Relevant and even prescient commentary on news, politics and the economy.

Winning More Hearts and Minds in Iraq

The Guardian has these quotes about the CIA’s assessment of the Iraqi resistance:

One military intelligence assessment now estimates the insurgents’ strength at 50,000. Analysts cautioned that such a figure was speculative, but it does indicate a deep-rooted revolt on a far greater scale than the Pentagon had led the administration to believe.

An intelligence source in Washington familiar with the CIA report described it as a “bleak assessment that the resistance is broad, strong and getting stronger”.

As an example of why the resistance is growing, look to stories like this one:

FALLUJAH, Iraq (AP)–U.S. troops opened fire on a truck carrying live chickens near the tense town of Fallujah, killing five civilians aboard the vehicle, including a father and his two sons, relatives said Wednesday.

“They went to bring chickens … and they came back at 9 or 10 at night and we were waiting for them,” said Khalid Khalifa al-Jumaily, whose two nephews were killed on the truck. “The Americans fired on them.”

Add a few more to that 50,000. Sigh.

Kash

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Warren Buffett’s Interesting Solution for the Trade Deficit

Note that I call it an ‘interesting’ solution, rather than ‘sensible’ or ‘good’. I like Buffett – he seems like a decent guy (for a billionaire) and his priorities are basically in the right place, in my opinion. But this idea has some serious problems.

In an article in Fortune magazine (subscription required), Buffett says that he is extremely worried about the US trade deficit. In particular, he is worried about the fact that by running trade deficits, and thus effectively trading US assets for foreign goods and services, the US is becoming too deeply indebted to the rest of the world. Here’s his solution:

The time to halt this trading of assets for consumables is now, and I have a plan to suggest for getting it done. My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to increased overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise almost certain to occur.

We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties—either exporters abroad or importers here—wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.

To his substantial credit, by the way, Buffett began his piece with a disclaimer, acknowledging that he is not an economist and does not have a good record of macroeconomic forecasting.

But what about the substance of his suggestion? I find it fascinating to consider.

He’s basically completely right in everything he says. The US is indeed becoming more indebted to the rest of the world with every passing day. He’s also right that his plan would very quickly eliminate the US’s trade deficit. And he’s right when he says that his proposed solution functions essentially like an across-the-board tariff, though he doesn’t mention that it’s a peculiar type of tariff with the revenues being transferred directly into across-the-board export subsidies. It’s actually an extremely elegant way to simultaneously and uniformly tax imports and subsidize exports.

Now what about the question of whether it’s a good idea? Put aside the fact that it would be grossly illegal under WTO rules, and would therefore probably require the US to exit the WTO altogether. The problem is while he’s right that the trade gap is problematic in the long run, in the short run its a good thing. In this, it’s very much like the paradox of thrift.

In other words, there are substantial benefits to the US trade deficit in the short run. In particular, the trade deficit allows the US to have higher business investment (in addition to consumption) than it would otherwise. Without it, therefore, US firms would be investing in less productive capacity, making the US economy grow more slowly, be less productive, and therefore have lower wages over time.

Another problem is that without a trade deficit, the US would (by definition) no longer be attracting net capital flows. All of the money that is currently flowing into the US to purchase US assets would go elsewhere. This would probably lead to a substantial drop in asset prices. The stock market would fall, interest rates would have to rise sharply, and real estate prices would tumble.

His plan would also probably create all sorts of temporarily perverse incentives during its implementation, would wreak havoc on international financial markets, would lead to a sharp bout of inflation for the US, and probably cause a few other problems as well.

And yet, I completely agree with Buffett’s worries about the long-run implications of the US trade deficit. So while I can’t endorse Buffett’s solution, I’m sympathetic to his goals. As an alternative, I can repeat the tired old prescription of “higher savings, lower consumption” in the US – but that’s not really something that a policy-maker can do much about. So I have to admit that I don’t have a good solution of my own to offer. I wish I did.

Kash

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Bush Takes Advice from France

From today’s NYTimes:

WASHINGTON, Nov. 12 — The Bush administration, moving up its timetable for self-government in Iraq and yielding to its own handpicked leadership there, has decided to try to hold elections in the first half of next year and turn civilian authority over to a temporary government before a new constitution is written, administration officials said Wednesday.

Isn’t this exactly what the French have been advocating for the past several months? Let’s look back in time and see. From The Economist, September 19, 2003:

France wants the UN to play a bigger role in rebuilding Iraq. France is also agitating for self-government for Iraqis as quickly as possible. Mr Chirac has urged America to allow a provisional Iraqi government—more powerful than the American-backed all-Iraqi Governing Council—to take over [within months], with elections to follow next spring. America thinks this is ridiculous—it would, Washington argues, mean handing power to Iraqis before they are ready, and thus consigning the country to more chaos.

Of course, this doesn’t mean that the Bush administration has changed its mind. It always intended things to be this way, right? Because Team Bush never makes mistakes.

Kash

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The Republicans’ Senate Sleepover

Senate Republicans are holding a big PR event in the Senate tonight, with a 30-hour marathon session of sleeping on cots, hot chocolate, late-night gossip and camaraderie, and speeches about the treatment of Bush’s judicial nominations. They want to draw attention to the fact that Senate Democrats, through the use of filibusters, have blocked the nomination of 4 of Bush’s judicial nominees.

I feel no sympathy for them. This is why:

I’m not sure which phrase leaps to my mind first: something about dishing it out but not being able to take it, or the single word “hypocrisy.” Click here for more specifics.

Kash

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Recession in 2004?

Okay, I don’t really think that we’re going to have a full-blown recession next year in the US. However, as I’ve alluded several times, I do think that economic growth in the US will slow considerably over the next 6-12 months. And in just the last week, I’ve encountered a raft of people who agree with me. Here are some examples that echo my fears about the US economy for 2004:

Stephen Roach, chief economist of Morgan Stanley:

In today’s US economy, there’s a veritable lack of pent-up demand in the two sectors that normally spark cyclical upturns; consumer durables currently stand at a record 11.4% of GDP versus a sub-7% reading in the early 1990s, and residential construction has moved up to a cycle high 4.3% of GDP versus a 3.3% reading a decade ago. Lacking in classic sources of pent-up demand, America is more than ever in need of new sources of growth.

Justin Lahart, commentator for CNN/Money:

Structurally the economy doesn’t look the way it has at the beginning of past recessions. The current account deficit — the gap in the United States’ trade in goods and services with the rest of the world — has risen to about 5 percent of the total economy. That’s as high as it’s ever been. In contrast, at the beginning of past economic expansions the current account has tended to be in surplus.

Housing prices usually get hurt during recessions. In this one, they did not. Consumer spending usually sees some sort of slowing. Again, didn’t happen this time.

For some economists, these things represent structural flaws in the economy which will make the expansion less potent and less long than the ones that preceded it.

And finally, from The Economist:

The main reason for doubting that America is back on a path of strong, sustainable growth is that it has failed to purge the excesses of its previous boom. It is, to say the least, odd that at the beginning of an economic recovery many indicators—low saving, rampant household borrowing, record house-building and uncomfortably high stockmarket p/e ratios to name but a few—have more the look of a cycle that is drawing to a close.

I think the US economy is going to do fine in the short-run. But I do worry that these long-term imbalances are going to make it impossible for the US to enjoy a sustained boom over the next several years, as we would normally expect at this stage in the business cycle. And judging by some of the financial press recently, I am apparently not alone.

Kash

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At Least 14 Italian Soldiers Die in Iraq

As you’ve probably heard by now, a car bomb went off in the Italian base in Nasiryiah today, killing numerous Italian soldiers and Iraqis. As you may know, I like to understand what’s happening in the domestic politics of other countries. So here are some quotes of reaction from various Italian politicians, compiled from the BBC and The Guardian.

Pietro Folena of the main opposition party, the Democrats of the Left, said:

“They were sent to an Iraq in flames because the government wanted to do a favour for the Bush administration without taking risks into consideration. Now the Italian soldiers must come home. It is the only right thing to do at this moment.”

Green Party leader Alfonso Pecoraro Scanio said troops should be pulled out of Iraq:

“It is immoral to put the lives of thousands of young Italians at risk for Bush’s pre-emptive war.”

Prime Minister Silvio Berlusconi, after consulting with Interior Minister Giuseppe Pisanu, voiced his grief over the losses, but insisted the operation should go on:

“No intimidation should distract us from our will to help that country rise up again and build up self-government, security and freedom.”

The European Commission president, Italy’s Romano Prodi, has called for peacekeeping operations in Iraq to be taken over by the UN:

“We must move on to a phase where the UN has a greater involvement in achieving peace, a phase in which greater weight and power must be given to the Iraqi people within the Iraqi Government.

“I had always thanked God because the Italians had been spared, but our fears were justified: this time it was our turn.”

I’ll be curious to see the sort of pressure that Berlusconi faces over the coming days. This is the sort of thing that can bring down governments, if not handled carefully.

Note that Nasiriyah was the site of the heaviest losses for US troops during the invasion or Iraq. A story from yesterday’s BBC provides one of the first comprehensive accountings of that day, in which 29 US soldiers were killed. It’s a rather chilling story, not least because of the estimate that in addition to the US dead, over 1,000 Iraqis died during the fight for Nasiriyah.

Kash

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Well Said!

From Slacktivist:

Don’t forget about the schools — that’s what this war has always been about, the centers of mass instruction. And the Good News is that the schools are open. Mission Accomplished, schools-wise.

AB

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Soros and Large Political Donations

Today’s Washington Post has a great piece about the recent donations that George Soros has begun making to liberal advocacy groups.

NEW YORK — George Soros, one of the world’s richest men, has given away nearly $5 billion to promote democracy in the former Soviet bloc, Africa and Asia. Now he has a new project: defeating President Bush.

“It is the central focus of my life,” Soros said, his blue eyes settled on an unseen target. The 2004 presidential race, he said in an interview, is “a matter of life and death.”

Soros, who has financed efforts to promote open societies in more than 50 countries around the world, is bringing the fight home, he said. On Monday, he and a partner committed up to $5 million to MoveOn.org, a liberal activist group, bringing to $15.5 million the total of his personal contributions to oust Bush.

My favorite quote comes at the end of the piece, however:

Asked whether he would trade his $7 billion fortune to unseat Bush, Soros opened his mouth. Then he closed it. The proposal hung in the air: Would he become poor to beat Bush?

He said, “If someone guaranteed it.”

It’s gratifying to see what happens when the anger that many of us feel toward the Bush administration is shared by one of the richest men in the world: it gets translated into massive political donations. The only catch is that those donations can’t go directly to the Democratic Party, thanks to the McCain-Feingold campaign finance act of 2002 (M-F). His big donations have to go to unaffiliated groups that aren’t governed by M-F.

This is also a good illustration of why M-F has hurt Democrats more than Republicans. Perhaps counter intuitively, Dems have recently (i.e. the last 10 years or so) gotten more of their money from a few giant donations than Repubs.

This matters, because the Supreme Court is due to issue its ruling about M-F within the next month or so. If the campaign finance law is found illegal, expect a huge surge in soft money donations to Democrats (and a large, but somewhat smaller surge for Republicans), one that could substantially level the financial playing field between the two parties. Of course, I also believe strongly in campaign finance in principle. So I’m left very torn about what to wish for from the Supreme Court – a dilemma faced by many others on both sides of the aisle, I’m sure…

Kash

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Leave California. Now.

Ok, it’s not that bad. But I see via Digby that Gov. Schwarzenegger hired Stephen Moore (see this post for background on Moore) as an advisor. Apparently, the US Newswire lets people write the headlines for articles that mention them:

Gov. Schwarzenegger Names Stephen Moore to Calif. Audit Committee; Noted Economist and Activist to Help Solve Golden State Fiscal Crisis

Moore’s Club for Growth is the last bastion — other than a few people at the AEI and in the current administration — of the theory that tax cuts will increase general revenue.(*)

AB

(*) Yes, tax cuts will increase general revenue when rates are near 100% (because if taxes are 100%, then revenue will be near zero as almost nobody will work), but given modern tax rates, that’s a non sequitur.

UPDATE: Upon closer inspection, the US Newswire piece is a press release, so Moore or one of his agents is responsible for referring to Moore as a “noted economist.” The last line, which says “For more information or to schedule an interview with Stephen Moore, please contact Kevin McVicker at 703-739-5920,” gave it away.

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