Good economic news is often really bad

Are things getting better?  That’s difficult to know, because good news often turns out to be bad news.

Here’s an example.  Personal savings have increased.

Recent reports indicate that consumer spending has declined, but savings are up.  In other words, people are saving more and spending less.

What’s wrong with that?  The American economy is driven mostly by consumer spending, which accounts for about two-thirds of all activity.  When people save, they buy less of everything from food to vacations.  Fewer new jobs are created.

Saving money is also essential.  Most people have put too little away to support themselves in retirement.  They may be forced to rely on Social Security, but that program may itself come up short when many of today’s workers are ready to retire.

Savings can boost the economy by providing funds for loans to businesses and homebuyers, but they don’t produce the immediate lift to the economy that spending does.

The increased savings rate may be an important sign about changes in the American economy caused by the Great Recession.  If the economy can collapse suddenly, people may realize they need nest eggs, just in case they lose their jobs. 

Protecting oneself against such setbacks is a valuable lesson that had largely been ignored in favor of promoting spending.  But worrying about the future may undermine short-term recovery.

Second example: the Federal Reserve has been helping recovery from the recession.

While the Fed cannot increase government spending or alter taxes, it can boost the economy by reducing the cost of borrowing.

The Fed lowers interest rates to make it easier to borrow for a new home or to expand a business.  When these moves take place, they create new jobs.

Congress has refused to approve any additional government spending for job creation, because, without a tax increase, it would make the federal deficit even larger.  Cutting back on the size of government means recovery is left to the private sector and the Fed.

It has cut interest rates to historically low levels.  And its policy has been successful in stimulating borrowing.

For investors, including most pension programs, by lowering interest rates, the Fed has driven them to the stock market.  To boost their income, they turn from lending to investing in corporate stock.  When many buyers chase stocks, their prices increase.

That’s just what has happened, and the stock market has hit record highs. But then a strange switch takes place.

If there’s good economic news, which everybody wants, investors guess the Fed will allow interest rates to increase.  The conventional wisdom is that investors will start lending to business and cut back on stock purchases, leading to a decline in stock prices.

These days, just the hint of good economic news has the odd effect of causing the stock market to fall.  Without the Fed increasing interest rates, the net result of good news can be a loss of gains for pension plans and other investors. 

Good economic news, which should cause stock prices to climb, is bad news, pushing those prices down.

There have been good times when both increased interest rates and a rising stock market have been possible.  But that’s not today’s conventional wisdom.

Third example: cutting taxes.

Another switch from good to bad occurs when taxes are reduced.  Of course, just about everybody wants to pay less tax, so tax cuts should be good news.

Unless governments resort to more borrowing, which amounts simply to putting off payment and paying interest as the price of the delay, tax cuts force them to reduce spending and reject new demands on the public treasury.

Here’s one recent example.  The sudden emergence of the ISIS terrorists has posed a dangerous threat the U.S. cannot ignore. 

But taking military action against ISIS is already running up federal spending, and the effort will require billions of dollars.  Some of the same members of Congress who steadfastly oppose government spending and demand tax cuts also seek strong U.S. military action against ISIS.

Holding the line on taxes can lead either to more borrowing and government debt or to cuts in programs like Medicare and Medicaid to find the funds necessary to combat new terrorist organizations.  Either way, the good news of tax cuts can quickly turn into the bad news of more debt or more cutbacks.

The problem seems to be that we want to see only one side of major issues.  The world has become more complicated and making choices between good and bad is a lot more difficult.

U.S. Intelligence failed to warn about ISIS

The emergence of ISIS, a brutal terrorist group, has forced the U.S. to gear up for a new phase in the war on terror. 

It has led the formation of a new coalition to combat ISIS (also called ISIL or the Islamic State). The struggle against this powerful group may take years, well after President Obama leaves office.

Fatigued by wars in Iraq and Afghanistan, Americans have been reluctant to send troops to the Middle East.  Instead, the U.S. deploys aerial attacks, hoping to destroy ISIS together with action by local ground troops.

Though the U.S. has inflicted damage on ISIS, the forces on the ground have been poorly equipped and, at the outset, were unable to hold off the terrorists as they advanced to the outskirts of Baghdad.

The international coalition has been assembled in hopes of turning the tide and ultimately to wipe out a terrorist group that threatens countries far removed from the Middle East.

After struggling to come up with a plan to counter the terrorists, Obama says the U.S. will use increased force and the new coalition to eliminate ISIS.

The sudden appearance of ISIS and the protracted effort to come up with a response to it raise questions going beyond the efforts to organize an effective response.

One question is how U.S. intelligence apparently completely missed the rapid growth of a terrorist organization having sound finances, modern arms, and a large fighting force including American and British citizens.

The massive American intelligence complex was unable to warn Obama and military leaders about the new threat in the Middle East. Such a warning might have given them the time to snuff it out earlier.   

This was not a few terrorists in a cave. This was a big, new organization that was missed or ignored.

The failure to spot ISIS was not the first such mistake.  Intelligence officials, possibly influenced by Bush era political leaders, thought American troops would have flowers spread at their feet when they entered Iraq to topple Saddam Hussein.

They failed to understand that Saddam and his Sunni minority had dominated the majority Shia population in Iraq.  The new American sponsored government controlled by the Shia retaliated and excluded the Sunnis, rather than creating a broad government that could promote national unity.

That left the Sunnis as ripe recruitment targets for ISIS.  Only when this fact became evident did the U.S. take steps to induce the Iraqi government to deal more fairly with Sunnis, a process not yet completed.

In short, the American intelligence miscalculation at the time of the Iraq invasion contributed to the situation allowing ISIS to gain support.

The need for a new effort to deal over a period of years with the ISIS threat comes as a surprise.  Apparently, the end of American involvement in Afghanistan and Iraq was considered by some to be the end of “the war on terror.”

Even without a clear military victory, the end of a ground war fought by American troops meant that the ongoing struggle would be managed by using intelligence services to help countries in danger to protect themselves.  But war did not end, and intelligence did not produce good information.

Terrorism is likely to be a continuing threat to nations.  New terrorist groups should face an international community prepared to deal with it, not an American president forced to develop a new response and recruit a coalition of volunteers.

The United Nations was created to try to prevent countries from going to war against one another.  It was expected to deal with threats involving countries, so-called “state actors.”

Terrorists were not considered to be a major international problem.  They are “non-state actors” and have replaced, though not completely, wars between countries as the biggest threat to peace.

ISIS, the terrorist organization that is a “non-state actor,” wants to end up being a new country carved out of Iraq and Syria.

The U.N. could be updated to make it the main forum for states to spotlight terrorists, whose success presumably is not in the interest of any country.  At least, the U.N. might reveal if any countries were backing the terrorists.

By using the U.N. to identify terrorist threats, the U.S. and others could find it easier to form coalitions willing to fight terrorism.

Al Qaeda and ISIS should have taught the world to be better prepared for dealing with terrorism.  The U.S. and other countries must accept that the war on terror may never end and remain ready to defend against it.

Is the U.S. Senate Broken?

This year could bring a major change in the U.S. Senate.  Some pundits predict the Republicans will gain a majority, giving them control over both houses of Congress.

After Labor Day, campaigns have begun to heat up.  In Maine, incumbent GOP Sen. Susan Collins, considered one of the few Senate moderates, faces Democrat Shenna Bellows, a long shot but credible candidate now gaining by convincing members of her own party to support her.

As a backdrop to the elections, some conservatives and liberals want the Constitution amended to repair what they see as problems with the Senate itself.  Of course, they disagree about changes that ought to be made.

The Senate was at the center of the constitutional compromise at the outset of the U.S.

Members of the House of Representatives, elected by the people, would be distributed by state.  But if Congress were based only on population, three states would have had enough votes to overrule the other ten.  The small states insisted that each state, no matter its population, would be assigned two seats in the Senate. 

Senators would not be elected by the people.  State legislatures would choose senators in hopes of electing elite leaders who could keep a lid on popular enthusiasms.

But people grew increasingly unhappy with Senate elections by state legislatures.  Some senators gained their seats through corruption and payoffs. 

Senators were often wealthy men, who protected the interests of the privileged few.  Finally, in 1913, the Constitution was amended to provide for popular election of senators.

Now, people on both ends of the political spectrum have become unhappy and have proposed new amendments.

A leading conservative commentator advocates returning to the election of U.S. senators by state legislatures.  He believes that today most states oppose the Affordable Care Act, while an unrepresentative Senate Democratic majority supports it.

Despite the political swing toward conservatives, they have been frustrated by their inability thus far to control the Senate.

House districts are often engineered to produce GOP majorities, even though the Republicans get a minority of all state votes when all House elections are combined.  Running statewide, Democratic Senate candidates win, because they don’t have to worry about district lines.  That could explain the difference between the two houses on the ACA.

Some conservatives are wary of too much democracy, a view in line with the thinking of the people who took part in the original constitutional negotiations.  Some of the country’s founders thought the president and the Senate would serve as checks on the popularly elected House. 

Today’s advocates of state legislative elections of senators also lament the relative weakness of state governments compared with the federal government.  The change to direct elections stripped states of some Washington influence, which its repeal could restore.

What about the liberals?  While the conservatives think the Senate is too liberal, the liberals think it is too conservative.

They surely don’t want an end to direct elections.  They argue the appointed Senate assured slave states of enough voting power to block abolition no matter what the House wanted.

Since direct elections were introduced, liberals have remained concerned the Senate can still block essential legislation authorizing the federal government to deal with current problems. 

Of course, the Senate could be less of a problem for either party if the filibuster were eliminated.  By requiring 60 votes to pass a bill, instead of the simple majority dictated by the Constitution, a minority can block all legislation.  But senators cannot even agree to end the filibuster, possible by simply amending Senate rules.

Minority control is an even bigger problem.  With two votes for each state, senators representing a minority of the U.S. population can control the Senate. 

Right now, senators from 21 states with a total population less than California’s can block any legislation. 

Senators from California, with the largest population, represent 66 times as many people as those from Wyoming, the state with the smallest population.

The liberal solution would be to have Senate seats allocated by population, though each state would be assured of at least one seat.  California, which usually votes Democratic, with 12 percent of the total population, would gain from its current two percent of the Senate seats. 

To adopt the reforms that either side advocates would require amending the Constitution, and that’s not likely to happen.  It takes two-thirds of the Congress and three-quarters of the states to amend it.

 
Of course, the elections this year won’t lead to such changes.  We are likely to end up with more partisanship, divided government and continued stalemate.

“Regime change” is a failure

One of the biggest American exports these days is democracy, but it’s a product that isn’t doing very well.

Almost as soon as opposition to a dictatorship appears, the U.S. supports “regime change,” supposedly helping rebels to replace the despot with democracy.  

The list of failures of this effort is depressingly long.  It includes Russia, Afghanistan, Iraq, Libya, Egypt, Syria, and Pakistan.

Americans seem to think it self-evident that a representative democracy – a republic – is the best form of government for any nation.  When people throw off authoritarian rule, we believe they should do the most natural thing and adopt a republican form of government.

But democracy is difficult.  You need only look at the current Washington conflicts over what the U.S. Constitution means in its practical application to matters ranging from the Affordable Care Act to voting rights to see how even a mature republic still struggles.

A look at countries where democracy has failed to take root after the overthrow of a dictatorship teaches some lessons.

Russia has no democratic history.  But, with the collapse of the Soviet Union, the United States and others countries took it for granted that it would install democratic institutions.

While Russia may have adopted the appearance of popular control of the government, it has become clear that the Russian people prefer an authoritarian rule allowing them some limited freedoms.  A majority likes President Putin, largely because he is a throwback to paternalistic control under the czars.

Afghanistan sheltered Al Qaeda terrorists, which justified American military action to root them out.  But the U.S. has engaged in its longest war ever to stamp out opposition and install democracy, so far without success.

The problem in this case is that Afghanistan has never really been a country.  A collection of regions dominated by warlords, it, too, has no democratic traditions or even a truly national identity.  The net result of 13 years of war may be no improvement over the U.S. staying for only 13 months and with more limited goals.

The only surviving justification for the American war on Iraq is that we toppled Saddam Hussein, a ruthless dictator.  But he was no threat to the U.S., because it turned out he wasn’t lying when he said he had no weapons of mass destruction.

Democracy has not been a success there, thanks to a government that has sought to crush or exclude those who backed Saddam, rather than adopting an inclusive system.  The new regime has provoked a violent and even more ruthless reaction by those it mistreated.

In Libya and Syria, the U.S. led the efforts to dump dictators.  But what was the expectation from the replacement regimes?

In Libya, President Gaddafi had already disposed of nuclear weapons and sought more cooperation with the West.  His replacement is a failed country that has no functioning government and warlord justice.

The chaos of Syria’s civil war opened the door to the involvement of regional terrorists, providing them a new base of operations.  It proved impossible to know whom among the rebels to back, as the U.S. sought to avoid funneling weapons to terrorists while backing the rebels.

In Egypt, the fall of President Mubarak opened the way to elections, but this democratic exercise produced control by the Muslim Brotherhood, which then promptly tried to squash democracy and roll over anybody who did not support it.

In Pakistan, while there has been the appearance of democracy, the country is obviously run by the military and intelligence services.  Much of the massive military aid supplied to Pakistan can flow through these services to America’s foes.  And the Pakistani military obviously sheltered Osama bin Laden.

Democracy cannot itself be the policy objective, though it may be the right tool to reach political and strategic goals.  But achievable goals must come first.

And the U.S. needs to do more than roll the dice and trust that democracy will inevitably produce positive results.  Is the opposition capable of creating a viable government?  Is it likely to adopt policies compatible with American objectives?

The U.S. should consider the country and its history.  Will the people welcome democracy?  Do they have any experience with democratic rule?  Is authoritarian government, despite being less satisfactory by our standards than democracy, more likely to produce benefits for its people and the U.S.?

The lessons learned so far seem clear.  A supposedly democratic regime is not an end it itself.  If “regime change” will produce chaos, the abrupt imposition of a system with no roots is not the best idea.