Sardanapale

Just about everyone agrees that the banking meltdown has revealed fundamental flaws in the (mostly) deregulated economic order that has prevailed for a quarter-century.

But few pause to consider why this order arose in the first place.

The idea that markets are better at making financial decisions than bureaucrats did not emerge in a fit of collective madness or for the sole benefit of globalised elites.

The current system emerged across the world because the old one, dominated by the visible hand of government, had produced rising prices, mass unemployment and the misery index.

Those ills and the market solutions that vanquished them are analyzed by Robert J Samuelson in his latest book, The Great Inflation and Its Aftermath.

Its main arguments are presented by Jonathan Rauch in his latest column – whose eloquence precludes paraphrasing.

I can only invite you to read it.

It must be noted that neither Rauch not Samuelson say that the present system must be preserved at all cost - only that it is there for a reason.

So you might want to think twice before calling for a “new paradigm for financial markets”, as George Soros does in a new article .

Sadly, I feel that Soros is more in tune with these panicky times than the cool-headed Samuelson.

In the 1990s the latter wrote another brilliant book, The Good Life And Its Discontents, which did little to dispel fashionable economic worries. I fear his latest will fall on even deafer ears.

From a Wall Street Journal article by Abigail and Stephan Thernstrom:

The conventional wisdom among voting-rights advocates and political scientists has been that whites will not vote for black candidates in significant numbers.

Hence the need for federal protection in the form of race-based districts that create safe black constituencies where black candidates are sure to win.

But the myth of racist white voters was destroyed by this year’s presidential election…

These results do not mean we now live in a color-blind society. But we can say that the doors of electoral opportunity in America are open to all.

The aggressive federal interference in state and local districting decisions enshrined in the Voting Rights Act should therefore be reconsidered.

That statute, adopted in 1965 and strengthened by Congress in the summer of 2006, demands race-driven districting maps to protect black candidates from white competition.

That translates into an effort to create black representation proportional to the black population in the jurisdiction.

That law gave federal courts and the Justice Department what are, in effect, extraordinary war powers to combat the evil of ongoing Southern black disfranchisement. But blacks are no longer disfranchised - by any definition.

In fact, racially gerrymandered districts are an impediment to political integration at all levels of government.

Herding African-Americans into “max-black” districts forces black candidates to run in heavily gerrymandered districts.

The candidates who emerge from those districts are, unsurprisingly, typically not the most well-positioned to appeal to a broader swath of the electorate.

Black candidates can win in multi-ethnic and even majority-white districts with color-blind voting.

Mr. Obama should make it a priority to give more aspiring black politicians the opportunity to stand before white (and Latino and Asian and other ethnic) voters. He won, so can they.

Fouad Ajami has a superb piece in the Wall Street Journal about the Obama phenomenon:

“There is something odd - and dare I say novel - in American politics about the crowds that have been greeting Barack Obama on his campaign trail. Hitherto, crowds have not been a prominent feature of American politics.

We associate them with the temper of Third World societies. We think of places like Argentina and Egypt and Iran, of multitudes brought together by their zeal for a Peron or a Nasser or a Khomeini. In these kinds of societies, the crowd comes forth to affirm its faith in a redeemer: a man who would set the world right.

As the late Nobel laureate Elias Canetti observes in his great book, “Crowds and Power” (first published in 1960), the crowd is based on an illusion of equality: Its quest is for that moment when “distinctions are thrown off and all become equal. It is for the sake of this blessed moment, when no one is greater or better than another, that people become a crowd.”

These crowds, in the tens of thousands, who have been turning out for the Democratic standard-bearer in St. Louis and Denver and Portland, are a measure of American distress (…)

Save in times of national peril, Americans have been sober, really minimalist, in what they expected out of national elections, out of politics itself. The outcomes that mattered were decided in the push and pull of daily life, by the inventors and the entrepreneurs, and the captains of industry and finance.

To be sure, there was a measure of willfulness in this national vision, for politics and wars guided the destiny of this republic. But that American sobriety and skepticism about politics — and leaders — set this republic apart from political cultures that saw redemption lurking around every corner.

My boyhood, and the Arab political culture I have been chronicling for well over three decades, are anchored in the Arab world. And the tragedy of Arab political culture has been the unending expectation of the crowd - the street, we call it - in the redeemer who will put an end to the decline, who will restore faded splendor and greatness (…)

America is a different land, for me exceptional in all the ways that matter. In recent days, those vast Obama crowds, though, have recalled for me the politics of charisma that wrecked Arab and Muslim societies. A leader does not have to say much, or be much. The crowd is left to its most powerful possession - its imagination.

From Elias Canetti again: “But the crowd, as such, disintegrates. It has a presentiment of this and fears it… Only the growth of the crowd prevents those who belong to it from creeping back under their private burdens.”

The morning after the election, the disappointment will begin to settle upon the Obama crowd. Defeat — by now unthinkable to the devotees — will bring heartbreak. Victory will steadily deliver the sobering verdict that our troubles won’t be solved by a leader’s magic.

I profess my ignorance, for once (I usually keep quiet about it).

Would someone help me understand what’s so new about the current financial crisis?

Why should the classic pro-market view on such things – that the state usually makes things worse by stepping in – no longer be valid?

This view was popularized by Milton Friedman, who argued in his book “Free to Choose” that the Great Depression had been caused not by flawed markets but by the policies of the Federal Reserve.

The regulatory system, Friedman wrote, tends to blame

“all problems on external influences beyond its control and takes credit for any and all favorable occurrences.

It thereby continues to promote the myth that the private economy is unstable, while its behaviour continues to document the reality that government is today the major source of economic instability.”

Some commentators have used similar arguments in the context of the present crisis.

Alvaro Vargas Llosa, in the New Republic, argued that the Fed had created conditions for the turmoil through credit expansion, which encouraged reckless lending.

But the underlying problem, as Vargas Llosa sees it, is not so much the Fed’s decisions as its very existence: a financial system underpinned by the officials wielding monopoly power can never be as stable as one where private banks are free to issue money.

Vargas Llosa, of course, knows that abolishing the Fed but is inconceivable right now, but nevertheless calls for bold thinking:

“There are less dramatic measures that can be taken on the road toward a definitive solution. The most obvious one is to simply stop using the Federal Reserve to inflate the currency.”

The strange thing is, this classical view of the crisis is very much in the minority – even among analysts that are usually pro-market.

In The Wall Street Journal, Arthur Levitt Jr blames new fancy financial instruments for the debacle:

“The combination of structured financial products and subprime mortgages fundamentally changed the lending business.

No longer did those doing the lending have to expose themselves to the credit risks of the borrowers. Instead, they packaged their loans for sale to the investing public.

With no exposure, loan originators offered mortgages to just about anyone they could find.”

Levitt does not exonerate regulators, but he says their basic failure was not too much supervision, but too little – “regulatory underkill”, as he puts it.

The Economist, meanwhile, defends the emergency measures taken by the Fed to tackle the crisis: helping JP Morgan acquire Bear Stearns, lowering the discount rate, and offering $200bn in short-term loans to investment banks, etc.

The Financial Times‘ Martin Wolf – one of the most eloquent advocates for globalization – also seems to take a positive view of the Bear Stearns rescue and other moves by officials, and argues that the era of financial deregulation is over.

His point is best encapsulated by a banker he quotes: “I no longer believe in the market’s self-healing power.”

For these analysts, the rules of the game have radically changed: the financial system has become inherently unstable, and it is incumbent on enlightened officials to save it against itself.

I’m not dismissing such ideas out of hand.

But before I turn my back on Milton Friedman and give up on a central tenet of my faith in markets, I want to make sure it is truly obsolete.

You see, I have a sneaking suspicion that these guys are rushing into the protective arms of the state – as people tend often do in times of trouble. Help anyone?

I’m watching the race for the Democratic nomination with all the interest of a Liverpool Fan for the struggle between Manchester United and Arsenal in the English Premiership (except, of course, that McCain, unlike my favourite club, has a chance of winning.)

From this detached position, I confess a preference for Barack Obama – although this is due to Clinton fatigue on my part rather than an active appreciation of their rival.

The same reflex leads me to cheer any opponent of Manchester. OK: I’m dropping this tired metaphor NOW.

But such lack of enthusiasm for either candidate is much more of a problem for a liberal American than it is for a conservative European.

To get an idea of how frustrating it can be to feel cold about a candidate you’re supposed to love, I strongly recommend Jonathan Rauch’s latest column about his own “Obama resistance complex”.

As usual, it’s eye-opening and highly entertaining.

Both French and US voters are obsessed with the stagnation of living standards.

In France, this feeling is largely behind the unpopularity of President Nicolas Sarkozy and the conservative losses in the current local elections.

In America, the “middle-class squeeze” is a major theme for both Democratic front-runners.

Hillary Clinton has spoken of “seven years of stagnant wages, declining incomes and increasing inequality.”

Barack Obama claims to be on the side of “the struggling masses”, as opposed to “the idle holders of idle capital”.

But is it true that, as millions believe on both sides of the Atlantic, the circumstances of ordinary folk have not improved in decades, and that the benefits of growth have accrued to a wealthy minority?

I have problems reconciling this idea with my own experience.

In 1960s France, only well-to-do families had a television and a washing machine; today the humblest households have several TVs, a DVD player, and a dishwasher.

When I was growing up single mothers didn’t fly to the Canary islands for their vacations.

When I tell my daughter that people used to darn socks and shirts that had holes in them, she thinks I was raised in the third world.

And there’s no need to go back to the 1960s and 1970s to be struck by remarkable changes in lifestyle and consumption trends.

In the early 1980s, most households had only one phone – and it was a landline that was very costly to use by today’s standards. Few people had a computer.

A mere 15 years ago, no one had heard of the internet.

What about the basic things in life: a roof over your head and food?

Rents have risen no faster than income. Despite rising supermarkets prices over the past year, it’s still much cheaper to feed your family today than it was 40, 20, or even 10 years ago.

So why do are so many people – including economist – telling us that living standards have stagnated?

Without claiming to exhaust the question, I will mention a few points made by Thomas Sowell in his latest look Economic Facts and Fallacies.

Most economists focus on households, which have been declining in size since the 1970s.

Hence the relatively low increase in household income conceals a significant rise in income per head (+51 in the US over 30 years, according to Sowell).

Moreover, the focus on households income distorts the statistics on inequality. Rich households have more members than poor ones.

In the US the top 20% of the household distribution has almost twice as many people as the bottom 20% - which now typically includes single-parent families and senior citizens, rather than large families of underfed children.

The gap between the rich the poor has indeed widened on an individual bases, but not by as much as you would think by looking at household figures.

And when people talk about rising inequality, they often forget that the poor do not form a stable group.

Those who are at the bottom of the social heap today are the same who were there 20 years ago.

Their ranks are constantly renewed, mostly by immigrants (for whom a minimum wage is a boon), just as the ranks of the rich are replenished by the middle classes are the poor.

So the fact that inequality has risen does not necessarily mean that “the poor are getting poorer and the rich are getting richer”.

There are signs that social mobility is decreasing. But this worrying trend is at work both in statist France and more business-friendly US and UK: you can’t blame markets for it.

In short, the obsession with “stagnating living standards” rests mostly on statistical illusions, and Clinton and Obama should know better than outdo each other in populist rhetoric.

For enlightenment on these issues, I recommend Sowell’s magnificent interview on Econtalk, my favorite podcast, and this article by Brad Schiller in the Wall Street Journal.

Last week I criticised George Bush’s “stimulus package” – an overtly Keynesian measure designed to spur America’s economy back into life.

But I hasten to add that have nothing against reducing taxes as a long-term strategy.

There is a world of difference between, say, Carter’s $50-for-everyone-rebates, which achieved nothing, and the Reagan tax cuts.

The latter had two features that the former lacked: a) they were permanent, and b) a focus on marginal rates.

Of those two features, the second is the least understood.

Contrary to popular opinion, the purpose of those cuts was not to help the rich.

The man who popularized them, Arthur Laffer, reminded us is a recent Wall Street Journal opinion piece of the profound progressive effects of the cuts:

“The highest marginal income tax rate in 1980 was 70%. Today it is 35%. In the year Ronald Reagan took office (1981) the top 1% of income earners paid 17.58% of all federal income taxes. Twenty-five years later, in 2005, the top 1% paid 39.38% of all income taxes.

There are other ways of looking at tax receipts by income bracket. From 1981 to 2005, the income taxes paid by the top 1% rose to 2.96% of GDP, from 1.59% of GDP. There was also a huge absolute increase in real tax dollars paid by this group. In 1981, the total taxes paid in 2005 dollars by the top 1% of income earners was $94.84 billion. In 2005 it was $368.13 billion…

Let’s take a look at the bottom 75% of taxpayers over this same time period — the group current Democrats refer to as middle- and lower-income earners. From 1981 through 2005, the share of all income taxes paid by the bottom 75% of all income earners (as reported on the individual income tax returns) declined to 14.01% from 27.71%.

As a share of GDP, total taxes paid by the bottom 75% fell to 1.05% from 2.50%. The bottom 75% of all taxpayers today pay less than 35% of all the taxes paid by the top 1% of all income earners…

The important point here is that, over the last 25-plus years, the only group that experienced an increase in income taxes paid as a share of GDP was the top 1% of income earners.”

There is nothing wrong with reducing the tax burden on low and middle incomes. But the best way to spur growth is to act against punitive marginal rates, which both maximises revenue and boosts supply in the long term.

It is also important to remove special breaks that benefit tax consultants and their rich clients.

Bush, on the contrary, is using tax cuts to spur demand and has done nothing to simplify the tax code.

When it comes to cutting taxes, he has taken his cue from Carter not Reagan.

The whole Laffer article can be read here.

Another quotation game: who is the author of the passage below?

“To be anti-American nowadays is to shout with the mob. Of course it is only a minor mob, but it is a vocal one.

Although there is probably some growth of ill-feeling as a result of the presence of American troops, I do not believe that the mass of the people in this country are anti-American politically, and certainly they are not so culturally.

But politico-literary intellectuals are not usually frightened of mass opinion. What they are frightened of is the prevailing opinion within their own group. At any given moment there is always an orthodoxy, a parrot cry which must be repeated, and in the more active section of the Left the orthodoxy of the moment is anti-Americanism.

I believe part of the reason… is the idea that if we can cut our links with the United States we might succeed in staying neutral in the case of Russia and America going to war.

How can anyone believe this, after looking at the map and remembering what happened to neutrals in the late war, I do not know…

But at any rate the orthodoxy is there. To speak favourably of America, to recall that the Americans helped us in 1940 when the Russians were supplying the Germans with oil and setting on their Communist parties to sabotage the war effort, is to be branded a “reactionary.”…

Surely, if one is going to write about foreign policy at all, there is one question that should be answered plainly. It is: ‘If you had to choose between Russia and America, which would you choose?’ It will not do to give the usual quibbling answer, ‘I refuse to choose.’

In the end the choice may be forced upon us. We are no longer strong enough to stand alone, and if we fail to bring a western Europe un-ion into being, we shall be obliged, in the long run, to subordinate our policy to that of one Great Power or the other.

And in spite of all the fashionable chatter of the moment, everyone knows in his heart that we would choose America. The great mass of people in this country would, I believe, make this choice almost instinctively.

Certainly there would be a small minority that would choose the other way. Mr Zilliacus, for instance, is one of them. I think he is wrong, but at least he makes his position clear. I also know perfectly well what Tribune’s position is. But has Tribune ever made it clear?”

Last year two US academics published an article in the London Review of Books on America’s “Israel lobby”, sparking furious debate.

Most of it raged in the blogosphere, as the issue proved too controversial for US newspapers (which is why the piece had to be published across the Atlantic).

Now the debate has been re-ignited by the book-length extension of the piece, published last month.

I haven’t read it yet, but I thought I’d give you my two cents worth, based on the original article.

The authors, John Mearsheimer and Stephen Walt, make essentially two points:

1 - The “Israel lobby” (Mearsheimer and Walt prefer this label to “Jewish lobby”, as they believe it is mainly concerned with defending the interests of Israel, not those of US Jews) is singularly effective in influencing decision-making in America.

2 - The policies the lobby successfully promotes run counter to US interests: Washington has set aside its own security needs to attend to those of a foreign state.

First of all, let me make clear that I feel they should have been aired and debated.

Mearsheimer and Walt are no anti-Semitic ideologues: they present their arguments in a reasoned way.

Now for my two cents. I found their first contention - about the influence of the “Israel lobby” - convincing.

They do not regard the lobby as a cabal wielding power behind the scenes: pro-Israel groups operate in the open, by rewarding friends with votes and donations and rounding on enemies.

In other words they do what every other lobby does - just more effectively.

Several surveys of members of Congress have shown that they regard AIPAC as one of the two most powerful lobbies in Washington (along with the American Association of Retired People).

Mearsheimer and Walt give ample illustration of this influence.

Their own inability to find a publisher for the original article in the US indicates that the lobby also intimidates much of the mainstream media.

I’m not sure, however, about their contention that its power extends to university campuses.

They talk about “efforts to police academia”, but the main example they offer - fanciful accusations of anti-Semitism leveled again Columbia University’s Middle East program - suggests such policing is not very effective.

In my two years on US campuses I have found that the biggest intellectual bullies there were the “progressives”, not the Zionists

But again, Mearsheimer and Walt, it seems to me, adequately show that the firepower of the pro-Israeli lobby is formidable where it really matters.

As they argue:

“The US form of government offers activists many ways of influencing the policy process…

They enjoy a disproportionate amount of influence when they are committed to an issue to which the bulk of the population is indifferent.

Policymakers will tend to accommodate those who care about the issue, even if their numbers are small, confident that the rest of the population will not penalize them for doing so.”

But when Mearsheimer and Walt make their second point - that helping Israel hurts the interests of the US - they leave the realm of observable fact to enter that of value judgment.

US support for Israel, the war on terror and the Iraq invasion may be good or bad for the US - but accusing those who decided them to yield to Israeli intimidation is idle.

Who is to say what goes on the minds of policy makers?

Why should we doubt their sincerity when they proclaim they are acting in the best interest of the US?

Such sincerity is not an argument in their favour.

Many disastrous policies - from Hitler’s attack on the USSR to Mitterrand’s nationalisation program - were implemented by conviction politicians who thought they were acting on the best interest of the country.

And by accusing US leaders of caving in to pressure and allowing Israel to hijack US Middle East policy, Mearsheimer and Walt exonerate those leaders from one of the greatest political sins: stupidity.

In the New York Times Book Review, Harvard sociologist Orlando Patterson appraises a book about Clarence Thomas.

The main point of the article - entitled “Thomas Agonistes” - is that the Supreme Court justice suffers from “chronic contradictions”, which Patterson summarizes thus:

“Although he seriously believes that his extremely conservative legal opinions are in the best interests of African-Americans, and yearns to be respected by them, he is arguably one of the most viscerally despised people in black America.

It is incontestable that he has benefited from affirmative action at critical moments in his life, yet he denounces the policy and has persuaded himself that it played little part in his success.

He berates disadvantaged people who view themselves as victims of racism and preaches an austere individualism, yet harbors self-pitying feelings of resentment and anger at his own experiences of racism.

His ardent defense of states’ rights would have required him to uphold Virginia’s anti-miscegenation law, not to mention segregated education, yet he lives with a white wife in Virginia.

He is said to dislike light-skinned blacks, yet he is the legal guardian of a biracial child, the son of one of his numerous poor relatives.”

I will not dwell on the ad hominem gossip about private life, and go straight to Patterson’s critique of Thomas’ public opinions.

The idea that any consistent supporter of states’ rights should retrospectively endorse the racist laws of the old south is a cheap polemic, and Patterson knows it.

The fact that bigots believed in states’ rights does not mean that anyone who supports that doctrine is a bigot.

In the European context, it would be just as absurd for a supporter of the (now defunct) EU constitution to portray all its critics as far-right xenophobes, on the grounds that France’s National Front was against it.

Thomas’ claim to have suffered at the hand of racists does not seem outlandish for someone who grew up in Georgia in the 1950s. It should not stop him denouncing the modern form of ideology that sees racism everywhere today.

That Thomas is at odds with most other black people on many issues, including where their interest lies, is a fact. This fact may show that he is isolated, or perhaps wrong. But it is not a contradiction.

More precisely, it is only a contradiction if you assume that all African Americans, on account of their race, must subscribe to the same point of view.

As for the notion that you cannot condemn a policy that you have benefited from as unjust, it is equally bizarre.

In the dying years of the French ancien régime aristocrats were the fiercest critics of aristocratic privileges. Should they be condemned as illogical and self-loathing or praised for their lucidity?

Closer to home (especially for Patterson), I know a prominent academic whose children went to Harvard but refused to tick the “African American” box that would have given extra points for admission.

Of course, once they were at Harvard, they had to endure the condescension of white students who assumed they had jumped to queue.

You may not share these black kids’ resentment of affirmative action as insulting, but you shouldn’t regard it as a contradiction.

Unless, that is, you assume that prominent blacks belong first and foremost to their group. This assumption lies at the heart of Patterson’s view of “Thomas Agonistes”: by defending conservative positions, the justice is denying a key part of his own identity.

The idea that some officials owe their political allegiance to their own kind is most forcefully states in an open letter to Thomas quoted in the book (entitled Supreme Discomfort. The Divided Soul of Clarence Thomas).

The letter, written by a black district judge after Thomas took his seat on the Supreme Court in 1991, urges him to remember his roots and not to let the side down.

“You … must try to remember that the fundamental problems of the disadvantaged, women, minorities, and the powerless have not all been solved simply because you have ‘moved on up’ from Pin Point, Georgia, to the Supreme Court.”

Reciting a roster of notables from the past, the judge told Thomas to see his life as connected to

“the visions and struggles of Frederick Douglass, Sojourner Truth, Harriet Tubman, Charles Hamilton Houston, A. Philip Randolph, Mary McLeod Bethune, W. E. B. Du Bois, Roy Wilkins, Whitney Young, Martin Luther King, Judge William Henry Hastie, Justices Thurgood Marshall, Earl Warren, and William Brennan, as well as the thousands of others who dedicated much of their lives to create the America that made your opportunities possible.”

In other words a black judge has a duty, but virtue of his race, to espouse certain opinions.

I’m sure there are good reasons to a liberal, but this legal apartheid is not one of them.