Streetwise Professor

Merry Christmas to all of my SWP friends.  I deeply appreciate your visiting and reading and commenting; your active participation has made SWP very rewarding.  May you have a joyous Christmas and a Happy New Year.

Russia has approved a plan to sell stakes in a variety of state companies for an estimated $32 billion. Notable by its absence from the list is Transneft, the state oil export pipeline monopoly.  Transneft management has been outspoken in its opposition to any sale of a stake in the company to outside investors.

And no wonder.  Why would they want any nosy outsiders in on their rackets?  Their big time rackets, as news reports indicate:

The leaking of an official report suggesting $4 billion was stolen by Transneft insiders during the construction of a pipeline to the Chinese border was greeted Wednesday with the government offering congratulations to the state-controlled oil pipeline operator for completing the project.

“They stole. They overstated prices. They connived with contractors to cheat. Then they destroyed the documents,” Andrei Navalny, a minority Transneft shareholder and lawyer, wrote on his blog, where he published what he described as a Transneft report requested by the Audit Chamber.

. . . .

One of the largest allegations of expropriated funds in Navalny’s Transneft report is in the “baseless inflation of estimated project-exploration values” as a part of the initial phase of the ESPO pipeline. The amount alleged to have been stolen is more than 10 billion rubles.

There are more details here.

Now the allegations are directed at the previous management, and the company’s current management hinted that it agreed with the reports of massive fraud by its predecessors.   But they would, wouldn’t they?  They have many reasons to.  For one, they can use this to shovel blame for any subsequently discovered problems or missing sum on the previous management.  Moreover, this is the perfect pretext to undo arrangements with contractors and others entered into by the prior management–so the current management can replace them with its own tunneling schemes.

The allegations bring to mind the Credit Mobilier scandal of the 1860s-1870s in the US.  Credit Mobilier was a firm that was contracted to construct the Union Pacific Railroad.  Credit Mobilier was owned by officers and directors of the UP, and (among other things), overcharged the railroad for construction.  Since the government was footing a big portion of the construction of the road, the overbilling defrauded the government.  Something similar was going on (should I say “was”?) at Transneft.

Big infrastructure builders like Transneft (or the UP) are the perfect vehicles for this kind of scheme.  Nosy independent shareholders would be harmed by these actions, and would have an incentive to try to uncover them (although if the minority shareholders are diffuse their incentives would be somewhat weaker).  Depending on where the company is listed, the private shareholders could take legal action against the company if such a scheme were uncovered by them.  Auditors would also be more concerned about liability, and would have an incentive to be more inquisitive.

So it is no surprise whatsoever that Transneft has resisted so vociferously being included in any Russian privatization plan.  The last thing it wants is to risk any sunlight illuminating the dark tunnels through which so much money flows.

The Federal Reserve has launched a second round of “quantitative easing”–QE2.   How is it that this “easing” leaves me uneasy?

Macro is not my thing.  But economics is economics, and I know enough to have serious questions about quantitative easing.  I may not be able to tailor a magnificent macro suit, but I can pretty much tell when the king is naked, and I think that’s the case here.

Bernanke is arguing that easing is needed because of deflationary concerns.  But has there ever been a deflationary episode during which commodity prices spurted ahead?  Definitely not during the 1930s.  Not in the 1920-1921 crash (which at its outset was more severe than the Great Depression).  Not in 1893.  In all of these episodes, commodity prices crashed.  So if this is deflation, it is a weird deflation.

Bernanke was asked about this specifically at a presentation at Jacksonville University.  His answer was not comforting:

Asked by a student if “skyrocketing” commodities prices may threaten his inflation outlook, Bernanke said rising commodities prices are “the one exception” to a broad reduction in inflationary pressures. Overall, excess slack in the economy will make it difficult for producers to push through higher prices to consumers, he said.

Well, exceptions can be pretty damned informative.  Anomalies are the things that should make you question your analysis.  If there is “excess slack” why is the demand for commodities high?

Relatedly, in what deflationary or near deflationary episode has the country facing the more severe deflation problem seen its currency depreciate, rather than appreciate?  Japan’s skyrocketing yen is consistent with deflationary pressures there.  Commodity prices have risen little, if at all, in yen terms.  But the dollar has cratered.  How is that consistent with a US deflationary episode?  Another anomaly in the deflation story.

Bernanke is known primarily as an expert on the Great Depression.  It is pretty clear that that is the mental model he is relying on when deciding that QE is necessary.  But there is always the possibility that he is the general fighting the last war.  Or that he is the master with the hammer, but the current problem isn’t a nail.  Before plunging ahead with a radical scheme, I’d want to have a better understanding why these anomalies exist, and what they mean.  To me, they suggest that the Depression template is a very bad fit.  But it is driving his thinking.  I am worried when people fix monomaniacly on things that confirm their priors and dismiss those that don’t.  That’s not the recipe for wise decisions.

Bernanke acknowledged in a WaPo oped that the 2008 crash was a global phenomenon, but that the slow recovery is primarily an American (and Japanese) one.  In the Jacksonville talk, he acknowledged that emerging markets are booming.  Parts of Europe, especially Germany, are growing smartly.  Even the UK has bounced back better than the US.  So what makes the US different?  Is this difference something that can be addressed by QE?  

I have my doubts, particularly in an open economy: a lot of the stimulus will spill over to–is spilling over–to emerging markets.  I think that there is a good possibility that America’s economic sluggishness is a reflection of the grim fiscal situation and the spate of regulatory and other government burdens that have been piled on in the last 2 years.  If that’s the case, then QE2 will not correct stagnation, and risks stagflation.

I also have my doubts as to how this is going to work, exactly.  In his WaPo oped, Bernanke touts the interest rate channel.  That’s hardly persuasive.  He also mentions boosting the stock market, and I think that is more accurately reflective of his true strategy.  QE2 is a hair of the dog gambit: asset bubbles got us into this mess, an asset bubble will get us out.  He’s not Helicopter Ben–he’s Bubble Ben.

I could see–barely–this working if QE were to boost housing prices.  This would ease pressure on household balance sheets, drying out underwater mortgages, which could spark an increase in consumption.

But although Ben can open the monetary floodgates, he’s powerless to direct where the flood of money goes.  Right now it’s heading to emerging markets, commodities, and to some degree stocks.  Housing does not seem to be benefitting.  And this could be contbuting to the QE decision loop.  The Fed and Bernanke point to the CPI as evidence that there is little inflation, and that we are on the cusp of deflation.  But CPI has a large housing component (about 25 percent, if memory serves).  This could be giving a misleading picture of true inflationary pressures.

I wonder what the monetary channels are now.  One possibility is that easing leads to asset price inflation first and foremost, and that goods price inflation occurs with a lag.  By the time that monetary pressures show up in the goods price measures that the Fed/Bernanke are monitoring, it may be too late to intervene to prevent a big inflationary spurt, or any such intervention may crater the economy.  The dilemma that I disussed in late-08 to early-09–where the Fed is faced with the grim choice between rampant inflation and a major recession–is still present.

This means that QE is unlikely to do anything to boost the American economy.  At the same time it is already sharply increasing international tensions in a way that poses a real risk of trade, currency, and investment protectionism.

All of this also injects a tremendous amount of uncertainty into the economy.  This uncertainty makes decision making harder–and investment/resource allocation mistakes more likely.  I once quoted Sherwin Rosen’s bracing remark in his Econ 300 class in Chicago in ’82 or ’83: “The problem with inflation is that it f*cks up relative prices.”  Well, even if QE doesn’t spark measured inflation, it almost certainly will–and arguably already is–f*cking up relative prices.  That’s not good.  And just the uncertainty itself is a drag on the economy, as decision makers decide that procrastination is the better part of valor.

You don’t have to go all Austrian to have serious concerns that continued monetary stimuli can distort price signals, leading to perverse resource allocations, and economic problems down the road when these misallocations become manifest. 

In brief: I see a lot of icebergs out there, but Captain Ben has just ordered all ahead full.  I hope there are enough lifeboats.

NPR’s firing of Juan Williams is a travesty, of course, and one that’s so obvious and so widely remarked that I see no purpose in saying any more about the firing itself.  One thing that has struck me, though, is the analysis of Williams’s words.  In particular, the frequent statement that Williams’s fears of those in traditional “Muslim dress” were irrational because terrorists would try to blend in.

One example:

If anything, an Islamist terrorist wants to blend in, not stand out.

Another:

In this, [Williams] was simply acknowledging an anxiety that is felt by millions of Americans who fly.

This may not be entirely rational (the odds of being victimized by terrorism are very small), and Muslim garb is an unlikely marker of a terrorist in a U.S. airport anyway (a terrorist is likelier to try to fit in).

Williams’s fear was not entirely rational (though not entirely baseless, either).  But the “terrorists would try to fit in, not stand out” critique of is reasoning is unpersuasive.

It is unpersuasive because as a matter of policy, the adamant refusal of security personnel to profile as a matter of policy means that wearing such dress would have little if any effect on the likelihood of the wearer being subjected to additional scrutiny.  (Whereas my wife, who would fit no non-insane terrorist profile known to man was harassed by TSA in the St. Louis airport yesterday, although that could have been best explained as the actions of a twisted TSA agent abusing the new body scanning equipment.  Probably a good thing I wasn’t there.)

And as for Islamic terrorists trying to fit in, and avoiding Islamic dress, just as recollecting that one black swan is sufficient to disprove the hypothesis that all swans are white, it is useful to recall the events of about a year ago.  For that is when Major Nidal Hasan, the Fort Hood assassin, regularly paraded about in such garb.  Including on the day that he committed the murders:

An owner of a 7-Eleven at Fort Hood said Hasan — whom he knows as “Major Nidal” — came in for coffee and hash browns most mornings, including the morning of the shootings. Surveillance video from the store obtained by CNN shows a man who according to the store owner is Hasan at the cashier’s counter at about 6:20 a.m. Thursday, about seven hours before the mass shooting. He was carrying a beverage and dressed in traditional Arab garb.

In brief, Juan Williams’s fears were not based on careful analysis–and certainly, few fears are, and Williams forthrightly acknowledged that–but the analysis of those who critiqued those fears are hardly persuasive.  Williams wasn’t consciously being a Bayesian, but a coldly calculating Bayesian would not disregard Islamic dress in assessing the odds that an individual is a potential terrorist.  Those odds are extremely small in any individual case, including cases of individuals wearing said dress, but this is not a piece of data that should be discarded as wholly uninformative.  If Hasan’s superiors had taken note of his clothing preferences, especially in light of other information, the 14 people he murdered might be alive today.

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.

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.

I am in France for a few days.  This time–no battlefields.  I’d thought about going to Lille to see the Vauban designed citadel, and some other remaining Vauban fortifications in Normandy, but decided instead to visit the Loire valley, which I’ve not visited before.  Right now, I’m in Saumur, in a hotel room looking directly up at the chateau; the hotel  lobby that overlooks the river.  (Ironically, my dad was based here during his glorious service as a draftee in 1955.  I’m guessing that the tarpaper shacks he and the other GIs inhabited here and in Chinon up the river are long gone.  As are the Polish WWII veterans who served at guards at those bases.  My dad said they were the toughest, meanest SOBs he ever met.  They were men without a country who had fought against the Germans from 1939 until 1945.  If that doesn’t make you tough, nothing will.)

I spent the morning at Le Mont St. Michel.  Truly spectacular.  It is the second biggest tourist attraction in France, and I can see why.  Thanks to the suggestion of FB friend Stephanie, a Normandy native, I stayed on the Mont itself; given that the place was booked for the weekend, I rejiggered my plans and drove directly from Paris after my flight so I could stay there on Thursday, when I could get a room.  Definitely worth it.  The crowds are insane before 5 (at this time of year–can’t say what it’s like at the peak season), but then the busses leave and you can have the place pretty much to yourself.  I was up early, and again–the place was mine.  Watching the sunrise over the bay was truly remarkable.  (Another advantage of a September visit: you can watch the sunrise without getting up before the crack of dawn.  Or something like that:))

The interior of the abbey itself is beautiful, but the views of the exterior, and of the surroundings, are what make it spectacular.

Then a drive to the Loire.  It’s hard to beat rolling through the rolling French countryside, listening to good music, under a high blue sky with cotton-white Simpson’s clouds.  Most of the fields were in stubble, with the exception of some cornfields, and a few fields of sunflowers, their bright yellow faded, with huge seed-laden heads looking like big black eyes.  The trees haven’t turned yet.  But still a pleasant aspect, wherever I cast my eye.

Tomorrow, some more Loire sights–chateaux, abbeys, etc., before a night in Tours.  Sunday?  Who knows, but I doubt I can go wrong.

And the best thing about this trip: no tropical storms.  Seriously.  September 15, 2009–Ike (not to mention Lehman!)  September 15, 2010, a typhoon in Hong Kong.  This year, placid, cool, crisp.

* F is for French–and my grade in French.  I originally titled this “Le Bon Vie.”  D’oh!

From Reuters:

UC RUSAL (SEHK: 486, EuroNext: RUSAL/RUAL), the world’s largest aluminium producer, is pleased to announce details of CEO Oleg Deripaska’s lecture – ‘The Power of Focus: Turning Opportunity into Success’ – which is the inaugural speech of the UC RUSAL Presidential Forum at Hong Kong University of Science and Technology (HKUST).

In his lecture, Oleg Deripaska, one of Russia’s leading businessmen, will talk about his principles . . .

Deripaska is in the midst of a charm campaign, as mind boggling as that concept is.  He’s trying to sound all high minded and strategic and stuff, to make it look/sound like he’s something other than a Kremlin creature with a shady past–and a shady present.  Presumably this is to gull foreign investors to help him shovel out from his debt burden, and to give him a leg up in the war with Potanin over Norilsk Nickel.

Deripaska has to be figuring that P.T. Barnum erred substantially on the low side when he said there’s a sucker born every minute.

* Speaking of short, posting may be light in the next couple of days, and those posts may be somewhat abbreviated–esp. by SWP standards.  I am in France where I am participating in an International Energy Agency workshop on “Carbon Market Oversight.”  Yes, you read that right.  The event is in Paris Monday and Tuesday, but I came over a few days early.  Am now at Le Mont St. Michel, and will visit chateaux in the Loire Valley over the weekend.

Obama’s speech on Iraq seemed listless and perfunctory.  Much of it was boilerplate–no surprise there.  Some of it was disturbing, most notably his continued ambivalence on Afghanistan:

Within Afghanistan, I have ordered the deployment of additional troops who-under the command of General David Petraeus -are fighting to break the Taliban’s momentum. As with the surge in Iraq, these forces will be in place for a limited time to provide space for the Afghans to build their capacity and secure their own future. But, as was the case in Iraq, we cannot do for Afghans what they must ultimately do for themselves. That’s why we are training Afghan Security Forces and supporting a political resolution to Afghanistan’s problems. And, next July, we will begin a transition to Afghan responsibility. The pace of our troop reductions will be determined by conditions on the ground, and our support for Afghanistan will endure. But make no mistake: this transition will begin – because open-ended war serves neither our interests nor the Afghan people’s. [Emphasis added.]

He throws a small bone to the critics of his Afghanistan policy with his remark about “conditions on the ground.”  But everything else in the statement–including the phrases I’ve italicized–clearly indicate that the American commitment is tightly circumscribed.  Moreover, the commencement of the drawdown is written in stone (“But make no mistake: this transition will begin”).  The only flexibility is on the pace of the drawdown–not its inevitability.

This is all delusional because the goal of his policy–Afghanization, the building of Afghan capacity to secure the country’s future–is completely incompatible with this cramped timeline.  It is widely recognized that Afghan state and military capability are years behind Iraq’s, and there are grounds for concern about the viability of Iraq’s as an independent entity even after many years of robust American support and training.  So there is no way Afghanistan will be capable of what Obama wants in July of 2011, or years beyond that.  If we are lucky, the drawdown in Afghanistan will commence when we are at the end of the beginning of the beginning.  This is a disaster in the making.  A warm up the helos and clear the roof of the embassy-type disaster.

But that’s not the main thing that struck me about the speech, because it was completely in line with his previous statements.  What hit me was the clunky attempt to “pivot” to the economy.  This was hardly a thing of grace, and in its own way is quite revealing:

Unfortunately, over the last decade, we have not done what is necessary to shore up the foundation of our own prosperity. We have spent over a trillion dollars at war, often financed by borrowing from overseas. This, in turn, has short-changed investments in our own people, and contributed to record deficits. For too long, we have put off tough decisions on everything from our manufacturing base to our energy policy to education reform. As a result, too many middle class families find themselves working harder for less, while our nation’s long-term competitiveness is put at risk.

And so at this moment, as we wind down the war in Iraq, we must tackle those challenges at home with as much energy, and grit, and sense of common purpose as our men and women in uniform who have served abroad. They have met every test that they faced. Now, it is our turn. Now, it is our responsibility to honor them by coming together, all of us, and working to secure the dream that so many generations have fought for -the dream that a better life awaits anyone who is willing to work for it and reach for it.

Our most urgent task is to restore our economy, and put the millions of Americans who have lost their jobs back to work. To strengthen our middle class, we must give all our children the education they deserve, and all our workers the skills that they need to compete in a global economy. We must jumpstart industries that create jobs, and end our dependence on foreign oil. We must unleash the innovation that allows new products to roll off our assembly lines, and nurture the ideas that spring from our entrepreneurs. This will be difficult. But in the days to come, it must be our central mission as a people, and my central responsibility as President.

Note the direct assertion that the same kinds of things that work in a military campaign are what are needed to rejuvenate the economy.  This is not new.  Statists are fond of using military metaphors to describe the economy, and military style, command and control, methods to address economic issues.  Lenin’s writing is littered with military metaphors.  (And no, I’m not saying Obama is a Leninist.)  Ditto fascist economic tracts.  (And not saying he’s a fascist either.)  In the US, during the New Deal, military metaphors and command and control type measures to address the crisis were all the rage.   In the 1970s, Carter said that fighting the energy crisis was the “moral equivalent of war,” and attempted to implement a raft of centralized, government-driven initiatives to deal with energy.   Statists rattle the economic saber at every opportunity.

Obama’s speech reflects a similar mindset that the economy is something that is amenable to central direction and control, like a military campaign, as does his recent statement on the economy:

“Every single day, I’m pushing this economy forward, repairing the damage that’s been done to the middle class over the past decade and promoting the growth we need to get out people back to work,” Obama said in his statement.

General Obama, leading the economic charge.  “Fighting for economic recovery on all fronts.”  He called for a “full-scale attack” on economic issues, and called on the Republicans to end their “blockade” against a “jobs bill.”  It is amazing that a man that is so painfully, obviously diffident–at best–about his real military responsibilities as Commander-in-Chief is so aggressive in his deployment of military imagery–and centralized, quasi-military methods–on economic matters.

This is fundamentally wrongheaded, and actually destructive.  The economy is not an army, to be commanded and directed.  Centralized methods founder on information and incentive problems, and the daunting complexity and interconnectedness of the economic system.  Attempts to centralize invariably impair efficiency, and stymie growth, rather than the reverse.  This is particularly true when helter skelter attempts to restructure massive parts of the economy create pervasive uncertainty that paralyzes private decision makers.  Military-style, centralized, command and control methods are the last thing the economy needs to prosper.

I’ve said before that the greatest lesson of the Great Depression is that we learned the wrong lessons from the Great Depression.  There was at the time (notably at Chicago), and increasingly so today, a recognition that the dirigiste thrust of Roosevelt’s policies and the great uncertainty created by the improvisational nature of the centralized policies exacerbated the depth and duration of the Depression.

This is a plausible reading of the current situation as well.  If Obama truly views economic matters in the way suggested by his rhetoric, as something amenable to centralized, hierarchical, military-style methods, we can anticipate a continuing, stumbling recovery, if we’re lucky.  In other words, General Obama’s ringing call to economic arms will not lead us to victory, but to quagmire–to appropriate a word so beloved of his ilk.

Some Congressional Democrats testifying to their deep and abiding respect for the Constitution.

Rep. Phil Hare (D-IL).

Nancy Pelosi (D-CA)

Pete Stark (D-Senility) (Go forward to about the 2:37 mark.)

Gold Hat (Just another Federale):