Don’t Ask

I think every American should have the right to kill Taliban. That includes homosexuals.

But I don’t want to impair our aggregate ability to kill Taliban in order to include homosexuals in the effort. I’m not saying that including openly gay men and women in the armed forces will impair our ability to kill Taliban, just that effectiveness has to be considered in limiting membership in the force.

Effectiveness has two aspects: recruiting/retention and unit cohesion. I don’t know how permitting open gays to serve will effect either of those phenomena, but I am worried by the arguments advanced that it won’t affect them.

First is the claim that there have always been homosexuals in the army, and many have served bravely and effectively in units that have not been disrupted by their presence. The problem with this claim is that it is completely unresponsive to fears about openly gay service members. Don’t ask, don’t tell permits closeted gays to serve, presumably because closeted gays have no effect on recruiting/retention (except to expand both to include closeted gays) and no discernible effect on the performance of their units (although one cannot know what one gay soldier’s crush on another might mean in a pinch). But nothing about the experience with closeted gays tells us anything about a force that welcomes openly gay soldiers.

Second is the concern that we may lose valuable talent, specifically Arabic translators. It seems to me that this argument cuts both ways. If losing gay translators is a problem, then losing straight translators who don’t want to serve with gays would also be a problem. It won’t do to say that homophobic translators aren’t worth worrying about, because the whole point of the argument is that we need translators. Any policy change that produces fewer net translators cannot be defended on the ground that we need translators.

Third is the claim that a growing number, now a majority, of armed forces members say they would have no objection to serving with openly gay unit members. Maybe. But doesn't that imply that a significant minority of the current force and of the potential recruiting pool would be uncomfortable? And if so, would there really be enough openly gay recruits to replace those straight soldiers who quit and those straight young men who refuse to be recruited. BHO is fond of saying how his stimulus bill kept jobs from being lost. Can't we apply the same logic to claim that Don’t ask, don’t tell has prevented many resignations and abstentions from enlistment?

Fourth is the argument that Blacks were integrated in the face of similar hostility. That is true, but when Truman integrated the service, there were way more Blacks looking to serve than there are gays. History records that Truman’s Executive Order, issued in 1948, wasn’t really implemented until the Korean War demanded a larger recruitment pool. Thus, racial integration appears to have helped recruitment. By 1986, nearly 20% of the armed forces members were Black. That cannot be the case for gays. How the recruitment/retention consequences will play out is hard to predict, but the irrelevance of the Black experience seems to me safe to assume.

Finally, there is the affecting claim that forcing gays to live a lie in order to serve their country in a service that values personal honor is just plain wrong. That’s a good point. But then what? Why do people think that one good argument is all it takes for their position to win the day?

And then there’s unit cohesion. Again, the experience of closeted gays is irrelevant. The greatest threats to unit cohesion arise from (i) straight soldiers’ squeamishness about being sex objects of identifiable platoon-mates, and (ii) romantic entanglements of openly gay soldiers with each other. Undoubtedly, there are Brokeback Mountain relationships in the service now, but the number is too small to matter. If openly gay men and women are invited to join, the number of couples, and, worse, triangles, may expand exponentially.

I am not arguing here that homophobia and the resulting animosity between soldiers are a reason to exclude gays (although it could prove to be). I am talking about the real fact of serving in close quarters with someone who views you the way you view the opposite sex. A straight male soldier showering with a gay is entitled to feel as if he were showering with a woman or as if he were a woman showering with a man. An enlightened indifference toward the co-showerer’s sexual preference per se is fine, but it has no bearing on one’s comfort level in the shower with someone whose idea of a sex partner is you.

I don’t pretend to know how admitting gays into the military will work out. I do know, however, that the arguments advanced, other than fairness and “honor,” i.e., the ones not related to recruitment, retention, or unit effectiveness, are all bogus, and it would be nice if something more cogent could be offered in its support.

Finally, there is the matter of risk. Certainly, there is some risk that admitting openly gay service members will have a negative effect on recruiting, retention, or unit effectiveness. Whether that risk is small enough to run depends not only on whether the change is "right" as a matter of social policy, but also on how bad the consequences of being wrong would be and especially, how difficult reversing the policy would be if it harms our military readiness. How would that be known? Would our political machinery ever acknowledge that a drop in recruiting/retention absent a ban on gays was the result of ending that ban? Or would that old stand-by, a demand for impossibly absolute proof, be trotted out? My guess is that the genie will be permanently out of the closet.

Intergenerational Games

Game theory has something sad to say about the state of intergenerational relations in the US. 

Imagine that you had to support your retired parents if they could not support themselves on their savings and private pensions.  One thing would be true, at least in somewhat functional families: the intergenerational transfer from younger to older would be negotiated with some attention by the elders to the solvency and happiness of the younger generation and its offspring.  We care about our children and grandchildren.

But what if we can rely on Social Security and Medicare to care for our retired parents?  Or more, important, what if our parents do not have to impose on us directly because they get support from us indirectly?  The consequence is that there is nothing our parents can do to relieve us of the burden of caring for them.  Our payroll taxes are due no matter what.  Of course, wealthy parents can give gifts, but we’re talking about parents of modest means with parents of modest means.  Where those parents might, absent Social Security, try to accommodate their children’s economic needs, they don’t have to do that for the mass of payroll tax payers who support elders’ entitlements.  The oldsters can say “we’ve earned it,” and demand that the bills be paid by someone other than their own children, unable to do anything about the fact that someone else is making those children pay for them. 

Without socialization, we could assume that the aggregate intergenerational transfer would be the sum of what the younger generation can afford.  With socialization, the amount of the transfer is dictated by the voting power of the respective generations, or the ability of the young to impose inflation on seniors, something the latter have dealt with at the ballot box by indexing Social Security benefits and providing Medicare benefits in kind.  Because I cannot protect my kids from the tax voted by others, I might as well vote for those taxes so that I get what I've “earned.”  It’s a version of the tragedy of the commons, which is really a massively multiplayer prisoners’ dilemma game.

No one wants to ration healthcare.  But Medicare is on a bad trajectory, one that cannot be saved by tort reform or “insurance reform” or “pay for outcomes” or any other increase in medical productivity.  What we need are fewer old people consuming less care.  But not only can’t you always get what you want, sometimes, you can’t even get what you need.  Who will put the bell on that cat? 

David Brooks argues in the NYT today that we need oldsters to step up and match their aggregate demands to their kids’ aggregate ability to pay.  But where is the political will to do that?  How do we get seniors to reduce their entitlements to fund the war in Afghanistan or pay for better schools?  Or healthcare for the uninsured.  Hard to see a happy ending…

Politics in a nutshell

This morning, an Op. Ed article in the New York Times included the following:

[P]opulism is popular with the ruling class. Ever since I started covering politics, the Democratic ruling class has been driven by one fantasy: that voters will get so furious at people with M.B.A.’s that they will hand power to people with Ph.D.’s. The Republican ruling class has been driven by the fantasy that voters will get so furious at people with Ph.D.’s that they will hand power to people with M.B.A.’s. Members of the ruling class love populism because they think it will help their section of the elite gain power.

I think that about sums it up.

CITIZENS UNITED v. FEDERAL ELECTION COMM’N

Big Supreme Court cases are too unwieldy for a simple “rightly” or “wrongly” decided to mean much. Justice Stevens in dissent lists a whole catalogue of reasons why the Court should have resolved this case without reaching the issue of corporate speech per se. I have not read those arguments, not because they may not be persuasive but because I do not care if they are persuasive. Justice Stevens may be entirely correct that the Court should not have taken up this issue at this time, and a future Court may hold that everything this Court said about the issue was “mere” dictum, worthy of little or no jurisprudential respect. But that’s not what I’m here about today.

Likewise, Justice Stevens says that the decision does harm to the Court as an institution by procedural error. That’s a big deal, and, again he may be right. So, again, the case may well have been “wrongly decided” if, absent those errors, the result for the parties would be other from what it is. And, again, I don’t care about that today. This post is about what the Court should have done if the issue were properly before it, not about whether that was or was not actually the case.

The arguments in the opinions seem to me somewhat simplistic. Clearly, the First Amendment was intended to protect the political speech of citizens, and advertisements for or against a candidate are political speech. But, as the dissent points out, we restrict the political speech of soldiers, civil servants, foreign nationals, etc., and we don’t let people electioneer right next to polling places. These are things we do to serve other societal interests and with which we have made peace. Thus, it is wrong, I think for the majority to say that the BCRA is bad because it imposes “any” restriction on political speech, but the dissent is wrong to say that it is OK because it only slightly abridges the freedom of the press. Some slight abridgements are permissible, and some slight abridgements are not. The binary arguments of both sides strike me more as advocacy, not jurisprudence.

My own jurisprudential sense sides with Justice Stevens on the procedural side. The Court should do as little as possible, and that, it seems to me, makes it difficult to defend on jurisprudential grounds the broad holding in this case. But that leaves open the question of what the law ought to be in this regard, i.e., whether the Court's holding and dicta are good or bad for America, whether or not they were right or wrong for the Court to issue. These things are not always aligned, although one hopes that the most often are.

The law is always drawing lines, and the lines almost always do some injustice. Here’s an excerpt from a hypothetical corporate prospectus for XYZ Widgets:

The greatest obstacle to the success of any American widget company is competition from cheap Chinese widgets. This competition has driven virtually every American widget maker out of business. We believe that if American trade law were changed, an American company that is set up to make widgets would have a competitive advantage over others that have closed shop and moved on. To that end, we intend to use the first $100,000,000 of capital we raise to elect legislators and a President who support tariffs on Chinese widgets. Advertising in support of suitable candidates will be a key part of our strategy. Our success as a business depends on those legislative changes, and the use of our capital to achieve it seems to us the best possible use of that capital. Shareholders should, therefore, understand that their capital will be used to influence the outcome of elections.

Conceptually, I cannot imagine a legitimate restriction on the advertising that this corporation seeks to undertake. The political change is essential to the corporation’s success, the shareholders are aware of the proposed activity – and so don’t have to invest if they want someone else to be elected – and the ads are clearly political speech on behalf of the individuals with an economic interest (as are most political interests) in the outcome of the elections in question.

Practically, however, I see the problem. If this corporation can place ads, what about the corporation whose shareholders don’t share the views of management? It’s not always so clear which candidates do or do not support things that are in the shareholders’ interests. And what about pension funds and mutual funds? Many of us are invested in companies whose identities we do not know, much less their political machinations. And then there are labor unions, where the membership or contribution may be a condition of employment? Or non-profits whose contributors don’t all share management’s politics?

Assuming some of these entities can rightly be prohibited from some political action, where do we draw the line? Can we draw it so sloppily that it catches my electioneering start-up? Or must there be an exemption for truly voluntary enterprises that have stated their political plans for all to see? What about a donor-financed non-profit that has made the same disclosures?

PACs are intended to allow shareholders to band together to support candidates, but individual contributions to PACs and contributions by PACs are limited. For me, those limits vitiate any argument about how PACs allow shareholders to do what BCRA prohibits corporations from doing. If, however, the limitations on PACS were removed, and corporations that have disclosed their intentions to shareholders are permitted to use contribute corporate funds to PACS, I don’t think I would have much objection to a requirement that PACs be the conduit for political action money. But then, why bother?

As in so many things, transparency seems to me to the key here. If a corporation clearly has political interests, and it makes clear to investors what those political interests are, and no one is forced to invest in that corporation, then I don’t see why the corporation ought not to be able to use corporate funds to advance those announced interests. Right now, we have no such law, and the Supreme Court cannot write one. If this decision is seen as the Court’s way of getting that law written, and we end up with such a law, the correct philosophical view, I think, is not to assume that the Court wants or has enabled the wholesale use of corporate funds for political purposes, but only that it has said to Congress “give it another try.” Frankly, I have not, and may not read every word of every opinion in this case. It’s only as interesting to me as it is. So I cannot say whether the Court invites or does not invite Congress to take a Mulligan. But it doesn’t matter. Congress certainly will try again, and maybe this time, they’ll get it right.

The sky is not falling.

Who Shot John?

I have several objections to the efforts to assign personal responsibility for the financial mess. They all pretty much boil down to asking the wrong question, because the question itself proceeds from a bad premise.

That premise is that things will be all better if the person or persons responsible are “held accountable.” I do not believe that premise holds. We suffered a systemic collapse, and we need systemic solutions. Finding wrong-doers is necessary, but it is not sufficient, and it is not more important than finding systemic causes and fixes.

We build dams to hold back rivers. But what happens when there is a storm upstream, or unprecedented ice melting, or whatever, and the river comes at the dam with unprecedented fury? If the dam breaks, we can, and should ask why it broke. But that answer won’t help us if we have not dealt with the possibility that, if the dam had not broken, it would have been overtopped, causing some flooding anyway, or that the banks would have flooded, hurting the people who live along the river instead of those in the town below the dam. We must deal with the fact that the water had to go somewhere.

Now, we certainly don’t want our towns defended by dams that will not hold, so something must be done about the dam. If we can figure out whose contribution to the dam failed, we need to find a new contributor for that part of the damming process. But we ought not to fool ourselves: the real problem was the river. We need to be asking what we can do to prevent the river from coming down on us like that, and nothing else we ask should be viewed as more important than, or as a substitute for, that inquiry.

And even if we do identify a “culprit” – someone who should have done a better job – we need to find a way to prevent the person who gets that job next from being able to make the same mistakes. Probity and competence are nice, but systemic changes – regulations – are critical to counteract human foibles. To the extent that removing people becomes an obsession, fixing the system that made their bad behavior possible loses its urgency. So, again, actually naming names and lopping heads can be counterproductive, however satisfying it may be.

Consider one domino in the financial mess: the ratings agencies. They were, in my opinion, the guys whose part of the dam cracked. Goldman Sachs is accused of selling short against securities that they created, after “persuading” the ratings agencies to issue those securities high ratings. What if the agencies had said “no.”? What if no subprime-backed paper got AAA ratings? What if the ratings agencies announced that paper backed only by alleged property values (and by none of the usual mortgage underwriting tests) would only be rated AAA if it could withstand a 50% decline in the value of the underlying real estate? What would have been issued, what would have been sold short, what defaults could have been swapped, etc.?

I don’t know the actual numbers associated with the various things that went wrong. I’m quite certain that credit default swaps should have been illegal from Day 1, and that CDS contracts unrelated to mortgage-backed securities could have done enormous harm even without the sub-prime mess. But again, if I were at a ratings agency, I would never issue an AAA-rating to any security that could be backed by a CDS: the moral hazard imposed on the securities by the very existence of CDS contracts would be enough to make the security risky. Indeed, the mere legality or, at least the apparent, and so-far untested, legality of CDS contracts should have been enough to make ratings agencies unwilling to rate any paper as virtually risk-free.

But what are we to do about the ratings agency problem? To the extent that ratings agencies were corrupted or insufficiently vigilant by reason of their business model – issuers paying for ratings – we need a new ratings mechanism, something like the Underwriters Lab, where the people with skin in the game pay for the rating and demand toughness rather than accommodation from the agency. But that may not be enough, because I’m not sure anyone at the ratings agencies should have been able to dope out the moral hazard created by naked CDS contracts, and, especially those situations where naked short selling was used as an accelerant for torching the underlying paper.

To prevent the systemic risks, we need bans on CDS contracts and naked short selling. Those bans, I submit, would be more important than a change in the agencies’ business model. Not because changing the business model wouldn’t be a good idea, but because the business model has been in place for many years, and absent systemic threats like sub-prime lending and naked CDS contracts and naked short-selling, the occasional ratings error wouldn’t bring down the whole house of cards. Because there wouldn’t be a house of cards.

So even blaming the people that I blame the most for the mess – in terms of being the weakest link in the chain – would be a distraction from the systemic changes necessary to keep the dam from breaking. And even those systemic changes would be a distraction from figuring out what caused the flood, and whether shoring up the dam would have prevented the mess, or merely changed its shape.

My earliest posts to this blog were about the water – petro- and sino-dollars, but I have not tried to figure out where those dollars would have gone if we had not created phony AAA-rated paper to receive them. The answer, I think, is to financing the Federal debt, and the consequences of that deserve their own post or two. For now, though, I only want to say about that inquiry is that nothing in the blame game leads us to it – that Mr. Angelides’s lynch mob, charged with “inquiring” into the causes of the financial crisis, doesn’t seem at all interested, and that all this talk about taxing banks and bankers is a further distraction. When the scapegoat has been slaughtered, will we still care - have we ever cared - what really happened?

One Cheer for the Bank Tax Proposal

Politics is a messy thing. In this country, it’s the art of getting stupid people to support good ideas, and that almost always involves lying to them in some sense. I oppose the bank tax because I believe it is an ex post facto bill of attainder – an unconstitutional twofer. Here are two responses to that argument:

1. Robert Gibbs, White House Press Secretary:

If you want to be on the side of big banks, then you're certainly — this is a great country — you're free to do so.

2. Lawrence Summers, White House economic advisor:

It's surprising to me to see institutions who have benefited so substantially at a time when there is so much economic distress among others in the country to be complaining about the justice of what has happened to them from their executive suites.

Neither response is a rebuttal. Neither says “No, it is constitutional.” Both say “Any stick is good enough to beat a dog.” This is how things are done in our democracy. Politicians defend their bad actions by attacking someone, by implying that anger is argument, which, since they know better, is lying.

But, as I said, given the limited intellectual resources of the electorate, one must lie to get them lined up on the right side, so it is hardly surprising or necessarily wrong for our politicians lie to us. How else could they govern?

I believe the bank tax proposal is a lie, too, like the unconstitutional proposal to tax the AIG retention payments retroactively. No one believed that that tax would pass, but everyone wanted to be seen as “for” it. In other words, the only way our politicians can “prove” that they hate bankers as much as we all should is to appear to throw a tantrum and propose that they be fed to the lions. Eventually, other politicians, who can then be painted as bank-loving jerks, will stop them, or an “out-of-touch” Supreme Court will throw the law out. There is thus very little down side to proposing a bad law that violates our principles to attack bad people.

The bank tax strikes me as special because it stokes anti-Semitism. So I do not approve even of the proposal. But for the sake of philosophizing, let’s take the parallel to Nuremburg off the table. Let’s suppose no one identified Wall Street with any particular demographic other than greedy bastards. The tax would still be unconstitutional, and I would still oppose it, but I’m not sure that I would think any less of the politicians who proposed it. That’s because there will be an anti-banker residue from the process that I believe is salutary, or would be if so many bankers weren’t Jewish.

Warren Buffett said this in an interview with the BBC:

If 50 of us were on a ship and there was a shipwreck, we all swam to an island, we knew we'd never be rescued - and fortunately it was a fertile island so we could all plant rice and grow enough to take care of ourselves. We would not take the five smartest people out of the 50 and tell them "why don't you start trading rice futures and speculate among yourselves", and by the way we think that's so valuable we're going to give you the most money and probably a favorable tax rate on top of it. Hell no, we'd get everybody producing rice.

We have too many of our best minds trading rice futures, and we are diverting too much of our GNP to compensating them for doing it. In a free society, we cannot and should not single out an occupation for a legal restriction on income. The power to impose such a limit is corrupting, and the temptation to engineer society by doing so would be overwhelming. It would be a bad idea.

But there is no reason that the people cannot hold their vultures in low esteem. We can certainly feel free to shame the rice traders when there is no rice being produced, in part because the human capital essential to its production – those best brains working on financial engineering – are misallocated. It’s no accident that Buffett, who describes himself as “allocating capital” for a living, would have strong views on the allocation of human capital as well as money capital.

Nor is it wrong for the President to use the bully pulpit to foment some of that low opinion. But it’s a tricky business. It will be messy, there will be excesses. There are always excesses. Still, as I wrote earlier, there is too much money to be made on Wall Street doing too little to enable the growing of rice. And the bankers have behaved badly, as might be expected when there is so much money to be made.

On the other hand, we do need bankers. And then there’s that Jewish thing. Ain’t nothin’ easy.

The Road to Nuremburg II

Today, President Obama, upset about the "obscene profits" being made by big banks, proposed that they be charged a “Financial Crisis Responsibility Fee” so that the American people can recover the money they lost bailing out AIG and GM. (The President is taxing banks for the same reason Willy Sutton robbed them: that's where the money is.)

The fee is, of course, a bill of attainder aimed at Wall Street bankers, and like it or not, "Wall Street" means "Jewish" to a lot of bad people. Folks blame the mess on people and firms with names like Goldman, Sachs, Blankfein, Greenberg, Lehman, and even Dimon (who who isn’t Jewish but sounds like he might be, which is close enough for the torch and pitchfork crowd). The President’s plan, and the speech announcing it, validate resentment, and in so doing, give a green light to the mob to do its worst.

I know BHO was a Constitutional Law professor. But what country’s constitution did he teach? Implicit in his proposal is the principle that it is ok to tax those people that our politicians blame for our ills. That seems to me bad medicine, but if we are to adopt that principle, we ought to do it right. Why limit the evildoer's punishment to mere confiscation of assets? Certainly, some degree of opprobrium should attach and a way be found for the rest of us to spot and shun those responsible for our problems. I suggest that anyone associated with a taxed bank be required to wear some emblem - I'm thinking a green arm-band with a dollar sign on it - to indicate that he is responsible for the financial crisis and ought not to be treated by ordinary citizens any better than he is treated by their government. That is the point, is it not?

Just a thought.