Broken

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October 3, 2021

by Steve Stofka

This week I enjoyed a video (CFR, 2019) on the 2008 financial crisis that aired on HBO in 2019. VICE reporters interviewed former Fed chairman Ben Bernanke, and former Secretaries of the Treasury Hank Paulson and Tim Geithner, key policymakers during the crisis. They regretted the devastating effect that the crisis had on so many families. They understood the public anger at the bailouts of Wall Street. They attributed the rise of populism to the public perception that there was one rule for the elites on Wall Street who had created the crisis and those on Main Street who suffered the consequences. As I watched the financial Trinity of Paulson, Geithner and Bernanke, I thought they still don’t get it.

A prominent feature of the global political system is anarchy, the lack of a central authority governing all the states. Until the 2008 crisis, the public thought that national institutions supervised the global financial system to make sure that the players in that system did not endanger the public. The Trinity were in control of institutions that were charged with the safety of the public trust. Each of them believed in a light supervisory touch, thinking that the financial system was mostly self-regulating because the players kept each other in check. The crisis demonstrated the fault of that thinking.

Realism is one of the two dominant methods of analysis in international relations. Realists focus on the strength and distribution of military power among states who have competing interests. The force in the financial system is not military weapons but the ability to leverage capital. National governments bestow those weapons of power on their financial institutions. Each of the big investment banks serves their own interests and are supposed to follow the rules. Central banks and supervisory institutions rely on a balance of power between the big financial players to self-regulate this system.

In the global political system, there is no central ruling authority. In the American financial system, the financial industry lobbies against any oversight or regulatory power. They want anarchy – to be left alone until their risk taking reaches critical mass and threatens the global system as it did in 2008. Then the players rush to the Fed or the White House for a bailout. Despite the financial power that Paulson, Bernanke and Geithner had at their fingertips, they felt impotent during the crisis. It was not comforting to watch each of them make gestures of futility as they spoke, arguing that they had to follow the law. Why? The people who ran the investment banks that took extraordinary risks did not play by the rules.

As the crisis unfolded, the public watched the anarchy on display. The big investment banks have the equivalent of nuclear weapons given to them by their governments and there is little effective supervision. The Trinity blamed “liar loans” for contributing to the crisis. Prospective homeowners were told by mortgage companies that they did not have to document their income. Many low-income families welcomed the chance to own their own home for the first time in their lives. They believed the government was supervising these mortgage companies because the mortgages were being bought by government institutions. Even if it sounded too good to be true, the government must know what it was doing. That belief was about to be shaken to its foundation.

The 2000s were marked by a string of government follies. The public was shocked to learn that the nation’s security agencies had been alerted to the threat of the 9-11 attackers. A lack of communication and coordination between agencies had let the attackers slip through the security net. Following that revelation, the Department of Homeland Security was created to coordinate federal agencies. In 2002, the public learned that no one had been supervising the nation’s largest accounting firms. As the giant Arthur Anderson imploded, investors wondered whether the financial statements of the nation’s largest companies were fiction. Enron and some dot-com companies blew up. After demonstrating American military power and technology in the invasion of Iraq, the mismanagement of the war became apparent. The fumbling federal response to Hurricane Katrina confirmed the impotence of the Federal government. Five consecutive years and five government failures.

After all that, the American public still trusted the imprint of the federal government on a mortgage. The financial crisis was the last in a string of government failures that caused a large loss of trust in government. Government institutions like the Fed and the Treasury had trusted Wall Street but not Main Street. Government had broken a bond of trust with the public and these three had been partly responsible for that broken pact. Breaking trust is difficult to understand or acknowledge.

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Photo by Aimee Vogelsang on Unsplash

CFR. (2019, May 01). Panic: The untold story of the 2008 Financial Crisis | full vice special report | HBO. Retrieved October 03, 2021, from https://www.youtube.com/watch?v=QozGSS7QY_U

Missing Workers

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September 26, 2021

by Steve Stofka

As I am out and about I’ve noticed the Help Wanted signs posted in storefront windows. $15 per hour reads the sign at the gas station near me. Why were there so many of these signs, I wondered? The latest Job Openings report reported a 50% increase in job openings, accounting for about 2.5 million jobs. I dusted off my Sherlock Holmes hat, found my magnifying glass and set out to look for the missing workers.

In the latest employment report from the Bureau of Labor Statistics (BLS) there are 6.3 million fewer people working today than in February 2020, just before the first alarming reports of Covid hospitalizations and deaths in New York City. Digging through many series of labor data, the missing workers are spread throughout the population. What was most surprising to me were those segments of the population where workers are not missing.

After the Great Financial Crisis, employment among workers older than 65 surged, almost doubling to 11 million strong by 2020, when the pandemic struck. 1 out of every 12 workers was over 65. For the past decade, economists have identified several reasons for the surge – people lost homes or had their savings significantly lowered. The Boomers didn’t save enough during their working years. Active Boomers did not want to retire. Employers preferred older workers with more reliable work habits than younger workers.

Before the pandemic, 1 out of 4 older people were working. The number of people in this age group has grown by 2 million during the pandemic. If that employment trend had continued, we would expect that 1/2 million workers continued to work. Instead, the number of older workers fell by 600,000. Many older workers who staffed jobs at retail establishments decided to forgo the risk of getting sick. Almost a million workers near retirement, those aged 55 and above, have taken early retirement or simply not returned to work out of fear of getting sick. So far that has accounted for more than two million workers, leaving 4 million unaccounted for.  

The next place I went to look was younger workers who would no doubt be playing video games and enjoying the sweet life. According to recent BLS and Census Bureau surveys, however, the number of workers aged 16-24 is about the same now as it was before the pandemic. Workers aged 16-19 have actually increased by 200,000.

That left only the core work force aged 25-54. Before the pandemic, 4 out of 5 people in this age group were working. In April 2020, it fell to 70% but has recovered to 78%, the same as in October 2016, on the eve of the 2016 election. I don’t remember seeing a lot of Help Wanted signs then. Because the core work force makes up 2/3rds of the 150 million employed, a few percentage points adds up to a lot of workers. Before the pandemic there were about 101 million workers in this age group. Today that number is 98 million, a decline of 3 million workers.

Adding in some known reporting errors and seasonal adjustments account for the bulk of the missing workers but there are some curious anomalies. The number of people who report that they are working part-time because they couldn’t find full-time work is about the same level as it was before the pandemic. Yet many fast food establishments have Help Wanted signs for full and part-time workers. I am guessing that many applicants would prefer not to have jobs in customer service where they are constantly exposed to people on a face-to-face basis.

I sometimes hear that young people don’t want jobs, that they are sitting at home playing video games and collecting extended unemployment benefits. Misinformation and unsubstantiated opinion never take a day off.

Life Choices

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September 19, 2021

by Steve Stofka

Economics is built on the principle of the rational person capable of making a choice between two options. In casual conversation we use the word “rational” to mean making sense but in economics it means making a choice. The choices presented may have constraints that make the word “choice” seem inappropriate. Does an addict have a choice? Yes. Sometimes we steer our lives with a critical choice of more or no more, having to choose between an unbearable more and a no more that contains an equally unbearable number of unknowns.

We might leave a job with only the hope that we can find another one soon. We may cast a no more vote, rejecting an incumbent for an unknown candidate. People living in the path of a hurricane or forest fire must make the difficult choice of evacuating the area or staying in their home and hoping they will be safe. Making a no more choice with family relationships can twist a person’s mind and soul in knots. A battered women may endure more until they reach the point of no more and leave their situation.  

As the Delta variant of Covid-19 sweeps through the population, many people are making difficult life choices about their jobs. In March 2020, the number of job openings plunged more than a third from 7 million to 4.6 million. In January this year, openings regained their pre-Covid levels and have risen quickly since then. The July report indicated almost 11 million openings, a series record.

After adjusting to online work, some workers have made that a critical preference. They have said no more to long commutes. Some have moved from dense urban areas to less populated states like Montana where rents or house prices will not consume half a paycheck. They have said no more. The sudden job loss last year caused some workers to rethink their priorities and career choice. The lack of affordable childcare has been a deciding factor for some workers.  

In economics, utility theory explores a choice between quantities of two goods. For example, will I have more pizza or more ice cream? These simple unrealistic examples help a student practice the concepts but are not suitable for no more life choices. Because these decisions act like switches, their calculations are hard to model. We may be able to bargain with our company who wants workers back in the office. Many times, we have to make a hard choice, one that can’t be undone.

We may revisit difficult choices, trying to understand and refine our decision making process. Many younger workers will look back and see this as a defining moment in their life. Some will wonder what if, replaying their choice. In a period of five years, our grandparents and great-grandparents endured rationing during WW1, followed by the Spanish flu that killed thousands, then the severe recession of 1921. Life narrowed their choices and they endured. By the time a person reaches their 80s, they have decided on more about 30,000 days. We remember the no more decisions more than we remember the many decisions of more. Each day is a crossroad.

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Photo by Einar Storsul on Unsplash

The Tools of Peace and Power

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September 12, 2021

by Steve Stofka

The recent exit from Afghanistan after a twenty year war (2001-2021) reminds me of the twenty year war we fought in Vietnam (1955-1975). Neither war achieved our ends, demonstrating again that war is a series of miscalculations of the gains and costs. Our overwhelming fighting force can dominate short-term conflict like the Gulf War but it is not a winning strategy against poorly funded insurgent groups.  To those who study the practice of war, this dichotomy prompts many pages of speculation as to the causes.

An answer that fits the facts is that a dominant force like the U.S. does not go to war to win, so it achieves its goal by not winning. The traditional end of war – a win – is to capture territory or access to resources within a region. In Vietnam and in Afghanistan, the U.S. had no such designs. Its goal was remove an existing regime and to prevent its return to power. The first is a military goal. The second is a political end. In both countries, we achieved the military goal of removal. In both countries, we learned that armed troops cannot achieve a long term political goal. Why didn’t we learn our lesson after Vietnam?

An answer that fits the facts is that our goal is to demonstrate our military power, not to learn lessons. In 1795, shortly after the final ratification of the U.S. Constitution, the philosopher Immanuel Kant wrote Perpetual Peace, an essay arguing that a republican government, one with a separation of legislative and executive powers like the U.S., was the only hope of perpetual peace. Without a central authority over all the nations, the only constraint on leaders must come from within each nation.

Only those under a republican form of government understood the true costs of war. The citizens had to fight it, fund it and repair the country after the war was over. 200 years later, the development of technology has allowed most Americans to vote for war without fighting it. The U.S. spends over $536,000 per person in the armed forces, more than five times what China spends per active duty person (GFP, 2021). Because we are able to borrow from the rest of the world, we don’t have to fund our wars with our own taxes. Lastly, the wars are fought in another country so that we don’t have to repair the damages of war. The horrific attack on the World Trade Center twenty years ago was a visceral, deeply wounding reminder of the cost of war fought on the homeland.

Kant wrote that a treaty of peace could not solve the tendency of nations to find a justification for war because a treaty ended only one war. Since peace was not a natural feature of human societies, countries should try to construct a peace that ended all wars. He suggested a League of Peace and stressed that it be a federation of nations, not a nation of nations. The League of Nations formed after WW1 constructed only a treaty, not a peace. Intent on punishing Germany for the war, the Treaty of Versailles ensured the next war twenty years later. The United Nations and NATO were two attempts to form international organizations aimed at resolving issues without war. We have not had another world war since the mid-20th century but we have not constructed a durable peace either.

America has overcome Kant’s three safeguards against perpetual war. Writing at the end of the 18th century when nations fought to take something from someone else, Kant could not imagine our present circumstances. We fight wars to give something to other peoples, a chance for freedom and hope. That is our justification for the damage we do. But the end of war is to take what we want, not to give. We have built the most formidable fighting machine that has ever existed, but it is a tool of power, not peace. In memory of those who died that day 20 years ago, let’s invest in the tools of peace.

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Notes:

Photo by Stephen Johnson on Unsplash

GFP. 2021. “2021 Military Strength Ranking.” Global Firepower – World Military Strength. https://www.globalfirepower.com/countries-listing.php (September 11, 2021). Note: dividing total military cost by active personnel: US $536K per person, Russia – $48K, China – $108K, India – $44K, Japan – $198K, S. Korea – $76K.

Kant, Immanuel. 1983. Perpetual Peace, and Other Essays: On Politics, History, and Morals. Indianapolis, IN: Hackett.

National Constitution Center (NCC). 2021. “On This Day: Congress Officially Creates the U.S. Army.” National Constitution Center – constitutioncenter.org. https://constitutioncenter.org/blog/on-this-day-congress-officially-creates-the-u-s-army (September 11, 2021).

A Call for Free Market Justice

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September 5, 2021

by Stephen Stofka

In a 5-4 decision this week, the Supreme Court decided to let stay the Texas law against abortion that went into effect this week. The court is a democracy whose majority opinion, no matter how slim the majority, becomes the winning opinion. Despite the black robes and pretense of objectivity, the court “elects” its opinions. In 1776, America declared independence from the tyranny of one person rule yet we often stand here today subject to the rule of one person on the court. Should we change our procedure so that the court operates more like a free market?

Writing in the independent court commentary Scotusblog, Amy Howe (2021) summarized the history of the case, the unsigned majority decision and the signed objections of the four dissenting justices including the Chief Justice, John Roberts. Under the law, anyone assisting a woman terminating a pregnancy after 6 weeks can be sued by a third party in Texas civil court. Most women do not know they are pregnant until at least six weeks so this is an effective ban on most abortions. The law effectively deputizes private citizens as vigilante enforcement, paying them up to $10,000 for each successful case and absolving the state of legal responsibility.

The court’s majority opinion was largely founded on procedural grounds that there was no way to know if the person named in the suit would bring a case against an abortion provider under the new law. U.S. and Japanese courts have concrete judicial review as opposed to the abstract review of the European system. Under concrete review, courts act only on cases brought before them. The crafting of this law was designed to take advantage of that aspect of our court system.

The Federalist Society was founded in 1982 to push a libertarian ideology as a counteracting force to the perceived dominance of a liberal interpretation of the Constitution. The Society champions a judicial interpretation of the law “founded on the principles that the state exists to preserve freedom [and] that the separation of governmental powers is central to our Constitution” (Federalist Society, 2021). Without clear jurisdiction granted to the federal government by the Constitution, state law should be given deference. Six of the nine members of the Supreme Court are members of the Society and lean toward that libertarian interpretation of the Constitution.

Libertarians champion the dynamics of the free market because it is not a democracy ruled by a majority. There are multiple brands competing for our loyalty. In metropolitan areas, local governments do compete with each other for residents but governments generally act like the water and electric utilities they regulate as public monopolies. A government provides a public monopoly on force and on rule-making. In our Federalist system, 50 states have 50 different sets of laws, 50 separate court systems and 50 interpretations of the Federal constitution and federal law.

We already have a free market in our judicial system. Why should we let a slim majority vote in the Supreme Court contaminate that free market? The justices base their decisions on what they consider sound jurisprudence consistent with past historical principle. Legal briefs present competing opinions that are a distillation of many opinions, a winnowing process that is characteristic of a free market. In choosing between those few dominant legal interpretations, the justices try to establish a positive reasoning to a normative opinion of what is the “best” interpretation. The free market is at work until that final moment when free market principles are upended by a majority vote of one opinion to rule them all.

Let the last step in the process be one that preserves free market principles. If there is a close vote, let each justice vote on the two most dominant opinions whether they agree with those opinions or not. From those votes, let two choices emerge and each choice be assigned a 1 or 0. A roll of nine dice will decide the winning choice. Each six-sided dice will have 1 spot on three faces and no spot on three faces.  The majority rule of the dice, not human beings, would decide the final choice of the winning opinion.

This method will preserve historical precedent, an important feature of the common law foundation of American jurisprudence. In current practice, contesting and concerned parties submit merit and amicus curiae briefs that cite both past majority and dissenting opinions. Adopting this suggested method would continue to support that practice. We would place our most cherished jurisprudence before the whims of fortune, not the tyranny of one person’s vote. Let Lady Justice be truly blindfolded as each opinion is put on the scale.

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Notes:

Photo by Tingey Injury Law Firm on Unsplash

Federalist Society. (2021). About us. Retrieved September 04, 2021, from https://fedsoc.org/about-us

Howe, A. (2021, September 02). Supreme court Leaves Texas abortion ban in place. Retrieved September 04, 2021, from https://www.scotusblog.com/2021/09/supreme-court-leaves-texas-abortion-ban-in-place/

The Individual, Common and General Welfare

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August 29, 2021

by Stephen Stofka

In the short version of Monopoly, the property deeds are shuffled and dealt out to the players. Some think that God does the same with our talents and circumstances and that it our duty to play with what we are given. They argue that the proper role of government is to provide for the common welfare, like defense, police, schools and infrastructure. Some take a more secular view, arguing that the hands dealt are largely the result of past policies and practices, the good, bad and quite ugly. Given this history, government has a duty to correct these inequities. They argue that government should take an active role in improving individual welfare to raise the general welfare. Moderates argue that a mixture of individual and common welfare programs will best improve the general welfare but they disagree on priorities.

According to the Bureau of Economic Analysis, federal assistance for education, welfare and housing has increased 3 times since 1960 as a percent of GDP. During that period, health care spending at the federal level has increased 9 times; at the state and local level it has increased 3 times. To help offset these increases, federal spending on defense has declined by 67%. What distinguishes all these increases in spending is that they are targeted toward individual welfare in the hopes that an improvement in individual welfare will raise the level of general welfare.

State spending on the common welfare like education and transportation have both declined 25%. After several decades of this shift in strategy, our schools, roads, water and sewer systems are in bad repair because state revenues as a percent of GDP have changed little in the past fifty years while spending on individual welfare has increased. The $3.5 trillion infrastructure bill being debated in Washington targets that neglected common infrastructure.

The spending mix of families has changed as well. In 1964, 33 cents of every family’s expenses was spent on food. Today, it is only 13 cents, a drop of 67%. Despite that decrease in food spending, 1 out of 12 families relies on food stamps, the SNAP program, to help feed their families. Why is that? In the past four decades housing costs as a percent of GDP have gone up 30% (CRS, 2021). Since housing is the largest monthly expense for most families, this sizeable increase has significantly lowered individual welfare. Government programs help alleviate that stress.

During the Depression, a shared suffering prompted a shift in the role of government from public projects, the common welfare, to individual welfare. Many New Deal programs incorporated both elements in their design. Electric generating projects like the Hoover Dam and Tennessee Valley Authority (TVA) were built by men who sent part of their government paychecks to their families to help with food and housing expenses. A contribution to the common welfare helped relieve individual suffering. During that era, the Roosevelt administration and Democratic Congress initiated the Social Security program, requiring working Americans to contribute to a common fund which would be used to pay benefits to contributors when they retired. Those payroll tax contributions were the price of admission to the benefits of the program.

At that time, only states, local communities and private charities administered welfare programs. These were benefits paid to families based on their need, not an admission fee of contributions to the program. In the 1960s, the Johnson administration and Democratic Congress ushered in the Great Society programs that firmly established a precedent that raising individual welfare increased the general welfare. In the late 1970s, Democratic President Jimmy Carter fought this expansive role of government but his sentiments were countered by the liberal wing of his party, particularly the powerful House Speaker Tip O’Neill, a strong believer in the government’s power to correct social problems (Cuomo, 2021).

Conservatives argue that federal programs designed to increase individual welfare exceed the boundaries set out in Article 1, Section 8. Such programs may weaken the supports provided by family, church and local community (O’Neil, 2021, 106). They do not incentivize people to change their behavior. The programs encourage people to cast their vote for those politicians who promise more benefits, making the voting process a transaction, not a civic endorsement of a voter’s values. At a fundraiser in the closing weeks of the 2012 Presidential Election, Republican candidate Mitt Romney commented that the 47% of Americans who paid no income tax were the base constituency of the Democratic Party (Moorhead, 2012). His implication that half of Americans were moochers was a blow to his campaign.

Liberals argue that the “general welfare” clause of the Constitution implies a government duty to improve individual welfare. They counter that many people in poor communities do not have informal support networks to lean on. Many people did not choose their circumstances and their decisions, whether prudent or ill-advised, are not based on gaining access to a government program. Farmers, business owners and executives also vote for government programs like subsidies, lower taxes, and less regulation. All voters are motivated in part by their self-interest.

How do individual, common and general welfares interact? What is meant by the general welfare? What does it consist of? Shortly after the Constitution was presented to the states for ratification, anti-Federalists argued that “providing for the … general welfare” imposed few constraints on the federal government’s ability to tax the people to fund that general welfare (Debates). Americans continue to argue the merits of these programs and the role of government in their lives.

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Notes:

Photo by Camylla Battani on Unsplash

Congressional Research Service (CRS). (2021, May 3). Introduction to U.S. Economy: Housing market. Retrieved August 28, 2021, from https://sgp.fas.org/crs/misc/IF11327.pdf

Cuomo, M. M. (2001, March 11). The Last Liberal. Retrieved August 28, 2021, from https://archive.nytimes.com/www.nytimes.com/books/01/03/11/reviews/010311.11cuomot.html

Debates. “Centinel,” the pen name of Samuel Bryan, and “Brutus” were among several anti-Federalists who protested the insertion of the “general welfare” clause in the Constitution.  See Centinel I and Brutus V editorials.

Moorhead, M. (2012, September 18). PolitiFact – Mitt Romney says 47 percent of Americans pay no income tax. Retrieved August 28, 2021, from https://www.politifact.com/factchecks/2012/sep/18/mitt-romney/romney-says-47-percent-americans-pay-no-income-tax/

The Defiant and Compliant

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August 22, 2021

by Steve Stofka

Most of the people showing up at the nation’s emergency rooms desperate for air are unvaccinated. For various and diverse reasons they decided not to get vaccinated. Some think that the vaccines were developed too fast. Others are waiting for all the facts. Some think the vaccines were not tested enough on people of color. Some don’t trust scientists or government. Others suspect a conspiracy. We have become a nation of two groups: the defiant and the compliant.

In Ayn Rand’s novel Atlas Shrugged the nation adopts totalitarian socialist policies similar to the Communist regime of the Soviet Union. Ayn Rand was only 20 when she emigrated to the U.S. in 1925, a year after the death of Vladimir Lenin (Anthem, n.d.). Throughout her career, she adopted a libertarian stance in opposition to the totalitarian planned economy of the new Soviet Union. In Atlas Shrugged, several captains of key industries demonstrate their defiance of the new regime by refusing to comply with the state’s demands for individual sacrifice on the altar of the common good. They shrug.

At hospitals around the country, but particularly in southern states, nurses are leaving. In some hospital systems, a third of nursing positions are vacant (Jacobs, 2021). Many nurses are frustrated by the recent surge in unvaccinated patients, those defiant ones who took their chances, then arrive at emergency rooms and expect that hospitals and their staff will devote themselves to round the clock care. The defiant ones rely on the compliance of others.

In Rand’s romantic account, the pursuit of self-interest has no negative externalities. The heroes who defect have extraordinary talent. In the real world of the pandemic, it is ordinary people who no longer want or can handle the stress of caring for people who didn’t care for themselves or those around them. They are tired of coming to work and having dirt and objects thrown at them by the defiant ones. The nurses are shrugging and leaving.

The defiant ones championed individual freedom over collective responsibility but they championed their freedom, a selfish freedom of the few. The self-styled freedom fighters hoped that hospital workers would value compassion and compliance more than their personal freedom. As more hospital workers quit, the defiant ones reach out and say, “You need to stay and be compassionate. My needs are more important than your freedom or your mental health.”

A civil society depends on voluntary compliance by a large majority of the people. We may complain about the rules but we regard the government as a legitimate maker of rules. The defiant ones may respect the force of the state but do not acknowledge the legitimacy of state institutions. In their eyes, the sovereignty of the individual is paramount and the individual has no moral obligation to abide by any rule they do not approve. As the number of defiant ones grows during a pandemic, the norms and resources of a civil society break down. As southern states test those civil boundaries, there might be less dangerous places to visit.

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Photo by Ani Kolleshi on Unsplash

Anthem – Ayn Rand Biography. (n.d.). Retrieved August 21, 2021, from https://www.cliffsnotes.com/literature/a/anthem/ayn-rand-biography

Jacobs, A. (2021, August 21). ‘Nursing is in Crisis’: Staff Shortages Put Patients at Risk. Retrieved August 21, 2021, from https://www.nytimes.com/2021/08/21/health/covid-nursing-shortage-delta.html

Chains of Corruption

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August 15, 2021

by Steve Stofka

This week the Taliban accelerated their months-long takeover of Afghanistan, a country where the American people have spent almost $1 trillion in the past two decades (BBC News, 2021). As the insurgents command large cities there are daily reports of atrocities committed to enforce the Taliban’s extremist interpretation of the Koran, particularly women’s dress codes and smartphones (Gibbons-Neff, Shah, & Huylebroek, 2021). People are asking why is there so little resistance to the Taliban? American taxpayers have helped bolster the Afghan military to 300,000. Couldn’t they fight a Taliban insurgency of less than 100,000? American taxpayers have spent a lot of money to build an Afghan air force, much of which is now in the hands of the Taliban. What happened?

A short answer is corruption. A slightly longer answer is that no amount of money can build strong institutions of trust and fairness among a people in less than two decades. One indication of corruption is the ease of doing business in a country. In 2018, the World Bank ranked Afghanistan 173rd out of 189 countries (FRED, 2021). As a comparison, Zimbabwe and Nigeria, two countries famous for the corruption in government at all levels, rank 140th and 131st  in ease of doing business. The U.S. is ranked 6th, a rule of trust, law and order that most Americans take for granted.

The Afghan people are bound together by the chains of bribery. People must pay bribes in addition to the normal fees to get electricity turned on, to get an ID card, or to open up a small shop (Keefe, 2015). Corruption becomes the dominant institution, creating a culture of predator and prey. There is no incentive to improve public service because the waiting list for those services supports the livelihood of public officials dependent on the bribe system. Those able and willing to pay a generous bribe to a utility worker can get their electric service turned on in a week. Less generous customers might wait six months. Those with any public authority prey on everyone else and there is competition for those positions of authority. To keep a position, a public official kicks back part of their monthly take in bribes to their supervisor and the money flows to the top of the government “food” chain (Filkins, 2009). In 2010, Mohammed Bouazizi lit himself on fire to protest a similar system in Tunisia in North Africa.

Reporters stationed in Afghanistan report that there may be only 60,000 soldiers actually serving in uniform. The rest are on the payroll because they know someone who knows someone. Those in uniform have little food or ammo, the money for those goods disappearing into someone’s pocket.

American taxpayers have paid for a lot of improvement as well as death in Afghanistan. GDP is five times higher in 2019 than it was in 2000. In 1980, literacy was 18%. In 2010, it was 30%. In fifty years, the fertility rate has declined by almost half and the infant mortality rate plunged to a sixth of what it was in 1962, when 1 out of 4 Afghan infants died. Life expectancy at birth has increased from 32 years in 1960 to 65 years in 2018 (FRED, 2021). Much of the progress has occurred after the U.S. invasion, a testament to the American commitment to the well-being and security of the Afghan people.

There is no magic formula for building strong institutions of trust and law among a people. The British built an extensive bureaucracy to administer India, but the interpersonal culture of India turned that formal institutional structure into the infamous “license raj” system that exists today. Despite decades of effort and political promises, that corruption hinders growth in India, which is ranked 63rd in ease of doing business. Imagine what it is like in Afghanistan with its rank of 173rd.  Instead of focusing on the money Americans have spent in Afghanistan, lets be grateful that we enjoy an environment of trust, law and order that is not perfect but better than most countries.

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Photo by Claudio Schwarz on Unsplash

BBC News. (2021, July 06). Afghanistan war: What has the conflict cost the US? Retrieved August 14, 2021, from https://www.bbc.com/news/world-47391821.

FRED – Federal Reserve. (2021). Various series on Afghanistan. Retrieved August 14, 2021, from https://fred.stlouisfed.org. Note: search for Afghanistan

Filkins, D. (2009, January 02). Afghan corruption: Everything for sale. Retrieved August 14, 2021, from https://www.nytimes.com/2009/01/02/world/asia/02iht-corrupt.1.19050534.html

Gibbons-Neff, T., Shah, T., & Huylebroek, J. (2021, February 15). The Taliban close in on Afghan Cities, pushing the country to the brink. Retrieved August 14, 2021, from https://www.nytimes.com/2021/02/15/world/asia/taliban-afghanistan.html

Keefe, P. R. (2015, January 19). Corruption and Revolt. New Yorker. doi:http://emiguel.econ.berkeley.edu/assets/assets/miguel_media/387/The_New_Yorker_Corruption_and_Revolt___Does_Tolerating_Graft_Undermine_National_Security.pdf

Obligate Growth

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This week Goldman Sachs announced that they were raising the starting salaries for entry level analysts to $110,000 from $85,000. When I heard that on the radio, I remembered the bailout of Goldman Sachs a dozen years ago. I thought of the many hospital workers who have risked their lives during the Covid crisis. Most were not making that kind of money. Under capitalism, market transactions direct resources but do they signal a society’s values?

In Sustainable Capitalism, John Ikerd (2005, 4) calls for a balance of our self-interest with our common-interests, citing the classical economists like Adam Smith who recognized that a market system must work within the ethical bounds of society (2005, 4). There is no point to capitalism if the wealth that the system can generate does not improve the general well-being of a society. Capitalism directs resources but only for goods where two parties can agree on a value. It’s hard to find common agreement on the value of many public or common goods. The infrastructure bill being negotiated in Congress this year bears witness to that reality. What is the value of a well-lit street, improved cable systems, safer electrical generation and the many public goods that we take for granted?

Capitalism evolved to assemble and deploy investment for shipping ventures, and to diffuse the extreme risk of shipping goods across oceans. In the 18th century as many as half of all ships returning to England laden with goods from India were lost at sea. Most ventures were launched without insurance. In the 17th century, insurers often went insolvent and could not cover a great loss (Johns 1958, 126). Many did not know how to price risk. In 1720, Lloyds of London and the Royal Exchange were formed to spread the risk. During the American Revolution the British government contracted out the shipping of armaments and British troops to the colonies. In 1780, a series of sea battles between the British, Spanish and French fleets severely damaged the West Indian fleet and caused great losses to underwriters (Johns 1958, 126). Loss is a good teacher of better risk management.

The underlying principle of capitalism is constant growth. In these early centuries the destruction of capital provided a natural constraint. In the 19th century, inflation from government money printing was another natural constraint (Formaini, n.d.). The capital grew but it bought less. The growth of most populations hits the bounds of their environment. Rabbits run out of food and the population periodically crashes. In the last century following World War 2, economists thought that countries who adopted democracy and capitalism would develop into thriving markets for capital. After key losses, capital managers became reluctant to deploy investment into poor countries without infrastructure, institutions and respect for private property.

Decades later, economists and political scientists now question that growth hypothesis. According to that theory, India and some former African colonies should be thriving. They are not. Given the global constraints of growth, the competition between capitals produces a concentration of capital in fewer multi-national corporations. Countries become segregated into two groups: those whose people are still very much engaged in agriculture and those whose people are engaged in services and to a lesser degree industrialization.

Agriculture is an economic trap because it is seasonal. Farmers harvest a particular crop at the same time and their competition drives the prices down. That is good for everyone except the farmers. Weather events can affect an entire region whose economy is dependent on crop production. As more farmers give up or lose their farms, large corporations take over the land. Their size and dispersal across several regions diffuses risk just as the insurance pools brokered through Lloyds of London in the 18th century.

As capital flows become more concentrated, the pool of those who benefit becomes smaller and smaller. Adam Smith’s “invisible hand” no longer spreads a general sense of well-being to the greater community. A few industries, like finance, prosper while many struggle and scrabble for the remains.

Those on Wall Street make a lot of money, but it is highly competitive and stressful. When Goldman Sachs did an internal survey of entry-level analysts at their firm, those analysts reported working an average of 95 hours a week to meet the upswell of client demand as the Covid vaccine led to a lifting of restrictions (McCaffrey 2021). Many reported physical side-effects from the long hours and stress. That $110,000 a year works out to $23 an hour. The median pay for a plumber is $28 an hour. Those entry level analysts suddenly don’t look like titans of industry. Many have student debt. They live in New York City with its high cost of living. Many probably thought that, if they could hang on for a year or two, their load would lighten and all their study and hard work would pay off. They are on capitalism’s hamster wheel. How long can the wheel keep turning?

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Photo by dylan nolte on Unsplash

Bureau of Labor Statistics (2021). U.S. Department of Labor, Occupational Outlook Handbook, Plumbers, Pipefitters, and Steamfitters. Available from https://www.bls.gov/ooh/construction-and-extraction/plumbers-pipefitters-and-steamfitters.htm (visited July 17, 2021).

Formaini, R. L. (n.d.). David Ricardo Theory of Free International Trade (2nd ed., Vol. 9) (Federal Reserve Bank of Dallas). Dallas, TX: Federal Reserve.

Ikerd, J. (2005). Sustainable Capitalism [Scholarly project]. In University of Missouri. Retrieved August 06, 2021, from https://faculty.missouri.edu/ikerdj/papers/WIMadisonSustainCapitalism.pdf

John, A. H. (1958). The London Assurance company and the marine insurance market of the eighteenth century. Economica, 25(98), 126. doi:10.2307/2551021

McCaffrey, O. (2021, August 02). Goldman Sachs Is Giving Entry-Level Bankers a Nearly 30% Raise. Retrieved August 07, 2021, from https://www.wsj.com/articles/goldman-sachs-is-giving-entry-level-bankers-a-nearly-30-raise-11627930285

Thug

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August 1, 2021

by Steve Stofka

Following the Civil War, the Democratic Party welcomed a new breed of thug organized under the name of the Ku Klux Klan. Clad in white hoods and bed sheets, they looked like characters in a Punch and Judy show. Using fear, torture and fire they attacked black people in the South. They used intimidation and poll taxes to discourage blacks from participating in their own government. The Democratic Party hugged the thugs.

In 1954, the Supreme Court decided the Brown v. Board of Education case (Oyez, 2021) and held that segregated schools were not equal. In 1956, a Clinton, TN school was the first high school to attempt integration. The sons and grandsons of the KKK thugs can be seen throwing rocks at black girls trying to go to school (LOC, 2004).

Ten years later, former Texas Senator and now President Lyndon Johnson signed the Civil Rights Act and the Fair Housing Act to help give black people an equal opportunity to participate in politics, and the liberty to compete in the economy without prejudice. He tried to kick the thugs out of the Democratic Party and that bugged the thugs.

Dubbed the “Southern Strategy” Presidential candidate Richard Nixon welcomed them to the Republican Party. Instead of throwing rocks, Nixon proposed vouchers and other taxpayer funds that would help white parents in working class neighborhoods send their children to white only schools (Brown, 2004, 191-2). It was to be called “school choice.” In 1971, Nixon even proposed a Constitutional Amendment to reverse a Supreme Court decision to integrate schools.

“The Democrats don’t care about working people anymore,” became the refrain of voters who switched their allegiance from the Democratic to the Republican Party. In the 1980s President Reagan led a conservative movement that nurtured an intellectual thuggery. The actor Michael Douglas’ rallying cry of “Greed is good!” in the 1987 movie Wall Street portrayed this new-style thug. A 40-something Donald Trump, coddled from birth and protected by bodyguards and lawyers, liked the brashness. He portrayed brash.

Thirty years later Mr. Trump was brash enough to take on a phalanx of Republican Presidential candidates. He was a thug with a mug and spoke to the thugs in the party, saying any damn thing he wanted to because he was a smug thug. Thugs throw rocks at little girls. They grab women’s privates with impunity because they are not bound by the rules of decency. Mr. Trump promised his supporters a wall to keep out the Others. His supporters’ kids wouldn’t have to go to school with those Other kids. When he became President, he appointed an Education Secretary who championed school choice, and for four years he kept trying to build his Big Beautiful wall.

After he lost the election, the thug did not shrug. Rather, he remembered a line from actor Jimmy Cagney, “You dirty rat,” and complained, “Those thugs bugged the polls.” He called his supporters to the White House on January 6th  to take out the dirty rats who had stolen the election from him, including his own Vice-President, Mike Pence. The Presidency was his territory, see, and those Other guys was muscling in on his territory. Mr. Trump called on his supporters to take back the territory and they broke open the doors to Congress.  

Convinced that democracy produces populist thugs like Mr. Trump, the Founding Fathers set up a republic to insulate the institutions of law and government from public passions. After much argument and compromise, they would not let people even vote directly for their own President. Today we elect members of an Electoral College who elect the President. Two years after the drafting of the Constitution in 1787, the French people stormed the Bastille in Paris and ten years of Revolutionary fervor and terror followed. Answering critics, Alexander Hamilton and James Madison pointed to the anarchy that erupted in France as a demonstration that people could not be trusted with the power of a fully democratic state. January 6th was yet another reminder of that truth.

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Photo by Martin Zaenkert on Unsplash

Brown, F. (2004). Nixon’s “Southern strategy” and forces against Brown. The Journal of Negro Education, 73(3), 191. doi:10.2307/4129605

Library of Congress (LOC). (2004, November 13). Brown v. board at Fifty: “with an Even hand” the aftermath. Retrieved July 31, 2021, from http://www.loc.gov/exhibits/brown/brown-aftermath.html#obj121C

Oyez. (2021). Brown v. Board of Education. Retrieved July 31, 2021, from https://www.oyez.org/cases/1940-1955/347us483