In 2012 Democrats Will Run as Defenders of the Welfare State – Beyond Spending Cuts, Republicans Have to Make a Case That Small Gov. Works Better – Examples from Indiana, New Jersey, Virginia

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By Paolo von Schirach

May 26, 2011

WASHINGTON– The Republicans just lost NY-26. This used to be a safe House seat in up state New York. This defeat happened largely on the basis of the Democrats’ strong opposition to the Medicare radical reform plan presented nationally by the Republicans. True enough, Democrat Kathy Hochul did not win by a huge margin, (only a 47% plurality), while Republican Jane Corwin was hurt by Jack Davis, a third party candidate claiming a Tea Party allegiance, who syphoned off 9% from the Republican vote. Karl Rove commented in The Wall Street Journal that it was this unfortunate combination, and not the Medicare issue, that cost the Republicans this safe seat.

Medicare the issue?

Well, the Democrats have an entirely different reading. As they put it, it was all about “Medicare, Medicare, Medicare”. The Republicans –this was the message– want to take it away from you, the Democrats want to keep it for you. The emerging conventional wisdom is that this New York state upset is an indication that the Republican plan for Medicare is so scary that even conservative voters lean towards the Democrats. Repeat the NY-26 results nationally and you got another major electoral upset in 2012, with the Democrats retaking the House.

Difficult to make national extrapolations from one House race. But I believe that the Republicans need to do a lot more work to convince the general public that: 1) Radical Medicare reform is absolutely necessary, as the system will be broke soon; 2) Their reform plan is the way to go. So far, I see no indication that they know how to do this. I also see no Middle America appetite for a radical overhaul of such a key retirement benefit. Very simply, nobody “sees” the federal deficit; for most its is still an abstraction. Everybody “sees” very tangible Medicare benefits.

Pundits think that the Republicans have a strong platform

But some pundits think instead that a GOP bent on serious fiscal reform has excellent electoral chances. Daniel Henninger of the WSJ, (The Building Blocks of a GOP Agenda,May 26, 2011), gives an upbeat prognostication about future Republican success on the basis of spending cuts implemented at the state level by capable Republican Governors such as New Jersey Chris Christie, Indiana Mitch Daniels; and now newly elected John Kasich in Ohio and Scott Walker in Wisconsin.

Henninger’s point is that these elected officials are working to shrink bloated and unaffordable state governments in order to recreate fiscal health as the necessary precondition to restore the fundamentals for economic growth. Downsizing government and reducing taxes are going to be the building blocks of a national political agenda to be embraced and carried forward by whoever the Republican nominee to run against Barack Obama in 2012 will be.

Fiscal rigor, no taxes is not enough for a national agenda

This is all well and good. I am totally in favor of re-establishing fiscal sanity. Looking at our monstrous yearly deficits and at the accumulation of more and more federal debt, we should all be in favor of cutting spending, including entitlements reform, as most of the federal money goes to entitlements.

That said, I am extremely skeptical that “the fiscal probity theme” is enough to build enthusiasm around a Republican platform. Cutting spending is absolutely necessary. But this cannot be the core of a governing platform.

True enough, Ronald Reagan run on a similar platform in 1980, “Get the government off the back of the people”. But at that time it got traction because it was bold and new. And the issue was not the deficit. The issue was a conservative revolutionary wave that wanted to do away with liberal thinking.

The Reagan Revolution was different

Reagan could say that he was the reformer that would dismantle the oppressive machinery of the state in order to unleash the productive potential of millions of Americans. This was new talk. And it sounded intriguing. By slashing and killing the federal monster, Reagan could restore the American Dream to its proper station and glory. And so he won in 1980 and again in 1984.

But at that time all this neo-liberism –and indeed the first version of neo-conservatism– were all new. The Republicans appeared to be the party of new ideas. The Reagan/Conservative Revolution was about a deep rethinking and reappraisal of the role of the state and especially about debunking the liberal conventional wisdom asserting that “Big Government” is good that had been accepted for decades as “the truth” by the larger part of the American cultural establishment.

We cannot repeat the Reagan experience, it will not be new now

The point of this historic reference is that we cannot do a Reagan Revolution again, because we have already done it once. And, by the way, whatever the faithful may claim, it did not work as advertised. The Federal Government was not defeated by Reagan. Whereas tax cuts, without matching spending cuts, gave us the first taste of large federal deficits. And then the Revolution was diluted. After Reagan it was George H. Bush. But he lacked the credentials of a believer. And then 8 years of Bill Clinton, to be followed by George W. Bush who could not be considered a disciple of Ronald Reagan. He allowed profligate spending without any regard for deficits. And finally, under Republican stewardship we have had the most colossal financial disaster since the Great Depression shaking any confidence in the Republicans ability to run anything at all.

Ronald Reagan looks awfully far away, after all what happened, and his model and legacy hard to recreate. And, most fundamentally, Reagan’s small government ideas –at the time– looked new, revolutionary and exciting. The painful cuts proposed by his current would be Republican disciples look just painful.

A national platform needs an invigorating plan

While fiscal rectitude may be a good currency at the state and local level, at the national level Americans want to believe in someone who says something new and energizing. Small government and no new taxes alone just will not do it.

Not to mention the fact that, as things are shaping up, while Obama will have to defend his record, now he is also the self-appointed defender of the welfare state against the insane and mean spirited attacks of the Republicans. This is a bonus handed over to him by the House Republican budget blueprint.

Fiscal rigour versus populism

Sensible people should recognise that the Republicans are serious about fixing public finances, while the Democrats are demagoguing on this, using scare tactics to convince people that if the GOP wins it will throw widows and orphans in the snow, just to save a penny, while giving tax brakes to their millionaire friends. If you think that people will see through this attempt to muddy the waters and choose the sensible economic rebuilding platform proposed by the GOP, I think you are a real optimist.

Magic trick: show that small government really works better

The real magic trick that the Republicans should be able to produce, on the basis of real facts, is that their smaller, streamlined government really works better. Yes, lean Government under competent stewardship delivers higher quality services at a lower cost. Yes, you can be lean, and smart and capable and truly serve the public interest, all at the same time. Can such a case be made between now and November 2012?

Gingrich Is Right on the Politics of Medicare: Ryan’s Plan Will not Sell – Democrats Win Big on This, as Americans Want to Keep All Benefits

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By Paolo von Schirach

May 23, 2011

WASHINGTON– A recent Associated Press-GfK polls confirms what all politicians instinctively know about federally funded entitlements: most Americans want to keep Social Security and Medicare as they are currently structured. They do not believe, or they do not want to believe, that cost is an issue affecting long term viability. Ignoring massive non partisan evidence, a majority of Americans amazingly still believe that it is possible to re-balance the budget and put the US on a healthy long term fiscal course without reducing these fantastically expensive entitlement programs. And, most ominously for the Republicans, according to the same poll, US voters believe that only the Democrats can be trusted to keep things as they are regarding cherished Medicare and Social Security benefits. And they are right, as Republicans talk openly about paring down, in order to reduce spending.

Republicans right on the issues, Democrats right on the politics

In short, the Republicans are right on the merit of the issue: “We need to cut entitlements, otherwise their growth will ruin us”. The Democrats are right on the politics: “Americans like these programs, and we Democrats shall gain politically by stating that we shall preserve them”. And since the next elections will be in 2012, way before the entitlement programs will be in serious distress due to inadequate funding, the Democrats win, the Republicans lose –at least on this fundamental issue.

Ginrich attacks Republican Plan

To make things better for the Democrats, there is infighting among Republicans on this. Former House Speaker Newt Gingrich, now a contender for the Republican 2012 presidential nomination, created a big ruckus a few days ago by saying that the Republican Medicare reform plan, as reflected in a Budget proposals just passed by the House Republicans, (although it will never get through the Senate controlled by the Democrats), is too radical and that it is some kind of right wing social engineering. Gingrich says that he would like to reform the program, for sure; but gradually, and with more consultation, experimentation, etc.

This totally undiplomatic and uncharacteristically strong attack on a product of his own party, made on national TV, created deep consternation among Republicans, not accustomed to sniping from within. Do consider that all the House Republicans voted for what is known as the “Paul Ryan Plan”, after the Chairman of the House Budget Committee who conjured up the Medicare reform proposal.

Gingrich undiplomatic; yet right on the politics: this will not sell

So, is Newt Gingrich wrong? Is he a traitor? Did he go mad by attacking his own party platform? None of the above. He is undiplomatic and socially challenged, perhaps, regarding timing and choice of words. But he is neither mad nor wrong. He knows the politics of welfare programs and he wants to win the elections. He knows –as all observers know– that the House Medicare plan is now a political liability. Whatever its substance, politically it is way too big of a jump. America is unprepared for it. And the public does not buy it. Unfortunately Americans do not understand the severity of the fiscal crisis; and they do not understand that it is mostly about the increasing cost of entitlement programs as currently structured, including Medicare.

Paul Ryan: courageous reform, but no real popular following

I commented in previous pieces that the GOP Medicare reform proposal put together by Paul Ryan, Chairman of the House Budget Committee, is revolutionary. I praised Mr. Ryan for his boldness in putting on the table something entirely new, amounting in practice to the end of the Medicare program as we know it, by transforming in into a limited subsidy. There is also hope that the end of government as an enabler of health care inflation, (in as much as Uncle Sam pays the bills as presented by physicians), might put salutary pressure on the health care industry, so that it will reduce its costs.

However, I also said that, substance aside, the political appeal of such a radical change would be modest if not minimal, even in this supposedly new Tea Party inspired fiscal rigor climate. I sensed that it would be very difficult for anybody running for the GOP nomination –if they really want to get elected and not just nominated by the party faithful– to get squarely behind this reform program that essentially cuts the level of benefits, as a way to pare down the federal deficit. I thought that Ryan was courageous in coming up with something new and radical; but I believed that he would be charging along essentially alone.

GOP presidential contenders not endorsing Ryan Medicare Plan

And it turned out more or less this way. While it is still very, very early in the GOP nomination process, no serious Republican contender for 2012 so far has touched the Ryan Medicare reform plan, let alone embraced it. Undiplomatically, presidential hopeful Gingrich attacked it and essentially dismissed it, to the delight of the Democrats. An open disagreement among key Republicans over such a major issue is a fantastic political bonus. So, let the Republicans shoots themselves in the foot. The Democrats gain simply by claiming that they will protect the status quo, essentially doing nothing. They know that they are on the correct political side of this issue. Americans want these programs, while they believe that these entitlments will be preserved as long as the Democrats are in control. Most Americans conveniently ignore the cost of all this; and the Democrats are not interested in reminding them.

So, is Paul Ryan hopelessly wrong? Not really. Ryan may be wrong in the type of remedy and the timing of radical changes. But he is absolutely right on the merit: we do need to change course. The cost of entitlements –Medicare first and foremost– will grow so much that in a few years it will absorb the entire federal budget. The Republicans problem is that they do not yet know how to sell this politically; and I seriouly doubt that they will be able to find a good way before the 2012 elections, as Americans just do not believe that Medicare will bankrupt the US.

Americans in denial

Indeed, the fundamental problem here is that America is still mostly in denial about the extent of the fiscal crisis and that the crisis is caused mostly by the growing cost of Medicare, Social Security and Medicaid. And the Democrats can cynically ride this between now and November 2012.

We know and they know that Medicare, Medicaid and Social Security will not go broke by the time of the elections. Sure enough, if the programs are left unchanged financial ruin will come –but not just now. It will be a decade or more before the growing cost of federal entitlments turns into a fiscal emergency. In the meantime, between now and November 2012, it is not about “making the hard choices”. It is all about winning elections. And if the voters believe that Medicare is affordable, why contradict them?

With their earnest, but politically ill advised, radical reform plan the Republicans gave the Democrats a powerful political advantage. Just by guaranteeing that they will not change Medicare, the Democrats have secured the votes of a huge majority of senior Americans who depend on these programs and of millions of others who count on them as soon as they will retire.

Advantage for the Democrats, defenders of entitlements

Of course, many things can change between now and November 2012. And Barack Obama’s record is hardly stellar. He is likely to go into the general election with low economic growth, still high unemployment, a sickly housing market, foreclosures and more bad stuff. But he will also be known to tens of millions of senior Americans as the president who will preserve the entitlements most Americans want. The president knows that long term Medicare is unaffordable. But this is a problem that we can deal with later. Right now, let’s get re-elected. And thanks to Republican political clumsiness, the job just got a bit easier.

S&P Downgraded Italy to Negative – Cites Inability to Tackle Debt Now at 125% of GDP

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By Paolo von Schirach

May 21, 2011

WASHINGTON– The list of sick Euro-zone countries, comprising now Greece, (just readmitted to the financial rescue ward), Ireland and Portugal may soon comprise Italy as well, even if just an out patient. Standard & Poor’s just changed its outlook for Italy from “stable” to “negative”. The S&P A+ rating for Italy’s debt has not been changed. But it may be changed later on, if the rating agency does not see real progress in tackling the enormous Italian national debt, amounting now to 125% of GDP.

Weak economy, unstable government

It is true that the Italian Government has been relatively good at containing the annual deficit and thus the rate of growth of the overall debt. However, S&P notes a negative combination of structural economic weaknesses and political gridlock in Rome as factors inhibiting growth. The country would need a much more dynamic economy in order to generate the surplus necessary to start paying back at least some of its debt. So, Italy at the moment is not a candidate for intensive therapy by the EU and the European Central Bank. But, unless more vigorous pro-growth policies are enacted, it may become one.

Rome: not rue, government strong

The Italian Ministry of the Economy replied to this downgrade by stating that Italy will fulfil all its obligations and that there is no risk of political gridlock in Rome. Now, the latter point is a bit optimistic, if not preposterous. The ruling center-right coalition presided over by Prime Minister Silvio Berlusconi, barely survived a split and a recent no-confidence vote by a very thin margin in the Lower House. The Prime Minister spends time in court defending himself in a variety of trials. The coalition lost votes in recent local elections. While the Government is still there, it is not solid; and it is unlikely that relying only on this unstable base it can launch far reaching economic policy reforms.

Italy is not competitive

Italy is not very competitive and there is nothing that would indicate higher productivity in the years ahead. It is also believed that existing economic plans, as envisaged by existing government policies, will be unable to stimulate the economy. S&P is concerned that gridlock and political weakness at the top would make it more difficult for Rome to muster the consensus necessary to reduce public debt. If growth is even lower than the currently estimated 1.3%, in the 2011-2014 time frame, then we can expect lower revenue and inability to pay back more debt.

Long term, demographic trends also look very unfavorable. Italy has one of the lowest fertility rates among developed countries, (1.39 children per woman). Over time, this means fewer active people paying taxes and more retirees collecting benefits; thus progressively increasing the financial weight of entitlement programs for seniors on the rest of the economy. This is no recipe for lowering public spending.

The Government firmly denies any real deterioration that would support a change of outlook to “negative” on the part of S%P. They cite reforms, tax credits for setting up new businesses and more positive steps that would improve the fiscal outlook. But all this is unlikely. The Italians are experts at walking the tightrope. And this Government has managed to avoid disaster by tightening fiscal policies and thus annual deficits.

Italy needs structural economic reforms

Still, the structural shortcoming is Italy’s lack of overall competitiveness, while the enormous national debt overhang slows everything down even more. A very dynamic government, enjoying a vast consensus for reforms aimed at making the country nimble, could start a turn around process. But there is no such thing. If the center-right coalition supporting Berlusconi does not collapse, the present government may be able to hold this together for a while. If this government does not last, not much hope for a dispirited and disorganised opposition to take the lead on the economy. Italy’s outlook, while not disastrous a la Greece, is neither good nor promising.

Strauss-Kahn’s IMF and the EU-ECB Had it Wrong on Greece – Yet the Inclination Is to Throw More Credits at Virtually Bankrupt Greece

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By Paolo von Schirach

May 19, 2011

WASHINGTON– Aside from his current and rather extraordinary “legal problems”, it seems that Dominique Strauss-Kahn, (DSK), who just resigned as head of the International Monetary Fund, IMF, got it all wrong regarding the EU-IMF rescue package for Greece he helped put together last year. As Desmond Lachman of the American Enterprise Institute, a Washington think tank, puts it in a The Financial Times op-ed piece, (The IMF is making the same mistakes all over again, May 19, 2011), DSK believed that Greece had a “liquidity” issue rather a basic “solvency” problem.

Austerity caused a deep recession

This assessment led to give large credits to Greece, while placing the country on a strict diet. Less spending would have generated the funds to repay debts and get things back in order, it was believed last year. Well, it did not work at all as anticipated. The austerity diet imposed on a weak, non competitive economy in a country riddled with tax evasion and widespread corruption, caused a deep recession. This meant even lower revenue and and thus no money to pay back the outstanding debt. The markets have no confidence in the cure. If Greece wants to borrow more, now it has to pay astronomic interests. Forget about going back to normal borrowing by 2012.

One year later, back for more

And so, one year and $ 150 bn later, we are back to square one. And this is thanks to the EU , the European Central Bank, ECB, and the IMF who got the wrong diagnosis and the wrong cure. Sick Greece is coming back for more. Will Europe and the IMF, (now without DSK’s enlightened leadership, as he is otherwise engaged, trying to stay out of jail), try more of the same? Will they just try and dilute the harsh medicine, hoping that more credits will revive Greece ands that the country will become –who knows how– a productive, competitive economy, capable of generating the surplus necessary to pay back its staggering debts?

The alternative is really bankruptcy, or “restructuring” as it is politely called. May be an exit from the Euro. But in Europe there is little appetite for the shock waves that a Greek default would generate. Too many disappointed creditors, it seems.

Greeks still do not get it

And the Greeks do not seem to get it. The citizens protest loudly against the austerity measures. May be some of them really think that they are the innocent victims of some sort of sinister international plot. And they do not seem to be willing to do even the minimum.

In the words of Lorenzo Bini-Smaghi, who sits on the board of the ECB, Athens needs to “convince its citizens to pay taxes” and “retire at 65 as everyone else does in the Western world“. Got that? One year after an immense historic disaster that brought the country down on its knees, begging for a rescue package, we are still at the rather basic –not mention essential– point of trying to convince the Greek government that, yes, it would be good for Greek people to pay taxes and that, no, retiring at 55 is not acceptable.

So much for the “policy dialogue” between lenders and debtor before and after the rescue package. Basically, the wrong cure, combined with political failure at improving incorrigible Greek behavior, made things worse. And yet, with zero improvement, Greece is cheerfully coming back for more.

ECB and IMF share responsibility for this failure

The ECB and the IMF share responsibility for this failure. Now Mr. Strauss-Kahn is out of the picture. Hopefully the IMF will get better leadership and the EU and ECB will have the courage to admit error and propose something different.

The reality is that Greece, without continuing international life support, is bankrupt. Not a pleasant picture. But this is it. With an un-cooperative society that does not accept responsibility and too many citizens still believing that “someone else”, (and not me), will have to make sacrifices, the chances that additional credits and softer terms will solve the problem are really slim. Bankruptcy is painful. But at least it may give the country, what is left of it, a chance to start all over.

Illinois Governor Quinn to Sign Landmark Education Bill, Teachers Accountability Introduced, Unions Power Reduced – Along With Indiana Law, Boost for US School Reform Movement

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By Paolo von Schirach

May 13, 2011

WASHINGTON – The urge to transform secondary schools systems in different US states is catchy. Reform movements advocate performance related criteria for teachers evaluations, so that bad teachers can be eliminated, (in most cases they cannot be fired because of tenure systems and others protections created by union contracts). Indiana Republican Governor Mitch Daniels is leading in his state. There have been similar initiatives in Florida started when Jeb Bush was Governor.

School reform in Illinois

But now we see a new bill going through the Democratic dominated Illinois state legislature, to be signed by Pat Quinn, Democratic Governor. The new bill will create teachers’ accountability and will base promotion on performance and no longer on seniority. Besides, teacher seniority would no longer be the sole factor in determining who will be fired in case of budget cuts. Performance will determine future assignments. Before teachers can strike, the last offer on the table will be made public, so that families can evaluate and judge whether strikes are appropriate or not. School boards will be able to fire teachers for bad conduct or performance. Essentially the intent of the law is to make teachers accountable, while making it easier to promote good teachers.

The law would also allow Chicago’s Mayor Rahm Emanuel to lengthen the school day in the city’s schools, so that more after school activities benefiting children could be introduced.

America wants higher education standards

Well, this is real progress. It would appear that citizens across America are beginning to grasp the consequences of public education neglect. They pay taxes to fund schools, so that their kids get an education that would give them a good chance to compete in an increasingly tough global economy. But they get a lot of junk. Now we are beginning to see desire for change turning into legislative action.

May be the whole “charter schools” movement and other voices advocating higher professional standards for teachers are finally making a dent. About time, as America seems to fall farther down year after year.

Teachers unions dominated the system

Reform is mostly about ending or curtailing the medieval guild system whereby unionized teachers, once they get tenure, are essentially untouchable and unaccountable. They are protected by a thick wall of contractual arrangements that, whatever the originary intent, de facto created a regime of institutionalized mediocrity across most public school systems, since teachers, even very bad ones, in practice cannot be fired.

The end result of an education system that is not at all about educating children but about teacher’s job security is appalling standards across most US public schools. And the failures are even more noticeable in the poorer neighborhoods. If mediocrity is generally dominant, if you are poor, Black or Latino in America the chances of getting anything at all from the public education system are slim to non existent.

Nobody cared about failing schools

For whatever reasons, until not too long ago, nobody cared that much. The cynics would point out that the well off Americans, inlcluding a big chunk of elected leaders and policy makers, did not care because their children are unaffected. Their children go to private schools or to the few well funded public schools located in rich areas.

And so we have created a two tier society. The rich can get an education, the poor or semi-poor cannot. For them The “American Dream” is destined to remain a dream. Without the tools provided by a decent education, good luck to you in climbing the ladder of success in an extremely competitive society.

Reform: start with good teachers

Well, if these reform movements do catch up, then there is hope. There is nothing mysterious about how one can change failing schools. Start by firing bad teachers and incompetent administrators. Call in motivated educators, engage families. As you raise teachers’ accountability, give them the tools to do their job and at the same time raise academic standards.

Of course, execution on such a massive scale is tough, especially in disadvantaged areas where there is so much catching up to do. But we know what the tools are. A key one is lengthening the school day, so that children, especially poor children who do not have a supportive environment at home, can benefit more from the whole eduction experience. And, as many reformers, including Education Secretary Arne Duncan, have passionately argued, it is possible to involve all sorts of non profit groups that can introduce and support after school hours programs that would add real value to the education experience of all the children.

America can do it

For the country that once led the world in space exploration and is still leader in information technology and so many other scientific fields, how to design and implement sound curricula aimed at truly benefiting kids cannot be an overwhelming task. Now that we have woken up from this national inertia, and now that we realize that in schools, as much as in any other sector, unchecked union power is not beneficial, getting on with the actual business of providing a good education cannot be more challenging than landing on the moon.

US Energy Policy? Senator Schumer Lecturing ConocoPhillips CEO Mulva on Taxes

WASHINGTON– Question: what do American law makers do when people are anxious about high gasoline prices? Answer: Theatre. During a May 12 Senate Finance Committee hearing Democratic Senator Charles Schumer of New York gave a good rendition of the irate law-maker browbeating ConocoPhillips CEO James Mulva. Schumer found it deeply offensive that ConocoPhillips dared calling ”un-American” any attempt to repeal tax benefits that oil companies enjoy –along with everybody else, mind you. So, Schumer did his act of the righteous law-maker, asked for apologies and got media attention, but not much else. Unfortunately, grandstanding aside, none of this nonsense will have any impact on high gasoline prices, the worry of the day.

US oil companies do not set oil prices

Whatever Congress may want to do about taxing oil companies, the sad reality is that America still does not have an energy policy –and this is the real problem. For transportation fuel there is basically only oil based gasoline, (subsidized corn-based ethanol adds only a little bit). And 60% of the oil we consume has to be imported, because America is running out of reserves. And now, because of deep unrest in the Middle East and the loss of most Libyan exports on account of the ongoing uprising there, oil prices have gone up to around $ 100 a barrel. This translates into $ 4 a gallon for gasoline. The honest truth is that there is no fix for today’s prices. However, if we are smart, for the long term it would be a good idea to craft an energy policy that would reduce dependence on foreign oil.

Grandstanding instead of crafting policies

But no, Washington politicians, thinking that they have to respond to the general misconception that it is possible to enact policies that will immediately reduce oil prices –a total fantasy– launch silly and totally irrelevant proposals, while doing little or nothing for the long term. And so they engage in what they do best: posturing and grandstanding, trying to show that it is all big oil’s fault. And so, to make this point and to show Joe Public that ”we are doing something“, the Senate Finance Committee dragged the evil oil men into a hearing for the purpose of lecturing them about their sinful sky-high profits and to tell them that the Senate intends to repeal tax relief for oil companies –relief that they should not really get, given all the outrageous money they are making.

OPEC and world demand determine prices, not US oil companies

Now, what is the correlation, let alone cause and effect connection, between tax subsidies, relief or whatever it is that the oil companies enjoy –along with everybody else– and high gasoline prices? You got it: zero. Gasoline prices depend on world-wide oil prices that, contrary to popular opinion, are not controlled by Exxon, Chevron and BP. No, they are determined in large part by Chinese, Indian, American and European consumers who have an unstoppable thirst for oil.

And they are also determined by the OPEC oil cartel, as OPEC controls a huge percentage of global supply and thus influences prices. So, it is strong demand and (manipulated) supply that now gets you $ 4 at the pump. (The opposite is true as well. When the world economy was reeling in 2008 and 2009 because of the financial crisis, oil prices were half what they are today. Demand fell drastically and so did oil prices).

Sure, it may be a nice gesture on the part of the oil companies benefiting so handsomely from extra high prices to give up their tax breaks. But this would be their own version of political posturing and grandstanding. This would be about public relations, not about gas prices. In any event they are not interested in any of this.

In the end, the Senate had its show, with the hope of getting headlines. If this is what they mean by being “law makers”, God Help Us.

House Republican have their own populism: “Drill Baby Drill”

But this populist character flaw is nicely spread around. The Republican controlled House of Representatives has its own populism on energy. Now the rage is about drilling more in the US, ”so that we can get our own oil“, thus fueling the surprisingly popular misconception that, if we would only stop regulating drilling, there would be thousands of gushers all over and our problems would be over. Not true, friends. In principle, more drilling is not a bad idea, but it has limited value. It is not the ”solution” to high gas prices.

Additional oil is good, but do not oversell it

Let’s be clear, any additional domestic oil is good. But, unless America would discover and start pumping very soon an additional few million barrels a day, whatever we do will have zero or minimal impact on prices. Again, it is about demand and supply. Increasing global supply by 20,000 barrels here and there, or even a few hundreds thousand barrels a day will not mean that much in term of total world supply and prices. And world prices determine what eventually you pay at the gas station here in the U.S.

The more we produce at home the less we buy abroad

That said, additional domestic supply would have benefits. And what are they? Very simple. Assuming constant demand, every additional barrel that we produce at home is a barrel that we do not buy abroad. This is money that stays in America, as opposed to being transferred to oil-producing nations. Besides, additional domestic energy investments mean more money spent to add to new business here at home and some more jobs generated in America. Oil is a big industry, it generates demand for all kinds of supplies and services. So, more domestic drilling helps the economy.

Again, let’s not oversell this. There is a broad balance of payments benefit if we get more oil at home; but it is no economic panacea, unless we start talking about millions of barrels. There will be more jobs created; but this will not cut unemployment by 50% or even 5%t. And this will not – repeat, it will not– lower gasoline prices, unless the new oil finds will be so significant that new American discoveries will actually move world prices. Chances of this happening in the near term: about zero.

So, taxing the bad guys won’t work. “Drill, Baby Drill” will also do nothing to lower prices.

What can we do to reduce chronic oil dependence?

So, what would work? Nothing much that America can do, especially in the near term, to make oil prices go down. But policy makers, along with industry and the public, can work together to minimize the impact of high oil and gasoline prices by reducing dependence on oil. For sure, this would take a while; but it is well within our possibilities.

Very simply, we need to consume less oil. And this can be done through a combination of: 1) conservation; 2) changes in public policy that would encourage mass transit solutions, as opposed to driving individual cars; 3) aggressive development of alternative fuels.


Conservation, all experts would agree, is the neglected and yet totally available low hanging fruit. Conservation means moving much faster to smaller, low consumption vehicles. It does not mean that we stop driving. It means that we ditch the SUVs and get on with compact cars. If the switch would be fast and substantial enough, this would translate into savings of one to two million barrels a day. And all those who drive a compact car will spend less money to fill it up.

Mass transit via “Bus Rapid Transit”

Then we could aggressively boost mass transit via “Bus Rapid Transit”, BRT. It is complicated but totally possible to achieve the same advantages of costly underground metro rail systems via much cheaper, modern integrated bus networks using dedicated lanes. The advantages are that millions of people would use a more fuel-efficient bus rather than their own vehicles to get around metropolitan areas. You leave the car at home, you do not burn fuel.

New fuels: electricity and natural gas

And then there are the alternative fuels. This is the year of electric vehicles: GM Volt, Nissan Leaf and others. May be this is the answer, even though their cost effectiveness is still in the future. Still, electric cars mercifully use no gasoline or very little, in the case of the dual engine Volt.

Finally, there is all this US natural gas now extremely cheap, due to the exploitation of vast shale gas reserves. Gas can be used as transportation fuel. It is used this way in many countries, relying on proven technologies. Now this switch requires major changes in industry and mind set. But the economic advantages are huge. US gas is abundant and it costs about 1/4 of gasoline. In one stroke we could boost domestic industry and save a lot of money by buying less oil.

For starters, it would make sense to use natural gas as fuel for 18 wheelers operated by large fleets that normally have their own centralized refueling stations. There is pending legislation in Congress that would help expedite heavy trucks conversion. Down the line, it should be possible to manufacture regular cars powered by natural gas.

We can do this

So, there you have it. Not much that we can do to control oil prices. But if we use much less oil, then the impact of high gasoline prices will be less painful. So, let’s get started. First it is conservation: choose high mileage cars. Second, use mass transit and drive less. Down the line, make your next vehicle an electric car or one that burns domestic, natural gas.

If we could get started on all of these policies, in a decade we may see the cumulative effects in terms of significant reduction in oil consumption and therefore oil imports. And all these changes would be economically beneficial. We would have more energy investments at home. We would send less money abroad. The average consumer would be less dependent on gasoline and thus less exposed to high prices.

Politicians still looking for feel good quick fixes

Of course, none of these initiatives are going to help politicians today. And, assuming high gasoline prices between now and the November 2012 elections, who knows which way angry voters might go. Unfortunately, law makers and the White House react to today’s pressures, and do not think much about the long term. And so America, the biggest oil consumer in the world, limps along with no energy policy. Is it really that preposterous to believe that we could do better?

Expect Agreement on Raising US “Debt Ceiling” – Ryan: Medicare Reform Key Part of 2012 Elections Debate

[the-subtitle ]

by Paolo von Schirach

May 6, 2011

WASHINGTON– Vice President Joe Biden assembled at Blair House, (just across the street from the White House), a small group of Democratic and Republican lawmakers, along with Secretary of the Treasury Tim Geithner, Budget Director Jacob Lew and National Economic Council Director Gene Sperling for a series of talks to get a deal on spending cuts. This deal would clear the way to a law needed to to raise the “debt ceiling”, so that that the Federal Government will have the legal authority to borrow in order to finance its growing debt. (What if no deal? Well, without legal authority to borrow, the US would soon run out of cash and it would be technically “insolvent”, a bit like Greece. No, actually Greece did better, as it got rescued by the European Union).

Get the Republicans to vote “yes”

The issue here is how to to get to a political compromise that would allow the anti-deficit Republicans to vote “yes” on a measure aimed at increasing borrowing and deficit spending. (For every dollar Uncle Sam spends, 41 cents are borrowed). Technically, the US Government will run out of cash in just a few days. Treasury indicated that it can stretch things a bit and squeeze enough dollars to keep the lights on until early August. Hence the urgent need for a deal; otherwise America will not just look like a Banana Republic; it will be one).

No debate on entitlements

The talks apparently started in a reasonably relaxed atmosphere. And why so, given the sharp differences between Democrats and Republicans on the size and scope of spending and welfare programs in particular? Well, it would seem that there is an agreement that this huge subject of the size and scope of welfare spending, in particular for health care, will be saved for the national political debate beginning to unfold now in view of the 2012 presidential and congressional elections. So, there will be a fight on entitlement reform, but not now on this urgent issue of raising the “debt ceiling”.

Paul Ryan: reform will be part of the 2012 elections debate

Congressman Paul Ryan, Republican Chairman of the House Budget Committee, presented his own plan for fiscal reform, (“Path To Prosperity”), focusing largely on radically transforming key Federal health care programs. Still, Ryan indicated that there will no action on welfare reform before the 2012 elections. He believes that his party will be able to bring the issue to the voters and that –with a clear mandate– after a (hoped for) Republican victory in November 2012 it will be possible to engage in reform.

Ryan indicated to a Washington crowd that going around his constituency in the state of Wisconsin he sees that when people are told “the truth” about ruinous entitlement spending and the consequent need for serious change “they get it” and they support real change.

Who will win?

I hope that Paul Ryan is right. I know he is right when he affirms that Medicare and Medicaid, if left unchanged, will bankrupt America. However, as to Middle America’s appetite for radical reform that will curtail government help in paying their bills, I would not be so sure. It is guaranteed that the Democrats will present themselves to the voters as the staunch defenders of the status quo that favors large benefit to senior citizens. And everybody knows that in America senior citizens vote in high numbers.

In any event, expect a deal on raising the “debt ceiling” soon, as the contentious entitlement reform issues that may block an agreement are apparently off the table.

US May Pass Natural Gas Legislation – This Would Kickstart Conversion to Gas as Transportation Fuel

[the-subtitle ]

by Paolo von Schirach

May 5, 2011

WASHINGTON – Long after the “Drill, Baby Drill” populist slogans of the 2008 presidential campaign, in America we are still not having a serious conversation on the merits of exploring for and extracting more oil from domestic sources. Supporters claim that this is the miracle cure; detractors assert that it would do nothing good. Sure enough, in an ideal world, we would try and move away as fast as possible from high polluting hydrocarbons and focus instead on clean, renewable sources. We have heard all the anti-oil arguments based on environmental damage, public health hazards, global warming, and what not.

Clean fuels still too expensive, meanwhile oil is at more than $ 100 a barrel

Except that the clean fuel alternatives as yet are not economically practical; while we have a gigantic oil bill due to our continued reliance on oil. And we need to import 60% of total consumption, because we do not produce enough of it. And that is about 9 million barrels of imports –every day. At a price now in excess of $ 100 per barrel, that is a lot of money. Our oil bill is far greater than the scary trade deficit with China that is usually depicted as a national calamity. Indeed, if you consider it cumulatively, the money that we pay oil exporters to satisfy our energy needs is one of the largest wealth transfers in history.

Conservation is good, but not enough

Of course, we could reduce our total consumption and therefore the amount that we need to import simply by using less. America is still a very wasteful society. Our continued reliance on cars versus mass transit and on high fuel consumption vehicles is dumb. We could do a lot better. Still, even a more judicious energy use would not eliminate imports of an increasingly expensive commodity. Hence the economic value of increasing domestic energy supplies, even if combined with more aggressive energy conservation measures. And that includes producing more oil and natural gas, now very abundant and very cheap. (More on gas below).

Increased domestic oil production is good economics

Now, no sane person would suggest that more oil drilling in the US, on shore and off shore, would magically yield the 9 millions barrels a day that we currently import. However, given the high and growing cost of oil, it would make economic sense to reduce our energy bill as much as we can by increasing domestic supply. The more we produce at home, the less we have to buy abroad. Increased supply will not solve our basic dependence problem; so we should not oversell its benefits. Still, it would reduce somewhat our energy imports and our chronic balance of trade deficit. Not to mention improved economic conditions where new oil is found and produced. Check with the people of North Dakota. They are now enjoying a real economic boom due to significant oil discoveries in Bakken, with estimated reserves totaling 11 billion barrels. All this does not sound very complicated. I do not see why it should be so controversial.

The natural gas revolution

But, down the line, an even greater help to domestic energy supply and to out balance of trade is coming from a veritable US “natural gas revolution“. America has a lot of “unconventional” gas and now it is exploiting it massively through “fracking” and horizontal drilling. These are technologies that allow getting to gas trapped in deep rock formations. There are issues about safety and reliability. There have been some widely reported accidents involving water contamination due to poor well design and more. But, on balance, while regulatory tightening to ensure safety may be in order, there is no indication that getting this gas off the ground is inherently unsafe. Thousands and thousands of wells using fracking have been safely drilled.

Why would gas help with oil imports?

But what has gas got to do with oil? Americans usually think of gas as fuel for electric power generation and for heating systems, while we use oil mostly to make gasoline and diesel to power vehicles. Well, the open secret is that natural gas can be and is already used as transportation fuel. This is an old and proven technology.

The incredible abundance of cheap natural gas combined with sky high oil prices presents the opportunity to convert at least part of the national vehicle fleet to natural gas. Most experts agree that the most cost effective starting point for a “switch” from oil to natural gas should be heavy vehicles. Natural gas as fuel for heavy trucks would be about 1/7 the price of diesel!

Legislation to induce fleet operators to get trucks using natural gas

And it would appear that we may soon have legislation in place that would provide the inducements for large 18 wheeler fleet operators to hurry up any (admittedly expensive) fleet conversion process. Largely the brain child of a 7 year lobbying effort promoted by veteran oil man T. Boone Pickens, a new version of earlier and failed attempts to have a Natural Gas legislation may actually be on the horizon.

According to an April 18, 2011 story in TopStockAnalysts, H.R. 1380, the “New Alternative Transportation to Give Americans Solutions (NAT GAS) Act.” has been introduced in the House of Representatives by a bipartisan group. Congressmen Kevin Brady (R-TX), John Larson (D-CT), Dan Boren (D-OK) and John Sullivan (R-OK) have submitted this bill.

According to T. Boone Pickens, this draft legislation has already almost 200 co-sponsors from both parties and it has good chances of passing the House. It may face greater opposition in the Senate; but, considering also White House political support, it has a decent chance of becoming law.

Why legislation if gas is such a good deal?

But why do need legislation, tax brakes and other sweeteners, if the numbers in favor of natural gas are so compelling? Well, because we need to jump start a gigantic national conversion process practically from zero. There is the one time cost of replacing expensive heavy vehicles. There will be additional investments necessary to create the refueling infrastructure for fleet operators.

Tax brakes and other incentives provided for by this legislation, combined with very low fuel cost, would prod businesses to get the new trucks that will use the new fuel, this way expediting the conversion process. Conversion to domestic natural gas will translate into lowering demand for imported oil and significant savings for America. The sooner we start, the more we save. In addition, the adoption of natural gas will jump start an entire new industry that will include down the line regular natural gas powered automobiles.

America can cut oil imports by 2 1/2 million barrels a day

The estimates are that by converting just heavy vehicles to natural gas America could cut down its imports by about 2 1/2 million of oil a day. Now that’s a saving of 2 1/2 million out of 9 million. Not so bad as a way to cut our oil bill by relying on a cheaper and cleaner domestic energy source.

And there will be other economic advantages. More demand for natural gas will incentivize supply, this way increasing employment in the domestic energy industry. And as Americans will realize the enormous price difference between natural gas and gasoline they will start clamoring for regular cars that use natural gas. And this demand will create new manufacturing jobs. Not a bad deal altogether.

Gas is not the final solution; but it is a really good deal

Natural gas will not solve all our energy problems. And at some point we may indeed get cost effective, zero or low emission renewable fuels. So consider natural gas a temporary solution. (Still, at current consumption rates America has enough gas for another 100 years). But between now and our renewable energy future, here is the alternative: “Do you want to pay $ 4 dollars a gallon for mostly imported gasoline, or do you prefer paying $ 1 dollar a gallon for natural gas produced at home?“ I would go for natural gas. It is good for the consumer and it is good for America.

Bin Laden Operation Shows How to Conduct Anti-Terrorism against al Qaeda: Intelligence and Navy SEAL Units – US Military Occupation of Afghanistan and Iraq Simply not the Right Tool

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by Paolo von Schirach

May 4, 2011

WASHINGTON– I have already said that killing Osama bin Laden –important as it is– is largely a symbolic victory, resonating mostly within the United States because of the memory of 9/11. Indeed, compared with the challenges of a Middle East in turmoil for reasons that have almost nothing to do with Islamic fundamentalism and compared with the need to contain Iran, the killing of Osama bin Laden is at best a tactical victory in what has become a secondary national security front.

That said, since Osama’s killing in Abbottabad, Pakistan is still a mile stone, this is as good as any time to take stock of what President George W. Bush most inappropriately dubbed “The War on Terror“, thereafter embarking in an extravagantly large military adventure almost totally out of synch with the nature of the terror threat we were and are still facing. Yes, 10 years after 9/11, notwithstanding hundreds of billions of dollars spent and hundreds of thousands of people who died in the process, including thousands of US troops killed and mutilated, we are still not done.

Counter terror: right goals wrong means

Overall, my assessment is that while the objective of smashing all terrorist groups is unobjectionable, the means chosen –the occupation of two countries via regular armed forces– have been totally mismatched with the goals, this way creating an enormous waste of human and financial resources. Some goals were accomplished. Terrorists have been captured or killed. Al Qaeda lost its 2001 momentum. But the cost has been extravagantly high and totally disproportionate with what was accomplished. The collateral damage immense.

And this is largely because America employed the wrong mix of tools: mostly armies and some intelligence; while it should the reverse. If you want to see the right mix, just look at the operation leading to Osama’s killing: intelligence gathering, with super specialised NAVY SEAL units called in to finish the job. I wish this could become the blueprint for whatever will be done in the future.

US engaged in conventional wars to defeat terrorists

Looking at the past, while national security officials may be able to claim that we did something right, as the US was not successfully attacked after the 9/11 disaster, my take is that the totally valid goal of protecting the homeland did not require a 10 year military occupation of Afghanistan and then 2003 war in Iraq. These decisions turned into large scale military operations that on balance had little or nothing to do with the appropriate goal of dismantling al Qaeda.

“War on Terror”

The US got down the wrong path by defining this conflict with decentralized, multi-national terror cells a “War on Terror“. But this was not a not a war in the generally accepted meaning of the term. Besides, “terror” cannot be an enemy. The term only describes a modality to use force. Our problem is with groups that use terror against us.

And this is not to downgrade anti-terrorism to routine police work. Quite clearly in al Qaeda America faced and faces a lot more than an efficient criminal outfit. Al Qaeda and affiliates are ruthless, ideologically driven enemies, relying on terror via suicide missions in the pursuit of their fantastic objective of destabilizing our society as a necessary step in the creation of a new Caliphate.

It is a conflict

But so, if it was not a war, what was it? It was and is a conflict with an elusive, transnational, ideological enemy that finds shelter in a variety of countries. These countries may be open supporters, such as the Taliban regime at the time of 9/11, or countries too weak to resist. They may also be internally divided countries in which at least some elements of the government or civil society may provide direct or indirect assistance to the terrorists. Shelter may include just pretending that they are not there. And this may have been the case of Pakistan in relation to Osama bin Laden’s last refuge, in the middle of a Pakistani city full of military facilities.

Armies are unsuitable for these conflicts

Facing a hidden opponent, as opposed to a government controlling a country, the traditional instruments of warfare are terribly unsuitable. And the goal, very popular in the early Bush years, of “draining the swamp”, adds even more complexity. By “draining the swamp” they meant modifying the socio-economic fundamentals in Muslim societies so that ideological extremism would not find adherents. While laudable in principle, this principle defined an extravagantly large goal, more akin to “draining an entire Ocean” so that you can catch one particularly nasty shark. Talk about mismatch between means and ends.

Without getting into all the details of 10 very complicated years, the macro picture is of a fight against an elusive enemy that almost immediately turned into a broad “sanctuary denial” strategy via military occupation of entire countries. All this was costly, unnecessary, unpopular and it did not produce the intended results.

Iraq and WMDs

Of course, the motivations for invading Iraq were different, although it was believed that they did fit within the broader goals of the “War on Terror“. It was believed that super rogue Saddam Hussein might have had deals with terrorists and that he would have been willing to supply them with weapons of mass destruction, (WMDs), that America and many others assumed he had. Iraq was invaded not because there were al Qaeda training camps in Baghdad, but because a dangerous outlaw state might be a powerful ally of the terrorists.

Be that as it may, and even conceding that US intelligence was just mistaken in assuming the existence of large scale WMD programs in Iraq, what is most striking here is the assumption that “regime change” in Baghdad would have been only a little more complicated than getting a new management team at the head of a major corporation, after a hostile take over. The naivete displayed by key policy makers in assuming an easy fight, a short occupation and then handing over the keys to capable, pro-Western Iraqi emigres is truly shocking.

Inability to forsee the cost of the Iraq operation

This inability to envision and therefore factor in the cost and complexity of the Iraq operation got the United States, even if one would agree that the motives were somehow aligned with anti-terror objectives, into an extremely expensive multi-year enterprise that had at best a peripheral relevance to fighting terror groups. Sure enough, supporters may argue that the world is better off today without Saddam Hussein and that, with US help, Iraq has now the foundations of democracy that it never would have had.

All true. But again, it is a matter of cost effectiveness. Much was accomplished and hopefully it will have a lasting value. But the cost has been immense; while the whole operation at least for a few years stoked more terrorism, as the US military occupation became a magnet for assorted foreign fighters and an al Qaeda in Iraq franchise.

Afghanistan, where it all began

Back to Afghanistan, where it all began on account of the hospitality offered to al Qaeda by the old Taliban regime, the conflict could have been carried out differently, since the initial and quite successful operation was conducted –note this– mostly with unconventional means.

Undoubtedly the US had every justification to pursue both al Qaeda and the Taliban allies in Afghanistan. But interestingly enough, even though an intervention in a sovereign country would have been the closest thing to a conventional war, at least at the beginning, the US did not engage in a regular armed conflict.

In order to defeat al Qaeda and the Taliban the US used mostly unconventional tools in Afghanistan in 2001. America relied on alliances with local war lords established via the CIA. It paid leaders so that they would switch sides. It supported and supplied the Northern Alliance that was already engaged in a fight against the Taliban. All in all, while the US Air Force bombed Taliban positions to help the Northern Alliance, conventional military means and US “boots on the ground” played a relatively minor role in getting the job done.

Stick with a light foot print formula to haunt al Qaeda

It would have been good to stick with that formula, trying to stay friends with the war lords and make sure that the Taliban would not easily reorganize. Instead the US and its allies fell into the usual trap of engaging in reconstruction and modernization programs with the objective of “immunizing” –thanks to us– a modernised Afghanistan against the perils of fundamentalism. Good idea in principle. A disaster in practice given the incredible magnitude of the objective, compared with the resources that America and all the others were willing to expend. So, we ended up with a botched affair. A 10 year military occupation, an inconclusive counter insurgency and billions of dollars spent to move a country away from the Middle Ages.

Afghanistan turned into a counter insurgency

In the end, in Afghanistan we have a huge, poorly conducted, nation building effort with very little to show for all that was spent. Sure enough, we can claim that Afghanistan now does not provide sanctuary to al Qaeda training camps. Fine. But this is a small victory and this goal could have been achieved via special forces sent in to destroy any new camps.

Besides, camps and terror networks can be created elsewhere. Al Qaeda and all the other offshoots are transnational groups that can find some shelter in various parts of the globe. If Afghanistan is denied to them, then they’ll find another place. Which is to say that the way the conflict in Afghanistan has been conducted is rather pointless.

What have we accomplished?

Even now, notwithstanding a huge increase in troops and resources since the end of 2009, the attempt to defeat the reorganised Taliban is almost a lost cause. And it is not relevant to our anti-terror goals, since not all new Taliban are natural al Qaeda allies. Many Taliban are Pashto tribesmen who want to reassert control over the country. This has almost nothing to do with anti-American terrorism. They fight the Americans because they are there.

More broadly, our goal is not to have Afghanistan with a government made to our specifications. Our goal is to have a reasonably stable situation in which al Qaeda will not find it easy to get back in. If Afghanistan has or does not have a good human rights record and whatever they will do with gender equality or girls education is way beyond the goals of fighting Islamic terrorist groups. We did not go into Afghanistan so that the military would help build schools. This is nice; but it is not part of the core mission.

Osama operation illustrates how you do it right: intelligence work and special ops

In the end, what really works against elusive terrorists is exemplified by the effort aimed at locating Osama bin Laden. This was intelligence work. It was a thorough intelligence operation that finally led to his location. It was only at the very end that elite SEAL units were called in to execute the arrest, or killing as it turned out. I am sure that this operation had its significant costs. But the size, scope and means seem to be commensurate with the ends: capturing or killing the foremost leader of al Qaeda, and seizing materials that may help dismantle their communications and overall effectiveness.

In an ideal world we would want to reform countries so that the appeal of fundamentalism would fall flat. But this is way too expensive and, as it turns out, America does not know how to do this. And that includes whatever we are trying to accomplish in Afghanistan. It would be great if we could clean up the country, while helping a legitimate government in a genuine modernization effort. But Afghanistan is 200 years behind the modern world. Meaningful help in this would take at least a generation. A noble endeavor; but totally beyond our means.

No need to “drain the swamp”

Besides, except for some extreme cases, this type of effort may not be necessary. As the Arab uprisings are showing, Muslim societies have already formulated strategies aimed at obtaining political change that are quite separate from religious fundamentalism. In this sense, it would appear that “the swamp has drained itself“, without calling in the Marines to do the heavy lifting.

And this intellectual maturation that has occurred within Arab countries is the best indication that al Qaeda may very well be on its way down, at least in terms of its ability to generate broad based appeal for jihad. All the more reason to focus on the real targets: the actual terror networks, without being distracted by peripheral goals of reforming entire societies.

Modernizing Afghanistan, nice idea, assuming unlimited resources

In the case of Afghanistan, assuming unlimited US resources, it would be great to stay involved. But America, as we now know, chose the most complicated and least cost effective tools to fight this conflict with terror groups right at the time in which it was running low, (for completely separate reasons), on national resources. It is a fact that Washington has run out of money. A country that currently borrows 40 cents of every dollar it spends cannot afford to fight wars of choice indefinitely. Uncle Sam cannot pay the bills.

Fight terror with intelligence tools

So, let’s go back to basics: our problem is with anti-American groups that use terrorism. This is our target; and not the reform of the Muslim world.

Which is to say that sticking with intelligence tools to fight terrorism is both good policy and good economics. I do hope that someone will realize this, and soon.

The Arab Spring Outcome Will Be Decided by Economic Reforms That Will Spur Growth

[the-subtitle ]

by Paolo von Schirach

May 1, 2011

WASHINGTON– The Arab Spring is still unfolding –and not neatly. And I am not talking about the unresolved political fights in Syria, Libya, (with NATO military involvement), or Yemen. Even assuming victory for the revolutionaries in all three and beyond, there are layers of almost impossible tasks ahead. First and foremost, Arab countries will have to create viable democratic institutions. And then, through these untested institutions, they will have to forge a consensus that will open up oligarchic, economies, expanding opportunity for millions. All this is unbelievably complicated. But this –real economic development leading to more inclusive societies– is precisely what will determine the success of this revolution.

Mixing up political revolution and economic goals

In the immediate, the greatest danger lays in the fact that many revolutionaries mixed together kicking out dictators and the creation of jobs and prosperity, thinking that the first would necessarily lead to the second. Likewise, probably many of the old elites may mistakenly believe that, even with the old political regimes out, they shall continue indefinitely with business as usual, excluding millions from the prosperity they accumulated through the old political ties. But the truth is that, even if the old power structures let go, there are just not enough resources to offer rapid economic improvements to all.

Demonstrations will not get you jobs

The tens of thousands of young Egyptians who demonstrated in Tahrir Square wanted Mubarak out. But they also wanted and want better prospects for themselves, in a country with very high youth unemployment. Now that they got the first goal, they will have to realize that the second, improved economic prospects, is much more difficult to attain. Will they understand that no one can fix the problem of millions of young unemployed in Egypt –or elsewhere? Will they understand that another occupation of Tahrir Square will not make jobs appear overnight? Will they have the patience to wait, who knows for how long? And will they have confidence that a new political process will not shortchange them –again?

Credible economic reforms are needed

Simply stated, while the beginnings of these revolutions as political uprisings are promising, the truly difficult part –the part that will in the end determine whether all this effort was a success– is what has to come next. And that is the reorganization, in fact re-invention, of semi-feudal societies so that they will have modern, or at least viable, institutions that will allow them to create a credible path to broad based economic development.

Real challenge for resource poor Arab countries

For the North African and Middle Eastern countries that have little or no oil reserves that would provide capital for financing development, there is a desperate need to devise economic development strategies that will increase growth levels. And the list of these underesourced countries is long: Egypt, Tunisia, Morocco, Jordan, Syria, Bahrain. (The oil countries will have the challenge of directing oil revenue towards productive investments. Their own past record as well as that of other countries, if you exclude Norway and very few others, is pretty bad on this score. Oil wealth breeds a lot of corruption and very little development).

Asia showed that growth is possible

Elsewhere in the world, we know that resource poor countries, especially in Asia, managed to grow by opening up the economic environment, by improving infrastructure and public services delivery, and by developing human capital –the precursor to enterprise. The rise of Asia in the last 40 years shows that resource poor countries from Korea to Thailand do not have to stay poor forever. Improvement is possible.

Can the Middle East learn from Asia?

But, while this road to growth is open to all as a matter of principle, how long will it take for, say, Jordan to become a new Vietnam in the Middle East? A long time. And, if we look at the whole Region, so far, the prospects for rapid transformation are not so good, and the challenges truly daunting. A Tunisian participant in the early phases of the revolt was recently quoted in The Wall Street Journal saying: “This uprising was for what? The people who have money and the heritage of the old regime aren’t giving up control“.

This pretty much sums it up. The autocrat is gone. But in Tunisia the old, entrenched socio-economic structures, the class divisions, the oligopolies represented by just a few families controlling most of the resources and the capital are still there. And changing all that in a productive way, while at the same time experimenting with new political freedoms, without any tradition on how to run a functioning democracy, is an incredible challenge.

Oligarchies in Egypt

And in Egypt its is not that different, with the added complication that the Egyptian Army, reasonably well behaved in engineering the first steps of the post-Mubarak transition, is also deeply vested in the old Egyptian economic set up. A true economic opening of the Egyptian society should include the Army giving up control of important assets. It is doubtful that they will do it.

Given all these road blocks that need to be eliminated, try as they may, these Arab societies cannot realistically catch up in a couple of years. Beyond dictators, a combination of cultural conservatism and economic control by a few families close to the regimes smothered vitality at every level: economic, artistic, cultural and social. We will have to wait perhaps a decade to have a sense of how all this played out.

What will happen in Saudi Arabia?

And let us add that we still have no idea as to how Saudi Arabia, a really key actor in this drama, will adjust. So, far all is quiet. It would appear that Saudi Arabia managed to avoid the “freedom bug” contagion. And this is largely due to a combination of repression and blandishments via public money thrown at the masses so that they will stay quiet. But these tactics may not work in the long run. Can the Saudi royal family keep a lid on any aspiration coming from below indefinitely?

Besides, let us not forget that any major domestic upheaval within Saudi Arabia would hardly be an internal matter only. Saudi Arabia is by far the most significant OPEC oil exporter. If trouble in Libya (oil production about 1.6 million barrels a day) caused oil prices to shoot up way beyond $ 100 a barrel, imagine what even far lesser troubles in Saudi Arabia would do to oil prices and thus to the entire world economy. Saudi Arabia’s production is now about 9 million barrels a day. Its capacity is to pump up to 12.5 million.

In the end Arab uprisings will depend on economic reforms

In a somewhat simplistic fashion, Western media portrayed the beginnings of the Arab Uprising as an easy to understand fight for freedom against tyranny. Confronted with massive upheavals, the tyrants eventually will let go. It seemed a good fight and it made good TV: geriatric or loony dictators doomed in a fight against virtuous young people on Facebook. Well, it turns out that even though some of these struggles for political power are still underway, (Yemen, Libya, Syria), this Arab story is really a lot more complicated than getting rid of old Hosni Mubarak, Assad or Gaddafi.

Later on, covering slow economic change will be a lot less glamorous than reporting on massive youth demonstrations or on the fight for Misrata in Libya. But the ability to engineer real economic change is what will really decide the future outcome of what started as the Arab Spring.