Another Obama Foreign Policy Miss

The ongoing dustup between Iran and Saudi Arabia over the Saudi execution of a Shiite cleric (Nimr al-Nimr) and three other Shiites reflects another foreign policy foul up by the Obama administration.  Instead of tamping down sectarian tensions in the Middle East, the Obama administration (and its predecessor, the George W. Bush administration) made it easier for conflict to flare up.  A "democratically elected" government was established in Baghdad which, not surprisingly was Shiite dominated because Iraq is majority Shiite.  But adequate protection for the interests of Iraqi Sunnis, Kurds and other ethnic or religious groups wasn't ensured.  So Iraq degenerated into sectarian warfare, with the Sunni-dominated ISIS readily able to seize vast amounts of Sunni Iraq without facing much of a fight.  For the same reasons, it's been impossible to organize a military force in Iraq that can dislodge ISIS, except at the margins.

The Obama administration stood by the sidelines as Syria descended into civil warfare, without having a discernible, let alone coherent, policy.  The only line in the sand drawn by President Obama was to warn Bashar Assad against using poisonous gas, and when Assad did just that, Obama flinched.  His flinch paved the way for Vladimir Putin to start mucking around in Syria, a role that Putin has now expanded to a much larger military commitment to Assad.  Iran has been supporting Assad, because he is a member of the Alawites, a religious group affiliated with the Shiites.  So we have Russia and Iran working against the Saudis and their allies, who have been supporting Sunni interests in Syria.  The war in Syria is now firmly sectarian.  The ideals of the Arab Spring died a hard death there.

In Yemen, Shiite rebels have booted the Sunni ruler, and Iran is supporting the Shiite side of a civil war against the Saudi-supported Sunni side.  The U.S. used to have a Special Forces presence in Yemen, but those troops reportedly have left the country.  So we have in Yemen a second proxy war between Iran and Saudi Arabia.

The Obama administration has been trying to sell the nuclear accord with Iran as a great diplomatic achievement.  But the Saudis are nervous about the agreement, apparently believing that it doesn't truly restrain Iranian nuclear ambitions.  So, even while Obama thinks he's getting somewhere with Iran, he's losing influence over the Saudis.  It shouldn't be a surprise that the Saudis are getting feistier.  They evidently don't believe they can count on the U.S.  One would think that the U.S. might have restrained the Saudis from executing Nimr al-Nimr.  But either the administration didn't know the execution was scheduled (which would seem an intelligence failure) or it didn't understand the importance of the execution to the Iranians (which would seem an intelligence analysis failure). 

At the same time, the nuclear accord appears to have emboldened the Iranians.  They fired missiles from a ship that was hardly a mile away from an American aircraft carrier in the Persian Gulf.  They've announced they'll increase their ballistic missile capabilities, apparently in violation of a UN resolution.  But neither action generated a response from the U.S. other than commentary by official spokespersons along the lines of "naughty, naughty." 

The President reportedly is holding back on sanctions against Iran because he wants to implement the nuclear accord and strengthen the hand of Irans moderates.  The problem is we don't really know who is in control of Iran (another intelligence failure).  Implementing the accord means rolling back sanctions and allowing Iran to sell more oil internationally and otherwise engage in more international trade.  This will increase Iran's financial strength.  Who really controls that strength--Iranian moderates, Iranian radicals or Iranian terrorists?  No wonder the Saudis think they may have to go their own way.  If Obama is, in effect, going to strengthen Iran, the Saudis have to find ways to push back.

President Obama is dead set on avoiding conflict.  That much is clear to everyone.  Assad steps across his line in the sand and he does nothing.  Iran engages in provocative behavior after the nuclear accord, and he does nothing.  Putin has Russian jets bomb American-supported moderate rebels in Syria and Obama does nothing.  While almost no one in America wants our ground troops back in the Middle East, it's clear that the administration's policies are heightening sectarian tensions in the Middle East.   Just as the Obama administration was unduly focused on al-Qaeda until ISIS literally blasted its way into the administration's consciousness, it's now too obsessed with combating ISIS and not focused enough on the root problem of reducing sectarian tension.

The Middle East could degenerate into regionwide sectarian warfare in a flash--indeed, it's already partly there.  ISIS has been able to hold large amounts of territory only because sectarian tensions have been allowed to flare up.  It's important now to try to get the Iranians and Saudis to stand down.  The more Obama appeases Iran, the more provocative Iran becomes.  The recent Iranian Persian Gulf missile firing and ballistic missile program boost should be met with sanctions and a delay in the implementation of the nuclear accord.  The Iranians need to be firmly told that if they want to be re-admitted to international society, they have to be good citizens.  At the same time, the U.S. should quietly reassure the Saudis that it stands with them, and that they need to cool their jets.  Saudi arms should be twisted if necessary.  In other words, Obama has to stop appeasing and get tough with the toughs in the Middle East.

If the U.S. can lower sectarian animosity in the Middle East, it may be able to put together a working alliance to defeat and eventually destroy ISIS.  But if sectarian tensions keep increasing, there will be no workable solution for dealing with ISIS, and more conflict will likely erupt, further eroding American interests and influence.  ISIS could survive and perhaps even prosper.  It seems unlikely, however, that Obama, now firmly ensconced in his Ivy League populated bubble, will somehow connect with the realities of foreign relations.  That's a shame, because it means that he, like George W. Bush before him, will leave a foreign policy mess for his successor.

Obama's Illusion

Yesterday, President Obama said that the United States is safe from attacks by ISIS.  (See http://www.cnn.com/2015/12/03/politics/barack-obama-isis/index.html.)

Today, we have news that the female San Bernardino shooter, Tashfeen Malik, pledged allegiance to ISIS.  (See http://www.cnn.com/2015/12/04/us/san-bernardino-shooting/index.html.)

The President looks like a fool.  He's been snookered repeatedly by ISIS.  Apparently, until recently, he believed that the U.S. had contained ISIS in the Middle East.  He was then shaken by the Paris attacks, which he described as a "setback."  If he'd had a realistic view of ISIS, he wouldn't have seen those attacks as a setback.  They were simply part of ISIS's obvious strategy of cross-border expansion, and something that was likely to happen.  Before the Paris "setback," ISIS had already spread its tentacles into Asia and Africa.  Why would Europe and North America be immune from ISIS's metastasis?

President Obama is living an illusion.  ISIS is not contained and, as recent events graphically demonstrate, we aren't safe from its attacks.  Obama is now in the seventh year of his Presidency, and is understandably concerned with his legacy.  He seems to want to be able to claim that, while in the White House, he contained ISIS.  This apparent desire seems so strong it may have, in his mind, overwhelmed his capacity to accept the truth.  Human beings are notorious for not letting the facts interfere with their strongly held beliefs and the President seems all too human.

If Barack Obama wants a strong, positive legacy, he has to come to grips with reality.  He can't blame America's intelligence services.  He can't blame all the yes-people with whom he's surrounded himself.  He can't blame gun control laws--gun control (such as France's very strict regulations) won't stop a dedicated enemy like ISIS which couldn't give a rat's left ear about the law.  He has to blame himself.  He is the one who has failed.  His foreign policy legacy is in tatters.  He won't begin the process of recovery until he's hit bottom--and he's laying in the gutter now.  He has to face the fact that ISIS is much tougher than he is.  They've outwitted and outmaneuvered him.  They're winning. 

Obama may still have time to turn the tables.  Even though ISIS is a lot tougher than he is, he has much more power--military, diplomatic, technological, financial and moral.  If he comes to grips with reality, he might turn the tide.  This doesn't mean that hundreds of thousands of U.S. troops need to go back to the Middle East.  It doesn't mean that the NSA should be allowed to trample all over Americans' Constitutional rights.  It does mean that the President has to realize that this is war, and you don't win unless you commit to winning.  Wars aren't won by containing the enemy.  They are won by defeating the enemy, and perhaps in this case, destroying them.

Everyone's a Loser in Syria

With Russia's entry into the bag of dog doo that is Syria, the chattering classes are all astir over who's up, who's down, who's winning and who's losing.  Russia is the usual nominee for winner.  But what exactly has Russia won?  It can't win the war.  Between ISIS, the Kurds and various other rebel groups, most of Syria is no longer in the hands of the Assad regime.  Russia can't afford to commit the tens of thousands of ground troops, equipment and air power that would be needed to retake and hold all this ground, and the Assad regime's army appears too depleted to mount the major offensives that would be needed.  All Russia can do is prop up an Assad rump regime in western Syria that would be under constant attack.  That would mean an indefinite commitment to a war with no end in sight and no possibility of a Russian victory.  

Russia's puppet in Syria, Bashar al-Assad, isn't a winner; he has only avoided becoming a big loser.  His diminished army can't reconquer what he's lost in Syria.  Russian air strikes will allow him to bolster his lines and tighten up his defenses.  But a few dozen Russian air craft don't begin to provide enough air power to support an offensive that could retake all of Syria.  At the same time, Assad's authority is diminished.  Now, he will have to do whatever Putin tells him to do, and like it, as well.

The Iranians, who apparently negotiated an alliance of sorts with Russia, have had their weakness revealed.  For all their bluster and unacknowledged efforts to build nuclear weapons, they don't have the strength to prop up a two-bit dictator in a small nation.  They had to call in first, their Hezbollah allies, and then Russia.  Maybe the Iranians are claiming a propaganda victory.  But they just ceded power to Vlad the Invader, and it's generally a bad idea to give power to an aggressive despot.  Has the Islamic Iranian government forgotten that one reason Shah Mohammed Reza Pahlavi allied himself so closely with the United States was because the Russians wanted to take over Iran after World War II?

The Shiite dominated government of Iraq has cozied up to Russia and allowed Russian military planes to fly over Iraqi air space in order to reach Syria. Maybe it had no choice; its Iranian handlers could have told it to cuddle up to Putin.  But, reality is you can't be an ally of America and an ally of Russia.  If the Iraqis snuggle up to Putin too much, America may not provide as much military equipment or intelligence to Iraq as it once did.  It may see less value in supporting a Shiite government in Baghdad and perhaps more value in supporting the Kurds.

The Sunni rebel groups--ranging from ISIS to the various metastasizes of al Qaeda to the tiny and shrinking handful of moderate rebels supported by the United States--are ships out of luck.  They can't win, not with Russian military assets located in and protecting western Syria.  They will be battered by Russian air power, and will have to hunker down.

Saudi Arabia and its Sunni allies have quietly been supporting various of Assad's opponents, hoping to unseat him and install a Sunni-friendly government.  That ain't happening now, not with Russian soldiers in Latakia.

The Kurds have enjoyed notable success in Syria, carving out safe havens for themselves and others who aren't Sunni or Shiite crazies.  But Russian air power will likely preclude further Kurdish gains.  The Kurds will have to concentrate on holding what they have.

Turkey has been fighting Russia for centuries.  Now, with Russian military aircraft in Syria, the Russians just flanked Turkey and can hit it from two sides.  Not that Putin has expressed any unfriendly intentions toward Turkey, but given the centuries of war between these two nations, nothing needs to be said.

Israel has been fighting various Russian allies almost since its inception.  Never, however, have Russian military assets been so closely positioned to Israel.  Had Iran been so brazen as to station military aircraft in Latakia, Israel's more advanced air force would have swarmed in the next morning before dawn and walloped the warm living yogurt out of the Iranians.  But Israel cannot attack Russian forces.  It can only watch, and hope that Syria proves to be a hopeless morass for Russia.

And last, but not least, the United States has seen its modest influence in Syria diminish even more.  By propping up Assad, Putin precludes any possibility of an American victory.  Not that it matters since, at this point, America isn't even really engaged in Syria.  The Obama administration issues a steady stream of press releases about Syria, but it's doing little more than talking. Since it's not engaged in Syria, it doesn't have the leverage to get the Russians out.  Hopes that Russia will join hands with the U.S. in attacking ISIS are delusional.  ISIS has weakened America's position in the Middle East.  Why would Putin want to weaken ISIS, which is doing the dirty work for him?  All he needs to do is prop up Assad, his puppet in Syria, while ISIS and America batter away at each other, neither able to conclusively defeat the other.

In the end, the absence of anyone strong enough to impose peace and order in Syria means that the country will be de facto partitioned.  That's what happened to Yugoslavia.  It's what's happening now in Iraq.  The flood of refugees into Europe will continue.  The truth is everyone is a loser in Syria.

Obama's Irrelevance

Barack Obama is becoming irrelevant.  With a Republican-controlled Congress, he cannot implement much of his agenda.  When he tries, he has to ally himself with the Republicans, as he recently did on trade policy.  The result was to aggravate the Democrats in Congress, who used the moment to extract concessions of their own.  Now, the Republicans don't like Obama, because he's a Democrat.  The Democrats don't like Obama, because he's not really a Democrat.  And Obama finds himself without any real friends in Washington.  Not that anyone has real friends in Washington, except maybe their dogs.  

ISIS does its best to give the President opportunities to shine.  With every atrocity, the extremists provide another excuse to drop a smart bomb or authorize a Special Ops raid on the hideaway of some senior nasty guy.  But in the war against terrorism, there is no Omaha Beach, no Bastogne, no bridge at Remagen, no unconditional surrender.  And there won't be much opportunity for a President to build a lasting legacy. 

The President would like very much to pivot toward Asia.  And smaller Asian nations, watching China literally construct territory in the South China Sea, would like America to swivel their way.  But the increasing chaos of the Middle East keeps sucking the President into its vortex.  He dreams of detente with Iran, seemingly unaware that making nice nice with the ayatollahs will probably increase the desire of Saudi and Gulf State Sunnis to support Sunni insurgents in Iraq and Syria (possibly including ISIS) in order to counterbalance growing Iranian power.  A gain in stability could be met with an increase in instability.

But even as Obama recedes into the background, the Republicans can take no comfort.  They will achieve little in Washington without control of the White House.  And they're bogged down by a mosh pit full of Presidential hopefuls, none of whom have captivated the electorate.  Perhaps they, too, are fading into irrelevance.

Malaysia Airlines Flight MH 17: Putin's Money Problem

Inevitably, lawsuits will be filed over the shoot down of Malaysia Airlines Flight MH17 in eastern Ukraine.  Typically, the plaintiffs' attorneys will name as defendants just about everyone who had any connection with the shoot down and his uncle.  The airline itself will surely be a defendant.  But we know that.  What's interesting is that Vladimir Putin might, depending on circumstances, be a defendant.

In a civil lawsuit, such as those that will be filed, legal liability does not necessarily depend on proving that the defendant deliberately pulled the trigger or ordered the downing.  A person who was negligent or reckless with respect to supporting and arming the rebels in eastern Ukraine (assuming they're the ones who actually fired the missile) might have civil liability.  Information reported indicates that Flight MH 17 was following a well-established international route at a cruising altitude of 33,000 feet, which is typical of commercial airliners.  Just what do you think might happen if you give a bunch of Ukrainian rebels under air attack from the Ukrainian air force a missile system capable of reaching that high?

Since the Ukrainian separatists might not have the expertise to operate a missile system such as the one that evidently downed Flight MH 17, Russian personnel may have had their eyes on the radar screen and fingers on the trigger.  If so, the link to Putin may be strengthened, and his potential for personal liability increased.

If Vlad faces potential personal liability to the Flight MH 17 plaintiffs, he could have a serious money problem.  Although he denies having money stashed in the West, news reports have suggested he may control tens of billions of dollars of assets, maybe as much as $50 billion.  The plaintiffs' attorneys and the insurance companies that make payouts to MH 17 claimants have a powerful incentive to hunt down that money, if it exists.  And who knows?  Maybe they'll succeed.  In that case, Vlad could lose some or all of his hell or high water fund.

The nation of Russia, too, might be liable if it is shown to have provided the missile system.  And it's potential for liability would be heightened if Russian personnel actually operated the missile system.

There is historical precedent for holding bad actors on the international scene liable for civil liabilities.  In 1988, Libyan agents bombed Pan American Airlines Flight 103.  The next year, Libyan agents bombed a commercial airliner flown by UTA, a French airline (UTA Flight 772).  In both cases, the nation of Libya ultimately paid substantial sums of money (totaling billions of dollars) to settle civil claims. 

One big problem for Vlad is that the toothpaste is out of the tube and he can't put it back.  With the plane already shot down, all he can do is scramble to cover his butt.  Current news reports indicate that heavily armed men of uncertain identity are blocking international investigators from getting to the crash site.  Perhaps other men of uncertain identity have recovered the black box and . . . well, maybe the black box will be another victim in this tragedy.  Possibly, many bankers in Western nations are working day and night to shift assets of shadowy Russian entities to new and more obscure locations that are likely to entangle the curious in a briar patch of banking secrecy laws.  But Russia itself can't disappear, nor can it conceal all of its assets. 

The Obama administration has been accused of taking a tepid tack on sanctions over the Russian invasion of Ukraine.  European nations have been criticized for being even more equivocal.  But, to make a living as a plaintiff's attorney, you have to be as shy as a great white shark.  And, unless they have accidents with poison-tipped umbrellas, plaintiffs' counsel for Flight MH 17 claimants may be relentlessly pursuing Vlad and Russia for years.

The Limits of Globalization

Russia's seizure of Crimea reminds us that globalization isn't all it's cracked up to be.  The fall of the Soviet Union led to self-satisfied proclamations in the West about the triumph of capitalism and history ending in a glowing halo of liberal democracies.  Economic globalization would supposedly lead to worldwide reallocation of capital and resources to ever more efficient applications, with the result that economic tides would rise everywhere and prosperity would simmer in every pot. Nations and peoples worldwide would become increasingly interdependent and interlinked, making mutual tolerance in everyone's pecuniary interest.  Pots would melt around the world, diversity would be embraced, and preschoolers everywhere would learn the lyrics of Kumbaya.

Russia is interlinked with the rest of the world today:  economically in the energy markets and the financial markets, and securitywise with America and Western Europe in terms of dealing with Islamic radicals.  But none of that made a difference when Ukraine moved toward closer links with the West.  The centuries old Russian imperial imperative--that the Eurasian heartland be controlled from Moscow--howled.  Russia endeavored to maintain strategic geographic advantage by snatching control of Crimea's ports and naval bases, securing military and trade access to warm water.  Political machinations inside Ukraine have increased, in an effort to impede its Westward shift.  Russian troops in large numbers coincidentally gather for exercises within spitting distance of Ukraine's borders.  The economic sanctions imposed and threatened by the West have had no discernible impact on Russian policy. 

Globalization was an illusion fancied by people who fancied themselves elites.  This fancy illusion could be maintained as long as one cultivated ignorance of history.  But globalization is nothing new.  Europe in 1913 had extensive cross-border economic and financial relationships.  The European elites of the day were multilingual, cosmopolitan and cultured.  Somehow, none of that prevented the ignition of World War I over . . . well, nothing.  The most ridiculous war ever fought, World War I resulted in 20 million dead and peace terms imposed on Germany that were so harsh they practically guaranteed another war.  And that war--the Second World War--would require only 21 years before exploding in a frenzy of land grabs disturbing similar to what Vladimir Putin is doing now.  Whatever economic, financial, cultural and other ties are fostered by globalization, they don't trump the tribalism that characterizes almost all peoples in Europe, Asia and Africa.

Tribalism is difficult for Americans to grasp.  Having built a remarkably successful, diverse nation, Americans struggle with the idea that narrow concepts of group, based on cultural and historical ties, could somehow be so important as to justify conquering and killing.  Surrounded by the enormous economic benefits of the Melting Pot, Americans don't understand why other peoples can't embrace tolerance when tolerance will allow them bigger shopping sprees at the mall. But history tells us that you have to understand and deal with other peoples' irrationalities.  War, after all, is essentially always irrational.  But there are plenty of wars, all the time.  A smart foreign policy incorporates the need to consider and address other peoples' motivations, whatever they may be.

Economic sanctions have a role in America's and Europe's response to Russia.  But it would be a mistake to think they will be enough.  The sheer exertion of power will also have a place.  This doesn't mean triggers need to be pulled.  Strengthening NATO would get through to Putin, whose attention you get only if you exert power.  A pragmatic alliance with China should be sought (recall that Russia and China fought brief shooting wars in 1929, 1934, 1937 and 1969, so the Chinese have no illusions about Russian intentions).  The Japanese, who fought two wars with Russia in the 20th Century, should get a fist bump and more.  Unavoidably, America's Cold War coalition will have to be rebuilt.  And that's okay.  What's not okay is to believe that reason, plus maybe a few trade deals, will bring Putin around.

How Putin Makes America Look Good

Not long ago, America was having a lot of bad hair days in foreign affairs.  The war in Iraq ended without stirring speeches or victory parades.  The war in Afghanistan is winding down, but won't have a prettier conclusion.  America led from behind in Libya and messed up in Benghazi.  Then, America led from even farther behind in Syria and, not surprisingly, got an aviary flip from the Assad regime when President Obama objected to the use of poisonous gas.  To avoid being totally blown off by a two-bit tin pot dictator, the Obama Administration had to work with Vladimir Putin's autocracy for a face-saving compromise that still isn't near full implementation.  America's grand strategy of pivoting toward Asia has floundered as extremism of numerous varieties keeps provoking eruptions in the Middle East and Europe.

Now comes Vladimir Putin--let's call him Vlad the Invader--who puts the shine on the United States.  Using the most transparently farcical of pretexts, Putin seized Crimea from Ukraine.  Okay, so there was a referendum in Crimea as to whether or not to "validate" the Russian land grab.  But with thousands of Russian troops "guarding" the polls to ensure "integrity" to the voting process, we knew how the vote would turn out before the polls opened.  There is nothing America can do to prevent Russia's annexation of Crimea, just as there was nothing America could do to stop Putin's 2008 land kleptomania in Georgia.

But America can and will react.  The EU will talk a lot--and then talk some more.  It will issue a few condemnations and maybe even an excoriation.  But sanctions?  Well, let's talk some more. 

America's sanctions will be primarily economic.  And Russia will respond in kind.  America's economic interests will suffer.  But Russia's economic interests will suffer more.  Not necessarily in terms measured by dollars (or rubles), but in terms of relative pain.  Russia has a much smaller and weaker economy than America.  And Russia's economy is growing slower, with continued prospects for slow growth.  Crimea requires significant subsidies, which will further drain Russia's resources, along with the added cost of all the military "exercises" the Russian Army is staging with walking distance of the Ukrainian border.  From a strategic standpoint, Russia's nuclear arsenal is a match for America's.  But Russia's economic arsenal is far weaker.  And Russia's energy customers and trade partners will look elsewhere for supplies and opportunities, not wanting to give leverage to a bully with a powerful military.

The Cold War was primarily an economic struggle.  America and the Soviet Union engaged in a 50-year competition to build to the most advanced and powerful military.  Arsenals cost money, and America's vastly greater wealth left the Soviet Union moribund, unable to deliver prosperity or even anything approaching a First World standard of living for its citizens.

As America and Russia swap sanctions, it is important to keep in mind that, realistically, the goal isn't to force Russia out of Crimea.  That won't happen.  The goal is to turn the crisis into an opportunity to make America once again the world's shining beacon of freedom and democracy.  America's sanctions, although likely to be ineffectual in terms of sending Russian troops back to the barracks, will contrast sharply with the EU's decrepitude, and the near silence from the Asia.  As an ironic consequence, America's influence around the world, and especially in the periphery of Russia's borders with many former members of the Soviet Union and former Soviet satellite states, will likely grow.  After all, no one likes a bully.  The bottom line is Putin has made America stronger.

The outcome of the looming war of sanctions is difficult to predict with precision.  But the advantage lies with America and its great economic strength.  Germany and Japan won the early rounds of World War II.  The Soviet Union won most of the early rounds of the Cold War.  But we know how those stories ended.  Even if Putin will be able to feel like a studly fellow for a while, time isn't on his side.  Keep the faith.

Expect Nothing From the Government in 2014

Chances are the federal government won't do much of anything in 2014.  Neither party has control of the government, and neither has a coherent program in any event.  Republicans are at war with each other, with the mainstream and Tea Partiers wrestling for dominance.  Right now, the Republicans couldn't put together a coherent set of policies if they wanted to.

The President is playing defense, trying to get the federal health insurance exchange out of the ICU, contain the NSA surveillance scandal, deal with the Iranian nuclear program without another major American military commitment in the Middle East, pivot toward Asia, and bring the troops back from Afghanistan, all while avoiding a government shutdown from yet another lousy rerun of the debt ceiling crisis in early February.   The Democrats on the Hill are angling to keep their majority in the Senate and perhaps gain some seats in the House, but the administrative debacle with the sign-up process for the federal health insurance exchange has left Democrats facing re-election scrambling for cover.  That means distancing themselves from the President.  And that makes the formulation of a coherent set of Democratic policies pretty unlikely.

The mid-term elections this fall will drive doings in Washington.  That will mostly mean doing nothing.  In today's politics, everyone wants to be a critic, and no one wants to be a doer.  Critics get a lot of press coverage.  Doers are targeted by critics.  When you do something in Washington, you may benefit some people.  But you'll also damage the interests of others.  And they will dispense political contributions with a view to getting even.  It's safer to be a critic, verbally heave donkey dung at one's adversaries, and avoid actually doing anything.  You may not help anyone, but you also won't make a lot of enemies.  Voters gravitate toward those who tell them what they want to hear.  With today's grossly gerrymandered districts, critics have an easier time getting elected and staying that way. 

So expect little from the government this year.  Far right-wingers and hard-core libertarians may think this is a good thing.  But everyone who realizes that essentially the entire country--from the top 1% to those below the poverty line, from the big banks to the small businesses scrambling for an SBA loan, from parents who want safe toys for their kids to those who prefer not to eat tainted food to home buyers looking for a mortgage loan to anyone who is potentially exposed to communicable disease (and that excludes very few of us)--needs a functioning government must hope against hope for something more.

Barack Obama's Curious Redistribution Ideas

President Obama recently spoke critically of the gap between the rich and the poor.  He has endorsed an increase in the federal minimum wage, from $7.25 up to $10.10.  He has argued for stronger enforcement of the labor laws.  He seeks universal pre-school.

Predictably, Republicans stood in opposition.  More government spending isn't the answer, they contend.  Economic growth is the tide that will lift all boats, they say.

Republicans, whether they are right or wrong, have nothing to worry about.  Barack Obama, whatever he may say, isn't really serious about changing the distribution of income or wealth.  He favors reducing the cost of living adjustment for the Social Security, military and federal retirement benefits that tens of millions of Americans depend on.  Cutting back on retirement benefits worsens the distribution of income and wealth.

There were some federal tax increases that took effect this year.  But the income tax increase on high level earners was accompanied by an increase in Social Security taxes (which are regressive).  So what was the net effect?  Most likely, very little or no redistribution.

The Affordable Care Act would have a redistributive effect because of its health insurance subsidies for low income participants.  If only people could enroll  . . . .

Barack Obama has serious credibility issues.  He drew a line in the dust over the use of poison gas, and Assad stepped over it.  Obama squirmed, complained, and then let the Russians broker a deal.  He didn't have the management skills to implement his signature legislative achievement, the Affordable Care Act.  He negotiated some sort of deal on nukes with Iran, although that deal seems to have implementation issues as well.  As negotiators talk, Iran continues to enrich.  If you're looking for action from the White House on redistribution of income or wealth, don't hold your breath.  Keep saving and investing, because you're on your own.

A World of Foreign Policy Gambles

It is almost axiomatic that when a political leader faces domestic problems, he or she will turn to foreign relations as a way to divert disgruntled constituents from their daily travails.  Appeals to national pride easily tap into the often reflexive patriotism that many people have.  Folks tend to rally 'round the flag whenever there's a dustup with some bunch of dang foreigners.  Since foreign relations tend to be largely in the domain of Presidents, Prime Ministers and other national executives, legislative interference is less of a problem and credit for success can be hoarded.

With essentially all of the world's major economies unimpressive, sluggish or even tending toward torpid, it's hardly a surprise that some world leaders are indulging in cross-border shenani . . . , well, activities.  China has a slowing economy, with a real estate bubble, a debt bubble, increased competition from lower wage nations around the world, growing unemployment, a lack of high-value innovation, and a demographic demon of too many elderly and way too few young workers that's far, far worse than America's social security issues.  So what does China do?  Make noise about territorial claims in the East China Sea and South China Sea.  America responds by flying B-52s into an area claimed by the Chinese.  The Japanese, with a sludgy economy and a recently elected Prime Minister, Shinzo Abe, who appears to be of a nationalistic bent, contest the Chinese claims with their military aircraft, sabre-rattling as good as they've been rattled at.  Japan and China are quietly drifting into an arms race, while the U.S. military is expanding its presence in Asia.  And of course, there's North Korea, an economic dead zone, which engages in virtually nonstop sabre-rattling to legitimize its autocracy. 

Meanwhile, in the Middle East, a newly elected Iranian leadership faced with a sanctions-hammered economy that's circling the drain, are suddenly open-minded about a deal to slow down their nuclear program.  An American President, crippled by the virtual non-launch of his showcase domestic health insurance program, decides it's okay to let Iran continue to enrich uranium up to the 5% level, even though this isn't exactly a complete freeze of Iran's nuclear program.  (Even though Iran says it wants to have 5% uranium to develop nuclear power, since when does a country with gobs of petroleum reserves need to develop nuclear power?)  This deal could be seen as an effort by the U.S. to reduce its presence in the Middle East (so it can increase its presence in Asia).  Does that make war in the Middle East less likely?  Or will the increasingly nervous Israelis act on their own, as they have in the past?  And if they do, will America be militarily dragged into the consequences?

Over the past century and a half, foreign policy adventurism has tended to end badly.  Sometimes, very badly, with 20 million dead in World War I and 60 million dead in World War II.  This isn't to suggest that America and other nations should become isolationist.  The world is interconnected and some degree of international engagement is necessary.  But citizens should be skeptical of their leaders, who often have much to gain by stepping up their rhetoric and actions.  The recent popular outcries against American and British military action in Syria over its use of poisonous gas is an example of how the levelheadedness of the citizenry can cool the jets of a handful of very powerful people who may spend too much time talking to each other.  If a nation's leader seems to have a gambling problem in the foreign policy arena, citizens should stage an intervention.

Are We Stuck With a Powerless Government?

Despite its image as an overbearing ogre, the federal government may be largely powerless these days.  The President has managed to undercut himself with an astonishingly bad non-launch of the federal health insurance exchange.  Is there anyone in his administration with executive or management ability?  Could anyone in his administration succeed as evening shift supervisor at the local McDonald's? 

On the foreign policy front, the President managed to set his foot downrange and pull the trigger over Syria's use of poison gas.  Only an embarrassing intervention by Russia prevented the President from a real morass of a morass.  Now, the administration touts a deal with Iran to freeze its nuclear program, even though it can continue to enrich uranium to the 5% level.  Not very frozen, but perhaps global warming is having an impact.  One wonders whether this deal with Iran is a sign of strength or weakness on the part of the President.

Meanwhile, over on Capitol Hill, Congress remains essentially non-functional.  The Democratically controlled Senate was able to approve the appointment of a few judges by changing its rules, although scowling Republicans made many dire and threatening predictions that the Dems would be sorry for doing this.  Nothing like a love fest to make folks feel collegial.  As for the federal budget and the debt ceiling, they aren't likely to trigger new crises, but will be resolved by kicking the can down the road.

The only institution that seems to be doing anything is the Federal Reserve.  And even it may be losing some of its mojo.  The most recently released minutes of the Open Market Committee meeting in October have been interpreted to mean that the Fed may be thinking about pulling back soon on quantitative easing.  Antacid sales on Wall Street have jumped.  If the efficacy of Fed money printing is diminishing, we may find ourselves in a public policy Sahara with very few water holes.

A powerful government can be scary.  A powerless one can be scarier.  The problem is this isn't a horror movie and we can't get up and leave the theater if we don't like the show.

The Fiscal Crisis: Can Kicks Are All We Can Expect

Tonight (Wednesday, Oct. 16, 2013), Congress has temporarily "fixed" the fiscal and debt crises by re-opening the government until Jan. 15, 2014, and raising the debt ceiling until Feb. 7, 2014.  In other words, the government will resume operations and not default on its debt until early next year, when we return to crisis mode again.

Can kicking is all we can expect.  The government that the voters elected in 2012 isn't capable of decisive action on divisive issues like government spending.  With the House held hostage by a small but very loud group of Tea Partiers, and the rest of government controlled by the Democrats, dysfunction is baked into the cake the voters made last year.  Maintaining the status quo--a/k/a can kicking--is the only thing a sharply divided government can do.

Early next year, when Congress and the White House revisit the fiscal and debt crises, they will again kick the can through the end of the 2014 fiscal year (which ends Sept. 30, 2014)--because they won't be able to do anything else.  Maybe they'll make minor tweaks, but nothing big will happen.  Come late September or early October 2014, with the 2014 Congressional elections imminent, they will kick the can again past the election date, perhaps into early 2015 for the next Congress to deal with.

To end can kicking, voters need to elect a functional government next fall.  Yes, the idiots in Washington are to blame for behaving like children.  But the electorate put them in office.  Democracies function by compromising.  If narrow-minded, uncompromising fanatics are elected, expect the can to be well-kicked for years to come. 

The Key To Obamacare's Survival?

Even though the House of Representatives has just voted to use the budget bill to defund Obamacare, its chances of survival are pretty good.  Not just because the Senate will delink the defunding from the budget bill, but also because Obamacare suddenly seems to have some powerful supporters.

Not that these supporters are speaking openly.  But here's the scoop.  Major American corporations are moving their workers or retirees to the private exchanges.  Wahlgreens, Sears, and Darden Restaurants (think Olive Garden, Red Lobster, Longhorn Steakhouse, Capital Grille and more) have announced that employees will move to the private exchanges.  IBM and Time Warner are moving retirees to the private exchanges.  Apparently, these companies will pay employees or retirees subsidies to reduce their premium costs.  But these companies, and others making similar moves, are offloading a very important risk--the unpredictability of health care costs.  They provide fixed subsidies, thus stabilizing their costs.

Businesses love predictability and certainty.  Profits are more likely if you can control major cost items like health care coverage for employees and/or retirees.  In essence, Obamacare is on the verge of becoming an important subsidy to big business.

Experience teaches that government subsidies are virtually impossible to eliminate.  Long after the Great Depression and Dust Bowl, agricultural subsidies that make no public policy sense persist.  Even after being nationalized just before they could bring down the entire U.S. economy, Fannie Mae and Freddie Mac roll along, now more centrally positioned in the financing of residential real estate than ever before.  Virtual giveaways of access to minerals on federal land continue unabated even though the settlement of the West was effectively complete by 1890.

With Obamacare in the process of becoming a potentially really, really important subsidy to really, really big corporations, do we really think that it's going to be eliminated?  The Tea Partiers in the House make a lot of noise, but can they take on the political firepower that big business lobbyists can bring to bear?  Recent polls indicate that a majority of Americans support Obamacare, and politicians in a democracy eventually have to pay attention to the polls (see Obama-Syria-poison-gas-response for more on this point).  But, just as importantly (or more so), powerful business interests can arrange the survival of big subsidies no matter how loud some people in the House of Representatives scream.  This may reflect poorly on the nature of the political process, but it's the truth.  And Obamacare may well now have the backing of some highly influential lobbyists who will speak softly (to stay out of the cross-hairs of the Tea Party) but will wield big sticks to keep their clients well-subsidized.

One and Done in Syria, Right? Right? . . . Come on, right?

Once upon a time, there were some nasty guys known as al Qaeda.  In August 1998, they bombed the U.S. embassies in Kenya and Tanzania.  Over 200 people were killed, including 12 Americans.  In order punish the baddies, President Clinton order cruise missile attacks on al Qaeda training camps in Afghanistan and a pharmaceutical factory in Sudan which supposedly made chemical weapons.  Dozens of cruise missiles were fired and hit their targets.  After that, al Qaeda was never heard from again.

Unfortunately, the last part isn't true.  Al Qaeda, as we all know, survived in Afghanistan, killed some 3,000 Americans on September 11, 2001, and triggered wars that have turned out to be America's longest military conflicts.  Over 4,800 Americans died in Iraq, and more than 2,000 in Afghanistan.  American personnel are now engaged in fighting al Qaeda or its affiliates in South Asia, the Middle East, the Arabian Peninsula, North Africa, and who knows, maybe even Southeast Asia (there are Muslim insurgencies in Indonesia and the Philippines).   There is no end in sight for America's war against violent Islamic radicals.

President Obama and his supporters seem to think they can conducted a limited strike in Syria to punish Bashar al-Assad for using chemical weapons, and then be done with it.  Who are they kidding?  The bad guys in this scenario grow beards on the other cheek; they don't turn it.  Iran, Syria and Hezbollah are all promising retaliation if America launches cruise missiles.  Americans and American facilities in Iraq, Afghanistan, and probably other places are likely to be on the hit list.  American allies like Israel, Turkey, and other nations may be attacked.  Sooner or later, Assad or one of his allies will do something that will require further American action.  That's what happened with al Qaeda 15 years ago.  The 1998 cruise missile strikes on al Qaeda's training camps led to the 9/11 bombings, which then led to a war we're still fighting.

There is no chance--as in zero percent--that a U.S. cruise missile strike against Assad's forces will be the last word.  President Obama has yet to explain how he will deal with the many retaliatory responses from the bad guys, all without putting boots on the ground in some distant place and without entangling us in another endless war against people who can outlast us because it's their home.  In all likelihood, he has no explanation, because there is no way to contain America's involvement in Syria once we cruise in. 

As Americans know from hard experience, the road to Hell is paved with good intentions, and President Obama has the road we're now on very well paved.   Good intentions aren't the only thing that counts.  Competence and diligence matter, too.  You have to have a strategy to win--convincingly and quickly.  If you don't have such a strategy, don't dive into a war.  Ask the 58,000 Americans who died in Vietnam and the 4,800 who died in Iraq about this point.  There doesn't seem to be much strategic thinking going on in the White House; just political maneuvering in the hope of preventing the President from losing credibility for shooting from the hip.  Some of the U.S. troops in Afghanistan today were seven or eight years old at the time of the 9/11 bombings.  Today's parents of elementary school students should pay close attention to the discussion of U.S. military action in Syria.

How Does Obama Define Success in Syria?

Barack Obama has flinched.  Not once.  Not twice.  But three times in the last year or so.  Each time, he rattled the saber at Syrian President Bashar al-Assad, Assad called Obama's hand, and Obama flinched.  Now, evidently rattled himself by the unexpected rejection of military action by the British Parliament, Obama seems to be looking around for someone to offer a fist bump.  French President Francois Hollande has been supportive, but Obama has called for Congress to pass a resolution endorsing a military response to Assad's use of chemical weapons on Syrian civilians.

The Democrats, who control the Senate, are feeling queasy, but may support a narrowly crafted resolution.  The Republicans, who control the House, are skeptical and may reject the resolution. 

The Administration has offered a variety of negative reasons for striking Assad's forces, arguing that bad or negative consequences will ensue if the U.S. does not strike.  Chemical weapons are horrible and are prohibited by international law.  The United States, and especially the President would lose credibility.  The Iranians would be emboldened in their quest for nuclear weapons.  The North Koreans would be emboldened to pull more septic content.  The Russians would be emboldened in any number of ways. 

Chemical weapons are horrible.  But does the President see himself as a referee, seeking to penalize Assad for face masking?  Is the President's plan to throw down a yellow flag, move Assad back a few yards, and then let the slaughter continue?  Is it okay for Assad to continue his nationwide massacre if he just limits himself to conventional weapons?  Why don't we issue striped uniforms to the U.S. military and give them whistles to blow along with cruise missiles to fire?

As for credibility, Assad is in a fight for his very life.  He couldn't give a rat's left ear what Obama does, because Obama won't put U.S. boots on the ground and hasn't even provided military support to the Syrian rebels that he promised months ago.  Obama doesn't present a significant threat to Assad.  Maybe Assad's forces will refrain from obvious use of chemical weapons for a while and employ more conventional but plenty lethal weaponry to kill many more Syrians.  But nothing Obama is contemplating will make him more credible to anyone who matters.

The Iranians are, if the vaguely sourced information published by the press over the past few years is accurate, hellbent on building nuclear weapons on the fastest possible schedule.  It won't matter a bit what Obama does in Syria.  A U.S. military strike there will only lead the Iranians to more comprehensively disguise their activities.  But it won't dissuade them in the least from halting their nuclear program.

The North Koreans are constrained by the presence of 26,000 U.S. troops stationed along the demilitarized zone in the Korean peninsula.  North Korea can't do anything substantial to South Korea or any other nation without affecting these troops.  As long as those troops are there, what Obama does or doesn't do in Syria isn't significant.

As for Russia, Prime Minister Vladimir Putin is ex-KBG.  If there was an intelligence service that knew how to spot and exploit human weakness, it was the KGB.  Putin surely has Obama figured out--the man isn't bold.  He's not a risk taker.  He wants to be on the winning side no matter who that is or what happens (this is how the U.S. wound up being detested by everyone in Egypt--we tried to be everyone's buddy and ended up no one's buddy).  Obama is like the political equivalent of Microsoft--very successful, but not so likely to continue that success in the future because of an aversion to taking real risks.  Whatever carefully calibrated and narrowly focused military strike Obama now orders isn't going to convince Putin that Obama is anything except a smart, but cautious man trying to stay on his feet in a back alley brawl.  The smartest man in the alley might win the brawl, but the meanest man is the one you have to watch out for.

To persuade Congress and the American people that military action in Syria is justified, President Obama has to present positive reasons.  We need to know how we succeed, how we win.  Waging war for the purpose of stopping bad people from being bad isn't likely to work, unless one is prepared to wage total war and completely conquer the enemy, as America did to Germany and Japan in World War II.  No one has suggested that America conquer Syria.  For the past fifty years, America has dived into military adventures for poorly conceived reasons, and not surprisingly done poorly.  The only clear case for offensive military action--the 2001 invasion of Afghanistan-- was thoroughly botched by the second Bush Administration when it failed to deal definitively with Osama bin Laden after trapping him in late 2001 at Tora Bora.  We're still suffering the consequences of that failure.  If President Obama wants our support for a strike in Syria, he should tell us how we attain victory.  If there is no victory that can be defined or attained, we should hold our fire.

Why Did Obama Fire Bernanke?

Okay, President Obama didn't actually fire Federal Reserve Chairman Ben Bernanke.  But it felt like that when the President strongly hinted a couple of days ago that he wouldn't nominate Bernanke for re-appointment.  The stock market followed up with a two-day belly flop of almost 560 points.  Much of that drop was because the Fed announced that it would indeed, contrary to infantile market expectations, eventually take away the quantitative easing punchbowl.  But the backdrop to this announcement was Ben Bernanke's short remaining term as bartender-in-chief.  That creates enormous uncertainty.  The financial markets love Bernanke, even though not all market players will admit it publicly because he was a policy pragmatist (read heretic in the eyes of many purists).  He gave the markets lots of sweets and never let them pout or fuss for long.  He never met an asset class he didn't like and tried to puff them all up.  (That's why virtually all asset classes are dropping now--Sugar Daddy is leaving town.)  With Ben's helicopter thumping away toward the horizon, it gets a lot harder to predict what investments might have actual economic value, so investors renew their love affair with cash.

But why did Obama choose this moment to put Bernanke on the stagecoach going out of town?  Obama is no economist, so it couldn't have been for an economic reason.  The President is a consummate politician, though, so one has to entertain the sneaking suspicion that he did it for political reasons.  A not uncommon reason for pulling the rug out from underneath an incumbent is because you foresee the need to blame him or her for something.  Maybe the President was concerned that the eventual end of QE would cause the markets to fall, and he wanted to be able to blame Bernanke and say he didn't re-appoint him.  But the very act of leaving Bernanke behind in the dust aggravated into prophecy fulfillment the markets' inclination to swan dive.  So, if this was the President's thinking, he may have contributed to the problem he foresaw and could end up taking some of the blame for the market's hissy fit.

The President is having second-term hiccups in a variety of ways--the IRS, NSA, State Dept., and DOJ come to mind.  Is he losing his grip?  Bernanke was the last man standing when it came to federal officials doing something to boost the economic recovery.  Why ax the most highly regarded civil servant in the country?

The financial markets hate uncertainty.  And they've gotten a belly full of it recently.  That's why the last two days have been bad for 401(k) accounts from sea to shining sea.  And the picture probably won't get brighter for months.

Your Social Security Benefits: Countering the Chained CPI

The President has proposed using the Chained CPI as the measure for cost-of-living increases in Social Security benefits, and other federal and military retirement benefits.  The impact on benefits would be to reduce the annual increase by about 0.3%.  While this amount seems small, it accumulates over time.  After ten years, your benefits would be reduced by 3-4% per year.  After twenty years, the reduction would be around 6-7% per year.  If you receive Social Security for thirty years, the reduction would be around 9% or more per year.  For those relying heavily on Social Security, which could be up to half of all recipients, that can hurt, especially considering the unstoppable, uber-inflationary costs of medical care for the elderly.  The Chained CPI proposal is criticized for hitting the most elderly and vulnerable the hardest.  Women take a bigger hit than men because they live longer and depend more heavily on Social Security.

The Chained CPI would also increase taxes.  Tax brackets and certain other features of the tax system are adjusted for inflation.  If the adjustment is smaller, as it would be with the Chained CPI, the effect would be to raise taxes.  As with Social Security benefits, the tax increases would fall most heavily on those at the lowest income levels (who otherwise are taxed lightly).

If you're wondering if implementation of the Chained CPI would affect you, the answer is yes.  It affects everyone, although the well-off would suffer the least in relative terms.  The likelihood of the adoption of the Chained CPI is difficult to predict.  Conservatives and many moderates generally like the idea, although the white Boomers at the heart of the Republican Party will sooner or later figure out that they would take a bullet for their party's ideology from the Chained CPI.  When they do, we'll find out if there's a cure for stupid.

Anyway, how could you counter the impact of the Chained CPI, if it's adopted?  Save more.  Start saving more now, and save more every month.  It's hard to estimate how much more, because the answer would depend heavily on the specifics of your financial situation.  But a rough guesstimate might be 1% of your income or a bit more if you're in your 20s or 30s, 2% for those in their 40s, and 3-4% if you've reached the Big 5-0.  This may not sound like much, but try doing it (remember, this amount would be in addition to other saving you should be doing for retirement).  A lot of Americans can't.  Those who fail should acquire a taste for dog food, because it looms in their futures.

President Obama may think that proposing the Chained CPI keeps federal spending at a relatively stimulative level in the near term future, to help pull the economy out of the Great Recession, while reducing long term spending to help control the deficit.  But if rational Americans begin saving more to compensate for the lower benefits and higher taxes promised for their retirements, the near term impact of the Chained CPI would be to reduce consumption and retard recovery.  And continuation of the Great Recession would prolong the large deficits we now have.

The President seems obsessed with attaining a Grand Compromise.  He seems to think doing so will burnish his legacy.  That's weird.  Consider the Presidents who attained greatness through compromise.  There's . . . uh . . . well . . . I mean . . . you know . . .  Okay, look at the flip side of the question.  Consider the great Presidents.  George Washington, who lost 7 of the 9 major battles he fought in the American Revolution, didn't compromise with the British.  Abraham Lincoln, who dallied initially with compromise until the Confederates digitally and martially expressed their views, became the great non-Compromisor who rid America of the curse of slavery.  Franklin Delano Roosevelt, greatest President of the 20th Century, allowed Republican leaders as much input into the New Deal as Mozart had into Jailhouse Rock.  Let us recall the great proponents of compromise in America's history:  Henry Clay, Daniel Webster, and John C. Calhoun.  Their accomplishments as progenitors of accommodation are known to as many as 26% of all high school students for a period of time not exceeding 36 hours before and 2.14 minutes after exam time.  This is a desirable legacy?  Well, maybe in the eyes of some, but, please, not at the expense of those least able to bear that expense.

Political Risks of Social Insecurity

The financial press has reported that the United States ranks 19th worldwide in the retirement security, lagging behind Slovenia, the Czech Republic and Slovakia, among other nations.  http://www.cnbc.com/id/100534205.  We're one step ahead of Britain, but well behind France and Germany.  The Scandinavian countries rank at the top, along with Switzerland, Austria, the Netherlands and tiny Luxembourg.  Even Japan, after more than two decades of economic malaise, ranks 15th, four steps higher than America.

This probably doesn't surprise many Americans, particularly those who are approaching or in retirement.  They have probably already viscerally sensed their comparative insecurity.  Herein lies great risk for politicians who would reduce America's social safety net.  Our net is modest compared to the protections offered by most of the industrialized world.  If it's cut, the pain--particularly for moderate and lower income Americans--could be pronounced.  It's one thing if your retirement benefits may not cover as many restaurant meals as you would like.  It's another if your cost of living increase is so paltry that you can't afford needed prescription medications.

That we have a fiscal imbalance is because our taxes are even lower on a comparative basis.  (See http://usatoday30.usatoday.com/money/perfi/taxes/2009-11-25-oecd25_ST_N.htm.)  America could without enormous pain pay for its current social safety net without having to borrow.  We just don't want the taxes it would take to get there. 

Many politicians in Washington sound off about cutting Social Security and Medicare benefits.  This isn't just Republicans.  President Obama has been quick to offer reductions in Social Security.  One is to change the Social Security inflation adjustment from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Personal Consumption Price Expenditures Index (PCE).  The effect of this change would to gradually erode the relative value of Social Security benefits, with the most elderly being the hardest hit over time.  Is is really a good thing to whack the most vulnerable, who may have exhausted their savings and be unable to work? 

Consciously or subconsciously, Americans know that their retirement benefits aren't great.  And many of them won't be happy with politicians who make their retirements bleaker.  If the President and the Republicans somehow reach a Grand Bargain to stabilize or even balance the budget, the political impact may surprise them.  As Republicans clumsily attempt to embrace diversity, their core of older, white Americans may abandon them if they lead the charge to cut retirement benefits.  President Obama, instead of being viewed as a latter day FDR, may end up appearing to fall into the mold of Herbert Hoover.  And the liberal left, annoyingly shrill as they can sometimes be, may end up inheriting the White House in 2016. 

Reducing the Deficit: Should the Fed Monetize the Federal Debt?

Desperate times call for desperate measures.  We've seen yet another dysfunctional mess from the political process, and have to think expansively.

The recent fiscal cliff deal was largely a failure.  It raised taxes on most Americans, while doing virtually nothing to reduce federal spending.  While income taxes were not increased for the middle class, Social Security taxes were increased for all workers at all income levels.  The well-off (the $400,000 plus crowd) face a higher income tax rate of 39.6% (20% on qualified dividends and capital gains) and wealthy dead people now pay a 40% tax rate (instead of 35%) on the portions of their estates exceeding $5 million ($10 million for married couples).  The automatic spending cuts required by the cliff were deferred for two months (except for $24 billion in cuts that do go into effect), so spending largely continues apace.  Presumably, there will be a second face off over spending cuts when the President asks Congress to increase the debt ceiling in the next few weeks (even though the White House insists it won't negotiate over the debt ceiling).

One thing to take away from the cliff deal is that spending cuts are really hard to agree on--so hard that the Dems and Republicans simply kicked the can down the road.  But they will be even harder to agree on two months from now.  The Republicans have lost significant leverage by agreeing to tax increases now.  The tax side of the fiscal cliff has been resolved, more or less favorably to the Democrats (although some liberal Dems are still unhappy).  What incentive do the Dems, who control the Senate, now have to agree to spending cuts?  Of course, the Dems would agree to some spending cuts (the defense budget would be their target number one).  But Republicans are focused on hurting core constituencies of the Democratic Party through Social Security, Medicare and Medicaid cuts.  With the Dems having largely won on the tax issues, they have little reason to make concessions on the social safety net.  Even if the President is willing to give the Republicans some of what they want (which he seems to be), he may have a problem in the Senate, where Social Security, Medicare and Medicaid were stoutly ring-fenced and defended during the fiscal cliff talks.

Realistically speaking, we shouldn't expect our dysfunctional elected government to find grand solutions to the fiscal deficits.  Due to a variety of bad and intractable political dynamics, that simply won't happen.  We have to look elsewhere for solutions.

The next logical candidate to get the hot potato would be the Fed.  The central bank has played a central role in combating the Great Recession, not without some success.  In the course of its massive quantitative easing programs, it's accumulated a balance sheet of close to $3 trillion.  This total is likely to grow as the Fed continues to purchase debt on the open markets.  Slightly over half of the balance sheet consists of U.S. Treasury securities.  Total federal debt is about $16 trillion.  Thus, the Fed holds about 10% of all federal debt.

Why not have the Fed simply forgive some or even all of the U.S. Treasury debt it holds?  In other words, it would declare that the Treasury wouldn't be required to pay the debt.  That, by definition, would reduce the federal deficit by reducing the amount of federal debt outstanding.  And it's what happens anyway.  When the Fed receives debt payments from the Treasury (usually consisting of interest payments), it simply remits those funds back to the Treasury Dept. (except for a small amount retained to finance the Fed's budget).  Debt forgiveness by the Fed would simply expand on what happens in the ordinary course.   

Of course, such debt forgiveness would be tantamount to monetizing the debt, and has the potential to be inflationary.  But precisely what the heck do we think is going on now?  When the Fed launches repeated quantitative easing programs, with ever more asset purchases but not the tiniest hint of when, if ever, it would unwind its Brontosaurian balance sheet, it has functionally monetized the debt.  With the economy expected to be a sick puppy for years, reality is the Fed may hold a lot of its current inventory of U.S. Treasury securities until they mature.  When they mature, it will remit the principal payment it receives from the Treasury back to the Treasury (or use the funds to make more open market purchases of Treasury securities).  The federal debt has been monetized, even though no one on the government's payroll is going to admit it. 

Such debt forgiveness wouldn't fully resolve all the deficit problems.  But it could reduce the scope of the crisis, and would amount to little more than accurately accounting for what is actually going on.  If inflation flared, the Fed could suspend debt forgiveness and raise short term interest rates, combating inflation as it traditionally would.  But as long as inflation is subdued, debt forgiveness could contribute to resolving a problem that politicians clearly won't be able to solve, at least not comprehensively.

Ultimately, the best solution to the deficit problem is to boost economic growth.  Greater growth means higher employment levels and more income and corporate profits to be taxed.  If the economy were growing briskly and unemployment were around 5%, we probably wouldn't feel we have a deficit crisis.  Housing seems to be stabilizing, although its long term prospects remain clouded.  So we can't count on housing to be the engine for growth.  Measures the government could take include:  (a) rebuilding infrastructure--this is something the government has historically done well, and should do more of given the crumbling state of our infrastructure; (b) loosen up immigration restrictions for well-educated people and people who can invest substantial capital in America to create jobs--we need more innovators and entrepreneurs; (c) improve education, not by handing out loans to anyone who has a pulse and a signature (there's way too much student debt already, and it will be the next big debt bubble), but with measures to make education more efficient and inexpensive, like expanding Internet-based educational programs.  Achieving greater economic growth will take time, but it's a lot easier than trying to use the political process to agree on budget cuts. 

The Fiscal Cliff Negotiations: Just Who Is Barack Obama?

Recent negotiations over the fiscal cliff, which seem to be faltering after initial signs of progress, raise a persistent question about Barack Obama:  has he any political principles?  After campaigning this fall to protect the poor and middle class, he agreed in fiscal cliff negotiations to changes to the income tax structure and Social Security that are more damaging to the poor and middle class than the prosperous segments of American society.  By accepting Republican demands for the Social Security inflation adjustment to be the Chained Consumer Price Index, Obama has effectively reduced inflation protection for Social Security recipients, military retirees and federal civilian retirees, the vast majority of whom are low or middle income.  At the same time, because the same inflation adjustment would be made to income tax brackets, the brackets would rise more slowly during inflationary times.  That would effectively result in heavier taxation across the board, a seemingly regressive result.  Additionally, Obama agreed to raise the threshold for higher tax brackets from his original position of $250,000 to $400,000.  To be cynical, this might be viewed as a gift to the upper middle class professionals who often are his supporters and contributors.  And to be more cynical, it can be observed that many lower income folks, especially older whites heavily reliant on Social Security and/or military pensions, tend to be Republican more often than Democrat.  Perhaps the President sees little to lose in imposing austerity on them.

One wonders if Obama, after four years of dealing with the Great Recession, understands even the basic structure of the U.S. economy.  Our economy is 70% consumption.  Money in the hands of the poor and middle class gets spent.  They don't have enough to save hardly a penny.  This spending stimulates the economy.  Money in the hands of the upper middle and upper classes is frequently saved, allowing the rich to get richer relative to other income categories.  By raising taxes on the poor and middle class while cutting benefits to Social Security recipients, and military and federal civilian retirees, the President is reducing consumption and its stimulative impact on the economy, while exacerbating the inequality in wealth distribution.  What policy sense does this make?

During his first term, Obama demonstrated time and time again at critical junctures that he is a clever politician and dealmaker much more than a leader.  He craftily co-opted his most serious Democratic rival, Hillary Clinton, by making her secretary of state.  And he kept the liberal wing of the Democratic Party at bay by putting one of their number, Joe Biden, in the Vice President's residence.  But he has few loyal constituencies.  His one signal achievement, the Affordable Care Act, may transform life in America.  But transformational legislation doesn't necessarily bestow greatness on a President.  Lyndon Johnson's Great Society programs transformed America far more than anything Barack Obama has done or will do.  Indeed, the Voting Rights Act of 1965 enfranchised black and other disadvantaged Americans, paving the way for Obama to win the White House.  But Johnson has been denied the mantel of greatness.  While this is due in large part to his foreign policy catastrophe in Vietnam, it's also because Johnson, like Obama, was a consummate politician without any large loyal constituencies.  There's no one running around singing Johnson's praises.  Obama will always be remembered as the first nonwhite President, and there's a measure of greatness in that.  But John Kennedy was America's first non-Protestant President, and in 1960 that was an achievement not far from Obama's achievement in 2008.  Kennedy is remembered today for his charisma and charm.  But he doesn't rank among the great Presidents.  And, because Obama seems to value a deal more than principles or loyalty to constituents, neither will he.