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RESEARCH AND OPINION ON PUBLIC POLICY 2014 • NO. 4 • FALL THE HOOVER INSTITUTION •

RESEARCH AND OPINION ON PUBLIC POLICY 2014 • NO. 4 • FALL

Hoover Digest

Research and Opinion on Public Policy

2014 no. 4 fall

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The Hoover Digest offers informative writing on politics, economics, and history by the scholars and researchers of the Hoover Institution, the public policy research center at Stanford University. The opinions expressed in the Hoover Digest are those of the authors and do not necessarily reflect the opinions of the Hoover Institution, Stanford University, or their supporters. The Hoover Digest (ISSN 1088-5161) is published quarterly by the Hoover Institution on War, Revolution and Peace, Stanford University, Stanford CA 94305-6010. Periodicals Postage Paid at Palo Alto CA and additional mailing offices. POSTMASTER: Send address changes to the Hoover Digest, Hoover Press, Stanford University, Stanford CA 94305-6010. © 2014 by the Board of Trustees of the Leland Stanford Junior University

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On the Cover

In 1950, American efforts to rebuild Europe were outgrowing their original ambitions:

feed the hungry, revive trade and currencies in allied and former enemy nations alike, resur- rect industry, and restore stability. Now Soviet militancy was rising, threatening Europe’s fragile security and posing an ideological challenge. This poster was part of a Marshall Plan contest meant to persuade Europeans to choose democracy and open markets and reject the Soviet appeal. It was part of a larger war of ideas. See story, page 202.

Hoover Digest Research and Opinion on Public Policy 2014 • no. 4 • fall www.hooverdigest.org The
Hoover Digest Research and Opinion on Public Policy 2014 • no. 4 • fall www.hooverdigest.org The

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Contents

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IRAQ

  • 9 Axis of Folly The president of the United States proved rash, the former prime minister of Iraq, arrogant. Why Iraq is teetering. By fouad ajami.

    • 13 Best Frenemies? As Iraq wobbles, Iran might almost look like a friend. It isn’t. By abbas milani.

    • 16 The Price of Our “Responsible” Exit The Iraq war never ended. We just quit fighting it. By kori n. schake.

    • 21 An Army of Revisionists How quickly we forget our reasons for toppling Saddam—and our politicians forget how they endorsed it. By victor davis hanson. THE ECONOMY

    • 26 Why the Fed Must Return to Rules What does the economy need from the Fed? Less intervention, more stability. By john b. taylor.

    • 31 The Foundation Crumbles Rising taxes and the unrestrained growth in entitlements are eating away at the very foundation of our economy: property rights. By michael j. boskin.

INEQUALITY

  • 35 Rickety Piketty Economist Thomas Piketty wants to confiscate wealth, but he doesn’t grasp where wealth actually comes from. By richard a. epstein.

  • 42 The United States of Envy What closes income gaps? Education and innovation—not confiscatory taxes such as those Thomas Piketty proposes. By allan h. meltzer. CALIFORNIA

  • 47 Economics in a Time of Drought Let the water flow where the market, not the government, says it should go. By edward paul lazear.

  • 51 An End to Pension Patches Meaningful ways to mend the Golden State’s pension-funding gap. By carson bruno. THE ENVIRONMENT

  • 56 Railroading the Environment Block the construction of pipelines and more oil gets shipped by train. That will make spills and accidents more likely, not less. By terry l. anderson.

INEQUALITY 35 Rickety Piketty Economist Thomas Piketty wants to confiscate wealth, but he doesn’t grasp where
INEQUALITY 35 Rickety Piketty Economist Thomas Piketty wants to confiscate wealth, but he doesn’t grasp where

HEALTH CARE

  • 61 Side Effects May Include Collusion Caution: ObamaCare might encourage hospitals and doctors to fix prices. By daniel p. kessler.

  • 64 Waiting for Dr. Godot Long treatment delays at VA hospitals shouldn’t shock us. In coun- tries with government health care monopolies, waiting months— even years—represents business as usual. By scott w. atlas.

  • 72 Bitter Pills Higher costs, fewer choices—the Affordable Care Act is becoming harder and harder to swallow. By richard a. epstein. POLITICS

  • 78 Affirmative-Action Foibles The Democratic Party likes racial preferences in college admissions, but Asian-Americans don’t. Might we see a parting of the ways? By lanhee j. chen.

  • 81 They Might Be Giants Then again, they might not. If politics were baseball, President Obama’s team would have whiffed. By bill whalen. INTELLIGENCE

  • 86 The Secret Sharers If leaks of secret information are so bad, why not plug them? Be- cause both the public and the government consider them useful. By jack goldsmith.

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In Snowden We Trust? Never

Self-appointed crusaders, no matter how clever or articulate, must never get to decide which secrets our government can keep. By benjamin wittes.

THE MIDDLE EAST

  • 98 Imaginary Egypt Egyptians told themselves a thrilling story about their revolution. Then the fable ended where it had begun: with a pharaoh in power. By samuel tadros.

    • 107 Will Iran and Israel Meet in the Middle? In Iran, hints of a secular thaw. In Israel, the increasing prominence of religious parties. Two nations, antagonistic—and unsettled. By abbas milani and israel waismel-manor.

    • 112 Clooney of Arabia Movie star George Clooney found a love match among the Druze, a sect whose members have seen their own share of drama. By lee smith. UKRAINE

    • 122 “Ukraine Is Fighting Our Battle” Five reasons the United States should send military aid to Ukraine. By paul r. gregory.

91 In Snowden We Trust? Never Self-appointed crusaders, no matter how clever or articulate, must never
91 In Snowden We Trust? Never Self-appointed crusaders, no matter how clever or articulate, must never

CHINA

  • 128 A Modern Mandarin Opening itself to free markets, China has lifted several hundred mil- lion people out of poverty. That was the easy part. An interview with Hoover fellow michael spence. By jonathan schlefer. INTERVIEWS

  • 133 Reform Conservatism and the Junior Senator from Utah “In the absence of a unifying conservative reform agenda,” says Mike Lee of Utah, “there will be a lot of bickering. We need to fill the void.” An interview with peter robinson.

  • 143 Game of Loans Banking crises are a product of people and strategy, not mysterious forces, say Hoover fellows charles w. calomiris and stephen h. haber. By kathryn jean lopez. VALUES

  • 152 The Fairness Fallacy Wait for perfect fairness in life and you’ll wait forever. But that doesn’t mean anybody is holding you back. By thomas sowell.

  • 155 Moral Debts The way we deal with our debts involves more than dollars and cents. It reveals our very character as a people. By david davenport.

  • 158 Who Will Speak? Today, Salman Rushdie lives in freedom. But the spirit of the fatwa— and the censor—has only grown stronger. By timothy garton ash.

IN MEMORIAM: FOUAD AJAMI

  • 163 “It Would Be My Fate to Return

. . .

Rooted in the old world, the late Hoover fellow fouad ajami flour- ished in the new. A reflection from his final book, In This Arab Time.

  • 172 Fouad’s Gift Farewell to a friend, a guide, and a storyteller of the Arab world’s disorder. By charles hill. HISTORY AND CULTURE

  • 178 Who’s Number One? Does It Matter? Country rankings are being twisted to tell all kinds of sto - ries—but rarely the story of how America meets its challenges. By victor davis hanson. HOOVER ARCHIVES

  • 184 One Summit, Different Dreams The Cairo Summit offered China a chance to present itself as an equal on the world stage. For Chiang Kai-shek it would lead to bitter disappointment. By hsiao-ting lin.

  • 202 On the Cover

IN MEMORIAM: FOUAD AJAMI 163 “It Would Be My Fate to Return ” . . .
IN MEMORIAM: FOUAD AJAMI 163 “It Would Be My Fate to Return ” . . .

Axis of Folly

The president of the United States proved rash, the former prime minister of Iraq, arrogant. Why Iraq is teetering. By Fouad Ajami.

Editor’s note: This is the last essay by Hoover senior fellow Fouad Ajami to be published before his death in June. Turn to page 172 for reflections on Dr. Ajami’s life and work.

Two men bear direct responsibility for the mayhem engulfing Iraq: Barack Obama and Nouri al-Maliki. The US president and the Iraqi prime min- ister stood shoulder to shoulder in a White House ceremony in December 2011 proclaiming victory. Obama was fulfilling a campaign pledge to end the Iraq war. There was a utopian tone to his pronouncement, suggesting that the conflicts that had been endemic to that region would be brought to an end. As for Maliki, there was the heady satisfaction, in his estima- tion, that Iraq would be sovereign and intact under his dominion. In truth, Iraq’s new Shiite prime minister was trading American tute- lage for Iranian hegemony. Thus the claim that Iraq was a fully sovereign country was an idle boast. Around the Maliki regime swirled mightier, more sinister players. In addition to Iran’s penetration of Iraqi strategic and political life, there was Baghdad’s unholy alliance with the brutal Assad regime in Syria, whose members belong to an Alawite Shiite sect and were taking on a largely Sunni rebellion. If Bashar Assad were to fall, Maliki feared, the Sunnis of Iraq would rise up next.

Fouad ajami was a senior fellow at the Hoover Institution and co-chair of Hoover’s Herbert and Jane Dwight Working Group on Islamism and the Inter- national Order.

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US Department of Defense/Jim Gordon

Now, even as Assad clings to power in Damascus, Iraq’s Sunnis have risen up and joined forces with the murderous, Al-Qaeda-affiliated Islamic State of Iraq and al-Sham (ISIS), which controls much of northern Syria and the Iraqi cities of Fallujah, Mosul, and Tikrit. ISIS marauders are marching on the Shi- ite holy cities of Najaf and Karbala, and Baghdad itself has become a target. Iraq’s leading Shiite cleric, Ayatollah Ali al-Sistani, has called on his followers to take up arms against ISIS and other Sunni insurgents in defense of the Baghdad government. This is no ordinary cleric playing with fire. For a decade, Ayatollah Sistani stayed on the side of order and social peace. Indeed, at the height of Iraq’s sectarian troubles in 2006–7, President George W. Bush gave the ayatollah credit for keeping the lid on that volcano. Now even that barrier to sectarian violence has been lifted. This sad state of affairs was in no way preordained. In December 2011, Obama stood with Maliki and boasted that “in the coming years, it’s esti- mated that Iraq’s economy will grow even faster than China’s or India’s.” But the negligence of these two men—most notably in their failure to successfully negotiate a Status of Forces Agreement that would have main- tained an adequate US military presence in Iraq—has resulted in the cur- rent descent into sectarian civil war. Iraq’s Kurds were made to feel like beggars at the Maliki table.

Iraq’s Kurds were made to feel like beggars at the Maliki table.

There was, not so long ago, a way for Maliki to have avoided all this:

the creation of a genuine political coalition, making good on his promise that the Kurds in the north and the Sunnis throughout the country would be full partners in the Baghdad government. Instead, the Shiite prime minister set out to subjugate the Sunnis and marginalize the Kurds. There was, from the start, no chance that this would succeed. For their part, the Sunni Arabs of Iraq were possessed of a sense of political mastery of their own. After all, this was a community that had ruled Baghdad for a millen- nium. Why should a community that had known such great power accept sudden marginality? As for the Kurds, they had conquered a history of defeat and persecu- tion and built a political enterprise of their own—a viable military insti-

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TOPPLED: Thirty-foot-tall bronze busts of former Iraqi strongman Saddam Hussein once towered over the grounds of the Republican Palace in Baghdad. A decade after the fall of Saddam, Iraq is convulsed in sectarian violence, in part because of Nouri al-Maliki’s refusal to set up a genuine political coalition to govern his country.

tution, a thriving economy, and a sense of genuine national pride. The Kurds were willing to accept the federalism promised them in the new Iraq. But that promise rested, above all else, on the willingness on the part of Baghdad to honor a revenue-sharing system that had decreed a fair allocation of the country’s oil income. This, Baghdad would not do. The Kurds were made to feel like beggars at the Maliki table. Sadly, the Obama administration accepted this false federalism and its facade. Instead of aiding the cause of a reasonable Kurdistan, the adminis- tration sided with Baghdad at every turn. In the oil game involving Bagh- dad, Irbil, the Turks, and the international oil companies, the Obama White House and State Department could always be found standing with the Maliki government.

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With ISIS now reigning triumphant in Fallujah, in the oil-refinery town of Baiji, and, catastrophically, in Mosul, the Obama administration cannot plead innocence. Mosul is particularly explosive. It sits astride the world between Syria and Iraq and is economically and culturally inter- twined with the Syrian territories. This has always been Mosul’s reality. There was no chance that a war would rage on either side of Mosul without it spreading next door. The Obama administration’s vanishing “red lines” and utter abdication in Syria were bound to compound Iraq’s troubles.

Why should a Sunni community that had known great power accept sudden marginality?

Grant Maliki the harvest of his sectarian bigotry. He rode that sectari- anism to nearly a decade in power. Obama’s follies are of a different kind. They are sins born of ignorance. He was eager to give up the gains the US military and the Bush administration had secured in Iraq. Nor did he pos- sess the generosity of spirit to give his predecessors the credit they deserved for what they had done in that treacherous landscape. As he headed for the exits in December 2011, Obama described Maliki as “the elected leader of a sovereign, self-reliant, and democratic Iraq.” One suspects that Obama knew better. The Iraqi prime minister had already shown marked authoritarian tendencies, and there were many anxieties about him among the Sunnis and Kurds. Those communities knew their man, while Obama chose to look the other way.

With ISIS now reigning triumphant in Fallujah, in the oil-refinery town of Baiji, and, catastrophically, in

Reprinted by permission of the Wall Street Journal. © 2014 Dow Jones & Co. All rights reserved.

With ISIS now reigning triumphant in Fallujah, in the oil-refinery town of Baiji, and, catastrophically, in
With ISIS now reigning triumphant in Fallujah, in the oil-refinery town of Baiji, and, catastrophically, in

New from the Hoover Institution Press is The Struggle for Mastery in the Fertile Crescent, by Fouad Ajami. To order, call 800.888.4741 or visit www.hooverpress.org.

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Best Frenemies?

As Iraq wobbles, Iran might almost look like a friend. It isn’t. By Abbas Milani.

There’s plenty of blame to go around in Tehran, Washington, and most of all Baghdad for the mess in Iraq—blame for strategic blunders and tactical bullying. In all three capitals, the chickens of past follies have come home to roost, giving rise to dangerous conditions, a virtually balkanized Iraq, a politicized blame game, and drastically different narratives about what is happening and how to find a way out of the morass. A murderous, ragtag army of Salafists from around the world, on an apparent rampage against any Muslim who is not a Salafi Sunni, has suc- ceeded in laying bare the fissures in the facade of security in Iraq and Syria. It has also begun to expose the potential long-term devastating conse- quences of the Obama administration’s early inaction in the face of Syrian President Bashar al-Assad’s brutalities—Assad’s use of chemical weapons and heavy artillery against peaceful demonstrators—of Iran’s intervention in Syria, and of Sunni states’ support for radical Salafism as an antidote to Shiite power in Iran, Lebanon, and Iraq. As in virtually every domain, Tehran and Washington are domestically riven by different views about the sources of the crisis in Iraq and potential solutions, and whether Iran and the United States should cooperate, if not

abbas milani is co-director of the Hoover Institution’s Iran Democracy Project, a member of Hoover’s Herbert and Jane Dwight Working Group on Islamism and the International Order, and a Hoover research fellow. He is also the Hamid and Christina Moghadam Director of Iranian Studies at Stanford University, where he is a visiting professor of political science.

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coordinate efforts, to save Iraq’s government. In Washington, even sena- tors John McCain and Lindsey Graham can’t agree on how to criticize the Obama administration.

Competing, if not conflicting, interests hinder any tactical alliance between countries in dealing with Iraq.

In Tehran, the radical conservatives—consisting of many in the Revo- lutionary Guard (IRGC) and clerics close to Supreme Leader Ali Khame- nei—see the surging Islamic State of Iraq and al-Sham (ISIS) as merely the concoction of the US-Israel-Turkey-Qatar–Saudi Arabia alliance that, in this scenario, is using Salafis to weaken the Islamic Republic of Iran (and its allies in Syria and Lebanon). Their recommended policy is a repeat of their past bombast: defeat the Salafists by strengthening the Assad-Maliki Shiite axis, and help Maliki organize and mobilize Shiite militias to fight the Sunni insurgency. The radical conservatives chastise Iranian President Hassan Rouhani and his allies for using the “pretext” of the ISIS threat to normalize relations with the United States. One website claims that ISIS leaders live in Turkey and are protected by the country’s intelligence agencies.

Tehran and Washington are riven by different views about the sources of the Iraq crisis and potential solutions.

A different narrative in Tehran is offered by Rouhani and former presi- dent Akbar Hashemi Rafsanjani’s increasingly assertive camp. They are trying to distance themselves from the policies of the Ahmadinejad era by arriving at a long-term agreement with the six world powers negotiating with Tehran on its nuclear program (Iran insists work has begun on draft- ing a final agreement) and by normalizing relations with the West. Britain has announced it will reopen its embassy in Tehran; Iran and the United States held direct talks this past summer (not long ago publicly declared as a taboo); and there are hints about a coordinated effort against ISIS Salaf- ists. More than once, the Rouhani-Rafsanjani camp has declared the Salafi threat to be rooted in extremism and a threat to all Muslims.

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Yet in spite of the desire for Iran and the United States for cooperation in Iraq, there are serious issues—other than the nuclear program—that render it hard to realize. There are competing, if not conflicting, inter- ests that limit the nature of a tactical alliance between the two countries in dealing with Iraq. In both Iran and the United States, as well as the Middle East region, powerful forces would feel threatened by any Iran- American rapprochement. Iran wants to keep Iraq together, keep Shiites in power (if not Nouri al-Maliki), and keep the Revolutionary Guard’s extensive network of mili- tia and economic presence in Iraq intact. The United States clearly has no love lost for Maliki and his sectarian politics, is gingerly moving toward favoring a loosely federated Iraq, and certainly does not want to encour- age, or enable, increased Iranian power in Iraq. Moreover, the two coun- tries find themselves on opposing sides of the war in Syria, from which ISIS has overflowed. While Rouhani took four days—only after much cudgeling by conser- vatives—to congratulate Assad on his recent “election” victory, radical conservatives in Iran keep insisting that keeping Assad in power is a key strategic goal of the Islamic regime. In spite of these tensions, the specter of ISIS haunting the Levant is strong enough to bring the old foes togeth- er, if only briefly, to try to put the genie of Salafi extremism back in the bottle.

Yet in spite of the desire for Iran and the United States for cooperation in Iraq,

Reprinted by permission of the New Republic. © 2014 New Republic (www.tnr.com). All rights reserved.

Yet in spite of the desire for Iran and the United States for cooperation in Iraq,
Yet in spite of the desire for Iran and the United States for cooperation in Iraq,

Available from the Hoover Institution Press is The Myth of the Great Satan: A New Look at America’s Relations with Iran, by Abbas Milani. To order, call 800.888.4741 or visit www.hooverpress.org.

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The Price of Our “Responsible” Exit

The Iraq war never ended. We just quit fighting it. By Kori N. Schake.

So this is what a “responsible withdrawal” from Iraq looks like? Mosul overrun by terrorists more virulently dangerous than Al-Qaeda. Iraqi security forces throwing off their uniforms and fleeing, leaving their high-end hardware—paid for by the American taxpayer—in the hands of our enemies. Iranian Revolutionary Guard forces streaming into Najaf and Karbala to protect Shiite Muslim holy sites. The former Iraqi leader still incapable of building cross-sectarian cooperation even when the aggres- sive Islamist group known as ISIS is sixty miles from Baghdad. Kurdish paramilitary forces stepping in to protect only Kurdish areas, setting the boundaries for a secession bid. Militias forming to protect communities where the state has failed. Ayatollah Ali al-Sistani issuing a call to arms. Jihadists poised to achieve control of a country, a sanctuary in which to train more jihadists and plot attacks against the “far enemy.” That would be us. The narrative of jihad will cement into a Sunni-Shi- ite conflict instead of a struggle by moderates of all faiths against barbaric violence in the name of religion, creating the circumstances for the next round of warfare in the Middle East. Soon, either Iraq will be the caliphate Osama bin Laden yearned for or the Iraqi government will be beholden to Iran for its own preserva-

Kori n. schaKe is a research fellow at the Hoover Institution and a member of Hoover’s Working Group on the Role of Military History in Contemporary Conflict.

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tion. Iran will have achieved a stunning victory: dramatically expanding and consolidating its regional influence while getting the United States to ignore its domestic repression and lethal influence in Lebanon, Syria, and Iraq in hopes of a nuclear weapons deal. Iran’s supreme leader, Ayatollah Ali Khamenei, must be thrilled: so little invested, so much achieved. Here in the free world, we await the White House’s explanation that the collapse of our influence in the Middle East is really the fault of the George W. Bush administration. House Minority Leader Nancy Pelosi has already rolled out that ludicrous defense. Back in 2008, when it signed the Status of Forces Agreement, the Bush administration anticipated remaining militarily and politically engaged in Iraq to stabilize security and consolidate democracy, working to integrate Iraq among our allies in the region and building a bilateral partnership of the kind we have with Germany, Japan, and South Korea. President Obama’s supporters insist he has always been clear about his objective to “end the war in Iraq.” But neither the president nor his sup- porters have ever been straightforward about the fact that the war wasn’t ending. We just quit fighting it. The war continued. Then–secretary of state Hillary Clinton grandiosely claimed in 2011 that our “responsible withdrawal” of military forces from Iraq would be supplanted by the largest US diplomatic program since the Marshall Plan. That never materialized either.

The Obama White House is once again telling our enemies all that we will not do.

The Obama administration declined to use what leverage it had left to broker a stabilizing political bargain after the 2010 parliamentary elec- tions, standing in silence as Maliki politicized the electoral commission (it invalidated numerous winning candidates), violated the Iraqi constitu- tion, replaced effective military commanders with cronies, and used the justice system to persecute sectarian foes (including the former vice presi- dent, Tariq al-Hashimi). The Obama administration complained ineffectually for over a year about multiple Iranian weapons shipments transiting a country that had

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18 Hoover Digest N 2014 · No. 4 Illustration by Taylor Jones for the Hoover Digest.
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Illustration by Taylor Jones for the Hoover Digest.

no air force to patrol its own airspace; we declined to police that airspace ourselves. We allowed Syria to go up in flames without even helping to shield neighboring countries like Iraq from the migration of jihadists into their territory. The politicians who serve as the president’s national security aides might even have indulged in some smug satisfaction to see the Maliki government begging for the military assistance we offered, and which Iraq declined, under the Status of Forces Agreement in 2011. Those White House politi- cians might consider that the Iraqis publicly advised the Karzai government in Afghanistan not to make the same mistake. But that would require less swagger and more compassion for the difficulties of democratic transitions in war-torn countries than this White House team has evidenced.

Iran’s supreme leader, Ayatollah Ali Khamenei, must be thrilled: so little invested, so much achieved.

While answering questions about the Bowe Bergdahl prisoner exchange, the president lectured us that “this is how wars end in the twenty-first century: not through signing ceremonies but through deci- sive blows against our adversaries, transitions to elected governments, security forces who are trained to take the lead and ultimately full responsibility.” Yet he ended our participation in the Iraq war without achieving any of those things. Obama is now looking at the destructive consequences of his “respon- sible withdrawal” from Iraq. The president implied that Iraq would need military assistance in the near term. He gravely intoned that all options are on the table. His White House team rushed out to clarify that “all options” do not include the option of sending American soldiers to bolster the Iraqis’ fight. Denying the Iraqi government assistance in a counter- terror fight will finally and completely discredit Obama administration claims of support for our partners around the world. We have already convinced our friends in the Middle East that we no longer care about governments killing their people. Given the speed of ISIS’s advance into Iraq, there is probably no time to pull together an international coalition of forces to share the burden

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of preventing Iraq’s fall to jihadists. At best we could loosely coordinate action among countries that fear Iran’s spreading influence. More likely, any assistance we now offer will be too late. Still, the White House is likely to conclude it needs to do something—the very worst way to get involved in a national security crisis. But the administration is certain not to iden- tify a preferred end state or allow the military to figure out plans for the use of force to achieve it.

The Obama administration declined to use what leverage it had left to broker a stabilizing political bargain.

The Obama White House is once again telling our enemies all that we will not do, and failing to convince our allies that we will do much of anything. The president is so spooked by the prospect of “a third Ameri- can war in the region” that he has compromised our security to prevent it. He ought to have understood that he wasn’t starting a third American war in the region—he needed to finish the first one.

of preventing Iraq’s fall to jihadists. At best we could loosely coordinate action among countries that

Reprinted by permission of Foreign Policy (www.foreignpolicy.com). © 2014 Foreign Policy Group LLC. All rights reserved.

of preventing Iraq’s fall to jihadists. At best we could loosely coordinate action among countries that
of preventing Iraq’s fall to jihadists. At best we could loosely coordinate action among countries that

Available from the Hoover Institution Press is State of Disrepair: Fixing the Culture and Practices of the State Department, by Kori N. Schake. To order, call 800.888.4741 or visit www.hooverpress.org.

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An Army of Revisionists

How quickly we forget our reasons for toppling Saddam—and our politicians forget how they endorsed it. By Victor Davis Hanson.

Who lost Iraq? The blame game mostly fingers incompetent former prime minister Nouri al-Maliki. Or is Barack Obama culpable for pulling out all Ameri- can troops monitoring the success of the 2007–8 surge? Some still blame George W. Bush for going into Iraq in 2003 in the first place to remove Saddam Hussein. One can blame almost anyone, but one must not invent facts to sup- port an argument. Do we remember that Bill Clinton signed into law the Iraq Liberation Act of 1998 that supported regime change in Iraq? He gave an eloquent speech on the dangers of Saddam Hussein’s weapons of mass destruction. In 2002, both houses of Congress voted overwhelmingly to pass a resolution authorizing the removal of Saddam by force. Senators such as Joe Biden, Hillary Clinton, John Kerry, and Harry Reid offered moving arguments on the Senate floor why we should depose Saddam in a post-9/11 climate. Democratic stalwarts such as Senator Jay Rockefeller and Representa- tive Nancy Pelosi lectured us about the dangers of Saddam’s stockpiles of weapons of mass destruction. They drew on the same classified domestic and foreign-intelligence reports that had led Bush to call for Saddam’s forcible removal.

Victor daVis hanson is the Martin and Illie Anderson Senior Fellow at the Hoover Institution and the chair of Hoover’s Working Group on the Role of Mili- tary History in Contemporary Conflict.

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Illustration by Taylor Jones for the Hoover Digest.

The Bush administration, like members of Congress, underestimat- ed the costs of the war and erred in focusing almost exclusively on Sad- dam’s supposed stockpiles of weapons. But otherwise, the war was legally authorized on twenty-three writs. Most of them had nothing to do with weapons of mass destruction and were unaffected by the later mysterious absence of such weapons—which is all the more mysterious given that troves of WMD have turned up in nearby Syria and more recently in Iraqi bunkers overrun by Islamist militants. Legally, the United States went to war against Saddam because he had done things such as commit genocide against the Kurds, Shiites, and marsh Arabs and attacked four of his neighbors. He had tried to arrange the assassination of a former US president, George H. W. Bush. He had paid bounties for suicide bombers on the West Bank and was

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harboring the worst of global terrorists. Saddam also offered refuge to at least one of the architects of the first World Trade Center bombing in 1993 and violated UN-authorized no-fly zones. A number of prominent columnists, right and left—from George Will, David Brooks, and William F. Buckley to Fareed Zakaria, David Ignatius, and Thomas Friedman—supported Saddam’s forcible removal. When his statue fell in 2003, most polls showed that more than 70 percent of Amer- icans agreed with the war.

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What changed public opinion and caused radical about-faces among the war’s most ardent supporters were the subsequent postwar violence and insurgency between 2004 and 2007, and the concurrent domestic elections and rising antiwar movement. Thousands of American troops were killed or wounded in mostly failed efforts to stem the Sunni-Shiite savagery.

In 2002, both houses of Congress voted overwhelmingly to pass a resolution authorizing Saddam’s removal by force.

The 2007–8 surge engineered by General David Petraeus ended much of the violence. By Obama’s second year in office, American fatalities had been reduced to far less than the monthly accident rate in the US military. “An extraordinary achievement,” Obama said of the “stable” and “self- reliant” Iraq that he inherited—and left. Before our invasion, the Kurds were a persecuted people who had been gassed, slaughtered, and robbed of all rights by Saddam. In contrast, today a semiautonomous Iraqi Kurdistan is a free-market, consensual society of tolerance that, along with Israel, is one of the few humane places in the Middle East. In 2003, the New York Times estimated that Saddam Hussein had killed perhaps 1 million of his own people. That translated into about forty thousand deaths for each year he led Iraq. A Saddam-led Iraq over the past decade would not have been a peaceable place. We can also imagine that Saddam would not have sat idly by as Pakistan and North Korea openly sold their nuclear expertise, and as rival Iran pressed ahead with its nuclear enrichment program.

When Saddam’s statue fell in 2003, most polls showed that more than 70 percent of Americans agreed with the war.

Nor should we forget that the US military decimated Al-Qaeda in Iraq. Tens of thousands of foreign terrorists flocked to Anbar province and there met their deaths. When Obama later declared that Al-Qaeda was “on the run,” it was largely because it had been nearly obliterated in Iraq.

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Launching a costly campaign to remove Saddam may or may not have been a wise move. But it is historically inaccurate to suggest that the Iraq War was cooked up by George W. Bush alone—or that it did not do enor- mous damage to Al-Qaeda, bring salvation for the Kurds, and by 2009 provide a rare chance for the now-bickering Iraqis to make something out of what Saddam had tried to destroy.

Launching a costly campaign to remove Saddam may or may not have been a wise move.

Reprinted by permission of Tribune Content Agency. © 2014 Tribune Content Agency, Inc. All rights reserved.

Launching a costly campaign to remove Saddam may or may not have been a wise move.
Launching a costly campaign to remove Saddam may or may not have been a wise move.

New from the Hoover Institution Press is Iraq after America: Strongmen, Sectarians, Resistance, by Joel Rayburn. To order, call 800.888.4741 or visit www. hooverpress.org.

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Why the Fed Must Return to Rules

What does the economy need from the Fed? Less intervention, more stability. By John B. Taylor.

As the Federal Reserve’s large-scale bond purchases wind down, financial markets and policy makers focus on when the Fed will move to increase inter- est rates. There is a more fundamental question that needs to be answered:

will the central bank continue its highly interventionist and discretionary monetary policies, or will it move to a more rules-based approach? A conference last spring at the Hoover Institution brought top Fed policy makers and staff together with monetary experts and financial jour- nalists to discuss this crucial question. David Papell of the University of Houston used statistical analy- sis to determine objectively when the central bank followed rules-based policies. The periods when it did—such as in much of the 1980s and ’90s—coincided with good economic performance: price stability, steady employment, and output growth. Using a different approach based on his research of the Fed’s hundred-year history, Carnegie Mellon University’s Allan Meltzer concluded as well that “following a rule or quasi rule in 1923–28 and 1986–2002 produced two of the best periods in Federal Reserve history.”

john b. taylor is the George P. Shultz Senior Fellow in Economics at the Hoover Institution, the chair of Hoover’s Working Group on Economic Policy and a member of Hoover’s Shultz-Stephenson Task Force on Energy Policy, and the Mary and Robert Raymond Professor of Economics at Stanford University.

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From 2003 to 2005, however, the Fed kept interest rates lower than such a rules-based approach would imply. This contributed mightily to the housing bubble and the risk-taking search for yield. The Fed’s dis- cretionary policies since the financial crisis—particularly the large-scale purchases of mortgage-based securities—have continued and have also set a dangerous precedent, according to John Cochrane of the University of Chicago. “Once the central bank is in the business of supporting particu- lar sectors, housing—and homeowners at the expense of home buyers— why not others? Cars? Farmers? Exporters?” Digging deeper into history, Lee Ohanian of UCLA found that the Fed’s deviations from rules that would produce low and stable inflation during periods of large changes in regulatory policies—such as the Nation- al Industrial Recovery Act of the 1930s—often harmed the economy. He concluded that “economic growth would have been higher had the Fed stuck to policy rules.”

When the central bank followed rules-based policies there was good economic performance: price stability, steady employment, and output growth.

Michael Bordo of Rutgers noted another central-banking responsibil- ity that the Fed has discharged in an ad hoc and discretionary manner:

to act as a lender of last resort. This, he wrote, has led to instability throughout the Fed’s history, most recently in 2008 when it bailed out Bear Stearns and AIG but let Lehman Brothers go under. Bordo recom- mends that the central bank adopt a rule to govern when it will make loans of last resort, and make it publicly known. This could mitigate or even prevent future crises of the sort precipitated by the ad hoc policies of 2008. Marvin Goodfriend of Carnegie Mellon University also noted that uncertainty about which creditors would be bailed out by the Fed cre - ated confusion among policy makers and led to a botched rollout of the Troubled Asset Relief Program in 2008. He recommends a new “Fed-Treasury Credit Accord” which would require a “Treasurys only” asset-acquisition policy with exceptions in specific emergency situa - tions.

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Illustration by Taylor Jones for the Hoover Digest.

There were dissenting views. Andrew Levin, a former special adviser to the Federal Reserve now on leave at the International Monetary Fund, emphasized that the parameters of policy rules shift over time making them less reliable. Indeed, the long-run average level of the federal-funds rate— central to any Fed interest-rate policy rule—could change. Levin did not recommend throwing out rules-based policy altogether, howev- er. Rather, if a key interest-rate rule must change the Fed should communicate the reasons clearly. The clear implication of the monetary ideas pre-

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sented at the conference is that the Fed should transition to a more rules-based policy. Richard Clarida of Columbia University showed that these same ideas apply globally and would have beneficial effects for the entire international monetary system. A start, suggested by Charles Plosser, president of the Federal Reserve Bank of Philadelphia, would be for the Fed to report publicly the estimated impacts of the reference policy rules that it uses internally. An open discussion, in press confer- ences and congressional testimony, would lead to questions and answers about why the Fed deviates from such rules and thereby create more accountability.

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In my view more is needed. The big swings between discretion and rules that have characterized Fed history—and the damage this has led to—lead me to favor legislation requiring the Fed to adopt rules for setting policy on the interest rate or the money supply. The Fed, not Congress, would choose the rule. But the rule would be public. If the Fed deviated from it, the Fed chair would be obligated to explain why, in writing and congres- sional testimony.

“Once the central bank is in the business of supporting particular sectors, housing—and homeowners at the expense of home buyers—why not others? Cars? Farmers? Exporters?”

Although it is likely to resist such legislation, the Fed could make it work to a good end. The Fed has already adopted a 2 percent inflation target, which is the value embedded in the rule-like policy advocated by many at the conference at Stanford. In addition, the forecasts for the ter- minal or equilibrium federal-funds rate by the members of the Federal Open Market Committee now average about 4 percent, which was also built into the rule-like policies discussed by many at the conference. Fed Chair Janet Yellen has expressed agreement that the Fed should even- tually “adopt such a rule as a guidepost to policy,” though she adds that the time is not yet ripe because the economy is not yet back to normal. So the main debate now is about when, not whether, a rules-based policy should be adopted. Based on recent research, the sooner the better.

In my view more is needed. The big swings between discretion and rules that have characterized

Reprinted by permission of the Wall Street Journal. © 2014 Dow Jones & Co. All rights reserved.

In my view more is needed. The big swings between discretion and rules that have characterized
In my view more is needed. The big swings between discretion and rules that have characterized

Forthcoming from the Hoover Institution Press is Across the Great Divide: New Perspectives on the Financial

Crisis, edited by Martin Neil Baily and John B. Taylor. To order, call 800.888.4741 or visit www.hooverpress.org.

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The Foundation Crumbles

Rising taxes and the unrestrained growth in entitlements are eating away at the very foundation of our economy: property rights. By Michael J. Boskin.

Property rights and the rule of law are essential foundations for a vibrant economy. When they are threatened, or uncertain, the result is inefficien- cy, rent-seeking, a larger underground economy, and capital flight. Unfortunately, individual rights to capital, land, and the fruits of one’s labor are threatened—in many cases redistributed from creditors to debt- ors, from those out of political power to those in power, and especially from young to old. And a much larger battle is looming. Nine years ago the Supreme Court gutted the Constitution’s “public use” restriction on eminent domain (Kelo v. City of New London, 2005), allowing local governments to take the property of some individuals for the benefit of others, especially private developers. In 2009 President Obama trampled the legal rights of secured Chrysler bondholders and transferred billions of dollars to unions. The Environ- mental Protection Agency issues 1,500 wetlands compliance orders annu- ally to halt land use. The owner can be stuck in limbo for years pend- ing the agency’s final order. In this situation, at least, the Supreme Court

michael j. bosKin is a senior fellow at the Hoover Institution, a member of Hoover’s Shultz-Stephenson Task Force on Energy Policy and Working Group on Economic Policy, and the T. M. Friedman Professor of Economics at Stanford University.

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recently decided 9–0 that land owners can sue to block the EPA from “strong-arming regulated parties into ‘voluntary’ compliance,” with fines of up to $75,000 a day (Sackett v. EPA, 2012). The biggest future threat will be to the fruits of one’s labor. The unfunded liabilities of Social Security and Medicare are now several times the national debt; the unfunded liabilities of state and local governments for pensions and other benefits are in the trillions of dollars and mount- ing. The panoply of other government programs nonetheless continues to expand. The result, according to Congressional Budget Office projections, is that federal spending will reach 36 percent of GDP in a generation. This implies that taxes will have to double from the current, near-historic aver- age, 18 percent of GDP. All federal taxes will increase—on income, capital gains, dividends, corporate earnings, employer and employee payrolls. Left unchecked, many middle-income earners eventually will face mar- ginal tax rates of 70 percent or higher—reducing them to minority part- ners in their own additional work and sundering the value of the invest- ments in their own education.

Taxes explicitly designed for redistribution—instead of revenue—are “justified” by the fanciful conjecture of writers such as Thomas Piketty.

Either the next generation will be saddled with steeply higher taxes on their work and savings or the growth in entitlement spending will be slowed. The political battles over this fundamental question will be waged between generations, income groups, high- and low-tax states, taxpayers and retirees, public employees, and recipients of every government service. The math is unavoidable. The biggest safety-net programs, including Social Security and Medicare, began under far different economic and demographic conditions. But as economic growth has slowed and the population has aged, the ratio of people receiving government benefits to those paying taxes has been rising rapidly. Spending on these two and other entitlement programs will gobble up bigger and bigger chunks of the federal budget. They are already crowding out defense. Against this unavoidable math is the widespread belief, as the Social Security Administration notes on its website, among many Americans

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that “their FICA payroll taxes entitle them to a benefit in a legal, con- tractual sense.” Politicians feed this belief but it is false. As far back as 1960 the Supreme Court (Flemming v. Nestor) ruled that benefits can be changed by Congress at any time—and they have been. The growth of retirement benefits will have to be slowed. The notion that people not yet born “own” much larger Social Security benefits in the future is a legal and practical fairy tale.

The biggest future threat will be to the fruits of one’s labor.

Most responsible people agree that reducing the growth of benefits should be gradual and protect current non-wealthy seniors. Benefits for the more affluent are the logical place to begin. It makes no sense to destroy their work and investment incentives with high taxes in their most productive years, only to subsidize them heavily a few years later. Despite the recent increases in taxes on income, dividends, and capi- tal gains, many on the left are clamoring for more: an 80 percent top income-tax rate and even a progressive global wealth tax with rates as high as 10 percent. This is exactly the wrong road to take. Such taxes will only discourage production, encourage black markets, raise far less revenue than proponents claim, and—by curtailing capital accumulation—lower future wages and living standards. Over time, such rates would expropri- ate a sizable fraction of wealth. Taxes explicitly designed for redistribution—instead of revenue—are “justified” by the fanciful conjecture of writers such as Thomas Piketty, who claim that wealth inevitably will become more concentrated, since the return to capital exceeds the income growth rate. This conjecture rests on a series of implausible assumptions—that the return on capital won’t fall as more and more capital accumulates; that these returns will all be saved and not spent; that fortunes won’t dissipate by repeated division across generations nor given to charity; and that capital will become far more substitutable for labor. Ultimately, behind this and other attacks on property rights is the notion that the government owns all income, leaving to you only what it doesn’t demand. But as President Reagan said in July 1987, “working peo-

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ple need to know their jobs, take-home pay, homes, and pensions are not vulnerable to the threat of a grandiose, inefficient, and overbearing gov- ernment.” In particular, taxation “beyond a certain level becomes servi- tude. And in America, it is the government that works for the people and not the other way around.”

ple need to know their jobs, take-home pay, homes, and pensions are not vulnerable to the

Reprinted by permission of the Wall Street Journal. © 2014 Dow Jones & Co. All rights reserved.

ple need to know their jobs, take-home pay, homes, and pensions are not vulnerable to the
ple need to know their jobs, take-home pay, homes, and pensions are not vulnerable to the

Available from the Hoover Institution Press is The New Deal and Modern American Conservatism: A Defining Rivalry, by Gordon Lloyd and David Davenport. To order, call 800.888.4741 or visit www.hooverpress.org.

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Rickety Piketty

Economist Thomas Piketty wants to confiscate wealth, but he doesn’t grasp where wealth actually comes from. By Richard A. Epstein.

The relationship between inequality, whether of income or wealth, and economic growth is perhaps the defining issue of our age. But I have urged readers to take a critical view of Thomas Piketty’s new book, Capital in the Twenty-First Century, the bestseller that predicts a vast, inevitable concen- tration of wealth in the hands of a few. Consider these two points:

• We should welcome any increase in wealth to the rich or the poor that does not leave other people worse off, whether that change increases or narrows the gaps in wealth between rich and poor. Any such Pareto improvement meets the gold standard of economic welfare. The extra wealth increases the scope of human possibilities no matter where it is lodged. Over time, market and charitable transactions will spread that wealth across society.

• This contention about welcoming an increase of wealth is borne out by looking, ironically, not directly at wealth but at individual utility, happi- ness, or satisfaction. These outcomes are notoriously difficult to measure, which is why all systems of taxation and regulation are keyed to wealth rather than utility. But wealth is just one of several imperfect proxies for

richard a. epstein is the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution and a member of the steering committee for Hoover’s Work- ing Group on Intellectual Property, Innovation, and Prosperity. He is also the Laurence A. Tisch Professor of Law at New York University Law School and a senior lecturer at the University of Chicago.

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personal utility. A far better proxy is overall life expectancy. In the United States that figure has increased by over thirty years per person since 1900, and by over forty years for African-Americans. A black/white longevity disparity of fifteen years in 1900 has shrunk to four years today.

Thomas Piketty asserts that overall growth rates are constrained by some invisible Malthusian hand.

Much of that gain comes from overall improvements in public goods, such as better sewage management and vaccinations. Wealth, not utility, funds these advances, so most of their costs are necessarily borne by the wealthy, but the resulting gains are not concentrated in the top 1 percent. Sadly, Piketty’s lengthy book is silent about the massive advances in basic science, public health, and medicine that fueled this revolution, creating widespread benefits for the population at large. This massive benevolent and uncontroversial redistribution has no place in his calculations of inequality.

PITNEY V. PIKETTY

Piketty misunderstands the sources of social-wealth creation. Thinking that capital accumulation drives social inequality, Piketty favors progressive tax- es, including a progressive annual tax on capital. “This will make it possible to avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation,” he writes. Yet he is oddly indifferent to the virtues of competitive markets and the damage that monopolies and cartels can inflict on social welfare. Perhaps Piketty would not have made this fatal mistake if he had read the opinion of a great, if unappreciated, Supreme Court justice, Mahlon Pitney, who addressed this issue in the 1915 Supreme Court case of Cop- page v. Kansas. At issue in Coppage was whether an employer had a con- stitutional right to insist by contract that his workers not join a union so long as they remain in his employ. Pitney held for the employer:

A little reflection will show that wherever the right of private property and the right of free contract coexist, each party when contracting is inevitably more or less influenced by the question whether he has much

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property, or little, or none, for the contract is made to the very end that each may gain something that he needs or desires more urgently than that which he proposes to give in exchange. And since it is self-evident that, unless all things are held in common, some persons must have more property than others, it is from the nature of things impossible to uphold freedom of contract and the right of private property without at the same time recognizing as legitimate those inequalities of fortune that are the necessary result of the exercise of those rights.

The gist of Pitney’s argument is that any contract between an employer and employee is one for mutual gain: why else would the worker make it? Indeed, the right to contract is, as Pitney stresses, “as essential to the laborer as to the capitalist, to the poor as to the rich, for the vast majority of persons have no other honest way to begin to acquire property save by working for money.” To argue in this case that some level of inequality of bargaining power between the parties is reason enough to block their con- tract misses the point altogether, for it imposes limitations on the employ- ees’ freedom of choice. Unionization, of course, will benefit the position of those workers who voluntarily join the union. Yet unionization dims the prospects of excluded workers, and of the suppliers and customers who are put at the mercy of a monopoly union, armed with extra political powers and able to engage in well-timed strikes, to the massive inconvenience of everyone else.

For better or worse, capital and labor are intertwined.

Piketty does not address the nitty-gritty of labor market regulation and

thus misses Pitney’s point that gains from trade are necessarily blocked by taxation and regulation. Even if these fall nominally on the employer, both sides are hurt from the contraction of the labor market. The National Labor Relations Act of 1935 is similarly blockheaded on this point. It contains the outlandish claim that “(t)he inequality of

bargaining power between employees

. . .

and employers

. . .

tends to

aggravate recurrent business depressions, by depressing wage rates and the

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Illustration by Taylor Jones for the Hoover Digest.

purchasing power of wage earners in industry and by preventing the sta- bilization of competitive wage rates and working conditions within and between industries.” The inequality of bargaining power has little role in well-defined com- petitive markets, where employers have to meet the going wage. The “pur- chasing power of wage earners in industry” includes the loss in wages from workers who are excluded from union activities. Business depressions are more likely to arise in rigid labor mar- kets where firms and

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workers cannot incrementally adjust to changed conditions. Stabilization of wages is an oblique way of referring to how labor cartels force outsid- ers to bear all the costs of uncertainty from any exogenous shock to labor markets.

PIKETTY’S FATALISM

Unfortunately, Piketty’s preoccupation with inequality blinds him to the huge hit to growth that comes from union organization and, more gener- ally, from regulations across the labor, product, and real estate markets that artificially set wages, prices, or the terms of trade. Ignoring these midlevel institutions leads Piketty to assert that overall growth rates are constrained by some invisible Malthusian hand so that “there is ample reason to believe that the growth rate will not exceed 1–1.5 percent in the long run, no matter what economic policies are adopted.” What economic nihilism! Countless systems of direct taxation and regulation reduce gains from trade in countless economic areas. One key way

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to spark growth is to reduce the repressive income and growth taxes Pik- etty favors because, ironically, he thinks overall growth is not sustainable. It would also do him a world of good to look more closely at current schemes of industry-specific direct regulation that result in the inefficient deployment of capital. He might, for example, consider the adverse impact on pharmaceutical innovation that arises from the unduly risk-averse attitude of the Food and Drug Administration, or the perverse distortions of energy markets from the equally misguided efforts to subsidize wind and solar energy in ways that make it harder to take advantage of the enormous advances in traditional fossil-fuel technologies.

Simplifying the tax code and cutting regulations could easily bump the growth rate above Piketty’s dire predictions.

Moreover, one of the most persistent threats to growth occurs in Piketty’s home court, the misguided regulation of capital markets. As Tyler Cowen points out, Piketty writes as if all capital falls within a single undifferentiated lump. But in practice, the efficiency of capital markets depends critically on recognizing the distinction between venture capitalists, coupon clippers, and everyone else in between. Capital of course never runs without manage- ment and investor expertise; it is essential to match entrepreneurs and inves- tors with the right holdings. It does no good to have retirees take large stakes in risky new ventures while industry experts hold Treasury bills. Hence, capital must be mobile over the life cycle of new innovation. Most high-risk start-ups fail, but the extraordinary returns from suc- cessful ventures more than compensate for the dry holes. Yet those suc- cessful ventures need to find cheap, effective ways to go public so that high-risk players can start new ventures and risk-averse investors can reap solid returns. Standing athwart this enterprise lies the Securities and Exchange Com- mission and the multiple agencies under the Dodd-Frank Act whose dis- closure and regulatory policies can add unreasonably to the cost of going public. A reliable exit option will increase initial investment levels, which will in turn drive up the demand for labor and with it overall wages.

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For better or worse, capital and labor are intertwined. It is wrong to think that the infinite array of intermediate institutions and practices do not have a huge impact on overall levels of growth. In my academic career, I have devoted much time to examining the rise of the regulatory state and the havoc it wreaks on economic growth. The poor growth rates of the past decade are not the unavoidable consequence of natural events or huge impersonal forces. Many of them stem from our boneheaded choices on regulation and taxation. Simplifying the tax code and cutting regulations could easily bump that growth rate above Piketty’s dire predictions. But so long as policy makers take Piketty’s lead, preoc- cupying themselves with inequality, our prospects for growth are grim. We will continue to pay a high social price if we place our faith in Piketty’s rickety economic theories.

For better or worse, capital and labor are intertwined. It is wrong to think that the

Reprinted from Defining Ideas (www.hoover.org/publications/defining-ideas), a Hoover Institution journal. © 2014 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

For better or worse, capital and labor are intertwined. It is wrong to think that the
For better or worse, capital and labor are intertwined. It is wrong to think that the

Available from the Hoover Institution Press is The Case against the Employee Free Choice Act, by Richard A. Epstein. To order, call 800.888.4741 or visit www. hooverpress.org.

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The United States of Envy

What closes income gaps? Education and innovation—not confiscatory taxes such as those Thomas Piketty proposes. By Allan H. Meltzer.

The Obama administration continues to tout the idea of income redistri- bution, openly encouraging envy of the top 1 percent of earners. Reduc- ing the share received by the highest earners to pay for larger transfers to the lowest earners has long been a main objective of the administration. We can expect this theme to be loudly taken up by the mainstream press as the midterm election approaches: some of us can have more, the argument goes, if we force others to have less. Support for the alleged social benefits of setting much higher marginal tax rates on the highest incomes has now been endorsed by the Interna- tional Monetary Fund, based heavily on research by two French econ- omists named Thomas Piketty and Emmanuel Saez. The two worked together on the faculty at MIT, where the current research director of the IMF, Olivier Blanchard, was a professor. Like Piketty and Saez, he is also French. France has, for many years, implemented destructive policies of income redistribution. Professor Piketty collected data on income distribution from approxi- mately twenty countries over different periods. He concluded that raising

allan h. meltzer is a co-chair of the Hoover Institution’s Regulation and the Rule of Law Initiative, a distinguished visiting fellow at Hoover, and a professor of political economy at Carnegie Mellon University.

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the tax rate to 60 percent on the highest incomes and redistributing the receipts to the poor would increase spending and economic growth. The New York Times declared his book, Capital in the Twenty-First Century, one of the great achievements of modern economics. It put it in a class with Karl Marx’s Das Kapital and John Maynard Keynes’s General Theory. This lavish praise seems both wrong and extreme. I agree that in the past there was a notable positive association between economic growth and the spread between the shares of income going to the top 1, 5, or 10 percent of the earners and the share going to the remainder. The mistake is to conclude that narrowing the distribution contributes to growth. The far more plausible explanation is that economic growth in capitalist coun- tries over the past two centuries contributed to a steep decline in the share of the top earners. Simply put, Piketty, President Obama, and the IMF have the cau- sality running the wrong way. Taxing the rich to redistribute did not produce growth. On the contrary, growth reduced the share earned by the highest earners.

THE REWARDS OF HUMAN CAPITAL

In my 2012 book Why Capitalism? I used some data on the share of income received by the top 1 percent that two Swedish economists gathered. Pik- etty uses some of the same data. The seven countries in the Swedish data- set are the United States, the United Kingdom, Sweden, Australia, France, Canada, and the Netherlands. Of course, data on income distribution are never precise, but broad trends can be informative. The data show a remarkable degree of uniformity. The share of income received by the top 1 percent declined persistently from about 1910 to 1980. The share fell from an initial 20 to 25 percent of total income to about 5 to 8 percent. Then the share rose in several of the countries, nota- bly the United States, the United Kingdom, Canada, and Sweden. By the end of the sample data, about 2005, the share in several of these countries was back to about 10 percent. The share of the top 1 percent in the United States reached 15 percent, more than halfway back to where it was early in the twentieth century. It is this rise that initiated the loud outcries about the failure of modern capitalism to benefit the middle class.

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It is impossible for anyone to show that the decline in all seven coun- tries resulted from higher taxes on the highest incomes and redistribution to the poor. The reason is that the welfare state did not exist in several of the countries and was relatively small in the others. In the United States, federal government spending was rarely more than 3 or 4 percent of total spending in non-war years until after 1930. Old-age pensions didn’t start until the late 1930s, and health care spending did not expand until the late 1960s.

The mistake is thinking that narrowing income distribution contributes to economic growth. Far more plausible: growth contributes to a decline in the share of the top earners.

The timing in other countries differed. Sweden undertook welfare-state spending in the 1930s, but substantial growth waited for the end of World War II. The same is true for most other countries. Higher tax rates and increased social spending rose long after the share of the top 1 percent had declined from the early peak to the trough in 1980. In 1980, the share of income earned by the 1 percent ranged from 5 percent in Sweden, with its larger welfare state, to 8 percent in the United States. Two major forces explain most of the decline. At the start of the series, private capital receives a relatively high return because it is rather scarce. As investment and the capital stock rose during the twentieth century, the share of total income going to capital declined. The total income from capital increased but more slowly than total income. Since the highest income earners receive a disproportionate share of their income as earning on capital, their share fell. That alone does not explain the steep decline in the share received by the top 1 percent. During the early twentieth century, the United States absorbed millions of immigrants, many unskilled. Many began work at low-wage jobs. Minimum-wage laws did not come until the 1930s. By working, the immigrants learned new skills; their productivity increased and with it their wages. That narrowed the gap between the incomes of the top and the bottom earners. But many did something else. They sent

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their children to colleges and universities where they learned professional skills that earned middle-class incomes. This process continued in recent decades for immigrants from Korea, China, Mexico, and Latin America. That history sends an important mes- sage. The growth of the middle class and the narrowing of the income dis- tribution was largely a result of working to acquire new skills and higher productivity. Current policy works against this process. It doesn’t reward work. It gives the unemployed and underemployed food stamps, health care, hous- ing allowances, and income. Instead of working, many learn to live on the government benefits, supplementing them occasionally by working in the underground economy. Instead of acquiring productive skills, they learn how to live without working at regular jobs. That’s one way that the welfare state worked to increase the share of the highest paid 1 percent after 1980. The welfare state also contributes by weakening and even destroying family structure. Single women who head families are often on the bottom rung of the income distribution.

The clamor about the 1 percent pays no attention to the importance of education, skill, and innovation.

A different process is at work now. The capital that is most highly rewarded is now human capital—the education and skill that produce innovations like the Internet, social media, popular apps, energy innova- tions, and three-dimensional manufacturing. The top 1 percent of the earners in any year include people like Steve Jobs and Bill Gates who made the Internet into a commercially successful, widely used means of com- municating. But the top 1 percent also includes sports stars with unique skills and rock musicians with enormous popular appeal.

OPPORTUNITY OR ENVY?

The clamor about the rise in the share going to the top 1 percent pays no attention to the importance of education, skill, and innovation. It is no accident that most new products and much new music originate in

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the United States. Countries like Canada, Sweden, and Britain contribute also, welcoming foreign innovation and rewarding those who bring new ideas to market successfully. What has worked in the United States for several centuries has worked well for many other countries in the past fifty years. Once China adopted capitalist methods, it moved millions out of low-productivity agriculture, taught them new skills, and raised their wages. Korea sends its young to learn new skills in the United States. That enabled it to move successfully from a low-wage provider of unskilled labor to a technically advanced country with a skilled labor force. And it increased freedom along with wealth. Other examples are Hong Kong, Singapore, and Taiwan—free, capitalist democracies. Add Chile, Peru, and Mexico, and many others.

The growth of the middle class and the narrowing of the income distribution was largely a result of new skills and higher productivity.

France is at the opposite pole. Mired in its hatred of capitalism and demands for redistribution, it has maintained its low share of income going to the top 1 percent. But the cost is high. The young and innovative leave France for Britain and other shores. The French get massive redistri- bution and unemployment for many who remain behind. Voters who will hear the Obama call for envy and redistribution should ask themselves and others: would you prefer to live in an America where the market is dynamic and opportunity abounds or in France, where unemployment is high and tax rates are crushing? Don’t you prefer oppor- tunity to envy?

the United States. Countries like Canada, Sweden, and Britain contribute also, welcoming foreign innovation and rewarding

Reprinted from Defining Ideas (www.hoover.org/publications/defining-ideas), a Hoover Institution journal. © 2014 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

the United States. Countries like Canada, Sweden, and Britain contribute also, welcoming foreign innovation and rewarding

New from the Hoover Institution Press is NAFTA at 20: The North American Free Trade Agreement’s

Achievements and Challenges, edited by Michael J. Boskin. To order, call 800.888.4741 or visit www. hooverpress.org.

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Economics in a Time of Drought

Let the water flow where the market, not the government, says it should go. By Edward Paul Lazear.

Many parts of the country, notably California and Texas, are experiencing intense drought. Voluntary or mandatory cutbacks in residential water usage are common. Yet weather isn’t the only problem: government-dictated prices, cou- pled with restrictions on the transfer of water, have made a bad situation much worse. Shortages are generally caused when governments place ceilings on prices or when they prevent markets from operating freely in some other way, like restricting trade. Gasoline is a case in point. Thanks to the 1970s oil shocks, gas became less abundant and prices rose. The US govern- ment’s response was to put ceilings on gasoline prices, which caused short- ages and long lines at gas stations. The current water situation resembles oil in the mid-1970s. Prices are determined in large part by state and federal government dictates rather than by the market. When drought hits, the price to some users, most nota- bly agriculture, is too low to clear the market and shortages result. Ironically, in addition to eliminating shortages, allowing the market to work would

edward paul lazear is the Morris Arnold and Nona Jean Cox Senior Fellow at the Hoover Institution, co-chair of Hoover’s Conte Initiative on Immigration Reform, and the Jack Steele Parker Professor of Human Resources Management and Economics at Stanford University’s Graduate School of Business.

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Illustration by Taylor Jones for the Hoover Digest.

result in prices that are lower than those currently paid by most residential users. Markets would encourage farmers to sell water to urban users, thereby increasing residential supply and driving residential water prices down, as the University of California’s Howard Chong and David Sunding showed in a 2006 study published by the Annual Review of Environment and Resources.

Government-dictated prices and restrictions on transfers have made a bad situation much worse.

The price farmers pay for water differs from that paid by urban users, sometimes dramatically. For example, San Francisco Bay Area residents obtain much of their water from the Hetch Hetchy reservoir. The pipes from Hetch Hetchy to the Bay Area intersect the California Aqueduct, which supplies water both to agriculture and urban areas. Residential users of aqueduct water in San Diego pay rates that can be more than five times as high as those paid by the farmers in Kern County. So if some people, businesses, or localities have rights to water and oth- ers would be willing to pay more for those rights, why not trade? Answer:

government controls and lawsuits. In 2012, the Public Policy Institute of California reported on the morass of regulations that continue to restrict the exporting of local water to other communities. Permits are required, which necessitate environmental stud- ies and a lengthy assessment procedure. Statewide water transfers require approval by the State Water Resources Control Board, which also requires proof of compliance with the California Environmental Quality Act and additional proof that the transfer will not injure another legal user. Finally, even approved transfers are subject to reversal by courts. Recently the Ninth Circuit Court of Appeals ruled that the US Bureau of Reclamation violated the Endangered Species Act when it failed to inform the US Fish and Wildlife Service of plans to renew forty-one long-term contracts with California agricultural irrigation districts that could harm the delta smelt, a fish. To solve California’s water problem, the first step is to let all owners of water sell their rights with minimal government limitations. This would ensure that water goes to its highest valued use.

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Second, federal and state agencies that redirect water to environmen- tal use should pay the market price for it. Although there may be good reasons to ensure that some fish and wildlife be protected, we should not pretend that this protection is costless. Agencies that divert water for environmental purposes should be required to budget explicitly for the lost revenue associated with the decision to divert it for this purpose, rather than allowing it to be sold at the market price for urban or agri- cultural use.

The price farmers pay for water differs from that paid by urban users, sometimes dramatically.

Third, farmers who now receive water at below-market prices should be compensated for having to pay higher prices by giving them the rights during a transition period to use or sell the water they typically use. This would honor existing property rights and help ensure that agricultural lobbies and lawsuits do not block the transfer of water. Rather than praying for rain, we should get the government out of the water-allocation business.

Second, federal and state agencies that redirect water to environmen- tal use should pay the market

Reprinted by permission of the Wall Street Journal. © 2014 Dow Jones & Co. All rights reserved.

Second, federal and state agencies that redirect water to environmen- tal use should pay the market
Second, federal and state agencies that redirect water to environmen- tal use should pay the market

New from the Hoover Institution Press is Game Changers: Energy on the Move, edited by George P. Shultz and Robert C. Armstrong. To order, call 800.888.4741 or visit www.hooverpress.org.

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An End to Pension Patches

Meaningful ways to mend the Golden State’s pension-funding gap. By Carson Bruno.

The problems in public pension funding point decisively toward reform. But the public employee unions have a strong influence on local and state politics and consistently resist change, so reform is controversial. The lon- ger it takes to enact reform, however, the bigger the problem becomes. In June 2012, voters in San Diego and San Jose sent a clear message to elected officials and public employee unions statewide: they are eager to accept bold public pension reforms. In each city, by margins greater than 30 points, voters endorsed a new 401(k)-style reform in San Diego and a new, low-cost defined benefit plan in San Jose. Although both reforms are still in litigation, their passage has ushered in a new era of reform discus- sion in a state long dominated by the unions. Statewide, the two main pension systems—CalPERS and CalSTRS— are massively underfunded. Based on estimates by Governor Jerry Brown’s Department of Finance, CalSTRS has about an $80 billion unfunded liability. Meanwhile, Stanford professor Joe Nation estimates CalPERS’s unfunded liability at $170 billion. Localities also experience daunting challenges. For instance, before reform, San Jose had a $3 billion unfund- ed liability and roughly 20 percent of its general fund budget went to paying pensions.

carson bruno is a research fellow at the Hoover Institution.

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A recent conference at the Hoover Institution, co-hosted by Hoover senior fellow Josh Rauh and Stanford Institute for Economic Policy Research’s David Crane and Joe Nation, explored potential solutions to California’s public pen- sion problems. The participants included Hoover fellows such as Michael McConnell and Jonathan Rodden, pension scholars including Robert Novy- Marx and Amy Monahan, current and former California and out-of-state policy leaders like Mayor Chuck Reed of San Jose and Rhode Island Deputy Treasurer Mark Dingley, and other pension reform specialists. The conference yielded substantial agreement. The post conference report (available on the Hoover Institution’s website, www.hoover.org) that emerged is a primer for reform in California. Overall, the conference yielded three important overarching themes:

  • 1. The “California rule” needs to be amended.

  • 2. Reform needs to be holistic.

  • 3. Leadership, with public support, is essential.

THE “CALIFORNIA RULE”

Meaningful reform cannot occur in California until the “California rule” is changed. Courts have long determined that state retirement stat- utes create a contract between the state and its employees. The Califor- nia rule takes this one step further by creating the contract on the first day of employment. As California-rule expert and University of Min- nesota School of Law scholar Amy Monahan notes in her 2011 paper on the topic, the California rule makes it so “pension benefits for cur- rent employees cannot be detrimentally changed, even if the changes are purely prospective.” This, in effect, means localities or a state operating under the rule can- not adjust pensions for current employees even if only for future hours, while not touching already accrued benefits. Monahan concludes that this rule inappropriately curtails the power of the legislature and runs counter to both legal and economic theory. Roughly 75 percent of attendees at the Hoover conference strongly agreed that amending the California rule is necessary to enable meaningful reform.

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While operating under the rule, California and its localities can enact only small reforms—in a sense, nibbling around the edges. Common reforms include adjusting or freezing cost-of-living adjustments, eliminat- ing the ability to spike pensionable pay or double-dip salaries, changing the definition of pensionable pay, and changing benefits for new or future hires (which just delays solvency for decades). However, as 80 percent of conference participants indicated, these alone are not sufficient to address the mounting unfunded liabilities. For instance, based on estimates from Rauh and University of Roches- ter economist Robert Novy-Marx, a 1 percent cost-of-living-adjustment reduction would lower unfunded liabilities by just 9 to 11 percent. And with each day that passes without meaningful reform, the problem grows:

CalSTRS’s unfunded liability grows each day by $22 million.

BETTER UNDERPINNINGS

As such, California and its localities need to examine the issue holisti- cally: addressing the current unfunded liability, which itself is daunting as well as fixing the reasons why the unfunded liability has occurred, that is, structurally reforming pension systems. While much of the focus has been on the generosity of pensions—for instance, in 2012, thirty-one thousand state retirees collected pensions valued at $100,000 or more—most of the pension problems in California stem from elected officials and/or pension boards overpromising and underfunding. Requiring those responsible to fully honor promises would also help make the generosity of plans more reasonable. Another way to establish better financial health of public pension sys- tems is to insist that 100 percent of the actuarially required contributions (ARC) be made and that a risk-free rate of return be used. The ARC is the amount necessary to ensure pension systems can meet their annual ben- efits. As such, not contributing 100 percent (CalSTRS received only 44 percent of ARC in 2013) means the employer is inherently underfunding the plan. Currently, pension boards use a rate of return based on the expected return for their invested assets. For instance, CalPERS assumes a rate of return of 7.5 percent. Since 2000, however, the actual average annual rate

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of return for the fund has been only 4.5 percent. Moreover, if pensions are indeed considered guaranteed (that is, riskless), then a risk-free rate of return is logical. Conference attendees, by a ratio of almost nine to one, agreed that these two simple steps would be prudent for fiscally stabilizing pension funds. However, the main focus for structural reform has been on switch- ing public pensions from defined benefit to defined contribution. In a defined-contribution plan, the employer and/or the employee contributes a certain amount to an individual, transferrable investment account. Nei- ther the employer nor the investment fund guarantees a benefit. A defined-benefit plan, on the other hand, guarantees a previously speci- fied benefit based on a host of criteria. Employers (and to some extent employees) contribute a certain, but not set, amount to an investment fund that is structured to ensure sufficient funds to match the promised benefit amount. If employers set reasonable parameters when establishing the benefit formula, use a risk-free rate of return to discount investment cash flows, and maintain full contributions, defined-benefit plans can be fiscally sound. Yet the attractiveness of defined-contribution plans is that they, for the most part, structurally prevent the type of overpromising and under- funding to which defined-benefit systems are vulnerable.

LEADING AND LEARNING

Even so, 61 percent of the conference’s participants did not think that moving from defined benefit to defined contribution is the only solution. Conference participants believe that leadership, with public support, is the key to meaningful reform. In Rhode Island, the Democratic state treasurer, Gina Raimondo, spent eight months negotiating and discussing the issue with stakeholders before submitting a reform bill. While these actions did not create a completely smooth legislative process, the heavily Democratic legislature overwhelmingly passed the reform bill (57–15 in the lower chamber and 35–2 in the upper house). In San Jose, city councilmembers and Mayor Chuck Reed publicly dis- cussed with city residents the fiscal effects of inaction, pointing to closed libraries or parks and laid-off police officers. Although negotiations with

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employee unions did not produce an agreement, Reed and the city council did incorporate some of their concerns into a ballot proposition, Measure B. Their efforts resulted in 69 percent of voters passing the reform. In San Diego, a reform proposal that moved the city’s non-public-safety employees from a defined-benefit plan to a defined-contribution system enjoyed 66 percent support among voters. The lesson from all these reform efforts is simple: strong leadership is necessary. Without Treasurer Raimondo, Mayor Reed of San Jose, or Mayor Sanders of San Diego, reform probably would not have occurred. Educating the public about the implications of inaction and garnering public support are just as important. At a certain point, California and its cities will reach insolvency and reform will have to occur. It is more a matter of when than whether.

employee unions did not produce an agreement, Reed and the city council did incorporate some of

Reprinted from Defining Ideas (www.hoover.org/publications/defining-ideas), a Hoover Institution journal. © 2014 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

employee unions did not produce an agreement, Reed and the city council did incorporate some of
employee unions did not produce an agreement, Reed and the city council did incorporate some of

Available from the Hoover Institution Press is Pension Wise: Confronting Employer Pension Underfunding—And Sparing Taxpayers the Next Bailout, by Charles Blahous. To order, call 800.888.4741 or visit www.hooverpress.org.

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Railroading the Environment

Block the construction of pipelines and more oil gets shipped by train. That will make spills and accidents more likely, not less. By Terry L. Anderson.

It’s obvious that we’re going to continue moving crude oil and petro- leum products from where they are extracted to where they are needed. When considering whether to approve pipelines such as the proposed Keystone XL, therefore, the question has to be: which are safer, pipes or rail tank cars? The Keystone XL lingers near death, thanks to the Obama administra- tion’s decision to ignore the evidence of a definitive government study and instead keep listening to environmentalists’ dubious claims. The conse- quence will be more political fires in Washington sparked by train derail- ments in the absence of a pipeline to transport oil more safely. After a derailment in downtown Lynchburg, Virginia, on April 30, approximately 30,000 gallons of Bakken crude oil burned or spilled into the James River. On May 9, a derailment north of Denver spilled an addi- tional 6,500 gallons of oil, which was contained in a ditch before reaching the South Platte River. Fortunately, unlike in the 2013 derailment in Que- bec where a 1.3-million-gallon spill killed forty-seven people and inciner- ated thirty buildings, no one was injured in Lynchburg or Colorado.

terry l. anderson is the John and Jean De Nault Senior Fellow at the Hoover Institution and the William A. Dunn Distinguished Senior Fellow and former president and executive director of PERC in Bozeman, Montana.

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President Obama’s own State Department answered the comparison question plainly in February. According to the report, pipelines larger than twelve inches in diameter in 2013 spilled more than 910,000 gallons of crude oil and petroleum products—compared with 1.15 million gal- lons for tank cars, the worst in decades. Comparing total oil spilled makes it appear, at first glance, that pipeline and rail safety records are similar. But pipelines carry nearly twenty-five times as much crude oil and petro- leum products. The State Department report estimates that if the Keystone XL carried 830,000 barrels a day, 0.46 accidents would likely result annually, spill- ing 518 barrels a year. Under the most optimistic rail-transport scenario for a similar amount of oil, 383 annual spills would occur, spilling 1,335 barrels a year.

Pipeline spills are more easily controlled and cleaned up than tank-car derailments.

The report is even harsher on railroads when it comes to human injuries and fatalities. It estimates that tank cars will generate “an esti - mated forty-nine additional injuries and six additional fatalities” every year, compared with one additional injury and no fatalities annually for the pipeline. Consider the safety record of the Trans-Alaska Pipeline System, which includes the huge forty-eight-inch-diameter mainline pipe carry - ing crude from Prudhoe Bay, eleven pumping stations, several hundred miles of feeder pipelines, and the Valdez Marine Terminal. The larg - est oil spill in the system occurred in 1978, when an unknown person blasted a one-inch hole into a pipeline. It leaked 16,000 barrels and had no disastrous effects. The debate over the Keystone XL versus railcar transport can be lik- ened to the safety of offshore versus onshore oil production. By putting nearly 60 percent of potentially oil-rich onshore lands off limits, we have forced exploration and production offshore. Oil production onshore is safer than offshore, just as pipelines are safer than tank cars. While the Deepwater Horizon oil spill gushed nearly five million barrels into the

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Illustration by Taylor Jones for the Hoover Digest.

Gulf of Mexico over an eighty-seven-day period beginning on April 20, 2010, a blowout in western Pennsylvania in June (while Deepwater Horizon was spilling) was capped in sixteen hours and spilled only a few thousand gal- lons.

Similarly, pipeline spills are more easily controlled and cleaned up than tank-car derailments. With so many railroads running along waterways and wet- lands, seventeen-mile-long oil slicks, like the one from the Lynchburg derailment, will be more com- mon. In contrast, the State Department reports that the Keystone XL would drill under rivers to avoid

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“direct disturbance to the riverbed, fish, aquatic animals and plants, and river banks.” Moreover, between 1992 and 2011, 40 percent of the liquid spilled from pipelines was recovered. Putting the debate over the Keystone XL in this context shows the absurdity of killing the pipeline project. But the Obama administra - tion appears determined to accept environmental arguments that the pipeline could leak (even though the likelihood is less than with rail) and that with the extraction and use of oil from Alberta, Canada’s oil sands will increase global warming. On the latter point, the State Department report again is clear that net carbon emissions won’t be much different with or without the Keystone XL—because the

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Canadian tar sands will likely be developed regardless of how the oil is transported and because trains emit more carbon dioxide than pipe - lines.

Pipelines carry nearly twenty-five times as much crude oil and petroleum products as trains do.

Whether the president and other politicians or environmentalists like it or not, oil and gas will be moved from remote areas in the north to refineries in the south, east, and west or to overseas terminals. Opponents may take smug satisfaction in raising the cost of energy and discouraging consumption, but their actions are hypocritical when it comes to saving the environment. Fish, birds, wildlife—and people—beware.

Canadian tar sands will likely be developed regardless of how the oil is transported and because

Reprinted by permission of the Wall Street Journal. © 2014 Dow Jones & Co. All rights reserved.

Canadian tar sands will likely be developed regardless of how the oil is transported and because
Canadian tar sands will likely be developed regardless of how the oil is transported and because

Available from the Hoover Institution Press is Reacting to the Spending Spree: Policy Changes We Can Afford, edited by Terry L. Anderson and Richard Sousa. To order, call 800.888.4741 or visit www.hooverpress.org.

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Side Effects May Include Collusion

Caution: ObamaCare might encourage hospitals and doctors to fix prices. By Daniel P. Kessler.

Liberals and conservatives agree that promoting vigorous competition among doctors and hospitals is essential to reducing spending and improv- ing quality in markets for health care. New research, however, suggests that increases in hospitals’ ownership of physician practices—stimulated, in part, by the Affordable Care Act—may be more of a threat to this goal than has been previously thought. Hospitals have been aggressively buying physician practices over the past decade. Analysis by Robert Kocher and Nikhil Sahni published in 2011 in the New England Journal of Medicine showed a nearly 75 per - cent increase in practicing doctors employed by hospitals from 2000– 2008, and more recent hospital announcements suggest this trend is accelerating. In theory, this could have two opposing effects. On one hand, closer ties between doctors and hospitals can improve communication across care settings and reduce wasteful duplication of diagnostic tests. On the other, such ties can hurt consumers by letting doctors and hospitals raise prices. For example, by employing physicians, a hospital may increase its market power by depriving its rivals of a source of referrals. In addition, closer ties can enable hospitals to give physicians the incentive to supply

daniel p. Kessler is a senior fellow at the Hoover Institution and a professor at Stanford University’s Graduate School of Business and Law School.

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unnecessary treatments, especially if hospitals use these ties to pay hidden kickbacks for inappropriate admissions. Health policy analysts understand this. The Affordable Care Act gives doctors and hospitals incentives to integrate by rewarding them financially for joining together and partici- pating in the Medicare Shared Savings Program. At the same time, the Federal Trade Commission and Department of Justice have set enforce- ment guidelines designed to prevent doctors and hospitals from using the Shared Savings Program as a pretext to harm competition. The question is whether the incentives in the Affordable Care Act and the antitrust agencies’ guidelines strike the right balance between promot- ing integration that enhances efficiency while discouraging that which is not in patients’ best interests.

HIGHER PRICES

New work by Laurence Baker, Kate Bundorf, and me published in Health Affairs suggests there are reasons to be concerned with the current approach. We analyzed data on the health care provided to 3.5 million people with private health insurance between 2001 and 2007. The data included the price paid to the hospital each time one of the people was hospitalized. We could also compute the total number of hospitalizations per person and the total spent on hospitalizations from the data. We used this information to construct measures of prices, hospital use, and spending on hospital care for 639 counties covering about two-thirds of the US population. We also measured the market share of hospitals that owned physician practices or were contractually integrated with physi- cians in each county, and other characteristics of the areas. We found that increases in the market share of hospitals that “own” phy- sicians lead to higher hospital prices and spending. We show that the effect on spending is essentially due to the effect on prices: there was no evidence that hospital ownership of physician practices leads to higher rates of hos- pital use. Thus, our evidence did not show that hospitals integrate simply to pay doctors to admit more patients. We also found that increases in the mar- ket share of hospitals that have looser, contractual relationships with their

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doctors lead to lower rates of admissions—suggesting that integration can have both harmful and beneficial effects. (This reduction in admission rates, however, is too small to translate into statistically significant or eco- nomically meaningful declines in hospital spending.)

CAUTIONARY NOTE

There are reasons why our results may not accurately predict the conse- quences of hospital/physician integration going into the future—and so may not represent an important criticism of the Affordable Care Act. First, our analysis is based on historical data. Market conditions may be different today, as may be the forces driving integration. At least in theory, the Affordable Care Act seeks to encourage pro-competitive integration in ways that were not present in our study period. Second, we may not have controlled for factors that are correlated with integration but not caused by it; if these factors also lead to higher prices and spending, we would be blaming integration when something else was at work. Even so, our study adds a new cautionary note to the Affordable Care Act’s enthusiasm for changing the way that medical care is organized in the United States—and a new challenge for health policy. As J. Thomas Rosch, a former member of the Federal Trade Commis- sion, points out, the Shared Savings Program might end up enhancing market power over the privately insured so much that it leads to higher costs and lower quality—precisely the opposite of its goal. If this comes to pass, it will be another example of how even health care reforms with the best of intentions are subject to the law of unintended consequences.

doctors lead to lower rates of admissions—suggesting that integration can have both harmful and beneficial effects.

Reprinted by permission of Investor’s Business Daily. © 2014 Investor’s Business Daily Inc. All rights reserved.

doctors lead to lower rates of admissions—suggesting that integration can have both harmful and beneficial effects.

Available from the Hoover Institution Press is Healthy, Wealthy, and Wise: Five Steps to a Better Health

Care System, second edition, by John F. Cogan, R. Glenn Hubbard, and Daniel P. Kessler. To order, call 800.888.4741 or visit www.hooverpress.org.

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Waiting for Dr. Godot

Long treatment delays at VA hospitals shouldn’t shock us. In countries with government health care monopolies, waiting months—even years—represents business as usual. By Scott W. Atlas.

The disgraceful state of the health system for America’s military veterans is finally being exposed. In our Veterans Affairs (VA) hospitals, veterans suffer because of shamefully long waits before receiving important medi- cal care. Relying on an internal audit ordered by the White House, the Associated Press reported that more than fifty-seven thousand patients are still waiting for their appointments ninety days after requesting them. Bureaucrats apparently covered up the facts, and some staff members even falsified records to earn personal bonuses. Americans should recognize the importance of these revelations. Such scandals serve to vividly remind everyone of the personal consequences of allowing the government to fully control health care. But the circum- stances should not have been a surprise. While such waits are otherwise unheard of in the health care system of the United States, they in fact typify the very systems held up as models for US reforms by supporters of ObamaCare. Even though the facts have been thoroughly documented by govern- ments running nationalized health systems and in renowned scientific and medical journals, it is puzzling that the shocking waits for care in those systems—whether for specialist appointments, heart surgery, stroke treat-

s cott w . a tlas , md , is the David and Joan Traitel Senior Fellow at the Hoover Institution and a member of Hoover’s Working Group on Health Care Policy.

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ment, diagnostic scans, or cancer care—go virtually unreported by the mainstream US media.

“OUTRAGEOUS” DELAYS IN BRITAIN

Last year, Britain’s National Health Service (NHS), the paradigm of govern- ment-controlled health care, turned sixty-five and officially entered senior citizenship. As opposed to the celebration that might have been expected, headlines in the British press documented scandalous patient care, shameful waiting lists, catastrophic hospital practices, and financial debacles. Access to medical care has been so poor for so long in the NHS that the government was compelled to issue an “NHS Constitution” in 2010 wherein it declared that no patient should wait beyond eighteen weeks— four months—for treatment after a referral from a general practitioner. While NHS England officially states that the laughably long wait of eigh- teen weeks to initiate treatment is being met, as of February 2014 more than fifty thousand patients had waited more than those eighteen weeks after referral. In Scotland, as reported last May, more than 10 percent of patients were still waiting more than eighteen weeks for their treatment to begin—four months after being referred by their doctors.

Long delays for treatment typify the very systems held up as models by ObamaCare supporters.

Even more shocking is the recent decree from the comptroller and audi- tor general of England’s Department of Health: “NHS England intro- duced zero tolerance of any patient waiting more than fifty-two weeks (for treatment after doctor referral), for which trusts face a mandatory fine of £5,000 for each patient doing so.” Yes, waiting more than one full year for treatment is apparently a possibility in the NHS. Despite the UK government’s repeated laws and decrees, more patients than ever are now on waiting lists, and the NHS is failing to deliver on its most basic promises to the taxpayers. In April 2014, hospital waiting lists soared to their highest point since 2006, with 2,993,108 patients in England on waiting lists for treatment. Figures for July 2013 showed that 508,555 people in London alone were waiting for operations or other

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treatment to begin—the highest total for at least five years. Almost 60,000 more patients were waiting for treatment at the capital’s thirty-four NHS hospitals than one year before.

Paradoxically, America has been doubling down on government authority over health care just as more and more European governments have been forced to address their unconscionable waits.

In October 2013, the median wait time in England’s NHS for hospital inpatients—patients sick enough to require hospital admission—was a staggering nine weeks to begin treatment, a full two months after doctor diagnosis and referral. For outpatients, median waits were also markedly higher in October 2013 than a year earlier. Paul Smith, a senior research analyst at the Nuffield Trust health think tank, said to the Guardian that “this is hardly surprising. Waiting times are a good barometer of the gen- eral health of the NHS.” In its characteristic mode to allow itself significant latitude to meet its own targets, the NHS years ago cynically set a goal specifically for cancer patients. They specified that 85 percent of patients should wait no more than sixty-two days to begin their first definitive treatment after an urgent referral for suspected cancer from their GP. Yet, in the fourth quarter of 2012–13, according to NHS England’s National Statistics, 19.4 percent of lung cancer patients, 22.2 percent of colon cancer patients, and 17.4 percent of urological cancer patients were not treated within two months after “urgent” referral. The Welsh government also reported their NHS is still failing to treat 8–13 percent of the most urgent cancer cases within sixty-two days. Indeed, in data from England released last spring, for those referred for “urgent” treatment after being diagnosed with suspected can- cer, that low expectation target time was breached by assessing all cancer patients. More than 15 percent of patients waited more than sixty-two days—two full months—to begin their first definitive treatment after an urgent referral for suspected cancer from their GP. Perhaps it should be no surprise that the United Kingdom has far worse cancer survival rates than the United States.

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Foreshadowing what we now know about our own VA system, the BBC uncovered scandalous news last year: many patients initially assessed as needing surgery were subsequently recategorized by the hospital so that they could be removed from waiting lists to hide the already unconsciona- ble delays. Royal College of Surgeons President Norman Williams, calling this “outrageous,” publicly charged that hospitals are cutting their wait- ing lists by artificially raising thresholds. Meanwhile, England’s National Audit Office reported in January 2014 that records of waiting times are riddled with inconsistencies and errors, raising significant doubts about published data for the NHS’s performance on the eighteen-week target. According to a recent House of Commons report, nearly one-third of NHS patients had no recorded wait times whatsoever, and an additional 26 percent were frankly inaccurate.

Perhaps it should be no surprise that the United Kingdom has far worse cancer survival rates than the United States.

Adding to those indefensible facts is a long list of scandals in NHS hos- pitals that were epitomized in 2013 by the Mid Staffordshire Trust debacle, in which 400 to 1,200 neglected and abused patients died in squalid and degrading circumstances. Although virtually unreported by US media, the 2013 Francis report, consisting of more than a million pages and sixty- four thousand documents and costing British taxpayers about $20 million, caused widespread outrage in Britain. While forcing the resignation of the NHS chief, the report officially called out the insidious, negative culture in the NHS, characterized by a tolerance of unacceptably poor standards and patient neglect along with a preoccupation with cost-cutting, targets, and processes, all the while losing sight of its fundamental responsibility to pro- vide safe patient care. The parallels to America’s VA system are undeniable.

PRIVATE COVERAGE IN SWEDEN

Paradoxically, America has been doubling down on government author- ity over health care with the Affordable Care Act just as more and more European governments, including Denmark, Britain, Finland, Ireland, Italy, the Netherlands, Norway, Spain, and Sweden, have been forced by

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public outcry to address the unconscionable waits for care by introduc- ing new laws. But it is even more essential for American voters to realize, and for our government leaders to acknowledge, what other countries are beginning to recognize all over the world. These governments have started to understand that the cure for their failed nationalized health systems is a shift to privatization. And citizens under government-dom- inated health systems are increasingly circumventing their own systems, pursuing private health care to solve the uniformly poor access to care and limited choices.

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Illustration by Taylor Jones for the Hoover Digest.

Consider Sweden, often heralded as the paradigm of a successful welfare state. The facts tell a different story. Having failed its citizens in health care access, the Swedish government has aggressively introduced private market forces into health care to improve access, quality, and choices. Although once entirely public, over a quarter of Swedish primary care clinics are now run by the private sector. Sweden’s municipal governments have increased spending on private care contracts by 50 percent in the past decade. Private nursing facilities

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now receive substantial public funding to care for patients. Widespread private sector competition has also been introduced into pharmacies to tear down the pre-2009 monopoly over all prescription and nonprescrip- tion drugs. Since the Swedish government sold over half its pharmacies to private firms in 2009, twenty private firms entered the market and over three hundred new pharmacies opened, not only improving accessibility but providing the first pharmacies ever to many small towns. Moreover, despite the fact that an average Swedish family already pays nearly $20,000 annually in taxes toward health care, according to Swedish economist Per Bylund, about 12 percent of working adults bought private insurance in 2013, a number that has increased 67 percent over the past five years. Half a million Swedes now use private insurance, up from a hundred thousand a decade ago, even though they are already “guaran- teed” public health care.

BETTER CHOICES AND ACCESS

In England, the overwhelming majority of financially successful people now avoid the NHS, the system still naively cited by many as the model for US health reform. About six million Britons now buy private health insurance, including almost two-thirds of those earning more than $78,700. More than 50,000 Brits travel out of the country per year, spending $250 million to receive medical care, because of lack of access. According to the Telegraph, the number of people paying for their own private care is up 20 percent since the previous year, with about 250,000 now choosing to pay for private treatment out of pocket each year—even though they already pay for NHS insurance.

None of the key goals for health reform in America requires the government to directly provide insurance or health care itself.

In the wake of the current VA scandal, President Obama has the opportu- nity to reach a grand consensus on health care reform, despite the sharp divi- sions on the issue in the nation. Just as in every country with a nationalized health system, the truth is becoming obvious for all Americans who bother to look. Whether you are a veteran with VA care, a poor person under Med- icaid, a senior relying on Medicare, or a member of the middle class under

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ObamaCare, being insured is not the same as having access to medical care. The president offered a ray of hope when his administration recently backed away from a plan to reduce affordable private coverage options inside Medi- care, options that all Medicare beneficiaries enjoyed before the law.

The bottom line: being insured is not the same as having access to medical care.

Allowing our veterans to use private care with government funding was a more direct action to improve choices and timely access to medical care by expanding private care choice. The next step for the president is to do the same for the most vulnerable, the low-income Americans and their families. Rather than expanding traditional Medicaid at a cost of nearly a trillion dollars over the decade, our elected officials should consider something far bolder: add a premium support option for beneficiaries, offering financial assistance instead of traditional Medicaid insurance for people to choose among private plans. But there is an even more fundamental point that should be appreci- ated. Frankly, none of the key goals for health reform in America—reduc- ing health care spending, expanding access to affordable coverage, preserv- ing personal choice and portability of coverage, promoting competition in insurance markets, and maintaining the excellence of medical care and innovation—requires the government to directly provide insurance or health care itself. Let’s hope President Obama and the polarized Congress have the courage to truly lead with creativity, by seizing the opportunity to facilitate access to America’s private health care. Perhaps a genuine con- sensus can be achieved after all.

ObamaCare, being insured is not the same as having access to medical care. The president offered

Reprinted from Defining Ideas (www.hoover.org/publications/defining-ideas), a Hoover Institution journal. © 2014 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

ObamaCare, being insured is not the same as having access to medical care. The president offered

Available from the Hoover Institution Press is In Excellent Health: Setting the Record Straight on America’s Health

Care, by Scott W. Atlas. To order, call 800.888.4741 or visit www.hooverpress.org.

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Bitter Pills

Higher costs, fewer choices—the Affordable Care Act is becoming harder and harder to swallow. By Richard A. Epstein.

An old saying in the garment business says, “You can’t make up in vol- ume what you lose in money on each piece.” We could say the same thing about the Patient Protection and Affordable Care Act (ACA). President Obama thinks that the sudden surge in enrollments to about eight million people means “the repeal debate is and should be over.” I don’t think so. The ACA has just begun its maiden voyage. Enrollment is only the first step. A sound evaluation of the program must explain how, over its entire life cycle, it can overcome all the theoretical objections about its design. That will at a minimum require solid knowledge of how this program is going to work, year in and year out. With sustainability as the key test, any such judgment depends on the implementation of the basic structure, the ACA’s arcane rules, and the behavior of insurers, covered firms, and individuals under the new rules. In addition, it is critical to keep separate the ACA’s distinct compo- nents. There are all sorts of ways to keep young adults on their parents’ policies until they are twenty-six, to improve Medicare reimbursement systems, to extend (wisely or not) Medicaid, and to deal with pre-existing

richard a. epstein is the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution and a member of the steering committee for Hoover’s Work- ing Group on Intellectual Property, Innovation, and Prosperity. He is also the Laurence A. Tisch Professor of Law at New York University Law School and a senior lecturer at the University of Chicago.

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conditions, without also turning the private individual and employer mar- ket upside-down. Yet the ACA’s centerpiece—the individual and employer mandates— disrupts the market in major ways. Both of these do (or at least did) impose a play-or-pay requirement on the provision of health care. Under the original ACA approach, either you obtained minimum essential cov- erage, as defined by the ACA, or you had to pay a tax or a penalty to the government for failing to meet that requirement.

It’s odd for the president to insist on the sustainability of a plan whose key provisions have been temporarily shelved because they threatened to destabilize the market.

The individual mandate, which generated an epic constitutional battle, was at one time thought strictly required to counter massive consumer opportunism. Under the ACA’s open-enrollment policies, people can sign up in the individual program even on the eve of a medical crisis, no ques- tions asked, only to walk away when the emergency has passed. The man- date was the antidote to this moral hazard. The teeth were pulled from that mandate by two key decisions the Obama administration took unilaterally in March 2014. The first allowed individuals to avoid the mandate tax in cases of self-determined “hardship.” The second let employees keep their current noncompliant health care coverage until 2017, in order to prevent as many as eight million to ten million people—no definitive numbers are available—from abandoning what the president airily dismissed as “sub- standard policies.” That decision was combined with the postponement of the employer mandate for midsize employers (with fifty to ninety-nine employees) until 2016, and a relaxation in the required number of covered employees (from 95 to 70 percent) until 2015.

THE MEASURE OF SUCCESS

It is odd for the president to insist on the sustainability of a plan whose key provisions have been temporarily shelved because they threatened to destabilize the overall market. Indeed, the current information indicates

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© MCT/Andre Chung

that these built-in difficulties are far from being solved even as the presi- dent takes his premature victory lap. If we judge ObamaCare by the social gains and losses it generates, the enrollment figure of eight million tells us nothing. We must know the full set of benefits and costs before making any judgment as to the desirability of the plan.

The centerpiece of “minimum essential benefits” will be a constant thorn in the long-term operation of the system.

It is not enough, therefore, to claim victory by saying individual sig - natories are better off from taking the plan—assuming, as is still unclear, that these signatories will fork over the required premiums. It is also necessary to add back in the handsome federal subsidies they received on joining the plan. These subsidies introduce market distortions, so the total cost (both payment and subsidy) of joining the plan exceeds the private benefit to the plan member. Extended over a broad popula - tion, these subsidies add up to tens of billions of dollars now and into the future. Given that a large, if undefined, fraction of these new public enrollees were evicted from their private health care plans, the net effect is that taxpaying for-profit programs are out, and tax-subsidized govern- ment bureaucracy is in. Throw on top of this the huge government cost of setting up exchanges and churning out and enforcing endless public regulations, and the old joke from the garment industry takes on new life. The social losses could well increase with each new member who signs up.

WHO WILL SIGN UP?

That anxiety only becomes greater when adverse selection is put on the table: on average, will the sick population sign up more? Everyone stresses the need to recruit and retain high numbers of young people, between eighteen and thirty-four years old, to subsidize the older plan members. Right now, the estimates are that about 28 percent of health care sub- scribers are in that young group, but the ideal number for plan balance is estimated at 40 percent.

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TAKING THE PLUNGE: Tania Ruiz helps Jose Morales, 23, of Washington, DC, as he consid- ers signing up for health care. The long-term success of the Affordable Care Act is highly dependent on recruiting and retaining high numbers of young people to subsidize older plan members. Currently, about 28 percent of health care subscribers are between eighteen and thirty-four, but the ideal number for plan balance is about 40 percent.

The shortfall is not our sole source of worry. On average, people in the younger age group are healthier than their elders. But the unresolved question is whether the young sign-ups who pay are a random sample from that age cohort. Given that these enrollees may use private informa- tion that they can keep from the insurers, the odds are that this group is on average more expensive to service than the random sample. In addi- tion, the looming risk is that many of the people of all ages who have not signed up early will jump in, as feared, just in time to receive expensive coverage later on. In short, the plan could prove too expensive to many, who then drop out with the next round of premium increases. As part of his premature victory statement, the president trumpeted the decline in the rate of increase in health care costs from about 8 per- cent to 4 percent per annum. That number is phony because it assumes

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declines are all attributable to the ACA, whose key provisions on indi- vidual and employer plans have yet to take effect. Some long-overdue Medicare reforms, an overall decline in employment during the recession, and modifications of standard insurance policies offer more likely expla- nations for the change. But now that the act is taking hold, reports speak of a “recent surge” in health care expenditures, some of which are attributed to the expanded ACA coverage. These increased expenses will work themselves into next year’s premiums, which could lead to the adverse-selection death spiral. If it does, we can expect yet another round of belated and ad hoc govern- ment interventions.

LESS CONSUMER-FRIENDLY

The flap over the enrollment rates should not, moreover, obscure the many structural flaws in the ACA. Its centerpiece of “minimum essen- tial benefits” will be a constant thorn in the long-term operation of the system. That comprehensive list contains benefits not currently found on even the most expensive voluntary plans, a strong indication that they are worth less to consumers than they cost.

Higher costs and fewer choices are not a recipe for long-term success.

The money to fund these benefits has to come from somewhere. But where? One early casualty of the overall system is the president’s now- forgotten pledge that if you like your current health care plan, you can keep it. But the choice of physicians and hospitals is an expensive perk, albeit one highly valued by consumers. However, because legislation sets out a comprehensive list of required services, insurers will have to scram- ble to identify other ways to economize. Typically, that requires limiting physician choice and the number of secondary and tertiary care centers to which patients can go. The upshot is that the new plans will be less consumer-friendly than earlier ones that gave greater choice in the overall mix of benefits provided. Still, the government plans will get high levels of new enrollment in part because they cut out by law the private plans that people would prefer to buy with their health care dollars.

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The president constantly derides his critics for their unwillingness and inability to come up with any viable alternative to the ACA. But this is false. The ACA designers ignored efforts to reduce regulations that could have increased competition in the health care market. They took no steps to permit interstate sales of private insurance or to relax licensing requirements to allow large retailers to provide general health care services. Instead, they opted for compulsion backed by a bevy of special taxes and fee regulations. Higher costs and fewer choices are not the recipe for long- term success. The president may not understand these fundamentals right now, but he will when the system comes crashing down around him in the months and years to come.

The president constantly derides his critics for their unwillingness and inability to come up with any

Reprinted from Defining Ideas (www.hoover.org/publications/defining-ideas), a Hoover Institution journal. © 2014 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

The president constantly derides his critics for their unwillingness and inability to come up with any
The president constantly derides his critics for their unwillingness and inability to come up with any

Available from the Hoover Press is Free Markets under Siege: Cartels, Politics, and Social Welfare, by Richard A. Epstein. To order, call 800.888.4741 or visit www. hooverpress.org.

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Affirmative-Action

Foibles

The Democratic Party likes racial preferences in college admissions, but Asian-Americans don’t. Might we see a parting of the ways? By Lanhee J. Chen.

A recent effort to reinstitute affirmative action in admissions to Califor- nia’s public colleges and universities was defeated—demonstrating the political power of Asian-American voters and challenging the convention- al wisdom about their partisan loyalties. The defeat is a reminder that Asian-Americans can have a decisive impact on political and policy-making processes. Perhaps more important, it sug- gests that if education is a key issue that drives Asian-American voters, the Democratic Party may not be able to rely on their support in the future. In 1996, California voters passed Proposition 209, which banned the consideration of race, ethnicity, or gender in state public employment and higher education. Last spring, Assembly Speaker John A. Pérez (D-Los Angeles) tabled a proposed constitutional amendment, known as SCA 5, that would have restored the use of affirmative action in admissions to the state’s public institutions of higher learning. Pérez went against the vast majority of Democratic legislators, as well as many ethnic-identity groups traditionally supportive of Democrats, when he effectively killed the amendment.

lanhee j. chen is the David and Diane Steffy Research Fellow at the Hoover Institution, a member of Hoover’s Conte Initiative on Immigration Reform, and a lecturer in public policy and law at Stanford University.

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He took this action because of strong, organized opposition to SCA 5 from the Asian-American community—or at least its most vocal leaders and others active in politics. This ability to force such action supports the notion that the Asian-Amer- ican community is at a “tipping point” in California politics. Its numbers are high enough (about 15 percent of the state’s population) to be a decisive constituency, particularly in statewide races and in close, contested elections. And community members’ interest in education issues suggests that the affir- mative-action debate may have political repercussions for Democrats. A majority of Asian-Americans have consistently affiliated with Dem- ocrats since the early 1990s. But before that, they regularly supported Republicans. In fact, George H. W. Bush won 54 percent of the Asian- American vote for the presidency in 1988. Survey data suggest that the parties’ positions on education may have something to do with this turn toward the Democratic Party. In a 2012 post-election survey of Asian-American/Pacific Islander voters, 81 per- cent of those responding said education issues were “very important” to their vote, second only to the economy and jobs at 86 percent. President Obama had a 42-point advantage among those citing education issues as being very important to their vote.

A majority of Asian-Americans have affiliated with Democrats since the early 1990s. Before that, they regularly supported Republicans.

This debate over affirmative action highlights an area within education policy where the interests of Asian-Americans are at odds with the Demo- cratic Party. It also creates opportunities for the GOP to gain support. Democrats have made it clear that they want to reinstate racial prefer- ences in admissions, while Asian-Americans do not, as illustrated in their efforts to defeat SCA 5. Given that the percentage of freshmen admitted to all University of California campuses who were Asian-American increased between 1996 and 2013, Democrats do not appear to be accounting for the Asian-American community’s interests. Notably, the percentage of freshmen admitted to all UC campuses who self-identified as Latino or Chicano nearly doubled during that time,

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while the African-American percentage stayed the same. This suggests that affirmative action need not be an issue that divides racial and ethnic minorities.

Affirmative action need not be an issue that divides racial and ethnic minorities.

Will the Republican Party be able to capitalize on the debate? It depends in large part on whether its leaders are able to articulate principled argu- ments both about why the restoration of racial preferences in admissions is wrong and why the GOP’s perspectives on access to higher education and the importance of choice, accountability, and high standards in K–12 education are right. Although SCA 5 is dead for now, Pérez and his Democratic colleagues called for a task force to examine whether the state’s public institutions should change the way they admit students. Continuing efforts by Cali- fornia Democrats to reinstitute affirmative action have the potential, therefore, to alienate segments of the very electoral coalition they rely on for success in the state and beyond.

while the African-American percentage stayed the same. This suggests that affirmative action need not be an

Reprinted by permission of the Los Angeles Times. © 2014 Los Angeles Times. All rights reserved.

while the African-American percentage stayed the same. This suggests that affirmative action need not be an
while the African-American percentage stayed the same. This suggests that affirmative action need not be an

Available from the Hoover Institution Press is Beyond the Color Line: New Perspectives on Race and Ethnicity in America, edited by Abigail Thernstrom and Stephan Thernstrom. To order, call 800.888.4741 or visit www. hooverpress.org.

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They Might Be Giants

Then again, they might not. If politics were baseball, President Obama’s team would have whiffed. By Bill Whalen.

At some point in a second term, presidents run out of steam and journal- ists run out of news. For Barack Obama and the White House press corps, that moment might have come last spring when CNN ran the breathless headline “Obama Goes for a Walk.” Actually, President Obama did more than head out for a surprise stroll on the National Mall. He also flew up to Cooperstown, New York, to become the first sitting president to take in the National Baseball Hall of Fame and Museum. And that was three days after he surprised a group of Washington-area Little Leaguers with an impromptu visit (actually, more premeditated than it appeared) at an afternoon practice. You may ask: when did our chief executive fall in love with the national pastime? This is a president more closely associated with bas- ketball and golf. It could be as innocent as it appears: Obama was in Cooperstown, White House officials said, simply to pitch international tourism. As for the Little League stop: what’s not to like about a photo op with ten-year-olds? Then again, there might be more at play. Early in his first term, Bill Clinton had an image problem. In 1993, the newly elected president (Clinton was forty-six years old at the beginning of his first term; Obama was forty-seven) liked to go for jogs around town. But the camera didn’t like what it saw: Clinton huffed and puffed. His clothes were hardly flattering. His gait was neither confident nor athletic.

bill whalen is a research fellow at the Hoover Institution.

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In short, it became a metaphor for a young administration unable to find its stride. So it wasn’t long before the presidential jogs were traded in for a more leisurely and dignified eighteen holes at Andrews Air Force Base. So perhaps Obama has come to recognize that during a midterm elec- tion in which his party finds itself in deep trouble in red-state senatorial races, a new embrace of baseball plays better in the heartland than cozy -

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Illustration by Taylor Jones for the Hoover Digest.

ing up to an NBA culture fueled by the likes of Beyoncé and Jay-Z and seen as overly hip-hop.

PLAYING FOR TIME

Unfortunately, there are two problems with Obama championing base- ball. The first is that among modern presidents he has the least connection to the game. Obama’s predecessor, George W. Bush, was a junior-varsity relief pitcher at Yale who went on to own a share of the Texas Rangers. The highlight of the Bush 43 presidency? It might be taking the mound at Yankee Stadium before Game 3 of the 2001 World Series and throwing a letter-high strike. As for Bill Clinton, to this day he can wax eloquent about growing up in Arkansas and listening to the exploits of Stan Musial on the Cardi- nals’ broadcasts, courtesy of KMOX radio, “the voice of St. Louis.” His predecessor, George H. W. Bush, was the starting first-baseman on the Yale varsity squad that participated in the 1947 College World Series (the 2014 Yale squad dedicated its season to the forty-first president). Ronald Reagan re-created Chicago Cubs games for his Midwestern audiences and, of course, played Grover Cleveland Alexander in 1952’s The Winning Team. And Barack Obama? He didn’t grow up playing the game or watching it. Conservatives have taken him to task for shaky knowledge and an even shakier throwing style.

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Then there’s the second problem: though he may respect baseball’s past, Obama may not understand how the game’s tenets apply to his presidency. Consider this recent comment by him about his foreign policy agenda:

“That may not always be sexy. That may not always attract a lot of atten-

tion

. . .

but it avoids errors. You hit singles, you hit doubles; every once

in a while we may be able to hit a home run.” Fair enough. But other than the Osama bin Laden raid, name a foreign- policy moment that comes anywhere close to the late Earl Weaver’s for- mula for on-field success (“the key to winning baseball games is pitching, fundamentals, and three-run homers”). As for the other areas of the game, the same president who twice ran impressive national campaigns has trouble pitching the everyday details of his administration (ObamaCare, economics, government transparency). To the extent that a high-caliber baseball team is built around a solid, if not stellar, five-man rotation, can you name five Obama cabinet secretar- ies who are all-star caliber?

The president who twice ran impressive national campaigns has trouble pitching the everyday details of his administration.

On the field and in the White House Press Room, the defense has its holes. Then again, the president plays a lousy shortstop, and not just because he’s left-handed. Obama easily moves to the left, but not so to his right. Thus a lot of double-play chances—say, an energy deal that gives Republicans their pipeline in return for more renewables— go unturned.

HOT STREAK NO MORE

Baseball’s grueling 162-game schedule may be the toughest test in profes- sional sports. Likewise, eight years in the White House is a test of physical and mental endurance. In baseball, it’s not complicated: a team gets hot for forty or fifty games and avoids long losing streaks the rest of the way. But not so this White House.

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It’s hard to remember a hot streak other than the heady early days after 2008’s victory, when Congress was on the same page. The past four years? On the mound, too many balks (the Syrian “red line”), wild pitches (for- ever blaming Fox News), and free passes (Vladimir Putin). At the plate, too many swings and misses (Middle East peace overtures).

This president is really more of a basketball and golf guy.

President Obama knows what it’s like to come up short on the dia- mond. In 2010, he was booed as he took the mound at Nationals Park. Here’s hoping he gave Cooperstown a good look: unless he shakes up the lineup and starts playing the game at a higher level, his presidency won’t be remembered as Hall of Fame material.

It’s hard to remember a hot streak other than the heady early days after 2008’s victory,

Reprinted by permission of Real Clear Politics. © 2014 RealClearPolitics. All rights reserved.

It’s hard to remember a hot streak other than the heady early days after 2008’s victory,
It’s hard to remember a hot streak other than the heady early days after 2008’s victory,

Available from the Hoover Institution Press is The Unbearable Heaviness of Governing: The Obama Administration in Historical Perspective, by Morton Keller. To order, call 800.888.4741 or visit www. hooverpress.org.

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The Secret Sharers

If leaks of secret information are so bad, why not plug them? Because both the public and the government consider them useful. By Jack Goldsmith.

Michael Kinsley, in his New York Times review of Glenn Greenwald’s book, No Place to Hide: Edward Snowden, the NSA, and the U.S. Surveillance State, made the following claims about leaks of national security secrets:

The question is who decides. It seems clear, at least to me, that the private companies that own newspapers, and their employees, should not have the final say over the release of government secrets, and a free pass to make them public with no legal consequences. In a democracy (which, contrary to Greenwald’s opinion, we still are), that decision must ultimately be made by the government. No doubt the government will usually be over- protective of its secrets, and so the process of decision-making—whatever it turns out to be—should openly tilt in favor of publication with mini- mal delay. But ultimately you can’t square this circle. Someone gets to decide, and that someone cannot be Glenn Greenwald.

I disagree with Kinsley, as both a descriptive matter and a normative matter. As a descriptive matter, the press does effectively have the final say over the publication of US national security secrets. The only constraints are the weak ones of marketplace (the New York Times was widely criticized

jacK Goldsmith is a senior fellow at the Hoover Institution and a member of Hoover’s Jean Perkins Task Force on National Security and Law. He is the Henry L. Shattuck Professor at Harvard Law School.

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for publication of the SWIFT story in 2006) and even weaker (and weak- ening) legal constraints in practice. We have been moving toward this system of journalistic hegemony for a while, and the trend has been exac- erbated by digital technology and the globalization of media. The government has enormous control over its secrets—it creates them, it stores them, it decides how widely they are disseminated behind walls of secrecy, it can punish its employees for mishandling secrets, it can create secrecy defenses, and the like. But once a secret is out, the fact is that the press—or, more accurately, whoever holds the secret outside the govern- ment—decides whether to publish. I think Kinsley is also wrong about the normative question of who should decide. The government should not have the final say about which of its secrets is published. Government action undisclosable to the Ameri- can public is presumptively illegitimate. We tolerate secrecy to some degree because it is necessary for national security. But such secrecy runs the risk of getting out of control, and of fostering illegal or illegitimate action, or simply action that the American people do not approve of. The govern- ment, like all institutions, is imperfect—self-interested, myopic, underin- formed, biased, prone to mistakes, motivated by glory and power, and so on. If the government had the final say on its secrets, it could define the world of secrecy as broadly as it wanted, in a self-serving way, and shield its actions from a democratic (and judicial) check—an especially danger- ous prospect during endless war where the claims of secrecy are greater.

The people have effectively decided that some degree of leaks is necessary to the proper operation of secret government.

But if the government cannot have the final say, who does? The essen- tial problem is that journalists (like all individuals and institutions) are biased too. They are self-interested, myopic, underinformed, nonexpert about national security, biased, prone to mistakes, and often motivated in their publication decisions by fame and profit. Kinsley makes this point (and to my astonishment, many journalists, including, apparently, Green- wald, do not see it—I am always amazed that journalists who insist on the need for a robust press to expose the folly of the self-serving institutions

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© DPA/Soeren Stache

are blind to their own self-serving interests). Kinsley thinks that between the self-serving government and self-serving journalists, the government, supported by the people, should have the final say. One problem with Kinsley’s conclusion is that it pushes to government absolutism on secrets in the name of democracy, and yet the people can- not judge their government’s secret actions. Yes, the people have approved through law a system of checks and balances behind the wall of secrecy, but that does not suffice. Many leaks over the past decade—on interroga- tions, drones, and surveillance, for example—have led the people to alter the course of government action. If the government had the final say, these and dozens of other reforms and corrections never could have occurred. Especially in an era of endless war, the government should not decide as a final matter what the people know. So leaks of secrets will occur, and they are sometimes normatively appropriate. But of course this necessary check on government leads to all sorts of problems. For secrecy too is sometimes necessary and appropriate, and journalists sometimes, perhaps often, publish secrets that cause enor- mous harms that outweigh any conceivable benefit from the perspective of democratic governance. How to resolve this paradox? The answer, I think, lies in two simple propositions: (1) The government could do much, much more to protect secrets, including cracking down harder on journalists, but (2) it doesn’t do so because the American people don’t want it to. As noted, the government still has enormous control over how secrets are made and protected. It could create many fewer secrets, and it could protect them better. It doesn’t do so in part because it sometimes benefits from the porous secrecy system. But even while it benefits from the system, the government could in theory crack down much harder, not just on leakers but also on the press. First Amendment precedents permit punishment of journalists for publication of national security secrets and allow the govern- ment great leeway in forcing journalists, on penalty of contempt, to reveal their sources. So much is true in theory. But in practice, legal and political norms are making it harder and harder for the government to punish journalists in these ways for disclosing secrets. Congress has done nothing to make it

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SCRUTINY: German artist Oliver Bienkowski projects the words “NSA in da House” on the facade of the US Embassy in Berlin in July. Arguably the public has decided that some degree of leaks is necessary to the proper operation of secret government in endless war, even though the toleration of the leaks itself produces many harms.

easier for the executive branch to pursue the press, and has been threaten- ing a shield law for a while. In short, the government, despite its huffing and puffing about leaks, has done very little, especially against journalists, to stop them. To the con- trary, it has largely tolerated the massive leaks of the past decade, including the extensive Snowden leaks. As I wrote in Power and Constraint:

Underlying this persistent restraint is a recognition—based in part on poli- tics and in part on a powerful constitutional tradition—that press coverage of secret executive branch action serves a vital function in American democ- racy, even though the press often miscalculates the harm of publishing secrets and thus often harms national security. “Some degree of abuse is inseparable from the proper use of every thing; and in no instance is this more true than

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in that of the press,” said Madison. “It has accordingly been decided

. . .

that

it is better to leave a few of its noxious branches to their luxuriant growth, than, by pruning them away, to injure the vigor of those yielding the prop- er fruits.” Madison did not have publication of national security secrets in mind, but his reasoning applies to the issue. It is no accident that, as [former Washington Post editor Marcus] Brauchli notes, the nation with the largest and most powerful military and intelligence services in the world is also the nation that, by a large margin, gives its media the freest reins in discovering and publishing classified secrets. There is in theory room to tighten these reins. But the United States has basically decided that a self-serving and insti- tutionally biased media which pursues and publishes government secrets that sometimes harm national security achieves important accountability benefits that on balance outweigh the harms to national security.

Once a secret is out, the fact is that the press—or, more accurately, whoever holds the secret outside government—decides whether to publish.

Contra Kinsley, the demos has effectively decided that some degree of leaks is necessary to the proper operation of secret government in endless war, even though the toleration of the leaks itself produces many harms. The government could change the system, it could do more against journalists, but right now all the evidence is that the government does not think it has political support for such a crackdown. Kinsley might not accept this. He might be arguing that the equilibrium should be changed. But it is he who is out of step with the people on that question, at least right now.

in that of the press,” said Madison. “It has accordingly been decided . . . that

Reprinted by permission of Lawfare, a project of the Harvard Law School/Brookings Project on Law and Security. © 2014. All rights reserved.

in that of the press,” said Madison. “It has accordingly been decided . . . that

Available from the Hoover Institution Press is Perjury:

The Hiss-Chambers Case, third edition, by Allen Weinstein. To order, call 800.888.4741 or visit www. hooverpress.org.

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In Snowden We Trust? Never

Self-appointed crusaders, no matter how clever or articulate, must never get to decide which secrets our government can keep. By Benjamin Wittes.

Let’s give Edward Snowden his due: he did himself a lot of good in his interview with NBC’s Brian Williams last May. He presents well, com - ing across as earnest, thoughtful, and intelligent. There is no manic gleam in his eye, no evident hatred of his country. He is well-spoken and articulate. He presents his own case more compellingly than does Glenn Greenwald, who speaks with a barely suppressed rage much of the time and an altogether unsuppressed hostility all of the time. Snowden, by contrast, is cool and measured, his affect cerebral. Where Greenwald and Julian Assange talk about the NSA as an evil mono - lith, Snowden talks about how he misses his former colleagues, whom he regards as good people. He gamely objects to their vilification. I have no doubt that his performances move many viewers, who see—as he clearly does—nobility in his sacrifices, purity in his motives, and honor in his decision to defy the law in some larger defense of morality as he sees it. Yet I was unmoved by Snowden’s performance.

benjamin wittes is a member of the Hoover Institution’s Jean Perkins Task Force on National Security and Law, a senior fellow at the Brookings Institu- tion, and co-director of the Harvard Law School/Brookings Project on Law and Security.

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Illustration by Taylor Jones for the Hoover Digest.

My stony indifference to his earnest self-account was not because his interview with Williams was insubstantial. It wasn’t. Indeed, Snowden raised at least two important factual matters that warranted clarification by his former agency. The first was that the NSA had repeatedly described Snowden as a former systems administrator, a kind of tech-support guy who helped manage computers for the agency. Snowden, by contrast, describes himself as a cyberspy, a claim Greenwald also advances in his recent book. The disparity is at least a little important, as it goes to the question of exactly what sort of person did this. Was the problem one of a disaffected support staffer who took matters into his own hands or was it that the NSA was betrayed by one of its own operatives? It also goes to the question of how much Snowden can reasonably claim to know about the agency’s substantive work—whom it targets, how, and why. And it thus goes also to the question of credibility. Is the government downplaying Snowden’s role to diminish his credibility or is he padding his résumé to enhance it? Second, and more important, Snowden in this interview directly chal- lenged the NSA’s claim that he had never raised his concerns internally. This claim has been crucial to the government’s dismissal of Snowden as a legitimate whistleblower. Yet Snowden says he raised his concerns by e-mail more than once. The government announced that it had found only one such e-mail, which it released and which did not remotely suggest whistleblowing. The exchange, rather, reflected a routine inquiry about the

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relationship between executive orders and statutes—one to which a lawyer responded appropriately. Again, one side or the other is going to emerge with egg on its face. If this brief e-mail exchange—which took place long after Snowden was already exfiltrating documents from the agency—is what Snowden meant by raising his concerns internally, his effort was laughable. On the other hand, if more material were ever to

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turn up that actually supported Snowden’s claims, it would seriously undermine the government’s credibility concerning his internal behav - ior before he left Hawaii.

A GUEST OF THE KREMLIN

However important these questions are, they are not ultimately the matters that will determine what we should think of Snowden. And on the more important issues, Snowden—earnestness and all—utterly failed to explain certain stubborn, inconvenient facts that make it hard to accept him as the figure he claims to be. Some of these facts he did not challenge at all, as they are too clearly true. Some he challenged only weakly. And some Williams did not bother to ask him about at all. The result is a haze over the noble portrait the fugitive paints of himself.

Snowden talks about how much he misses his former colleagues, whom he regards as good people. He gamely objects to their vilification.

Let’s start with the fact that Snowden ran. Greenwald spends a good deal of space in his book describing how deeply at peace Snowden was with the likelihood of spending a very long time in prison. The early church martyrs were not more blissfully resigned to their suffering than was the Snowden of Greenwald’s book—a man whose freedom, indeed whose very life, was as nothing compared with the public’s need to know the government’s interpretation of Section 215 and its compromise of Angry Birds . Yet Snowden did not, after all, return to face the consequences of his stand. He has evaded law enforcement for more than a year. And his explanation of that evasion is hardly that of a brave man. You see, Snowden explained in the interview, the law he violated doesn’t allow the defense he would want to put on. So he would probably be convicted and serve a very long prison sentence—to which we learn he is not quite so eager to subject himself as Greenwald once admiringly thought. Snowden, of course, explained that he had an entirely selfless reason for not wanting to spend decades in prison. It’s not that he fears it,

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you understand. But it might scare other whistleblowers out of following his example. Whatever the reason, when push came to shove, Snowden chose not to martyr himself but to flee. And where did he flee? He ran to Moscow. On this point, Snowden’s explanation was particularly obtuse. Ask the State Department why he’s there, Snowden suggested. He was just trying to transit through Russia. It wasn’t his fault that he got stuck in Moscow; this happened because the US government revoked his passport. The passport revocation is not, in fact, why Snowden is stuck in Mos- cow. For one thing, the government revoked Snowden’s passport before he ever left Hong Kong. Moreover, it does not mean that he must stay in Moscow. It’s at most the reason why he has a choice between remaining in Moscow and coming back to the United States and facing arrest and lacks the option of finding non-Russian safe haven. He chooses, in other words, to remain in Moscow because he prefers the protection of the dictator there to trial at the hands of his own government. We should add that he treats this dictator with remarkable kid gloves for a foe of tyranny and surveillance. The words “Ukraine” and “Crimea” did not pass his lips during the Williams interview. Nor did the words “Pussy Riot” or the names of any dissidents who face real repression at the hands of his hosts. Nor, for that matter, did he dwell on Russian sur- veillance practices, though he noted the professionalism of the Russian intelligence services. He acknowledged that it’s a little uncomfortable to be in Russia at this particular time, but his only specific criticism of his host government is a relatively bland one about the country’s new blogging law.

Snowden is not a free agent but a tool of Russian intelligence—and of Putin himself—even if he doesn’t know it.

Snowden, to be sure, denies that he has any kind of relationship with Russian intelligence. He did not bring any documents to Russia, he insists, and he has no access to his stash remotely. He is not paid by Russian intel- ligence, he says, and he has never been interviewed by the FSB. Even if all of this is true, his larger point is not. He is, at this stage, not a free

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agent but a tool of Russian intelligence—and of Putin himself—even if he doesn’t know it. He is in the country because his presence embarrasses the United States and because his disclosures serve Russian interests. He is doing things there that help Russia and he is refraining from doing things that offend his hosts. People without some kind of relationship with the security services simply don’t find themselves calling in and throwing softball questions to Vladimir Putin on Russian television. And people without some kind of relationship with the security services also don’t tend to have as their asylum lawyers Kremlin loyalists who also happen to be members of the FSB’s oversight board.

HARM AS A GOOD THING

And then there’s Snowden’s denials that he did any damage. Show me the evidence, he protested to Williams, that anyone was really hurt by anything I did—and Williams did not call him on the point. But it’s a mug’s game to acquit oneself of doing harm by simply defining all of the harms one does as goods. If one calls it democratic debate and sunshine when one exposes sensitive intelligence programs in which one’s country has invested enormous resources and on which it relies for all sorts of intelligence collection, the exposure is of course harmless. If one regards as salutary the exposure of one’s country’s offensive intelligence opera - tions and capabilities to the intelligence services of adversary nations, then of course that exposure does no harm. And if one regards the many billions of dollars American industry has lost as merely a fair tax on its sins for having cooperated with NSA, then sure, no harm there either.

Snowden chooses to remain in Moscow because he prefers the protection of the dictator there to trial at the hands of his own government.

Snowden is too smart to actually believe that he did no harm to the United States. What he means, rather, is that he regards harms to US intelligence interests as good things much of the time and that he reserves for himself the right to define which harms are goods and which harms are real harms.

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And this brings us to Snowden’s ultimate arrogance, the thing that makes his calm certainty more infuriating than anything else: he believes he is above the law. He believes he should get to decide what stays secret and what does not. He believes he should get to decide what laws he can and cannot be tried under. He believes he gets to decide what rules should govern spying. And not only does he believe he should get credit for civil disobedience without being willing to face the legal consequences, he believes he should get credit for courage as though he had done so. As I say, I am unmoved.

And this brings us to Snowden’s ultimate arrogance, the thing that makes his calm certainty more

Reprinted by permission of Lawfare, a project of the Harvard Law School/Brookings Project on Law and Security. © 2014. All rights reserved.

And this brings us to Snowden’s ultimate arrogance, the thing that makes his calm certainty more
And this brings us to Snowden’s ultimate arrogance, the thing that makes his calm certainty more

Available from the Hoover Institution Press is Speaking the Law: The Obama Administration’s Addresses on National Security Law, by Kenneth Anderson and Benjamin Wittes. To read this special online publication, go to http://www.hoover.org/taskforces/national- security/speaking-the-law.

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Imaginary Egypt

Egyptians told themselves a thrilling story about their revolution. Then the fable ended where it had begun: with a pharaoh in power. By Samuel Tadros.

That Egypt’s revolution has failed is hardly disputable. The excitement of those magical eighteen days in Tahrir Square and the hopes of a dawn of democracy are long gone. Replacing them is widespread despair among Egypt’s revolutionary activists and their international cheerleaders. Those who lament the failure of a revolution that captivated the world usually blame two forces: Egypt’s military and the Muslim Brotherhood. A military that never accepted the notion of civilian control and that aimed to protect its exclusive domination of the state and its economy, and a Brotherhood that ruled in a noninclusive manner and alienated many segments of Egypt’s population—these form the basis of analysts’ explanations of why Egypt reached the state it is in today. Remarkably little attention has been given to the actions and choices of Egypt’s non-Islamist revolutionaries. Besides the usual criticism of their organizational weakness and the more recent critical look at those among them who supported the military coup, they have largely escaped any crit- ical examination and hence blame.

samuel tadros is a contributor to Hoover’s Herbert and Jane Dwight Working Group on Islamism and the International Order, a research fellow at the Hudson Institute’s Center for Religious Freedom, and a Professional Lecturer at the Paul H. Nitze School of Advanced International Studies (SAIS) at Johns Hopkins University. He is the author of Reflections on the Revolution in Egypt (Hoover Institution Press, 2014).

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This is all the more surprising given the fact that three years earlier, when the crowds occupied Tahrir Square, both the media and Western analysts fixed their gazes on those young men and women, often described as liberals, democrats, moderates, and secular, to the extent of seeing noth- ing but them. Egypt’s revolutionaries were hailed as the heroic force that ended what seemed like an eternal dichotomy between repressive authori- tarian regimes and totalitarian Islamists.

Who “won” Egypt? The army? The Islamists? The revolutionaries?

The lack of scrutiny of Egypt’s revolutionaries creates a serious gap in our understanding of the events that unfolded in the past three years. From their decision to call for mass demonstrations on January 25, 2011, their rejection of participation in politics, their calls for an end to the Supreme Council of the Armed Forces (SCAF) rule, their continuous demonstrations and violent clashes with the police, and the choices they made in the parlia- mentary and presidential elections, Egypt’s revolutionaries were not helpless victims but actors who affected and shaped the direction of the country.

THE ENVISIONED EGYPT OF THE REVOLUTION

The feeling of jubilation in Tahrir Square on February 11, 2011, as Omar Suleiman read Hosni Mubarak’s resignation was indescribable. That night, hardly anyone slept as hundreds of thousands celebrated in the streets. The next day, they woke up to a question: what happens next? In reality, no one knew. No one had ever given that question much thought, let alone prepared for that day. The people had united in their demand for Mubarak to step down; what would come after was anyone’s guess. The accidental coalition that led to the fall of Mubarak was bound to collapse. The core of the conflict centered on the question of who had achieved that task: was it the army with its decision to side with the peo- ple, the Muslim Brotherhood for providing the troops necessary to turn a demonstration into a revolution, the ordinary men and women who suddenly rose after having been apathetic for decades, or the core of the revolutionaries—those who had struggled for years against the regime and then demolished the first brick in the regime’s wall of oppression?

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The claim of ownership of the revolution was not an abstract question, and it would have profound ramifications. Ownership meant entitlement, entitlement to set the future course of the country, maybe even entitle- ment to rule. No group faced a harder dilemma over the question of the future than the revolutionaries. Young and old alike, veteran activists had devoted their lives to the fight against Mubarak. Now that the object of their hatred was gone, what were they to do with their lives?

Egypt’s revolutionaries once were hailed as a heroic force that ended the perennial dichotomy between repressive authoritarian regimes and totalitarian Islamists.

The eighteen magical days in Tahrir were not only the culmination of years of struggle but also their most glorious moment. The world was cap- tivated by their struggle, journalists were flocking to interview them, and their faces were on the cover of magazines. There was life before Tahrir, and then there was life in Tahrir. There was the life of failure, frustrations, and depression, and then there was the life of success, glory, and pride. Many of them would later speak of those eighteen days in mythological terms: poor and rich standing side by side, Christian and Muslim, men and women, no hatreds or differences, millions of Egyptians, all united by love of country. Soon the square became Egypt, and they became the revolution. The Egypt of their imagination was a simple one. Egypt was a rich country, yet its people were poor. The reason for their poverty was Mubarak and his corrupt regime. Once corruption was ended—and in the world they con- structed, corruption could magically end—Egypt would become prosper- ous. Legends about Mubarak’s wealth were proclaimed. The man had sto- len anywhere from $70 billion to $5 trillion. That money, once returned, would transform Egypt. Reality was, of course, quite different. There never were the imagined millions of people in Tahrir Square. The square with all its surrounding streets could barely hold four hundred thousand to begin with. Most of the country had not participated in the revolution; they watched the events on television and had little attachment to the fairy tale. While the

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Illustration by Taylor Jones for the Hoover Digest.
Illustration by Taylor Jones for the Hoover Digest.

revolutionaries would later lament their fate, arguing that their great- est mistake was leaving the square, as Harvard political scientist Tarek Masoud observed, the truth was strikingly different: “You didn’t leave the square. The rest of the country did.” Few Egyptians were saddened by Mubarak’s resignation. For most Egyptians, however, the revolution had achieved its demand. Mubarak had resigned, and now we can all go back to finding food for our families. The economy was in trouble, tourists had disappeared, and the security situation was frightening. The military certainly agreed with that. For the revolutionaries, however, the revolution was not an event. It was a journey, and soon one without any identified destination.

The people united in their demand for Mubarak to step down. What would come after was anyone’s guess.

Less than forty-eight hours after Mubarak’s resignation, a new mil- lion-member demonstration was announced, scheduled for February 18, to celebrate victory and continue the revolution until it achieved all its demands. Those demands were ever-growing. Some were at least clear:

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© XINHUA/Pan Chaoyue

oust Ahmed Shafik’s government, arrest Mubarak and former regime fig- ures, end the state of emergency, fire the attorney general. Others were nothing more than slogans: social justice, an end to corruption, indepen- dence of the judiciary. One Friday to the next, the demonstrations never stopped. For a while their methods seemed to be working, as every week brought new develop- ment, more arrests of former Mubarak ministers, or news of the govern- ment resigning. Beneath the surface, the revolutionaries’ isolation from the rest of the country was growing. While the rest of the country was searching for a return to normalcy, nor- malcy was the last thing the revolutionaries wanted. Change was no longer the goal; the revolution itself became the goal. A Trotskyite motto, the per- manent revolution, became theirs. The list of individuals and institutions that belonged to the old order and thus in need of purging continued to grow. The “remnants of the old regime” became an all-encompassing designa- tion. Everyone had a place on the list: the bureaucracy, judiciary, police, mili- tary, religious institutions, anyone who belonged to the previous ruling party, the media, businessmen. Little did the revolutionaries ponder the wisdom of their actions, little did they contemplate the hostility that would result.

Once corruption was ended—and in the world the demonstrators constructed, corruption could magically end—Egypt would become prosperous.

Authority as a concept became scorned. The revolution became a revo- lution against everything old: tradition, respect, even decency. With their language becoming more and more abusive and their graffiti more vulgar, the revolutionaries’ words soon turned into action. Violence would only be a matter of time. The revolution had not been peaceful in the first place, but the cycle was deteriorating by the day. It became common for the revolutionaries to publicize the home addresses of those they hated on social media, thereby endorsing mob action against them. There had been torture in Tahrir dur- ing the revolution. Those suspected of being thugs or secret police were held and beaten. A confinement tent for suspected thugs became a com- mon sight at the center of the revolutionary camp in Tahrir.

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HAIL TO THE CHIEF: An Egyptian man salutes during a rally in support of former military leader Abdel Fattah al-Sisi, now Egypt’s president. Three years ago, when the Arab Spring erupted in Egypt, the news media and Western analysts were enthralled with the young rev- olutionaries who seemingly ended an eternal dichotomy between repressive authoritarian regimes and totalitarian Islamists. Ultimately, the revolutionaries failed to create a program of elections and governance. Egypt again finds itself in a world it knows all too well: faith in the deliverance offered by one man.

The contradictions were glaring. The revolutionaries who claimed the mantle of human rights were practicing torture. Men who called for the rule of law came to think of themselves as above the law. People who argued for the freedom of the press demanded the silencing of all who criticized them. Champions of democracy rejected people’s choices and proclaimed revolutionary legitimacy. Those who stood against military trials were calling for revolutionary trials for their opponents. They had no patience for justice. Instead, revolutionary justice became the motto.

WHO BETRAYED THE REVOLUTION?

Egypt could not be expected to wait in limbo until the revolutionaries finished their vendetta against the state. The revolution had unleashed

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forces long contained and suppressed by Mubarak’s authoritarian grip on power. With the repressive hand removed, Pandora’s Box suddenly opened. Workers were demanding higher wages, Copts an end to their discrimination, Islamists an Islamic state, women equality, retirees higher benefits. The demands were endless. Even police officers were striking for better pay. The revolution had unleashed a colossal euphoria of expecta- tions, and delivery on all fronts was eagerly awaited.

The revolutionaries who claimed the mantle of human rights were practicing torture. Men who called for the rule of law thought of themselves as above the law.

Upon assuming power, the military had promised a swift transition to democracy and power transfer in six months. Mubarak had initiated the process of amending the constitution in his last days in power, but it was now more urgent than ever. Who would write the constitution became the first battle that split those who had united in toppling Mubarak. The Muslim Brotherhood, the best-organized and most popular movement in the country, was naturally in favor of a fast-track transition. Non-Islamists, on the other hand, were frightened. A swift transition would mean a Brotherhood victory. They needed more time to organize. Like the Brotherhood and other Islamists, the military favored a yes vote. The March 19 referendum became a test of size and appeal. Results were not even close. A whopping 77 percent of the electorate voted against non-Islamists. In a repeated phenomenon, whenever they were faced with failure, non-Islamists would join their revolutionary brethren in blaming anyone but themselves. Mubarak, they insisted, had allowed the Islamists to grow. In reality, as Tarek Masoud wrote, “If the movement had a head start over liberals, it is not because it had an easier time under Mubarak, but rather—as Brotherhood members are likely to aver—because they have worked harder. No delay in elections will change that.” The revolutionaries and the larger non-Islamist camp were growing more isolated from the rest of the country. Isolation gave birth to delu-

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sions, and when delusions ultimately met reality, they either grew more delusional or developed into bitterness and disdain. As the months went by and it became obvious that the majority of Egyptians did not share the revolutionaries’ euphoria, the condescension began. Instead of being a heroic people, Egyptians were now called “a slave people,” accustomed to submission to the extent of developing Stockholm syndrome, who didn’t deserve the revolutionaries’ sacrifices. In the following months, a Jacobin discourse dominated the revolution- aries’ worldview. Anyone who did not share their quest for the continuous revolution was a traitor and thus no true revolutionary. Even old comrades of the square who advocated caution and compromise were showered with contempt. Politicians were frightened. If they dared suggest that perhaps it was time to put an end to the demonstrations game and start playing politics, they risked being painted as enemies of the revolution. Politics was not only a game the revolutionaries refused to play; it was also one they completely disdained. Looking back, that was hardly sur- prising. The cause of their success in toppling Mubarak was the reason for their failure thereafter. The appeal to abstract principles and empty slogans was instrumental in uniting people against a dictator but mean- ingless as a program of elections and governance.

In time, the revolutionaries came to believe that anyone who did not share their quest for the continuous revolution was a traitor.

But the revolutionaries’ worst offense was their complete ignorance of the country they sought to transform. Their imaginary Egypt had no rela- tionship to the actual Egypt. When Salafis began demanding an Islamic state, many a revolutionary expressed surprise and admitted not knowing Salafis existed in Egypt. When attacks on Christians intensified, many a revolutionary was astonished by the level of sectarianism in the country. When Egyptians elected Islamists to parliament, the revolutionaries could not understand why voters didn’t choose the revolution’s party. When Mohammed Morsi and Ahmed Shafik received the highest number of votes in the first round of the presidential election, there was genuine shock among the revolutionaries.

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©

©

©

Today, Egypt’s former revolutionaries are split between the submissive and the delusional, between those who have become no more than cheerlead- ers for a military coup and those who continue to dream of an endless revolution. After the revolution and its hopes and disappointments, Egypt finds itself in a world it knows all too well: faith in the deliverance offered by one man. The hope is now invested in a former military commander, Abdel Fattah al-Sisi. It is dictatorship by demand, as it were. The country has been here before. For two decades, from 1954 to 1970, Gamal Abdel Nasser gave Egypt its moment of enthusiasm and then led it to defeat and heartbreak. It would take a leap of faith, and luck beyond what history offers, to believe that this faith in a redeemer will yield a better harvest than the one before it.

© © © Today, Egypt’s former revolutionaries are split between the submissive and the delusional, between

Excerpted from Reflections on the Revolution in Egypt, by Samuel Tadros (Hoover Institution Press, 2014). © 2014 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

© © © Today, Egypt’s former revolutionaries are split between the submissive and the delusional, between
© © © Today, Egypt’s former revolutionaries are split between the submissive and the delusional, between

New from the Hoover Institution Press is Reflections on the Revolution in Egypt, by Samuel Tadros. To order, call 800.888.4741 or visit www.hooverpress.org.

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Will Iran and Israel Meet in the Middle?

In Iran, hints of a secular thaw. In Israel, the increasing prominence of religious parties. Two nations, antagonistic—and unsettled. By Abbas Milani and Israel Waismel-Manor.

Although the Israeli and Iranian governments have been virtually at war with each other for decades, the two countries have much in common. Both are home to some of the oldest civilizations on earth, and both are primarily non-Arab states in a mostly Arab region. In the 1950s, David Ben-Gurion’s Israel and Shah Mohammed Reza Pahlavi’s Iran were bas- tions of secular nationalism; the shah pushed authoritarian modernization while Ben-Gurion advanced a form of nonreligious Zionism. Only after the 1979 Islamic Revolution in Iran did radical Islam all but eclipse this secular brand of politics. It held on for much longer in Israel but is now under threat. Both Iran and Israel are entering potentially challenging new stages in their relations with the outside world, and particularly with the United States. Over the past seven years, United Nations Security Council resolu-

abbas milani is co-director of the Hoover Institution’s Iran Democracy Project, a member of Hoover’s Herbert and Jane Dwight Working Group on Islamism and the International Order, and a Hoover research fellow. He is also the Hamid and Christina Moghadam Director of Iranian Studies at Stanford University, where he is a visiting professor of political science. israel waismel-manor is a senior lecturer at the University of Haifa and a visiting associate professor of political science at Stanford.

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tions have imposed sanctions on Iran with the aim of halting its nuclear program. For years, Iran’s former president Mahmoud Ahmadinejad railed against the “Great Satan.” But even if Iran’s supreme leader, Ayatollah Ali Khamenei, is still opposed to reforms, it appears that some officials inside Iran have finally realized that continued intransigence and bellicosity will beget only more sanctions and catastrophic economic consequences.

More than 60 percent of Iranians are under age thirty, and they overwhelmingly believe in individual liberty.

As the winds of change blow across Iran, secular democrats in Israel have been losing ground to religious and right-wing extremists who feel comfortable openly attacking the United States, Israel’s strongest ally. In recent months, Israel’s defense minister, Moshe Yaalon, called Secretary of State John Kerry “obsessive and messianic” while Naftali Bennett, Israel’s economy minister, labeled Kerry a “mouthpiece” for anti-Semitic ele- ments attempting to boycott Israel. Israel’s secular democrats are growing increasingly worried that Israel’s future may bear an uncomfortable resemblance to Iran’s recent past.

FEARS OF A “CULTURAL INVASION”

For more than three decades, Iran’s oil wealth has allowed its religious leaders to stay in power. But sanctions have taken a serious economic toll, with devastating effects on the Iranian people. The public, tired of Ahma- dinejad’s bombastic and costly rhetoric, has replaced him with Hassan Rouhani, a pragmatist who has promised to fix the economy and restore relations with the West. But Rouhani’s rise is in reality the consequence of a critical cultural and demographic shift in Iran—away from theocracy and confrontation, and toward moderation and pragmatism. Recent tensions between America and Russia have emboldened some of Iran’s radicals, but the government on the whole seems still intent on continuing the nuclear negotiations with the West. Iran is a land of many paradoxes. The ruling elite is disproportionately made up of aged clerics—all men—while 64 percent of the country’s sci-

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ence and engineering degrees are held by women. In spite of the gov- ernment’s concentrated efforts to create what some have called gender apartheid in Iran, more and more women are asserting themselves in fields from cinema to publishing to entrepreneurship. Many prominent intellectuals and artists who three decades ago advo- cated some form of religious government in Iran are today arguing for popular sovereignty and openly challenging the antiquated arguments of regime stalwarts who claim that concepts of human rights and religious tolerance are Western concoctions and inimical to Islam. More than 60 percent of Iranians are under age thirty, and they overwhelmingly believe in individual liberty. It’s no wonder that recently Ayatollah Khamenei told the clerical leadership that what worried him most was a non-Islamic “cul- tural invasion” of the country.

THE POWER OF DEMOGRAPHY

As moderate Iranians and some of the country’s leaders cautiously shift toward pragmatism and the West, it seems that many Israelis are moving away from these attitudes. In its sixty-six years, Israel has seen its share of ideological shifts from dovish to hawkish. These were natural fluctuations driven mainly by the country’s security situation and prospects for peace.

Israel’s defense minister called Secretary of State John Kerry “obsessive and messianic.”

But the current shift is being accelerated by religion and demography, and is therefore qualitatively different. While the Orthodox Jewish parties are currently not part of the government, together with Bennett’s Jewish Home, a right-wing religious party, they hold about 25 percent of seats in the Knesset. The Orthodox parties aspire to transform Israel into a theocracy. And with an average birthrate of 6.5 children per family among Orthodox Jews (compared with 2.6 for the rest of the Jewish population), their dream might not be too far away. By contrast, Iran has a falling birthrate—a clear indication of growing secularism, and the sort of thing that keeps Ayatollah Khamenei awake at night.

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The long-term power of these demographic trends will, in our view, override Iran’s current theocratic intransigence and might eclipse any fleeting victories for liberalism in Israel. Israel’s shift toward orthodoxy is not merely a religious one. Since the vast majority of Orthodox Jews are also against any agreement with the Palestin- ians, with each passing day the chances of a peace deal diminish. Nor is time on the side of those who want to keep seeing a democratic Israel.

In Israel, Orthodox parties aspire to transform the country into a theocracy.

If Israel continues the expansion of settlements, and peace talks serve no purpose but the extension of the status quo, the real existential threat to Israel will not be Iran’s nuclear program but rather a surging tide of economic sanctions. What began a few years ago with individual efforts to get supermarket shoppers in Western countries to boycott Israeli oranges and hummus has turned into an orchestrated international campaign, calling for boycotts, divestment, and sanctions (BDS) against Israeli companies and institutions. From academic boycotts to calls for divestment on American univer- sity campuses to the unwillingness of more and more European financial institutions to invest in or partner with Israeli companies and banks that operate in the West Bank, the BDS movement is gaining momentum. Prime Minister Benjamin Netanyahu recently called BDS advocates “clas- sical anti-Semites in modern garb.”

FRIENDSHIPS GROW LUKEWARM

In the past, Israel could rely on Western nations and especially the Unit- ed States to halt such initiatives, but as the fabric of Israel’s population changes, and Jewish populations in the West become less religious and less uncritically pro-Israel, the reflex to stand by the Jewish state, regardless of its policies, is weakening. Moreover, as Western countries shift toward greater respect for human rights, the West Bank occupation is perceived as a violation of Western liberal norms. A new generation of American Jews see a fundamental ten- sion between their own liberal values and many Israeli policies.

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This, coupled with the passing of the older generation and a high rate of interfaith marriage among American Jews, means the pro-Israel lobby will no longer be as large or as united as it used to be. While American presidents from Lyndon B. Johnson to Barack Obama have declared that the United States’ commitment to Israel flows from strategic interests and shared values, in a generation or two, interests may be all that’s left. An opposite shift is occurring in Iran’s diaspora. An estimated five mil- lion to seven million Iranians live in exile. Their economic, scientific, scholarly, and cultural achievements are now well known in the Unit- ed States, thanks to people such as eBay founder Pierre Omidyar. They are increasingly establishing themselves as a powerful force advocating a more democratic Iran and better relations with the United States. Just as a united Jewish diaspora once helped the new state of Israel join the ranks of prosperous, industrialized states, Iran’s diaspora could one day play a similar role for a post-theocratic Iran. One of Israel’s most popular singers, the Iranian-born Rita Jahanforuz, laments on her recent album, “In this world, I am alone and abandoned, like wild grass in the middle of the desert.” If Iran’s moderates fail to push the country toward reform, and if secu- lar Israelis can’t halt the country’s drift from democracy to theocracy, both Iranians and Israelis will increasingly find themselves fulfilling her sad prophecy.

This, coupled with the passing of the older generation and a high rate of interfaith marriage

Reprinted by permission of the New York Times. © 2014 The New York Times Co. All rights reserved.

This, coupled with the passing of the older generation and a high rate of interfaith marriage
This, coupled with the passing of the older generation and a high rate of interfaith marriage

New from the Hoover Institution Press is Israel and the Arab Turmoil, by Itamar Rabinovich. To order, call 800.888.4741 or visit www.hooverpress.org.

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Clooney of Arabia

Movie star George Clooney found a love match amung the Druze, a sect whose members have seen their own share of drama. By Lee Smith.

The tabloids and gossip sheets were delighted when Hollywood heartthrob George Clooney popped the question to his girlfriend, Amal Alamud- din. The thirty-six-year-old Beirut-born and London-based human rights lawyer (who speaks French, English, and Arabic) is said to be a good match for the screen star, but that’s a given—Clooney’s past paramours have included cocktail waitresses, models, and a professional wrestler. The more interesting question is whether Clooney is good for the Druze, the small confessional sect to which his fiancée belongs. The Druze are a heterodox offshoot of Shia Islam that dates back to the eleventh century. Most of the world’s fewer than a million-and-a- half Druze live in the Levant. There are roughly 20,000 Druze in Jordan, 125,000 in Israel, 700,000 in Syria, and a quarter of a million in Lebanon, home to what is perhaps the most influential Druze community, led by Walid Jumblatt. An opponent of the Syrian regime and onetime pillar of Lebanon’s pro-democracy movement who now sees his sect caught in the middle of a Shiite-Sunni regional war, Jumblatt welcomes the Clooney- Alamuddin announcement as rare good news. He is eager, he wrote me in an e-mail, to throw a party for the actor at his ancestral home in the Chouf Mountains.

lee smith is a senior editor at the Weekly Standard and the author of The Consequences of Syria (Hoover Institution Press, 2014).

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“Tell me when George Clooney will be coming to Lebanon so I can greet him in Moukhtara. I will bring a delegation of Druze sheikhs,” Jum- blatt gushed. “As for Amal Alamuddin, well, she is lucky.” “Sure, it’s good for us,” says Makram Rabah, a doctoral candidate in history at Georgetown whose research is on the role of his own Druze community in the Lebanese civil war (1975–90). “Any media support on his end making Druze look good is welcome. Instead of being on the front page of the news section when we’re killing and dying, we’re now featured in entertainment magazines.” And it’s good for the future groom, too, says Rabah. “My advice to Clooney is to take advantage of his association with the Druze. Her vil- lage, Baakline, is a nice place to spend a vacation. And since he’s done advocacy on Sudan issues, he should know he is much safer going to Leba- non than Darfur.” Also, says Rabah, he should embrace the sect’s customs. “The essence of Druze tradition is tribal,” he explains. “So visiting with the Druze at weddings and funerals are duties. And then he should also drink arak,” the anise-flavored liqueur that is Lebanon’s national drink, and which the Druze, in spite of their Muslim identity, drink in abundance. “It would be good,” adds Rabah, “if Clooney learned how to dance the dabke.”

There are roughly 20,000 Druze in Jordan, 125,000 in Israel, 700,000 in Syria, and a quarter of a million in Lebanon.

“Clooney better acquire a taste for yerba maté,” says Rola Abdul- Latif, a Lebanese-born Druze who lives in Washington, DC. Maté is the tea-like beverage that Druze immigrants to Latin America brought back home with them. “But the really big thing is food,” says Abdul- Latif. “Being passionate about food is a way to get close to the hearts of the Druze.” Abdul-Latif’s husband, the non-Druze journalist Hussain Abdul- Hussain, also has some advice for Clooney. “The upside” of marrying a Druze, jokes Abdul-Hussain, “is that if he is worried about having to learn a new religion, he won’t. Most of the Druze themselves know nothing about their faith, so he doesn’t have to fear awkward moments

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114 Hoover Digest N 2014 · No. 4 Illustration by Taylor Jones for the Hoover Digest.
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at holiday celebrations like Passover or Christmas, because there aren’t any holidays.” The downside, says Abdul-Hussain, is that some Druze don’t like non- Druze men marrying Druze women. “He has to be careful which Druze he tells that he’s married to a Druze. He might run into people who won’t like it, even though he’s George Clooney.”

MESMERIZING TO THE WEST

The Druze have been known to take their tribal solidarity to violent

extremes. In an incident widely reported in the Lebanese press last year, a gang of Druze men beat and mutilated a Sunni man who had eloped with a family member. Afterwards, Jumblatt excoriated his people. “It would be useful after the occurrence of the barbaric act,” he wrote, “for the Druze community to hold an internal dialogue over

the future of the

Where will the culture of rejecting the other

that breeds intolerance and hate lead? Does that not create a threat to

the future?”

Walid Jumblatt often thinks about the future. Where will the Druze find a place in it?

Perhaps because of the Syrian war now engulfing the region, Jumblatt is often thinking about the future and where the Druze will find a place in it. He inherited his role after Bashar al-Assad’s father Hafez killed his father, Kemal, in 1977, and he’s preparing his own son Taymur to replace him. Given Jumblatt’s open contempt for the Syrian president, who regards him similarly, his end may come sooner rather than later. Jumblatts, as he likes to remark, don’t die in bed—like his father, his grandfather was assassinated. Even when joking, Jumblatt seems to see dark clouds ahead for himself and the Druze. “You can tell Clooney to do a movie about the Druze, and he could say that they are the last of the Mohicans,” Jumblatt wrote me. “I could be Geronimo.” For such a tiny sect, the Druze have been an object of fascination for centuries. After Napoleon’s 1798 conquest of Egypt, Europe was mad for all things Oriental and the Druze’s esoteric wisdom—seemingly bred from

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a mixture of Ismailism, a heterodox branch of Shiism, as well as Sufism and Gnosticism—was appealingly exotic. Researchers and travelers vis- ited the Druze heartland in the Lebanese mountains to uncover the sect’s mysteries. They came away with only wisps of smoke, albeit very color- ful ones. In his travel book Journey to the Orient, the nineteenth-century French poet Gérard de Nerval relates a likely fictional interview with a Druze sheikh who, rather than answer Nerval’s questions about the Druze faith directly, spins out a long tale of impossible and forbidden love. The sheikh’s story, which Nerval called “The Tale of the Caliph Hakim,” purports to chronicle the events leading to the mysterious dis- appearance, or death, of one of the Druze founding figures, Al-Hakim bi-Amr Allah (AD 985–1021), the sixth caliph of the Fatimid dynasty, an Ismaili empire encompassing much of North Africa and the Levant with its capital in Cairo. Al-Hakim, often disparagingly referred to as the “Mad Caliph,” may have believed he was God incarnate. One of the faith’s earli- est adherents certainly did—Muhammad bin Ismail Nashtakin al-Darazi, a renegade Ismaili preacher from whom it seems the Druze derive their name and whom other early adherents, including the Druze imam, Ham- za ibn Ali, quickly came to consider a heretic.

“Instead of being on the front page of the news section when we’re killing and dying, we’re now featured in entertainment magazines.”

Al-Hakim and Hamza ibn Ali dispatched letters to various communi- ties in regions where the Druze are now concentrated, encouraging them to accept the key Druze doctrine, tawhid, the knowledge of the oneness of God. The first letter is from 1017, when Al-Hakim announced the opening of the da’wa, or invitation to convert. In total there are 106 let- ters, dealing mainly with spiritual matters, that form the Druze’s sacred text, the Epistles of Wisdom. Perhaps because of political persecution, the da’wa was closed in 1043, at which point the Druze would theoretically accept no more converts—in practice it appears that there were many subsequent conversions. In any case, timelines are somewhat beside the point when it comes to the Druze. They believe that their souls never die but are reincarnated in the body of another Druze, a conviction that,

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IT’S A MATCH: Laha, a Beirut-based women’s weekly, puts George Clooney and his fiancée, Amal Alamuddin, on the cover. Alamuddin, a human- rights attorney in Britain, is wearing her profession’s traditional robe and wig. “Tell me when George Clooney will be coming to Lebanon so I can greet him in Moukhtara,” said Druze leader Walid Jumblatt. “I will bring a delegation of Druze sheikhs. As for Amal Alamuddin, well, she is lucky.”

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according to one scholar, gives rise to the Druze saying, “We are born in each other’s houses.” The apparently ethereal nature of Druze spirituality—which, again, the vast majority of Druze know little or nothing about—is in sharp contrast to their worldly reputation. The Druze are stout, hard-minded mountain men, farmers, and laborers, best known for their fighting skills and politi- cal agility—both of which talents are evidenced by the fact that this tiny group has survived the violent furies of the Middle East for nearly a mil- lennium.

The Druze are by necessity opportunistic—a small minority that must bend with the wind or be broken by it.

The Druze fought the Crusaders for nearly two hundred years and then resisted the Ottomans. In the mid-nineteenth century, the Druze were in conflict with their mountain neighbors, the Maronites, which in 1860 culminated in one of the region’s bloodiest episodes of sectarian warfare. The Druze and the Maronites were again on opposing sides when the Lebanese civil war erupted in 1975. Kemal Jumblatt, an Arab national- ist, leftist, and avowed Buddhist who saw similarities between Buddhism and Druze belief, cast his lot with the Palestinians, as did Walid when his father was murdered in 1977. It wasn’t until after the war that Jumblatt made his peace with the Maronites. He and Samir Geagea, head of the Christian militia that Jumblatt’s Druze fought in the mountains in a bitter reprise of the 1860

FASCINATING: A Druze man, center, is among the models for a series of 1873 photographs of subjects of the Ottoman empire. The Druze were an object of fascination to the West for centuries. After Napoleon’s 1798 conquest of Egypt, Europe was mad for all things Oriental and the Druze’s esoteric wisdom—seemingly bred from a mixture of Ismailism, a hetero- dox branch of Shiism, as well as Sufism and Gnosticism—was appeal- ingly exotic.

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war, became two of the cornerstones of Lebanon’s pro-democracy March 14 movement.

OPPORTUNISTIC OR PRACTICAL?

For many observers, Jumblatt’s turnaround—from Syrian ally to opposi- tion leader, from a Soviet client in the 1980s to a friend of the Bush White House a decade ago—was evidence of an almost deranged opportunism.

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Library of Congress/Pascal Sebah

To the Druze it all made perfect sense. They are by necessity opportunis- tic—a small minority that must bend with the wind or be broken by it. Israel’s Druze community, for instance, discerned very early during the 1948 war for independence that the Zionists were going to defeat the Arabs, and cast their fate with the former. They are among the Jewish state’s proudest citizens, fiercest warriors, and most active politicians. Syr- ia’s Druze community has also subscribed to the power of the state—tak- ing Assad’s side in the ongoing civil war. The Druze of Lebanon are different insofar as they stand on the side- lines of a political system designed to balance the country’s three largest communities: Christians, Sunnis, and Shiites. This affords Jumblatt what is effectively a permanent swing vote, and thus more room to maneuver and win concessions for himself and the Druze. Jumblatt is often called a weathervane, as he is acutely sensitive to the region’s political winds. When he saw the United States unleash its military might in Iraq, he seized the chance and turned against his former Syrian overlords and jumped on the freedom-agenda bandwagon.

When Jumblatt saw the United States unleash its military might in Iraq, he seized the chance and turned against his former Syrian overlords.

However, even after it was clear that neither the White House nor the international community was going to protect him, his Druze, or his country from Assad’s depredations, he continued to call out Assad and Iran and, closer to home, Hezbollah, which laid siege to the Chouf Moun- tains fastness of the Druze in May 2008. Thus, at a critical moment for the Druze, Jumblatt let fall the mask of the opportunist. He stuck his neck out in the knowledge that his enemies, Assad among others, have long memories and longer knives. The leaders of minority communities throughout the Middle East, including Christian clerics, like some Western officials and analysts, say they prefer Assad to the Sunni-majority opposition because he protects minorities. Not Jumblatt. Two years ago he urged Syria’s Druze soldiers to stay at home and “refrain from participating” in the war to prop up Assad. “We must avoid being part of an axis against [Syria’s Sunni] majority in

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order to avoid future political repercussions,” he said, adding, “popular memory has no mercy.” His warnings were ignored. It seems that no one is listening to Jumblatt these days—not about the dangers facing his Druze, especially in the midst of the Syrian conflict. I e-mailed him that Clooney’s engagement seems a golden opportunity. Here’s a man who advocates on behalf of Darfur and other foreign policy issues and plays basketball with the American president, a close personal friend, Clooney claims. With Clooney marrying a Druze, maybe he could advocate on behalf of the Druze. Maybe after more than 150,000 dead in Syria, he could finally get through to Obama. Maybe Clooney could per- suade Obama to bring down Assad once and for all. “Please let me be far from the empathy of Obama,” Jumblatt wrote back, “and the butcher Bashar.”

order to avoid future political repercussions,” he said, adding, “popular memory has no mercy.” His warnings

Reprinted by permission of the Weekly Standard (www.weeklystandard.com). © 2014 The Weekly Standard LLC. All rights reserved.

order to avoid future political repercussions,” he said, adding, “popular memory has no mercy.” His warnings
order to avoid future political repercussions,” he said, adding, “popular memory has no mercy.” His warnings

New from the Hoover Institution Press is The Consequences of Syria, by Lee Smith. To order, call 800.888.4741 or visit www.hooverpress.org.

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“Ukraine Is Fighting Our Battle”

Five reasons the United States should send military aid to Ukraine. By Paul R. Gregory.

US presidents must be able to deal with more than one emergency at a time. Whereas the Middle East is a boiling cauldron that defies solution, Russia’s subversion of Ukraine can be dealt with effectively at low cost:

the United States and Europe can simply give Ukraine the military means to defend itself and its territorial integrity. No “boots on the ground” are required, just a few billion dollars’ worth of real weapons. Thereafter, Ukraine will do the heavy lifting itself. Russia must pay its mercenaries; young Ukrainians are fighting and dying for a cause. So far, President Obama has denied Ukraine meaningful military assis- tance, for reasons I find difficult to fathom. After months of stalling, Obama announced on June 4 a $5 million (not billion) package of non- lethal military aid to Ukraine to supplement his earlier grant of military box lunches. Better nothing than such an insulting token amount. In contrast, analysts from Forbes’ Ukrainian site placed a $250 mil- lion price tag on the two-month Donbass separatist operation paid for by shadowy Russian “sponsors.” The fifteen thousand $300-per-day merce- naries streaming across the border with their lethal weaponry accounted for most of this cost.

paul r. GreGory is a research fellow at the Hoover Institution. He is the Cullen Distinguished Professor of Economics at the University of Houston and a research professor at the German Institute for Economic Research in Berlin.

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Russia has outspent the United States fifty times over on military assistance in the Ukrainian theater and by an infinite amount on lethal assistance. Whenever the topic of Ukrainian military assistance is broached, Euro- pean and American opponents immediately revert to anxiety about “boots on the ground.” Ukraine is requesting training, advice, and military equip- ment, not a “third world war” as naysayers prophesy. There are compelling reasons why the United States and NATO should supply embattled Ukraine with military equipment.

• First, Ukraine is fighting the United States’ and Europe’s battle against a wealthy petro state whose rogue leader, Vladimir Putin, has broken interna- tional treaties and norms and must be reined in before he expands his hori- zons. Ukraine has fought this battle so far on its own paltry resources, with little assistance from a civilized world too timid to confront a bully state. In military engagements in Vietnam, Iraq, and Afghanistan, the United States has provided military assistance to local allies unwilling to defend them- selves. Ukraine, with its increasing loss of life and spilled blood, is fighting on its own behalf, as the United States and Europe spur it on with vague promises of sanctions and expressions of concern delivered safely from the sidelines.

• Second, the United States need not fear that military assistance to Ukraine will turn Putin or the Russian people against America. This has already happened. Throughout Putin’s tenure, the United States and NATO have been vilified as Russia’s enemy number one. (Remember that Mitt Romney was scorned for returning the favor.) Clearly Russia will not assist us in the world’s trouble spots. In Syria and Iran, Russia has made things worse rather than better. Putin’s nonstop propaganda blames the United States and Europe for the Ukraine conflict. It claims that the US State Department paid for the protests that began in Ukraine last fall, backed the neo-Nazi extremists who took control of Kiev, and remarkably has its agents in east Ukraine to protect shale oil deposits for energy conglomerates. Ukraine’s new presi- dent and his government are mindless puppets of Washington, the Rus- sian media trumpets day and night. There are no limits to the imagination of Putin’s “information technol- ogists,” and they are effective. Authoritative Levada Institute polls show a

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© AFP/Anatolii Stepanov

dramatic worsening of Russian public opinion towards the United States and Europe. Russians believe the mantra, as routinely enunciated by For- eign Minister Sergei Lavrov: “You cannot avoid the impression that they (the Americans) are running the show very much, very much.”

• Third, in the case of Ukraine, the Obama administration has a rare international consensus on its side. Russia is the aggressor; Ukraine is the aggrieved party. What more could Obama want? Ukraine has the 100–11 vote of the United Nations General Assem- bly condemning Russia’s annexation of Crimea. The UN Human Rights Commission’s May 15 report chronicled abuses by the pro-Russian forc- es in both Crimea and east Ukraine. The Organization for Security and Cooperation in Europe (OSCE) blasted the illegal actions of armed sepa- ratists as “an attempt to prevent the election, deny citizens the fundamen- tal right to freely participate and elect their chosen representative” in its report on the May 25 Ukrainian presidential election. The G7 commu- niqué of June 4 also did not mince words: “We are united in condemn- ing the Russian federation’s continuing violation of the sovereignty and territorial integrity of Ukraine. Russia’s illegal annexation of Crimea and actions to destabilize eastern Ukraine are unacceptable and must stop. These actions violate fundamental principles of international law and should be a concern for all nations.” In granting military assistance to Ukraine, Obama can cite the support of the international community, which he, as a presidential candidate, promised as a condition for action in international disputes.

• Fourth, Putin takes great pains to describe the battle for east Ukraine as a civil war between oppressed Russian speakers in the east and rabid anti- Russian extremists in the west. This is anything but a spontaneous civil

FRONT LINES: Ukrainian soldiers guard a checkpoint near the eastern city of Debaltsevo, where government forces battle pro-Russia separa- tists. Russia has outspent the United States fifty times over on military assistance in the Ukrainian theater and by an infinite amount on lethal assistance.

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war. Rather, it is a contrived diversionary campaign planned and executed by outside forces from Russia. The pro-Russian forces tried to look “local,” at least in the early phases of the campaign. While shady locals appointed themselves mayors or gov- ernors of self-proclaimed nonexistent “people’s republics,” Russian mili- tary officers controlled them from the shadows. After reputable polls showed that even the east Ukrainians wanted to remain part of a unitary Ukrainian state and the Donbass independence referenda bombed, the veil was lifted. The Russian military commanders openly boasted of their credentials from wars in Chechnya, Georgia, and Transnistria. (They even posted heroic “Russian men of steel” billboards of themselves on Ukrainian city streets.) The new civil head of the people’s republic arrived from Moscow, claiming no local ties. Mercenaries from Russia, Chechnya, and Ossetia openly admitted in interviews with the Financial Times that they had been told to come by their regional boss. They do not hide that they are paid generously. Gone is the all-important civil war narrative that Putin attempted to peddle. Ukraine is fighting against Russian mercenaries who have no attachment to the cause other than their daily wages. Obama can rest assured: military aid is not going to fight fellow Ukrainians but to drive out Russian mercenaries.

• Fifth, no lasting diplomatic solution is possible, despite the European Union and OSCE’s intense lobbying for round-table negotiations in the vain hope of freeing themselves of their eventual obligation to pitch in on Ukraine’s behalf. The only viable solution—a military one—cannot be achieved amid the status quo of a weak Ukrainian army fighting profes- sional mercenaries from Russia. Putin will accept nothing less than a neutered “federalized” Ukraine that he controls either directly or indirectly. Ukraine cannot accept Putin’s terms for “peace,” which mean complete capitulation. The United States and Europe must understand that Putin will not and cannot back down. There will be no political solution because Putin does not want one. He is the main beneficiary of violence in Ukraine: consider his soaring popu- larity ratings as the Russian people celebrate Russia’s return to great-power

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status. Putin pulling out and allowing a free and independent Ukraine

would be as unlikely as Winston Churchill announcing in 1942 that Herr Hitler is really a decent chap, so let’s let him have what he wants. Violence will end only if Russian mercenaries are driven out by the Ukrainian army. With real American military equipment, Ukraine’s army could put down the mercenaries, unless Putin wanted to risk a full-scale invasion with all its consequences. There also can be no diplomatic solution when one party to a settle- ment cannot be trusted. Putin has performed his “man of peace” theatrics too often. The US State Department dispenses with diplomatic language in listing Russia’s false claims about Ukraine. NATO officials complain that “Russian officials have been repeatedly misleading and evasive regarding their roles in both Crimea and eastern Ukraine.” Even the cautious defense minister of Germany said in an interview with Der Spiegel that “Russia has

destroyed a massive amount of

trust. . . .

Currently, Russia is not a partner.

Partners adhere to joint agreements.” Deutsche Welle reports even franker talk from the German representative of the Heinrich Böell Foundation in Ukraine, who said Russia “should just stop with the lies and speak plainly:

this is a war, and Russia is a party in this military conflict.”

Obama can hold off on biting sanctions on the grounds that he must persuade a reluctant Europe to come on board. He has no such excuse with respect to military assistance. Obama today can order the lethal mil- itary equipment delivered that will make the difference between defeat and victory. And it will be brave Ukrainians, not Americans, who spill their blood for a cause that the world community has judged as just. How about some leadership rather than following from behind?

status. Putin pulling out and allowing a free and independent Ukraine would be as unlikely as

Special to the Hoover Digest.

status. Putin pulling out and allowing a free and independent Ukraine would be as unlikely as

Available from the Hoover Institution Press is Women of the Gulag: Portraits of Five Remarkable Lives, by Paul R. Gregory. To order, call 800.888.4741 or visit www. hooverpress.org.

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A Modern Mandarin

Opening itself to free markets, China has lifted several hundred million people out of poverty. That was the easy part. An interview with Hoover fellow Michael Spence. By Jonathan Schlefer.

Michael Spence won the Nobel Memorial Prize in Economic Sciences in 2001 for esoteric research on how people make decisions when critical information is hard to obtain. But by that time, after more than a decade and a half as an academic dean at Harvard and Stanford, many of Spence’s colleagues had begun referring to him as a “former economist.” Spence begs to differ: he learned to become a better, “older” economist, he counters. With his background in studying information, he began thinking about how the Internet, compressing time and distance, would strengthen sup- ply chains around the world. In 2005, the World Bank asked him to give the keynote talk at its annual conference on poverty reduction. Worried that he had little useful to contribute, he balked. “Why would you want me?” he recalled asking. As it turned out, that talk, which “seemed not to bomb,” led his career in a new direction, prompting the World Bank to name him chairman of its Commission on Growth and Development in 2006. He chose nine-

michael spence is a senior fellow at the Hoover Institution, a professor of econom- ics at New York University’s Stern School of Business, and the Philip H. Knight Professor Emeritus of Management in the Graduate School of Business at Stanford University. He was awarded the Nobel Memorial Prize in Economic Sciences in 2001. jonathan schleFer wrote this article for the New York Times.

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teen former planning ministers, finance ministers, and business leaders to join the group—but only two economists: the Nobel laureate Robert M. Solow, who “probably knew more than anyone else about growth,” he said, “and me, who didn’t.” He seems to have learned fast. In recent years, Spence has become something of an expert on the Chinese economy after being invited by Beijing, along with Edwin Lim, a former chief World Bank representative in China, to put together an unaffiliated advisory group, supported by the Cairncross Economic Research Foundation. The group has met inten- sively with the Chinese government’s key planning and economic officials and conducted what those officials have called an unprecedented study of China’s development challenge. While Spence has come away impressed with how “curious and open” Chinese officials are, he also doesn’t mince words about how serious Chi- na’s problems are. With the global economy increasingly dependent on China, the danger is that the nation is “on a collision course with its own growth model,” he said in an interview. The Chinese must move beyond low-wage exports and “generate a fair amount of demand domestically, or they’ll fail.” China faces a daunting challenge called the middle-income transition, where developing nations have repeatedly stumbled. Since Japan rebuilt after World War II, only the Asian Tigers—South Korea and Taiwan and the city-states of Singapore and Hong Kong—have made it from middle- income status. In the modern era, poor nations have often found that the most effec- tive strategy to jump-start their economies is to specialize in low-wage exports, tapping vast global demand. But the middle-income transition, Spence argues, requires a much more sophisticated economic policy, with nations gradually moving up the ladder of producing more complex industrial goods, and, importantly, strengthening domestic demand for consumer goods. Moreover, an export-led strategy no longer can rely on nearly insatiable demand from the United States, as the Asian Tigers could through the end of the twentieth century. Stagnant economies in Europe and Japan limit global demand even more. China therefore faces unusually harsh pressures

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to increase the buying power of its own consumers if it wants to make the leap to a truly prosperous nation. This is a fairly conventional Western view of the Chinese economy. But what was surprising is that it was a central theme of the no-nonsense 2011 report prepared under Lim and Spence—and that Beijing published it not just in English but in Chinese for domestic consumption. Further discussions in 2013 helped Liu He, a top economic adviser to President Xi Jinping, and his colleagues formulate major reforms approved at a Com- munist Party plenum in November.

Poor nations often try to specialize in low-wage exports, but the middle-income transition, Spence argues, requires a much more sophisticated economic policy.

Barry J. Naughton, professor of Chinese economy at the University of California, San Diego, says Spence deserves some credit as he “has encour- aged top Chinese advisers, and maybe even helped them think up these ideas.” The 2011 report (another based on the 2013 discussions will be pub- lished) details a host of problems: steadily worsening income inequality and a reduction in the amount of economic activity going to wages from two-thirds of GDP in 1980 to barely half today. It laments an “enormous” three-to-one disparity between urban and rural wages, and worse dispari- ties in health care provision, a fragmented school system, and poor social services. The report calls for reversing these troubling trends, thus both strength- ening domestic demand and pressuring firms into more innovative, pro- ductive sectors. It also calls for exposing huge public sector banks and often-inefficient state-owned companies, controlling more than half of China’s fixed investment, to more market pressure. Though the Lim-Spence group includes many economists, its recom- mendations step outside well-known economic models. Those models say plenty about exposing firms to market pressure and something about supporting short-run demand. But they say nothing about the long-term

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global demand deficit that Spence worries about or China’s need to delib- erately shift the composition of demand. Nonetheless, these are coherent ideas based on experience, Spence argues. The need to tap long-run demand can be seen at work in poor countries that export into the global economy, and they surely apply in different ways to advanced nations. But clarifying such ideas in formal models belongs very much on economists’ “to do” list, he says. But just because top officials in China have endorsed an economic reform agenda doesn’t mean they will actually adopt it. Lots of Chinese are saying, “we’ll believe it when we see it,” Spence said with a sigh. China’s eleventh Five Year Plan (2006–10) also called for strengthening domestic demand, but it weakened instead. In 2000, private consumption account- ed for 46 percent of GDP, but by 2012 it had fallen to a mere 36 percent of GDP. The November party plenum called for some 20 percent of the Chinese population to migrate from rural to urban areas, where wages and social services are far better. But cities are starved for taxes, so they increasingly turn to real estate ventures and borrowing via “financial vehicles,” notes Anthony J. Saich, a China expert at the Harvard Kennedy School. Cities will not even provide schooling for children of millions of rural migrants who lack official residency permits, and they resist issuing more permits.

“If the party does not deliver real progress to the vast majority of Chinese—it’s a very inclusive concept—they will fail.”

The profits of state-owned firms, today almost wholly reinvested, would seem to be a natural revenue source. The November plenum called for channeling 30 percent of profits into government coffers. But the managers of those firms are fiercely resistant to any incursions on their independence. “The mountains are high, and the emperor is far away,” Saich said, echoing an ancient proverb that suggests that China hasn’t changed as much since the Communist Revolution as it might seem. For all the fears elsewhere of the emergence of a powerful China, the whole world has a stake in its ability to develop into a successful advanced

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economy, according to Charles Kenny, who has published a new book, The Upside of Down: Why the Rise of the Rest Is Good for the West. But it is still not clear whether China can negotiate the treacherous path from middle-income to high-income status. Beyond the economic challenge, political obstacles abound. A rising middle class inevitably seeks a larger role in decision making. Spence doubts that officials think China immune to such pressure, but they do not yet deem the time right for moves toward democratization.

Just because top officials in China have endorsed an economic reform agenda doesn’t mean they will actually adopt it.

The traditional Chinese alternative has been “a rather small civil ser- vice surrounding the emperor,” he says. “It’s a meritocracy, selected by examination.” These are the talented, Western-educated officials the Lim- Spence group has come to know. With its thousands of years of centralized decision making, China may never resemble a Western democracy. But the elite recognizes it must sus- tain popular support, Spence says. “If the party does not deliver real prog- ress to the vast majority of Chinese—it’s a very inclusive concept—they will fail.”

economy, according to Charles Kenny, who has published a new book, The Upside of Down: Why

Reprinted by permission of the New York Times. © 2014 The New York Times Co. All rights reserved.

economy, according to Charles Kenny, who has published a new book, The Upside of Down: Why
economy, according to Charles Kenny, who has published a new book, The Upside of Down: Why

Available from the Hoover Institution Press is Constitutional Conservatism: Liberty, Self-Government, and Political Moderation, by Peter Berkowitz. To order, call 800.888.4741 or visit www.hooverpress.org.

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Reform Conservatism and the Junior Senator from Utah

“In the absence of a unifying conservative reform agenda,” says Mike Lee of Utah, “there will be a lot of bickering. We need to fill the void.” An interview with Peter Robinson.

Peter Robinson, Uncommon Knowledge: Mike Lee grew up in Utah, received his undergraduate degree from Brigham Young Univer- sity in 1994, and graduated from the BYU Law School in 1997. Lee has clerked for Supreme Court Justice Samuel Alito, served as an assistant US attorney in Salt Lake City, and practiced law with large firms in Salt Lake City and Washington, DC. In the tea party year of 2010, Lee was elected to the US Senate on the Republican ticket, defeating his Demo- cratic opponent by a ratio of almost two to one. In recent months, to quote New York Times columnist Ross Douthat, “The junior senator from Utah has pivoted from leading the ‘defund ObamaCare’ movement to basically becoming a one-stop shop for provocative reform ideas. Lee’s proposals are more interesting and more promising than almost any - thing Republicans campaigned on in 2012.” Senator Lee, welcome. Senator Mike Lee: Thank you.

miKe lee is the junior US senator from Utah. peter robinson is the editor of the Hoover Digest, the host of Uncommon Knowledge, and a research fellow at the Hoover Institution.

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THE NEED FOR CONSERVATIVE REFORM

Robinson: “It’s hard to believe,” you said in a speech at the Heritage Foundation late last year, “but by Election Day 2016 we will be about as far from Reagan’s election as Reagan’s election was from D-Day.” It’s time to get over Ronald Reagan? Lee: Certainly not over him. It’s time to move forward with an agenda that meets our needs, the needs of today. These needs are always changing. When we think about the fact that 2016 will be about as far away from Reagan’s election as Reagan’s election was from D-Day, it reminds us of the fact that we have to constantly be looking for ways to retool our agenda. Robinson: All right. Ramesh Ponnuru in the National Review wrote that, after the election of Barack Obama, the GOP “was consumed by a bitter debate over the legacy of George W. Bush. Conservatives came to regard the fight against fed- eral overspending, ObamaCare, and big government as nearly the entirety of the conservative program.” You were elected in 2010. Does that feel accurate to you that the Republican Party as it was represented in the Senate and the House was the party of essen- tially no—no to Obama? Lee: In many respects, yes, and with good reason. We always have to be mindful of the need to resist the kind of government we don’t want. That’s been something that has marked American history from the very beginning, going all the way back to 1773, when some American patri- ots boarded a ship in Boston Harbor and tossed crates of English tea into the water in symbolic protest against the kind of national govern- ment they did not want: a London-based national government that was taxing them too much; that was regulating them quite oppressively; that was so far from the people that it was slow to respond to their needs. It took us fourteen years to get from that moment to Philadelphia. So Boston was where we started protesting against the government we didn’t want and—having declared, fought for, and won our indepen-

THE NEED FOR CONSERVATIVE REFORM Robinson: “It’s hard to believe,” you said in a speech at

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dence—fourteen years later in Philadelphia we embraced the kind of gov- ernment we did want. So my point is we will continue to have our Boston moments. We will always have those, as needs arise where we need to push back against the kind of government we don’t want. But we also have to start having our Philadelphia moments too, and that’s what this conserva- tive reform agenda is all about. Robinson: I want to make sure that point stands out very clearly. So there are times when saying no is necessary and valuable in itself. It was impor- tant to stand up during those first Obama years? Lee: It’s important to do that, and it will continue to be important to do that. But it’s not enough. We have to do more. In addition to protesting against the kind of government we don’t want, we have to embrace the kind of government we do want. Robinson: One more reference to the Heritage Foundation speech you gave last year. You drew a comparison between the present day and the late ’70s and early ’80s. In 1976 the conservative candidate, Ronald Reagan, tried to wrest the Republican presidential nomination from the establishment candidate, Gerald Ford. Reagan lost, but four years later he grasped the nomination and the presidency itself. You said, “The difference between 1976 and 1980: the hard, heroic work of translating conservatism’s bedrock principles into new and innovative policy reforms.” That’s what you’re about now. Lee: Yes, exactly. In 1976 the conservative movement in America found a conservative leader for the ages in Ronald Reagan. But we still failed to win an election in that year. We still failed to get that conservative leader for the ages in office in 1976. What really changed between 1976 and 1980, when we finally got that conservative leader for the ages elected, was that we developed an affirmative policy agenda—a reform agenda—and that’s what we need now. Robinson: Margaret Thatcher said, “first you win the argument, then you win the vote.” Lee: Yes.

ONE

BITE

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Robinson: Once again, your Heritage Foundation speech: “I submit that the great challenge of our generation is America’s growing crisis of stagna-

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© CQ Roll Call/Bill Clark

tion and sclerosis—a crisis that comes down to a shortage of opportuni- ties.” So, before you figure out the reforms, you define the problem, and it’s overwhelmingly an economic problem in your view. Lee: Yes. It’s an economic problem, and it manifests itself at every level on the economic ladder. Among the poor it shows up as immobility. These people very often are trapped in poverty by government policies. I blame not those who are in poverty but the government policies that are trapping them there. In the middle class you see a degree of insecurity where people—when- ever they find that they’ve achieved a little bit of additional income, if they’re ever able to get to that point in the first place—they find that once they have that additional income it’s been swallowed up by taxes and by higher prices brought about by inflation, some of it resulting from our monetary policy and some of it resulting from overregulation, costing the American economy $2 trillion a year, and that of course gets passed down- stream to the end consumer. And then at the top of the economic ladder, you see a different kind of problem—also created by government—in that you’ve got people who are held in place at the top of the economic ladder by cronyist privilege. Having climbed to the top of the economic ladder them - selves, they’re willing to pull up the ladder behind them, making it more difficult for others to get to where they’ve gone. Some of these same people are held in place artificially by the government through a combination of subsidies and the kinds of regulations that create natural barriers to entry. Robinson: All right. Senator, we’re talking about conservative reform here. Among the specific pieces of legislation you’ve proposed are the Transportation Empowerment Act, the Family Fairness and Opportu- nity Tax Reform Act, and the Working Families Flexibility Act. From the conservative point of view, it almost seems as though you’re offer- ing reforms that you yourself consider quite modest. Here’s the federal Leviathan and here we have Mike Lee, who in his first two years got a reputation as a tea party, vehemently antigovernment senator, and when it comes to the legislation and reforms Mike Lee is actually introducing, they’re not so big. How come?

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ONE STEP AT A TIME: Mike Lee, the junior US senator from Utah, arrives at the Capitol for a vote last year. Lee was elected in the tea party year of 2010. One pundit says that “Lee’s proposals are more interesting and more promising than almost anything Republicans cam- paigned on in 2012.”

Lee: Look, if you’ve got an elephant and you want to eat that elephant, you can’t swallow the elephant all at once. You’ve got to take a bite at a time. We can do that in a way that still shows our bold colors as conservatives. It doesn’t require us to put on pastels and blur the differ - ence between conservatives and people who are not conservative. But we need to do it a step at a time, and these are very digestible pieces of legislation, very digestible reforms, that could move forward sometime in the next few years and could gain the support of a majority of the members of both houses of Congress. So that’s why it’s important to do this. Abraham Lincoln said that the most important function of govern- ment was to clear the paths of laudable pursuit, to lift artificial weights

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from the shoulders of all, and thus provide for a fair start in the race of life, and that’s really what we’re trying to do. Here, many of these arti- ficial weights are placed on the shoulders of Americans by the federal government. We’re looking for ways that we can start removing some of those weights. We might not be able to remove all of them, and maybe not all at once, but if we can remove one or two of them here or there, it’s a good start. Robinson: So you’re also making decisions about your career as a mem- ber of the US Senate. I think they still say that the choice a senator has to make is whether to be a workhorse or a showhorse. In office just over two years and you’re not just railing against the federal government, you have said: I want to get things done in this chamber; I want to move legislation. Is that correct? Lee: Yes, that’s fair to say. Robinson: But you’re still not comfortable with it? Lee: Well, I would say that I reject the premise that you have to choose necessarily between painting in bold strokes that show where you want to go long-term and painting with smaller, more-detailed strokes that show where you want to go right now. I think you can do both at the same time. I think you can walk and chew gum simultaneously. And this is an attempt to do that. Robinson: Back to your Heritage Foundation speech. You talked about comparing today’s reform conservatism with a Reagan agenda. Here’s what occurs to me, particularly as we think about 2016 and a Republi- can candidate running for president, that the Reagan agenda, by the time he came into office was just sweeping and he set into place a domestic agenda—tax cuts, rolling back legislation—that launched a quarter of a century of economic growth. It’s that Reagan recovery that makes the current recovery look so weak, so tepid. I grant you your argument that if you are serious about getting things done in the US Congress, you’ve got to take it bite by bite. But put all of this together and I don’t see that it’s enough for conservatives to run on in 2016. There’s not an embrace of new growth, a new opportunity for the American economy. I know that you believe that free markets can do far more for the poor than the federal government ever can. So what’s missing here? You’re saying: this

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is what I, as one member of the US Senate have attempted to offer; let’s keep talking; we as conservatives need to continue the conversation. Is that what you’re saying? Lee: Yes. This is nowhere near complete. I never intended to sug - gest that what I proposed so far is a complete package of conservative reform proposals that can cure all the ailments of the federal govern - ment. It’s a good start and we’re still moving forward with a lot more, but just as important, what we’re trying to do here is connect a consis - tent thread of conservative thought through all of these proposals and the other proposals that will follow—the others that have not yet been introduced—to connect them together and help do what Reagan did, which is to help the average voter out there understand why it is that conservative principles will be good for them, why it is that conserva - tive principles will help the poor, and why it is that they will help the middle class. That’s what Reagan did so effectively, and that’s what set in motion the sequence of events that led to the greatest economic recovery that we’ve seen in recent memory. That’s what we need again today, but the common thread is conservative principles connecting up the middle class and the poor and helping them understand how this benefits them. Robinson: So Mike Lee’s message to conservatives is not that it’s all that simple, but here are a few pieces of legislation—more to follow—this is how it can be done. Lee: Yes.

THE SHAPE OF THINGS TO COME

Robinson: Let me ask you, if I may, to comment on divisions among conservatives, among the GOP, that if the GOP is to have a serious chance of capturing the Senate and moving on to capture the White House, need to be dealt with. By the way, if you don’t think these divisions are as deep as the press tends to suggest, say that too if you would. Lee: I again reject the premise that one must choose between on the one hand voting according to one’s conscience and on the other hand winning elections. Good policy leads to good politics, especially if you’re consistent in the reasons for your voting pattern. So I don’t think it’s a good idea for

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us as Republicans or as conservatives to water down our message or to change the way we vote just to make it look like there is less contrast. I think what we need is more contrast rather than less. We need bold colors, not pastels. I think when we paint with pastels the distinction becomes hazy and we lose elections. Robinson: So what about this notion that within the Republican Party it’s the tea party versus the establishment? Lee: Well, we can’t take it too far. There will frequently be a gap between a party’s base and its elected political leaders, and right now I think that gulf is exactly the size and the shape of a conservative reform agenda. That’s why we need the conservative reform agenda. This can help bridge that gap and fill that hole so that we can move forward on a somewhat united front in pursuing this agenda. Robinson: Because the entire divide between the establishment and the tea party comes down to one question: how to respond to Barack Obama’s agenda. The tea party says, vote it down. The establishment, broadly speaking, says we may have to compromise here and there. But as long as it’s a question of responding to Obama’s agenda, that divide will persist. Is that the argument? Lee: Yes, that’s right, and in the absence of a strategy and the absence of a unifying conservative reform agenda, there will be a lot of bickering. That void will be filled; it’ll just be filled with a lot of contention within the party that won’t necessarily be good for the party. I’m trying to fill it with something that’s positive, that can unite us as a party, and help us win elections. Robinson: This question is based on your comparison between the Reagan years and the present. The country has changed to some extent, in some ways deeply. Daniel Patrick Moynihan, in a 1965 report titled The Negro Family: The Case for National Action , wrote: “The funda - mental problem is that of family structure. The Negro family in the urban ghettos is crumbling. So long as this situation persists, the cycle of poverty and disadvantage will continue to repeat itself.” When Moynihan wrote those words in 1965, the illegitimacy rate among African-Americans was 25 percent. Today among whites it’s over 30 percent, among Hispanics more than 50 percent, and among African-

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Americans over 70 percent. You could come up with reform conser - vatism on issue after issue, but what does it matter if the American family continues to collapse? Lee: This is what reform conservatism is all about. The entire focus of my conservative reform agenda is to help strengthen and bolster the twin pillars of our civilization: free market economies and voluntary institu- tions of civil society, including families, churches, synagogues, and other voluntary associations. The bigger government gets, the more muscle it flexes, and the more the muscle of free markets and civil society will tend inevitably to atrophy. So reform conservatism focuses on how we can get the federal government to pull back, especially in those areas where it’s causing a lot of these problems, where it’s making more severe a lot of these societal problems—problems that relate to the family structure and so forth—where it’s holding people in poverty, where it’s creating undue disincentives for people to work, and to get married and stay married. If we stop creating those disincentives, if we get the federal government in the right place— Robinson: Not necessarily smaller, but in the right place. Different pro- grams. Are you saying that past a certain size the federal government tends to crowd out family? Lee: It tends almost inevitability to crowd other things out as it gets big- ger and bigger. So, yes, I am saying it’s necessary for it to be smaller, but that doesn’t necessarily mean that you simultaneously shrink everything in the federal government at an equal rate because there are some things that only the federal government can do and there are other things that the federal government perhaps ought to allow someone else to do, whether that someone else is a state or local government or a voluntary institution of civil society. Robinson: This November, fifteen Republican and twenty-one Demo- cratic seats in the US Senate will be up for re-election. To capture control of the Senate, Republicans need a net gain of six. Care to call it? Lee: Yes, I think we’ve got a better than even chance of gaining at least six seats in the US Senate this November. Obviously we’ve still got a long time before that happens, so it’s too early to call, but we’ve got a lot of red-state Democrats who are up for re-election. We’ve got a few other

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Democratic senators who are retiring in states where we appear quite well- positioned to be able to recapture the seats. Robinson: When the next Congress is sworn in in January, you could be joined by Congressman Tom Cotton—Harvard Law School, two tours of duty, and now running for the Senate from Arkansas. You think of your generation of members in the Senate now: you, Ted Cruz, John Barrasso, Marco Rubio. The US Senate has not for a couple of decades been the place where the action was, but it could be, couldn’t it? Lee: It could be. Tom Cotton is a very exciting candidate. He’s done great work in the House, and his background and expertise will make him a very effective senator, and I look forward to working with him. There are others out there that will be joining us; many of them are younger Ameri- cans much like Tom Cotton. Ben Sasse in Nebraska is somebody I’m really excited about, a younger American who’s running for the US Senate, and I frankly expect that he will win and that he’ll be a great colleague. Robinson: So you could have fun? Lee: Absolutely. Robinson: Mike Lee, junior senator from Utah, thank you. Lee: Thank you.

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Game of Loans

Banking crises are a product of people and strategy, not mysterious forces, say Hoover fellows Charles W. Calomiris and Stephen H. Haber. By Kathryn Jean Lopez.

“Everyone knows that life isn’t fair, that ‘politics matters,’ ” Charles W. Calomiris and Stephen H. Haber write in their new book, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit (Princeton University Press, 2014). “We recognize that politics is everywhere,” they continue, “but somehow we believe that banking crises are apolitical, the result of unforeseen and extraordinary circumstances, like earthquakes and hailstorms.” That’s simply not true, Calomiris and Haber argue: “The pol- itics we see operating everywhere else around us also determines whether

societies suffer repeated banking crises

or never suffer banking crises.”

. . . Fragile by Design will make you skeptical of the “version of events told time and again by central bankers and treasury officials,” and criti- cal when that version is “repeated by business journalists and television talking heads.”

charles w. calomiris is a co-chair of the Hoover Institution’s Regulation and the Rule of Law Initiative. He is the Henry Kaufman Professor of Financial In- stitutions at the Columbia University Graduate School of Business and a professor at Columbia’s School of International and Public Affairs. stephen h. haber is the Peter and Helen Bing Senior Fellow at the Hoover Institution; director of Hoover’s Working Group on Intellectual Property, Innovation, and Prosperity; and the A. A. and Jeanne Welch Milligan Professor in the School of Humanities and Sciences at Stanford University. Kathryn jean lopez is editor at large of National Review Online.

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Kathryn Jean Lopez, National Review Online: Is the “Game of

Bank Bargains” anything like Game of Thrones? Why do you set things up this way? Stephen W. Haber: Well, there are a lot fewer beheadings in the Game of Bank Bargains than in Game of Thrones, and none of the protagonists in our book are fifteen-year-old monarchs with antisocial personality dis- order. More seriously, the point of explaining bank regulation as a game in Fragile by Design is to get across the idea that laws and rules are not produced by robots programmed to maximize social welfare. They are the outcome of strategic actions of interested parties—a game, as it were— and those strategic interactions can produce unlikely alliances that work against the interests of society as a whole. Let’s take the United States in the 1990s as an example. There was a strategic alliance that consisted of banks that were in the process of merg- ing and activist groups. The activists supported bank-merger applications, and in exchange the banks directed hundreds of billions of dollars in mortgage credit through the activist groups. In order to make this alliance stable, the megabanks and the activists had to draw the housing GSEs [government-sponsored enterprises], Fannie Mae and Freddie Mac, into the partnership. Fannie and Freddie agreed to purchase the loans that the megabanks had made to satisfy their activist allies, and in return received the right to back their portfolios with paper-thin levels of capital. Each of the three players in this game had a strategic objective: to further its own interests. The one group that did not have a seat at the table as the game was being played was taxpayers, who were presented with the bill when the game was over.

“Housing subsidies turned out to be a very expensive lunch.”

Lopez: Is there a danger you downplay morality in banking? Charles W. Calomiris: Policy in banking, as in all things, should be morally defensible. As James Madison recognized, however, moral achievements of government are largely the consequence of the quality of rules that govern a society, not the inherent virtues of its citizens. Laws, he reminded us, are not fashioned for angels, but rather to govern the

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affairs of flawed human beings. Most important perhaps, good laws and regulations predictably occur more in societies whose rules of political engagement make it harder for groups of citizens to use the government as a means of taking advantage of other citizens.

“Laws and rules are not produced by robots programmed to maximize social welfare.”

Lopez: Do taxpayers have any control over this, a real role to play in banking and financial reform beyond praying the money is real? Haber: They absolutely do! The laws that govern the banking system are passed by our elected representatives. Obviously, the average taxpayer is not going to become an expert on the arcane details of bank regula- tion. But taxpayers can apply a simple heuristic: there are no free lunches. When a government official promises a subsidy, taxpayers should ask, who is ultimately going to bear the cost of that subsidy? When a government official promises a subsidy and implies that no one is going to bear the cost, taxpayers should grab hold of their wallets. Taxpayers might keep the following example in mind: Americans were told that the mortgage giants Fannie Mae and Freddie Mac should receive a range of special privileges that subsidized their operations, because those subsidies were passed on in the form of reduced costs of home ownership. Everyone was getting a free lunch. This turned out to be false on two counts. First, a large body of research has shown that the majority of the subsidy was captured by Fannie and Freddie’s stockholders and managers, not home owners. Second, when Fannie and Freddie failed in 2008, they had to be bailed out at enormous taxpayer expense. Housing subsidies turned out to be a very expensive lunch. Lopez: Is Canada better at banking than we are? Calomiris: In Fragile by Design, we show that banking instability and credit scarcity are not inevitable outcomes dictated by the nature of banks, per se, but rather are outcomes of a political bargaining process. It’s not that Canadian bankers are more innovative or brighter than American bankers. The political rules of the game, defined by Canada’s constitu- tion and under which Canadian banks operate, are and always have been