Tag: corruption

Econ 101: Capitalism and Socialism

The popularity of socialism seems on the rise. Is it justified?

Starting from the top, the difference between capitalism and socialism is who decides how our resources (capital and labor) are allocated. Under capitalism the private owners of a country’s resources decide how to use what they own. They are driven by the desire to maximize profit. Under socialism public owners (government) of our resources decide how to deploy them. They are driven by…. Well let’s see.

Capitalists (company shareholders and the management they employ) seek out the goods and services the public want and the cheapest way to provide them. Entrepreneurs develop new products and services they hope the public will want and will pay for. The government’s role is to protect private property, enforce freely-agreed contracts, provide infrastructure that facilitates trade, and enforce law and order (including defense from potential foreign invaders). Freely negotiated prices reflecting supply and demand provide capitalist with essential information in their search for maximum profits.

While capitalists own the capital they deploy, they must attract and hire the labor who work with it. Consistent with their pursuit of maximum profit they seek the most productive (skillful) workers at the lowest cost (wages). While a worker’s wage is a very important part of their willingness to accept a particular job, every other aspect of the conditions of their employment is important as well. Thus, their employer has a profit incentive to establish with employees the least-costly way of satisfying those demands. These incentives (private ownership and profit maximization) have maximized the incomes of capitalist economies. https://wcoats.blog/2026/08/02/econ-101-profits/

The incomes of the average person hardly changed from poverty levels for thousands of year. But with the advent of capitalism and the industrial revolution average income in the United States over the last 250 years increased 50 to 60 times.

Some capitalists have become very rich. For seventeen years Bill Gates was the richest man in the world. Was that a bad thing–a price we had to pay for the benefits of capitalism? I have always and continue to think that I have benefited from Gates’ Microsoft products (Windows, Word, Excell, PowerPoint to name a few) far more than I have paid for them. But that is the nature of capitalist free market transactions: win-win.

In Socialist economies, the “government” owns much of the economy’s capital (e.g., government grocery stores, or airplane factories), and determines how to allocate much of its resources (what to build and produce—e.g., silicon chip factories). While the government might seek to determine what the public wants, it will also determine what it thinks it should have.

But who is the government and what are the incentives it faces when making its decisions? The government consists of elected politicians (in democracies) with the power to make laws, the public officials they appoint to various agencies to implement them, and the workers those officials employ. The primary incentive for politicians is to get elected and reelected. Presumably that depends on supporting (and actually implementing) the policies most voters in each congressional district want. Voters might support policies they think are in the country’s best interest or in their own personal best interest.

Many of the voters in the state of Washington work for Boeing aircraft and might favor government programs that direct tax money to that company. Boeing has a large complex a few blocks from where I live in Pentagon City Virginia (half a mile from the Pentagon). It builds nothing there but seems to keep its workers busy.

Unlike the profits from sales by private firms to their customers, which result from the voluntary purchases of satisfied customers, the goods and services provided to the public by governments are rarely paid for by the recipient. Nor are their costs paid for by the politicians or officials who provide them. Therefore, the incentives of governments (politicians, officials, employees) are very different than those of private firms.  This is true of any government but the scale of what is directed by socialist governments is significantly greater.

Consider the implications of these incentives for the workers hired by socialist governments. By the way, in 2024, the US federal government employed just over 3.0 million people (excluding 1.3 active-duty military personnel). State and local governments employed an additional 20 million, or a combined 7.1% of the total population.  As government officials are not spending their own money, their incentives for choosing workers can be quite different than are those for private capitalists. Hiring friends and relatives may be more rewarding to public sector bosses than those who are most qualified and hard working.

The incentives for corruption in large governments are significant. Thus, the American constitution provides checks and balances between the congress, executive, and courts. Moreover, congress has established additional oversight of executive branch agencies in an effort to keep them honest. Unfortunately, in January 2025, President Trump abruptly fired at least seventeen presidentially appointed inspectors general from major cabinet departments and federal agencies without providing the 30-day advance notice or substantive rationale required by the Inspector General Act. And by the way, Trump’s net worth and business revenues have surged during his second term, with financial analysts estimating he brought in roughly $2.2 billion to $2.4 billion during his first year back in office alone, pushing his overall net worth to an estimated $6.5 billion. This does not include our tax money he has used to put his name, picture, and gold all over the place. This is a failed businessman who declared bankruptcy six time. Just sayin.  

Even if a Socialist government is led by honest people truly committed to the general public’s interest, they lack the market prices that guide capitalists when deciding what would be “best.” Moreover, they are not likely to offer multiple options when choosing policies to impose on the public. It is unlikely that a socialist government will establish a range of different policies to satisfy different tastes. The top-down decision making of socialist governments is more likely to impose uniform approaches to the provision of goods and services and rules. In capitalist economies we are freer to choose among a wide variety of e.g., stores following different approaches to satisfying their customers.

When choosing capitalist or socialist economies, we want to know which has been more successful in allocating our resources to their most productive and desired uses. Given the differences in the incentives faced by each outlined above, have socialist governments been better at “choosing winners” than capitalists? The answer from the real world is overwhelmingly clear.

Given the different incentives faced by each, it should not be surprising that the economic well-being of capitalist and socialist economies has been dramatically different. The most dramatic comparison of the economies of two otherwise similar countries are the former East and West Germany and North and South Korea. In 1989, the year before East and West German merged into the Federal Republic of Germany, percapita income of West Germany was about double that of East German. The differences are much more dramatic between North and South Korea. In 2024 percapita income in North Korea was only 3.4% of South Korea’s.

Perhaps those promoting socialism do so thinking that it would better service the poor. This has not been true, but it does suggest that capitalist societies need to provide well-considered safety nets for those who stumble. The U.S. does not have a perfect set of safety net policies by any means. I advocate a Universal Basic Income and a government financed by a consumption (rather than income) tax. These maximize the freedom of choice and incentive to work. https://wcoats.blog/2023/01/15/fair-tax-act-of-2023/

America Alone

Donald Trump campaigned on a pledge to end “forever wars” and to put American interests first. In office, he has done the opposite.

In the first year of his second term Trump has bombed seven countries and 50 speed boats killing 159 people. His joint war with Israel on Iran is threatening global recession. None of these were authorized by the American Congress as required by our Constitution and violate international law as well. He has threated one an all even more freely (e.g. Canada, Greenland).

If this were not bad enough, Trump has insulted and alienated our friends and allies resulting in the refusal of most EU and Nato countries (Germany, France, UK, Spain, Italy) and Australia and Japan to agree to Trump’s plea for help in defending the Staits of Hormuz.

These measures have isolated and weakened the U.S.  Trump’s policies have not put America First–they have made a weakened America Alone.

Deploying his bully substitute for diplomacy, Trump, with help from JD Vance, Trump accused the EU of “extraterritorial censorship of Americans” through EU content‑moderation and hate‑speech rules. At the Munich Security Conference in February 2025, Vance warned that “across Europe, free speech…is in retreat,” This is from the same administration that repeatedly labeled critical media “fake news” and “the enemy of the people.” Currently he and senior officials have accused outlets critical of his Middle East war policy of undermining the country, with allies at the media regulator warning that broadcasters risked losing licenses if they spread “fake news.”

Condemning the opposition as enemies rather than challenging the policies of opponents is a sign of weakness and typical of tyrants. Trump attacks his domestic enemies as fiercely as foreign ones. Note the childish hate in Trump’s tweet today about the death of the man who investigated his misbehavior at the bottom of this blog:

The administration has backed or initiated high‑dollar defamation lawsuits against critical outlets (for example, a multibillion‑dollar suit against the Wall Street Journal). The Department of Justice has revived policies to subpoena reporters’ phone records to identify leakers, and Homeland Security officials have publicly boasted about catching sources for journalists—moves described by the Committee to Protect Journalists as “terrifying” and chilling to newsgathering.

The White House has at times revoked or restricted press credentials for reporters and outlets seen as adversarial, most famously CNN’s Jim Acosta. New, more restrictive rules for White House press passes have been criticized as targeting critical journalists and limiting independent coverage.

The unfunny clown who heads our Department of War has driving away most honest reporters by require department review of their prospective reports. A federal district court in Washington, D.C., just struck down key parts of the Pentagon’s new press-access and reporting restrictions. In a suit brought by The New York Times challenging the Defense Department’s 2025 press policy the judge ruled that the Pentagon’s policy limiting reporters’ access and conditioning accreditation on pledges not to gather or publish information without official approval violated the First Amendment and also raised due process concerns under the Fifth Amendment.

We have historically relied on the strength of our constitution and the separation of powers it establishes between the three major branches of government to contain abuses of government power. Generally, our institutions have served us well. But Trump has stretched executive power weakened its guardrails, for example by firing all Inspector Generals and failing to seek congressional support.

Trump and his repulsive advisor Stephen Miller’s immigration/deportation policies via the masked ICE agents who have killed two American citizens on public streets, have unleashed terror and abuse of power never seen in my life time. Last year 32 people died in ICE custody and in just the first weeks of 2026, at least 6 more people died in ICE detention.

The list goes on and on. From his reelection to his second term (2024) to early 2026, Trump’s estimated wealth has increased on the order of 2–4 billion dollars. Forbes reported his net worth at about 7.3 billion dollars by September 2025, calling it the most lucrative year of his career. In the realm of pure childish ego, he has added his name to the Kennedy Center now to be closed in two months, and the Institute of Peace, rebuilding the White House, and threatening to rename Dulles Airport. On top of that he wants his image on a gold coin. His administration proposing both a commemorative gold coin and a circulating $1 coin.

None of these are serving America’s interests.  Various indices of freedom/authoritarianism report a steep decline by the U.S.  Freedom House, which scores countries (0–100) on political rights and civil liberties and categorizes them as Free, Partly Free, or Not Free reports that the U.S. score is now at its lowest level since they adopted the 100‑point scale, while still rated “Free.”   The democracy watchdog, Martin Gelin reports that “Trump is aiming for dictatorship”. But we can still stop him if we wake up and yell STOP.

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).