Streetwise Professor

I would have to say that this is unprecedented, at least I hope so:

Commodity Futures Trading Commission (CFTC) Administrative Law Judge George H. Painter made serious allegations regarding fellow CFTC judge Bruce Levine in announcing his retirement.In a notice sent to complainants and their attorneys, Judge Painter claims that Levine  told him that he had promised former CFTC Chair Wendy Gramm “that he would never rule in a complainants favor”. Painter’s notice goes on to say, “A review of his rulings will confirm that he has fulfilled his vow.”

In the notice Painter recommends the CFTC request the services of an administrative law judge to be detailed to the Commission from another regulatory agency to handle the remain cases on his docket. Painter writes, “If I simply announced my intention to retire, the seven reparation cases on my docket would be reassigned to the only other administrative law judge at the Commission, Judge Levine. This I could not do in good conscience.”

Yes, I’d say those charges are pretty serious, and disturbing.  Judges don’t, as a rule, criticize one another.  Things must have been pretty bad for Painter to break that rule.  But it doesn’t seem that in the end it will have a real effect.

Painter’s criticisms are limited to reparations cases (basically cases where customers of brokerage firms claim their brokers have failed in their duties towards them, and cost them money).  But he raises questions about the possibility of an ideological bias that could have affected decisions in other cases too.

I have been involved in a couple of Levine’s cases.  I’ve heard stories, but this is neither the time nor the place.  I would hope that there is some mechanism for investigating Painter’s allegations, and either clearing Judge Levine’s name if they are baseless, or holding him accountable if they are not.

Halloween is fast approaching, and Gazprom is getting into the spirit (no pun intended) of the holiday by trying to scare the children in Europe.  (No trip to the costume shop required.  Gazprom is a monster in real life.)

Specifically, Gazprom is telling lurid horror stories about what would happen if, heaven forfend, the EU limits Gazprom’s ownership and control over a pipeline from the Yamal Peninsula through Poland to Europe, and Europe moves away from long term contracts to spot contracting:

Medvedev said the EU initiatives forced Gazprom to change its operational routine to adjust to new rules under which customers have the right to change their nominations once, on the day before supply instead of several times a day. Gazprom now maintains backup transmission capacities to meet the quickly changing demand but under the new rules this is unfair competition, he said.

“It will be very difficult to provide the envisaged reliability and flexibility of supplies without such backup capacities… Taking into account seasonality and an extremely uneven demand throughout the day – reliability and flexibility are of paramount importance for the gas industry,” Medvedev said.

Medvedev also criticized EU plans to switch to a spot market mechanism of gas supplies from long-term contracts favored by Gazprom saying the new mechanism would lead to higher prices.

“Without long-term price contracts the volume of gas coming to the market starts depending on the price appeal. The gas will be available when the price is high. If the price is low, volumes may outflow to more attractive markets or stored until better times. Hence, the reliability of European gas supply will be determined by the competition with other global gas markets, primarily, with Asian ones,” Medvedev said.

He said there were also risks for the development of gas transmission and storage capacities which required heavy investment with a long payback period unattractive to anyone but gas companies.

I’m sitting in the airport waiting out a delay, so I have a lot of time–which is a good thing because The Other Medvedev’s (“TOM”) economic epistle is so chock-full of silliness it will take a while to deconstruct it.

My favorite part is the paragraph beginning: “Without long-term price contracts the volume of gas coming to the market starts depending on the price appeal.”  Uhm, isn’t that the whole idea?  Aren’t prices supposed to guide the allocation of resources to their highest value use?  Is TOM saying that gas currently doesn’t flow to the highest value users?  Isn’t it the point that high prices signal high demand and that volumes should respond accordingly?  And that the reverse is true?

A very telling example of Gazprom’s market-phobia.

Note the use of the scare word: “reliability.”  This suggests that gas will be turned off in a spot market regime.  Hardly.  If gas is scarce, the price will be high, but you can get it if you want to pay for it.

Furthermore, TOM could use a little schooling on the Coase theorem.  A long term contract with the Europeans gives them the right to receive the gas.  But if there is a higher value use for the gas–consuming it later, selling it to another market–those holding that right have an incentive to forego consumption and enter into transactions that ensure that the gas flows to that higher value use.  Basically what a long term contract would do is let the fixed price buyer capture the value of the gas when that value is high (and above the contract price), whereas Gazprom could capture it in a high price regime; the flip side is that the fixed price buyer overpays when the value is low (below the contract price).  So, to a first approximation, the form of contracting won’t affect where and when the gas flows, but will affect the allocation of surplus among the parties.

This analysis, of course, assumes that the parties adhere to the terms of a long term contract.  But Gazprom has an incentive to–and has in the past–acted in an opportunistic fashion.  When the value of gas exceeds the contract price, Gazprom has an incentive to renege opportunistically in order to capture the surplus that would otherwise go to the buyers under the contract.  If the shoe is on the other foot, of course, Gazprom will insist on rigorous adherence to the contract.  Opportunism is costly, as are the governance mechanisms to control it.

Insofar as price certainty is concerned, the development of a robust spot market for gas will facilitate the parallel development of a robust derivatives market for allocating price risk.  A spot market plus derivatives market facilitates efficient allocation of physical gas and gas price risk, while economizing on the contracting hazards inherent in the kinds of long term deals that Gazprom favors.

Note how Gazprom rattles the Asian market skeleton to scare the kiddies–another nice Halloween touch.  Sorry.  That’s getting a little old.  And especially when you’re talking about gas from Yamal, which is way out of position relative to China and other Asian markets.

Insofar as operational efficiency and flexibility are concerned, TOM acts as if he’s never heard of the vibrant North American market for natural gas that has been operating on open access principles for going on 25 years now.  Common carrier pipelines with markets for capacity, gas, storage services, and no integration of producers, transporters, and buyers work incredibly efficiently in North America.  Believe it or not, weather in North America can shift dramatically, leading to equally abrupt changes in the demand for gas.  Moreover, there can be supply disruptions (e.g., hurricanes, pipeline blowups).  Nonetheless, the price mechanism and the array of markets for the myriad, complementary services required to get gas from where it is to where it’s needed deal quite effectively with this fundamental volatility, and on a continental scale.  Gas flows from the frozen Canadian plains and the semi-tropical waters of the Gulf to every point in between on the continent, and can respond fluidly to the twists and turns of the weather, production, and industrial demand.  In short, the post-1986 experience in the US demonstrates that it is possible to achieve the “reliability and flexibility [that are] of paramount importance to the gas industry” without monopoly and vertical integration.

As to “risks for the development of gas transmission and storage capacities which required heavy investment with a long payback period unattractive to anyone but gas companies,” is TOM saying that Gazprom is willing to accept rates of return that do not compensate adequately for risk and the time value of money?  If so, that sounds like another reason to support a market-oriented approach that will employ capital more effectively.

And again, the US experience demonstrates that investors responding to market price signals are perfectly capable of making appropriate investments in transmission and storage.  Indeed, financial players have found investment in storage or acquisition of rights to use storage facilities quite profitable, and have used their knowledge of optionality to maximize the returns to such investments.  (There are a lot of real options in a storage facility, most notably over choosing the timing of inflows and outflows.)  And in the bargain, this rigorous approach to understanding and exploiting the optionality of storage has served to enhance market efficiency, flexibility, and reliability.

In brief, TOM is either a blinkered ignoramus with no knowledge of economics or of the gas market outside his cozy little (well, not little) monopoly, or he is shoveling it fast and furious. Sounds like a pick ’em to me.

This means that nobody should be scared of Medvedev’s Tales from the Crypt.  Indeed, the very developments that Gazprom fears would be a boon for its consumers.

The headline of the Ria Novosti article is “Gazprom says EU gas reform a threat to the company,” which makes it clear that Gazprom is the one running scared.  That threat may well may be a very real one.  And that would be more like Christmas than Halloween, at least to those currently dependent on Gazprom for a good share of their gas.  So this is a RN headline that I hope comes true.

This article mentions the alleged suicide of Ukrainian Interior Minister, Yuriy Kravchenko, in 2005.  He chose a very novel method: shooting himself in the head.

What’s so novel about that, you ask?  He shot himself twice.  No sense leaving such things to chance!  (The only thing that could make this story better is if the bullets were different calibers.)

That brings to mind the story of the VTB bank executive, found dead in his Moscow swimming pool.  State television stated that he had committed suicide–even though his hands and feet were bound.

The Kravchenko story is back in the news because Ukraine’s “Prosecutor-General’s Office concluded that the only person who ordered the murder of journalist Georgi Gongadze.”  Kravchenko’s supposed double-tap suicide took place the day before he was supposed to give evidence in the case.  Pinning it all on the now well decomposed Kravchenko is quite, quite convenient for others currently in power or close to it who were involved in Gongadze’s death

As the EDM article suggests, this is just one of many indications of Ukraine’s er, evolution (devolution?), from a chaotic cesspool of corruption to an authoritarian cesspool of corruption, and from a country somewhat independent of Russia to one increasingly in its thrall.

Whenever I criticize Putinism and the current Russian purgatory (yeah, I know it’s rare, but it happens!), the whataboutists invariably say: Whatabout Ukraine!  Better orderly and authoritarian, they say, than chaotic and passably democratic. Heck, Putin himself makes that argument that it is imperative to avoid “the Ukrainian Scenario.”

The implicit argument here is those alternatives are exhaustive.  Let’s assume for the sake of argument that’s true.  It would be hard to imagine a more damning indictment of the legacy of the Soviet past, and a more depressing characterization of the post-Soviet future.

CFTC Commissioner Bart Chilton never struck me as the Claude Rains type, but he recently did a good Capitaine Reynaud imitation:

“The number of people that have come in requesting to be exempt from the law, or to have the law delayed has literally shocked me,” said Bart Chilton, 50, a Democrat who has served as one the agency’s five commissioners since 2007. “A lot of folks are having problems coming to grips with the fact that they do have a new law, and will have to change their business models.”

. . . .

“The volume and intensity of the lobbying is unprecedented in my experience at the agency,” Chilton said. “They all have an ask. The types of loopholes that people are suggesting exist are either non-existent or very farfetched.”

Neither Chilton nor anybody else should be even mildly surprised, let alone shocked.  The requirements of Frank-n-Dodd are so extensive, and so intrusive, that they will impose substantial costs on derivatives market participants.  Said participants have every incentive to try to influence the rules.  And the time is now.  What’s more, they have every incentive to try any argument that might work.  What’s to lose?

The pace and intensity of the lobbying will no doubt ease after the rule making process winds up next summer.  But no matter how carefully-crafted the rules (hah!), they will not anticipate all contingencies, and will have ambiguities and contradictions.  Moreover, market participants will take unanticipated actions that will raise issues about interpretation of the rules.  Hence, for years to come market participants will continue to try to affect the agency, ask for interpretations or no comment letters, or do things that lead to an agency reaction and market participant counter-reaction.  The CFTC will also find it necessary to issue policy statements to clarify the inevitable confusions.  There will be litigation arising from the legislation and regulations that will result in decisions and findings that lead to yet more changes.

In no time, there will be a thicket of decisions and interpretations that will in turn raise new issues.  And the market will continue to adapt and innovate and evolve, both in response to the regulations and technology and market shocks.  These adaptations and evolutions will present further challenges to the regulations and the regulators.

All this will generate more lobbying and lawyering.

When this happens nobody–nob0dy–should express the slightest shock.  Unless, that is, they relish the role of laughingstock.

One of the first things I wrote on Russia was “Just Say No–to Gazprom,” published in Energy World Magazine in July, 2006.* Apparently the Poles didn’t have a subscription, as they seem bent on saying yes to Gazprom’s terms for a verrrrryyyy long term gas contract–with deliveries running out to 2037(!).  Vladimir Socor lays out some of the terms of the agreement:

1) Packaging the new agreement with the 1993 inter-governmental agreement on transit of Russian gas via Poland and deliveries to Poland, which runs to 2022; and setting the duration of deliveries by contract until 2037. All this would help Gazprom to continue monopolizing the Polish market for that duration, preventing diversification of Poland’s natural gas imports and discouraging investment in the LNG project.

2) Exclusive right for Gazprom to use the Yamal-Europe pipeline in Poland until 2045. This would consolidate Gazprom’s position in Poland and Germany for another generation.

3) Europolgas to retain ownership as well as commercial and other operating rights on this pipeline. Thus, Gazprom would be able to lock out any competitors, also precluding reverse-use of this line.

4) Poland’s national transmission operator, Gaz-System, to become technical operator of Yamal-Europe in Poland, limited to a service provider’s role. This would fall far short of the operator’s independence from the supplier.

5) Deeply discounted transit fees to remain in force on this pipeline. The discount is intended not only for Gazprom’s profit, but also to deprive Poland of plough-back funds for modernizing this pipeline independently of Gazprom.

6) A ban on Polish re-export of Russian gas to third countries, with a right for Gazprom in that case to reduce its gas supplies to Poland by a corresponding amount. This is in line with Gazprom’s traditional third-country clause, irreconcilable with the EU’s gas market legislation.

All of these terms serve to tie Poland’s hands, and perpetuate both its and Europe’s dependence on Gazprom–and its vulnerability to opportunistic behavior in the future.

This very long term arrangement would be very short-sighted, just from a narrow Polish perspective.  There is tremendous uncertainty about the gas market right now.  Shale has already revolutionized the market in the US, and the effects are so large that it is having spillover effects around the world.  There are very real prospects for shale to have similarly dramatic impacts in Asia and Europe.  LNG potential is also great, and the interaction between shale and LNG technologies could further transform gas markets.  Traditional relationships in the Caspian are changing, and quite volatile; gas that once moved only through Russia and by Russian sufferance, now could move in myriad directions to myriad markets.  Ditto the Middle East, with the Kurds in Iraq representing a real wild card, and in the longer term, the possibility for Iran to become a viable supplier.  The European gas market is liberalizing, and there is a real prospect for a spot market developing in the near- to medium-term.  All of these factors have the potential to enhance dramatically flexibility in obtaining supplies, and undermining the need for any consumer to rely on a particular producer and pipeline system.

The trends are against Gazprom, and even discounting the trends, the incredible amount of uncertainty about future supply prospects and transport technologies dramatically enhances the real option value of waiting before locking into legacy supply relationships for more than a quarter century.

This is exactly why Gazprom is so hot to do this deal now, and why it is attempting to impose all these restrictions that would sharply constrain Poland’s ability to respond to favorable supply shocks in the future.  That’s perfectly understandable: what’s more mysterious is Poland’s haste in doing a deal on terms that do not reflect Gazprom’s strategic weakness over the coming decades.

And it’s not as if Poland will benefit greatly if these developments do not pan out, and legacy production and supply systems remain dominant.  If that happens, Gazprom will act opportunistically and attempt to exploit its greater power (unconstrained by these new supply sources that proved chimerical) in the future.  In other words, this is pretty asymmetric from Poland’s perspective: they give up the opportunity to benefit from favorable supply developments, but will be at Gazprom’s mercy if those favorable developments don’t occur.

Thus, this doesn’t make sense from a purely Polish perspective.  But there’s also an externality involved: Poland dealing with Russia means that it will succumb to the typical disaggregation/divide-and-conquer strategy so beloved of Russia and Gazprom.  This will redound to the disadvantage of Europe.  Europe, therefore, is attempting to pressure the Poles not to sign this deal.  The European Commission claims that the deal contravenes EU law.

Poland, as so often in the past, is caught between Western Europe and Russia.  But the choice should be an easy one.  EU and Polish interests are aligned: Polish and Russian interests are not.  If this lot of Polish pols does the deal now, Poles and pretty much everybody to the west will be paying the price for a long time to come.

* That’s a gated link.  I’ll try to get a PDF put online.

Back in Missouri over the weekend, I read the Kirkwood-Webster Times over coffee on Saturday.  There was an article on the Third Congressional District race between incumbent Democrat Russ Carnahan and Republican challenger Ed Martin. In a discussion of the stimulus and spending, Carnahan is quoted as saying:

In Congress, budgeting will help put us on the right path to year by year beginning to pay down this debt as our economy grows.

Yes, budgeting is an idea we can all get behind, Russ.  No.  Sorry.  Check that.  This year the Congress didn’t pass or submit a budget.  The Congress in which Carnahan is a loyal foot soldier for Nancy Pelosi, who couldn’t be bothered to put together a budget.  Heck, Congress couldn’t even pass a single appropriations bill, instead relying exclusively on continuing resolutions.

It’s pathetic enough that Congress can’t fulfill its basic obligations.  It’s even worse that Carnahan touts “budgeting” as the crucial tool to getting control over spending.  That’s chutzpah and that’s insulting.  It’s not as if Carnahan was outspoken in criticizing Congress–and his party’s leadership–for failing to pass a budget.

Carnahan’s sister, by the way, is running for Missouri’s Senate seat.  And speaking of stimulus, his brother’s company received $107 million of stimulus money for his windmill boondoggle.  I’m sure that was a complete coincidence.

HHS Czarina–I mean Secretary–Kathleen Sebelius has deigned to grant waivers from Obamacare mandates to big companies like McDonalds and Jack in the Box, and some big unions.  Get ready for this Brave New World, and not just in health care.

2010’s legislative monstrosities, notably Frank-n-Dodd and Obamacare, delegate massive discretionary powers to Federal departments and agencies.  As massive as these bills are, they will shrink into insignificance as compared to the torrents of paper that will cascade from government offices.  Order upon order, decision upon decision, interpretation upon interpretation will engulf us once the bureaucratic presses begin cranking away in earnest.

The effects of this will be entirely deleterious, and contrary to founding principles.  In the terms of the economics literature, Obamacare, Frank-n-Dodd, etc., are incomplete contracts that do not specify actions in all eventualities.  Instead, they largely create governance mechanisms and delegate residual control rights.  In the event, the rights of control are delegated to political appointees and staffers at Federal cabinet departments and agencies.

These control rights determine bargaining power.  And what that means is that in health care and finance–meaning, in just about every economic activity, because virtually every business intersects these sectors–virtually everything will be a negotiation between the government and those in its thrall–meaning the rest of us.  (The word thrall in its noun form, by the way, is a synonym for” serf.”)  These control rights also determine the allocation of the bargaining surplus–who gets the goodies, and who gets screwed.

This vast grant of control rights to bureaucrats will favor, in the first instance, large, concentrated, and organized interests at the expense of diffuse individuals and small firms; Czarina Kathleen I’s grant of a feudal privilege to large companies and unions is just an early example of that.  It will encourage politicization and corruption, as the legal tender in these transactions will be political support and obeisance.  It will move the US further towards corporatism.  It will stifle innovation and creative destruction, as the small and the upstart are at a comparative disadvantage in negotiating in such a system.  It will, in short, lead to the kind of sclerosis that Mancur Olson described, and the kind of ossification that Schumpeter predicted would signal the death of vibrant capitalism.

You can get a taste of what’s in store by looking at some historical examples.  In the last week I read some law review articles about futures regulation in the 1970s-1990s.  Under the Commodity Exchange Act, all contracts for “future delivery” had to be traded on exchanges regulated by the government.  This requirement, an absurdity when it was adopted starting with the Grain Futures Act of 1922, was beyond absurdity in the 1970s when financial innovations unthought of when Grannie was doing the Charleston were being developed (in part, due to the government policy-driven economic uncertainty prevalent at the time).  So the agency with the responsibility to enforce the CEA, the CFTC, acted in an ad hoc, political fashion in interpreting and implementing the law.  In response to new innovations and new issues it issued new interpretations that were wildly inconsistent with those issued not long before.  By the end of the 1980s, a thicket of completely confusing and contrary policy statements, interpretations, and no-action letters had made the “law” on the subject an incomprehensible mess.  This created legal uncertainty, distorted incentives, warped innovation and change–and created a cottage industry for lawyers.

Ironically, the demonized Commodity Futures Modernization Act of 2000 (which, even more ironically, Gary Gensler was actively involved in advancing) was a response to this situation.  It was an attempt to impose a more coherent, predictable, and consistent framework for regulation in these markets.  (And it did it in a mere 262 pages–pikers.)

We are not going back to that future.  We are going to something far worse, far more intrusive and extreme.  Look at all the discretionary power the CFTC has under Frank-n-Dodd to interpret myriad ambiguous terms, definitions, and mandates.  Think of the potential for bargaining, and the inevitable unprincipled and incoherent results of that bargaining, as those affected by the law and its interpretation exert influence on the agency and its Congressional overseers in order to achieve favorable outcomes.

And, of course, it will not just be CFTC, but the SEC, the OCC, the Fed in finance, and HHS and a host of other agencies and departments you’ve probably never heard of in health care.  It will take a forklift to carry the Federal Register.

It’s not all bad news though–if you’re a lawyer.  It is cruelly ironic.  Policies and legislation that undermine law as it should be redound to the benefit of lawyers who specialize in negotiating transactions in such a system.*

The Hayekian distinction between law and legislation is quite apposite here.  The legislation of 2010, and the regulations that will be used to implement it, are directly contrary to law as a system of well articulated, stable, and passably coherent rules applied in a non-discriminatory way.  No, law in reality has never been close to the Hayekian ideal, but what we are witnessing is a giant step in the wrong direction.

This corporatist, highly personalized, transactional system (all words that describe the current Russian government, by the way), will condemn the US to years of stagnation.  They will be a drag on growth, and provide an incentive for able individuals to devote their talents to negotiating for rents with their governmental overlords, rather than thinking of and implementing new ways to create things that people value.

(Thanks to Ed at Pickerhead for the inspiration and the nudge.)

* I am reminded of something I read on a visit to the Kentucky State Historical Museum in Frankfort.  It was a letter from the early-19th century remarking at how many lawyers there were in the state, in contrast to their (relative) scarcity just across the Ohio River in Ohio.  The reason was that whereas in Ohio the New England system of defining property rights by survey prevailed, in Kentucky deeds would define the boundaries of a piece of property by this tree and that rock, or somesuch.  As a result, property lines in Kentucky were extremely imprecise, and there were huge amounts of litigation and negotiation to resolve property disputes.  This gave lawyers–and judges–tremendous power.  But nothing that will compare to that wielded by lawyers, judges, and bureaucrats in the Age of Obama.

It gets better and better.  We will soon have a bona fide political hack as National SecurityAdvisor.  One whom SecDef Gates slammed in Woodward’s book:

In the book “Obama’s Wars,” Woodward writes that, “Gates felt that Donilon did not understand the military or treat its senior leadership with sufficient respect.”

“The secretary later told Jones that Donilon would be a ‘disaster’ as Obama’s national security adviser,” Woodward wrote.

The man he is replacing, Jim Jones, was even more scathing:

Jones — a former Marine Corps Commandant who served as Obama’s national security advisor since the first days of the administration — also warned Woodward about Donilon’s shortcomings, saying though he had “organizational skills,” his deputy didn’t know enough about the subjects on which he was advising the president.

“He had never gone to Afghanistan or Iraq, ‘or really left the office for a serious field trip,’ ” Jones said of Donilon in Woodward’s book. “As a result, he said, ‘you have no direct understanding of these places. You have no credibility with the military. You should go overseas.’ ”

Woodward adds that Jones told him of one occasion where Gates almost walked out of a meeting in anger over a “strong, spur-of-the-moment” comment Donilon made about an unnamed general.

“You frequently pop off with absolute declarations about places you’ve never been, leaders you’ve never met, or colleagues you work with,” Woodward quoted Jones as saying about Donilon.

Great. Not just a hack.  An arrogant, ignorant hack.  Arrogance and ignorance always go so well together.

Jones was no prize as NSA, but he had spent his life in, you know, national security.  In contrast, just what do you learn about national security while serving as a lobbyist for Fannie Mae? Or as a consultant for Goldman and Citi?

Oh.  He was Chief of Staff to a Secretary of State.  Problem is, that SecState was Warren Christopher.  The guy who Hafez Assad left twiddling his thumbs while he met with the Russian foreign minister–back when Russia’s power and relevance was at its nadir–just to show Christopher who was boss.  And Christopher took it.  The most feckless Secretary of State in modern memory.

There are two types of big time lawyers in DC:  The kick ass litigators and the kiss ass fixers.  Donilon is a classical example of the latter.  Working on political campaigns.  Lobbying for the likes of political creatures like FNMA.  Close family connections with the political establishment. (Donilon’s brother has worked for Biden: his wife is Biden’s wife’s chief of staff.)

His appointment is proof of the abject politicization of national defense under Obama. National security as the continuation of domestic politics by other means.  Yes, Bryan, there is inevitably a political component to defense policy.  But in his subordination of security to domestic political considerations, Obama has gone beyond the pale.  This appointment puts the exclamation point to that statement.

This appointment is revealing about two broader issues.

First, it is a telling confirmation of Michael Barone’s hypothesis that the left’s disenchantment with Obama is rooted in national security issues:

So why are Democrats less enthusiastic? And why has “the progressive donor base,” as Democratic consultant Jim Jordans reports, “stopped writing checks”?

I don’t think it’s just because the economy remains sour or that Barack Obama failed to jam a public option in the health care bill.

I find a more convincing explanation in an offhand phrase in a subordinate clause in a brief article by Adam Serwer of the Center for American Progress on The Washington Post’s opinion pages. “There’s no question,” Serwer writes, defying anyone to disagree, “that Obama has completely reversed on his promises to roll back Bush-era national security policies.”

As his political support craters, and more importantly, as the political strength of the Democratic party among independents craters, Obama is almost completely dependent on the support of the progressive left.  Add that to the fact that that’s where is heart is, and it’s no surprise that he appoints somebody like Donilon in the National Security Advisor post.

Second, and relatedly, it is a harbinger of how Obama will deal with a changed political landscape post-November.  Rather than tack center a la Clinton in 1996, Obama is going to go to the mattresses.  “Hand-to-hand combat” indeed.  He is going to hunker down, surround himself with ideological allies, and wage two years of scorched earth political conflict.

Amazingly, Hayek’s 60+ year old Road to Serfdom is the subject of contemporary political discussion even though in many ways it is about a world that disappeared long ago–and in, fact, never really existed, though Hayek feared that such a world was impending.  Some of the commentary is clueless: like this from the NYT for example.  (Go figure.)  Some is more discriminating, like this response in the Economist to the NYT article.  Tyler Cowen gives a lukewarm review based on a re-read.  Tyler concludes that: “It’s fine to downgrade the book, relative to some of the claims made on its behalf, but the book doesn’t give us reason to downgrade Hayek.”

I think this is a fair appraisal.  For me, Road to Serfdom was like a gateway drug to Hayek.  It was sufficiently interesting and provocative and informative to me when I read it at age 21 or 22 to make me want to read Hayek’s non-polemical work.  And what a revelation that was.  RTS contains the kernel of the Hayek’s key ideas, and hence it is a good thing if more people read it and become familiar with those ideas.  But it is a pale imitation of the real thing.

Yale’s Aleh Tsyvinski is bearish on Russian economic prospects. In particular, he argues that 3 percent growth in Russia is actually tantamount to stagnation that could have serious social and political consequences:

Russia is facing a “significant” slowdown in economic growth, which will strip away the government’s popularity, said Aleh Tsyvinski, co-director of the macroeconomics program at Yale University’s Cowles Foundation.

“There will be a significant slowdown in growth,” he said today in an interview in Moscow. “This is fraught with serious political and economic problems. It’s no secret that the popularity of the people in power greatly hinges on the big increase in the standard of living of average Russians.”

. . . .

Russia’s economy will “face stagnation” similar to that experienced during the reign of Leonid Brezhnev, who led the Soviet Union from 1964-1982, if oil prices remain around $70 to $80 a barrel, said Tsyvinski, 32, who is a professor at Yale in New Haven, Connecticut, and Moscow’s New Economic School.

Tighter Regulation

For Russia, economic expansion of around 3 percent constitutes stagnation and is comparable to the U.S. economy contracting 1 percent, he said.

“When oil prices were increasing and investors were expecting significant growth, Russia was an interesting country for them,” Tsyvinski said. “With oil prices between $70 and $80 a barrel, Russia becomes a lot less attractive.”

There will be tighter financial regulation after the global economic crisis, so less money will flow to emerging markets, Tsyvinski said. Russia will have to compete against Brazil and China for investment and it’s looking less attractive, he said.

Foreign direct investment into Russia, the world’s biggest energy exporter, fell an annual 11 percent to $5.4 billion in the first half, according to the Federal Statistics Service.

This fall in FDI in 2010 from already scary 2009 levels is particularly damning–especially inasmuch as other emerging markets are concerned about too much foreign money flowing in.  The world is hungry for yield.  They ain’t getting it in the US or Europe, so they’re headed to emerging markets in droves–except for Russia, that is.  That is very telling.

The government is forecasting a 4 percent growth rate in 2010-2011–if it runs the table on energy prices.  If not . . . As Tsyvinski notes, it’s unimpressive compared to the 6-7 percent growth of the mid-2000s (which, truth be told, wasn’t all that remarkable given the runup in energy prices, and by comparison to other FSU countries).

The Brezhnev metaphor is getting traction.  Discussions of Russian domestic politics frequently compare the present situation to the relatively unrepressive but suffocatingly constrained 1970s and early-1980s.  And now the comparisons of Russia’s current economic situation to the stagnation of the Brezhnev years are also becoming far more common.

However, I think it’s worth pointing out that although genuine politics are absent from Russia today, things are a far cry from the Brezhnev years in terms of the government’s ability and willingness to crush dissent.  Moreover, in part due to the relatively heady days of the mid-2000s, and Russians’ better understanding of the way the world lives and how they could live, expectations are much higher today.  This could foreshadow greater political instability, although it will take something to overcome the atomism and apathy of the Russian populace, and their (understandable) fear of another descent into chaos.

In the linked article, as is the case with virtually every article on the Russian economy, there are voices calling for Russia to diversify away from energy.  These calls are, in my view, highly unrealistic, and for several reasons, especially under the current political system.  First, it would require swimming upstream against the currents of comparative advantage.  Second, it would require a complete change in the mindset of the powers that be.  Said powers are highly comfortable siphoning off the rents of a resource intensive economy.  They are the bulwark of the natural state.

Thus, the Russian dilemma.  Overcoming economic stagnation would require a political change.  But no such political change is likely forthcoming because the existing system works to the benefit of those in power, who have the will and the means to defend their position.  As is all too tragically typical of Russia, if it were to come, change would likely be convulsive and chaotic, which would hardly be conducive to the transition to a modern economy.

This is a recurring theme of Russian history.  The 19th century tsars were far more comfortable in an extractive economy, and were highly suspicious of the development of a modern industrial one, recognizing that it would bring on massive social changes in its wake.  Today’s powers that be are similarly suspicious.  There may be talk of modernization, but true modernization is incompatible with the existing political, economic, legal, and social institutions.  When forced to choose between modernization and the political status quo, self-interest, and indeed, self-preservation make the choice obvious.  They won’t choose to be the next Gorbachevs.

There are remakes of American TV shows on the air in Russia–Married With Children, for instance.  That 70s Show might be on for real, for many years to come.