Climax of the Crisis?

This post is in a sense a sequel to the one I did on Friday, when I described demographic changes and related changes in values over the last half century. The coming sequester dominates the news this morning, and I am beginning to think that it will mark the beginning of the climax of the ongoing crisis in American life--one brought about by those demographic changes and the political changes that have come with them. I am not optimistic about the outcome.

For the last twenty years or so, the Republican Party has been a coalition of groups that hate the federal government and want to undo the role that it assumed, under the leadership of the northeastern, upper midwestern and Californian elite that dominated our politics during the middle third of the century. The coalition began with some--not all--businessmen who were never reconciled to government regulation or to the labor movement, and whose blueprint was written in the early 1970s by future Supreme Court Justice Lewis Powell, as recently described in a book by Hedrick Smith. They made enormous progress, first, by steadily moving manufacturing into non-union areas in the South and West, and then out of the country altogether, reducing the labor movement to near insignificance. Then in the 1990s the action shifted to the financial community, which successfully undid the most important regulations of the New Deal era. Meanwhile, the coalition added the white south, which, I am sorry to say, never seems to have gotten over its resentment of government mandated integration, and which developed a renewed aversion to all forms of government as soon as black citizens could vote and benefit equally from government services. That coalition elected and re-elected George W. Bush in 2000 and 2004 (with the help of the manipulation of the Florida election in 2000 and the Supreme Court), and created a permanent, large federal government budget deficit, a credit crisis, and unemployment not seen since the 1930s. That was the situation with which Barack Obama had to deal when he came into office--albeit with working Democratic majorities in both the House and the Senate.

As I have argued here many times, Obama did not use those majorities as wisely as he might have. He should have realized, I think, as FDR obviously did in 1933, that he simply had to bring about a measurable improvement in the lives of Americans hit by the housing crash and unemployment within the next two years, or face an electoral catastrophe. As it happened, he backed off somewhat from his stimulus plan, including too many tax cuts and too few jobs, and he spent most of his political capital on the health care law, which was not popular and which would not even go into effect for years to come. He failed to mobilize his constituency for the 2010 elections and the Republicans swept into control of the House. They immediately began using that power to threaten to shut down the government. The result, as detailed in this morning's New York Times, was the sequester. It was proposed, ironically, by Jacob Lew, the new Treasury Secretary, because it was similar to a trigger embedded in the Gramm-Rudman Act of the late 1980s, which did bring about meaningful deficit reduction in the second Reagan Administration. That, however, was an era in which grown-ups ruled the Congress. The sequester will do exactly what the Tea Party Republicans want: it will force the federal government to take a huge hit, which for them is, in principle, a good thing, regardless of the consequences for public school systems (in which many of them do not believe), meat inspection (which they would gladly dispense with altogether), and our defense posture (which they care about much less than traditional Republicans of all stripes did.) There seems to be no prospect of a deal this year.

Back at my old employer, the Naval War College, civilian employees, including faculty, have been ordered to prepare for furloughs that could take them out of the classroom. (I know my former colleagues would work without pay, but in the last, very brief government shutdown in the 1990s we were not allowed to do that.) Friends of mine in school systems report that the cuts will be devastating--not right now, but next fall. Tens of thousands of jobs will be lost, exactly the disastrous effect that we do not need as we are struggling to keep the economy going. It will be an exact replay of 1937-8, this time imposed by the legislative branch rather than the executive. (Roosevelt, who had fiscally conservative instincts, thought after four years of recovery that it was time to cut back on government spending. He was wrong and he played a huge price for it in the 1938 elections.)

I pointed out in several posts last year that the Republican Party since the 1990s has been engaged in a form of what Vietnamese revolutionaries called dau tranh, or struggle: an endless, multi-front attack on the existing order of things, using extreme rhetoric and leveraging every scrap of power within existing institutions to make their agenda prevail. The attacks on Chuck Hagel and the Republicans' endless obsession with Benghazi are further examples of dau tranh in action. I also pointed out that they did not shrink from creating budget deficits or economic crisis, since they invariably blamed these problems on Democrats. And in fact, it occurs to me that their incentives for pursuing that strategy have now grown even greater. President Obama won the election based largely on the issues of immigration, women's rights, and gay rights. The better the economy does, the more attention we have to focus on such issues. The tanking economy led to the Republican victory in 2010 and they may be betting that another recession will regain the Senate for them in 2014. Karl Rove has just suggested that the Republicans "compromise" on the sequester by insisting upon the cuts but leaving the decision on exactly what to cut entirely in the hands of the executive, so that the Obama Administration can take the blame for every cut that ensues. It is interesting, by the way, to compare the Republican use of the sequester to Obama's use of his opportunity, both in late 2010 and late 2012, to let all the Bush tax cuts expire. He compromised. They will not. That is because he believes in government, and they do not. Government programs, they are convinced, help only the undeserving, and increase the Democratic vote.

Obama's recurring fantasy is that Democratic electoral success will turn the Republicans into compromisers, and that he will secure political capital by being reasonable. It has not happened and it will not happen. In retrospect, he might have made the election a referendum on the sequester, or he might have insisted on undoing it as part of the bargain struck in the lame-duck session. He didn't. A new recession will mark a frightening stage in the new crisis. The odds at this moment seem to be in favor of it.

How the US has changed

Sometimes a picture is indeed worth a thousand words. The other day, teaching a class on the early stages of the Vietnam War, I set the scene by putting the electoral map of the 1960 election on the classroom screen. Here it is.



Now my students stared at this in some amazement, and one immediately asked me how Kennedy had managed to carry Texas, Louisiana, Georgia and the Carolinas. I explained that most white southerners had never voted Republican, and that there was an active liberal tradition in some of those states in those days, especially in Texas, on issues other than race. I also explained that the electoral votes of Mississippi and half of those from Alabama belonged to "unpledged" Democratic electors who voted for Senator Harry Byrd of Virginia, who had not campaigned for President at all. Lastly, I mentioned how close many of the contests were, including those in Minnesota, Missouri, Illinois, New Jersey, and California, the last of which went into Nixon's column only when the absentee ballots were counted. I should have mentioned, but did not, that Catholicism cost Kennedy millions of votes in the middle South, the Midwest, and the mountain states. But something else hit me rather hard as I looked at that map, the first one that I studied in detail in the whole of my lifetime. To put it bluntly, people like myself, in those days, were far more numerous relative to the population than they are now--and I'm not talking about race when I make that statement. Let us look for a moment at last year's electoral map to get a basis for comparison.



Kennedy won 201 electoral votes in the Northeast, the Mid-Atlantic region (in which I am including West Virginia, then a solidly Democratic state), and the progressive upper Midwest--that is, almost 75% of what he needed for election. But today, those states would give a candidate just 138 electoral votes. Those regions were at that time both the intellectual and political center of the country, but they have lost 30% of the share of the population that they had half a century ago. And indeed, a Democratic candidate who won Kennedy's 1960 states, plus the District of Columbia, would win only 246 electoral votes and lose the election. To put the situation in another more meaningful way, the northeastern and upper midwestern states carried by Kennedy, combined with the three reliably Democratic west coast states (74 electoral votes), the rest of New England (11), and DC (3), make just 226 electoral votes--44 shy of election. And from those must be subtracted West Virginia's five votes, which will not go for a Democratic candidate again in the foreseeable future.

The Northeast and upper Midwest were the original industrial heartlands of the nation, of course, but they were also its educational and cultural center. Their elites, who also ran cultural enterprises such as publishing, had a commitment to preserving western cultural traditions, as well as to a certain measure of economic justice. In part because in 1960 those elites had been newly supplemented with a large number of Jewish and Catholic immigrants, they were also committed to an end to ethnic and racial prejudice. The Negro elite, as it would then have been called, was separate, but shared the same values. They believed that self-restraint and respect for established authority were synonymous with civilization, and thus would have been quite shocked at the idea that citizens should walk the streets armed. They were concerned with the environment. And both parties were dominated by politicians from those regions--perhaps the biggest change of the last half century.

The northeastern elite is not only smaller, but it has done a great deal of harm to itself. The educational institutions its children attend no longer teach the traditional values of western culture or, crucially, a strong sense of the public good. Students in the humanities (whose numbers have very sharply declined) learn about the oppressive aspects of western culture; students in economics learn a model based upon free markets. Because the Progressive tradition in the upper Midwest has been eclipsed by economic changes, the great state universities of that region, once the pride of the nation, have become shadows of their former selves. (That has also happened in California.) And one of the most frightening developments in America today is the spread of fracking for natural gas into Pennsylvania and, possibly, New York. The documentary Gasland is available from HBO and I urge everyone to watch it. Fracking was clearly the centerpiece of a strategy of energy independence developed by Vice President Cheney's secret task force at the beginning of the Bush Administration. To make it possible, the Republicans snuck a provision through Congress exempting fracking from the Clean Water Act and the jurisdiction of the EPA. It has literally ruined the lives of hundreds of people in the remoter parts of the Great Plains, and it is having a dreadful effect on the air quality of the Dallas-Fort Worth area. If the gas companies can turn New York into an energy-producing state, its politics will change accordingly. Meanwhile, there is an excellent chance that they will destroy one of the engineering marvels of modern America, the New York metropolitan area's unfiltered water supply. Governor Cuomo is delaying his decision as long as possible.

It is fashionable,of course, to dismiss the achievements of the mid-century elite because it was composed mostly of WASP white males, although leavened, by then, with a good many children of Catholic and Jewish immigrants. But the Constitution that their ancestors wrote made no reference to race or ethnicity because it was based upon impartial principles. They gave us, in effect, the principle of equal opportunity. My own generation has been lacking in people determined to keep that principle alive.

The Arc of Anarchy?

Intellectually I am a child of the modern historical profession, founded in the 19th century by Germans led by Leopold von Ranke. It focused on the development of the modern state, an entity based upon reason, and upon relations among states. It was within that tradition that I, in my thirties, wrote Politics and War: European Conflict from Philip II to Hitler, which in effect studied the development of the state by examining the nature of international politics in four distinct eras. It concluded, first of all, that historians had systematically exaggerated the strength of European states in the years 1559-1659; that the era of Louis XIV (1661-1715) had seen states secure effective control of violence for the first time; that in the era of the French Revolution, the rationalism of the Enlightenment had become an excuse for the consolidation and expansion of states; and lastly, that the two world wars in Europe had been driven by conflicts between nationalities and worldwide, imperialistic ambitions. I concluded that book in the early stages of the Second World War, arguing that after 1941 it was fought on a world, not a European scale, and that traditional European politics had thereby come to an end. I found relatively little to add to that conclusion when Harvard Press published a second edition in the 1990s after the collapse of Communism. Now I wish I had gone much further.

I am convinced now that the Second World War had an even broader significance: it brought the power of the modern state to a peak from which it has been in an accelerating decline over the whole of my adult lifetime. The Cold War brought the entire industrialized world into either the American or Soviet spheres of influence, and nuclear weapons, among other factors, ensured that there would be no great war between the two spheres. But the Vietnam War discredited certain key military aspects of modern states, led by the draft, which ended in the US in 1973 and has gradually disappeared from other states ever since. A remarkable long-term decline in the size of armies began. This is hardly an entirely negative development. No one anymore fights wars with draftee armies that inflict casualties by the millions, and that cannot be regarded as a bad thing. Civilization, however, depends upon a certain measure of effective authority. The real nature of emerging changes became clear in the 1990s. First of all, the collapse of Communism led to the emergence of plutocracies and kleptocracies in most of the former Soviet Union, led by Russia itself. Simultaneously, by the late 1990s, the United States was undoing the New Deal-era tax structure and tradition of regulation of the economy. (Modern Social Security, Medicare and Medicaid, which have survived, belong to the Great Society, not the New Deal.) Since the turn of the century the Republican Party has embarked upon an all-out assault on modern government, both at the state and federal level. President Obama is now laboring to stop that assault in its tracks. But the decline of the state has been even more spectacular in huge swathes of the less developed world, and especially, of course, among Muslim nations

In the early modern era, and then in the nineteenth principles came to the Muslim world in two ways. The Ottoman empire was a bureaucratic despotism, much of whose key personnel were drawn from the Janissaries, the Christian male babies kidnapped in their childhood and trained for military and civil leadership with no loyalty to anything but the state. I have never read extensively about how that empire functioned, but it successfully governed Muslim, Christian and Jewish populations for more than 350 years, and remained a match for Russian and Austrian armies for about two centuries. By the nineteenth century it was in relative decline, but, like Japan and even China, it sought to arrest that decline by borrowing from the West. The Young Turks who seized power in the empire in the early twentieth century and created modern Turkey were westernizers who banned traditional dress and separated church and state. Meanwhile, European imperialism spread European concepts and institutions in other areas, including India, where British influence grew steadily for two centuries; Egypt, which the British occupied in 1881; and the new entities of Iraq, Syria, Lebanon, Jordan and Palestine after the First World War. The French did something similar in North Africa from Tunisia westward. All of this area, the first post-independence generation of leaders were westerners. Their influence, however, now seems to be disappearing.

Given that so much of the Third World became independent from 50 to 65 years ago, it is not surprising that, as Strauss and Howe would have predicted, so much of it is now in crisis. Iraq, where the United States forcibly eliminated a totalitarian state on the European model, quickly sank into civil war and is now gradually disintegrating. The end of the old order in Tunisia, Libya and Egypt has landed all three nations in various stages of turmoil and chaos. The government of Mali lost control of much of its territory to Muslim extremists. Syria is now in the midst of a brutal civil war with little or no chance of a peaceful resolution. Turmoil could spread to the Persian Gulf states, like Bahrain, and even to Saudi Arabia. Pakistan is in quite an advanced state of disintegration.

Like the US-led occupations of Iraq and Afghanistan, the French intervention in Mali represented a brief revival of nineteenth-century style imperialism. However one sees the moral rights and wrongs of this, however, there is no possibility that such interventions could provide a long-term solution to the anarchy that threatens the region. In the nineteenth and early twentieth centuries the populations of these areas, relative to those of European states, were quite small; now they are much, much larger. Iraq had less than two million people when the British occupied it in the early 1920s, and about 25 million when the United States moved in in 2003. Egypt has a larger population than any European country. Even Mali now has nearly 15 million people, Tunisia has 10 million, and Syria more than 20 million. Nations of such size must organize themselves.

What can the United States and the West do? Their best course of action, it seems to me, is to focus upon themselves, and to keep the ideals of modern western civilization--including the idea of the state as planner and regulator of key aspects of the economy--alive. That is the only way to give the ideas of religious freedom, civil equality, a fair system of justice, and social services alive. Developments in western universities over the last forty years have also critically weakened the western intellectual tradition, while the entertainment industry, which has a worldwide reach, has also foresaken most of our cultural tradition. The evidence is mounting that the influence of the Enlightenment definitely peaked sometime in the middle decades of the twentieth century. The question now is whether its disintegration will go as far as it did at the end of the ancient world.

Justice for All?

A month or more ago, I finally got around to reading a remarkable book by a friend and regular reader, Harvey Silverglate, called Three Felonies a Day. It's a very disturbing look at the federal criminal justice system, based upon quite a few different cases, including some of the highest-profile ones of the last few decades, including Michael Millken, Martha Stewart, and former Alabama governor Don Siegelman. Harvey is a defense attorney himself, and an earlier book, co-authored with historian Alan Kors (whom I also know slightly) went into some aspects of the current insanity in academia. I did not agree with all of the book, but a great deal of it was profoundly disturbing.

Harvey's first and perhaps most important point takes us back into the English common law tradition that was the foundation of colonial law and is still, according to him, behind most of our state law. That tradition, he says, firmly established that it is impossible to commit a serious crime without pretty clearly knowing that one is doing so. And that, he says, is exactly what many people who run afoul of the federal justice system do not know. Laws on bribery, mail and wire fraud, possession of pornography, and making false statements to authorities are so broad and so vague that federal prosecutors can decide that relatively normal political behavior is criminal. One of the first cases he mentions involved Theodore Anzalone, a Boston city official whom Republican prosecutor William Weld--eventually to be the governor of Massachusetts--indicted in the early 1980s in an effort to destroy the career of long-time Boston mayor Kevin White. Anzalone was accused by a convicted extortionist named Collatos of having participated in extortion himself, but charge eventually collapsed at trial after Collatos repeatedly offered Anzalone a change in his (Collatos's) testimony if Anzalone would pay him a bribe. (Silverglate and some of his associates listened in on one of their meetings.) He was also accused of laundering money that went into a brokerage account in the name of White's wife and mother--money whose source was never determined at all. In a story that was repeated several times throughout the book, Anzalone was convicted at trial of the money laundering charge because the judge bought, and built upon, the prosecution's theory of the case. Years later an appeals court reversed the conviction, but not before the scandal had driven White out of politics. The case was similar in some respects to that of former Providence Mayor Buddy Cianci, which I have discussed here. The Feds could never prove that Cianci had taken a bribe--although he had certainly abused the power of his office for petty personal reasons--but they managed to get a RICO conviction by arguing that he was the head of a criminal enterprise, the City of Providence, based upon bribes received by a close aide.

The problem to which the book returns again and again is that many defendants, unlike Anzalone, do not have the stomach or the resources to go through a trial, much less an appeal, and therefore plead guilty. Some high profile defendants like Michael Millken may also have plead guilty because the government threatened to go after family members of theirs as well. ( I would have appreciated more detail about the charges against Millken.) Harvey does go into much more detail about Enron, suggesting that its leading executives, including Jeffrey Skilling, were wrongly convicted because their corporate reports, although somewhat obtuse and relying on key footnotes, did contain enough information for investors to realize that the company was in extremely deep trouble. He is even more scathing about the prosecution of the accounting firm Arthur Anderson, which worked for Enron. The prosecution destroyed the firm, but the Supreme Court eventually threw it out. The Sarabanes-Oxley law, passed to prevent Enron-type abuses in the future, has created new problems, because prosecutors have used it to charge firms with obstruction of justice because they routinely destroyed documents that the government later took an interest in.

The Martha Stewart case was another very tricky one. It began when Samuel Waksal, the CEO of a biotech firm called ImClone systems, unloaded a great deal of his own stock in the company because the FDA had told him they were about to disapprove the company's new drug. (Why the FDA informs companies in advance of the public announcement I certainly do not know.) Waksal's broker, Peter Bacanovic, was Stewart's broker too. He told Stewart what Waksal had done and she unloaded her shares as well. According to the author, that was not clearly insider trading on Stewart's part, because she did not work for the company. It's not even clear, indeed, that Bacanovic did anything more serious than violating his company's rules. I personally think that Bacanovic and Stewart should certainly have been liable for a conspiracy to take advantage of privileged information, but in fact they weren't charged with insider trading, but merely with making false statements to federal agents in the course of the initial investigation. Silverglate argues that in fact, it would have been very difficult for the government to have convicted Stewart of insider trading, but they did convict her on the false statements charge.

Many people, myself, were shocked when Karl Rove an Alberto Gonzales were caught trying to remove US Attorneys who refused to target Democratic officials. That kind of scandal turns out to have been more serious than I knew. Don Siegelman, the only Democrat who could win a statewide election in Alabama, was convicted and given a long sentence for accepting half a million dollars to help pay for a failed campaign to establish a state lottery. All he did in return was to appoint the donor to a state board that supervised hospitals--a position which the donor had already held, and which did not receive any compensation. Silverglate hoped that a federal appeals court would throw the conviction out when he wrote his book, but that is not what happened, and Siegelman remains in jail. Another questionable prosecution put an end to the political career of a prominent Florida Democrat.

There is a great deal more in this book. The feds have also found several ways to call attorney-client privilege into question. The overarching point of it, which is very convincing, is that many areas of federal law are vague, and that prosecutors like the latitude that it gives them. Now that we are five years into the financial crisis with hardly a single major conviction, it is somewhat counterintuitive to think that the federal criminal justice system is out of control, but this indeed seems to be the case. The book deserves to be widely read, especially by those in a position to do something about the problems it points out.

A voice in the wilderness

My light reading for this week was Greg Smith's Why I Left Goldman Sachs, the book by a 34-year old South African of Jewish ancestry (he discusses that frequently) who, two years ago, announced in a New York Times op-ed that he was leaving the firm, where he had been a rising star, because he could no longer stand its toxic values. It's a troubling book in dozens of different ways, and I will try to do it justice.

Smith came to the United States in 1996 or so to go to college and Stanford, and he clearly has been a high achiever all his life. He had been a summer intern in another financial firm, and he felt very fortunate to be a Goldman new hire. I couldn't help thinking about my older son, Smith's exact contemporary, as I read the book: he too had landed a prime consulting job when he graduated in 2001, but by the time of his graduation the recession had struck, and that weekend his firm informed all their new hires that they would have to wait a while. Eventually the firm bought them all out rather cheaply, and his life took a very different turn. Smith threw himself enthusiastically into life at Goldman Sachs. He was taking his Series 7 professional exam on September 11, 2001, but he remained at the firm despite the subsequent crash, and eventually, he became involved heavily in derivatives.

For unrelated reasons, I had recently been going through some of my old books about professional football, and I was astonished at the similarities between Goldman Sachs and a pro football training camp. Indeed, Wall Street loves jocks for their competitiveness and their ability to summon up adrenalin, and many of Smith's colleagues had been varsity athletes of one kind or another. He himself had competed in the Maccabee Games in Israel as a ping pong player. (He describes how he threw a much-ballyhooed match to a client in order not to antagonize him, which for me was one of the more painful moments of the book.) As traders--the entry-level job--the new employees live a life quite similar to on-line poker players playing at least five games at a time. They are constantly given trades to execute, all in shorthand, and they have to remember them, close the deals, and properly record them. A young trader who sticks an extra zero on a trade is likely to be screamed at like one of Vince Lombardi's Green Bay Packers missing a block. This is the job so many of our best and brightest undergraduates aspire to, and I couldn't help thinking that it involves a shockingly small amount of real thought. Later on, if they are good, they begin dealing directly with clients, which is another matter altogether. The clients of Goldman Sachs are other players in the financial community--hedge funds, mutual funds, pension funds, private equity firms, etc., etc, etc. None of them seem to spend too much time thinking about the long-term economic health of firms or national economies; they are relentlessly focused upon squeezing the last penny from each of an endless, constant series of trades.

We still call the industry Smith worked in the financial services industry, but the whole point of his book is that it isn't much about servicing at all any more. Let me lead with his conclusion, which is by far the most important part of the book: proprietary trading, which since the repeal of the Glass-Steagall Act has allowed investment banks to trade on their own while executing huge trades for clients, has turned our financial markets into rigged casinos. Goldman can make trades of its own based on what its clients are thinking and doing. It's like a card game in which the dealer--Goldman Sachs, or one of its competitors--is not only a player, but can see most of the other players' cards. Wall Street since at least the early 1980s hasn't run on the analysis of long-term economic trends or of the performance of corporations, it runs on information. The new rules give the big banks an unbeatable information edge and a license to drain money out of the economy. Smith doesn't say so in so many words, but he evidently doesn't think the Dodd-Frank Bill did nearly enough to stop this.

That wasn't all. In the old days, Smith at least was led to believe, Goldman dedicated itself to the best interest of their clients. They had to, because, without proprietary trading, they depended on their commissions to live, and the only way to increase their profits was to get more clients by building up their reputation. Those days are gone. Clients are now prey, and Goldman preys on them in many ways, as Smith describes. Goldman was caught, spectacularly, when it worked with hedge fund manager John Paulsen to construct a derivative composed of particularly toxic subprimes and marketed it to unwitting customers. For that they paid a fine which amounts to cab fare for them. Only one person went to jail, and Lloyd Blankfein of Goldman defended the whole deal in front of a Congressional committee as part of being an investment bank.

Smith comes across as a very charming innocent, which may be why he rose pretty far pretty fast. He is extremely discreet in his discussion of the Wall Street culture, acknowledging drinking, downplaying drug use, and ignoring sexual behavior entirely. He generally looked up to his bosses and there are hints that they used him in ways he didn't fully understand. But Smith is painfully honest and he quit because he couldn't bear lying to his clients. For that I salute him. I was depressed, though, that he doesn't even seem to be able to imagine a world in which investment bankers were really looking out for the long-term health of the economy.

Smith's colleagues cared only about money, money and more money. Some of them, and some of his bosses, were women, and I must say they tended to undermine the expectations of the feminists of 40 years ago who expected women to transform institutions once they got the chance. The values of the women of Goldman Sachs were identical to those of the men, and I can't say I'm surprised. Nor can anyone be surprised that the Obama team essentially left the Wall Street system intact. Smith obviously feels more market disasters lie ahead, and I'm afraid he's right. I am not confident, however, that even another one will lead to fundamental change.