Tag: corruption

Ukraine’s and Russia’s War

Russia’s attack on Ukraine is horrifying, unjustified and illegal. We can’t help admiring the courage of the Ukrainian people in attempting to defend their country nor being enraged at Russia’s brutality.

In a recent article in Foreign Affairs, Alexander Vindman argued that: “America Must Embrace the Goal of Ukrainian Victory  It’s Time to Move Past Washington’s Cautious Approach” “Will America embrace Ukraine victory goal?”  Vindman, best known to us as Lieutenant Colonel Vindman, was born in Ukraine. It is understandable, but not excusable, that Vindman puts Ukraine’s interests above those of the United States.

As a naturalized American, Vindman proved his patriotism by testifying on October 29, 2019, before the U.S. House of Representatives’ impeachment inquiry against Donald Trump, for whom he worked as a member of the White House’s National Security Council. But when determining our role in Ukraine’s war with Russia, we should give primacy to America’s best interests in both the short and long term.

Historian and military expert Edward Luttwak tweeted recently that “Friends complain that my suggested war aim of restoring the Feb 23, 2022, status quo ante is too modest; some want the expulsion of all Russian forces from all parts of Ukraine incl Crimea, with others emphasizing the need to drive Putin from office. But both mean much more war…”  “Luttwak on war in Ukraine”

It is hard not to sympathize with the desire to punish Russia for what Putin has done and is doing—i.e., to demand justice. Many aspects of the world are not to our liking or of our making, even here at home. But we must deal rationally with the world that exists in the hopes of moving it bit by bit toward a better place.

In today’s Washington Post Brendan Rittenhouse Green and Catlin Talmadge wrote an oped titled: “The U.S. is expanding its goals in Ukraine. That’s dangerous. Comments by political and military leaders suggest the goal is no longer to drive Russia to the negotiating table but to seek a total defeat of Russian forces. That increases the odds of catastrophe.”

 “Talk of total victory aligns well with another recently floated objective: an extended bloodletting of the Russian army. Defense Secretary Lloyd Austin asserted on April 25 that the United States wants ‘to see Russia weakened to the degree that it can’t do the kinds of things that it has done in invading Ukraine.’ Yet crippling Russia’s military or expelling Russia from Ukraine are significantly more dangerous aims than preventing the further loss of Ukrainian territory or, through limited offensive operations, gaining some of it back. Unfortunately, if Russian President Vladimir Putin begins to think that his back is against the wall, he may lash out by directly confronting NATO, intensifying the conventional war in the east, or even using nuclear weapons.” “Ukraine war expansion risks nuclear”

Mr. Vindman wants us to make Russia a permanent enemy. That is never a good objective. Over the last half year both Presidents Zelenskyy and Putin have offered peace conditions that represented reasonable starting points for serious negotiations. Why haven’t we pressed them both to the negotiating table?

Vindman stated that: “A Ukrainian victory against Russia will be defined, first and foremost, by the Ukrainians themselves.” But then he also says that the US should give Ukraine more and better weapons. I am not sure that he sees the disconnect here. We should not push Putin into feeling he must escalate or lose. We should exert maximum pressure to bring this war to an end that is acceptable to both Ukrainian and Russian people and in a way that opens the door to a more peaceful Russia in the future. “Ukraine-France playing good cop with Putin”

Aside from the strong emotional desire to punish Russia for what it is doing, several of the usual suspects are dangerously prolonging this war. Billions of dollars are pouring into our defense industries, which, as always, have a profit incentive to keep things going. Though we are confronted with horrifying pictures of mangled buildings and bodies, they are “over there” somewhere. For most Americans the assumed horrors of war are academic, while in fact they are all too real for those involved. The huge cost of war in lives lost, human suffering, and economic and property damage are rarely given the weight they deserve as we cheer on the brave Ukrainians fighting to the last Ukrainian. Those very well-meaning Americans thanking our soldiers for their service rarely have any idea what we have asked of them to go and fight in other people’s wars.

So our emotions cry out to smash and punish the Russians. But how it ends will have a large impact on conditions in the world ten or twenty years from now. Our standard of living and the degree of security and cooperation in the world—particularly with Russia—will depend on when and how this war ends. We need to temper our emotions and engage our minds.

Our wars in Afghanistan and Iraq, for example, looked quite different at the end than they did as we undertook them. Ukraine is ranked only slightly less corrupt than Russia. “Transparency International” It is much more difficult doing business there than in Russia (Ease of doing business ranking lists New Zealand at the top, Russia 29 and Ukraine 64). “World Bank Ease of Doing Business index”  Thus it is a small wonder that John Hudson wrote in today’s Washington Post that: “Flood of weapons to Ukraine raises fear of arms smuggling Vague U.S. assurances spark concern about lost military equipment in Ukraine, a longtime hub of arms trafficking.” “Ukraine weapons trafficking”

It is too late to point fingers and ask why we did not press Ukraine and Russia to the bargaining table six months ago or four months ago. It is in our self-interest and the interest of Europe and the world to do so now.

Trade protection and corruption

Starting with the repeal of the Corn Laws in England (tariffs on grain imports) in 1846, cross border trade and incomes blossomed. “Global life expectancy in the past 175 years has risen from a little under 30 years to over 70. The share of people living below the threshold of extreme poverty has fallen from about 80% to 8% . . . . Literacy rates are up more than fivefold, to over 80%. Civil rights and the rule of law are incomparably more robust than . . . only a few decades ago.” From The Economist’s 175 anniversary issue September 13, 2018: “A-manifesto-for-renewing-liberalism”

Post World War II trade agreements reflected a process of progressive reductions in tariffs and other impediments to trade. Unfortunately and misguidedly, President Trump has reversed this trend by introducing new tariffs and raising old ones. Import tariffs are taxes on American consumers. Why is Trump doing this? He says that he wants to bring manufacturing jobs that have moved off shore back to the U.S. by making their output cheaper than taxed imports.

As the U.S. economy is fully employed (there are currently more job openings than people looking for work), increasing employment in one area can only occur by reducing it in one or more other areas. Starting with Trump’s 25% and 10% tariffs on steel and aluminum, the shift from imported steel and aluminum to domestically produced steel and aluminum as a result of tariff protection is only possible by shifting workers from other more productive activities lowering the value of over all output. Given that these products are inputs into some American exports, which are thereby made more expensive, it is estimated that more jobs will be lost than created. “Econ-101-trade-in-very-simple-terms”

The U.S. has already imposed steep tariffs on China’s steel and aluminum to offset Chinese government subsidies to its steel and aluminum industries and thus we import almost no steel and aluminum from China. Trump has justified his new steel and aluminum tariffs on national security grounds thus bypassing usual World Trade Organization (WTO) rules for justifying tariffs. It stretches credibility, to say the least, to claim that depending on Canada and Mexico for steel is a security risk, not to mention that existing domestic production by itself exceeds our military needs. “Trump-says-steel-imports-are-a-threat-to-national-security-the-defense-industry-disagrees”

Some claim that Trump’s tariffs and threatened tariffs are just part of his negotiating strategy to achieve fairer trade agreements by a free traders at heart. This is belied by the fact that steel and aluminum tariffs remain on Mexico even after tentative agreement on a NAFTA replacement/update with Mexico. The question is why would someone benefit one small sector of the economy while imposing much larger harm on the economy more generally? The short answer is corruption.

Corruption in this context refers to bestowing benefits on a few at the expense of others in exchange for something else. In government, corruption generally takes the form of vote buying, though sometimes it is for personal financial gain. My bottom line here is that in addition to reducing an economy’s output and thus its resident’s incomes by protecting inefficient or less competitive industries, tariffs and other forms of economic protection reflect, or at the least open the door for and encourage, corruption.

When the government has or takes the authority to tax or exempt from tax individual industries or firms, it invites, if not begs for, corruption. Read the story of the Dixon Ticonderoga pencil company and weep. “How-dixon-ticonderoga-has-blurred-lines-of-where-its-pencils-are-made”

Feeding the Swamp

During his filibuster leading to last week’s brief government shutdown, Sen. Rand Paul (R-Ky.) stated that: “When Republicans are in power, it seems there is no conservative party…. The hypocrisy hangs in the air and chokes anyone with a sense of decency or intellectual honesty.” He was protesting the compromise two-year budget just passed by the Senate and awaiting passage in the House. This budget, now signed into law by President Trump, adds over $300 billion in additional government spending this year alone on top of the $1 trillion dollar deficit created by the recently passed tax cut. “Why-did-the-GOP-vote-for-a-budget-busting-spending-bill-because-voters-dont-seem-to-care”

A few congressmen reacted with more principle. “’I’m not only a ‘no.’ I’m a ‘hell no,’ ” quipped Rep. Mo Brooks (R-Ala.), one of many members of the Tea Party-aligned Freedom Caucus who left a closed-door meeting of Republicans saying they would vote against the deal.

“It’s a “Christmas tree on steroids,” lamented one of the Freedom Caucus leaders, Rep. Dave Brat (R-Va.).” “Right-revolts-on-budget-deal”

Why should we worry about adding to the public debt? The “deficit” is the shortfall of tax revenue below expenditures in one year. This is now forecast to average about one trillion dollars in each of the next two years. “Bipartisan-budget-act-cements-return-trillion-dollar-deficits”. Each year these annual deficits add to the outstanding U.S. national “debt” currently at $20.6 trillion dollars. Even before the recent tax cuts and last week’s expenditure increases, the Congressional Budget Office projected Federal debt held by the public at $25.5 trillion or 91.5% of GDP by 2027. But that figure omits debt held by the Federal Reserve, Social Security “trust” fund, and other government entities, which must also be serviced and repaid. When these are included as they should be, gross federal debt is projected to be $30.7 trillion or 110% of GDP by 2027 and 150% of GDP in thirty years and climbing. And to repeat, this is before the recent tax cuts and budget increases.

As our economy grows so does the government’s capacity to carry and service (pay the interest on) the debt. But on the basis of existing laws and policies our debt will grow faster than the economy forever. But of course that is impossible. At some point taxes must be increased or expenditures cut, or the government defaults on its debt. In fact the problem is worse than these figures suggest because they fail to include the future taxes or borrowing needed to cover unfunded government liabilities. These are commitments, such as future Social Security pension payments, for which existing financing falls short. For example, Social Security payments already exceed its annual revenue from the wage taxes of current workers and the so-called trust fund will run dry in fifteen years. That will add still more to the deficit and the debt.

Indeed, there are times when deficits are ok and even helpful. When the economy goes into recession the government should allow the deficit that naturally results from falling tax revenue and increasing safety net spending. These are referred to as automatic stabilizers. However, we are currently not now in that phase of the business cycle. We are now at its peak and if the government is to achieve fiscal balance over the cycle it must run budget surpluses at the peak to pay for the deficits during the slumps. The U.S. should now have a budget surplus and not the huge deficit presently experienced and projected. The White House’s announcement today (Monday) that it is giving up on the traditional Republican goal of a balanced budget in ten years is hardly a surprise when we are starting with a large deficit at the peak of the business cycle. https://www.washingtonpost.com/business/economy/white-house-budget-proposes-increase-to-defense-spending-and-cuts-to-safety-net-but-federal-deficit-would-remain/2018/02/12/f2eb00e6-100e-11e8-8ea1-c1d91fcec3fe_story.html?utm_term=.514757e9c8de&wpisrc=al_news__alert-politics–alert-national&wpmk=1

Senator Paul was rightly angry that not only was the need to face and correct this untenable future kicked down the road yet again, but the process of doing so was corrupt. Votes were bought by sticking in special tax and spending breaks for the constituents and friends of individual congressmen—the old earmarks by another name. “Budget-deal-retroactively-extend-several-expired-tax-provisions”. While it is true that the bipartisan budget deal wouldn’t have passed without these bribes, it shouldn’t have passed. Instead of draining the swamp the Republicans have joined with the Democrats to feed it. “In-big-reversal-new-trump-budget-will-give-up-on-longtime-republican-goal-of-eliminating-deficit”. And more repulsive is the fact that these are the same Republicans who rallied against spending during the Obama years. This is the hypocrisy Senator Paul lamented.

Congress has failed yet again to prioritize it’s spending to match the resources that taxpayers are willing to pay. The moral corruption of this way of doing business was reestablished and reinforced. As another example of blatant corruption, Presidents have rewarded (paid off) large contributors with Ambassadorships to nice places like London, Paris, and Rome (to name a few) for decades. This is pure corruption for which the country pays with lower quality representation and diplomacy than would be provided by Foreign Service professionals. Unfortunately we have grown used to it and barely notice it. This is dangerous.

All individual government expenditures and programs look worthwhile to at least some people, but at the expense of what? What do taxpayers or investors or other government programs give up to finance them. These are not easy choices and decisions but it is the job of our representatives to make these judgments in the best interests of the country as a whole. That is probably expecting more than they are capable of delivering, but it is their job. Those of you of Generation X, Y and Z will have to pay for this so you are the ones with an incentive to do something about it. We need more Rand Pauls. “The-5-biggest-losers-from-the-2018-budget-deal-are…”

Trump’s approach to government corruption

PEOTUS Trump is giving conflicting signals on his policy toward government corruption. He seems to recognize clearly the conflicts of interest in the “military industrial complex,” when he criticized the F-35 fighter plane and the revolving door between the defense department and the defense industry. “On Monday, Trump also took a shot at Lockheed Martin’s $400 billion F-35 Joint Strike Fighter program, the most expensive in the history of the Pentagon, saying the “cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20th….Trump said there should be a “lifetime restriction” of top defense officials going to work for defense contractors ” “Trump-takes-aim-at-pentagons-revolving-door-and-lockheed-martins-400-billion-f-35-program”

This is commendable. But it is only one example of conflicts of interest that can arise in government. We await with interest to see how Rex Tillerson, Trump’s choice to head the State Department, will handle his conflicts of interest arising from the extensive business deals between Exxon-Mobile, the company he currently heads, and Russia and his friendship with Russian President Putin.

But we particularly await Trump’s clarification of how he will handle his own conflicts of interest. As a private citizen, Trump did not hesitate to use the power of government to force private citizens and companies to bend to his will. “And-so-here-we-are.” While Trump apparently has no direct businesses in Russia he has plenty of indirect business relationships. “Donald-Trump-ties-to-Russia” He has delayed until January his promised Dec 20 clarification of how he will handle this. “Trump-corruption-conflict-of-interest.” He still has not disclosed his personal and business tax returns that would clarify some of the potential conflicts. Given his strong position on the Pentagon’s revolving door, perhaps we can be hopeful that he will take equally strong measures with regard to potential conflicts of interest of his own and of his cabinet’s.

Trump the Terrible

To say that Trump’s future presidency promises to be a mixed bag, while true, seems increasingly too kind. On the positive side there seems to be a very good chance of a truly monumental tax reform. House Ways and Means Committee Chairman Kevin Brady recently released the outline of a major tax reform plan as part of Speaker Paul Ryan’s “A Better Way” agenda that would, if enacted, introduce a dramatic, growth enhancing reform of U.S. personal and business income taxation. While there are a few differences with the President Elect’s tax reform proposals, it should not be that difficult to resolve them. Prospects for adoption are the best they have been for decades.

On the growing negative side Trump is adding to the nasty character traits he seemed unable to control during his campaign—a level of blatant corruption that would even embarrass the Clintons. After having his daughter, who is also his business partner, at his side during his private meeting with the Japanese Prime Minister Shinzo Abe, a few days later he put Ivanka on the phone with Argentina’s President (Trump is seeking approval to build a real-estate project in Buenos Aires).

For me these examples of Trumps many conflicts of interests pale in comparison to the deal he claims credit for to keep 1000 Carrier jobs in Indiana where Mike Pence is still the governor. The Chicago Tribune reported today that “Carrier would receive a $7 million package of incentives to keep its factory here from moving to Mexico, the company said Thursday, under a deal negotiated with the state after an unusual intervention by President-elect Donald Trump that could reshape the relationship between the White House and private enterprise.” http://www.chicagotribune.com/business/ct-trump-carrier-jobs-subsidies-20161201-story.html

This goes beyond the corruption of personal enrichment and vote buying from the public purse to measures that undermine the very basis of our national wealth. And Trump proudly stated to the press that he would give any other company that wanted to move production abroad a VERY hard time. He is gloating over his “skillful” use of his great power as president.

The standard of living of the average middle class family in the U.S. could not even have been imagined half a century ago. Among the many things that make our wealth possible is the ability of companies and each of us to allocate our resources where we think they will be most productively used. Trump is now inserting the power of the Presidency—of the government—to over ride those economic decisions in order to save some jobs at some (favored) companies at the expense of other jobs and overall economic efficiency. This is blatant corruption of a high order and if allowed to persist will erode our economic productivity and standard of living over time. Read any of my blogs on trade and free enterprise (or what most of us call the liberal economic order).

Not only is Trump’s corruption shocking, but also his failure to behave presidentially is beyond embarrassing. It is dangerous. Someone should take Trump’s phone away until he figures out that his campaign style of ad libbing is simply wrong for the POTUS. When he said he would jail and take away the citizenship of flag burners, was he ignorant of the law (confirmed by a Supreme Court ruling) or contemptuous of it??? In his recent phone conversation with Pakistani Prime Minister Muhammad Nawaz Sharif, was he looking ahead to what he might say to the Indian PM when he committed himself (and implicitly the United States) to the following: “I am ready and willing to play any role that you want me to play to address and find solutions to the outstanding problems.” You can read the entire terrific, wonderful, exceptional conversation here: http://www.pid.gov.pk/?p=30445 What in the hell is he thinking? Unfortunately the list of problems is growing. And he’s not even the President yet.

Cayman Financial Review, Q3 2015

Dear Friends,

The Third Quarter issue of the Cayman Financial Review is now available on the web: http://www.compasscayman.com/cfr/. I am on the Editorial Board and have two articles in this issue that might interest you. The first discusses the continued decline of U.S. world leadership exemplified in the case of the new Asian Infrastructure Investment Bank located in China: http://www.compasscayman.com/cfr/2015/08/19/US-leadership-and-the-Asian-Infrastructure-Investment-Bank/

The second is the final installment of my series on the Kabul Bank scandal. The failure of Kabul Bank in Afghanistan was probably the biggest bank failure and fraud in history on a per capital basis.  As this final article looks at some of the legal issues and developments in recovering stolen assets held abroad and Afghanistan’s uneven struggle to strengthen its criminal justice system, Gary Gegenheimer, a lawyer who also worked in Afghanistan, joined me to write this third installment: http://www.compasscayman.com/cfr/2015/08/19/The-Kabulbank-scandal–Part-III/

I hope that you enjoy them.

Best wishes,

Warren

Crony capitalism and the Export Import Bank

An important and fundamental principle of the rule of law is that laws should have wide or universal applicability to everyone. This principle is generally violated when governments subsidize specific activities. These subsidize might take the form of tax breaks, loans at preferential interest rates or even grants to favored enterprises or activities. The Export Import Bank is a government program for granting such favors in the name of promoting exports.

If the EX-IM Bank only provided information to American firms that helped them satisfy foreign requirements for selling their products abroad or to connect with services available for marketing such produces—following the model of the Small Business Administration or the Agricultural Extension Services provided by many states—their continued existence might be defensible. However, like so many government intrusions into the private sector, it provides huge subsidize to a limited number of customers (about 30% of the total to Boeing to subsidize the sale of its planes to foreign carriers) at the expense of others. American carriers like Delta complain that EX-IM Bank subsidies to Boeing benefit their foreign competitors, who are able to buy Boeing planes more cheaply than they are. “The Airline Pilots Association of America estimates that the bank’s subsidizing of Boeing airline purchases abroad has forced our domestic airlines to cut about 7,500 jobs – decreasing the airline workforce by almost 2 percent.” (The Blaze, May 29, 2015)

While the cost of the EX-IM Bank to U.S. taxpayers is trivial, it is one more drop in the growing pond of crony capitalist connections to the government. Boeing moved its headquarters from Seattle, where most of its production was traditionally located, to Chicago and has diversified its production and suppliers around the country precisely to have more representatives in congress with an interest in its well being. Like many other large companies seeking government favors, it has hired key people from government such as Kevin Varney, former chief of staff at the Ex-Im during Obama’s first term. The stakes for Boeing are large so you can be sure it is spending a lot of money one way or another to protect its interests. This is the nature of crony capitalism, which gradually diminishes real market competition and chokes productivity.

Creating programs that grant favors also creates strong incentives for less subtle and more overt, traditional style corruption. “For example, Johnny Gutierrez, an Ex-Im Loan Specialist, pled guilty on April 22, 2015 of accepting up to $78,000 in bribes in return for recommending the approval of unqualified loan applications to the bank, among other misconduct. During this period, Ex-Im gave Gutierrez nearly a 20 percent pay hike and paid-out thousands in performance bonuses. “ (Adam Andrzejewski, Forbes, http://www.forbes.com/sites/adamandrzejewski/2015/05/31/the-export-import-bank-and-the-art-of-picking-losers/ )

The Ex-Im Bank and dozens of programs like it are economically unsound and wasteful and politically corrupting. It and others like it should be killed when ever possible. Here is a rare case where congress can do good by doing nothing (i.e. by not renewing the Bank at the end of this month).

Should the U.S. help finance Ukrainian weapons?

Ukraine is much more important to Russia than to the U.S. It borders Russia, was part of the Soviet Union, and much of what is now Ukraine, including Kiev, has been part of Russia from time to time for as long as the United States has existed. Ukraine’s importance to the U. S. is, however, more academic. It is reasonable to assume that as long as it is economically able Russia will counter any increase in Ukraine’s military capacity and activity in eastern Ukraine (the part bordering Russia) with equal or greater military force. If we increase our support and Ukraine elevates its military activities in the east, so will Russia. The Russian economy is suffering from years of exploitation by Putin and his friends as well as inadequate investment and is now suffering from the sharp fall in the prices of its primary exports– oil and gas. Russia will presumably only stop matching escalations from the West when it is no longer economically able to do so. Do we have a national security interest in escalating that far?

Our interest in Ukraine is humanitarian– not military out of a concern for our own security. We would like to see the people of every country enjoy the freedom and prosperity that we have. Moreover, most of us have long believed that healthy, prosperous, well-governed countries make better neighbors and a more peaceful and prosperous world. So it serves that interest and our humanitarian natures to encourage and financially support the new Ukrainian government’s efforts to reduce the corruption their country has long suffered from. Military aid is an entirely different matter.

Both we and Ukraine’s government in Kiev must accept and come to reasonable terms with Russia’s dominance in the area and its determination to remain in Eastern Ukraine as it has in South Ossetia and Abkhazia. The alternative, which would likely follow the injection of western arms into the conflict, would be a continued escalation of fighting with unknown consequences and an unknown end point. We don’t like to give in, and wouldn’t and shouldn’t whenever our national security is truly at stake, but this is not our war. What, after all, did our “victory” in Iraq (one of the most insane and ill-advised wars we have ever launched) gain us? ISIS!!

Let’s help Ukraine financially, which it desperately needs, as long as its government continues to seriously fight the corruption that has characterized it for so long (easier said than done). Ukrainian offensives in “rebel”/Russian dominated areas of the East are futile and we should not encourage them by providing the weapons that make them possible. Freeze the status quo until Russia comes to its senses (which we should encourage in every possible way) or collapses economically (which we should not hope for).

Afghan President Ghani’s attack on corruption?

The Comptroller General of Da Afghanistan Bank, Afghanistan’s central bank, has been sitting in jail since October 8 along with 3 DAB colleagues as part of President Ghani’s attack on corruption. What has he done, asked the two young children of this young 32-year-old rising Afghan star? Muhammad Qaseem Rahimi was one of 21 Afghans convicted on March 6, 2013 by a Special Tribunal appointed by President Karzai for crimes associated with the Kabul Bank fraud, by which Afghanistan’s largest bank channeled virtually all of its almost one billion U.S dollars worth of depositor money to a handful of its owners and their friends.

Kabul Bank’s founder Sher Khan Farnod and his former bodyguard and later Kabul Bank CEO Khalil Ferozi received light sentences of five years in prison and were asked to repay 279 million, 531 million respectively. Mahmood Karzai, one of the President’s brothers and the third largest shareholder got off scot free having repaid part of what he had “borrowed” and claiming that he did not need to repay the loan he received to buy his shares (illegal in itself) because the shares were now worthless!!! These two primary perpetrators of this crime, as well as the other 19 appealed their convictions. Farnod and Ferozi have repaid nothing and have been seen dinning around Kabul ever since. In one of his first acts as President, Ashraf Ghani, a former World Bank employee, ordered: the Supreme Court to get on with the case, the confiscation of stolen assets, the prosecution of accomplices, and the immediate incarceration of those convicted pending the resolution of their appeals. Justice finally on the move? Perhaps.

At the time of Kabul bank’s collapse four years ago, young Qaseem had just recently been appointed Deputy Director General of the central bank’s Supervision Department. As one of a group of young Afghan university graduates recruited to the central bank for special mentoring under a highly successful USAID capacity building program, Qaseem, a natural leader, rose rapidly within DAB. I frequently saw him standing in the middle of an admiring circle of his peers. As a Tajik of about 5’10’’ he towered over his much shorter Pashtun colleagues making him seem taller than he really is. After his two year mentoring appointment he left DAB and Kabul for graduate studies in Kuala Lumpur. Upon his return he pondered his options for a clearly bright future and with some hesitation (and some urging from me) returned to the central bank. He had hoped for a directorship but instead was offered the position of Deputy Director General of the Supervision Department. So what crime had he committed for which he now sits in jail?

The Special Tribunal found Qaseem as well as the Governor of the central bank, Abdul Fitrat, and its First Deputy Governor, Mohibullah Safi, both of whom have now fled the country, and five other DAB employees guilty of dereliction of duty. They had failed to detect and report the cleaver fraud perpetrated by Farnod and Ferozi. Though hard working and intelligent, at 28 years old Qaseem naturally lacked the experience of seasoned banking supervisors, who would have had great difficulty detecting this fraud as well. The central bank law like those in most every other country protects its employees from prosecution for acts committed in the good faith exercise of their duties.

At least two questions leap out immediately. How could the central bank staff have been charged and convicted in the first place and why haven’t their appeals been heard until now?

It is widely believed in the international community that the charges and convictions against the central bank governor and his staff were President Karzai’s retaliation for the embarrassment caused when Governor Fitrat disclosed the names of Kabulbank shareholders and borrowers in public testimony in Parliament on April 21, 2011. The names included one of Karzai’s brothers and one of Vice President Fahim’s brothers. Governor Fitrat resigned and fled the country for the United States soon thereafter for his safety. In a normal country these vengeful convictions would have been thrown out promptly but sadly Afghanistan and especially its judiciary is one of the most corrupt in the world.

But why Qaseem and his colleagues are still sitting in jail is harder to answer. If President Ghani wishes to move away from rule by Presidential fiat, as seems the case, he is right to adhere to established procedures as painful as they are. But jailing those convicted pending the consideration of their appeal is almost unheard of in other countries, though it is satisfying to see Farnod and Ferozi finally behind bars. An honest judiciary would have thrown out the convictions of the central bank employees long ago. Let’s hope they finally do so quickly now.

Our Government, or Lack There Of

Some of you thought my recent complaints against uncompromising Republicans toward the fiscal cliff were somewhat one sided. It takes two to tango in the compromise game, of course. I would like to suggest a structural change in the U.S. budgetary rules that I think will help reduce our deficits and our debt while at the same time making government more effective. It shifts the focus of the debt reduction discussion from taxation to expenditures, which is the side of the equation on which the Democrats have been irresponsible and uncompromising. The Democrat controlled Senate has not even passed our government’s budget for the last three years.

The subject of taxation divides into its structure (what is taxed and how the burden is shared among the population—these are issues of fairness and the economic consequences), and its level (how much revenue is raised). Getting the structure right is very important for economic growth and for public acceptance of and cooperation with paying the taxes chosen. My views on taxation were reviewed four years ago: https://wcoats.wordpress.com/2008/09/06/how-to-measure-the-size-of-government/ and more extensively almost 40 years ago: http://works.bepress.com/warren_coats/29/.

My proposal, which is really a bit of left over unfinished business from the Reagan administration, is that the level of tax revenue should be set to pay for all of government’s expenditures over the business cycle. Deficits would be allowed during recessions (the so called automatic stabilizers), which would have to be paid for with surpluses during booms. I would like to see a constitutional amendment that imposes this requirement in place of legislated debt ceilings. If the public really wants more government spending, taxes will need to be raised to pay for it.

The focus on taxation, and the refusal of many Republicans to raise them, has been very counterproductive. The Republicans have done a terrible job of making the case for smaller government and I blame a lot of that on their emphasis on taxes rather than spending. If we insist that Obama’s spending programs must be financed by tax revenue rather than borrowing (except for automatic stabilizers during recessions – e.g., increases in unemployment insurance and the natural fall in tax revenue when incomes fall), people would start focusing on the fact that they will have to pay for these expenditures. It would make fighting for more restrained spending easier.

The government (federal, state and local) should be involved in some areas of our lives, but we should make the case for such involvements carefully because the nature of government, if not firmly and continuously resisted, is to keep growing. The defense industry in the United States is large and powerful. It has an obvious profit interest in seeing the government’s defense expenditures increase and it has the economic means to help influence such an outcome. The taxpayers’ representatives in government need the counter pressure those taxpayers can provide to evaluate defense spending and all other government programs carefully and to apply rigorous cost benefit analysis to every proposal.

Even then, it is well known in public choice literature that it is difficult for the diverse and defused public interest of taxpayers to dominate over the individual special interests of bankers, pharmaceuticals, farmers, teachers unions, etc. If these special interests are able to gain special favors from the government (e.g., farm subsidies) they benefit greatly but the cost is spread widely over all taxpayers. These forces push government to grow into activities that can harm the economic efficiency and growth that benefits us all. But they also invariably push and ultimately cross the boundaries of honest advocacy into blatant corruption. I expounded on this dangers in (at least) two earlier blogs:

https://wcoats.wordpress.com/2009/12/23/keep-it-lean/ and http://dailycaller.com/2011/01/17/ikes-farewell-address-fifty-years-on/

Liberal (in the classical meaning defined by John Stewart Mill) and democratic societies are the exception in history. They are not easily defended.

“The price of liberty is eternal vigilance.”

Happy New Year.