Bush tax cuts | Normative Narratives

In consecutive Op-Ed articles, NYT writer Thomas Friedman considers how unscrupulous leaders and U.S. foreign policy have failed those dedicated to pluralism and democracy in the Middle East:

What to do With the Twins?:

Iraq and Syria are twins: multiethnic and multisectarian societies that have been governed, like other Arab states, from the top-down. First, it was by soft-fisted Ottomans who ruled through local notables in a decentralized fashion, then by iron-fisted British and French colonial powers and later by iron-fisted nationalist kings and dictators.

Today, the Ottomans are gone, the British and French are gone and now many of the kings and dictators are gone. We removed Iraq’s dictator; NATO and tribal rebels removed Libya’s; the people of Tunisia, Egypt and Yemen got rid of theirs; and some people in Syria have tried to topple theirs. Each country is now faced with the challenge of trying to govern itself horizontally by having the different sects, parties and tribes agree on social contracts for how to live together as equal citizens who rotate power.

In Iraq, the Shiite prime minister, Nuri Kamal al-Maliki — who had the best chance, the most oil money and the most help from the U.S. in writing a social contract for how to govern Iraq horizontally — chose instead, from the moment the Americans left, to empower Iraqi Shiites and disempower Iraqi Sunnis. It’s no surprise that Iraqi Sunnis decided to grab their own sectarian chunk of the country.

So today, it seems, a unified Iraq and a unified Syria can no longer be governed vertically or horizontally. The leaders no longer have the power to extend their iron fists to every border, and the people no longer have the trust to extend their hands to one another. It would appear that the only way they can remain united is if an international force comes in, evicts the dictators, uproots the extremists and builds consensual politics from the ground up — a generational project for which there are no volunteers.

I could say that before President Obama drops even an empty Coke can from a U.S. fighter jet on the Sunni militias in Iraq we need to insist that Maliki resign and a national unity cabinet be created that is made up of inclusive Shiite, Sunni and Kurdish leaders. I could say that that is the necessary condition for reunification of Iraq. And I could say that it is absolutely not in our interest or the world’s to see Iraq break apart and one segment be ruled by murderous Sunni militias.

ISIS / SISI:

ISIS and Sisi, argues Perlov, a researcher on Middle East social networks at Tel Aviv University’s Institute for National Security Studies, are just flip sides of the same coin: one elevates “god” as the arbiter of all political life and the other “the national state.”

Both have failed and will continue to fail — and require coercion to stay in power — because they cannot deliver for young Arabs and Muslims what they need most: the education, freedom and jobs to realize their full potential and the ability to participate as equal citizens in their political life.

We are going to have to wait for a new generation that “puts society in the center,” argues Perlov, a new Arab/Muslim generation that asks not “how can we serve god or how can we serve the state but how can they serve us.”

Perlov argues that these governing models — hyper-Islamism (ISIS) driven by a war against “takfiris,” or apostates, which is how Sunni Muslim extremists refer to Shiite Muslims; and hyper-nationalism (SISI) driven by a war against Islamist “terrorists,” which is what the Egyptian state calls the Muslim Brotherhood — need to be exhausted to make room for a third option built on pluralism in society, religion and thought.

The Arab world needs to finally puncture the twin myths of the military state (SISI) or the Islamic state (ISIS) that will bring prosperity, stability and dignity. Only when the general populations “finally admit that they are both failed and unworkable models,” argues Perlov, might there be “a chance to see this region move to the 21st century.”

“Both the secular authoritarian model — most recently represented by Sisi — and the radical religious model — represented now by ISIS — have failed,” adds Marwan Muasher, the former foreign minister of Jordan and author of “The Second Arab Awakening and the Battle for Pluralism.” “They did because they have not addressed peoples’ real needs: improving the quality of their life, both in economic and development terms, and also in feeling they are part of the decision-making process. Both models have been exclusionist, presenting themselves as the holders of absolute truth and of the solution to all society’s problems.”

We tend to make every story about us. But this is not all about us. To be sure, we’ve done plenty of ignorant things in Iraq and Egypt. But we also helped open their doors to a different future, which their leaders have slammed shut for now. Going forward, where we see people truly committed to pluralism, we should help support them. And where we see islands of decency threatened, we should help protect them. But this is primarily about them, about their need to learn to live together without an iron fist from the top, and it will happen only when and if they want it to happen.

Essentially, the twin cases of Iraq and Syria have been a crash course in what not to do. The U.S. invaded Iraq without an established partner ready and willing to defend a pluralistic democratic society. We ended up spending trillions of dollars, found no “weapons of mass destruction”, and, given recent developments in the region, have left Iraq in worse shape than under Saddam (and by no means do I believe Saddam was a viable long term solution either, stick with me here).

In Syria, Iraq’s twin state, essentially the exact opposite situation played out. A war weary American public held the belief it was best to not intervene militarily in Syria in the early stages of the uprising. But Syria was not Iraq; there was an organic, grass roots, civil society movement based on modern pluralistic democratic governance ready to fill the power void. Assad was and continues to butcher his own people openly and indiscriminately, and the pluralistic movement based on soft power has ceded ground to vicious extremist groups and government bombardment. This story has many parallels to what has transpired in Egypt over the past few years.

We must assist legitimate, pluralistic, democratic movements in the developing world, as they are the key to sustainable human development. Going to war without such an ally is a fools errand, as The Iraq War has shown. Abandoning such an ally (as we have done in Egypt and Syria) results in the slaughter of innocents, reverses in economic development and human rights, and presents opportunities for the rise of extremism / authoritarianism. When such an ally presents itself, we must be ready to assist them, before it is too late and that ally is marginalized / defeated.

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US Domestic Fiscal Policy:

The Iraq War highlights the greater folly of “starve-the-beast” economic policy. The central tenet of starve-the-beast is that government is just that, a beast, whose role must be minimalized. Notably, President W. Bush went to war in Iraq and gave large tax cuts during his presidency–he starved the beast. The U.S. government was therefore in a poor position to weather the Great Recession, creating somewhat artificial budget debates (even though for the U.S. Federal government, borrowing money was and remains little more expensive that spending from surplus).

Had Bush not given his tax breaks, and the U.S. was determining policy from the prospect of a huge federal surplus, one could argue that the American Recovery and Reinvestment Act would have been substantially larger (and therefore substantially more effective). President Obama deserves some of the blame for the inadequacies of the ARRA; he was a new president, very idealistic, and tried to make everyone in Washington happy instead of getting the best deal for the American people. Perhaps he wrongfully believed he could go back for more stimulus money later if needed–if so, this was a costly miscalculation. Nevertheless, the fiscal context against which the ARRA was drafted naturally played a role in its composition.

As the economic recovery drudges on for the vast majority of Americans (low growth, high unemployment, stagnant wages), one cannot help but wonder how different things may have been had the U.S. Federal government instead pursued somewhat counter-cyclical fiscal policies.

U.S. Foreign Policy

Getting the U.S. tied up in a decade of war sapped resources and public will to defend pluralism, human rights, and democracy abroad (understandably so; when they’re threatening to cancel your food stamps / unemployment insurance / pension, who cares whats going on in Syria?).

The U.S. fought a war we had no business fighting in Iraq, leaving ourselves unwilling to assist legitimate democratic movements in Egypt and Syria. This is the major consequence of starve the beast philosophy–when we waist money on things we don’t need now, we cannot afford the things we do need later (at least without relying on deficit spending). Domestically, unneeded tax cuts meant there was not enough stimulus money to jump-start the U.S. economy. Abroad, the will to intervene in situations where we should have intervened did not exist because of an unnecessary war.

Of all the costs of the Iraq War, our inability to assist our allies abroad in their time of need may indeed turn out to be our greatest failure.

It is up to civil societies to determine for themselves when to cast off the shackles of authoritarianism and demand modern and pluralistic democratic governance. It is the role of the U.S. and our allies to defend and nurture those movements whenever they present themselves.

(Earlier this week President Obama called for $500 million to train and assist the moderate Syrian opposition; file that one under too little too late category.)

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The U.S. government is not a beast, it is a force for progress and socioeconomic justice both at home and abroad, and the leader of the “international community”. Have their been policy failures, both home and abroad, in recent history? Of course. This is no reason to dismiss the many positive outcomes stemming from American domestic and foreign policies.

Starving the beast has real costs for both America and the world’s most vulnerable people; it is mind boggling that it has been the rallying cry of a major American political party for decades.

Some of you may remember, way back when Normative Narratives started a few months back, a prickly little topic on every news outlets agenda–The Fiscal Cliff. The Fiscal Cliff was supposed to be an outcome so unthinkable that it forced congress to act and pass a reasonable budget by new years day 2013. While this is no easy task during a recession (partisan gridlock aside), congress had from the summer of 2011 to come up with some sort of deal. Unfortunately, the best our congress could do was kick the can down the road for a bit.

True important tax reforms we’re secured during the Fiscal Cliff debate (raising the top rate on incomes over $400,000 and raising the capital gains tax, as well as keeping Bush era tax cuts in place for everyone else). Not to take anything away from the significance of averting the “fiscal cliff”, but it was at best an incomplete victory. But on the spending side, nothing permanent was decided. Congress was able to agree that the economy would be unable to absorb the shock of spending cuts without causing a double-dip recession / increasing unemployment, and succeeded in kicking the can down the road for a few months. If congress couldn’t figure it out in the year and a half time period between the original debt-ceiling debate and the “fiscal cliff”, was it realistic to think they would be able to reach an agreement on mostly the same issues over the course of two months?

Whether it was reasonable or not, we are currently face-to-face with another austerity program that could indeed send the U.S. economy back into a recession / greatly increase unemployment:

“In less than two weeks, a cleaver known as the sequester will fall on some of the most important functions of the United States government. About $85 billion will be cut from discretionary spending over the next seven months…The sequester will not stop to contemplate whether these are the right programs to cut; it is entirely indiscriminate, slashing programs whether they are bloated or essential…These cuts, which will cost the economy more than one million jobs over the next two years are the direct result of the Republican demand in 2011 to shrink the government at any cost, under threat of a default on the nation’s debt.”

This New York Times article does a great job of highlighting exactly how and where the cuts would take place.

Initially I was going to go through the article piece by piece and explain how each cut could hurt a specific group of Americans. But this is pretty obvious from reading the article, so I will leave it up to the reader to read about specific cuts and make their own judgements. Much less obvious is why these cuts will hurt the U.S. economy overall (and not just specific groups withing the economy). There are two main reasons for this:

1) The Government provides “public goods” that cannot be adequately provided by the private sector

2) We are still in what economists call a “liquidity trap”

First #1. The government provides public goods, such as schooling, infrastructure, and security (military / policing). Public goods are public because they inherently suffer from the “free-rider” problem. Everyone benefits from public goods, there’s no way of excluding someone from benefiting from a better school system, or better roads, or more police officers. These positive externalities mean that, left up to the private sector, investment in these goods will be insufficient. People will expect someone else to pay for the program and try to reap the benefits for free (hence the “free-rider” problem). Insufficient spending on public goods leads to higher crime (less law enforcement available combined with higher poverty rates due to cuts in social programs), and depresses both current (think poor infrastructure) and future (think inadequate schooling) economic prospects.

The private sector cannot decide to buy public goods just for certain people, as it cannot take advantage of “economies of scale” necessary for public goods to be affordable. Think how expensive it would be for a rich community to decide to pave it’s own roads, or build it’s own schools, and the security bill needed to ensure other people do not use these services. These bills would be much greater than the taxes otherwise needed to pay for such goods.

But lets suppose that the private sector could make up for this government spending. This is where #2 comes in–the liquidity trap:

A liquidity trap is a situation in which despite very low interest rates (up against the “zero-bound”), private sector funds are not being adequately invested into the economy, but instead dumped into government T-bills (or other low yield but safe asset). A common argument against fiscal stimulus is that it will “crowd-out” private sector spending, and therefore cannot lead to growth. In times of economic growth, this is somewhat true (although not true for “public goods”, as explained above). But in a liquidity crisis, this argument does not hold. Even given incredibly low rates of return, the private sector is unwilling to invest the money needed to create the aggregate demand needed for economic growth / job creation.

If the private sector instead decides it is better to give this money to the government, it should be a strong signal that the government should be spending the money in productive ways (instead of letting it sit in the Federal Reserve, and for it’s part the Fed led by Ben Bernanke has done a marvelous job making sure the economic recovery has not been even more stagnant / non-existent by pursuing unprecedented expansionary monetary policy, known as “quantitative easing”. But this alone is not enough, expansionary fiscal policy is also needed. If stimulus is not politically realistic, contractionary fiscal austerity must be avoided at least.

There is no additional cost to the government spending money, as it essentially pays zero interest on borrowed funds. Given high unemployment, why not put that money to work, and worry about paying it back later? Economically speaking, with an interest rate near zero, and a fiscal multiplier > 1, stimulus spending can be a magic bullet of sorts. Government spending costs the government less now than it otherwise would, and the expansionary effects of fiscal spending are greater now then they otherwise would be. Currently, stimulus is both fiscally responsible and economically necessary to boost aggregate demand (and stimulate economic growth / reduce unemployment / increase tax receipts by growing the economy).

So again here we are; the G.O.P. is playing a game of chicken with “the full faith and credit of the United States of America” (which is one of the reasons we are able to borrow at such low rates despite a relatively high debt / GDP ratio, the fact that American debt is considered “safe”). The effects of a default on our debt would cripple America’s ability to pursue meaningful monetary policy in the future. The effects of contractionary fiscal policy would depress an already weak U.S. economy (which would send out a ripple effect, depressing global economic growth) and raise unemployment. Yet the G.O.P. is willing to consider these unthinkable scenarios in order to push it’s tried and failed Austerian ideology.

America will have to reign in it’s deficit one day, especially with rising healthcare / social security costs, but that day is not today. Artificially forcing that day to be today, due to the sequester / debt-ceiling, will do nothing but hurt America’s credibility as an economic power both at home (by forcing the government to cut essential programs) and abroad (by making people reconsider whether U.S. debt is a “safe” investment or not).