Category Archives: Government Response

The Residual Damage of Personal Political Loyalty

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THE FREE PRESS[1] today ran a story on billionaire pilot, entrepreneur and former nominee of President Trump to head NASA, Jared Issacman. His nomination was scotched after five months of his appointment in May 2025, after a ‘thorough. review of prior associations.”  The issue seemed to have been one of prior conations by Issacman companies to Democrats (as well as to Republicans).

 

It is evident that this President values loyalty (narrowly defined in personal terms) even to the exclusion of competence. Many observers have noted this in other Trump nominees to his cabinet. Our view of this error is totally unlikely to change Trump’s criteria, and we observe similar characteristics in nominations during previous Administrations.  The second Trump term, however, is more fastidious in its exercise of the personal loyalty attribute of the candidate.  Without total personal loyalty, a potential nominee, however qualified, will not be nominated.  The Issacman case illustrates that vetting is fundamentally focused on a personal loyalty test. Such a test comes with a severe downside, particularly if it results in far less competent and qualified nominees.

 

Loyalty Oaths and frequent ‘hiring and firing” issues over loyalty have a beleaguered history in Washington. Much of it traces back to the worst excesses of the McCarthy era.  Much American expertise on China in the 1940’s was lost in the 1950’s over McCarthy’s antics.  Understanding China in that era should have been critical—as the MacArthur mistake in driving to the Yalu in1950 illustrated. China directly entered North Korea in response to MacArthur’s northward thrust. Many Marines were lost as a result of his disregard of State Department warnings of such a risk.  MacArthur’s brilliant pacific career was ended over President Truman’s firing.

 

Firing an unsuccessful General is not unique, and all difficult military campaigns from the Civil War through Viet Nam, Iraq and Afghanistan have illustrated when competence can become a political issue.  It is in fact from military history, and its appointments and dismissals that we learn the disadvantage of using personal loyalty as a significant differentiator on appointments. It happens in all areas of governance, but military campaigns quickly reveal that all military commanders are not created equal!

 

Given the complexity of so many aspects of Governance in an age of a huge acceleration in the speed of communications plus huge expenditures in all the sciences, the problem of “looking down the silos” has become literally beyond the scope of “Generalist” political leaders.  The modern age underscores the importance both absolutely and relatively of competence and expertise in Presidential advisors.

 

A political leader that vets strictly through personal loyalty is invariably making a second-best choice.  It will penalize the leader—exactly at the time there is a crisis in that Silo.  It will undermine the State—and ultimately endanger its Citizens.   They are the real losers in such an appointments and dismissals derby.  We know the many cases of refusal to serve, precisely because the advisor’s credibility is measured by personal loyalty.

 

[1] The Free Press, Thursday 7.10.2025 (by Gabe Kaminskiy).

CHINA RISING: the motivation behind Trump Tariff Policies

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President Trump’s actions on tariffs displays continual rounds of “bluffing,” as might be expected from the proverbial Fish in a poker game. Bluffs work until thoughtful players see the bluffer’s “Tell” and retaliate. Trump’s tactic will become a losing scenario if it has not already come to that.

Ultimately, I think there is a strategic goal behind his fascination with tariffs: force China to think about demand restrictions on Chinese exports. China’s macroeconomics are heavily laden with exports and relatively modest domestic consumption. (Some analysts see this as reflecting “abnormally high” domestic savings.

China's Macro Imbalances

Graph Credit: Stephen Roach – Center Yale University @ https://stephenroach.substack.com

Underneath this fear of continued Chinese exports causing new declines in American manufacturing, there is the evidence of China’s rising military expenditures and increased technological competence. Hence, the accelerated confrontation of the CCP with Taiwan’s continued independence.

Will China’s current squeeze tighten? Does this mean a military confrontation between the US and China? No doubt, Trump is thinking about that possibility. His recent approach to ending the conflict in the Ukraine has to suggest he might not be willing to defend Taiwan!

From what little I can glean of Chinese strategy, it looks like China is deploying an Anaconda technique… squeezing through daily flights and and naval provocations that simulate an invasion, perhaps telling the Taiwanese to capitulate and formally accede to rule from the Mainland. The process of choking Taiwan with no major military actions by the US to prevent capitulation creates ambiguity: does it mean the US is signaling both parties that the US might not intervene? Perhaps.

Despite Biden’s abrupt withdrawal from Afghanistan which triggered a massive reversal with heavy US support for Ukraine, the long run consequences for America’s imperial role are dismal. The American voter is tired of heavy aid transfers and increased tax burdens that come from a role as the world’s policeman.

This still is Grand Strategy, but not with Churchillian resolution… And it will likely end badly for the West. It will not be grand at all!

China is likely to see America’s fundamental lack of resolve as weakness and its reluctant confrontation as poor leadership: the continuation of four successive Presidential terms that manifested inconsistent foreign commitments.

Is Taiwan essential to the West? Does the US need to spend blood and treasure and risk an all out nuclear confrontation with China?

My guess is whoever is President at the time the Anaconda tries to finish off its victim, Morris Chang will have built enough of his new factory in the US to order to move TSMC to the US. Rich Taiwanese will also move and the CCP will gloat to its people that China is the wave… not of the Future, but of the Present!

The nature of Communism and authoritarian leadership in Russia and China suggests that they will force the issue when they deem the US has been unable to rouse sufficient nationalist passion in the US to be a fully responsive ally. Russia and China regard the contest as zero-sum. US withdrawal will be seen as a WIN validating CCP and Russian foreign policy assumptions. We are not a Paper Tiger, We are instead a heavily armed Kitty but we will not fight to save Taiwan.

Capitalism without competent leadership faces continual international weakness because the nature of our binary election system can push foreign policy into doing Cost/Benefit analysis rather than confronting the build-up of a foreign adversary with a willing military.

Capitalist diplomacy is laden with historical bad compromises because war is so costly. In a Democracy, this promotes Athenian not Spartan resolve. We are ALL too willing to bear the long run costs of a compromise rather than facing outright military confrontation.

My central take from WWII made us an Empire but contemporary American politics and our capitalist economy will not support the long run costs in Blood and Treasure to keep the Empire free and whole!

History seems to show that deals with authoritarian States are not sustainable. There comes a time when an Empire is challenged to fight or fold. We may be at the time now.

The ambition of totalitarian leaders is not often sated with a deal, and the tolerance of a militarized state built on a free market economy and free choice is quite time bound.

Voters in a free market society do not see the dangers until it is much too late to begin screwing up their courage to the sticking point.

Trump is trying to spin an illusion. He is more an actor than a grand strategist with great courage. He has negotiated himself out of financial, legal and moral issues his entire life. He loves the Drama as long as he has the lead.

The Democrats hid Biden’s growing senility and his desire to extract money using his position for an unbelievably long time, but their misplaced “anti-racism” was a fetish and they nominated two boobs that the public saw through.

The average Jane and Joe knew what they didn’t like and Trump collected the electoral vote of the key states as well as winning the popular vote

Trump’s victory is not a Reagan mandate. The public saw through Democratic scandal and woke nonsense, so despite Roe vs Wade, despite Trump’s convictions, the immigration-cum-fentanyl crisis made Trump’s patent “jingoism” fashionable for the crowd. His bloodied ear became a veritable Red Badge of Courage for for rich, non-Vet American voters!

The result is that we have a real problem in our Empire and a growing threat that someone miscalculates, or capitulates.

We can pose the counterfactual of how Churchill facing Germany with both countries having Nukes would have acted? Would the Play be “Band of Brothers” or “Let’s Make a Deal”?

I have an intuition but no proof that Churchill would have acted no differently than what we know he did. But, he was the exception. Pericles did the same but he died two years later in the Plague. Athens fought for 27 years, but its democracy progressives murdered their own competent generals and lost the war.

Trump is no Churchill. I fear the outcome of an Actor who bluffs too often.

I see where we are headed. It will be another tragedy when someone else’s country becomes a sacrificial lamb. Is there another possibility? Yes, but only in 2028 and only if China waits. The Empire needs a different kind of leadership to sustain itself.

There maybe a talented, brave and previously successful businessman, soldier or academic, maybe even with an immigrant background from a Totalitarian State who will show up to be our Shepherd.

Our Constitution forbids him to become President, but maybe he would be willing to be a strong Veep to a similarly committed and qualified native born American! They would have to be rich because national politics has become a rich man’s field. A Musk with a more suitable history and a more pleasing image who deeply believes in freedom and can stand being in second place and is not a threat to a native-born who can pass our Constitutional test. A big set of qualifications, but this country can respond to a quality individual. We still believe in Merit. We respect it although the Progressives wish to kill it as our basic standard.

I am not sufficiently politically informed to know if there is a “pair” out there who could lead properly and have a religious faith in both freedom and free markets. He or She should now be in their mid to late forties. Maybe you know such a pair? This big, beautiful country cries out for real leadership.

We have been following false prophets for so long that maybe the corruption and self interests that now reign would not allow such a pair to get into the race. Surely, however, such a pair exists!

There is a big prize! A well-led America can make a difference! We need to start looking for two handsome, smart, rich and successful believers in the real American dream! By 2028, Taiwan may not still be free and independent, but the China push will still be there in other parts of the world.

We will need committed leadership to convince Americans where its true interests lie!

A Lawyer turned Politician: It sure would help if POTUS had taken some economics courses

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When one listens to the President in a pre-arranged and canned News Conference, one is overwhelmed by political campaigning.   Equally, one is underwhelmed by Biden’s lack of knowledge of fundamental economics—both Micro and Macro.

Such was his distorted and Three Pinocchio press conference yesterday.   He gets the Three Pinocchio’s for his neglect of basic Macro and Micro.   It is possible he took economics while in college and just doesn’t remember any of it.  More likely, he is campaigning and uninterested in fundamental economics.

Macro:  POTUS claimed he was reducing the deficit.  Hardly.  This is simple:  Calculate G-T.  The latest data shows this is negative…ergo the deficit is growing, not shrinking.   But, maybe he meant the change in G-T?    This is the old “second derivative” problem that politicians confuse all the time…or maybe it isn’t an unforced error?  Perhaps, he has little regard for the intelligence of the average voter. Perhaps, he thinks they might rbuy his faulty economic reasoning?  The GDP data are essentially correct (plus-or-minus the revisions that will start next quarter and continue for quite some time).   If we have a deficit in the current period, however, then our total deficit is growing in the period in question, not shrinking. Sorry, POTUS, you fail Econ 1.

Of course, the POTUS may yet be able to claim that G-T over the entire calendar year will be positive, or that the deficit (G-T)<0  is still not as large as last year or that the QI2022 deficit is smaller than Q12021, but the relevance of the comparison is another Pinocchio, at least 1, maybe more!

Unfortunately, the economic malapropisms continued while the POTUS exuded a whitewash of Federal Reserve behavior.   ‘They were doing their job’ and the President alleges Inflation is a Supply Side Problem:  The POTUS  answer: first Covid then the Putin attack on the Ukraine.   These claims are easy to dismiss.  Inflation was heavily stimulated by excess monetary ease, despite the early allegations of a poorly reasoned commentary in 2021 by Jay Powell that observed inflation increases were transitory (Jay Powell was also trained as a Lawyer: please, JAY, never use the word “transitory” again!).  Inflation was rising well before the Russian attack on the Ukraine.  The President also claimed most economists agreed about the “transitory” nature of inflation.  Total Hogwash!  Many economists spoke out against the Monetary expansion that accompanied the fiscal blow-out.

Perhaps Lawyer Biden never heard of Milton Friedman’s obiter dictum, “Inflation is always and everywhere a monetary phenomenon…  But, any good Econ1 course would have noted that quote or at least a reasonable summary of the monetary causes of inflation.   One suspects that Law School didn’t do much for the  economic education of the POTUS.

What about the other economic faux pas yesterday?  Beware.  Biden throws sinkers!

The Oil Price Rise:  Cause?  the gouging of Oil Monopolists.   He doesn’t get a formal Pinocchio, even though his timing of the GROWTH of oil monopolies would be questioned by most oil economists.  Secondly, the cutback in crude oil shipments from the OPEC members never gets mentioned or rising world oil demand as Covid lessened. Too complex for a campaigner?  Believe voters are stupid?

A few other politically correct but economically incorrect assertions include the 9000 Federal Leases that are not being drilled during the huge increase in Crude Oil prices?  Why not?  NIMBY? Not enough pipelines from the well sites to major pipeline interchanges? No new pipeline approvals and the unlikely granting of new pipelines going forward?  The whimsical nature of the current Administration posturing on the Climate Crisis that makes building new production capability an exercise in what oil producers think the next turn of the screw from DC might be?  The 9000 un-drilled Federal Leases that his Press Secretary has been instructed to ridicule at her Press Conferences that are not being drilled by the gouging Oil Industry?  Another dog that won’t hunt.  One has to wonder whether the Press Secretary understands the propaganda her coaches wish her to pitch. If the lease was so good that a leaseholder would drill it given $100/barrel prices, they would drill it.  Listeners should ask, what barriers are there are that the Leaseholder must overcome?   We suspect mostly Government restrictions. The whimsical nature of current posturing on the Climate Crisis also makes building new production capability an exercise in what oil producers think the next turn of the screw from D.C. might be?  It is unlikely to be support.  At best less attacks, but POTUS teed off pretty strongly over alleged gouging.

Of course, the fascination with warding off Global Warming ignores the misguided love affair certain politicians have with electricity. As if it is a ‘free good.’  They ignore that new base load power has to be generated either by that hated word—COAL— or use higher price petroleum products (Fuel Oil, Diesel, Natural Gas) …or perish the thought that the even more hated source (Nuclear Power) is advocated.   Here, the POTUS might have looked at the turn-around of of GREEN NONSENSE in Germany or why the French don’t complain as much because significant quantities of their base load power is generated by rather safe NUKES!

We will ignore the caveat uttered by the POTUS that “Americans are working 18 hours a day just to keep food on the table.”   Shucks, if you can’t tell a first derivative from a second derivative, maybe 8 hours and 18 hours are about the same!

Then, there are the ingenuous attacks on tax policy by  Right Wing Republicans…”they wish to raise your taxes, but my tax policy of raising Corporate Taxes and making the Rich pay Their Fair Share will lower your taxes!’  Of course, the POTUS ignores the generally acceptable Public Finance finding that raising taxes on capital LOWERS the return to LABOR!

When he finally allowed a few questions, he stumbled when he came to “lowering tariffs.”  They are just “under consideration.” Finally, what about some of the more obvious political solicitations that might help to lower gasoline prices by depleting our corn supplies (15% ethanol)?  Are there some real alternatives to this posturing?  At least a few that could work.

Here’s my list of easy ‘do’s.”

Suspend the Jones Act and allow cheaper transportation of crude and products around the US including Alaska by other than expensive U.S. flagged carriers.

Let the KEYSTONE XL Pipeline be finished so we don’t create more CO2 by rail and truck shipping while we expand crude output.

Permit quicker approval to new pipelines that will increase the flow of both natural gas and crude oil from the oil fields to the refinery or processing plants.

The above list will not be a ‘do’ in this Administration nor will meat prices go back to their pre-Covid levels unless grain prices fall or this Administration teaches cattle and pigs to hold onto to their own methane!

One other important comment comes from the Graph below, available from the vast quantity of St. Louis Federal Reserve data.  The key point is to show that expectations by the public of rising prices are not very well anchored anymore and haven’t been since 2021. That means the Fed has a much bigger job to do than it has been admitting.

Did today’s collapse in the Stock Market reflect investors suspicions that the Fed is much further behind than it has been admitting?  It is a plausible hypothesis, even if not easily proved.  The graph triggered some commentary from the nominally Democratic supporters at the New York Times.    If in fact expectations of rising prices are indeed growing, then it will take a lot more action by the Fed to choke off economic demand…and getting to a soft landing might be far more difficult.

The graph suggests a little relief at the end of the current time period, but we should expect that the little relief we got yesterday in the monthly change of prices may not continue against still rising food and gasoline prices.

Tough markets reflect poor policy choices in the past and the conflicts they pose for the present and the future.

 

WHO PAYS FOR THE DAMAGES: more on Putin’s War on Ukraine

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A BACKGROUNDER

Historians of World War II have provided many lessons about the brutality of both aggressors and defenders. Americans tend to think that wartime brutality was a characteristic only of our opponents.  Sadly, notions of a “just war” to defend a country have turned into ugly sprees of killing even by our own troops.  War is a tragedy for both sides.

Our commanders of land and naval artillery forces as well as bombing missions that targeted large cities had to face the ugliness that their efforts created.  Not infrequently, many commanders resigned or had to be hospitalized because they were overcome with the destruction to lives and property of the “innocents.”  Their mental states often collapsed as a result.  It is not a relief for those on such missions to be told that we are not a particularly cruel people, but because war ultimately becomes a confrontation of“them” or “us”.

Rick Atkinson’s three volume recount of the U.S. effort in North Africa, Sicily, Italy and Western Europe, contains many vivid examples of how our troops were first sickened by the killing of innocents while they tried hard to maintain the dignity of life even for their opponents.  In fact, their own commanders often commented that their troops had to learn to “hate” in order to be successful soldiers against such a fierce opponent as the Nazi army.  War is not a parlor game.  The Bell tolls for thee!

Still, if modern historians are reasonably accurate, nothing the U.S. forces did in Europe compares with the ruthlessness of the Red Army as it advanced from the defeat of the last German offensive at Stalingrad.  There are many reports of Red Army savagery against the German citizens as the Russians crossed into Germany, and, in particular, during its last drive toward Berlin.  Of course, it can be argued that the German invasion of Poland and Russia was even more ruthless and cruel to the innocents of these countries.  The Nazi death camps were an unparalleled human travesty whose memory can never be erased.   Did that Nazi savagery justify the behavior of the Red Army?  It is impossible to answer such a question.

How then, are we to deal with the discovery in recent days of executed Ukrainians, apparently killed by their Russian military captors, sometimes with shots to the head while the victims were bound?  How should we deal with the looting of the homes of Ukrainians by retreating Russian soldiers? Who will punish the Russians for their current savagery or the Russian military for not disciplining their invading troops? Are such cruelties performed on orders from superior officers?  Were they in response to the Russian defeats suffered in engagements with active Ukrainian units trying to liberate areas first conquered by the invading army of Russia? Were the perpetrators young, untrained draftees who responded to the deaths of their own comrades by killing innocent civilians?

Drawing a line between cruel military tactics and a policy of trying to limit the casualties of an invading army—even when that army is an aggressor—is a permanent fault line for military strategists.   We have history to guide us.  There is a long line of historic cruelties that stretches back even to Fifth Century Greece.

Many college students read with horror Thucydides’ graphic account of the Athenian attack on Melos, a small island that seemed sympathetic to Sparta.  Athens’ conduct seems to be such a counterweight to the formidable, democratic ideals of Athens that are also carefully studied.   The Melian debate portrays the sad fate of a small nation attempting to stay “neutral,” in the Athenian war with Sparta.  Melos is sacrificed because the Athenians fear that the Melians could pose a threat if the island were recaptured by the Spartans!   Thucydides tells us that all the Melian men were executed and the women and children sold into slavery!  This was a tragedy of war with a moral dilemma that has been repeated many times since.

Now, we come to reports of Russian soldiers executing Ukrainian civilians and the glaring, visual evidence of Russian artillery and missiles used relentlessly against the villages, cities and people of Ukraine.  The destruction of private homes and public facilities means much rebuilding will remain even if the war ends the killing for now.  How should we react to such brutality?  Who should pay for this destruction and by what means should repayment be made?

A NECESSARY RESET IN AMERICAN FOREIGN POLICY

This is foreground for thinking through a necessary reset of American foreign policy toward Russia.  We cannot go back to our prior policy stance that was inconsistent and flawed.  Yes, Russia is a nuclear power and the possibility that a Thug like Putin emulates the Nazi Thug Hitler can never be totally dismissed.  Hitler died understanding that Germany was losing.  According to some historians, he expressed a wish that it be destroyed in a funeral pyre because the Germans had let him down!  Yet, realizing that Putin is a Thug and that Russian tactics are vicious in the extreme to innocents caught in their line of fire, should never be an excuse to admit Russian motives are justifiable.  We should not accept the Putinesque vision of a re-constitution of the old empire of the USSR.  We made that mistake in 2014 and Putin read our “book!”   We promised Ukraine that they would be protected if they gave up their nuclear weaponry.   We didn’t keep that promise in 2014 when the Russians annexed parts of Ukraine bordering on the Black Sea (Crimea) and which it still holds.  Had we acted then, it is likely we would not be seeing Ukrainians murdered and catastrophic property damage inflicted.  Being “soft,” or “accepting” of Russian phobic fears of NATO was the wrong answer then.  It is not the right answer now.

Thug regimes are much alike.  They rule by fear and specialized, directed violence against those who protest.  Russia only respects fearful outcomes as a State.  We should enact a foreign policy toward Russia that shows strength and continuity.  Russia must fear us in order to respect the peace.  A Russia without fear of U.S. actions is not a stable element of world order.

We should reflect carefully on how Russia treats its own dissidents—those brave Russians who protest their leaders’ violence and totalitarian governance.  The Putin government beats them, jails them, and sentences them in Kangaroo Courts to the Putin Gulag.  They resort to murdering  leaders of dissent in Russia, as well as Russians who flee to the West.   Russia, ruled as it is, can never be our ally in trying to bring calm to the Middle East.  We need to immediately cease that delusion as well in our negotiations with Iran.  Our efforts to restrain Iran are often based upon Russia as an interlocutor.  We fool ourselves with such policies.

One of the great ironies of the Russian invasion are the reported attempts by Finland and Sweden to consider joining NATO.  Finland had a tragic military experience with Russia in 1940.  The Finns at first successfully resisted the attack by the USSR, again over false claims that Finland would not be neutral toward Russia.  Then the Russians inflicted massive casualties to people and property and took over parts of Finland.  The similarity to the Ukrainian attack is telling.  And, for the Swedes to consider giving up their long-held neutrality bespeaks a real fear that their only credible defense against Russia is to join NATO and acquire strong allies.  Finally, the behavior of Germany, which has reversed nearly 20 years of Merkel’s toadying to Russian markets and Russian Oil and Gas, is striking.  A pleasant surprise  indeed.  It needs to be amplified.

The U.S. needs a complete Reset of its foreign policies toward Putin-controlled Russia.   We can and must counter their military buildup; their active military stance in Syria; and, we must try to reverse their conquest of former Ukrainian territory along the Black Sea.  Finally, we must not be misled by their threats of nuclear war.  We must be fully armed and fully ready and we should make the Russians highly aware of our capabilities.  The Cold War was won by consistent diligence, supported by both of our political parties.  Only Resolve will succeed against totalitarian Thugs.

Russian policies toward the West are now quite clear.   This Administration must do an immediate reset of its Foreign Policy.  There will be benefits to such a reset—particularly in Asia.  We should follow through with a meaningful reset toward China.  No longer, can it be “business as usual” in either Putin Russia or Ji Pin’s China.  Our policy has to be a deliberate, dedicated stance of supporting our allies, explicitly, and not kowtowing to a “one China policy” that merely placates a totalitarian regime.

A reset also requires the U.S. to formulate a permanent policy with regard to Russian exports to the West.  This should apply to all oil and gas imported by the West, but import restrictions to all Russian products must also be implemented.  Germany is in an awkward position as is Italy, but we are in a definitive Cold War II with Russia as it is now ruled.   We should levy heavy taxation on all Russian petroleum and gas imported into the West, and those tax receipts should be used to rebuild the terrifying damage in Ukraine, to people who have lost family and have lost their homes and businesses.  Such policies need not be restricted to Russian Oil and Gas.  Sadly, this means that part of the tax revenue so raised will come from Western pockets as it lowers returns from exports to Russia.

A government policy that is clear will motivate citizens to look to the origin of their energy supplies as well as to other Russian exports.  Restrictions should stop only when Russia moves away from its current policies. In the meanwhile, there will be meaningful  losses of revenue to the Oligarchs and to Putin from depressed prices of  oil and gas as well as other Russian exports.   We should never agree to pay for such imports in Russian rubles.  Forget that approach by the Russians.  Just say “No!”  If you don’t like payment in Euros or Dollars, find another market!

In similar fashion, the West should provide no insurance to Western firms that wish to invest in Russia.   Firms doing that should receive no protection from Western, tax payer supported governments.  If shareholders don’t punish an American entity for such risk-taking, that is the business of that entity, but the West should offer no Government sponsored protection from the Russian authorities or their thug mob of Oligarchs.  A similar ban on Russian investment in the U.S. should be considered.    Why encourage asset diversification that benefits Oligarchs that support Putin?  We need to make tough sanctions and then keep them indefinitely until Russia truly changes.   The need for a total Reset is now!

The entire West, and particularly the United States, has to realize that Putin’s Russia is a serious enemy.   It is an armed nuclear state that claims it is willing to launch aggression against its neighbors on highly profaned grounds.  We cannot do better unless we take their threats seriously and respond in kind, now and until Russia throws out its own Thugs.

Russia is likely to experience a revolt only when a dedicated minority realize the pain that Putin causes.  That means that the principal beneficiaries of Putin Thuggery have to experience severe pain by losing export markets and being refused status in the West.   We should gear that reset in policy to run as long as Russia remains a totalitarian state.   It may take several generations, but it is the right policy for now and the foreseeable future.

WHO PAYS FOR THE DAMAGES: Putin’s War on the Ukraine?

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It’s not too early to think about the end game in Putin’s murderous war on the Ukraine.  There are, of course, two possibilities:

Russian Success and a continuing Russian war of aggression

Suppose the Ukraine falls and a Putin supported Government is installed.  Possibly, common sense will occur in the Kremlin and at least some of the physical damage is repaired so that a functioning Ukraine can emerge from the damages inflicted. Undoubtedly it will minimal.   It is highly likely that Putin will limit his expense in cleaning up the mess his attack has caused.  Clearly, there will be no Russian compensation offered to the human casualties.  The Ukraine will become a totalitarian state “loyal” to Russian aims.  It will be hostile to the West and a threat to NATO members.  It will entail a permanent state of cold war with Russian military assets being deployed both to suppress the Ukraine’s population while posing as a tangible threat to other ex-Soviet states that border either Russia proper or occupied areas also conquered by Putin’s prior attacks. We should expect it will be Cold War II, extended in any case and hopefully not leading to a hot version

Russian failure but withdrawal

Suppose the Russians recognize they have failed and withdraw their army and the Ukraine retains its present government?  There will remain mammoth damages to be repaired to the physical structures and perhaps some State compensation for the tragic deaths of innocent Ukrainians who lost their lives as a result of the Russian aggression.   Who will pay for the this?  Which State pays?

It is impossible to believe that Putin’s Russia will foot the bill, no matter what the West together with the Ukraine will claim.  Yet, the West is not without resources for extracting financial resources from Putin Russia and his Co-Thug’s using the resources he and they control.  Russian commodities will try to regain lost export markets or enlarge the markets to which they can still export.  To the extent that these products enter the commerce of the West, they should be taxed!   Unfortunately, the incidence of such taxes falls on both the suppliers (Russian resource owners) and the users who continue to buy these resources.  The key to making Russia and Russian Thugs pay is the design of the West’s tax system.

Unfortunately, until former Russian users of gas and oil, wheat, metals, etc., switch their source of supply away from Russian-origin goods, any taxes levied will raise their cost of acquiring such resources.  To the extent that these goods are controlled by the Oligarch’s that support Putin, they will in turn realize less from their sales in the West—and perhaps that is a fitting and just allocation.    These Oligarch’s are the minions of Putin.  Previously, they gained lavish rewards, and many continue to support Putin.   The damages to their ostensible income from exporting these resources—in whichever form they are now exported—should become a perpetual drain to such Oligarch’s.  Maybe, they will realize that by supporting the Chief Thug, they will continue to pay a price and look for another political answer?   In the meantime, the West can collect revenues largely paid by the suppliers and contribute those tax revenues to the rebuilding of the Ukraine.

Reparations déjà vu

This becomes is a modern version of reparations.  The trick is to make the tax “bearable,” but distinctly painful to resource owners in Russia, as a continuing reminder that doing business with a Thug who has an Army to use on the innocents, has a distinct cost to the operators of such enterprises.

Wood the West resort to this tactic?  Surely, free-trade advocates will raise objections that will be that combining conditions of Trade and International Politics is a bad mixture, and that what is really needed is a reformation of property rights in Russia.  As far as it goes, the argument is correct.   Some will say that to offer tacit forgiveness by not restricting Russian trade opportunities as punishment for the heinous damages that the Thugs have essentially financed, is equivalent to allowing Putin and his supportive Oligarchs to escape from their adventure far too lightly.

That has to change and at least the Co-Thugs will now have an incentive to drop their support of Putin. The trick will be to construct import restrictions through licensing in some form for all products from Russia, however they are described in bills of lading or certificates of origin and to tax them heavily wherever they arrive.  It will take international cooperation from the West to construct such a regime.  Sadly, we will create another bureaucracy to levy, collect and disburse the proceeds.  And, at the end of the day, who knows where this kind of punishment will lead?

Perhaps it will lead to much less international trade, which is an affliction to traditional importers in the West?  Yet, it will force down the prices received by Russia and its collection of war-supporting exporters.  It will make for some suffering of those in Russia who are engaged in the chain of production and export.  They too have a stake in throwing Putin out as a leader of Russia.  Whatever revenues are collected should be donated to relief from the destruction Russia has caused.  It is not much given the scope of the Russian inflicted damages to property and people, but it is a step the West needs to take.

In the last few days, we have seen films of Hitler-type rallies organized by Putin in which he raises the absurd claims of de-nazifying the Ukraine.   He does so by the same techniques utilized by Hitler in the 1930’s as he motivated the hate and anger of Germans in support of his ultimate war aims.   No doubt, in this digital age, some of that nonsense will be recorded and filtered into the digital world of Russia, however internet communication is restricted by Putin.  Will it arouse the mass of Russians to revolt?

We don’t know; nor can anyone be relied upon to predict how the Russian Masses will behave.  Will they support Putin’s failed logic, or begin to develop sufficient resources to force Putin to retreat or resign?   200,000 cheering partisans gives the impression that his war on Ukraine has broad support.  We doubt that, but have no counter evidence.

We also doubt that a revolt in Russia is possible in the near future—and we must always remember that a revolt against a failed government requires a mobilized elite to organize the discontent.  We don’t know if such an elite will or can arise in Russia policed as it is by state and military police.

Thus, it is in the now-organized West, that a response is needed.   The West must stiffen its spine and penalize Russia for its behavior; for the deaths it has caused and the emigration that it has inspired.  The West must raise cash for a fund that can be used by the Ukraine when it has finally defeated this orgy of destruction led by Putin’s malevolence and Hitlerite ravings.

 

 

Cold War II has begun: when is the U.S. going to recognize that?

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Marx once said that history repeats, the first time as tragedy and the second time as farce.   Marx may have had it backwards.  The second Cold War has begun and it is clearly not a farce.   Ukraine is a tragedy of growing proportions and the U.S. is failing to recognize  a key aspect of revolutions: they are made by elites not by the masses.

Lenin knew that which is why after reading Marx’s treatment of the Paris Commune’s failure in 1871, Lenin took as his cardinal principal that a revolution must have a violent armed guard!  Ultimately, Lenin’s view led to the success of the Russian revolution.   America can learn that lesson too, but it must give up on current fantasies that limit its response to Russian aggression in the Ukraine.

Putin can win in the Ukraine, only if the U.S. continues to operate on the fantasy that strength is a weakness because it might lead to unwinable wars, or worse, to nuclear war.  Why is this wrong?  Because elites make and win revolutions, not the masses.   The latter only enter the game after the elites have defined the rules.   The Russian masses, as their German predecessors were in WWII, have been cowed by the power of the Russian Thug State and its Oligarch allies.  Yes, there are protestors, but the strength of the Russian police state is such that the current masses are largely quieted by economic incentives along with brutal force and threats.  They cannot be our allies in putting Putin in his place. Waiting for a revolt of the masses in Russia against Putin is a fool’s task.  This is not a waiting game.  Aggression never is.

That said, Putin does have vulnerabilities. His inept attack on the Ukraine reveals that the Russian military conscripts are like all conscripts:  they have incentive and motivation issues.  It also appears they are not well-trained in the art and logistics of “combined arms.”  The invasion force is not up to the task Putin gave them.

Where else are Putin’s potential weaknesses?  Very simply, with his co-opted thugs, the Oligarchs he has made wealthy with the resources of the Russian state.  The Oligarchs run  oil, energy,  banking, mining, shipping, pipelines, etc.  These Oligarchs have made vast fortunes.  They have massive yachts, planes, multiple estates outside of Russia and bank accounts all across the globe, particularly in more hospitable climes!   They have benefited hugely from their support of Putin. They will continue to be his henchmen in aggression until such time as their assets around the world are taken away from them, or the enlarged prospects of a nuclear war threaten both their lives and their property.    They play a role similar to the Russian military who revolted against Khrushchev when that “madman” threatened the U.S. with the Russian Navy sailing to Cuba with nuclear-tipped missiles aboard on the way to Cuba in 1962.  When the U.S. finally applies really tough measures on those Oligarchs, we may begin to see some moderation begin in the Russia’s aggression.  Surely, Putin will hear about their confiscated assets.  The Oligarchs want they and their families to enjoy their Putin generated wealth.

The Thug-Oligarchs are corrupted by the rewards of Putin’s total control of the forces of discipline within Russia.   Corruption is legion in Russia.  It affects the Police, the Army and the Scientists who tool Russian military expenditures with new ideas and techniques.  That’s where U.S. pressure could be effective.  It is essential if the US is to fight COLD WAR II.  Nuclear destruction is two sided.  One side can’t rule the roost.

By the way, it is not different in China.  Corruption has a role there too. Remember Deng Hsiao Peng’s reply to the Peoples’ Army after they lost their attack on North Viet Nam in 1979.  North Viet Nam kicked the Chinese Army in the groin.  China lost more men in six weeks than the U.S. did in 10 years!   As the new leader in China, Deng told his military, ‘go into business and I will get you modern weapons for a modern army!’   The Chinese Army did exactly that and Deng kept his word as well.  So, their Generals are also part of the corruption-laden regime.

Corruption is like a pandemic.  It doesn’t stop with a certain group—it invades the entire country.  Chinese beneficiaries know that and that is why Ji Pin has been punishing some select beneficiaries.   He can’t afford to have his own Oligarchs revolt.  Consequently, selective punishment is meted out and that cows the rest of the corruption tribe.  He may indeed lessen his present support of Putin because he can read the tea leaves of a toughened American response.

The U.S. has a problem in the application of this “Punish the Thugs” strategy.  It involves a lot of very powerful people and their companies in the U.S.  Take Apple for example, or the mainstay financial houses of Wall Street.  They are beneficiaries of the global transfer of technology and capital to China (despite the hickeys now being taken in the Chinese Real Estate sector).  Globalization cuts many different ways.  Yes, it makes the supply chain more efficient.   By that token, however,  it creates industrial and commercial hostages who don’t want to lose their advantage, both from a corporate standpoint and from the personal rewards it brings to its major executives.  We have just sketched another problem in American diplomacy:  our own corruption with the Chinese experience.  In our view, it silences much of Washington and New York  intelligence that should know better!

The U.S. possesses a peculiar kind of Capitalism.  Nominally, we worship the efficiencies Capitalism brings to capital and labor markets by inducing innovation stimulated by the prospect of profits.   But, in dealing with a non-democratic state, all too often, American capitalists recruit the local, corrupt foreign politicians, generals, and advisors to the main foreign political heavyweights, in order to gain entry and advantage in the foreign country.  Deals get done by who you know rather than what you know.  Exports of our industries that can serve a market of a billion and a half people are important. Who gets there first with whatever special advantages the Chinese partners can bring, is often the most important aspect to a deal.

In such corrupted-market environments, real economic risk is also limited by who you know, not by what you know.  Concessionary capitalism is often the way of the world in the global market.  Breaking the backs of the already corrupted Chinese will be far more difficult than in Russia.  There are more than a few.  China is a much bigger economy and its tentacles into American industry and finance are far more intricate and run deeper.  Russia is a small boy with a big nuclear punch, but its economics are definitely small scale.   It is largely a raw materials producer with competitors.  Americans buy few if any final products from Russia and produce very little in Russia for export back to the U.S.  China is a different animal all together.

For this reason, the implications of Russian aggression into the Ukraine are highly important to understand when it comes to a possible Chinese takeover of Taiwan by military means.  The U.S. doesn’t have a lot of time to prevent that eventuality.  It most re-arm Taiwan to the teeth and make perfectly clear to the Chinese that Taiwan will be defended even if it takes American direct intervention.   Being coy with a Thug is not a good policy.  Be direct and clear, Washington!  Sanctions don’t prevent aggression.  Certainly, that follows from the Russian experience.

The U.S. may be getting negative feedback from its most important strategic partner in NATO:  Germany.  The Germans want to limit their response and ours too.  The Germans are already hostage to Russian corruption.  Half of their petroleum-based energy is Russian in origin and Germany has achieved (or should we say re-achieved) a huge presence in the current Russian economy.   The German counterpart companies will not easily disengage in their Russian adventures.  In fact, despite their sympathy with the suffering Ukrainians, they probably have to be pushed to disengage.

Germany’s Russian adventure is a century old.   It started in the early 1920’s when Germany was facing the draconian Reparations of the Versailles Peace Treaty.   And, it started up again after the fall of the Berlin Wall in 1989.  German business has strong connections and strong profit positions coming from its Russian agenda.   The Germans have in fact been stronger in their resistance to Russian aggression than many here in the US expected.  That is a pleasant surprise, but we should be warned, however, that such financial interests are powerful incentives to avoid a further Russian confrontation.

Perhaps more surprising is the extent of German cooperation with the U.S. in trying to tame Putin.  But, don’t bet on a long game in that arena from Germany.  It is now a major hostage of Russian energy resources as well as a continuing supplier of industrial materials to Russia.  The German nuclear power industry has largely been shut down.  Petroleum based energy counts more in Germany than in the U.S.  That mistake cannot be addressed in Germany for many years.

There are reports from Vienna showing a possibility of a new Iranian-nuclear control agreement and the release of sizable amounts of Iranian crude oil.  It might be a winner politically for the Biden Administration (in its efforts to slow inflation), but it works adversely in Cold War II. The Iranians have repeatedly shown that any such agreement offers them cover for refining more nuclear material and perfecting suitable delivery missiles.  Iranian ambitions in the Middle East have not changed, but the temporary allure of more crude oil and possible a lower price at the American gas station is alluring to some American politicians who will shortly have to face their voters.  Signing an agreement with the Iranians can make the U.S. a hostage to the Iranian Mullahs bent on mischief of their own making.

The characteristics of Cold War II should determine American Strategy.  The first characteristic is Time!  The war in the Ukraine will not be over quickly.  Russia is not going to just quit tomorrow and stop with its debilitated attempt to take over the Ukraine.  There are other Russian targets as well in their geopolitical gunsights.  All of the areas that used to be constituent parts of the old Soviet Union are up for grabs, now or in the near future.  The U.S. has to plan for a long war,  and it must start by arming its allies thoroughly with whatever they need to defeat a Putin attack.  The difficulties the Biden Administration has today are nothing they could face in the future, if American unwillingness to confront Russia now continues during this recent aggression.

Our national interest is for a complete stop of the Russian invasion as quickly as possible with the Ukraine being returned to its former free nation status.  Without forceful and immediate aid from the U.S., that is an impossibility.   This Administration cannot afford to lose this opening battle of Cold War II.

 

Learning from History: has the US failed again?

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The World is witnessing a three-fold tragedy.  First, as we now appear to be just coming out of the Omicron variant, we are witnessing a terrible, inhumane, aggression against a sovereign nation by a Russian Thug.  Second,  rather than properly responding to the American security guarantees  given to an independent Ukraine by the Obama Administration in 2014 in exchange for giving up their nuclear weapons, the USA has basically said the Russian aggression is “0ff-Limits” to active American military forces.  Notwithstanding some help with armaments delivered now and over the course of 2021 and before and limited supplies of defensive weaponry since the Russian attack, the people of an independent and democratic state are being violently slaughtered and forced to run for their lives from Russian aggression.   Third, the Biden Administration, having botched the departure from Afghanistan, is sufficiently frightened of Putin’s threats that it has basically forgotten our history with the Russians.  Time to Remember Mr. President!

Relevant History

The history of dealing with aggression in Europe begins in the 19th century with the German attack on France, and  continues in 1914.  But, what is truly relevant is the September, 1938, Chamberlain concession to the Hitler regime. A misguided British Prime Minister allowed the Nazi’s to take over the Sudetenland, a largely German-speaking segment of the post WWI Czechoslovakian Republic.  Ironically, Chamberlain actually frustrated Hitler because, as we now know, Hitler actually wanted to march the Wehrmacht into Czechoslovakia thinking the British were too supine to resist.  Hitler was correct in his assessment of Chamberlain!   Chamberlain, of course, claimed he was preventing a war.  He did not succeed.  Rather,  he whetted tHitler’s appetite by allowing the take-over. (See Golo Mann’s brilliant history, “Germany since 1789.”

Britain and France might have been far better off to face the Nazi’s in 1938 rather than waiting until the tragedy of 1940 that gave the Nazi’s even more time to prepare their onslaught of Belgium and France accompanied by the Allies difficulty in sending supplies to Poland, next on the aggressor’s list of conquest.  In the meantime, Hitler got a respite from Communist Russia with the Hitler-Stalin pact and was able to carve up Poland (along with the Russians from the East, with the terrible consequences for the murder of so many people.  We need to remind ourselves what can happen when you stimulate the appetite of an aggressor!

Our relevant history, however,  is October, 1962, long before President Biden became a significant politician.  He was less than 20 years old when the Kennedy Administration had to face down the Russian Navy steaming toward Cuba with nuclear tipped missiles.   There was the risk of nuclear war then too, but the Kennedy ExCom Group stood its ground and the Russian military revolted against Khrushchev.  After the confrontation, we learned that the Russian military leaders were not willing to see whatever progress the Soviet Union had made since its second Revolution and its immense victory over Nazi Germany go up in a Nuclear Holocaust.  They essentially backed Khrushchev down and the Russian Navy turned back with its vicious cargo.  Of course, no one then (or now) can be sure what the Russians will do if confronted today, but certainly we have some intelligence to guide this Administration?  There is a precedent here, however much we have violated our Red Line in the Sand since 2014!

We may be witnessing the real decline of American power and prestige in our forlorn resistance to Vladimir Putin.  We are not willing to provide a No Fly Zone because combat between American-piloted aircraft against Russian invaders to Ukraine could be a pretext for Putin to ignite a Nuclear War.  One can’t blame this Administration for being cautious, but post-Afghanistan, we look weak, disordered and unwilling to exert the power that we have.   Will it whet the Aggressor’s appetite?  History speaks on this issue, in a very troubling manner.

Democratic countries worry about the next election, but our forbears,  just four years out of war with their former Ruler,  highlighted the two major tasks of our Republic in 1787.   Those two primary tasks were internal peace and quiet and external security.   We are now failing at both, lost in the Woke aspirations of saving Humanity from a climate future that is more scientific conjecture than reliable and tested climate theory. (Try running the climate models backward and see if you can predict current results!)

It is also true that there is considerable cant coming from Congressional electees who wish to suspend the sales of Russian crude oil around the world, to penalize Putin for his catastrophic adventure.   Based on the news clips, there is apparent misunderstanding, (perhaps deliberately?) over Congressional views on the nature of the global oil market.   Taking Russian’s approximately 10 mmbbls/day off the market would definitely tighten the current world supply of crude oil.  The mere threat has escalated crude oil to $130 bbl, and collapsed the Equity Market.  Such a policy will definitely impact inflation here and abroad, lowering real incomes.  But that vulnerability is also part of the Wokism that inhabits this Administration.

The U.S. has a lot of not yet developed crude oil supplies that will only begin gradually to come into the market if crude oil trades above $100/bbl as it now does.  It will take time to address the current price path of finished petroleum products.  Sadly,voters in many Blue States have elected politicians who parade Climate Worries and ignore national security.  In addition, countries like Germany, which discarded most of their nuclear generating capacity have made themselves unambiguous hostages to Russian oil and gas. Their financing and  build-out of NordStream 2 to make themselves integrated with a threatening supplier was the triumph of politicians wishing election and a denial of history.  Maybe the delay in certification of NordStream 2 will be longer than next year…but one never knows.  German politicians are also addicted to re-election and they have long believed that investment in Russia and exports to Russia were vital to their prosperity.  They are vigorous advocates of an Iranian deal, despite considerable evidence that this will not stop a nuclearization of Iran nor Iranian attempts to implement their own geopolitical aims in the Mid-East.

Maybe the Germans will learn what they once knew prior to 1989 when the Berlin Wall came down and the former Communist East Germany was successfully integrated into the West.  Thoughtful Geopoliticians in the US and Germany might understand, but German politicians ignore history as well to our collective discomfort.

So, Folks, as the President likes to say, there we are.  Stuck in a huge dilemma: whether to come to the aid of a vital, democratic country, resisting Thugs from the East who threaten the rest of us with a Nuclear War, or draw a line that we mean to enforce?

The Chinese “alliance,” with Russia is an additional geopolitical dilemma, worse so,  because so many American firms having been profitably “selling the rope by which we will hang them” (to use Lenin’s more than appropriate quip) dealing with China, despite their own inhumane behavior.  Are we tempting them to finally follow Putin’s path and invade Taiwan?   Rome burned while Nero fiddled, but the clock is running fast now for the U.S. and its democratic allies are fiddling while the Ukraine is burning.

The bottom line of many analysts is that our immense discontinuity in Presidential elections, our withdrawal from Afghanistan and our indecisiveness over what measures we will utilize to help the Ukrainians maintain their freedom is being seen by our Thuggish opponents as weakness.  They seem to think  we will not resist which makes their threats so real!  Its time to make the Thugs do a re-think on their own.

No one wants to see our young men and women perish again in a “foreign” war…but is it really a “foreign war, or is it a precursor to our own external security worsening even more?

 

Impediments to Rational Policy Choice on Covid-19

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Fauci has become an impediment to rational policy choice. He is talking his book and his book was and is wrong.

The data pretty clearly show that for those under 45 (the principal cadre of industrialized country work forces) the true mortality rate is not going up nor is it hugely high.  But expectations of testing and hospitalization have been pushed up way out of line with what the current state of treatment availability and success rates can do.

(I ignore developing countries with high density cities whose public resources are badly limited.  That is an issue more closely aligned with underdevelopment and resource limitations of the state, both financial and physical).

Distancing and working on hotspots are a legitimate strategy which should be promoted along with a careful statement by health care and political leaders that policy has to be one of triage — treating heavily those most likely to recover.  Lockdown is not a strategy that can promote recovery. Lockdown may work to save Grandma, but at whose expense? Re-opening is not heartless.  It is fighting back.  It is doing what we have to do to survive and prosper once again.  There will be casualties, and some will die.  That is what happens in war.

It is “Heartless” but not “Headless”. It is a health truth, but our Politicos lack the courage to tell the public what the current state of medical arts can do. We have a political aversion to truth that is totally bipartisan.   Churchill understood that in 1940 but we have no Churchill to lead the public.

We have dealt with and can deal with the physical capacity issues of medical treatment. NYC proved that.  But we are going to have death loss in the + 45 age group. Not high in % terms but a family that loses a parent or a grandparent will not be easily consoled.

Those are the facts.  Until we have a viable set of treatments (forget about a quick vaccine answer this year), our major focus is recovery for those most likely to recover.  In the meantime, we will have casualties and death loss.  That is what triage means in war and this is a war.

Political lying only encourages bad policy.

Now, the real risk is the economic recovery. And wringing tears from Fauci are an obstacle course. They can only promote bad policy as is evident in Democratic Helicopter Money proposals today.  The talking heads all criticize markets and public firms about being so short run focused on next quarter’s earnings.  From what I read public firms are adapting very quickly and considering how to operate with the virus going forward.

I don’t see that same degree of adaptability and innovation in the public sector — take the Tesla Tantrum as an example or closing the Fall semester at CSU! The right public strategy is to work out a plan that allows some reopening, and not stand on ceremony!  By the way non-elected permanent bureaucrats rule with as much foresight as George III once did!  They are not accountable!

And adaptability and innovation are the critical strategic aptitudes of winners in war and again this is a war!

Unfortunately Trump is not a believable leader so I am at a loss as to  how to get thoughtful strategy into the public arena over the crying towels of the public sobbing heads of the media or non-elected bureaucrats with fixed ideas and agenda.

The Troubling Return to Central Controls

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No one ever claimed that the path to freedom was untroubled by rocks in the road, but the corona pandemic has put added potholes and big detours in freedom’s path. We need to be observant of the risks that have now been created by the massive “step-in” of Government. Perhaps, the most amazing aspect has been the willingness of so many Americans to give over their personal responsibilities and ambitions to the cabal of politicians who in recent years they had learned to distrust. This is a bi-partisan, if misguided, delusion–––by the voters. They had previously demonstrated extreme disgust with the antics in Washington (and in many State Capitols in 2016), but the virus has thrown an unexpected curve ball at that stance. Fear of the unknown is a great mobilizer for giving up one’s personal controls over the conditions of life. More problems than additional infections and deaths is the current willingness to surrender control over our lives, and this terror has not been confined to individuals. Many corporate leaders, not seeing an immediate way out of the morass that lockdowns have created, are now on a pleading platform hoping to save what is left of their companies and their own power.

Coronaviruses–––there have been more than a few–––have crippling effects precisely because developing proper pharmaceutical treatment, let alone efficacious vaccines, has been a monumental task for even the best of the “biopharmas.” (( Swine fever, another coronavirus, is decimating pigs around the world. Known since 1907 it still has no known vaccine or for that matter a successful treatment. )) Believers in the efficacy of Government over Markets can point to the Manhattan Project and the claims that DARPA created the Internet as evidence that a properly marshaled government can perform wonderful magic when pressed into service. But is that a question of organization or an unlimited budget, untroubled by the personal concerns of private business for an adequate return to investment capital? Surely, we should distinguish between a war mentality that pits our survival as a nation as justification for Government takeovers and what we truly face, ugly though it may be, with COVID-19? Our national survival is not at stake.

No one should ignore the deaths that the virus has caused or is likely to cause before this particularly ugly pandemic has receded. As we currently approach some 70,000 deaths in the US caused by COVID-19, we are unpleasantly reminded that an ounce of prevention is better than a pound of cure. That said, adequate preparation for rare events is not particularly a virtue that Government has demonstrated. On the contrary, Government has been caught out more frequently than not when confronted with a rapid change in geopolitics, pandemics, or rapid technological change. That is in the nature of a free state governed by modest checks and balances. There will always be new dangers and questionable responses. Freedom is not a free lunch. We pay for our freedom by allowing multiple sources of information…and the threat that is insidious is to suppress the vast amounts of information that markets provide merely by their operation. Government may be a poor example of a first responder.

There are always post event claims of the “gurudom,” voices unlistened to at an early time, but Government is always and anywhere a late starter and then an information suppressor. Risk management occurs in private business because of the necessity of a budget restraints and the claims of equity and debt holders on current earnings coupled to the limits of corporate saving. That is how it should be. Failure in corporate or personal business is a great, even if unplanned, source of innovation. Yet, innovation is the mechanism that produces a better life for our specie. We learn, often through tragic circumstances, where not to reside, which natural flora and fauna are dangerous to our health, and which devices are likely to help us when we are surrounded by dangers to our survival. We do it piecemeal, and the uphill road to knowledge and control is fraught with many setbacks. However, the human condition is built on learning and progressing diversified by our experience in many different environments. That cumulative learning curve is our human history..

In military affairs, the State is often the driver of technology change, but there too, the State stumbles and often goes down roads to dead ends. In the worst of cases, we see the State collapse when it cannot marshal sufficient technologies or manpower or bureaucratic organization to overcome its adversaries. That is an important historical marker that should caution us to rely solely on the State organization of science, technology, production, and distribution. There is simply no way centralized government planning can duplicate the massive information production and distribution that a myriad of private markets provides nor the ever-present incentives to innovate when sufficient information is available. State planning often relies on very imperfect information and then commits vast quantities of resources chasing down roads to nowhere.

While it is true that there some counterexamples to these State-generated failures, it is more often than that States bury false moves and strategies until the light of historical research finally highlights them…often generations later. Sometimes, we attribute these cover-ups as the result of poor leadership, but that is truly another kind of error. With the power to marshal State resources, most leaders that go down false paths do not willingly provide evidence of their errors and there is no market response that normally would be self-correcting when error produces loss. In the most violent examples, States that find individuals who disagree with policy or judgment calls on the direction of technology or strategy use State violence to suppress alternative interpretations of facts and policies. Stalin murdered Tukhachevsky—his erstwhile former leading general of WWI—-prior to the advent of WWII. While the US doesn’t murder dissident military leaders, it does punish those out of step leaders who want to pursue alternatives not endorsed by the current ruling military clique. Hello Billy Mitchell, and George Patton—-you have great company with Winston Churchill.

That is the nature of Government—-it severely punishes dissenters within. Furthermore, it is hard for Government to finance and nurture alternative paths under the duress of military survival—-precisely what markets do every day. Great discoveries come from mavericks who throw out conventional wisdom because their failures are personal, not societal. Government failure can be societal precisely because once we hand over markets to Government, there are few outside alternatives to the Government ”truth!”

That is where the real danger lies today. Ironically, in spite of manifold distortions of truth and information, even this much criticized Administration has created, albeit by default, some remedy to overall Government takeover. Our Federal system allows, in fact, commands, many sources of alternative information and activity. Those politicians who demand a National Policy for fighting the corona virus miss the virtue of multiple attempts by State and local leaders—-and that provides an unending stream of useful information over what works and what fails. This administration has stumbled into the virtues of multi-pronged efforts by State governments probably because of its own lack of risk management much earlier in the game. Unfortunately, the current wisdom was that Lockdown was the appropriate death-mitigation model. That may turn out to be a half-truth if we find that restarting the American economy becomes a painful experience.

In the long postmortem on failed Viet Nam strategies, many military historians concluded that the massive firepower of the Westmoreland approach was inappropriate and devastatingly counterproductive. Early attempts at small local groups invested in the local communities—-a strategy vigorously asserted by our then chief of the Marine Corp—was squelched by the Johnson administration in favor of massive aerial bombing and huge suppression of the Viet Cong by tanks and napalm. (( Victor Krulak )) Protecting the people from the Viet Cong was abandoned by a fixation on body counts. That massive kill strategy ignored the politics of collateral damage.

The US has finally learned that massive power projections often have countervailing downsides. We now try with small groups of tactically distributed forces in Iraq, Afghanistan and Syria, with much better results and much lower collateral costs. We do learn—-but it is a painful learning experience for both for our military forces and for the residents of countries torn apart by conflict.

Somehow, whether because of crony capitalism or national leadership failure, it seems there are now prospects of utilizing markets to deal with the treatment and vaccine development to fight COVID-19. By default, we are unleashing many non-governmental firms to search out the myriad of possible pharmaceutical answers to this pandemic. It is highly probable that we will learn more quickly with less direct expense than by a massive single effort by our national government agencies. That is what markets are good at. They sort out multiple paths. They follow small bits of information that possibly can be profitable as well as efficacious.

Sadly, some of the current drift toward collectivization is suffused with claims that profits will interfere with efficacy—-nothing is further from the truth than this canard. Bureaucratic collectivization is the long trod path of singular direction. The next battle will be the socially powerful claim to controlling the profits of the pharmaceuticals taking the risks ancillary to developing treatment and vaccines. This is the old story of Government trying to control the distribution of outcomes (income and wealth) through mechanisms with massive dis-incentives. When it comes to profits, politicians invariably forget old lessons. Killing the goose doesn’t produce new eggs. If the Government wishes to subsidize the cost of treatment or vaccine, it must do it in a way that does not punish the creators of these silver bullets. We don’t need to provide more examples of the Bourbons “learning nothing and forgetting nothing.”

Sadly, the talk in Washington has a punitive theme: “don’t let the drug companies profit from our misery.” Will politicians ever learn how disastrous such a policy can be? Subsidies for use of a drug are one thing. Suppression of pharmaceutical pricing is quite another. This is not a panegyric for unlimited monopoly pricing power. We should expect that private pharma will have a number of remedies for treatment. We want many approaches. Hopefully each will be thoughtfully vetted by good statistical practices and early use limited to medical emergencies until suitable validation is obtained. We will make mistakes. Drugs with subtle contraindications will occur and we will never be perfect in eliminating hard to discover side effects. We can take reasonable precautions, but we should not promote the illusion that there are risk-free treatments or perfect vaccines. In medicine, it is also true that perfect is the enemy of good. To offer such false illusions—-even by well-meant Governmental health officials—-is another road to nowhere.

Ultimately, herd immunity must be the outcome or we will have to live with future episodes of corona virus emergence. What we should demand of Government is rapid response to local upsurges and a willingness to allow multiple paths in emergency situations. We will not be perfect. We never are. But we can do much better than we have done, as long as the learning path is not so obstructed by the “good intentions” of politicians who fail to make necessary cost-benefit calculations. Doing better is a worthwhile goal. Doing it perfectly is an errand for fools.

Indexing Stock Options or Granting Stock: which is a better method of compensating executives?

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Rewarding a CEO (or for that matter, any senior corporate official) by using an indexed stock option only goes part of the way in properly compensating management and they fail to adjust for the risk that managers take but do not disclose.[1] In nearly every case over the past several decades of corporate misgovernance, shareholders and sometimes Boards, only learn after a corporate disaster that huge, undisclosed risks were taken along the way. Options, indexed or not, offer leverage to managers but provide no downside penalties for bets that turn out badly for the shareholders. One-way optionality is a serious problem for corporate governance.

It is not wrong for corporations to take risks, nor is it wrong that benefits from risk taking are shared with management. What does matter, however, is that equity holders be well informed about the kind of risks to which their investment is exposed well before they purchase their shares. For that, shareholders depend not only upon what managers tell them in quarterly and annual reports, but also upon competent and well informed Boards who monitor the managers. Our current system of corporate governance doesn’t accomplish that as we have clearly outlined in our book, Disorganized Crimes that captures many of these issues since the 1990’s Boom through the financial disasters of 2007/2008.

It is highly unusual for Boards to reward significant performance without judging corporate performance against the company’s corporate peers. Sadly, however, Boards often don’t know or understand the risks that their managers take and are less likely to know about risks taken by competitors. Indexing stock options doesn’t do anything to disclose those risks. Options are still a one-way bet with no downside for managerial misbehavior, incompetence or excessive risk taking.  What’s the alternative

Granting stock, rather than a stock option, is a better alternative. It would at least put managers in the same risk position as their less than well-informed shareholders. It would also make managers far more aware that they are gambling their own money as well as that of their shareholders when they place the company into a high-risk situation.   ‘Heads I win, tails you lose,’ is a bad compensation metric, even if it is indexed against the performance of the industry.

It’s about time to deal with the real problem, not the taxation aspects of different compensation forms. If it ever turns out that income tax rates on currently earned income versus capital gains income get equalized, the real issues of managerial compensation would appear far more distinctly.   Compensation based upon transparent risk reporting and corporate accountability is what shareholders really need.

Let’s focus on the real problem to be solved, not the tax system that makes option compensation seem so attractive. Options distort the reality of undisclosed managerial risk taking. It’s time we pay attention to the

[1]This is a reply to the OpEd of Robert C. Pozen that appeared in the WSJ on November 14, 2016. See “A Nobel Idea to Pay CEOs What They’re Actually Worth: Indexing stock options would reward only skilled executives who beat their industry average.” http://www.wsj.com/articles/a-nobel-idea-to-pay-ceos-what-theyre-actually-worth-1479168732