The Tea Party and the Drug War
The Tea Party and the Drug War
by Jeffrey A. Miron
Voter dissatisfaction with Republicans and Democrats is at historic levels, and the tea-party movement is hoping to play kingmaker in the November elections. The country's current breed of discontent is ideal for the tea parties, because economic concerns are foremost, allowing the movement to sidestep the divisions between its libertarian and conservative wings.
As the elections near, however, voters will want to know where the party stands not just on the economy but on social issues. A perfect illustration is drug policy, where conservatives advocate continued prohibition but libertarians argue for legalization. Which way should the tea party lean when this issue arises?
If the party is true to its principles — fiscal responsibility, constitutionally limited government, and free markets — it must side with the libertarians.
[D]rug prohibition is not remotely consistent with fiscal responsibility.
Fiscal responsibility means limiting government expenditures to programs that can be convincingly said to generate benefits in excess of their costs. This does not rule out programs with large expenditures, or ones whose benefits are difficult to quantify; national defense is guilty on both counts, yet few believe that substantial military expenditure is necessarily irresponsible.
Any significant expenditure, however, should come with a credible claim that it produces a benefit large enough to outweigh both the expenditure itself and any ancillary costs. From this perspective, drug prohibition is not remotely consistent with fiscal responsibility. This policy costs the public purse around $70 billion per year, according to my estimates, yet no evidence suggests that prohibition reduces drug use to a significant degree.
And prohibition has unintended consequences that push its cost-benefit ratio even farther in the wrong direction. Prohibition generates violence and corruption by pushing drug markets underground and inflating prices. Prohibition inhibits quality control, so users suffer accidental poisoning and overdoses. Prohibition destroys civil liberties, inhibits legitimate medical uses of targeted drugs, and wreaks havoc in drug-producing countries.
Jeffrey A. Miron is senior lecturer and director of undergraduate studies at Harvard University and senior fellow at the Cato Institute. He is the author of Libertarianism, from A to Z, from Basic Books.
More by Jeffrey A. MironDrug prohibition, at least when imposed at the federal level, is also hard to reconcile with constitutionally limited government. The Constitution gives the federal government a few expressly enumerated powers, with all others reserved to the states (or to the people) under the Tenth Amendment. None of the enumerated powers authorizes Congress to outlaw specific products, only to regulate interstate commerce. Thus laws regulating interstate trade in drugs might pass constitutional muster, but outright bans cannot. Indeed, when the United States wanted to outlaw alcohol, it amended the Constitution itself to do so. The country has never adopted such a constitutional authorization for drug prohibition.
Finally, drug prohibition is hopelessly inconsistent with allegiance to free markets, regardless of the level of government. Free markets should mean both that businesses can operate as they please and that individuals can purchase and consume whatever they want, so long as these actions do not harm others, even when such decisions seem unwise. Drug prohibition interferes with precisely these activities.
Thus, if the tea-party believes in its principles, it must choose the libertarian path on drug prohibition.
$13,050,826,460,886.97
$13,050,826,460,886.97
by Michael D. Tanner
$13,050,826,460,886.97
That's what the National Debt topped this week, a record.
Go ahead, let it soak in: Thirteen trillion, fifty billion, eight hundred twenty-six million, four hundred sixty thousand, eight hundred eighty-six dollars . . . and ninety-seven cents.
Seen on the "debt clock" in Times Square, that number seems little more than an abstraction, something almost impossible to process. But think about it this way: If you earned one dollar every second, it would take you 416,000 years to earn enough money to pay it off. Or consider: Alex Rodriguez earned $33 million last year, making him the highest paid player in baseball. It would take nearly 400,000 Rodriguezes to earn that much money.
If Democrats and Republicans continue to spend like drunken sailors, it won't really matter who pays the bar bill.
But that's what our children and grandchildren now owe.
Actually, that's just part of the debt we have dumped on future generations. That's because most of what the government owes isn't on the official books.
Social Security, for instance, faces unfunded liabilities of more than $15.8 trillion. And while that sounds like a lot of money, it is dwarfed by Medicare's looming budget shortfall of between $50 trillion and $100 trillion, depending on which accounting measure is used.
So the real national debt may be as much as nine times bigger than the official estimate.
No wonder the bond-rating firm Moody's recently warned that the US government was at risk of losing its AAA credit rating.
This is not a partisan issue. When George W. Bush became president, the entire federal budget was $1.2 trillion. By the time he left office, it was $2.9 trillion, the biggest increase since World War II. A budget surplus in 2000 had become a $400 billion deficit at the end of Bush's term.
Contrary to Republican mythology, it was not just because of increased defense spending and the "war on terror." President Bush increased domestic discretionary spending faster than any president since Lyndon Johnson. His signature accomplishment was a new Medicare prescription drug entitlement that added more than $13 trillion to the program's future liabilities.
But President Obama makes Bush look like a skinflint. He's proposed a budget this year that would top $3.8 trillion.
His signature initiative so far is a new health care entitlement, which will add hundreds of billions to the federal deficit over the next 10 years, and trillions more beyond that.
As a result of this bipartisan profligacy, federal spending topped 24.7% of gross domestic product last year, the highest peacetime percentage in US history. The optimistic projections of the most recent Obama budget see that declining ever so slightly to 23.7% by 2020 (for comparison, the historical average has been roughly 21% of GDP). But that respite, such as it is, will be only temporary. As the full force of entitlement programs kicks in, the federal government will consume more than 40% of GDP by the middle of the century, and rise to an unfathomable 80% of GDP beyond that.
Congress doesn't seem to care, treating debt as an abstraction, monopoly money, someone else's problem. Let them deal with what happens when the US becomes Greece. Except that day may be sooner than they think.
There is no way to tax our way out of this mess. Just keeping up with currently projected spending would require raising both the corporate tax rate and top income tax rate from their current 35% to 88%, the current 25% tax rate for middle-income workers to 63%, and the 10% tax bracket for low-income workers to 25%.
And that's just at the federal level. State and local taxes would be added on top of that.
Does anyone really believe that our economy can survive that kind of taxation?
If Democrats and Republicans continue to spend like drunken sailors, it won't really matter who pays the bar bill.
Michael Tanner is a senior fellow at the Cato Institute.
More by Michael D. TannerWhether government borrows the money or raises it in taxes, every dollar that government spends is a dollar siphoned off from American workers, making us less productive, less prosperous and less free.
Sooner or later, someone is going to have to have the courage to say "No."
Surprisingly, that line may be drawn here — in New York and New Jersey. In Jersey, which faces a nearly $1 billion budget shortfall, Gov. Chris Christie has refused to raise taxes, and has made real cuts in state spending. Meanwhile, Andrew Cuomo, the leading candidate to become New York's next governor, has rejected a proposal by Lt. Gov. Richard Ravitch to borrow $6 billion to close the state's budget gap. Perhaps at least some politicians are learning to live within their means.
Now, if only a tiny bit of that courage would bubble up to Congress.
Stop the Federal Spending Spree
Stop the Federal Spending Spree
by Tad DeHaven
Runaway federal spending has emerged as the chief issue on the minds of voters heading into the fall election season — and for good reason.
In 2000, the federal government spent $1.8 trillion while debt held by the public stood at $3.4 trillion. A mere decade later, the federal government is on pace to spend $3.7 trillion while publicly held debt is approaching $10 trillion.
There's no blame game left to be played. President George W. Bush left office having presided over one of the largest expansions of federal spending in history.
President Barack Obama appears intent on pulling off the amazing feat of making Bush look like a relative tightwad.
And Congress has become so addicted to spending that the new Capitol Visitor Center — itself a $600 million fiscal boondoggle — might need to be converted into a giant methadone clinic.
Tad DeHaven is a budget analyst at the Cato Institute and co-editor of Downsizing Government.org.
More by Tad DeHavenSo what hope do taxpayers have left?
On the Democratic side of the aisle, it appears that there isn't any. While the European welfare states are beginning to collapse under their own weight, the Obama administration and Democrat-controlled Congress are pushing the U.S. full steam ahead toward a similar fate of unsustainable social welfare spending.
Obama's latest budget would push publicly held debt as a percentage of GDP to 90 percent by 2020 — a height last seen at the end of World War II.
Back then the ending of hostilities and a post-war economic boom led to a steady and precipitous drop in the debt as a share of the economy.
In the present day, it is entitlement spending that's driving the debt explosion. Unfortunately, the president's expansion of the government's role in health care will exacerbate the problem, despite the administration's claims otherwise.
Meanwhile, House Democrats just pushed through another $102 billion in spending for allegedly "stimulative" activities. The measures "only" add $54 billion to the deficit, thanks to $48 billion in tax increases.
For their part, Republicans are getting pretty good at halfheartedly objecting to the Democrats' spending orgy. But at a time when citizens are warning both parties to stop their fiscally profligate ways, Republicans need to do more than just say "no." They need to point out the underlying problems with federal spending — for example, that continuing to extend unemployment benefits helps keep unemployment high.
But Republicans, just as much as their Democratic counterparts, are afraid of offending potential voters by threatening to take away their subsidies.
Republican lack of credibility on cutting spending can be seen in the House Republican leadership's new YouCut Web site. Each week the Web site lists five possible spending cuts for citizens to vote on. The "winning" cut proposal then goes to the House floor for a vote.
Engaging citizens in the government's spending crisis is a good idea. The problem: the cuts the Republican leadership has selected thus far are minuscule.
For instance, one item recently proposed for cutting was $1 million in mohair subsidies. In the world of federal agriculture subsidies, this cut represents chump change.
Republicans can't be considered serious about restraining the budget unless they put subsidies for wheat, corn, soybeans, rice and cotton on the chopping block.
The Republicans' anti-spending initiative has caught the attention of House Democrats. House Majority Leader Steny Hoyer recently told Democratic chairmen that they "all need to find some programs to cut."
Unfortunately, the paltry cuts offered up by the YouCut Web site allow the Democrats to keep the bar low when trotting out their own gimmicks.
While neither party's leadership offers taxpayers much hope of ending the spending madness, a few rank-and-file Republicans do appear to understand that their party needs to take bolder steps.
Rep. Paul Ryan (R-Wis.) has introduced a blueprint for reining in runaway federal entitlement programs. Rep. Lamar Smith's (R-Texas) SAFE Act would cap annual growth in the federal budget to inflation plus population growth. In the Senate, Tom Coburn (R-Okla.) has repeatedly offered measures to eliminate unneeded federal programs.
The Republican leadership needs to embrace these efforts, which would signal to apprehensive voters that the party is ready to atone for its big-spending ways of the past decade. Saying "no" to Obama and congressional Democrats' bankrupting policies is fine.
But Republicans need to recognize that voters understand the difference between having one's own agenda and simply being against the other guy's.
Do Sticky Wages Weaken the Case for Markets?
Do Sticky Wages Weaken the Case for Markets?
When Rothbardian economists propose that the United States needs a Federal Reserve about as much as it needs a federal car company, it's not surprising that Keynesians ridicule the notion. What is surprising is that otherwise laissez-faire economists, particularly of the Chicago School variety, think that the market economy is good at producing goods and services except when it comes to money.
Specifically, these lukewarm free-marketeers think that, in a pure capitalist system, wages are "sticky." This observation supposedly proves the necessity of a central bank willing to inject whatever inflation is necessary to kick start the economy out of a deep recession.
As we'll see, this analysis is incorrect. Much of the alleged "stickiness" of wages is due to government policies, and the focus on macroeconomic aggregates overlooks the distortions among sectors that massive inflation causes. Economists who support the free market in other areas should bite the bullet and join the call to end the Fed.
The Alleged Problem of Sticky Wages
In his response to my earlier critique of his call for inflation, Greg Mankiw laid out the mainstream case. After quoting my argument that falling prices could restore equilibrium even if the economy needed "negative real interest rates," Mankiw wrote,
I think this analysis is correct, under the maintained assumption that prices (including wages) are completely and instantaneously flexible. But if prices are sticky, then the immediate deflation and concurrent increase in expected inflation won't occur painlessly. Instead, it would take a while for the price level to fall, and as we wait, the economy would suffer through a period of depressed economic activity.
According to conventional new Keynesian analysis, sticky prices are the ultimate market imperfection that makes aggregate demand matter. If you deny that prices are sticky and assume they can instantaneously jump downward to new equilibrium levels, many macroeconomic problems become much easier to solve. Indeed, you don't need to solve them at all, as the market would do it.
I wish we lived in the world that Mr Murphy describes, but my reading of the evidence is that we don't. (emphasis in original)
Mankiw is not alone in his view. For example, I recently debated a Fed economist who agreed with me on just about every major economic issue. But he thought that in periods when the demand to hold money increases sharply — such as in the early 1930s — that it is the job of the Federal Reserve to print new money to quench the thirst.
Because the Fed did not do so, it meant the exchange value of dollar bills had to rise, which is the same thing as saying that prices (quoted in dollars) had to fall. This led to massive unemployment, because workers' wages allegedly were much stickier than the prices of other products, meaning that businesses saw labor getting more and more expensive as the Depression intensified.
Finally, we have the case of Scott Sumner, a "right-wing" economist who is quite libertarian on most points. But Scott's claim to fame is that he thinks Bernanke was too timid during the crisis of 2008, and didn't create enough new money in the midst of the global financial panic. As a result, Scott thinks the United States suffered through an unnecessarily sharp recession, which a healthy dose of inflation could have greatly mitigated.
The Government Itself Makes Wages Sticky
As so often happens, the proponents of government intervention are pointing to a problem that is greatly exacerbated by the government itself. Recall that the trouble stems from workers not being willing to take pay cuts. When the demand from employers drops, at the old wage rate there is now surplus labor — a.k.a. unemployment. Only when market wages drop to a lower level, so that demand once again matches supply, will equilibrium be restored in the labor market.
Now we have to ask, why do workers hold out for so long without jobs, insisting on wages that no one is willing to pay? After all, the other goods and services in the economy see their prices fall in a speedy fashion even though the sellers of these items depend on them for their livelihood. So if a street vendor knows enough to slash his hot dog prices when demand collapses, why don't hairdressers accept pay cuts when the same happens to their industry?
In the case of the Great Depression, the answer is simple enough: the federal government didn't allow wages to fall. After the 1929 crash, Herbert Hoover gathered the nation's leading businessmen for a conference in Washington and urged them to allow profits and dividends to take the hit, but to spare workers' paychecks. Rather than cut wages, businesses were supposed to implement spread-the-work schemes where workers would cut back their hours.
The rationale for Hoover's high-wage policy was that the worker supposedly needed to be paid "enough to buy back the product." Hoover had bought into the trendy new economic theory blaming depressions on underconsumption. The idea was that wage cuts would just cause workers to cut their spending, which would in turn lead to another round of wage cuts in a vicious downward spiral.
Because of the uncertainty and actual reduction in the stock of money (an accident of the fractional reserve banking system when people withdraw their cash from banks), prices in the economy fell drastically in the early years of the Depression. But because of pressure from the government, businesses allowed wage rates to fall very slowly. As a result, real wages (i.e., paychecks adjusted for price deflation) actually rose more quickly during the early years of the Depression than they had during the Roaring Twenties! Because labor got more and more expensive, unemployment surged to an unprecedented 25 percent by 1933.
In our times, the extension of unemployment benefits is the most obvious example of a government intervention that prolongs job searches. Rather than accepting a job for lower pay than they are accustomed to, laid-off workers can continue their quest for much longer than would be the case in a free market. (Incidentally, Chicago School economists agree, and so does Mankiw.)
To see that wages can adjust on a relatively free market, even in the face of massive shocks to the economy, consider the 1920–1921 depression. From its peak in June 1920, the Consumer Price Index fell 15.8 percent over the next 12 months — a one-year price deflation that was half again more severe than any one-year drop during the Great Depression.
Even so, the economy quickly bounced back and entered the prosperous 1920s. The answer wasn't a massive injection of Fed money, either; in fact the Fed had jacked rates up to record high levels.
On the contrary, the reason the US economy quickly adjusted in the face of massive price deflation was that wages fell quickly too, dropping about 20 percent in a single year.
There's More to an Economy than Aggregate Price Levels
In the above section we saw that the argument that a free market has "sticky wages" and therefore requires massive doses of inflation simply doesn't hold up empirically. Ever since the 1930s, there have been systematic government (and labor union) efforts to prop up wages during economic downturns. In the relatively laissez-faire year 1920, wages fell quite rapidly to eliminate unemployment in the face of a collapse in prices.
But let's put all that aside, and tackle the issue head-on: Suppose that even on a relatively free market for some reason the demand to hold cash suddenly spikes. If the central bank stands by and does nothing, the increased demand for cash balances (with a constant stock of money) would lead to a general fall in the prices of goods and services. As businesses saw the demand for their products plummet, they would lay off workers. In principle, it could take years for wage rates to fall as much as other prices, meaning the economy would be operating below capacity for a long time.
In our hypothetical scenario, couldn't the central bank alleviate the misery by printing up wads of new cash early on? That way, the demand to hold more money would be satisfied by an increase in the number of dollar bills rather than by a wrenching fall in prices.[1]
To see why this suggested remedy is quite dangerous, let's forget about the sudden demand to hold more cash. Suppose we had an economy with a stable demand for cash, and all of a sudden the central bank doubled the money supply. What would happen?
Of course, in the long run, prices in general would rise, perhaps doubling. But in the interim, there would be other effects. In practice, when the central bank increases the money supply, it doesn't magically augment every single person's cash balance by the same percentage. No, some lucky recipients get the new money first. These people then have the ability to spend the newly created dollars at the old prices. They would therefore become relatively richer.
On the other hand, the people who were last in line to receive (or spend) the new money, would see prices rising at the store while their incomes were stuck at the old levels. These latecomers to the party would become relatively poorer.
Beyond the one-shot redistributive effects, there is also the damage caused by the existence of an inflationary central bank in the first place. Knowing that the bank had the ability to inject massive doses of new money into the market, investors and businesspeople would have less faith in the long-run purchasing power of the money unit. They would spend time and devote resources to hedging themselves against erratic central banking decisions, rather than focusing exclusively on the "fundamentals."
All of these problems hold true in a scenario starting with a sudden demand to hold more cash. In reality, it's not the case that every single person suddenly wants to increase his cash holdings by x percent, or that the central bank can instantly endow every person in the economy with the exact amount of new cash that he wishes to accumulate. (And even if it could, who wouldn't then say, "In that case, I'd like some more hundred dollar bills, please"?)
When people become fearful of the future in times of economic uncertainty, they naturally aim to bolster their liquid assets, especially their holding of money. But each person will cut back on his "normal spending" in a unique way. One person might cut out his weekly visit to his favorite restaurant, while another will sell some of his old baseball cards. In order for these subtle differences to be communicated through the economy, entrepreneurs need to see the changes in relative prices. In our example, workers need to leave the restaurant industry, while speculators may want to attend baseball card shows looking for bargains.
By dumping gobs of new money into a few access points of the economy, the central bank overlays these nuanced signals with a huge amount of interference. Only in simplistic macro models, which contain a few variables like M and P, does the "shock" of the increase in demand for money become perfectly offset by the increase in M. In reality, these two different disturbances don't cancel each other out. The economy is in fact left to deal with the real events that fueled the panic in the first place — people don't suddenly decide to hold a bunch of cash for no good reason — as well as the huge injection of money into the hands of politically connected bankers.
Conclusion
The argument of sticky wages does not justify the existence of a central bank. Market prices, including wages, are flexible enough to smooth out macroeconomic disturbances. To the extent that workers hold out for a better job, rather than take a pay cut, this too reflects a legitimate outcome on a free market. Only in a simplistic macro model, with ad hoc assumptions about wages and prices, can the central bank improve the economy.
Excuse Me, Madam Secretary
Excuse Me, Madam Secretary
Responding to a question at the Brookings Institute, US Secretary of State Hillary Clinton remarked,
Brazil has the highest tax-to-GDP rate in the Western Hemisphere and guess what — it's growing like crazy. And the rich are getting richer, but they're pulling people out of poverty. There is a certain formula there that used to work for us until we abandoned it, to our regret in my opinion.
Socialists are always telling us such things. At some place, at some time, water is observed flowing upstream, at least it seems that way, and — voilà! — the laws of economics are all thrown out the window.
First of all, one observation does not prove anything. Economics isn't that way. Mrs. Clinton is just revealing how ignorant she is of economic science. What is your theory, Madam Secretary, of the relationship between tax policy and economic growth, and what do all the data say? Economics isn't climatology. We don't get to hide the inconvenient data.
Second, economic theory doesn't say much about the ratio of "tax revenue" to GDP and economic growth. There are several reasons for this. I'll briefly list four reasons and then spend some time on a fifth.
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Are the revenues generated by the sale of products and services by government enterprises categorized as tax revenues? Clearly, if Brazil counts oil sales as tax revenue and Mexico does not, comparisons of the ratio of tax revenue to GDP to the rate of economic growth are meaningless.
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How much of government spending is financed by the issue of bonds, how much by the issue of fiat money, and how much by taxation? Clearly, if the United States finances half of federal government spending by issuing bonds and Brazil has a balanced budget, comparisons of the ratio of tax revenue to GDP to the rate of economic growth are meaningless.
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To what extent does mandated social insurance involve cross-subsidies? Clearly, if Chile has privatized social security, putting it onto a funded and actuarially fair basis, while the United States has a nonfunded and egalitarian system of social security, comparisons of the ratio of tax revenue to GDP to the rate of economic growth are meaningless.
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To what extent are taxes collected via low, broad-based tax rates? Clearly, if Brazil has substantially flattened its tax structure, so that it raises most of its tax revenue from low rates applied uniformly to broadly defined economic activity, and the United States exempts the lowest half of income earners from the federal income tax and applies the highest marginal income-tax rates in the world on the highest income earners, comparisons of the ratio of tax revenue to GDP to the rate of economic growth are, well, they aren't meaningless, but they are nonlinear.
Because of the above four concerns, those who developed both the Fraser Institute's index of economic freedom and Wall Street Journal/Heritage Foundation index do not use the ratio of tax revenue to GDP as part of their index. They look at a ratio of government expenditure to GDP and they look at the top marginal tax rates.
While each of the above four issues is important, the issue I want to focus on is the difference between the level of GDP and the rate of growth of GDP. The United States has long had a relatively free-market economy. As indicated by the index of economic freedom compiled by the Fraser Institute, on a scale of 1 to 10, the United States went from 7 in 1970 to 8 point something in 2000. Then, under the august leadership team of President George W. Bush, House Speaker Tom DeLay, and Senate President Pro Tempore Ted Stevens, economic freedom slipped a bit during the '00s, as we gambled US Economic Freedom on Operation Iraqi Freedom. As the numbers come to be compiled for our current leader, the Great One, they are sure to slip a bit further.
So, what would you expect would happen to economic growth in the United States during the past 30 years? You would expect strong economic growth during the 1980s and '90s, as our economy responded to the greater incentives to work, save and invest, exactly as happened. And, you would expect a slowdown during the '00s, exactly as happened. So, rather than contradicting the laws of economics, the recent track record of the United States further validates the already well-established laws of economics.
Now, let's turn to Brazil. Forty years ago, Brazil was a mixed economy, with elements of populist socialism and fascism. Not surprisingly, it was also a poor economy. Then, beginning in the late 1980s, the country began to implement economic reforms. Perhaps most importantly, it replaced its multidecade run of triple-digit inflation with a new and relatively stable currency. It also embraced the worldwide trend of privatizing state enterprises, freer international trade, deregulating the domestic economy, and lower marginal tax rates.
On the specific issue of marginal tax rates, Brazil's are lower than those of the United States (although both are given the same index number for 2007 by the Fraser Institute). In Brazil, the top corporate and individual income-tax rates are 25 and 27.5 percent, while in the United States, the comparable rates are both 35 percent. As to how Brazil can generate more revenue as a percent of GDP with a lower top marginal rate than we do in the United States, the reason is, as I said above, because the relationship is nonlinear.
From a nadir on the index of economic freedom of 3 point something in the mid 1980s, Brazil has steadily moved up, hitting 6 recently. So, what would you expect for economic growth in Brazil? Would it be that Brazil would be enjoying strong economic growth and the prospect, with continued market reforms, of further economic growth? Certainly it would! Water is not flowing upstream in Brazil. It's flowing in exactly the direction the laws of economics say it should flow.
To be sure, the index of economic freedom is still lower in Brazil than it is in the United States, and the standard of living, as measured by GDP per capita, remains lower. But, there is plenty of reason for optimism in that country. Global surveys find higher percentages favoring free trade and a market economy in Brazil than in America. It is Brazil, along with India, that continues to promote the Doha round of trade negotiations, long after the United States and the Europeans have given up on it. Brazil and the vibrant middle-income countries of the world get it. And don't even ask me about the emerging business community in the republics of Latin America and in other places in the world that have embraced market-oriented reforms of their economies.
Oh, one last thing. Brazil doesn't have the highest ratio of tax revenue to GDP in the western hemisphere. Cuba does.
South Korea's intelligence leaks
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South Korea's intelligence leaks
Their word is not enough
HAVING a sound military strategy against North Korea has rarely seemed more important. Unfortunately, “OPLAN 5027”—the main American-South Korean war plan—has been compromised. Last week, South Korea’s intelligence agency arrested one of its own former agents, as well as an active two-star army general, for handing over classified information. Apparently the ex-spy—identified only as “Mr Park”—was recruited by North Korean agents while living in China. The general is charged with using his connections in the army to collect top-secret information, including field manuals and troop deployments, which he then turned over to the North.
The country has been in a sort of shock since the sinking of a South Korean warship, the Cheonan, on March 26th. But the Chosun Ilbo, the South’s most widely read newspaper, quoted an officer who described this breach as being even more damaging. The defence ministry is trying to gauge the extent of the leak. It is resigned to having to alter parts of OPLAN 5027.
This is not the first time that the plan has been exposed. Last December North Korean hackers caught a glimpse of the plan thanks to a slip on the part of a South Korean officer. For all their ideological differences, the linguistic and ethnic homogeneity of the Koreas has always rendered each vulnerable to spying by the other. A especially striking number of high-profile cases of espionage have come to light in recent months. In late March, South Korean authorities arrested two would-be assassins who had come for Hwang Jang-yop, the highest-ranking official to have defected from the North. Other cases include that of Kim Soon-nyeo, a Mata Hari-like spy who obtained information about the South’s police and transport system from her lovers, and a Mr Kim who worked in China hunting North Korean defectors and keeping tabs on South Korean intelligence agents.
This spate of busted spies is breeding paranoia in South Korea. Some citizens have come to expect the use of scare tactics by conservative governments–especially when elections draw near. Mr Park of the OPLAN 5027, it so happens, was once involved in an attempt to discredit Kim Dae-jung as a North Korean spy. That Mr Kim, soon to become President Kim, was a political liberal on the eve of his election in 1997.
On May 20th an international inquiry delivered its case for concluding that the Cheonan was sunk by a North Korean torpedo attack. Lee Myung-bak, the country’s conservative president, followed with a sombre address to the country. Ever since, South Korea’s hyperactive blogosphere has been churning out conspiracy theories by the dozen. To some, the inquiry’s conclusion and Mr Lee’s speech smelled fishy—as if they were timed to coincide with local elections.
Sceptical South Koreans have deemed this all a case of “the northern wind”, a scurrilous political practice from the 1980s by which fear of the North was used to chill criticism of conservative governments in the South. Even if the ship's sinking and the investigative report were somehow all a fabrication engineered for domestic political ends, it wouldn't have counted as much of a success. Mr Lee’s party fluffed last week’s elections, losing the majority they held among municipal seats.
Not that South Korea’s conspiracy theorists comprise a voting majority. According to a recent poll, 72% trust the government’s conclusion that North Korea was behind the Cheonan’s sinking. That leaves a large remainder of the population unhappy with the government-led investigation. Their grumbling—often given voice by the opposition parties—has to do with the government’s having provided only incomplete information and its refusal to admit the investigative team that North Korea offered to send. Compared with the nearly-unanimous praise that Mr Lee has won from abroad for his handling of the crisis, his inability to convince more his own countrymen is puzzling.
The government is now trying to shore up credibility. In an unprecedented move, the defence ministry has invited popular bloggers, reporters from student-run media and a selection of Twitter-followers to view the wreckage of the Cheonan and to talk with a panel of experts on June 8th. If it botches this explanation, the rumour mills will continue to spin.
EDITOR'S UPDATE: China's government has made a formal complaint to North Korea after three Chinese citizens were shot dead last week near the border that divides the two countries. It will be interesting to see how North Korea responds to its patron. Aggressive language, of the type it aimed at the South after it was fingered for sinking the Cheonan, is out. But Kim Jong Il does not do regret very well either. For China there is also a balancing act here. Nationalism is so close to the surface that the government must be mindful about inflaming it with a public rebuke of its ally. On the other hand, when three Chinese citizens are killed by foreign soldiers attention must be paid, as Linda Loman said in another context.News analysis
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Business.view: Silicon Alley 2.0
Michael Bloomberg relaunches New York as a high-tech hub
“IT’S true, this is where it’s happening,” proclaimed Michael Bloomberg, New York’s billionaire mayor, in a speech on May 25th. The “it” in question is technological innovation, and there was symbolism in the occasion Mr Bloomberg chose to make his claim, a conference in the Big Apple hosted by the leading online newspaper of Silicon Valley, TechCrunch.
The speech is part of a campaign to rebrand New York as the new driving force of technology—not a bad idea given that the city’s existing image as a powerhouse of finance has become something of a liability. June 7th marked the start of New York’s third annual Internet Week. The previous two seemed like limp efforts to revive the brief dotcom-era flowering of internet start-ups in “Silicon Alley”. But this year’s event is larger and more upbeat, more in the spirit of the city’s long-established Fashion Weeks.
One reason for the renewed optimism is that, unlike in the first incarnation of Silicon Alley, the city now seems to have a few genuine winners. These include Gilt Groupe, a social-network-based fashion retailer; Foursquare, which connects people with others in their vicinity; OpenTable, a restaurant-reservations site; and Tumblr, a “microblogging” site which lets users post short messages and share things like photos.
A surfeit of angels
These successes are helping to attract venture capital to New York—enough at least for Mr Bloomberg to be able to boast that “during the first quarter of this year, venture-capital funding increased in New York by 19% even while it went down in Silicon Valley and the rest of the nation.” According to one local tech entrepreneur, who has just secured $10m of funding, “there’s a bit of a bubble developing in angel investing in the city.” Meanwhile, FirstMark Capital, a New York-based venture firm, has pledged to invest $19m alongside the $3m that the city government plans to put into local tech start-ups.
The city’s seeding of this fund is one of various initiatives the mayor has launched, along with Internet Week, to encourage the growth of the tech industry. Efforts have been made to reduce taxes on freelancers and contractors. The city’s economic-development department has launched two incubators for tech and social-media companies. A taxpayer-funded loan programme has helped small businesses hit by the credit crunch.
Mr Bloomberg even tries to spin to the city’s advantage the most obvious reasons not to start a business in New York: its high prices and high taxes. He argues that the city spends its tax revenues on making the city safe and attractive to both the employees and tech-savvy customers that start-ups need to survive.
To make his point, Mr Bloomberg likes to point to his own experience launching a financial-information start-up in and around New York (his version of the Silicon Valley garage was a barn in Connecticut where he built his early terminals). Yet his personal story could also been seen as the exception that proves the rule. While Silicon Valley has produced one billion-dollar company after another, it is hard to think of any other enterprise of that scale that has grown from scratch in New York in recent years except the mayor’s financial-information business. Add to that the fact that venture capital invested in New York, even though growing fast, is still a fraction of what is invested in Silicon Valley, and it is tempting to conclude that Mr Bloomberg’s promotion of Silicon Alley is just hype.
Location, location, location
However, there is one aspect of the Bloomberg story that suggests that the prospects for tech entrepreneurs may at least be better now than when Mr Bloomberg was starting out. The main reason he launched his firm in New York was that the city was the home of the finance industry, his intended market. Proximity to the action is not everything, but when you are starting a firm, it goes a long way.
Today, much tech innovation focuses on the media and advertising industries—both of which, for all their recent troubles and changes, remain lucrative and largely New York-based. That is why, for example, the bulk of Google’s 500-odd advertising staff, the source of a large chunk of its profits, are in New York, not in the Googleplex in Mountain View, California. So, although it may never overtake its big rival on the West coast, it seems safe to predict that Silicon Alley 2.0 will not crash the way that version 1.0 did, and that New York will be the source of a steady stream of innovative start-ups.
Israel and Gaza
Israel and Gaza
A policy aimed at keeping Gaza isolated has allowed Hamas to tighten its grip on virtually everything in the strip
THE “lynch” is what the Israeli government, media and man-in-the-street are calling their navy’s interception on May 31st of the six-vessel multi-nation flotilla that was attempting to bring aid to Gaza. And, in Israeli eyes, the victims of the lynch mob were not the pro-Palestinian activists, perhaps nine of them Turkish, who were shot dead in the operation, nor the dozens of others who were injured, but the Israeli commandos who were set upon with clubs and staves when they shimmied down from helicopters onto the deck of the leading vessel, a Turkish pleasure steamer called Mavi Marmara.
One popular columnist extended the “lynch” metaphor to the United Nations Security Council where, on June 1st, member-states unanimously condemned “those acts which resulted in the loss of at least ten civilians” and called for a “prompt, impartial, credible and transparent investigation”. American diplomats had laboured to mitigate much tougher language proposed by Turkey and others. But the Obama administration’s failure to cast a blanket veto on any deprecation of Israel is depicted in Israel almost as a betrayal. The head of Mossad, Israel’s foreign intelligence service, warned a Knesset committee that Israel was becoming “less of a strategic asset” to the United States (for an American view see article).
The disconnect between the way Israel sees itself and its actions and the way they are viewed by the world outside has never, it seems, been so wide. Nor has it ever been so starkly highlighted as by the bungled operation in the Mediterranean, some 80km (50 miles) off Israel’s (and Gaza’s) coast. A wave of anti-Israel demonstrations swept through cities around the world and Turkey recalled its ambassador.
Inside Israel, too, the gulf is palpably deepening between leftish liberals and the rightist-religious government coalition that represents majority opinion. Writers, such as Amos Oz and David Grossman, and left-wing politicians voiced their criticism this week of the entire policy of blockade and boycott against Hamas-ruled Gaza. But their opinions were widely excoriated as treachery and defeatism.
Where cracks did appear in the broad front of righteous victimhood was over the actual execution of the naval operation. Even the politicians and generals who insisted that the activists were “al-Qaeda-linked mercenaries who laid an ambush for our soldiers” could not cogently explain why the naval commando unit had fallen straight into this ambush.
Within the army, there was finger-pointing at the intelligence branch, which had failed to predict the reception awaiting the troops. Within the cabinet, recriminations have begun. There were even brief mutterings among Binyamin Netanyahu’s aides about the impetuosity of Ehud Barak, the defence minister, who had decided on the operation. But these were quickly squelched. Plainly the prime minister is not prepared to target, and risk losing, the leader of the Labour Party who has become his close political ally.
The prime minister was on a visit to Canada when things went horribly wrong. He was due to see Barack Obama in the White House the next day for what the Americans were billing as a fence-mending meeting after months of public tension. He hesitated, but eventually cancelled the meeting and flew home. The White House apparently was not offering the beleaguered prime minister a shoulder-to-shoulder public appearance alongside Mr Obama to help fend off the criticism. A spokesman said Mr Netanyahu had an open invitation to return.
Meanwhile, Mr Obama will be meeting the Palestinian president, Mahmoud Abbas, in Washington on June 9th in an effort to salvage the recently started “proximity” peace negotiations between Israel and the Palestinian Authority. Hamas, triumphant at the turn of events, has urged the authority to break off the talks.
The immediate task for Israel is to enlist American help in order to preclude international demands for an external inquiry, which it fears would be weighted against it. According to Israeli sources, America is said to be urging Mr Netanyahu to appoint without delay an Israeli inquiry under a High Court judge. But, at the same time, Israeli officials fear that diplomatic help from Washington to ease the crisis will come with a “price tag” in the peace negotiations. In the Israeli peace camp, people positively hope that this will be the case.
Israeli diplomats and soldiers are working the phones to Istanbul to try to prevent a complete rupture of relations with Turkey. The two countries, and especially their military establishments, have developed over decades a strategic alliance that has been a discreet but important axis of power in the region. But relations have recently soured with Turkey’s prime minister, Recep Tayyip Erdogan, repeatedly and vehemently criticising Israel’s policies towards Gaza (see article). A further deterioration would quickly follow if Turkey sent its own navy to escort future blockade-busting ships; Israel has said that it would stop any such attempt.
Not only Israel but America and the other Western countries which helped to isolate Gaza as a means of combating Hamas are now under pressure to rethink the blockade’s efficacy. Israel does not bear sole responsibility, the International Crisis Group, a think-tank, pointed out this week. “For years, many in the international community have been complicit in a policy that aimed at isolating Gaza in the hope of weakening Hamas. This policy is morally appalling and politically self-defeating. It has harmed the people of Gaza without loosening Hamas’s control.”
The policy began within weeks of Israel’s pull-out from Gaza in 2005. At the start, America tried to keep the gates open, brokering an Agreement on Movement and Access with Israel to allow the export from Gaza of hundreds of trucks of produce a day, regular bus convoys to and from the West Bank and the opening of a Palestinian-controlled crossing at Rafah to Egypt. But the agreement was in ink only. After just one year Gaza’s exports stood at a mere 8% of the agreed amount, Rafah was closed and the buses never came. Once the strip was under Hamas’s total control, Israel declared it a hostile entity, and prevented movement to and from the territory.
Initially Hamas and other militant groups, drunk on their self-claimed success in forcing Israel’s departure, sought to fight their way out with projectiles. The number of mostly home-made rockets hitting Israel rose from 281 in 2004 to 1,750 in 2008; and their range rose from a few kilometres to reach Tel Aviv’s outskirts. But stung by the ferocity of Israel’s reprisals, most lethally in the January 2009 war, Hamas reined in its fire and forced others to do likewise. So far this year 34 rockets have landed in Israel, none launched by Hamas. “Hamas is defending Israel,” chuckles an Israeli foreign ministry official.
Instead Hamas has turned its energies inward. With Gazans locked inside the 40km by 10km (154 square-mile) strip, the siege has given Hamas a free hand to mould the place. Its leaders liken Gaza to a ribat, a warrior monastery, and its inmates to murabitoun, or militant monks, recalling the 11th-century revivalist movement which withdrew to the Moroccan highlands before sweeping onto the Moroccan plains and Andalusia. They regale the struggle to survive with the same terminology they once used for fighting Israel. To ensure supplies they created a “resistance” economy, supervising the digging of an elaborate web of tunnels snaking under Gaza’s border with Egypt.
At first the resistance economy failed to meet people’s needs. But today, thanks to the tunnels, Gaza’s shop shelves are brimming with goods that often arrive cheaper and faster than when Israel opened the gates. Winches hoist in aggregates, allowing a spate of road repairs and housing construction. The authorities have filled in the craters in the football stadia left by Israel’s bombs and adorned the highways with cat’s eyes. Unlike post-war repairs elsewhere, the reconstruction is home-grown. Hamstrung by their own restrictions which prevent them buying smuggled goods, the UN and other international agencies have written themselves out of the repair effort. Unable to bring in cement to repair its schools, UNRWA, the UN’s Palestinian refugee agency which educates half of Gaza’s children, arranged to teach children in shipping containers, before Israel banned those too.
Humanitarian agencies, with an eye on external financing, bewail the lack of development. But their indices miss the point. Gaza is redeveloping, and Hamas is making society in its own image. Huge amounts now pass through the tunnel shafts each year, creating a new economy from which Hamas creams a handsome share of the profits to finance its rule. “The siege is a gift,” says a Hamas minister.
Co-ordinating the effort is a remarkably well-oiled bureaucracy. To finance its half-billion-dollar annual budget, the Hamas government has instituted an effective tax regime, raising duties on tunnel imports, including cigarettes, petrol, clothes and bread. Officials claim to have achieved self-sufficiency in melons (piled high on the roadsides) and onions; and the price of eggs has fallen to half what it is in the West Bank. With fishing in the seas restricted by Israel’s navy, Hamas is opening fish-farms in former Israeli settlements. Its institutions publish online compendia of the government’s directives, the results of civil service exams (based, they claim, on merit, not factional allegiance), and send text messages to the lucky few cleared for travel to Egypt to update them on bus and crossing times.
More damagingly for Gaza’s people, the siege has also allowed for much greater control. Manned by militants from its Ezz al-Din al-Qassam brigades hitherto deployed against Israel, Hamas’s internal security applies the brigades’ blinkered codes to harness society. This has created stability but at the price of a reign of fear. When rival Islamists decried Hamas’s rule in Rafah, the militants stormed the mosque and killed its worshippers. When leftists protested that the tax rises hit a people already burdened by siege, they were hauled to jail. The death penalty has been reinstituted. And insensitive to comparisons with Israel, Hamas’s forces have bulldozed the homes of Gazans who had moved onto former settlement land without authorisation. A thriving political culture has been culled to a one-faction state.
Manning the institutions is a new generation of highly motivated Hamas cadres who unlike their seniors have not studied abroad and who, with their narrow horizons and siege-mentality, view outsiders, Palestinians and foreigners, with suspicion. Tensions have emerged with an older generation, including the prime minister, Ismail Haniyeh, who after an attack on UN summer camps pleaded for tolerance.
End of some activists’ adventureA few Hamas old-timers, educated in Moscow and Damascus, warned that in its hunger for power, the movement risks betraying its religious principles. Their pleas have fallen on deaf ears. Hamas’s second generation—the 30-somethings who have lived their life under occupation—revel in the authority of office though lacking a clear vision of what they intend to do with their power.
Opening borders to allow Gazans to travel again and let other influences in could eat into that unfettered absolutism. But few international policymakers appear to know what to do or how. For three years the Palestinian Authority in the West Bank backed by Western paymasters has waged a beauty contest with its Hamas rivals; many there remain loth to improve Gaza’s odds. Egypt remains wary of another Islamist neighbour (Sudan is headache enough). For Israel, the siege might not have freed the kidnapped Israeli soldier, Gilad Shalit, or squeezed Gazans’ bellies to the point where they rise up against Hamas (both official justifications for the siege), but it has won the more valuable prize of a divided Palestinian polity. Much as Israel planted settlers to impede a two-state settlement, so, argue some, it has now successfully planted Hamas.
In the wake of the international outcry, Israel and Egypt have both taken temporary remedial measures to ease their respective closures. But a more formal safety-valve is required. There are many ways to do this but each has its drawbacks. The airport has been put out of action by Israeli bombing. Constructing a sea port remains on hold because of lack of materials. Reopening the crossings with Israel would re-establish Gaza’s ties with the rest of Palestine. But Hamas—as happy to disengage from Israel as Israel is from it—prefers opening Rafah on the Egyptian border as a gate to the Islamic world.
Regional and Western policymakers have tentatively hoped that intra-Palestinian reconciliation would end the siege. But advisers of President Abbas in Ramallah are suggesting something else. They are calling on him to head to Gaza immediately to emphasise his support for his besieged people and promote a federal arrangement under which the two governments might continue to rule under his baton. A vanguard was due in Gaza later this week despite Israeli and Hamas protests. If accompanied by the $4 billion odd that Arab and Western donors promised Gaza after the January 2009 war, such an arrangement might yet curry favour. But the prospects for a Palestinian rapprochement still look far more remote than the launch of another flotilla.
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