A Moral Hazard Danger

Charles Wheelan, the Naked Economist at Yahoo! Finance, asks some tough questions about US military service.

Link: A Moral Hazard of Global Proportions: The Naked Economist – Yahoo! Finance

…has our extraordinary all-volunteer military created a moral hazard problem?

…moral hazard is the idea that individuals behave differently — and sometimes badly, from society’s standpoint — when they don’t have to bear the full cost of their actions.

Americans can vote to send troops to without facing any risk of fighting themselves.

For all the bombast surrounding Iraq, to my mind the most subtle question gets too little attention: Would the same Americans who were originally for the war — both the politicians and the electorate who strongly supported them — have made the same decision if they, or their children, actually faced some risk? In other words, has our extraordinary all-volunteer military created a moral hazard problem?

While this may seem like heaping criticism on an increasingly unpopular war in Iraq, the question is equally applicable to humanitarian interventions around the globe, particularly in places where U.S. interests aren’t directly threatened.

Patriotism is cheap right now. And so, too, is humanitarianism. All it takes for most of us to demand that America "do something" is a comfortable chair and a remote control. But there is nothing cheap about "doing something" for the men and woman who actually have to do it.

Thomas Friedman on Oil and Democracy

Thomas Friedman describes why the US-led efforts to spread democracy in the Middle East are having unintended consequences. Excerpts below.

Source: New York Times, Addicted to Oil, by Thomas L. Friedman, February 1, 2006

So far the democracy wave the Bush team has helped to unleash in the Arab-Muslim world since Sept. 11 has brought to power hard-line Islamic fundamentalists in Iraq, Palestine and Iran, and paved the way for a record showing by the Muslim Brotherhood in Egypt.

The Bush team’s fault was believing that it could change that — that it could break the Middle East’s addiction to authoritarianism without also breaking America’s addiction to oil. That’s the illusion here. In the Arab world, oil and authoritarianism are inextricably linked.

You cannot go from Saddam to Jefferson without going through Khomeini — without going through a phase of mosque-led politics.

Why? Because once you sweep away the dictator or king at the top of any Middle East state, you go into free fall until you hit the mosque — as the U.S. discovered in Iraq.

The mosque became an alternative power center because it was the only place the government’s iron fist could not fully penetrate. As such, it became a place where people were able to associate freely, incubate local leaders and generate a shared opposition ideology.

That is why the minute any of these Arab countries hold free and fair elections, the Islamists burst ahead.

Why are there not more independent, secular, progressive opposition parties running in these places? Because the Arab leaders won’t allow them to sprout.

It is not this way everywhere. In East Asia, when the military regimes in countries like Taiwan and South Korea broke up, these countries quickly moved toward civilian democracies. Why? Because they had vibrant free markets, with independent economic centers of power, and no oil.

In the Arab-Muslim world, however, the mullah dictators in Iran and the secular dictators elsewhere have been able to sustain themselves in power much longer, without ever empowering their people, without ever allowing progressive parties to emerge, because they had oil or its equivalent — massive foreign aid. Only when oil is back down to $20 a barrel will the transition from Saddam to Jefferson not get stuck in "Khomeini Land."

If you just remove the dictators, and don’t also bring down the price of oil, you end up with Iran — with mullah dictators replacing military dictators and using the same oil wealth to keep their people quiet and themselves in power.

In the Middle East, oil and democracy do not mix. It’s not an accident that the Arab world’s first and only true democracy — Lebanon — never had a drop of oil.

Thomas Friedman on Green Cars, Energy, and Terrorism

Thomas Friedman challenges the Bush administration to address several current problems with vision. Excerpts below.

Source: The New York Times

we are in the midst of an energy crisis – but this is not your grandfather’s energy crisis. No, this is something so much bigger, for four reasons.

First, we are in a war against a radical, violent stream of Islam that is fueled and funded by our own energy purchases. We are financing both sides in the war on terrorism: the U.S. Army with our tax dollars, and Islamist charities, madrasas and terrorist organizations through our oil purchases.

Second, the world has gotten flat, and three billion new players from India, China and the former Soviet Union just walked onto the field with their version of the American dream: a house, a car, a toaster and a refrigerator. If we don’t quickly move to renewable alternatives to fossil fuels, we will warm up, smoke up and choke up this planet far faster than at any time in the history of the world. Katrina will look like a day at the beach.

Third, because of the above, green energy-saving technologies and designs – for cars, planes, homes, appliances or office buildings – will be one of the biggest industries of the 21st century. Tell your kids. China is already rushing down this path because it can’t breathe and can’t grow if it doesn’t reduce its energy consumption. Will we dominate the green industry, or will we all be driving cars from China, Japan and Europe?

Finally, if we continue to depend on oil, we are going to undermine the whole democratic trend that was unleashed by the fall of the Berlin Wall. Because oil will remain at $60 a barrel and will fuel the worst regimes in the world – like Iran – to do the worst things for the world. Indeed, this $60-a-barrel boom in the hands of criminal regimes, and just plain criminals, will, if sustained, pose a bigger threat to democracies than communism or Islamism. It will be a black tide that turns back the democratic wave everywhere, including in Iraq.

…George Bush may think he is preserving the American way of life by rejecting a gasoline tax. But if he does not act now – starting with his State of the Union speech – he will be seen as the man who presided over the decline of our way of life. He will be the American president who ignored the Sputniks of our day.

The American Way of Life

Can we continue to live like we have in the past? Jim Kunstler says…

      Many things have changed. One is that a potent segment of the Islamic world declared war on the west (jihad). Another is that OPEC, led by Saudi Arabia, has apparently lost its spare capacity, and therefore its role as the world’s swing producer of oil. Another is that the North Sea and Alaskan oil fields have passed their production peaks and are depleting at phenomenal rates — in the case of Great Britain’s fields, up to 50 percent a year — because they were drilled so efficiently with the latest technology. Yet Another is that rising ocean temperatures have led to several years of massive hurricanes wreaking havoc among the oil and gas platforms of the US Gulf Coast. Still another is the industrial turbo-expansion of China and India, taking advantage of their ultracheap labor to become the world’s factories and back-offices, while jacking up their oil consumption.

      Oil trade has now become a dead heat race between supply and demand, with demand looking like the stronger horse coming into the home stretch. As it overtakes supply, even more strange changes will unfold on the world scene. These are likely to take the form of fierce geopolitical struggles to gain favor in or control those regions that still have a lot of oil, foremost the Middle East, with Iraq located at dead center of it.

     There is really only one condition that will allow us to pull out of Iraq. That is if we make an enormous collective effort to change our behavior here in North America; if we break free from an economy pegged to suburban sprawl, reform the way we do agriculture and retail trade, make substantial investments in public transit and railroads in particular, and practice fiscal restraint at every scale, including an end to the reckless creation of mortgages. Unless we face these facts and the tasks associated with them, then we will find ourselves at the center of that geopolitical struggle.

     Right now, nobody from any political stance is talking about these facts and these tasks.

…wrassling a tarbaby in the Middle East

Jim Kunstler says that until our nation faces our addiction to oil, we can’t leave the Middle East. And, as long as we’re there, we will be targeted by terrorists. Catch 22!

Source: Jim Kunstler : Stay or Go?

     Maybe we ought to ask: what happens to the oil supply of the Crusader West when none of its representatives maintains a garrison in the Middle East? I use the term Crusader not to be cute, but to remind you how Europe and America are viewed by many people of the Middle East. They don’t like us. They have a longstanding beef with us. Some of them would like to punish us.

     America is leading the current crusade because we are the society most desperately addicted to oil, and the Middle East is where two-thirds of the world’s remaining oil lies. The one thing that we apparently cannot bring ourselves to talk about is our addiction itself. The commuters whizzing around the edge cities and metroplexes of this land probably got a big charge out of Congressman Murtha’s anti-war blast taking over drive-time radio on Friday. I wonder if they thought about how it might affect their commuting.

     This whole spectacle — both the inept war itself and our debate about it here at home — is particularly shameful for the official opposition, my party, the Democrats, because we could be talking about the so-called elephant-in-the-room, namely how we live in America and the tragic choices we’ve made, and the things we might do to change that — but the party leadership is too brain-dead or craven to do that. As long as we don’t, we’re going to be wrassling a tarbaby in the Middle East.

Some oil money is up to no good

Link: USATODAY.com – Some oil money is up to no good.

In case $3-per-gallon gas isn’t depressing enough, consider what your gas money pays for: A bull market in Saudi stocks. Handouts for Fidel Castro. And weapons for anti-American terrorists.

Oil-producing states haven’t seen a windfall like this since the twin price shocks of the 1970s. Persian Gulf countries this year will earn about $291 billion in oil revenue vs. $61 billion in 1998, when oil prices tanked, according to the Institute of International Finance (IIF). For every $1 increase in the price of a barrel of oil, Venezuela, the No. 4 source of U.S. imports, reaps almost an additional $1 billion a year.

In several oil-producing countries, soaring oil prices are complicating U.S. foreign policy or blunting commercial opportunities for American companies. Irans’ mullahs, locked in a standoff with the U.S. over Tehran’s nuclear ambitions, are bolstered by an oil-rich economy that the International Monetary Fund says will grow 6% this year and next.

  Biggest exporters
Countries that exported the most crude oil to the USA in June, in thousands of barrels per day:
Country
June 2005
Pct. of total
Canada
1,696
16.1%
Mexico
1,616
15.3%
Saudi Arabia
1,564
14.8%
Venezuela
1,292
12.2%
Nigeria
896
8.5%
Iraq
608
5.8%
Angola
397
3.8%
Algeria
292
2.8%
Ecuador
288
2.7%
United Kingdom
269
2.5%
Total of top 10
8,918
84%
Source: Energy Information Administration

Thanks to surging oil revenue, Mexico is able to delay the politically painful step of opening its oil fields to foreign oil companies, says Roger Tissot, country director for the consultancy PFC Energy.

Of course, not every dollar spent at the pump props up a desert autocrat or funds global terror. Norway, a major producer of North Sea crude, uses its oil export earnings to fund its citizens’ retirement program.

The Persian Gulf oil states are investing about half of their increased oil revenue in the region, spurring luxury hotel construction in places such as Dubai and sending shares on the Saudis’ Tadawul All-Shares index up 79.7% this year.

The other half of the windfall is being funneled into international markets, according to Howard Handy, the IIF’s director for the Middle East and Africa. "We estimate $360 billion to $400 billion will be looking for a home outside the region in 2005 and 2006 combined," he says.

That’s a significant sum, but it is being divided among a greater number of destinations than during previous booms. In the 1970s, most foreign investment by gulf states ended up in U.S. markets, which dominated global investing even more than today. Then-secretary of State Henry Kissinger encouraged Saudi investment so that the most influential member of OPEC would be discouraged from damaging the U.S. economy with future oil embargoes, says Rachel Bronson, director of Middle East studies for the Council on Foreign Relations.

Today, though it’s impossible to track specific figures, the Saudis and other Arab states are placing more of their investments in non-U.S. holdings, including euro-dominated securities that didn’t exist at the time of the first oil price shocks. Riyadh also no longer reflexively steers most major contracts to U.S. firms. In January 2004, for example, the Saudis bypassed Chevron and awarded lucrative natural gas exploration contracts to Russian, Chinese and European companies.

Following the Sept. 11 attacks, the Saudis met U.S. demands by ending government support for Islamic charities linked to terrorism. But individuals in the kingdom continue to send cash to groups that support anti-American terrorists.

"We know wealthy Saudis are funding terror. With higher oil prices, they just have more money to do so," Bronson says.

Soaring oil prices also are causing problems closer to U.S. shores. In Venezuela, President Hugo Chavez, flush with record oil revenue, is sending subsidized oil shipments to Cuba’s Fidel Castro and increasing military spending. Earlier this month, Venezuela announced a purchase of long-range surveillance radars from China. The U.S. has accused Chavez of funneling arms to leftist rebels in neighboring Colombia, which he denies.

At home, Chavez has lavished oil money on his constituents in Venezuela’s poorest neighborhoods. Through "Mission Mercal," a network of government-run groceries, Chavez provides half-priced food to more than 10 million people.

The social largesse cements the president’s political standing. But economists such as Claudio Loser, former head of the IMF’s Western Hemisphere department, say such spending can’t continue indefinitely. Already, inflation is galloping at 18% annually and is expected to hit 25% next year.

Big oil producers should have learned one lesson from earlier booms: High prices don’t last forever. Oil prices now are around $65 per barrel. But with greater production expected from non-OPEC producers such as Angola, Brazil and Azerbaijan, prices will drop to around $40 per barrel in 2007-08, says Jim Burkhart, director of oil market analysis for Cambridge Energy Research Associates.

That will spell trouble for some oil nations, including Venezuela. "The risk is what happens when oil prices decline and governments have to align their spending with fewer resources," he says.

Despite today’s easy-money atmosphere, there’s no need to envy the oil producers. Many face daunting developmental challenges that have gotten worse since the last oil boom.

Saudi Arabia’s population has exploded from 5.7 million in 1970 to 25 million today. That has driven down per-capita oil export revenue from more than $22,000 in the early 1980s to less than $5,000 today.

"Even with oil at $65 a barrel," says Bronson, "they can’t solve all their economic problems."

via The Kirk Report

A View on the War on Terror

My question: what percentage of every dollar that we spend on oil eventually funds terrorism?

Excerpts from a speech by Haim Harari on the War on Terror

The root of the trouble is that this entire Moslem region is totally dysfunctional, by any standard of the word, and would have been so even if Israel would have joined the Arab league and an independent Palestine would have existed for 100 years.

Birth rates in the region are very high, increasing the poverty, the social gaps and the cultural decline. And all of this is happening in a region, which only 30 years ago, was believed to be the next wealthy part of the world, and in a Moslem area, which developed, at some point in history, one of the most advanced cultures in the world.

It is fair to say that this creates an unprecedented breeding ground for cruel dictators, terror networks, fanaticism, incitement, suicide murders and general decline. It is also a fact that almost everybody in the region blames this situation on the United States, on Israel, on Western Civilization, on Judaism and Christianity, on anyone and anything, except themselves.

The events of the last few years have amplified four issues, which have always existed, but have never been as rampant as in the present upheaval in the region. These are the four main pillars of the current World Conflict, or perhaps we should already refer to it as “the undeclared World War III”. I have no better name for the present situation. A few more years may pass before everybody acknowledges that it is a World War, but we are already well into it.

  1. The first element is the suicide murder.
  2. The second ingredient is words, more precisely lies. Words can be lethal. They kill people.
  3. The third aspect is money. Huge amounts of money, which could have solved many social problems in this dysfunctional part of the world, are channeled into three concentric spheres supporting death and murder.
  4. The fourth element of the current world conflict is the total breaking of all laws.

The problem is that the civilized world is still having illusions about the rule of law in a totally lawless environment.

In order to win the war it is also necessary to dry the financial resources of the terror conglomerate.

I have no doubt that the civilized world will prevail. But the longer it takes us to understand the new landscape of this war, the more costly and painful the victory will be. Europe, more than any other region, is the key. Its understandable recoil from wars, following the horrors of World War II, may cost thousands of additional innocent lives, before the tide will turn.

HAIM HARARI, a theoretical physicist, is the Chair, Davidson Institute of Science Education, and Former President, from 1988 to 2001, of the Weizmann Institute of Science.

Link: Guerrilla News Network.

The Seven Signs of Non-Competitive Countries

Excerpts from the classic 1998 article Spotting the Losers: Seven Signs of Non-Competitive States
by Ralph Peters:

As change has internationalized and accelerated, however, new predictive tools have emerged. They are as simple as they are fundamental, and they are rooted in culture. The greater the degree to which a state–or an entire civilization–succumbs to these “seven deadly sins” of collective behavior, the more likely that entity is to fail to progress or even to maintain its position in the struggle for a share of the world’s wealth and power. Whether analyzing military capabilities, cultural viability, or economic potential, these seven factors offer a quick study of the likely performance of a state, region, or population group in the coming century.

The key “failure factors” are:

Restrictions on the free flow of information.
The subjugation of women.
Inability to accept responsibility for individual or collective failure.
The extended family or clan as the basic unit of social organization.
Domination by a restrictive religion.
A low valuation of education.
Low prestige assigned to work.

Some countries would devour investments as surely as they would soldiers. Others just demand savvy and caution on our part. Yet another might require a local ally or partner to whom we can make ourselves indispensable. Whether engaging militarily or doing business in another country, it gives us a tremendous advantage if we can identify four things: their image of us, their actual situation, their needs, and the needs they perceive themselves as having (the four never connect seamlessly).

There are parallel dangers for military men and businessmen in taking too narrow a view of the challenges posed by foreign states. An exclusive focus on either raw military power or potential markets tells us little about how people behave, believe, learn, work, fight, or buy. In fact, the parallels between military and business interventions grow ever greater, especially since these form two of the legs of our new national strategic triad, along with the export of our culture (diplomacy is a minor and shrinking factor, its contours defined ever more rigorously by economics).

The seven factors discussed above offer a pattern for an initial assessment of the future potential of states that interest us. Obviously, the more factors present in a given country, the worse off it will be–and these factors rarely appear in isolation. Normally, a society that oppresses women will do it under the aegis of a restrictive dominant religion that will also insist on the censorship of information. Societies lacking a strong work ethic rarely value education.

In the Middle East, it is possible to identify states where all seven negatives apply; in Africa, many countries score between four and seven. Countries that formerly suffered communist dictatorships vary enormously, from Poland and the Czech Republic, with only a few rough edges, to Turkmenistan, which scores six out of seven. Latin America has always been more various than Norteamericanos realized, from feudal Mexico to dynamic, disciplined Chile.

Ultimately, our businesses have it easier than our military in one crucial respect: business losses are counted in dollars, not lives. But the same cultural factors that will shape future state failure and spawn violent conflicts make it difficult to do business successfully and legally. We even suffer under similar “rules of engagement,” whether those placed on the military to dictate when a soldier may shoot or the legal restraints under which US businesses must operate, imposing a significant disadvantage vis-à-vis foreign competitors.

As a final note, the biggest pitfall in international interactions is usually mutual misunderstanding. We do not understand them, but they do not understand us either–although, thanks to the Americanization of world media, they imagine they do. From mega-deals that collapsed because of Russian rapacity to Saddam’s conviction that the United States would not fight, foreign counterparts, rivals, and opponents have whoppingly skewed perceptions of American behaviors. In the end, military operations and business partnerships are like dating–the advantage goes to the player who sees with the most clarity.

Link Spotting the Losers: Seven Signs of Non-Competitive States

How to Defeat Terrorism

From the very impressive Change This web site, where experts share ideas and solutions via the web, terrorism expert Benjamin Kuipers lays out a step-by-step process for defeating terrorism. Calling the Iraq war a major step backward in the fight against terror, Kuipers writes that mutual trust between communities is an important weapon against the spread of terrorism, as is trust between those communities and their authorities. Once trust is established, Kuipers claims, people turn terrorists in to the police.

Terrorism can be defeated. To do this, first we need to understand how terrorists are kept away in the best case, then how terrorists can fight against this mechanism, and finally what works and what doesn’t work to foil those aims.

THE THIN BLUE LINE

Although terrorists are not merely criminals, it is helpful to think about what keeps criminals under control in our society. Ask any police officer: it is not the police and the courts who keep criminals at bay. It is the society as a whole. It is the ordinary people who call the police when they hear a problem starting. It is the ordinary people who trust the police and cooperate with them to bring criminals to justice. The “thin blue line” only works when it is backed up by the vast majority of ordinary people.

This, by the way, is why police brutality is so damaging to law and order in our society. If ordinary people lose trust in the police, they won’t call and they won’t cooperate. If they fear that calling the police to quiet down a loud party could result in their neighbors’ kids being shot dead, they won’t call. And they also won’t cooperate in more serious cases. Without community backup, the “thin blue line” starts to feel very thin indeed. And criminals become bolder.

ChangeThis :: How to Defeat Terrorism

Captured documents provide insight into al-Qaeda’s strategy

Correspondence on the al-Qaeda computer captured recently has been analyzed by Atlantic magazine for insight into the terrorists thinking (emphasis below is mine).

Perhaps one of the most important insights to emerge from the computer is that 9/11 sprang not so much from al-Qaeda’s strengths as from its weaknesses. The computer did not reveal any links to Iraq or any other deep-pocketed government; amid the group’s penury the members fell to bitter infighting. The blow against the United States was meant to put an end to the internal rivalries, which are manifest in vitriolic memos between Kabul and cells abroad. Al-Qaeda’s leaders worried about a military response from the United States, but in such a response they spied opportunity: they had fought the Soviet Union in Afghanistan, and they fondly remembered that war as a galvanizing experience, an event that roused the indifferent of the Arab world to fight and win against a technologically superior Western infidel. The jihadis expected the United States, like the Soviet Union, to be a clumsy opponent. Afghanistan would again become a slowly filling graveyard for the imperial ambitions of a superpower.

Like the early Russian anarchists who wrote some of the most persuasive tracts on the uses of terror, al-Qaeda understood that its attacks would not lead to a quick collapse of the great powers. Rather, its aim was to tempt the powers to strike back in a way that would create sympathy for the terrorists. Al-Qaeda has so far gained little from the ground war in Afghanistan; the conflict in Iraq, closer to the center of the Arab world, is potentially more fruitful. As Arab resentment against the United States spreads, al-Qaeda may look less like a tightly knit terror group and more like a mass movement. And as the group develops synergy in working with other groups branded by the United States as enemies (in Iraq, the Israeli-occupied territories, Kashmir, the Mindanao Peninsula, and Chechnya, to name a few places), one wonders if the United States is indeed playing the role written for it on the computer.

Link The Atlantic Online

via Kottke.org