Wednesday, August 31, 2016

August 31, 2016

Another US Hack Blamed on Russia, Of Course
There's another political hack story in the news this week. This time the target was the voter registration systems of Illinois and Arizona.

Since it's a political hack story, it's naturally being blamed on Russia. Apparently, US politicians are under the impression that the long-deteriorating relationship with Russia has not quite been tense enough. Thus, they feel perfectly comfortable making strong accusations without meaningful evidence.

For more on this story, read's write-up, which explains that this is all just the worst form of electoral politicking. You can also check out our related article, out today, which makes a humble request to the Clinton campaign and the US media:

Hillary Clinton Deleted Emails Related to Benghazi Scandal
In spite of the FBI's decision not to prosecute Hillary (which wrote about here), the scandal surrounding her email server is alive and well.

That's because new shady information comes out about it seemingly every day. You can be forgiven if you're no longer shocked by any of it (or if you're bored by all of it). But with that disclaimer, the story that broke today is still worth your attention.

According to the State Department, as reported by AP, the FBI investigation recovered some 30 emails related to the Benghazi attack that killed a US ambassador in 2012. And critically, an "undetermined number" of these emails was not turned over by Clinton to the FBI for the purposes of the investigation. Instead, they were apparently deleted, either before the investigation occurred or as part of the "personal" emails.

This is a big deal. The Benghazi scandal is what Republicans were attempting to investigate when the private email server was discovered. Thus, it's virtually impossible to claim emails related to that scandal were legitimate to delete. We've also written previously about the Benghazi scandal itself, noting that it was really a distraction from the larger issue of the Libyan War. Still, it was a legitimate thing to investigate and Clinton was required to fully cooperate with that investigation. This latest report suggests that she and her team may have obstructed that investigation, and the investigation into the email server itself, more explicitly than previously understood.

64 Legislators Sign Letter to Delay Arms Deal for Saudi Arabia
In better news, 64 House members have signed a letter to President Obama to delay finalizing a recently announced arms deal with Saudi Arabia. In the letter, they specifically cite concerns about the ongoing atrocities being committed by the Saudis in the Yemen War, which you may recall, is a war to reinstall a dictator friendly to Saudi Arabia.

The United States Government has been supporting the war to appease its allies in Saudi Arabia, in spite of its clearly anti-democratic purpose and the immense suffering it has caused. This has included rhetorical support (if the issue even comes up, which is rare), and outright logistical support for the Saudi air force. That's why it's good news that there's some pushback on US efforts to provide even more support for the Saudis as they continue to prosecute the war in Yemen.

Granted, 64 isn't a majority. And they aren't trying to stop the arms sale outright yet or block explicit US support altogether. But it's a start.

Also, lest we be accused of hypocrisy, we should note that this situation is markedly different than the arms sanctions imposed on Iran, which we discussed and opposed earlier this year. The reason to oppose new arms sales to Saudi Arabia is because it's currently engaged in a brutal and baldly illegal aggressive war. The goal is to cut off supplies in the hopes that the aggressor might run out of supplies needed to keep the war going. If Iran was engaged in a similarly aggressive act, then we would oppose arms sales to them also. Right now, they aren't. (Iranian participation in the Syrian and Iraqi civil wars is in collaboration with the respective governments.)

Read Daniel Larison at The American Conservative for more on this story.

Please Get Your Russia Conspiracies Straight

Another public hacking episode is in the news this week, and naturally, Russia is being blamed for it.

Not that there appears to be much evidence as of yet that Russia is truly responsible. And such evidence is unlikely to be found, even if they did do it. Hacking cases are notoriously difficult if not impossible to definitively attribute. And attribution becomes even more unlikely if you're assuming the hackers have the effectively unlimited resources of a nation-state to fund very sophisticated attacks.

This all leads to a kind of Catch 22. Either Russia's state hacking apparatus is extraordinarily formidable and advanced--in which case, their culpability is not likely to be proved. Or, they are incompetent fools who can't even cover their own tracks--in which case, how much of a threat could they really be? Which one is it?

Sadly, that's not the only cognitive dissonance going on here.

The target of the latest purported "Russia" hacks was two state voter registration systems. This fits well with the useful campaign narrative that Putin is trying to manipulate the election to favor Donald Trump. But a moment's thought reveals that this story has contradictions of its own. On the one hand, we are told that we must fear the recklessness of Donald Trump and be appalled at the idea he would have control of nuclear weapons. But on the other hand, the reckless Donald Trump is also allegedly a "puppet" of Vladimir Putin, the leader of the other nuclear country that the US is most likely to exchange nuclear weapons with. How do we possibly reconcile this?

To believe both of those ideas simultaneously is to believe that Russia is trying to manipulate the elections in Donald Trump's favor, so that once elected, Donald Trump will start a nuclear war against Russia. Sure, no one ever says it like that. But if you believed both narratives that the Clinton campaign advances, that's where you end up. Hopefully, you don't need me to tell you that is crazy.

Thus, we have a humble suggestion. If you're going to demonize Russia, ideally try to use some actual facts. But if you can't muster that, at least get your conspiracy theories straight. It would save the rest of us a lot of needless frustration.

Tuesday, August 30, 2016

August 30, 2016

The Rest of What Colin Kaepernick Said
Last Friday, a new scandal erupted when San Francisco 49ers Quarterback Colin Kaepernick remained seated during the national anthem before a preseason game. Interviewed later, Kaepernick said it was a deliberate act of protest. And the reason for his protest that was most widely reported was about racial inequality, specifically his comment that "not going to stand up to show pride in a flag for a country that oppresses black people and people of color."

Thus, the controversy fell along familiar racial lines. Conservatives get to be outraged that someone would not be proud of their government and its symbols. After all, what could be more un-American than not showing blind loyalty to a government one finds oppressive? If only we had some kind of national precedent for protesting an unjust form of government...

Meanwhile, progressives could rejoice in the fact the issue of racial injustice was in the news and most--if football fanaticism didn't take precedent--surely supported him. However, it must have been a hollow joy. Because while it was getting attention, a significant portion of that attention amounted to a collective eye-roll.

The outcome for all concerned might have been considerably better if the media had decided to report the rest of what Kaepernick said. In fact, while concern about racism was part of the message, it was probably not the most interesting part. In particular, this is what he had to say about the presidential election--and what's notable is that his contempt was decidedly bipartisan in nature:
You have Hillary who has called black teens or black kids super predators, you have Donald Trump who’s openly racist. We have a presidential candidate who has deleted emails and done things illegally and is a presidential candidate. That doesn’t make sense to me because if that was any other person you’d be in prison. So, what is this country really standing for?
One might think it would be an important news story when a black celebrity, who's in the news for political reasons anyway, decides to call out Donald Trump and Hillary Clinton for being racist. But instead, the news focused on a comfortable, simpler narrative without that nuance.

Read more about Kaepernick's interview at Zero Hedge.

More US Allies Committing Atrocities
Reuters is reporting that the Shi'ite militias that the US backs in Iraq engaged in a series of atrocities after capturing Fallujah from ISIS. Fallujah was an overwhelmingly Sunni city, and the Shi'ite militias apparently tried to get revenge on many Sunni civilians. According to Reuters, the violence involved hundreds of victims and the use of both torture and execution. The exact death toll is uncertain, however, as nearly 700 people remain missing.

This story should be a reminder that, as we often say, there are no good guys in a civil war. The longer they drag on, the more brutal all parties to the conflict tend to become as more moderate and peaceful people flee or die in the cross-fire. This is also an excellent reason for the US not to intervene on any side. Any other course of action will invariably lead us to support atrocities in some form.

Read the quick summary from on this story, or the full report from Reuters.

Instant Runoff Voting on the Ballot in Maine
Closing with a more optimistic story today, The Intercept is reporting that voters in the state of Maine will get the chance to vote on a election process in November. The proposal is referred to as Instant Runoff Voting, and it's nice because it effectively removes the "wasted vote" excuse for voting for a Republican or Democrat when you actually prefer someone else.

We've previously written at length on why the "wasted vote" excuse is nonsense in the first place. But since, sadly, only a small portion of Americans are regular readers of The Daily Face Palm (for now), we're delighted to see formal, structural solutions to the problem emerge.

The basic idea is that voters rank their choices of candidates, so that if their first choice can't win a majority, then perhaps their second choice will. So instead of a vote for Johnson being a vote for Trump / Clinton (depending which party is warning you), it would make formally ensure that a vote for Johnson is only, well, a vote for Johnson. That's how it should be. In practice, it sounds like the legislation will only apply to statewide elections at first not the presidency, but still it could be a big step.

Read The Intercept's full article for more on this system and the background on Maine politics. Naturally, they approach the story from an overtly progressive lens, but the content is still good. And the fact is that this system, if implemented, would likely help minority ideas of all sorts, right, left, and libertarian.

Monday, August 29, 2016

August 29, 2016

Fed Continues To Pretend Obviously False Thing Is True
In a dramatically over-hyped meeting in Jackson Hole, Wyoming last week, the leaders of the Federal Reserve met for an annual symposium. Naturally, Fed Chair Janet Yellen was the one everyone was focused on, and her talk was decidedly ambiguous--which is what we've come to expect from the Fed in recent years.

Perhaps the most important line in her speech was her note that the Fed could consider purchasing "a broader range of assets". This is an indirect way of saying the Fed could consider buying corporate bonds and potentially stocks, instead of just government bonds to stimulate the economy with quantitative easing (which is money created out of nothing). This program has already been implemented by both the Bank of Japan and European Central Bank, and it's a truly terrible idea. In essence, it amounts to directly transferring wealth from the general public to people invested in the stock and bond market in order to prevent stock market from falling. Thus, not only does such a program explicitly prop up asset bubbles (which most of us frown upon), it also amounts to a wealth redistribution program from the poorest people (those with little or no financial investments) to the rich (who hold many such assets).

Fortunately, the Fed contends that this awful idea is merely something that should be considered and researched for the future, rather than something they are actively contemplating in the present. That said, we should have little doubt that they will attempt to implement this policy when the next recession strikes.

The other notable aspect of Friday's speech is that Yellen stated that the case for a rate hike is "strengthening". And in case the market didn't get the message, Fed Vice Chair Stanley Fischer noted in an interview that Yellen's comments were "consistent with a possible September hike".

Here, the Fed is once again pretending that 1) the economy is strong enough to tolerate a rate hike without chaos and 2) that it's confident enough in this, that it will risk hiking rates a month before the election. Of course it is possible that the Fed drinks its own Kool-aid, but this should be viewed with a heavy dose of skepticism. The behavior of the stock market in the last three months prior to a presidential election has an uncanny correlation with election results--if the stock market is rising, the incumbent party wins; if it's falling, the opposition party wins. This has been true 86% of the time, dating back to 1928.

No doubt, the Federal Reserve is also aware that the shape of the stock market has a significant impact on the presidential election as well. And that's why, despite their repeated protestations to the contrary, they probably are not foolish enough to raise rates in September. Time will tell.

Reason Triumphs A Little in Illinois Pension Debate
Last week, we discussed the precarious situation of the Illinois Teachers' Retirement System (TRS) pension plan, and the ongoing feud about the assumed rate of return.

Basically, the politicians wanted to keep the assumed rate of investment return high because it makes the pension plan look better than it really is. This, in turn, means the state government doesn't need fork over millions of dollars to the pension fund right away in an effort to keep the fund afloat. And because Illinois already has major budgetary issues, this is a very big problem for the politicians.

There's been an update on this story, and incredibly, reality triumphed over political imperatives. That doesn't usually happen.

Specifically, the TRS lowered its assumed rate of return to 7.0% from 7.5%. This is still very unrealistic, but it is slightly less unrealistic. That's still a win.

This development is good news if you're a TRS pensioner because it means the government will have to contribute more money to the plan and your pension payments won't run out quite as soon. If you're an Illinois taxpayer on the other hand, a new round of financial pain is about to start forthwith.

Turkey Invades Syria
The cluster that is the Syrian War got even more complicated last week when Turkish troops invaded Syria to participate in the assault on Jarabalus, in the country's north. ISIS was holding Jarabalus prior to the assault, and apparently, most of the ISIS fighters fled in the face of overwhelming firepower from the Turkey's troops and the rebel groups that they accompanied.

The immediate goal of the assault was about getting rid of ISIS, and that was one of the effects. However, the more important purpose of this attack was that Turkey wanted to prevent the Syrian Kurds from expanding their territory along the northern border. Readers will recall that the US backs the Syrian Kurds and even has special ops troops embedded with some of them; however, Turkey views the Syrian Kurds as a major threat.

Thus, the practical effect of the new Turkish intervention--which expanded to more villages over the weekend--is create even more fault lines in the Syrian conflict. The US and Russia back the Syrian Kurds, and now Turkey is directly confronting them. Turkey is on-board with fighting ISIS, along with Russia, Syria, and the US. Turkey also backs other Islamist rebels that are fighting Assad; the US is broadly on board with this policy, but Russia staunchly opposes it. Any one of these tensions could quickly lead to escalation, and that's why it's alarming that Turkey just added one more.

The only good news is that there's a new round of peace talks this week that hold more promise than most; here's hoping the US is finally willing to give up on regime change so a real ceasefire can be reached.

Read Patrick Cockburn for an in-depth take on the latest developments.

Thursday, August 25, 2016

EpiPen Price Hikes Are a Product of Government Failure, Not Market Failure

The EpiPen price hike story is tailor-made for political outrage. It involves a large for-profit corporation, a life-saving device, triple-digit price hikes, and as usual, poor people and their children are the ones that suffer the most.

For many people, it's a textbook example of market failure that demands government intervention.

In fact, it's a perfect example of government failure, and the best solution will be found in freer markets, not increased regulation.

Before we get to the economics of it, it's worth rehashing the basics of this scandal.

The EpiPen is used to treat life-threatening allergic reactions on the spot. It works by delivering a preset dose of the drug epinephrine. The tool is simple enough that even people who are panicking during an allergic reaction can self-administer the medication they need. It's a great idea, and it's been around since the 1970s. Epinephrine has also been around for some time, and is available in cheap generic forms today.

The problem is that one company, Mylan, owns the rights to the EpiPen device, and it has had a near-monopoly on the market. Thus, depending on where you read it, the price of the EpiPen has increased by 400 or 500 percent since around 2007. Given the critical nature of the device for people with serious allergies, these price hikes have not been too popular.

But this is where economics comes into play. Companies don't raise prices in a vacuum, and precious few could manage a four-fold increase and live to tell about it. If companies are raising prices dramatically and still making money, one of the following must be true:

  1. Their product is perceived to be so much better than the competition that their customers are willing to pay more. (Think Apple vs. PC.)
  2. Their product, and the underlying resources are in very short supply, and all companies in the industry are being forced to raise prices as a result. (For instance, this can happen for building materials after a natural disaster takes place.)
  3. Or more commonly, the company has little to no competition. And the government is keeping the competition out.
This last scenario is what accounts for the EpiPen's meteoric price rise.

In particular, the Food and Drug Administration has to approve any competing product before it can be sold in the US. And getting products approved by the FDA is a notoriously time-consuming and expensive process. As Reason notes, many companies are trying to compete in the epinephrine injection market, and the FDA has blocked most of them.

Meanwhile, the one product that has been approved by the FDA, Adrenaclick, has also been subtly sabotaged as a meaningful substitute. How? The FDA made it illegal for pharmacists to substitute a different version of the epinephrine injector for the EpiPen unless explicitly called for by the prescribing physician.

In other words, there's a reason that Mylan has been able to raise the price of a life-saving technology by 400 percent over the past decade. And that reason is government, not capitalism.

The Story and the Snapshot
The EpiPen is a new story, but in some ways, it's just a new version of the same story. It goes something like this:
The government steps in to regulate the market in order to protect consumers. 
These regulations have unintended consequences, and serve to restrict the amount of competition and supply in the market. 
Prices rise as a result.
Consumers complain about the price increases, and government introduces subsidies or other programs to offset the cost. Invariably, some consumers will fall through the cracks and find themselves without any access to the product they want or need. 
Even if we assume the best, purest intentions of government at every step of the way, the above story is still the likely result. The government starts with a good intention and ends up harming the very people it aimed to help. Of course, if we assume any corruption exists, the result deteriorates further.

It is near the last stage in the process above that these stories go viral, with politicians and everyday people starting to take note. 

And at this stage, all that gets reported is a snapshot--prices are extravagant, consumers are suffering, and usually, some corporation is making a lot of profit off all of it. And in that snapshot, capitalism really does look like it's at fault. Calling for more government intervention is the default response--after all, capitalism failed right?

But when we look beyond the snapshot, we see that capitalism is just the scapegoat for failed government policies. And if government intervention got us here in the first place, it's not likely a new intervention is going to provide the cure.

Wednesday, August 24, 2016

How Political Incentives Ensure a Pension Collapse

The State of Illinois just offered a wonderfully explicit example of how political incentives can lead to financial ruin.

The topic at hand was one of the state's numerous government pension funds--the Teachers' Retirement System (TRS). And like most, if not all, government pension programs, this one is deeply underfunded. As it stands, the pension fund's assets are estimated to cover just 42% of its obligations.

In essence, this means that under current assumptions about workers' life expectancy, future benefit payments, future investing returns on the pension assets, and future government contributions to the pension fund, the plan would have to start paying 42 cents on the dollar to pensioners right now in order to be sustainable in the long term. That gives you some sense of how bad things are.

But in reality, however, things are actually much worse.

The problem is that at least one of the assumptions used to calculate the pension's status is entirely implausible. The TRS assumes that they will earn an average 7.5% investing return on its funds. But the Federal Reserve's aggressive monetary stimulus efforts have pushed interest rates and bond yields to extremely low levels. And rates have stayed that way for years on end. For example

All of this has severe negative ramifications if you're a pension fund that invests in bonds to provide a safe and reliable return. As of this writing, even long-term US government debt like the 30-year Treasury yields a mere 2.24% return, and corporate debt doesn't offer much higher returns. Thus, in the current environment, pensions can no longer count on earning a 7.5% return with an acceptably low level of risk. But when the pension accountants go to calculate just how deep in the hole they are, this reality is forgotten. The accounting assumes the fund pension will continue to make 7.5% in spite of the fact that it has no realistic chance of doing so.

And this is where politics come into play. A growing number of analysts and observers are starting to note the obvious--that it is clearly absurd for pensions to assume a 7.5% return. Some have suggested a more modest figure like 4% would be much more credible and achievable, and honest, for anyone who cares about that.

But if this reality were acknowledged for a pension like the TRS, then the government would be obligated to contribute dramatically more funds to the pension to try to make it sustainable. This means higher tax rates or less spending in other areas--neither of which are going to be politically popular.

Thus, the governor of Illinois, Bruce Rauner, is trying to do everything in his power to kick disaster down the road, and presumably beyond his tenure as governor. There's nothing especially novel about a politician trying to ignore reality and delay negative consequences. But this case is still exceptional for just how bluntly they are willing to explain this rationale.

As Reuters reports, a senior adviser wrote a memo on the TRS pension situation, which included the following:
If the (TRS) board were to approve a lower assumed rate of return, taxpayers will be automatically and immediately on the hook for potentially hundreds of millions of dollars in higher taxes or reduced services.
And so, Illinois' Senate Minority Leader Christine Radogno proposed a bold political solution. Just kidding. Here's what she said:
This issue is important enough at the very least to put the TRS board on notice [that] we don’t want them taking any action that could cost taxpayers $200 to $300 million without appropriate scrutiny.
In other words, the TRS needs to continue to pretend that all is well with its investments, so that Illinois isn't forced to take action to address the problem now.

Of course, a compelling case could be made that the pensions in Illinois are already well-beyond saving. But what this latest exchange shows us is that even if they could be saved, mathematically and economically, it will always be impossible to save them politically.

Faced with the current pension crisis, the right response economically is to start acknowledging and addressing the problem as soon as possible. That would allow the financial pain, to pensioners and/or taxpayers, to be spread out over a longer time frame and could avoid an outright collapse. But the right response politically is to deny a problem exists to avoid causing voters any pain until the problem is too big to ignore (or fix).

In a case where rational long-term decision-making could produce a softer landing for the pension problem, politically motivated decision-making all but ensures the problem will end in full-on collapse.

It's true for Illinois and it's true for Social Security. It's not because the politicians are bad or stupid (though they may be). It's just that their incentives are wrong.

We can't trust people with short-term incentives to make good long-term decisions, yet that's what government pension programs ultimately require. Thus, we should not be surprised to see them slowly, tragically crumbling all around us.

(For readers interested to read more about this story and additional context on the Illinois pension crisis, this summary from Zero Hedge offers an excellent analysis.)

How Government Helps Perpetuate Poverty

Poverty may be the worst thing that conservatives and progressives agree on.

It's not on policy, mind you. But their policy proposals are both motivated by same basic assumption about what causes poverty--namely, the ignorance and incompetence of poor people themselves.

Some may surely bristle at this description, so it's useful to see how this concept is evident in the ideas that are explicitly advanced by both conservatives and progressives.

Conservatives tend to assume that poor people are poor because they make bad life choices. Maybe drugs, maybe having sex and getting pregnant too early, or maybe just spending more than they can afford to. And from this, conservatives often conclude we need not use government policy to help poor people. After all, they brought it on themselves, so how can we hope to save them from their own bad choices?

As appalling that position may sound, the progressive take is not really much better. Painting with a broad brush, progressives generally believe poor people are poor because an array of systemic forces stand in their way of a better life. They aren't wrong about this, but they are wrong about what those forces are.

Usually, progressives view the poor as a victim of the capitalist system, and every business they interact with is hellbent on exploiting them. Employers want to pay them too little, landlords want to charge them too much, and grocery stores probably want to sell them junk food--culminating in the relatively new issue of food deserts.

But notice what the progressive story also entails. In a capitalist system, people can't be (legally) exploited without their consent. What progressives are often ultimately saying about poor people is that they don't know what's really in their best interest.

Splitting a flat with another family might be necessary to save on the cost of rent. But it would be too degrading to their dignity so it shouldn't be allowed; city planning codes can make it illegal to solve this problem. This may make housing too expensive, no matter. No matter, we'll have the government depress interest rates and build affordable housing to fill the void.

Working overtime might help poor people make ends meet. But as we know from Mr. Sanders, progressives believe that if you work 40 hours a week, you should earn enough to not be in poverty. Thus, employers should be punished for making anyone work more than that and they are--in particular, employers have to pay time and a half for every hour above 40 per week. This seems like a benefit to the worker, but in practice, it serves to eliminate choice and flexibility. If the 41st hour of the week costs 50% more than other labor, employers will be reluctant to pay for it. So poor people who need to work more than 40 hours to get by may need to find a second job instead, since working overtime has become artificially expensive for employers and that much harder to find.

Not to worry, this has a solution too. If working 40 hours isn't enough to get by right now, then we just need to raise the minimum wage. And so on, and so forth.

Each progressive intervention creates problems that warrant new interventions to solve them. But the root cause in all of it is the same. Poor people are not smart enough to make good decisions for themselves--what wage is appropriate, how much they should work, how they should live, etc. Instead it's up to the high-minded and selfless progressive to craft policy to make certain unsavory choices illegal--thereby preventing the poor from being exploited.

Thus we see that, while the motivations and policy prescriptions may differ markedly, the fundamental assumption about poor people is the same for many conservatives and progressives alike: poor people are poor because they don't act in their own best interest. For conservatives, this is a justification for doing nothing at all, a defense of the status quo. For progressives, it's a justification for an endless series of interventions in the economy designed to help the poor, without regard for likely consequences.

Libertarians take a different approach.

Broadly speaking, we agree with progressives that there are a myriad of systemic forces that exist today that help keep people in poverty. The problem is that we believe most of those forces are the creation of government, not of capitalism.

We believe that poor people are in the best position to decide what is right for themselves. And each intervention that restricts their choices, no matter how well-intentioned, is likely to make them worse off.

To see exactly how this phenomenon manifests in practice, we recommend this excellent article from Charles Johnson at the Foundation for Economic Education. In it, Johnson shows how well-meaning policies on everything from housing to food safety have created a world where it is extremely difficult for poor people to get ahead or even get by. It's an essential read for anyone who cares about these issues.

Here's the link:

Scratching by: How Government Creates Poverty As We Know It

Monday, August 22, 2016

US Declares De Facto No-Fly Zone in NE Syria

Without debate and with little fanfare, the US has announced a major escalation in the Syrian conflict. In a move pregnant with disaster, the Pentagon has declared an "exclusion zone" over a part of northeastern Syria around the town of Hasaka.

This is an extension of a dangerous development over the weekend in which the US scrambled fighter jets to intercept Syrian planes that were attempting to bomb targets in Hasaka. That episode did not see any shots fired between the planes. However, with the new announcement, it is possible that future encounters could result in dogfights between US and Syrian warplanes. And since Syria is backed by both Iran and Russia, this would be a major progression of the indirect proxy war going on currently.

All of which might have a reasonable person wondering why any of this is occurring? Why did the US escalate the conflict, and why now?

The answer from the Pentagon is... self-defense. That's not a joke. Here was how Pentagon Spokesman Peter Cook explained it:
Our warning to the Syrians is the same that we've had for some time, that we're going to defend our forces and they would be advised not to fly in areas where our forces have been operating.
Seen in isolation, that statement sounds sort of reasonable. But in context, it is not at all.

What Cook is referring to is the open but little-discussed fact that the US has special operations troops on the ground in Syria. These troops are embedded with a Syrian Kurdish faction called the YPG, which is generally regarded as one of the US's more reliable allies in the fight against ISIS. And for the most part, the YPG has kept its focus on ISIS. Partly this may have been a matter of priorities, but it could also be explained by geography. The Kurdish forces are located primarily in the northern parts of Syria, and so most of the adjacent territory is held by ISIS rather than forces affiliated with the Syrian government. Thus, they are usually pitted against ISIS in the current conflict.

Hasaka, however, is the exception to the general rule above. Here, the YPG and the pro-government forces had generally split control of the city with relative peace, but fighting broke out in recent days.

It's not clear who started the fighting, but it is clear that the fighting has continued for multiple days. And because US special operations troops are embedded with the YPG, this means the US forces are now engaged, directly or indirectly, with forces aligned with the Syrian government.

While US proxies of some description have been engaged against the pro-government troops routinely in other parts of country, to my recollection, this is the first time a force that contained US troops was fighting directly against the Syrian regime or its partners.

And that's how we get to the pretense of self-defense advanced by the Pentagon. In an overt violation of Syrian sovereignty, international law, and the US Constitution, the US sent some 300 troops into Syria to embed with an insurgent group. This group is now fighting pro-government forces. And so the US is declaring that it will shoot down Syrian warplanes who attempt to bomb the insurgent group.

To put a finer point on it, analogies are always helpful. Of course, it's somewhat silly to speak of another country invading the US, but please humor me. Imagine the Vermont secession movement took an inexplicably violent, imperialist turn and sought to conquer the rest of New England before breaking away into an independent country. Ever interested in revenge, suppose Russia backed this secession movement and embedded some of its own elite officers within New England to help them out. Next, the US attempted to conduct airstrikes against the secessionists only to be threatened by Russian fighter jets. And Russia declares an "exclusionary zone" over the conflict area in order to "defend its forces".

That is the equivalent of the US position in Syria right now. First, we invaded, then we got in a battle with government forces, and now we are claiming self-defense. It is equal parts reckless, ridiculous, and illegal, and it is the official US policy in Syria.

This is how conflicts spiral out of control.

Newly protected from government airstrikes, the YPG is less likely to pursue a ceasefire in Hasaka against government forces. The Syrian government is similarly unlikely to surrender more territory without a fight, for fear of establishing precedent. And the US is unlikely to back down from this new policy, for fear of the domestic political fallout. (Can't you just imagine the ready-made attack lines--"The Democrats abandoned our allies on the ground in Syria, so they could appease Assad and the Ayatollah of Iran!")

The end result is an incredibly combustible situation. And if and when it explodes, there's little doubt that American politicians will breathlessly decry it as an act of aggression by the other side.

Sunday, August 21, 2016

Iran "Ransom" Scandal Is Back...and It's Still Nonsense

The purported Iran "ransom" scandal is back in the news after the State Department confirmed that it didn't allow Iran to take possession of the cash until the release of the American prisoners was confirmed. The State Department called it "leverage" while anyone looking for a reason to disparage Iran or President Obama calls it "ransom". The question is who is right?

When this story first broke, we argued that the whole issue was much ado about the nothing. In spite of the latest news, that assessment still stands.

To see why, first it is important to clarify the definition of ransom. Wikipedia uses the following definition, which seems appropriate: “Ransom is the practice of holding a prisoner or item to extort money or property to secure their release.”

Assuming the payment of $400 million was a prerequisite for the prisoner exchange to occur, as it now appears, a very narrow interpretation of the facts would call it either ransom or a bribe. Arguably, since prisoners were released on both sides rather than just from Iran, the payment would be more of a bribe to ensure the transaction took place. However, given that bribing a foreign government and paying ransom to it, are similarly blameworthy, this distinction is not critical. What matters is whether the payment truly constituted either in any meaningful sense. I would argue it does not.

The reason is that the US already acknowledged that it owed this money (and more) to Iran. This is critical. The connotation of ransom is that the kidnappers are trying to get money that does not otherwise belong to them, thus making it akin to theft. Obviously, the average criminal doesn’t kidnap for the purpose of trying to collect a legal debt that already exists. That would be absurd.

When I make my mortgage payment to US Bank, I’m not being extorted. It’s true that if I did not pay, they could eventually foreclose on the house and evict me. However, we don’t consider it extortion because there was a debt involved. Meanwhile, if criminals threatened to seize my house unless I paid them, this clearly would be extortion. The question of whether a debt existed beforehand is fundamental. And just as we don’t think it’s extortion when a legal debt is involved, it seems we shouldn’t think of it as ransom if the payment in question is, in fact, a repayment of funds that were already owed.

Based on this, one of two conclusions on the latest Iran scandal could be warranted. If one believes the debt involved to be legitimate, then the Obama Administration’s actions in the negotiations itself are not problematic. The US paid a debt that was owed; a prisoner swap ensued; and two longstanding issues that inspired hostility on both sides of the relationship—and thereby increased the chance for another needless war—have now been put to rest.

Alternatively, if one believes the debt in question is not legitimate and the US government did not owe any money to Iran, then the Obama Administration’s settlement is a problem, and constitutes either a bribe or ransom. In this case, the entire $1.7B that the US agreed to pay should be the amount that we object to. Unless we assume the US government will shirk on the unpaid balance, there is no reason to be up in arms exclusively about the $400 million paid in January.

If there’s an argument to be made about why the US did not owe Iran any money related to the old contract, then let’s hear it. Otherwise, it is difficult to understand why this should be a big scandal. Surely, the circumstances of the payment were cartoonishly suspicious (literally, flown-by-night), and the Obama Administration's shifting position on the story looks like a scandal--first, the negotiations on the debt and the prisoners were totally separate, and now we know there was some overlap. But the Obama Administration's failure to stick with a single version of events over the past few weeks does not change the facts of the underlying story. And that story is not a scandal; it is, instead, a very rare instance of diplomacy being used in the Obama years instead of coercion.

Also, it’s also worth noting that the $1.7B settlement is not a new story. The Wall Street Journal is (understandably) trying to play up the importance of their reporting, but all that’s new here is the timing and form of the payment—not that payments were going to be made. The settlement itself was widely reported back in January. So again, if we’re going to object, it seems like we should have been objecting to it in January, when the US agreed to pay the money, not just now that we learned some of the money was actually paid.

If you're a libertarian or someone else who supports peace, the knee-jerk criticism of the Obama Administration is somewhat understandable. It stems from a bias I share—namely, that if the Obama Administration did it, it’s probably awful. This bias has proven to be an extraordinarily reliable predictor in foreign policy over the past eight years, but it’s not right all of the time. And Iran is one of the cases where it's wrong.

Indeed, the Iran nuclear deal, and the side deals at issue here, is essentially the only significant foreign policy action President Obama undertook that moved the US closer to peace. US policies elsewhere in the region were an utter disaster for peace--a disaster that is still playing out to this day, in Afghanistan, Syria, Libya, and Yemen, to name just a few. But Iran is the one issue he ultimately helped improve. And he deserves credit for that, just as surely as he deserves to be impeached for overthrowing a sovereign government in Libya.

The point here is that there are plenty of legitimate and well-founded reasons to criticize President Obama. There is absolutely no need to manufacture scandals. 

Friday, August 19, 2016

The Obama Administration Did Two Great Things This Week

It appears to be legacy-polishing time at the White House. This is the time late in the second term where presidents start to recall the various terrible decisions they made over their tenure in office, and start looking to balance out the ledger so they'll still be remembered favorably. And since they aren't standing for reelection anyway, they tend to undertake actions regardless of their popularity politically.

For this reason, it's a time for both anxiety and cautious excitement, assuming there are at least a few issues where you share common ground with the president.

The goals of the legacy-polishing period are two-fold:

  1. To prevent any complete chaos or crisis from breaking out in the last days of your term, and
  2. To finally make progress on old campaign promises and pet projects alike.
We saw the first goal manifest itself in the renewal of the war in Libya last week--a war which even the Pentagon concedes is open-ended. The objective there, presumably, is to prevent ISIS from formally taking control of any high-profile city, at least until the next president is inaugurated.

While this is clearly terrible, there was also some genuinely good news to emerge. Interestingly, both items relate to prisons, which are not normally sources of hope and optimism.

More Releases from Guantanamo Bay
First up, reports emerged this week that the US had approved the release of 15 more detainees from Guantanamo Bay to the United Arab Emirates. This is the largest single release in the Obama years, and it brings the remaining population in Guantanamo down to just 61. Arguably even more impressive is that, according to The Washington Post, one of the detainees was slated for indefinite detention without trial.

Indefinite detention is an obviously illegal practice that is reserved for those detainees that the Administration has determined (without due process) to be "too dangerous to release" but impossible to convict. Although it probably won't be stated as such, the assumption here is that they wouldn't be able to convict them because some of the key evidence was derived through torture and thus wouldn't be admissible in court.

That's why it is particularly hopeful that a detainee managed to get off the "forever detention" list and actually get released. It's not clear exactly how many such prisoners remain at Guantanamo, but it's a win for due process that this dubious status is, at least in some cases, possible to be removed.

As with most decisions, there are risks associated with releasing prisoners, as there are with many political decisions. Many of these people have been tortured and denied their freedom for years by the American government. Frankly, it would be shocking if none of them hated America at this point, but the actual number of known violent incidents by former detainees is surprisingly small. In any case, the fact is that releasing people who cannot be prosecuted is still clearly the right thing to do. They may pose some danger to innocent people. But then again, a government that is empowered to incarcerate people indefinitely without trial poses a pretty strong danger to innocent people as well.

The End of Private Prisons, Sort Of
The second piece of great news is that Obama's Justice Department recently announced guidelines aimed at ending the use of private prisons for federal incarceration.

This is a big positive step. But it is more important symbolically than it is practically. The new guidelines do not do anything immediately; they merely instruct the federal government to either let contracts on the private prisons expire (and not renew them) or at least, substantially reduce the involvement of for-profit companies in the future. So again, today, nothing happens. And it's not a law, so technically, these guidelines could be overturned if, say, a law and order candidate got elected and decided private prisons were good for his brand.

Just as important, federal private prisons only hold around 22,000 inmates, out of the 2.3 million overall. Thus, even if these new guidelines were faithfully implemented, their direct impact is relatively small.

With all those qualifiers added, however, this is still a big step because it's going to refocus the debate on this subject. That's a good thing.

It's important to note that the problem with for-profit prisons is not a problem with for-profit companies in general. As the name implies, for-profit companies exist for one primary purpose, generating profits. In most markets, the incentives point in a direction that is beneficial. Companies produce profits by giving customers what they want, at a better price than the competition. It's a win-win.

However, a major problem arises when there are no customers to satisfy. And this is the case with private prisons. The people that deal with the private prisons the most are the prisoners themselves, but unlike customers, the prisoners don't have the ability to leave if the company behaves poorly. This, in turn, means companies have no incentive to meet the prisoners' needs, and these needs often go unmet.

A private prison corporation gets its revenue by winning contracts through the political process, not the market process. And once they win a contract, they are likely to preserve it as long as they avoid any major damaging scandals that could harm elected officials. Clearly, that is a very low bar for performance.

The result is that private prisons tend to be at least as bad as publicly run prisons. Then the private prison corporations recycle the profits into the political process to lobby for tougher crime legislation (and thus, greater demand for their services). In essence, the incentives are bad at nearly every step in the process.

That's why it's great news that the Administration is coming out publicly against this system--even if it doesn't have any immediate effect beyond crashing the stock prices of the prison corporations. It remains to be seen whether any state governments, who hold most of the US prisoners, will follow the federal lead.

It's not that often that we get the chance to praise President Obama, or any other politician, for that matter. But this week, at least on these narrow issues, he deserves credit. As the legacy-polishing continues, let's hope he sticks with the criminal justice theme. If he veers back into economics or foreign policy, it might not turn out so well.

Thursday, August 18, 2016

Obamacare Meltdown Shows the Importance of Profits

Let me tell you a story.

Ever with good intentions, Congress passes a law to further regulate a market that was already heavily regulated beforehand.

Private businesses try to participate in this market, only to find that they continuously lose money, year after year.

Said private businesses cease participating in this market in order to stop losing money, and focus their efforts elsewhere.

How would a reasonable person describe the behavior of the businesses? Rational, prudent, obvious?

How about greedy?

On the economic left, that appears to be a winning explanation for the fact that another major health insurance company has decided to withdraw from more of the Obamacare exchanges. Specifically, Aetna has announced plans to withdraw from 11 of the 15 states they have been participating in.

Senator Bernie Sanders offered a characteristically moderate assessment of the news:
It is disappointing that Aetna has joined other large for-profit health insurance companies in pulling out of the insurance marketplace. Despite the Affordable Care Act bringing them millions more paying customers than ever before, these companies are more concerned with making huge profits then ensuring access to health care for all Americans.
A similar tone was struck by others in the progressive community, as noted in the piece cited above.

So what's Bernie talking about? Is Aetna simply walking away from profits in an effort to smite poor and sick Americans?


In fact, according to Zero Hedge. Aetna is projecting that it will lose $300 million on its Obamacare exchange business in 2016 alone. In context, this would represent 12.5% of Aetna's net income from 2015. So it's not going to bankrupt Aetna, but it is still significant.

Bernie is right that the Affordable Care Act brought in more paying customers; the problem is that those customers aren't free. The average healthcare expenses that came with them, at least in the state exchanges,  were dramatically higher, on average, than the premiums and resulted in substantial losses for Aetna and others. Indeed, there has been a veritable flood of major insurance companies rushing for the exits on the Obamacare exchanges.

Bernie is also right that the health insurance companies are putting profits before ensuring access to health care for all. Of course they are. They are for-profit companies; it's kind of their thing.*

It's easy to blame for-profit companies for Obamacare's downfall, because people love to hate them. But it's not a new story that for-profit companies exist to seek profit. This was true before Obamacare was passed, it's true now, and it will be true in the future. Which leads us to a critical point:

If your healthcare policy requires companies not to pursue profits in order for it to be successful, then it is a terrible policy.

It's the economics equivalent of trying to fly by jumping off a cliff. It would have worked if gravity didn't exist, you say. Maybe so. But gravity does exist, and we know that in advance. Thus, it's a terrible idea, too.

The value of profits
More to the point, it's worth pushing back on the casual assumption that profits are evil. Profits are not evil. In fact, they are essential for a market economy to work. And the Aetna decision illustrates this point very well.

It is beyond the scope of our present discussion to give a full economic explanation of profits. But in the context of the healthcare, profits are a sign of sustainability. I don't mean sustainability in the environmental sense, but in the economic one.

If a business is making profits off providing a service, then chances are, it will continue to provide that service in the future. It's in the business's own self-interest to do so.

In a market-based healthcare system, everyone in the chain of service delivery needs to be able to make money--the doctor, the hospital, the medical supply company, and yes, even the damn health insurance company. Because if any member in this chain is failing to make money, then they are a risk to drop out.

This is precisely what happened with Aetna. It was losing money on the state exchanges, so it stopped participating. In some cases, this might be a minor inconvenience for policyholders who still have several options remaining. In other places, however, it is expected to reduce the highly touted competitive exchanges down to a single provider. So much for choice.

The core problem is that if the service-provider isn't making money, then it ceases to be about economic self-interest and starts becoming an act of charity. There's nothing wrong with charity. It's a wonderful thing. But people (and businesses, in some cases) provide charity when they have the resources and desire to do so. If they encounter financial challenges in their own life, they may have to cut back on giving and take on more profitable work. This obvious reality makes charity far less reliable and enduring than a regular market exchange that is in both parties' interest.

Based on this understanding, Aetna's decision must be viewed in a new light. Aetna's losses may have been due to the new Obamacare requirements, managerial incompetence, or a mixture thereof. In any case, something had to give. If we really want healthcare coverage for all, we probably also want that coverage to continue to exist over time. In other words, it needs to be sustainable.

And for it to be sustainable, it must be profitable--even for that widely-derided fount of evil known as the health insurance companies.

What comes next?
The Common Dreams article cited above suggests that the continued withdrawal of companies from the healthcare exchanges proves that a single-user system is necessary. And at least, that kind of system would not rest on the core structural problem in Obamacare, which all but ensures insurance companies will not be able to break even, as we wrote about previously. A single-payer system does away with the notion of profit and loss entirely, since the government clearly doesn't care if costs exceed revenues (at least for now).

That said, we must recognize that the Affordable Care Act was a substantial expansion of government intervention into the healthcare market. The result has been a very rapid collapse.

In other words, a large government intervention in a market proved to be a huge failure. Yet the proposed remedy is to give that same government even more control of that market. This should give us pause.

*Indeed, the publicly traded companies are actually required by law to attempt to maximize profits; that is, management can be sued by shareholders if they prioritize something besides profits.

Note: Another suggestion put forth to explain Aetna's behavior is that they are trying to use the bad publicity on Obamacare as leverage so that the Department of Justice will permit a major merger to go through. Senator Warren has suggested this, for instance. And the CEO of Aetna actually stated somewhat explicitly that, in the absence of a merger, Aetna might have to withdraw from its remaining states.

Certainly, this is a good negotiating tactic, but the conspiratorial angle is far from compelling. Of course, Aetna wants to pursue a merger that could save costs and further expand their insurance risk pools. That's obviously true, and it's conceivable it could help their bottom line. Fair enough.

But linking the decision to actually leave to their blackmail efforts seems to be a stretch. After all, they would have just given away 11 states worth of leverage without gaining anything in return, if this was the opening bid. So if the whole point of withdrawing was blackmail, then Aetna is awful at it.

Wednesday, August 17, 2016

What's a Burkini? And Why It Shouldn't Be Banned

The country of France has come up with a new way to restrict liberty and needlessly alienate Muslims within its borders.

Multiple seaside towns have adopted burkini bans, and now more are considering them. This week, French Prime Minister Valls decided to weigh in on the matter, reportedly speaking in favor of the bans and suggesting that burkinis are "not compatible with the values of France and the Republic".

All of which may have you wondering, what is a burkini? Glad you asked. In fact, it's basically what it sounds like--a rough combination of a burqa and a bikini. Or to be more precise, it's a full-body swimsuit worn by some Muslim women who apparently believe in dressing in conservatively, but still enjoy a day at the beach. While the styling is distinctive, in practice, it doesn't appear to be dramatically different than a full wetsuit. Here's a picture:

The bans are alleged to serve many practical ends, most notably hygiene. But the actual purpose of the ban is evident from the laws themselves. One municipal decree cited by Yahoo! News bans access to public beaches to (emphasis added):
...any person who is not properly dressed, respectful of moral behaviour and secularism, hygiene and bathing safety.
Iin reality, this has nothing to hygiene or "bathing safety", whatever that may mean. Rather, it's an experiment in coerced secularism.*

Ideally, in a governing context, secularism should mean that the state is separate from religion and makes no laws concerning religion. Oftentimes, however, it ceases to be a principle of good governance and becomes a policy objective. This is what we're seeing here. In other words, it's no longer enough for the government to make no laws favoring particular religions; now, it needs to make laws favoring no religion. Or at least in the present case, opposing a particular type of religion.

Verbally, the distinction seems subtle, but it makes a world of difference.

Of course, the reason any of this is in the news is because France has suffered a string of terrorist attacks, and most, if not all, of the recent attacks have been claimed by the Islamic State. The backlash against burkinis amounts to lazy collectivism, with logic that runs something like this:

  • Premise 1: Some people who self-identified as believing in Islam committed attacks
  • Premise 2: Some followers of Islam believe women should wear very modest clothing in public
  • Therefore: If women wear very modest Islamic clothing in public, they're probably with the terrorists.
This doesn't make much sense, but it's why Muslims are being targeted now. 

Also, I think it's worth noting that, even if you accept the hysterical guilt-by-association analysis posited above, there's no plausible way in which a burkini ban would be helpful. If you really think that the burkini-wearers are just one step away from committing terrorist attacks, how would making a new law directly targeting them going to help things? Moreover, if radicalization stems in part from a sense of alienation from society as some suggest, wouldn't making a law clearly aimed at Muslims make that problem worse? Clearly, the answer is yes on both counts.

This isn't the fundamental reason to oppose the burkini ban, however. It should be opposed because it is a wholly arbitrary restriction on liberty, and people should be free to wear whatever they choose in a public place. If you don't like the burkini, look away and don't buy one.

But what makes this policy more (and worse) than just another stupid and unjust policy in a world that has its share, is the fact that it is obviously targeting members of a particular religious group. And the group being targeted is already the most marginalized and vilified group in Western societies.

In short, the burkini ban is collective punishment and intolerance masquerading as enlightened secularism. And even if you evaluate the policy on its own terms, it remains equal parts foolish and appalling.

*For what it's worth, I'm atheist. But I'm of the strong opinion that coercive secularism is just as bad as coercive religion. 

Tuesday, August 16, 2016

Why You Shouldn't Believe the US Jobs Data

Earlier this month, the Bureau of Labor Statistics (BLS) released the latest jobs report data for July, showing that the US economy created 255,000 jobs. This was viewed as great news, and the financial markets and media seemed to breathe a collective sigh of relief.

That's because everyone was afraid it would be a lot worse.

You see, back in May of this year, the jobs report was nothing short of abysmal. After revisions, the number for May came in at just 24,000 jobs. This came on the heels of dramatic market instability in the first quarter of this year and a series of declining jobs reports preceding it:

  • February (still normal): 233,000 jobs increase
  • March (getting weaker): 186,000 jobs increase
  • April (weaker still): 144,000 jobs increase
  • May (falls off a cliff): 24,000 jobs increase
This trend seemed to be going in one direction, and it wasn't a good one. Thus, everyone was ecstatic when jobs shot back up in June by 292,000 (after revision). This positive sign was seemingly confirmed in July when the economy added 255,000 more jobs, beating all the expectations. Additionally, the hourly earnings for July were reported to increase by some 2.6% year-over-year.

Assuming all of this is true, these latest data points are certainly great signs for the US economy. But there's good reason to think the jobs data is just wrong.

Why does this matter?
It may not be obvious why anyone should care about the total number of jobs in the economy, provided your own job is still part of the total. As the old saying goes, it's a recession when your neighbor loses his job. It's a depression when you lose yours.

And in a sane world where the government did not take responsibility for managing the economy, the jobs data would not matter. In the world in which we actually live, however, it is one of the most important drivers of US fiscal and monetary policy. If the jobs data is too low, that means more spending by the US government, lower interest rates from the Federal Reserve, or both. Both types of policies have negative long-run consequences.

The jobs figures are also the primary numbers used by politicians to either celebrate or criticize the state of the US economy at any given moment. For this reason, we can expect them to make an appearance in the upcoming presidential debates. Hillary Clinton, running for a de facto third term of President Obama, will highlight the numbers if they remain strong through November. Meanwhile, we should expect Donald Trump to call them out if they weaken significantly.

So what does the other data say?
There are several other data points that point in the opposite direction of the jobs numbers. Here are a few of the most important ones:

GDP is basically stagnant
Gross Domestic Product (GDP) never makes the list of talking points when people want to praise the economic recovery during President Obama's tenure. That's because it's pretty awful by historical standards. Two charts make this point quite well.

First, here's a chart showing annual GDP growth for all years between 1950-2014, ranked from least to greatest. Years under President Obama's leadership are shown in red.

Second, here's a more zoomed in look at just the last several quarters. As you can see, things have recently been even worse than normal:

Now, as economic statistics go, GDP probably gets more emphasis from economists than it deserves. And it surely involves many complex calculations and assumptions to compute it each quarter. That said, it still conveys some information.

And right now, the GDP data is telling us that the US economy is still technically growing, but at a rate that is very weak by historical standards, just 1.2% in the latest quarter. It's not a recession; it's just not very good.

Corporate profits are falling
Even more telling than the GDP data is the dramatic decline in corporate profits over the last several quarters. US stocks may be near all-time highs, but their performance has had no connection with the performance of the underlying companies.

Here's the year-over-year change in corporate profits since 2000. All the data hasn't come in for Q2 2016, so here's how things looked through Q1:

As you can see, corporate profits have actually been declining (below 0 on the above chart) on a year-over-year basis for the past five quarters. This decline is expected to persist through Q2 2016 based on the earnings information that has been reported so far.

US tax receipts are basically flat compared to last year
Another bad sign comes from the tax receipt data from the US Treasury Department. For the first seven months of the year, total tax receipts are essentially flat compared to last year, down roughly $20 billion.

Meanwhile, if we look at receipts from income tax withheld--the amount pulled directly out of your paycheck by your employer--these figures are up just 1% year-to-date. Those gains were offset by declines in corporate taxes as well as other non-withheld income taxes.

Given that US tax policy has not radically changed since 2015, the slight decline in tax receipts seems to be driven by deteriorating economic activity overall.

Back to jobs
Bringing all of this data back together, we have the following:
  • GDP growth is hovering around 1%, well below what anyone thinks is a normal level of expansion.
  • Corporate profits have declined for 5 going-on 6 consecutive quarters now
  • US tax receipts have actually declined slightly for July YTD, relative to the prior year
Of these, the latter two data points are particularly striking because they don't rely heavily on assumptions. Corporate profits are calculated according to established accounting principles and subject to regular audits, and one assumes (hopes?) that the Treasury Department knows how to count up all the money it receives.

All that is left is to ask some obvious questions:

If corporate profits have been steadily declining, is it likely that they are going to be creating a lot of new jobs in the US?

The number of jobs in the economy is increasing each month at an year-over-year rate greater than 1.5%, and hourly wages reportedly increased at more than 2% in the latest report. So officially, more people are working, and on average they are making more money. Given this, and the fact that we have a progressive income tax, how is it possible that income tax withholding is only up 1%?

Simply put, these are facts that do not fit together. At least one of these numbers seems wrong.

And basically, we have three core data points to indict: corporate profits, tax receipts, or the BLS jobs data. 

If corporate profits are the source of our problems, that would mean many corporations have artificially understated their profits. This seems unlikely.

If tax withholding data is wrong, that would mean, in essence, that the Treasury Department hasn't figured out how to use a summation formula. I try not to put much faith in the competence of government officials, but this seems like too much of a stretch.

Or, perhaps the BLS's assumptions for estimating job creation in the economy were wrong. The BLS samples a relatively small number of businesses and relies on survey data. It then uses complex assumptions to extrapolate the results into an estimated figure for the overall economy. Clearly, this is the data point that has the largest chance of error.

And in fact, they've been wrong before. Just last week, they announced major revisions to past estimates of wage increases, causing substantial declines to previously published results. But the July jobs data remained unchanged.

Based on the analysis above, it's our expectation that there will be more dramatic revisions to come in the future. Until that time, it's probably best to treat any and all optimistic pronouncements on the US economy with a very large grain of salt.

Monday, August 15, 2016

Yes, Obama's Policies Helped Create ISIS, and Bush's Helped Too

The latest hard-hitting journalism from the campaign trail is once again related to Donald Trump. The happy news is that there's at least a kernel of truth in the latest remarks, and better still, it's about foreign policy. Unfortunately, the bad news is that, as usual with Donald Trump, he doesn't have many details to back it up, and the few details he does offer, are wrong.

First, here's what he said, at a campaign rally last week:
He is the founder of ISIS. He is the founder of ISIS, okay? He is the founder. He founded ISIS. And I would say the co-founder would be crooked Hillary Clinton.
Since then, Trump has alternated between doubling down on this formulation and downplaying it by saying the obvious--namely that sarcasm is, in fact, a thing.

As the tweet above suggests, the whole episode led to a series of apparently serious journalism explaining that Obama is not literally the co-founder of ISIS. For instance, CNN's self-styled terror expert Peter Bergen wrote this rebuttal. Among its winning lines were the following:
Like so much else that Trump has said, these claims are false. The founder of ISIS is Abu Bakr al-Baghdadi, a shadowy Iraqi cleric who President Obama is doing everything in his power to kill.
Wait, so you're telling me that Obama doesn't moonlight as Abu Bakr al-Baghdadi? Glad we got that cleared up, since I'm sure that's how most people interpreted Trump's remarks. After all, he's not prone to exaggeration.

Also, incidentally, the second part of Bergen's statement is wrong. In fact, President Obama is doing everything within his power and quite a few things that are beyond his power in an attempt to kill him--in particular, waging a war without Congressional authorization.

But I digress. While these various literal refutations seem merely inane at first glance, they actually serve an important purpose. By focusing the argument along the most narrow lines possible, the broader debate about America's interventionist foreign policy is avoided. The real question is whether America's interventions this century--in Afghanistan, Iraq, Libya, Syria, and elsewhere--have produced greater stability and security, or greater chaos. Any honest observer must conclude it is the latter.

In one sense, Trump is right: The blame for the ongoing, unquestioned disaster does rest on Barack Obama and on Hillary Clinton--who headed the State Department when the worst decisions were made. But it also rests on George W. Bush, and Trump was wrong to omit him.

With that framework in mind, let us briefly make note of the most salient policy disasters that helped lead to the creation of ISIS, which now has a presence in Iraq:

  • Bush - Invading Iraq and overthrowing Saddam Hussein in 2003 based on the false pretense of weapons of mass destruction.
  • Bush - Occupying Iraq after the regime change, ultimately serving as a security force for a new Iraqi government, no matter how corrupt and authoritarian it became.
  • Obama (and Clinton) - Overthrowing Ghadafi in Libya in 2011, based on a false pretense of an impending genocide in Benghazi.
  • Obama - Backing the substantially non-moderate opposition in Syria starting around 2012, based largely in the east of country. This invariably strengthened the budding rebellion among radicals in neighboring Iraq.
Although all of these policies are awful, the last is particularly striking based on what we know now. An internal intelligence document from the Defense Intelligence Agency was recently declassified. Written in August 2012, it noted the following key things:
  • That Al Qaeda in Iraq and similar extremist groups were dominant players in the Syrian rebellion
  • That the Western powers, Turkey, and the Gulf States were supporting the rebellion anyway
  • That the current trends could lead to the establishment of a "Salafist principality" in Syria and Iraq, but that could be useful for weakening Assad and, by extension, Iran.
In other words, Obama's own government intelligence predicted that backing the opposition in Syria risked strengthening extremist groups so much that they could eventually establish a de facto state. And in spite of this risk, he directed the CIA to do it anyway

Now, obviously that doesn't mean al-Baghdadi was hired by the CIA or that President Obama was trying to create a terror group that had far more power and influence than the ones that preceded it. So too, President Bush probably wasn't aspiring to light the entire Middle East on fire with the invasion of Iraq and inspire more terrorism for years to come.

But if we are going discuss foreign policy seriously, we must look beyond intentions and consider actual results.

Presidents Bush and Obama both overthrew secular dictators on false pretenses, in Iraq and Libya, apparently in the hopes that a better government would follow. Chaos followed instead. Similarly, whatever his precise intent, President Obama's policy of backing the opposition in Syria had the predictable result of strengthening extremist groups, ultimately culminating with ISIS holding substantial territory in Syria and Iraq, and Al Qaeda in Syria holding territory elsewhere in Syria.

There's no reason to think that Trump had all this history in mind when he suggested that Obama and Clinton "founded ISIS". In the remarks I've seen, the Trump camp has preferred to blame ISIS on Obama's decision to pull out of Iraq too soon. This is foolish, since the withdrawal timeline for Iraq was actually set by President Bush, and was not really the fundamental cause. One wonders what the media would do if Trump had the knowledge and guts to explain the real causes of ISIS's rise, but I doubt we'll get the chance.

Still, even if Trump himself doesn't know how America's foreign policy facilitated the rise of ISIS, it doesn't change the reality. And the reality is that we can draw a clear causal chain between the reckless decisions of the Bush Administration through to the reckless decisions of President Obama and Secretary Clinton, which ultimately helped create ISIS and the pervasive instability that reigns in the Greater Middle East.

Friday, August 12, 2016

August 12, 2016 - Tensions spike between Russia and Ukraine after terror plot, and other stories

Tensions spike along Crimean border after alleged Ukrainian terror plot
This past weekend, Russia claimed to foil a terror plot against the Crimean territory and accused the government of Ukraine of orchestrating. Tensions rose after this event. Now, the Ukrainian military has moved troops near the Ukraine-Crimea border and placed troops on the highest level of combat readiness, in an apparent show of force.

It goes without saying that Ukraine's military would be no match against Russia's if a conflict breaks out, so it's not obvious what the build-up is meant to achieve. Ukraine, for its part, has also claimed that Russia is building up forces on the Crimean side of the border.

Naturally, the US government (and much of the media) has treated Russian claims of a Ukrainian terror plot with a heavy dose of skepticism. And rightly so, as it is clearly an extreme and dangerous allegation. (One wishes the US media treated extreme accusations against Russia, say by a leading presidential candidate, with the same degree of skepticism, but that's not likely to happen anytime soon).

Having said that, it would be wrong to dismiss Russian claims out of hand. It's not clear how they concluded that the Ukrainian government itself was behind the plot, but it at least seems likely that a terror plot did occur. Assuming so, Ukrainian nationalists of some variety are the most likely culprits, though there's no particular reason to assume they are formally associated with the government.

The existence of a terror plot is credible largely because Russia has no obvious incentive to make it up. After all, Russia already annexed Crimea. And it has had many plausible opportunities / excuses since the Ukraine coup to launch a formal invasion of Ukraine in the past if it wanted to do so. It has no need to fabricate such pretexts.

Moreover, there is a history of sabotage against Crimea since the annexation. Last fall, for instance, power lines in Ukraine that carry power to Crimea were blown up, causing major power outages on the Crimean Peninsula.

(It's also worth noting that the article cited above is a delightful example of media double standards. In it, the culprits of the sabotage were referred to as nationalists or activists. Can you imagine if someone bombed key power infrastructure in the United States? Somehow I don't think they would downplayed as simple activists. But as long as it's targeting Russia, apparently blowing things up is an acceptable form of political speech (!).)

Whatever the facts are on the alleged terror plot, the resulting tensions are an incredibly dangerous situation.

Another reminder that governments lie, but this time it's a good thing (you know, sort of)
Yesterday, we noted that official economic data produced by the US government deserves a heavy dose of skepticism.

Today, we're reminded that official assessments of the undeclared war on ISIS warrant skepticism as well.

The results of two Congressional investigations into manipulated military intelligence were just released. The long and short of it is that senior US military officials distorted intelligence in the ISIS war to portray a more positive and successful narrative than the facts warranted. It's also not a partisan attack, as both Republicans and Democrats came to this same basic conclusion.

This may explain why progress in the war has seemed so slow in coming. US military officials consistently proclaim that the war effort is working, even as, nearly two years into it, "success" has remained elusive. ISIS still holds Mosul and significant territory in Iraq; Al Qaeda remains a dominant force in Syria (and works closely with US-backed groups, which is awkward); and suicide attacks still occur, generally in the Middle East, but occasionally in the West as well.

Ironically, the dishonest pronouncements on the war are probably a blessing in disguise. Because if the US government acknowledged the war was not working, it would surely insist on doing and bombing even more than it does currently. Thus far, the official narrative of progress has probably prevented more civilians and American troops from being put in harm's way; for that at least, we can be grateful.

Hillary Clinton embraces protectionism
Hillary Clinton took another bold step to outcompete Donald Trump on the critical issue of economic pandering policy. At a rally in Michigan, Clinton recently declared her support for using "targeted tariffs" against foreign countries.

Given the populist disdain for international trade, the new rhetoric is not altogether surprising. It is however, somewhat depressing as this is an area where a center-left politician like Clinton would usually side with the conventional economic wisdom on trade--namely that it offers net benefits. It also shows the influence that Bernie Sanders and Donald Trump have had on American politics.

Of course, massively complex free trade agreements like the Trans-Pacific Partnership are not synonymous with true free trade. And the fact that Clinton's new position could scuttle the deal after election could offer a small consolation prize. Her new support for protectionist policies, however, represent another threat to a US and global economy that can scarcely withstand it.

For more, read our longer take on this story, the benefits of trade, and why the US presidential race seems like a constant race to the bottom.

Presidential race to the bottom continues as Clinton embraces tariffs

Speaking at a rally in Michigan, Hillary Clinton apparently decided her current economic policies weren't sufficiently destructive. To remedy this, she announced that she now supports using "targeted tariffs" against other countries that "have gamed the system."

This position is mistaken and harmful to the average US worker. What politicians mean, in general, when they accuse foreign entities of gaming the system, is that they managed to sell goods at artificially low prices--prices so low that US companies and workers can't compete. The nefarious way in which they achieved this varies, depending on the politician--maybe currency manipulation (which everyone does), maybe paying workers too low of wages, maybe lax regulations, maybe government subsidies, and so on. But the general contours are the same.

To see why blocking trade is wrong, one only needs to consider the extreme case. What if countries were "gaming the system" so much they actually cut their net costs to zero and they just decided to give their product (let's say, cars) away in the US for free. Surely, no US manufacturer of cars could compete with free, and they would shortly go out of business, leaving their former employees unemployed. These people would struggle in the short-run. But meanwhile, consumers in the economy (including the displaced workers) benefit from free cars. At least in the short-run, a small fraction of people face hardship while the great mass of people benefit.

This exact same dynamic plays out with each new groundbreaking innovation as well. Lightbulbs displaced candlemakers, cars destroyed the horse-drawn carriage industry, and Microsoft Word surely displaced secretaries and typewriter manufacturers alike. Each development also dramatically improved worker productivity as well as the standard of living. International trade often seems like a totally separate economic issue, complete with its own set of jargon--trade deficit, "dumping", tariffs (instead of taxes), etc. But on a fundamental level, the same forces are at work.

The question is whether we should sacrifice the long-term interests of the many to the short-term interests of a few. Opposing international trade and supporting tariffs, means answering this question in the affirmative. And the logical extension of this principle is that our country, if the occasion arose, should refuse free goods and also actively block all technological innovation. This position is as close to self-refuting as they come--and now in the 2016 presidential race, it has bipartisan support.

Of course, given that opposition to trade was a core issue for Bernie Sanders, Clinton's new, stronger opposition to trade is not very surprising. It's also another example of how the political debate between the major party candidates continues spiraling downward. Both candidates have innumerable terrible ideas that could be credibly and persuasively exploited, by anyone that was trying. But instead, the candidates usually attack their opponents on the issues where they aren't quite bad enough. It's not framed that way, but that's the essence of what is happening.

Hillary supports a $15 minimum wage. So Trump, instead of explaining that the minimum wage harms the very people it seeks to help, breaks with Republican orthodoxy and supports an increase. Trump, when he's not calling for the US to murder terrorists' family members, occasionally says halfway noninterventionist things on war. So instead of focusing criticism on Trump's most belligerent remarks--a dovish line one assumes would resonate with her party--the Clinton campaign criticizes Trump for not expressing sufficient hostility with Russia. On nearly every issue where candidates differ, there is a race to be worse, first.

Trade policy appears to be just the latest competition. And regardless of which candidate runs faster, one thing is certain--everyone loses.