The Return of Mercantilism

Mercantilist trade policies have returned in a big, big way.

Dani Rodrik:

The liberal model views the state as necessarily predatory and the private sector as inherently rent-seeking. So it advocates a strict separation between the state and private business. Mercantilism, by contrast, offers a corporatist vision in which the state and private business are allies and cooperate in pursuit of common objectives, such as domestic economic growth or national power.

The mercantilist model can be derided as state capitalism or cronyism. But when it works, as it has so often in Asia, the model’s “government-business collaboration” or “pro-business state” quickly garners heavy praise. Lagging economies have not failed to notice that mercantilism can be their friend. Even in Britain, classical liberalism arrived only in the mid-nineteenth century – that is, after the country had become the world’s dominant industrial power.

A second difference between the two models lies in whether consumer or producer interests are privileged. For liberals, consumers are king. The ultimate objective of economic policy is to increase households’ consumption potential, which requires giving them unhindered access to the cheapest-possible goods and services.

Mercantilists, by contrast, emphasize the productive side of the economy. For them, a sound economy requires a sound production structure. And consumption needs to be underpinned by high employment at adequate wages.

These different models have predictable implications for international economic policies. The logic of the liberal approach is that the economic benefits of trade arise from imports: the cheaper the imports, the better, even if the result is a trade deficit. Mercantilists, however, view trade as a means of supporting domestic production and employment, and prefer to spur exports rather than imports.

Today’s China is the leading bearer of the mercantilist torch, though Chinese leaders would never admit it  – too much opprobrium still attaches to the term.

I have three things to add.

First, states around the world including in the West, and especially America, have massively adopted corporatist domestic policies, even while spouting the rhetoric of free trade and economic liberalism publicly. One only has to look at the growth trend in American Federal spending to see that America has drifted further and further and further away from its free market rhetoric, and toward a centrally planned economy.

Second, the key difference between a free market economy, and a corporatist command economy is the misallocation of capital by the central planning process. While mercantile economies can be hugely productive, the historic tendency in the long run has been toward the command economies — which allocate capital based on the preferences of the central planner — being out-innovated and out-grown by the dynamic free market economies, which allocate capital based on the spending preferences of consumers in the wider economy.

Third, these two facts taken together mean that the inherent long-term advantage of the free market system — and by implication, of the United States over the BRICs — has to some degree been eradicated. This means that the competition is now over who can run the most successful corporatist-mercantilist system. The BRIC nations, particularly China, are committed to domestic production and employment, to domestic supply chains and domestic resource strength. America continues to largely ignore such factors, and allow its productive base to emigrate to other nations. And the production factor in which America still has some significant advantage — design, innovation, and inventions — has been eroded by the fact that the BRIC nations can easily appropriate American designs and innovations, because these designs are now being manufactured predominantly outside of America, and because of (American) communication technologies like the internet. This is the worst of both worlds for America. All of the disadvantages of mercantilism — the rent-seeking corporate-industrial complex, the misallocation of capital through central planning, the fragility of a centralised system — without the advantage of a strong domestic productive base.

Why Modern Monetary Theory is Wrong About Government Debt

I’ve taken some criticism — particularly from advocates of modern monetary theory and sectoral balances and all that — for using total debt rather than just private debt in my work.

The modern monetary theory line (in one sentence, and also in video form) is that government debt levels are nothing to worry about, because governments are the issuer of the currency, and can always print more.

This evokes the words of Alan Greenspan:

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.

Of course, the point I am trying to make in worrying about total debt levels is not the danger of mass default (although certainly default cascades a la Lehman are a concern in any interconnective financial system), but that large debt loads can lead to painful spells of deleveraging and economic depression as has occurred in Japan for most of the last twenty years:

Japan-Debt-Hoisington-27

Of course, before the crisis in America (as was the case in Japan at the beginning of their crisis) government debt was not really a great contributor to the total debt level, meaning that the total debt graph looks far more similar to the private debt line than the public debt line, which means that when I talk about the dangers of growing total debt I am talking much more about private debt than public debt:

010212_2140_TheDebtwatc1

But what Japan empirically illustrates is the fact that all debt matters. Japan’s private debt levels have reset to below the pre-crisis norm, yet the economy remains depressed while public debt continues to climb (both in absolute terms, and as a percentage of GDP). If excessive private debt was the sole factor in Japan’s depression, Japan would have recovered long ago. What we have seen in Japan has been the transfer of the debt load from the private sector to the public, with only a relative small level of net deleveraging.

And high and growing public sector deficits often lead to contractionary tax hikes and spending cuts. This happened time and again during Japan’s lost decades. Peter Tasker of the Financial Times writes:

When Japan’s bubble economy imploded in the early 1990s, public finances were in surplus and government debt was a mere 20 per cent of gross domestic product. Twenty years on, the government is running a yawning deficit and gross public debt has swollen to a sumo-sized 200 per cent of GDP.

How did it get from there to here? Not by lavish public spending, as is sometimes assumed. Japan’s experiment with Keynesian-style public works programmes ended in 1997. True, they had failed to trigger durable economic recovery. But the alternative hypothesis – that fiscal and monetary virtue would be enough – proved woefully mistaken. Economic growth had been positive in the first half of the “lost decade”, but after the government raised consumption tax in 1998 any momentum vanished. Today Japan’s nominal GDP is lower than in 1992.

The real cause of fiscal deterioration was the damage done to tax revenues by this protracted slump. Central government outlays as a percentage of GDP are no higher now than in the early 1980s, but the tax take has fallen by 5 per cent of GDP since 1989, the year that consumption taxes were introduced.

A rise in debt relative to income has historically tended to lead to contractionary deleveraging irrespective of whether the debt is public or private.

The notion at the heart of modern monetary theory that governments that control their own currency do not have to engage in contractionary deleveraging remains largely ignored. Just because nations can (in a worst case scenario) always print money to pay their debt, doesn’t mean that they will always print money to pay their debt. They will often choose to adopt an austerity program (as is often mandated by the IMF), or default outright instead (as happened in Russia in the 1990s).

And what governments cannot guarantee is that the money they print will have value. This is determined by market participants. In the real economy people in general and creditors (and Germans) in particular are very afraid of inflation and increases in the money supply. History is littered with currency collapses, where citizens have lost confidence in the currency (although in truth most hyperinflations have occurred after some great shock to the real economy like a war or famine, and not solely as a result of excessive money printing).

And there has always been a significant danger of currency, trade and political retaliations by creditors and creditor nations, as a result of the perception of “money printing”. Many, many wars have been fought over national debts, and over currencies and their devaluation. One only has to look at China’s frustrated rhetoric regarding America’s various monetary expansions, the fact that many Eurasian creditor nations are moving away from the dollar as a reserve currency, as well as the growth of American-Chinese trade measures and retaliations, to see how policy of a far lesser order than the sort of thing advocated in modern monetary theory can exacerbate frictions in the global currency system (although nothing bad has come to pass yet).

Governments controlling their own currencies are likely to continue to defy the prescriptions of the modern monetary theorists for years to come. And that means that expansionary increases in government debt relative to the underlying economy will continue to be a prelude to contractionary deleveraging, just as is the case with the private sector. All debt matters.

The Growing Probability of a One State Solution

The unstoppable force of Israel’s settlement movement is about to hit the immovable object of Israel’s desire to be a Jewish-majority democracy.

Israeli politicians may have paid a whole lot of lip-service to the notion of a two-state solution over the years, but they continue to carve up and settle the very land that that Palestinian state would be founded upon.

Mahmoud Abbas is calling their bet. He is now threatening to disband the Palestinian authority and hand over control of the West Bank to Israel in retaliation for Israel’s ongoing settlement building activities:

Palestinian president, Mahmoud Abbas, said he will hand over responsibilty for the West Bank to Israel if peace talks are not renewed after Israel’s elections, Haaretz newspaper reported on Thursday.

In an interview with the Israeli newspaper, Abbas said he would relinquish control and disband the Palestinian authority if there was no progress after January 22.

This — if carried through — is quite literally the single smartest thing any Palestinian leader has ever done. As Jeffrey Goldberg noted back in November:

There is a strategy the Palestinians could implement immediately that would help move them toward independence: They could give up their dream of independence.

It’s a very simple idea. When Abbas goes before the UN, he shouldn’t ask for recognition of an independent state. Instead, he should say the following: “Israel occupied the West Bank and Gaza 45 years ago, and shows no interest in letting go of the West Bank, in particular.We, the Palestinian people, recognize two things: The first is that we are not strong enough to push the Israelis out. Armed resistance is a path to nowhere. The second is that the occupation is permanent. The Israelis are here to stay. So we are giving up our demand for independence. Instead, we are simply asking for the vote. Israel rules our lives. We should be allowed to help pick Israel’s rulers.”

Reaction would be seismic and instantaneous. The demand for voting rights would resonate with people around the world, in particular with American Jews, who pride themselves on support for both Israel and for civil rights at home. Such a demand would also force Israel into an untenable position; if it accedes to such a demand, it would very quickly cease to be the world’s only Jewish-majority state, and instead become the world’s 23rd Arab-majority state. If it were to refuse this demand, Israel would very quickly be painted by former friends as an apartheid state.

Israel’s response, then, can be reasonably predicted: Israeli leaders eager to prevent their country from becoming a pariah would move to negotiate the independence, with security caveats, of a Palestinian state on the West Bank, and later in Gaza, as well. Israel would simply have no choice.

This is the very best chance that the Palestinians have of getting a state, and if not a state at least equal democratic rights and some kind of peace. By accepting Israeli rule, Israel would be forced to choose between offering citizenship to the millions of Arabs living in the land it controls (endangering Israel’s status as a Jewish-majority state), or losing its status as a democracy (by denying West Bank Arabs votes) which has brought it significant international support and millions of dollars of aid. Goldberg’s theory is that Israel would choose to remain Jewish-majority, bring the settlement movement under control and relinquish land to the West Bank Arabs to found a Palestinian state.

But I don’t think that Israelis will overwhelmingly choose to abandon the settlements and retreat to the ’67 borders. The growth of Naftali Bennett’s Jewish Home party which advocates for a one state solution where West Bank Arabs are left without voting rights illustrates this very well. So too does Likud’s recent transformation into a party largely opposed to the two-state solution, under the control of hardliners like Moshe Feiglin and Danny Danon.

Indeed, the religious right in Israel appears wholly committed to the idea of not giving up an inch of the biblical land of Israel:

510px-Early-Historical-Israel-Dan-Beersheba-Judea-Corrected

The interesting thing is that Gaza is not part of that historic territory. It is often said that including the entirety of the Palestinian territories, Jews and Arabs are very close in population — according to 2007 data, there are 5,300,000 Arabs, and 6,000,000 Jews. However discluding Gaza, Jews retain a large majority — 6,000,000 against just 3,700,000 Arabs. What this means is that by withdrawing from Gaza as Sharon did, Israel could in theory annex the West Bank, grant full-citizenship to the Arab residents (and so remain a democracy), and remain heavily Jewish-majority for the foreseeable future.

This simple fact means that the likeliest compromise between Israel’s settlement movement and its desire to portray itself as a Jewish-majority democracy is the annexation of only the West Bank, leaving Gaza to either merge with Egypt — increasingly likely given the well-known ties between Hamas and the Muslim Brotherhood — or to exist as the Palestinian state.

While some like Naftali Bennett may push to keep West Bank Arabs from getting Knesset votes, Israel’s Jewish-majority status would not be threatened by every single West Bank Arab receiving a Knesset vote. This may very well be the best that West Bank Arabs can hope for — they are already under Israeli rule backed by overwhelming Israeli military superiority, and a diehard settlement movement, and have been for almost fifty years. And although there is significant discrimination against Arabs under Israeli rule — indeed, a majority of Israeli Jews openly advocate it —  a larger Arab voting bloc would minimise this.

Mahmoud Abbas’ threat is a wise acceptance of this reality. Israeli settlements are not going anywhere. The two state solution is effectively dead. Palestinians in the West Bank can either continue fighting futilely against an overwhelming enemy, or work toward equal rights in the state in which they now live.

Comparative Advantage and Global Trade Fragility

One of the cornerstones of the global economic status quo is globalisation and integration of markets. Here’s the growth in world trade as a percentage of global GDP since the 1970s:

worldtrade

There have been two key forces behind this outgrowth in global trade. First of all, the American military acting as hegemonic global policeman with bases in more than 150 countries and backed has created a situation generally known as the Pax Americana where goods and intermediaries can be shipped around the globe with minimal fear of piracy, seizure, theft, etc. Second, the international community has incentivised trade liberalisation through the policies of organisations including the International Monetary Fund (IMF), and World Trade Organization (WTO) requiring nations requesting loans or aid to open their markets to foreign trade competitors.

Most global policymakers and trade economists remain committed to and ultra-bullish about the agenda of global integration of markets. The OECD claims:

If G20 economies reduced trade barriers by 50%, they could gain:

More jobs: 0.3% to 3.3% rise in jobs for lower-skilled workers and 0.9 to 3.9% for higher-skilled workers, depending on the country.

Higher real wages 1.8% to 8% increase in real wages for lower-skilled workers and 0.8% to 8.1% for higher-skilled workers, depending on the country.

Increased exports: All G20 countries would see a boost in exports if trade barriers were halved. In the long run, many G20 countries could see their exports rise by 20% and in the Eurozone by more than 10%.

The overarching intellectual motivation for these policies is found in the work of the English classical economist David Ricardo and his neoclassical successors. The concept of comparative advantage introduced by Ricardo and expanded and formalised via equilibrium models by neoclassical economists including Samuelson, Mankiw, Hecksher and Ohlin (etc) has underpinned most of these policies.

Comparative advantage is the idea that nations benefit from specialising in what they are best at. Ricardo introduced the notion during debates about Britain opening her markets to European trade. Ricardo pointed out that total output and welfare would be greater for all countries in total if they specialised in what they were best at, and traded with each other to get what they wanted.

This principle works in Ricardo’s simple verbal model (and in the more sophisticated equilibrium models developed since). However empirical studies and meta-studies of modern day trade liberalisation suggest that there are some problems with this theory in practice.

Dani Rodrik noted in 2001:

Do lower trade barriers spur greater economic progress? The available studies reveal no systematic relationship between a country’s average level of tariff and nontariff barriers and its subsequent economic growth rate. If anything, the evidence for the 1990s indicates a positive relationship between import tariffs and economic growth.

The evidence on the benefits of liberalizing capital flows is even weaker. In theory, the appeal of capital mobility seems obvious: If capital is free to enter (and leave) markets based on the potential return on investment, the result will be an efficient allocation of global resources. But in reality, financial markets are inherently unstable, subject to bubbles (rational or otherwise), panics, shortsightedness, and self-fulfilling prophecies. There is plenty of evidence that financial liberalization is often followed by financial crash — just ask Mexico, Thailand, or Turkey — while there is little convincing evidence to suggest that higher rates of economic growth follow capital-account liberalization.

So what’s the difference between theory and reality?

There are a number of potential reasons why the theoretical promise of comparative advantage has not played out in reality.

First is graft and corruption. If countries are taking on loans from international institutions, and those loans are being deposited in the Swiss bank accounts of corrupt officials or businessmen instead of being spent on improving industry, skills or infrastructure, then what chance do developing countries have of developing?

Second is the danger of bubbles during the liberalisation process. Global capital flows into newly-liberalised countries can stoke bubbles in almost every sector (but especially equities, real estate, etc). When the bubble bursts, capital flows out, leaving the domestic economy deeply depressed.

Third is the social upheaval costs to labour, skills and institutions. As we have seen in the United States, manufacturing jobs and skills migrated abroad. Workers often cannot be retrained cheaply and easily, and often do not want or cannot afford to migrate to wherever their skills would be best-compensated. This stickiness can result in endemic unemployment and resultant economic weakness.

Fourth is the cost to capital stock.

As Steve Keen noted:

Some capital is necessarily destroyed by the opening up of trade.

Since capital is destroyed when trade is liberalised, the watertight argument that trade necessarily improves material welfare springs a leak.

Converting capital stock again and again to keep up with changing economic winds can be an expensive, difficult and mistake-ridden process.

Fifth is the problem of trade fragility.  Events like natural disasters and foreign wars can disrupt production and trade flows. Specialisation could cripple a country that depends on imports from foreign disrupted countries. Dependency on imported goods and intermediates renders countries vulnerable to shocks outside their borders. Wars and disasters that affect exporters have at times seriously disrupted and damaged the economies of importers, and vice versa.

The fact that trade liberalisation can have large social costs, create economic fragility and produce asset bubbles is a cause for pause. Is IMF-imposed globalisation opposed by the wider public really producing freer markets, or is it a misguided central planning experiment? Has the dogmatic pursuit of globalisation left global industry fragile to supply chain shocks caused by natural disasters and wars? Can the status quo really even be considered free trade, given that it is supported and smoothed by huge military-industrial subsidies? Does freedom of trade not also include freedom of nations to choose to protect domestic industries, institutions and supply chains from foreign competition? Why should the industries of developing countries be expected to compete against corporate multinational juggernauts?

While global trade may have provide a major disincentive against trade-disrupting wars, it seems probable that it has created a deep underlying systemic fragility. Trade interdependence means that regional or domestic shocks to production like a war or natural disaster may have consequences throughout the entire world, transmitted through dependencies. Similarly to the interconnective global financial system and the 2008 financial crisis, geopolitical shocks in coming years may well be magnified by globalisation.

How Palestinians Can Finally Achieve Independence

Jeffrey Goldberg’s suggestion:

There is a strategy the Palestinians could implement immediately that would help move them toward independence: They could give up their dream of independence.

It’s a very simple idea. When Abbas goes before the UN, he shouldn’t ask for recognition of an independent state. Instead, he should say the following: “Israel occupied the West Bank and Gaza 45 years ago, and shows no interest in letting go of the West Bank, in particular. We, the Palestinian people, recognize two things: The first is that we are not strong enough to push the Israelis out. Armed resistance is a path to nowhere. The second is that the occupation is permanent. The Israelis are here to stay. So we are giving up our demand for independence. Instead, we are simply asking for the vote. Israel rules our lives. We should be allowed to help pick Israel’s rulers.”

Reaction would be seismic and instantaneous. The demand for voting rights would resonate with people around the world, in particular with American Jews, who pride themselves on support for both Israel and for civil rights at home. Such a demand would also force Israel into an untenable position; if it accedes to such a demand, it would very quickly cease to be the world’s only Jewish-majority state, and instead become the world’s 23rd Arab-majority state. If it were to refuse this demand, Israel would very quickly be painted by former friends as an apartheid state.

Israel’s response, then, can be reasonably predicted: Israeli leaders eager to prevent their country from becoming a pariah would move to negotiate the independence, with security caveats, of a Palestinian state on the West Bank, and later in Gaza, as well. Israel would simply have no choice.

This follows my own train of thought very precisely. Trying to fight the world’s second or third most powerful military with small artillery is a dead end that just kills Palestinians and gives Israel an excuse to continue the blockade of Gaza. Palestinian resistance has just hardened Israelis in their determination to hold onto the land. Violence has failed the Palestinians, and will continue to fail the Palestinians. In order to move forward, Palestinians need to completely reject violence, recognise the reality of the state of Israel and demand voting rights in the state under whose authority they now reside.

Goldberg concludes that none of this will happen because the Palestinians are shortsighted. Maybe, but maybe not. Shortsightedness can easily be corrected.

What’s Next in the Middle East?

While the missiles, planes and rockets fly over Gaza and Israel, both Hamas and the Israeli government have been engaged in a battle of social media.

Hamas:

And Israel:

It is a battle to shape the perceptions of the rest of the world.

The IDF appears so far to have the upper hand in terms of social media, having notched up 143,000 followers on Twitter, although Hamas’ al-Qassam Brigades are in swift pursuit having just climbed above 20,000 followers.

Yet to view this as a simple conflict between Hamas and Israel is too superficial. It ignores the history and the context. This is a much bigger and broader tapestry.

Glenn Greenwald writes:

Israel‘s escalating air attacks on Gaza follow the depressingly familiar pattern that shapes this conflict. Overwhelming Israeli force slaughters innocent Palestinians, including children, which is preceded (and followed) by far more limited rocket attacks into Israel which kill a much smaller number, rocket attacks which are triggered by various forms of Israeli provocations  — all of which, most crucially, takes place in the context of Israel’s 45-year-old brutal occupation of the Palestinians (and, despite a “withdrawal” of troops, that includes Gaza, over which Israel continues to exercise extensive dominion). The debates over these episodes then follow an equally familiar pattern, strictly adhering to a decades-old script that, by design at this point, goes nowhere.

And Michael Chussudovsky writes:

On November 14,  Hamas military commander Ahmed Jabari was murdered in a Israeli missile attack. In a bitter irony,  barely a few hours before the attack, Hamas received the draft proposal of a permanent truce agreement with Israel.

“Hours before Hamas strongman Ahmed Jabari was assassinated, he received the draft of a permanent truce agreement with Israel, which included mechanisms for maintaining the cease-fire in the case of a flare-up between Israel and the factions in the Gaza Strip.”(Haaretz, November 15, 2012)

F-16 fighter planes, Apache helicopters and unmanned drones were deployed. Israeli naval forces deployed along the Gaza shoreline were involved in extensive shelling of civilian targets.

While Israel continues to enforce extreme restrictions on the lives of Palestinians, it has been inevitable that organisations like Hamas who promise resistance against Israel and Zionism will thrive. And while Hamas has thrived, Israel has continued to impose sanctions and restrictions. Both sides have been locked into a cycle of brutal retaliation (and a particularly suicidal cycle for the Palestinians).

In the latest skirmishes, Hamas has inflicted three Israeli casualties in rocket strikes, the Israeli military has already assassinated two high level Hamas commanders, and carried out successful strikes on dozens of Gazan targets resulting in thirty deaths.

But Israel and Hamas share a deeply interwoven history. The WSJ notes:

“Hamas, to my great regret, is Israel’s creation,” says Avner Cohen, a Tunisian-born Jew who worked in Gaza for more than two decades. Responsible for religious affairs in the region until 1994, Mr. Cohen watched the Islamist movement take shape, muscle aside secular Palestinian rivals and then morph into what is today Hamas, a militant group that is sworn to Israel’s destruction.

Instead of trying to curb Gaza’s Islamists from the outset, says Mr. Cohen, Israel for years tolerated and, in some cases, encouraged them as a counterweight to the secular nationalists of the Palestine Liberation Organization and its dominant faction, Yasser Arafat’s Fatah. Israel cooperated with a crippled, half-blind cleric named Sheikh Ahmed Yassin, even as he was laying the foundations for what would become Hamas.

And co-operation has continued between Hamas and Israel, even while they throw rockets at each other, and even while Hamas continues to receive funds and weapons from Israel’s major rivals, including Iran. Upon Ahmed Jabari’s killing, Haaretz noted:

Israel killed its subcontractor in Gaza.

The political outcome of the operation will become clear on January 22, but the strategic ramifications are more complex: Israel will have to find a new subcontractor to replace Ahmed Jabari as its border guard in the south.

Co-operation between Hamas and Israel should not be surprising. The two factions of hardliners — on one side Hamas, and on the other side Netanyahu’s coalition — validate each other’s existence. Without a state of perpetual enmity, the hardliners would find themselves marginalised. Nothing strengthens Hamas in Palestine like an Israeli rocket attack, and nothing strengthens Likud and Yisrael Beitenu in Israel like a Palestinian rocket attack.

However, Israel’s co-operation with Hamas may now be at an end. The surprise strike on Jabari may well be a sign that Hamas is to be cast aside and driven out of Gaza. This seems like the beginning of a new era in the middle east.

Now that the American election is out of the way, Netanyahu may be stepping toward engaging with Iran.

John Glaser, writing for AntiWar.com lays out one theory:

Israel, lest we forget, instigated this resumption of missile exchanges last week when two Palestinian civilians were shot and killed and Israeli tanks intruded into Gaza, prompting Gaza militants to respond by targeting Israeli soldiers, which then gave Israel an excuse to unleash successive airstrikes. And Israel had numerous chances to pacify the situation, considering Hamas publicly offered to establish a total ceasefire and Egypt appeared about to broker a truce between the two. Israel has intentionally inched towards escalation from the beginning. Are we to believe this isn’t strategic?

A ground invasion, and a reoccupation of Gaza by the IDF could be the first step toward engaging Iran. It would allow for Israel to dislodge Hamas, and create a buffer between Israel and Egypt, and the forces of the Muslim Brotherhood. The Morsi government in Egypt has pledged to support the Palestinians — but is this a bluff? Does Egypt have the capability or the desire to really oppose Israel? Does Iran really have the capability or the desire to oppose Israel in a more active way? Ultimately, Iran may have no choice, as Netanyahu is certain that they are on the nuclear threshold.

The world is in motion. Israel is playing its cards. The intent? To create facts on the ground that cement Israel’s position as the dominant power in the middle east for the next century.

Now, Iran’s move.

The Problem With Centralisation

Nassim Taleb slams the European project. Perfect timing to counteract the Nobel Peace Prize nonsense.

Via Foreign Policy:

The European Union is a horrible, stupid project. The idea that unification would create an economy that could compete with China and be more like the United States is pure garbage. What ruined China, throughout history, is the top-down state. What made Europe great was the diversity: political and economic. Having the same currency, the euro, was a terrible idea. It encouraged everyone to borrow to the hilt.

The most stable country in the history of mankind, and probably the most boring, by the way, is Switzerland. It’s not even a city-state environment; it’s a municipal state. Most decisions are made at the local level, which allows for distributed errors that don’t adversely affect the wider system. Meanwhile, people want a united Europe, more alignment, and look at the problems. The solution is right in the middle of Europe — Switzerland. It’s not united! It doesn’t have a Brussels! It doesn’t need one.

The future is unpredictable. In economics some decisions will be lead to desired results and others will not. Real-world outcomes are ultimately impossible to predict, because the real world is chaotic and no simulation can ever model the real world in precise detail; the map is not the territory.

Centralisation concentrates decision-making. Centralisation acts as a transmission mechanism to transmit and amplify the effects of centralised decisions throughout a system. This means that when bad decisions are made — as inevitably happens in human behaviour — the entire system will be damaged. Under a decentralised system, there is no such problem. Under a decentralised heterogeneous system, mistakes are not so easily transmitted or amplified. Centralisation is fragile.

And central planning is mistake-prone. Central planners are uniquely ineffective as resource allocators. Free markets transmit information; the true underlying state of supply and demand. Without an open market to transmit price information, central planners cannot allocate resources according to the true state of supply and demand. Capital, time, and labour are allocated based on the central planner’s preferences, rather than the preferences of the wider society.

These two factors taken together mean that centralised systems tend to be both fragile and mistake-prone. That is a dangerous — and unsustainable — combination.

Iran’s Insane Rhetoric

Iranian officials are once again firing off belligerent rhetoric.

 

Via the Jerusalem Post:

Hojjat al-Eslam Ali Shirazi, the representative of Iran’s Supreme Leader Ayatollah Ali Khamenei to the Islamic Republic’s Qods Force, said this week that Iran needed just “24 hours and an excuse” to destroy Israel.

In his first public interview in a year, reported in the Persian-language Jahan News, which is close to the regime, Shirazi said if Israel attacked Iran, the Islamic Republic would be able to turn the conflict into a war of attrition that would lead to Israel’s destruction.

“If such a war does happen, it would not be a long war, and it would benefit the entire Islamic umma the global community of Muslims. We have expertise in fighting wars of attrition and Israel cannot fight a war of attrition,” Shirazi said, referring to Iran’s eight-year war of attrition against Iraq.

Such claims are — more or less — inconsequential rubbish. The fact remains that Israel has nuclear weapons and a nuclear second strike, and Iran has no such thing, and the fact remains that the Iranian leadership knows this and are extremely unlikely to start a war where Iran (as Shimon Peres put it) will be the one wiped off the face of the Earth by Israeli plutonium. Yet the facts of military science will do little to stop the hawks of the West sounding off that Iran is irrational and that Iran is cooking up a plan to destroy Israel, and so must face regime change.

To grasp what is really occurring here we must look at how authoritarian Middle Eastern regimes (or, indeed, authoritarian regimes in general)  function. Authoritarian regimes  must maintain a cloak of authority. Tyrants do not attempt to look or sound weak; they try to project an aura of invincibility and indefatigability. We saw this during the last Gulf War, where Iraq’s information minister Muhammad Saeed al-Sahhaf — nicknamed Baghdad Bob in the American media — shot off hundreds of absurd statements during the war about how Iraqi troops were crushing the Americans, quite in contrast to the facts on the ground and right up until American tanks were rolling through the streets of Baghdad.

Baghdad Bob was not deluded. He was merely playing his role, and trying to project an aura of regime invincibility — providing propaganda for domestic consumption to keep the Iraqi population loyal to Saddam Hussein. It was a dog and pony show.

Iran’s belligerent rhetoric in this case is also strictly for domestic consumption — fierce rhetoric to keep the Iranian population fearful of the regime. Just like Baghdad Bob, the Iranian propaganda is far-removed from the real facts of the conflict. Whether the Iranian people really believe the regime’s propaganda — especially as the Iranian economy continues to worsen under sanctions — is dubious.

Yet one group of people — the Western neoconservatives, who are looking for another war — are more than happy to buy into the dog and pony “destroy Israel” bullshit.

As Robert Gates noted this week:

Painting a picture of internal political dysfunction in a dangerous world, former Defense Secretary Robert Gates warned Wednesday night that a U.S. or Israeli attack on Iran would have disastrous consequences.

Neither the United States nor Israel is capable of wiping out Iran’s nuclear capability, he said, and “such an attack would make a nuclear-armed Iran inevitable. They would just bury the program deeper and make it more covert.”

Iran could respond by disrupting world oil traffic and launching a wave of terrorism across the region, Gates said.

“The results of an American or Israeli military strike on Iran could, in my view, prove catastrophic, haunting us for generations in that part of the world.”

And as I wrote last month:

A regional war in the Middle East could result, potentially sucking in the United States and Eurasian powers like China, Pakistan and Russia. China and Pakistan have both hinted that they could defend Iran if Iran were attacked — and for good reason, as Iran supplies significant quantities of energy.

Frustratingly, the Iranian regime keep giving the neoconservatives more rope with which to hang themselves — and the West — on a cross of imperial overstretch, debt and blowback. 

The 71%

According to a recent FPI poll, 60% of Americans want go to war with Iran to prevent them from getting nuclear weapons.

This in spite of the fact that the US intelligence community is fairy unanimous that Iran is not even currently pursuing nuclear weapons. According to Micah Zenko:

First, as Director of National Intelligence James Clapper has repeatedly reaffirmed since late January, “we don’t believe they’ve actually made the decision to go ahead with a nuclear weapon.” Just yesterday, James Risen reported in the New York Times that the IC continues to believe (based on an assessment first made in November 2007) that Iranian Supreme Leader Ayatollah Ali Khamenei halted his country’s nuclear weapons activities in 2003.

This might be hard for many to grasp, since polling has found the American people disagree with the collective judgment of the 210,000 civilian and military employees and 30,000 private contractors comprising the IC. A recent poll found that 84 percent of Americans think Iran is developing nuclear weapons, while another from February 2010 concluded that 71 percent of Americans believe that Iran currently has nuclear weapons.

So 60% of Americans believe Iran should be attacked to prevent nuclear proliferation. Simultaneously 71% of Americans — in total contradiction to the evidence recognised by both the CIA and Mossad that Iran is not currently even developing a nuclear weapon — believe that Iran currently has nuclear weapons. There is almost certainly a high degree of overlap — and that’s some severe cognitive dissonance. Where are such ideas coming from?

There are some voices in the wilderness that are expressing the view that Iran already has a nuclear weapon to anyone who will listen.

According to Reza Kahlili, who claims to be a former CIA spy who infiltrated the Iranian Revolutionary Guard:

The pressure the United States and the West is bringing to bear on Iran to keep it from acquiring nuclear weapons is all for naught. Not only does the Islamic Republic already have nuclear weapons from the old Soviet Union, but it has enough enriched uranium for more. What’s worse, it has a delivery system.

And where did Iran supposedly get those weapons?

In the early 1990s, the CIA asked me to find an Iranian scientist who would testify that Iran had the bomb. The CIA had learned that Iranian intelligence agents were visiting nuclear installations throughout the former Soviet Union, with particular interest in Kazakhstan.

Meanwhile, Paul Muenstermann, then vice president of the German Federal Intelligence Service, said Iran had received two of the three nuclear warheads and medium-range nuclear delivery systems from Kazakhstan. It also was reported that Iran had purchased four 152 mm nuclear shells from the former Soviet Union, which were reportedly stolen and sold by former Red Army officers.

To make matters worse, several years later, Russian officials stated that when comparing documents in transferring nuclear weapons from Ukraine to Russia, there was a discrepancy of 250 nuclear weapons.

Lt. Col. Tony Shaffer, an experienced intelligence officer and recipient of a Bronze Star, told me that his sources say Iran has two workable nuclear warheads

Unlike the 71%, I’m not really convinced by this — if anything, it could be Iranian disinformation to try and avoid an American or Israeli attack. More importantly, the US and Israeli intelligence community at large don’t buy it. If they had any real evidence that Iran had a bomb today, Netanyahu would have been presenting it at the UN instead of drawing red lines on Wile E. Coyote bomb diagrams.

But if it were true, it would illustrate an extremely important point — that Iran with a nuclear weapon has not tried to obliterate Israel or the United States.

And if America were to attack Iran to prevent Iran from gaining a nuclear weapon, and Iran already has a nuclear weapon, the consequence could be thousands or millions of death — an attack on Iran would be even more dangerous and misadventurous for both the West and Israel than it already seems.

That makes the fact that a majority of Americans — as well as a disturbing number of hawkish policy analysts and talking heads like Reza Kahlili — agree that Iran already has a nuclear weapon, and that Iran should be attacked even more mind-boggling. To conclude (based on rumours and hearsay) that Iran already has a nuclear weapon, and simultaneously to encourage an attack on them is the height of foolishness.

Iran’s Imminent Nuclear Weapon

Here’s some context behind the claims that Iran will imminently possess a nuclear weapon.

It started a long time ago (but not, unfortunately, in a galaxy far, far away):

1984: Soon after West German engineers visit the unfinished Bushehr nuclear reactor, Jane’s Defence Weekly quotes West German intelligence sources saying that Iran’s production of a bomb “is entering its final stages.”US Senator Alan Cranston claims Iran is seven years away from making a weapon.

Seven years away? And did they have a bomb in 1991?

1992: Israeli parliamentarian Binyamin Netanyahu tells his colleagues that Iran is 3 to 5 years from being able to produce a nuclear weapon – and that the threat had to be “uprooted by an international front headed by the US.”

1992: Israeli Foreign Minister Shimon Peres tells French TV that Iran was set to have nuclear warheads by 1999. “Iran is the greatest threat and greatest problem in the Middle East,” Peres warned, “because it seeks the nuclear option while holding a highly dangerous stance of extreme religious militancy.”

1992: Joseph Alpher, a former official of Israel’s Mossad spy agency, says “Iran has to be identified as Enemy No. 1.” Iran’s nascent nuclear program, he told The New York Times, “really gives Israel the jitters.”

So was there a bomb by the late 1990s?

1995: The New York Times conveys the fears of senior US and Israeli officials that “Iran is much closer to producing nuclear weapons than previously thought” – about five years away – and that Iran’s nuclear bomb is “at the top of the list” of dangers in the coming decade. The report speaks of an “acceleration of the Iranian nuclear program,” claims that Iran “began an intensive campaign to develop and acquire nuclear weapons” in 1987, and says Iran was “believed” to have recruited scientists from the former Soviet Union and Pakistan to advise them.

1997: The Christian Science Monitor reports that US pressure on Iran’s nuclear suppliers had “forced Iran to adjust its suspected timetable for a bomb. Experts now say Iran is unlikely to acquire nuclear weapons for eight or 10 years.

So now we’re looking at a nuclear-armed Iran by 2007. Scary stuff, right?

2007: President Bush warns that a nuclear-armed Iran could lead to “World War III.” Vice President Dick Cheney had previously warned of “serious consequences” if Iran did not give up its nuclear program.

2007: A month later, an unclassified National Intelligence Estimate (NIE) on Iran is released, which controversially judges with “high confidence” that Iran had given up its nuclear weapons effort in fall 2003.

June 2008: Then-US Ambassador to the United Nations John Bolton predicts that Israel will attack Iran before January 2009, taking advantage of a window before the next US president came to office.

May 2009: US Senate Foreign Relations Committee reports states: “There is no sign that Iran’s leaders have ordered up a bomb.”

And Iran still doesn’t have a bomb today — all of those reports, all of that scaremongering and warmongering was wrong. Both the CIA and Mossad agree that there is no specific evidence that Iran is working on nuclear weapons today. And many experts believe that even if Iran were working on a bomb it could take up to ten to fifteen years.

Yet, it seems that nothing except a war will satisfy Binyamin Netanyahu, who felt the same way about Iraq:

There is no question whatsoever that Saddam is working towards nuclear weapons.

And how did that work out? A hugely expensive war and occupation, American imperial overstretch, thousands of dead soldiers, hundreds of thousands of dead Iraqis and no weapons of mass destruction. We should judge people on their predictive record.

On one level, I understand Netanyahu’s paranoia especially in the context of the 20th Century and the holocaust. Iranian Generals have talked about annihilating Israel.

In August 2012, Brigadier General Gholam Reza Jalali, who heads Iran’s Passive Defence Organisation, said “No other way exists apart from resolve and strength to completely eliminate the aggressive nature and to destroy Israel.”  And just six days ago in September 2012 Brigadier General Amir Ali Hajizadeh threatened to attack Israel and trigger World War III, saying that “it is possible that we will make a pre-emptive attack” which would “turn into World War III.” In the same statement, Hajizadeh threatened to attack American bases in the Middle East as well. Hajizadeh said that as a result of this attack, Israel would “sustain heavy damage and that will be a prelude to its obliteration.”

All disturbing rhetoric, yet almost certainly baseless threats given the context of Iran’s technological and military disadvantage. Iranian missiles fired at Israel would likely be shot down long before they reached Israeli airspace by Israel’s advanced missile defence systems that can intercept even short-range fire from Gaza and Lebanon. And Israel’s nuclear submarines in the Persian Gulf would almost certainly retaliate in kind. As Shimon Peres noted in 2006: “The President of Iran should remember that Iran can also be wiped off the map.” Most importantly, if Iran attacked Israel, it seems far less likely that other powers would come to Iran’s aid.

Yet an attack on Iran by Israel could well trigger a larger conflict, sucking in Iran’s trade partners who do not want to see the flow of oil and resources out of Iran disrupted. Just this week China announced new contracts to provide super-tankers to deliver oil from Iran to China. Would Russia and China sit idly by and see their Iranian investments liquidated while America and Israel invade Iran and destroy its infrastructure? Would they sit idly by and see their ally deposed? China and Pakistan have both hinted that they could defend Iran if Iran were attacked. An attack on or invasion of Iran is an incredibly risky adventure — and in my view the real danger to Israel. And for what? To discover that like Saddam Hussein, Ahmadinejad is not working on a nuclear weapon, and all the hot air about weapons of mass destruction is once again just bullshit?