnam was a special American phenomenon.  Whatever our original motivations, these were ultimately colonial wars.  Once you take over a country, the motivation of the occupier is stability at all cost.  That leads to wholesale corruption at the expense of the population and even the war effort.  The Afghan general described that situation exactly. You can get a more detailed picture here. Vietnam was the same. The classic on this subject was written in 1860—we should have figured it out by now.

We got into Afghanistan as a follow-on to 9/11.   It was up to us to help rebuild the country, schedule elections, and get out.

2. Watch out for fantasies. 

Something has to be done about an intelligence establishment that was so eager to please, that it couldn’t recognize that the fantasy had no basis in reality.  Remember there was NO exit plan.

3. Watch out for complacency, the idea that the future will just be a continuation of the past.

There is no other obvious reason why Biden was being told that the Afghan army would hold off the Taliban for six months to a year and a half!

4. Finally, going back to Eisenhower, watch out for the military industrial complex. 

For that, it’s worth thinking about who won this twenty-year war.  Not us, just forced to leave.  Not the Afghans who had to live with the fighting and corruption, and now are stuck with the Taliban. The real winners were the contractors.

Over the last 20 years of war in Afghanistan, the U.S. spent $89 billion in taxpayer dollars to fund the building and training of the Afghan National Army with an estimated $2.26 trillion in total operating costs funded by U.S. taxpayers. Ever since the U.S. government began keeping track, contractors have made up more than half of the military personnel working for the United States in Afghanistan and Iraq.  This is all the more remarkable since—as we’ve seen—their objectives were not even aligned with our national goals!

The contractors are said not to be worried at all about the end of the Afghan war.  There’s a whole new round of military modernization coming.  And we’ve never been short of wars.

China in the World Order

With China it’s unsettling enough that for the first time since the end of World War II our worldwide hegemony is under challenge.  However that’s just the beginning.  As we’ll see, that change is coupled with technological and economic factors that intensify both risks and upsides.

We need first to be clear that the challenge of China is real.  We have had other challenges in the past, most notably from the USSR, but none have had the economic might to back them up. This time we’re talking about an economy that by some measures is already larger than ours.  Those others look puny in retrospect, although the Russian collapse is dangerously seductive.  According to Bob Woodward, the Trump people were convinced that China was just like Russia, and the trade wars would cause a complete collapse in the same way.  When Xi said that the US is the barrier to Chinese national success, he was just restating Trump’s declaration that he would destroy the Chinese economy.  That of course didn’t happen, and the result was a policy that ultimately produced nothing.  Whether we like it or not, we simply don’t have that power.  The Chinese are not going away as an economic, technological, and military force.

At the same time it is equally important not to get hysterical about Chinese competition.  It’s strange how we periodically become obsessed with the idea that some centrally-organized economic system is going to leapfrog us by running things in a way that we can’t.  That happened in the fifties with the USSR (hard to imagine now) and in the eighties with Japan.  In reality the US economy succeeded by reinventing itself many times over, in a way that others did not.   For China, it is historical fact that state-run enterprises have been corrupt disasters, and the current economic miracle got its impetus from an unintended burst of local free enterprise.  Xi’s consolidation of control is no miracle cure.  China is a competitor with strengths and weaknesses. As one recent paper put it, China is not ten feet tall.

If we play to our own strengths, the worry is not that we’re going to be outcompeted by the Chinese (or undermined by Chinese stealing our secrets). It’s that we won’t succeed in creating a workable framework for international competition, and we’ll all lose.

Risks

We begin with the most basic of risks.  We’ve now had many years of Pax Americana, and people forget that history shows that world-power peace is the exception—not the rule.

The reason we’ve had peace is not human progress, international institutions, or even the rise of democracy.  It’s the threat of mutually-assured destruction.  And however much we may want to believe that all-out war is obsolete, that’s in fact a technology issue.

We can be specific.  Much has been written recently about hypersonic missiles, that would fly low at many times the speed of sound and be virtually impossible to detect by radar.  That sounds like a whole new arms race, but there’s actually no point to it so long as the balance of terror remains intact.  That we’re talking about it at all means we’re not so sure.  Reagan’s old “star wars” anti-missile shield was never more than an electoral fantasy, but now there’s plenty of current technology that’s relevant:  networks of satellites for detection, AI for decision-making, precision targeting for lasers.  China already has a nominally-defensive, satellite-linked system that enables ballistic missiles to be used against moving targets (e.g. US carriers in the South China Sea).  

A missile shield would be enormously destabilizing—North Korea could defeat the US in minutes.  (It’s interesting that as long as the system was going to be ours, we never thought seriously about what it meant!)  Who knows when or if something similar could be real.  However the world has been surprised many times by revolutionary changes in the technology of war (Vikings, Mongols, gunpowder, nuclear weapons).

We can’t assume peace; we can’t dictate the world order; we can’t wish away the image of a world trapped in a ruinous and deadly competition for dominance.  An encouraging fact is that everyone is much better off not living in such a world.  However for now we’ve chosen to divide the world into no-holds-barred competing camps.  Avoiding that division requires an act of creation—establishing a workable framework for cooperation and competition.  There are many examples of countries that failed such a challenge with disastrous consequences.   That’s our challenge here.

Making Progress

The first step to progress is to recognize that just as the risks today are higher than one might think, the potential rewards are also.  There’s actually quite a lot to say about the upside, although in the last decades it has been hard to see.

Why is that?   To repeat the obvious, the working classes in the West have been hit by two simultaneous body blows:  globalization and technology.  The result was dramatic, as shown by the following chart

Globalization has been going on forever, but China’s sudden economic development produced a major hit.  For technology the effects have been not only dramatic but accelerating.  Thomas Philippon’s recent book has a chart comparing highest valuation companies over the past six decades.  For the decade of the 1970’s the five highest valuation companies collectively were responsible for 2.4% of total employment.  For the decade of the 2010 the corresponding figure was down to .4%.  The bedrock upwardly-mobile manufacturing jobs are going away, as we continue toward a world where highly-skilled product development is the issue, and production is not.  That’s true for obvious software enterprises like Facebook, but also for pharmaceuticals, integrated circuits, and many other areas. And it’s getting worse.  AI puts a whole new class of jobs at risk, and electric cars (for example) will be much simpler in both manufacturing and maintenance. 

Thus far it has been convenient to blame everything on China, with the consequence that both political parties are promising to bring back the good old days once we stare down the evil Chinese.  (On the left  a 2018 paper by Susan Houseman is cited everywhere to support this position, though it’s actually about weakness in the US manufacturing sector!)  That mindset is dangerous on two grounds:  it’s a kind of scapegoating that gets in the way of rational action, and it obscures other serious problems that need to be addressed.  To get past that we need to discuss national prosperity and population welfare as separate issues.

National Prosperity

For prosperity the key point is that China has actually turned a corner in its effect on the rest of the world.  Although in aggregate terms China remains a very poor country (number 108 in per capita income, far below Mexico for example), the country is so large that its new middle class now buys enough to be a positive driver for the rest of the world economy.  Even with the current market access restrictions, China is the largest national market for Mercedes-Benz and a major market for film industries from everywhere.  The balance of payments deficit was reduced by half under Obama.  For the EU, more export-oriented than we are, the effect is even more pronounced.  (Intellectual property theft was also down under Obama.)

What this means is that, as opposed to the situation in the past, China has the potential for transforming itself from a drain on the world economy—producing more than it consumes—to the opposite.  Raising the living standards for a billion people is an enterprise with potentially many benefits for everyone concerned.  Nothing says that’s going to happen, but the difference is real.  The current situation is no longer dictated by the poverty of China, it is instead an expression of the relationship with China as it stands.  How do we make things better?  Well, if we want China to play by the rules, we need better rules.  As for motivation, growth in the West means growth for them (and, whether we like it or not, success for the ruling party).

The precondition for progress is establishing appropriate conditions for trade, that is to say a notion of fair trade which is comprehensive and up-to-date.  The comprehensive part means we need to cover many items that are not currently included, including labor conditions, environmental issues, international standards for taxation.  There is the potential for trade policy to become a vehicle for raising living standards worldwide.  Stated simply, we’ve had globalization for the rich; we need globalization for everyone else

There are of course no guarantees.  Some elements, such as environmental issues, may be clear areas of common interest.  Labor conditions will be more difficult.  Details of market access will need to be worked out.  It’s important to have everything on the table.  It is particularly important that these are not rules imposed by us on others but norms of behavior for everyone in a common enterprise.

That difference is important in any kind of negotiation, but it is of particular importance for China.  We don’t talk much about it, but China experienced some of the worst of Western imperialism extending well into the 20th century.  That shared history makes Xi’s nationalism easy.  If we want to get what we want, the last thing we should be doing is pretending it’s still true.

What Trade Rules Won’t Fix

Just as China wasn’t responsible for all problems, fixing China (even in the best case) won’t fix everything.  Two points in particular should be emphasized.  First, the kind of national prosperity we’ve been discussing thus far says little about personal welfare.  People are still going to lose jobs both from ever-accelerating technology changes as well as remaining international competition—regardless of fairness.  We’ll still be stuck with the prevailing inequality in society.   We’ll still have all of the dislocations that will result from the economic transformations with climate change.  Those are our domestic problems to solve. 

Blaming China has made it possible to ignore that reality.  Until recently in fact the prevailing ideology was that there is no additional problem of population welfare—the private sector would do it all.  So for loss of good jobs the only issue was globalization, and the only means to address it were tariffs and tax cuts.  Four years of a deficit-funded bubble with huge tax cuts to business did almost nothing for real wages or upward mobility.

Currently there are outlines of a solution.  Particularly with the transitions required by climate change, there is no shortage of work.  With the increases in corporate profit margins and high-end incomes there is no shortage of money—but workable taxation is a big issue.  The public sector needs to put all that together:  to see that the necessary work gets done and the population is supported with a national infrastructure that includes education at all levels, healthcare, so forth.  It’s a work in progress.

The second point to make is that we have tacitly assumed we will maintain our national competitiveness.  While we can see what has been successful in the past, there is no guarantee it will continue in the future.   That isn’t theory.  We just spent four years fighting science, demonizing foreigners, and favoring existing companies over new entrants.  All of that hurts.  It’s our job to play to our strengths.

Parallels with Climate Change

With that we return to the first issue—national prosperity.  For that we want to stress parallels with what’s happening for climate change.

With climate change we’re also presented with a very strong common interest, but a non-trivial task in breaking that down according to individual national interests.  As a country we haven’t thought much about that, since the national dialog has been primarily about getting our own act together, with the assumption that all the others just have to do their jobs too.  However the reality of the situation is that we in the US have twice the per capita CO2 production of any other major emitter in the world,

and we in the West are almost 100% responsible for the level of CO2 currently in the atmosphere.  The vast portion of humanity is going to have to sacrifice for our benefit, and it’s non-trivial to define acceptable justice.

Nonetheless the Paris agreement shows that with good will it’s possible to make progress.  It will require continuing work, with more commitment from the developed world, and also with a mechanism for follow-through on commitments (in the absence of any such system today).  But thus far the strength of common interest seems motivation enough to keep it going.  It’s worth noting that the Montreal Protocol to ban CFC’s (and preserve the Ozone Layer)—one of the most successful efforts at international cooperation ever—also proceeded as a series of successively more demanding steps:

So it’s no surprise—and no cause for panic—that the current Paris goals don’t yet get as far as we need to go.

The parallel with China is precise.  To keep the world economy sane and growing, everyone needs a stake in the game.  In practice it needs to be negotiated between the West and China with at least some account taken of the interests of the rest of the world.  But the issue is less a resolution of differing national interests than a recognition of the magnitude of common interest.  One can even argue that the climate discussions are a necessary prelude to the broader economic discussions that need to take place.

The WTO seems the appropriate vehicle for negotiations, although its capabilities need to be extended to deal with the broader definition of fair trade. Before Trump’s election all parties expected such discussions would begin—including of China’s continuing special status as a developing country.  Instead we got a repudiation of all international rules, in favor of an imagined omnipotent USA.  We’re now going back to the game with the doubled leverage of allies beside us, but with an adversary who views us (particularly after January 6) as weaker and less reliable.  What’s more we’ve spent four years strengthening the militant anti-western side of the Chinese Communist Party.  Certainly there’s a job to do.

It may seem strange to put such emphasis on the WTO since “Bill Clinton let China in the WTO and there was nothing we could do about the Chinese assault on American jobs.”   That truism is actually an example (among others) of what you might call bipartisan revisionist history (the left and right united against the center).  In fact the main issue raised with China’s behavior has always been currency manipulation, which was in no way permitted under WTO rules.  And as the job loss chart (from earlier) makes clear, the loss of American jobs was a phenomenon of the George W. Bush presidency—when we were too busy with the Iraq war and the financial crisis to press our case about anything else.  The WTO is what we make of it; the vast majority of US WTO cases have in fact succeeded.  For now it’s the best game in town.

Issues for Today

As a last topic, we want to be clear that we are in no way minimizing the seriousness of the immediate issues that divide the US and China.  One short list makes that clear:

– Taiwan

– Uighurs

– Hong Kong

– Islands in the South China Sea

– Regime-incited nationalism

The first point deserves special comment, because it shows how high the stakes can be.  On one side it is a matter of Chinese national pride, instilled by state propaganda for every school child.   On the other it is not only a matter of US national commitment, it’s also critically strategic.  As one example, Taiwan is the home of TSMC—the worldwide leader in IC manufacturing technology.  Every new iPhone has an TSMC processor.  (This example also shows we can’t solve global supply chain issues by just assuming we’ll bring it all home!)

Other articles have talked about scenarios for de-escalating this complicated situation.  We’re not going to go through those here, but it is nonetheless worth saying a few words about how each of the issues fits with the strategies we’ve just discussed.

The Uighurs and Hong Kong are issues that the Chinese view as internal matters.  Outside of China we can attempt to exert pressure by economic threats, but we’re in no position to change that point of view.  Four years’ worth of dictates have instead made it worse–a matter of sovereignty versus capitulation.  Ideally by bringing China into a broader realm of international standards for behavior, we can attempt to make both—and particularly the Uighurs—a different class of issue:  what it means to belong to the international order.  Hong Kong is the harder issue, because the threat to the national control is bigger.  However it’s easier to think about compromise once the sovereignty isn’t the main story.

The South China Sea is a national security question.  More than two-thirds of Chinese trade comes via the South China Sea.  China, like us, wants complete control of its immediate strategic environment.  We after all have the Monroe Doctrine.  Thus far we’ve taken the worst possible approach, asserting US control of the seas for any purpose we choose.  That’s going to be hard to walk back, but the only way to do it is by making freedom of the seas a matter outside of national whim, perhaps linked to some kind of regional agreement.  It won’t be easy, but we can at least dial down some of the immediate pressure.

Regime-incited nationalism is the usual face of fascism.  We heighten it by continuing to act as an imperialist power—asserting that it is our decision whether to continue to allow Chinese economic development.  We have limited ability to change the issue, as it is a tool the regime uses to maintain its power.  However, the more contacts there are and the less rabid our own vocabulary, the better the chance to cool it.  It’s worth noting that in the Nazi era, most Germans justified Nazi aggression by a belief that Germany had been purposely shoved aside.

Finally we return to Taiwan.  The only thing you can say is that it’s clear how much the issue means for both sides.  If cooperation is necessary for continued prosperity, then both sides need to find a way to save face.  That’s what we were doing for decades.  Trump and Pompeo were part of the change, but it was probably happening on Chinese side anyway.  The only way out is to strengthen the motivation for sanity.  For that, common interest (with a united West) is always better than military threats.  Even today, the impediment to invasion is more economic than military.  International institutions strengthen both the carrot and the stick—you’re giving up more and making retaliation more comprehensive and certain.

All that being said, we end by again emphasizing the parallel with climate change.  Climate change is a pending catastrophe that is forcing the world to come together in a more closely-coordinated way than ever before.  As with climate change, the China-US relationship constitutes a critical issue that can only be resolved by strengthening international frameworks for both cooperation and competition.   The world can be a better place, or we’ll all face the consequences.

How We Won the Cold War

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“File:Map-Flag of the Soviet Union.svg” by NuclearVacuum is licensed under CC BY-SA 3.0

We hear every day how we need to get tough for our new cold war with China.  The unstated subtext is that threats and bluster are the “getting tough” that’s going to win. In fact we know exactly what won the last Cold War.  It’s worth paying attention to what that was.

The dynamism of our economy won the last cold war.   Our technological base reinvented itself many times over, and the top down economy of the USSR just couldn’t match it.  There were many individual factors behind the collapse—low growth, corrupt state enterprises, spending on defense, oil price collapse, Chernobyl.  But what it all came down to is that the Soviet economy collapsed because it just couldn’t find the resources to keep up.

Many factors made the difference—the historical strengths of the United States:

– A free market for new technologies.  A venture capital industry supported by anti-trust enforcement to protect new companies from powerful old ones.

– The US as world’s best destination for entrepreneurs from everywhere to realize their dreams.

– Openness to ideas from everywhere and active participation in international organizations of all kinds.

– Government support for pure research–to be on the forefront as new developments translated to opportunities.

– Expanding equality of opportunity, so ideas can come from everywhere.

The USSR had a well-trained population of elite engineers and scientists, but ultimately they couldn’t compete with the ability of the US model to reinvent itself and grow.

What can we say about the current situation with China?  There are three points:

  1. The rise of China actually followed the US model.

One part of this is familiar—China invested in its people:  education, infrastructure, health care, etc.  The regime tolerated no disagreements, but it put money (as we used to) into the environment necessary for success.

However the bigger part is less-discussed—what kicked off the Chinese miracle was an accidental surge of free enterprise.  As a weakening of collective economic control, Chinese municipalities were freed to carry out their own businesses once obligations to the state had been met.  That minor bit of freedom took over the economy.  Independent municipal businesses became dominant to the point that they dwarfed the hugely-corrupt state-run enterprises.  Municipal businesses grew into the independent private sector.

  1. Under Xi, China is abandoning that approach in favor of a return to central planning and control.

Xi is a princeling—a child of former revolutionaries brought up to believe he was born to rule.  All of his recent actions have been directed at crushing independent forces in the Chinese economy.  Appointments have been based on loyalty above all.

China is back to the old Soviet and Chinese world of massive state enterprises and a dictated economy.   That won’t change the immediate future, but we have no reason to despair of our ability to compete.

  1. Under Trump we are similarly abandoning our strengths.

Trump, like Xi, is an autocrat who view himself as the all-encompassing genius who needs to run everything.  He picks winners and losers with tariffs.  He awards exceptions to supporters.  He ignores real problems (such as Covid) that he doesn’t want to deal with.  Job appointments are based on loyalty over competence.  Every one of the listed US strengths is at risk:

– New enterprises are sacrificed to the existing powers that be.

– Xenophobia and nativism are pushing entrepreneurs elsewhere.

– Global participation is discouraged.

– Science is discredited and only mainstream technologies (e.g. AI) or Trump whims are funded. Climate change can’t even be mentioned.

– A political strategy of divisiveness means we’re fighting internally rather than drawing on everyone for progress.

 

We didn’t beat the Russians by mimicking their authoritarian control and top-down economy.  We won because they couldn’t compete with our ability to reinvent ourselves over and over again.  We have that opportunity today, but we’re losing it to the false god of dictatorship.

Democracy is not a nicety but the core of our success.

Dictatorships lose.  All-powerful leaders make disastrous mistakes that cannot be remedied.  They can ignore the well-being of the population.  They create massive corruption that cannot be contained.  All these tendencies are visible today (Covid alone shows several), and the effect is—as always—accelerating.

We still like to talk about the power of democracy and free markets, but both are slipping away.  Voter suppression is an openly-discussed goal.  Anti-trust enforcement has effectively ceased to exist.  The power of corporate lobbyists has starved the public sector (including infrastructure of all kinds) and defended the economic status quo against all comers.

Our problems today are not weaknesses of democracy but an indication of how far we’ve strayed from it.  There’s no reason to despair for our competition with China—or for the country generally.  It’s just a sign we have to get back to doing what we’ve always done best.

The Coronavirus and the Limits of Capitalism

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“Lankenau Hospital” by Montgomery County Planning Commission licensed under CC BY-SA 2.0

It’s easy to look at the coronavirus as a one of a kind.  After all, who expected this cataclysm that came from nowhere?   How could anyone have predicted it?

In fact the world is full of low-probability events that you have to care about.   The coronavirus is on a par with airplane crashes and oil-rig explosions.  Capitalism is not good at dealing with any of them.

There’s a myth about that sort of thing.  Of course we don’t need airline or aircraft regulation, because the companies in question know what a disaster would mean and will take care that such things don’t happen.  That’s a nice story, but it’s false.   People don’t get promoted because of events that didn’t happen.  They do get promoted by saving money wasted on something that’s never going to occur.

If you’re going to stop that sort of thing from happening, you need a different mindset.  Government has to spend money on regulation and public health and safe, comprehensive infrastructure.   No one else is going to do it.  We now know unequivocally that we decided we didn’t have to care about the CDC.  It has come back to haunt us.  There’s more where that came from.

In fact there’s a whole bunch of other things we’ve decided we don’t have to care about.  After all, “I don’t have to care” has been the liberating elixir of our age.  Many of these we’ve talked about before, but it’s worth recalling some here:

Climate change

Avoiding a depression (clearly relevant now)

Nuclear proliferation

Losing our edge in science and technology

We’ve washed our hands of all of this, blithely punting to a private sector that is no more prepared than for the coronavirus.

The message from the coronavirus is that bad things really can happen, no matter how much we may want to avoid thinking about them.

The coronavirus is the canary in the mine.   We’ll get over it somehow, but we’ve had our warning.