Markets, World Affairs

The Never-Ending Greek Debt Slavery Saga Revisited

o-YANIS-facebook.jpg

Obedience is not enough. Unless he is suffering, how can you be sure that he is obeying your will and not his own?

George Orwell, 1984

‘To say [Varoufakis’ Adults in a Room] is the best memoir of the Eurozone crisis,’ writes Adam Tooze, ‘is an understatement.’ I would second that had I read others. Memoirs are simply not my genre. But the former Greek finance minister’s testament is a different matter altogether.

Although far from disinterested, Varoufakis is a reliable reporter from the trenches. His critique of the Troika is truly devastating. Simply put: They knew. They knew that their plan was guaranteed to fail. They knew that Greece was bankrupt and would never be able to pay back all the money that it owed. They knew that without debt relief in one form or another, there was simply no path back to sustainability. They knew that austerity was devastating the Greek economy and worsening its debt burden. They knew that pouring good money after bad was a non-solution. They, Varoufakis insists, did not even want their money back.

Yet, utilizing an impressive arsenal of Kafkaesque red tape they obstructed all potential solutions, and using all available means of diplomatic and financial coercion, arm-twisted successive Greek governments to submit to never-ending debt slavery. Why? Adam Tooze explains it best:

The main function of disciplining Greece, Varoufakis tells us, was to serve as a warning to the French of the price of fiscal indiscipline. In other words its purpose was to perpetuate and widen discipline. But that in turn was not so much an economic as a political problem. Berlin wanted to avoid the terrifyingly difficult distributional politics of even larger scale exercises in cross border bail outs and “transfers”. Holding the line in Greece was a way of containing what could have become a spiraling political disaster for the CDU and their coalition partners.

We will return to the strategic rationale for putting Greece in debtors’ prison. But first, How did we get here?

Greece was a victim of global macro forces well beyond its control. In 2001, Greece gave up monetary independence and adopted the euro. This meant that regaining lost competitiveness and correcting macro imbalances would require a real devaluation (ie, wages would have to fall in nominal terms); thus requiring an extraordinarily painful ‘structural adjustment’ programme in IMF-speak.

Bond markets responded to the advent of the euro by compressing sovereigns spreads; meaning that Greece could borrow at virtually the same interest rate as Germany. (See Figure 1.) Greece was thus able to borrow large sums from bondholders—debt that was only revealed to be unsustainable when sovereign spreads widened with the onset of the eurozone crisis.

GreekSpread.png

Figure 1. The spread between Greek and German sovereign bond yields.

At the same time, northern banks dramatically expanded their lending to Greece. Greek debt to foreign banks grew from €135 billion as of 2004Q1—surely up from a much lower level since 2001—to €217 billion in 2008Q1. (See Figure 2.)

Banks2Greece.png

Figure 2. Foreign banks’ credit to Greece.

More generally, Shin (2012) has shown that a banking glut in Europe was the principal driver of the financial boom in the European periphery as well as the United States. The idea here is straightforward: Fluctuations in the risk-bearing capacity of global banks drive fluctuations in the supply of credit. But let me offer a more precise thesis.

The credit boom preceding the financial crisis in the US and peripheral Europe was the great sucking sound of the wholesale market for collateralized funding. The extraordinary expansion of mortgage credit to, say, US households was due to demand for raw material (ie, mortgages) required for the manufacture of private-label mortgage-backed securities. (There was a persistent ‘shortage of safe assets’ in the global financial system.) In 2003-07, Pozsar (2015) shows, Wall Street was hard at work feeding the machine it had constructed to intermediate between cash pools (central banks, corporate and state treasuries, money-market mutual funds, et cetera) demanding ultra-safe assets in the money markets and portfolio managers demanding risk assets for their relatively high yields in capital markets. No wonder that Mehrling et al. (2013) describe shadow banking as ‘money market funding of capital market lending’.

Note that the centrality of the wholesale funding market does not undermine the role of the dealers’ risk-bearing capacity as the main state variable (or explanatory variable). To the contrary, funding markets exist in only as much as dealers make them. Physically, the interdealer funding market—the supercore of the dealer ecosystem and hence the global financial system—is a network of phone and Internet connections between traders at global banks. The point is that Shin (2012)’s finding—that fluctuations in balance sheet capacity drive fluctuations in credit supply—is only being fleshed out here; not superseded. [Of course, the risk-bearing capacity of the sell side ought to be measured relative to the financial size of the buy side. See Farooqui (2017) for the primacy of the relative scale of balance sheet capacity in pricing the cross-section of stock returns.]

The preceding paragraphs may seem like a digression. They are anything but. For the ‘excess elasticity’ of global finance was the fundamental reason why Hollande and Merkel had to impose debt slavery on Greece. The denouement of the financial boom unleashed by the unprecedented expansion of European balance sheet capacity came when excessive bank leverage met mounting losses on subprime loans. Germany and France could not acknowledge the scale of the bailout required by the banks to their audiences at home. They had to be bailed out without recourse to more public funds. While American policymakers used the AIG bailout to secretly bail out Goldman Sachs and JP Morgan, the Europeans used the Greek bailout to secretly bail out French, German and Dutch banks.

The [big] three French banks’ loans to the Italian, Spanish and Portuguese governments alone came to 34 per cent of France’s total economy – €627 billion to be exact. For good measure, these banks had in previous years also lent up to €102 billion to the Greek state.…

Why did Deutsche Bank, Finanzbank and the other Frankfurt-based towers of financial incompetence need more? Because the €406 billion cheque they had received from Mrs Merkel in 2009 was barely enough to cover their trades in US-based toxic derivatives. It was certainly not enough to cover what they had lent to the governments of Italy, Ireland, Portugal, Spain and Greece – a total of €477 billion, of which a hefty €102 billion had been lent to Athens. [The €102 billion in this quote is quite likely a typo—that’s the French banks’ exposure to Greece. As Varoufakis tells us later, the German banks’ exposure was €119 billion.] 

So, of every €1000 handed over to Athens to be passed on to the French and German banks, Germany would guarantee €270, France €200, with the remaining €530 guaranteed by the smaller and poorer countries. This was the beauty of the Greek bailout, at least for France and Germany: it dumped most of the burden of bailing out the French and German banks onto taxpayers from nations even poorer than Greece, such as Portugal and Slovakia. 

This disturbing transformation of the banking crisis in the northern core into a sovereign debt crisis on the periphery was accomplished in the very first phase of the eurozone crisis; well before Varoufakis arrived on the scene.

As soon as the bailout loans gushed into the Greek finance ministry, ‘Operation Offload’ began: the process of immediately siphoning the money off back to the French and German banks. By October 2011, the German banks’ exposure to Greek public debt had been reduced by a whopping €27.8 billion to €91.4 billion. Five months later, by March 2012, it was down to less than €795 million. Meanwhile the French banks were offloading even faster: by September 2011 they had unburdened themselves of €63.6 billion of Greek government bonds, before totally eliminating them from their books in December 2012. The operation was thus completed within less than two years. This was what the Greek bailout had been all about.

Thereafter, the European strategy was to enact a morality play to cover up the crime; complete with bloodletting—aka austerity—and moral sermons blaming the victim. The Troika’s treatment of Greece was tantamount to economic warfare. By the time Varoufakis got in the cockpit, the Europeans had developed the full apparatus of control. The reason he found the Troika to be Kafkaesque, is that the insiders were committed to controlling the narrative. They could not negotiate honestly with Varoufakis both because they feared the markets and because they would then be admitting guilt. While some individuals involved in the ‘institutions’ even admitted the crime to Varoufakis, institutionally the Troika was designed to bury the dirty little secret.

This is, of course, not to disagree with Adam Tooze about the role played by political constraints in Berlin, Paris, and indeed, Washington. Indeed, political constraints are precisely what drove the bank bailouts underground and started the Greek Debt-Slavery Saga.

VAROUFAKIS SAYS he had a financial deterrent to get Draghi to back off from financial strangulation and give him breathing room.

[The €33 billion] Greek debt to the ECB were legally momentous: any haircut of that sum or delay in its repayment would open Draghi and the ECB up to legal challenges from the Bundesbank and the German Constitutional Court, undermining the credibility of its overall debt-purchasing programme and causing a rift with Chancellor Merkel, who would never take on both the Bundesbank and the German Constitutional Court at the same time. Facing their combined might, Draghi was sure to find his freedom drastically curtailed, thus undermining the markets’ faith in his hitherto magical promise to do ‘whatever it takes’ to save the euro – the only thing preventing the currency’s collapse. 

‘Mario Draghi is about to unleash a major debt purchasing programme in March 2015, without which the euro is toast,’ I said. ‘The last thing he needs is anything that will impede this.’…I had no doubt that if a Syriza government signalled early on its intention to retaliate by haircutting the Greek SMP bonds held by the ECB in this way, it would deter the ECB from closing down the banks.

Calling the deterrent “potentially very powerful,” Tooze reports that

…the faction within the Tsipras cabinet that wanted to avoid a break was too strong. Varoufakis was never allowed to make the critical threat at the right moment. Greece was driven to a humiliating compromise without ever having deployed its deterrent.

Game-theoretically speaking, whether Varoufakis’ deterrent was effective cannot be answered without knowledge of the preferences of other players. Even if Draghi himself could be deterred, as indeed seems likely, that was only going to grant Greece a short term lease on life. There is no reason to believe that it would’ve forced the Troika to negotiate in earnest. A Greek threat to activate the deterrent could just as easily have yielded a Schäuble solution with the Troika turning the screws to push Greece out of the eurozone in the service of discipline. We cannot answer that without knowing just how much Merkel feared Grexit.

A distinct possibility is that the deterrence strategy was leaked to the Germans by someone in the Greek war cabinet—infiltrated as it was by the Troika—and that Merkel let it be known to Tsipras that the activation of the threat, or perhaps even its deployment against Draghi, would harden the Troika’s stance. What I mean to suggest is this: Tsipras is not a scoundrel. Why did he capitulate if the deterrent was in fact effective? Did he know something about the preferences of Greece’s jailers that Varoufakis did not? Could it be that Varoufakis’ dirty bomb was a recipe for tactical victory but strategic defeat? Is that why Tsipras capitulated instead of deploying the deterrent?

Advertisements
Standard
Geopolitics

Maritime Primacy, Network Externalities and Asymmetric Blocpolitik

ff4828a1-e8f0-4145-993e-0d18414dbaf4

Map 1. Great power blocs, independent powers, contested zones.

In an interesting and contemplative article in the current issue of the National Interest, Michael Lind casts a fresh look at world politics. His approach is to reformulate economic and security alliances as carriers of joint information about the world economy and the global balance of power. This frame of reference allows Lind to go beyond both realism and international economics. The former sees military alliances as temporary and flexible outcomes of great power balancing. In the latter, trade agreements and economic partnerships are divorced from great power politics and geared towards purely economic ends. Neither approach captures the real geoeconomics of blocpolitik.

[In theory, a state] can join one set of security alliances for purposes of military protection, a different trade bloc for commercial purposes and a third set of international alliances, perhaps drawn together by political creed and social values. In the real world, this kaleidoscopic complexity does not exist.

By construction, the overwhelming overlap of international security and economic alliances cannot be explained by purely economic logics. Likewise, the survival of the US-led Atlantic and Pacific security alliances 25 years after the capitulation of the Soviet Union is a glaring anomaly of realism. These anomalies stem from mistakenly treating ‘security and trade policy as distinct realms, each with its own internal logic and unconnected to the other.’ Lind’s novel approach allows him to put both economics and international power politics at the center of the frame of reference. He also pays attention to the neocolonial aspects of blocpolitik.

For the hegemonic power that orchestrates a bloc, the bloc multiplies national military power and wealth by adding foreign populations and foreign resources to its own. Given low fertility rates and the difficulty of raising productivity levels by innovation, the quickest and most effective way to boost the overall GDP of a bloc is to add more countries to it. Needless to say, strength based on territorial expansion as well as internal growth was the strategy of past empires. In the modern era, based on the rules of national self-determination and popular sovereignty, incorporation of additional territories by conquest would be resisted as illegitimate. But blocs that are similar to informal empires can be built up by means of security alliances and trade deals, which may be hard to distinguish from de facto colonialism where one partner is a weak protectorate and the other a great or superpower.… [Emphasis mine.]

In a world economy divided among great-power blocs, industries with increasing returns to scale, like manufacturing, are likely to be most productive and dynamic in the blocs with the largest integrated markets—that is to say, the internal markets of populous nation-states and even more populous blocs. Technological and commercial efficiencies enabled by scale can, in turn, permit higher growth, higher per-capita income and the possibility of raising more taxes in absolute terms, even with lower rates of taxation—taxes to be spent on, among other things, the military. This is the successful strategy the larger and richer American bloc used to drive the smaller and poorer Soviet bloc into bankruptcy.

So it makes economic and strategic sense for great powers to expand their blocs and grow their retinue of protectorates. Small and weak nations too gain from admission into great-power blocs.

The exporters and importers of small nations can be guaranteed access to bloc-wide markets and suppliers, and incorporated into bloc-wide supply chains. As de facto protectorates of the bloc’s dominant nations, weak countries can engage in “free riding” when it comes to defense, spending relatively little on the military.

The reference frame immediately solves the mystery of the endurance of the Western alliance. Indeed, the end of the Cold War led not to a dismantling of Nato but rather an American bid to convert ‘hegemony within its Cold War bloc into universal hegemony—turning the entire planet into a single sphere of influence.’ This bid failed ‘thanks to Chinese and Russian resistance and the war-weariness of the American public.’

‘There is not the slightest chance,’ Lind insists correctly, ‘that Chinese and Russian regimes, of any character, no matter how liberal or democratic, will ever accept as legitimate a permanent U.S. military presence along their borders.’ Whether or not Russia’s near-abroad and the South China Sea are turned into contested zones of Cold War-style military standoffs, ‘the division of the world among regional blocs and spheres of influence—will have come to pass.’

There would be neither enduring, widely accepted U.S. global military hegemony nor a rule-governed global free market. Instead, there would be, at least in the short run, a version of the world envisioned by Burnham and Orwell: an American-led “Oceania,” a Chinese “Eastasia” bloc of some kind, and a Russia-centered “Eurasia” much smaller and weaker than the former USSR. Over time, India might join the United States and China as a leading military and economic power, perhaps as the center of its own bloc—let us call it “Southasia.” Populist nationalism within Europe will doom any attempt to turn the continent into a centralized, independent bloc capable of acting as a unit in world affairs. Instead, Europe may remain a U.S. protectorate, drift into neutrality or, in the worst-case scenario, become a “shatterbelt” for which external powers once again compete.

One can quibble with Lind’s position on the European Union. The possibility of a great power based on the continent ought not to be so easily dismissed. But there are bigger issues with Lind’s prognosis.

My main beef is with Lind’s underemphasis on the extreme asymmetry of great power blocs. Russia’s sphere of influence in its near-abroad is a faint echo of the Warsaw alliance. China’s sphere is nearly non-existent. The only country firmly within the Chinese sphere is North Korea. Even Mongolia and the nations of the central Asian steppe are not yet in the Chinese sphere of influence. Meanwhile, the United States has a retinue of some sixty protectorates; including almost all the great industrial nations of the world—Japan, South Korea, Taiwan, Australia, Germany, France, Italy, Britain, and Canada. Moreover, the United States remains the preeminent foreign power in Central America, South America, Africa, Southwest Asia, and Southeast Asia. Even lesser powers that pursue stridently independent foreign policies from Washington—Vietnam, India, Iran, Cuba, Brazil and Venezuela—are likely to seek admission into the US bloc.

Instead of a world ‘divided among great-power blocs’ what we have is a near-unipolar configuration of global alignments. The US bloc militarily, economically, and technologically dwarfs the rest of the world combined. Due to the diffusion of reconnaissance-strike capabilities, the US can no longer impose primacy on China or Russia in their immediate neighborhoods. In particular, China is now in a position to hold all US surface assets in the Western Pacific at risk. In the event of a major confrontation, the US will no longer be able to send aircraft carrier groups to the Taiwan Straits to intimidate China. It will instead have to rely on less effective long-range and undersea platforms to project power.

As China closes the power gap, the exit from the unipolar world approaches. Even in a multipolar world, however, the US bloc would continue to enjoy decisive advantages. Above all, the United States would continue to enjoy maritime primacy until another great power becomes at least somewhat competitive in open ocean warfare. We are so far from that scenario that no other power has even contemplated mounting such a challenge. Because the plumbing of the world economy is sea-based, maritime preponderance gives the US bloc a decisive advantage against other blocs.

A second advantage that is no less decisive is that blocs enjoy network externalities. Beyond the economies of scale, blocs are also containers of technology and situated knowhow. To put it bluntly, the US bloc contains the entire tripolar core of the world economy. From an international politics perspective, these externalities generate a bandwagon effect whereby states outside face tremendous incentives to seek admission into the US bloc. This is why, for instance, Kerry got his opening in Myanmar.

So while I agree with Lind that international politics will become more contested as this century progresses, I seriously doubt that Russia or China will be able to forge a bloc even vaguely comparable to the US bloc. They will definitely try—China’s development bank and the New Silk Route are efforts in precisely this direction—but it will be uphill all the way. Blocpolitik is a useful frame of reference but we should not implicitly endow it with false symmetries.

 

Standard
Markets

The Tendency of Commodity Prices to Fall Over the Long Run

The Prebisch-Singer hypothesis states that real commodity prices have a tendency to fall over the long run. Harvey et al. have shown that the historical evidence from four centuries of commodity price data is consistent with the hypothesis. The most convincing explanation of the phenomena is that, with important exceptions, the income elasticity of primary commodities is less than 1. This means that incomes grow faster than demand for primary commodities, so that prices must fall to clear markets. This mechanism is subject to ecological constraints since if the ecological constraint bites, prices must rise to clear markets. So far, fundamental ecological limits have not trumped the tendency of commodity prices to fall over the long run. The tendency introduces a dynamic, systematic bias in favor of the core and against the periphery of the world economy since, by construction, nations or regions specializing in primary goods belong to the latter. In what follows, I’ll illustrate the tendency for a large number of commodity classes since 1850. All data is from David S. Jacks’s website.

Overall, the picture is that non-fuel commodity prices have fallen. Figure 1 shows the unweighted average of 37 non-fuel commodities. While there is a medium term cycle, the trend is clearly negative.

PSH1

Figure 1. Non-fuel real commodity prices (1850-2010).

The main exception is energy prices, which have shown a tendency to rise over the long run. See Figure 2.

PSH4

Figure 2. Real energy prices (1850-2010).

We should not expect the real price of gold (or other precious metals) to fall over the long run because it was, and still approximately is, the numeraire. Indeed, there is no long term trend in precious metal prices. See Figure 3.

 

PSH3

Figure 3. Precious metal prices (1850-2010).

Figure 4 shows the price of beef and other animal products. We see that even though pork and hide prices have fallen over the long run, the price of beef (and lamb) have increased significantly. This is because the income elasticity of beef is greater than 1 since it is not yet a necessity for the bulk of global households. Indeed, as mass affluence spreads around the world, we should expect the demand for beef to grow faster than global income.

PSH3

Figure 4. Animal product prices (1850-2010).

Let’s move to proper commodities starting with grains. Growing wheat, rice and corn is the mainstay of the world’s farmers. The real price of their product has been falling systematically over the past 150 years. See Figure 5.

PSH9

Figure 5. Grain prices (1850-2010).

I know what you are thinking: These farmers ought to plant cash crops such as cotton. Not so fast. The prices of cash crops have also fallen just as much if not more than grains. Figure 6 shows non-food soft commodities.

PSH8

Figure 6. Non-food soft commodity prices (1850-2010).

Figure 7 shows the systematic decline in the price of “drug foods” that played such an important role in the early modern world economy.

 

PSH10

Figure 7. Drug food prices (1850-2010).

What about metals and minerals? Are commodities that are dug out lucky as a class? The evidence does not support that conclusion. Figure 8 shows metal prices. The data is noisier but the common trend component is clear.

PSH5

Figure 8. Metal prices (1850-2010).

Figure 9 shows the prices of minerals such as iron ore and sulphur. Here the trend is even more manifest.

PSH7

Figure 9. Mineral prices (1850-2010).

I hope to have convinced you of the tendency of commodity prices to fall over the long run. The finding raises the stakes for the politics of global inequality and the international division of labor. But trend analysis is merely the first step. For a full analysis of the role of commodities in the global condition, we have to look at how both the terms of trade between the town and the countryside (defined in terms of price levels) and the volatility of commodity prices affects commodity producers and informs their politics.

Standard
Thinking

Yellen Let the Cat Out of the Bag

Lowflation

The Fed has failed to deliver on its inflation target consistently.

So in the Q & A after her speech, Yellen spelled out why the FOMC expects inflation to “return” to target. It was a remarkably honest admission. This is from the FOMC Press Conference on June 14, 2017.

Yellen: [The neutral rate] is hard to pin down; especially given the fact that the so-called Phillips curve appears to be quite flat—that means that inflation doesn’t respond very much or very quickly to movements in unemployment. Nevertheless, that relationship, I believe, remains at work.

Yellen is wrong. As I have argued previously, the ‘second unbundling’ has transformed the inflation process in the core of the world economy such that global slack drives inflation; not domestic slack. More recently, Auer, Borio and Filardo (2017) have shown that the intensity of participation in global value chains explains the time-variation and the international cross-sectional variation in the strength of that relationship. They have thus tied the mutation of the inflation process directly to Baldwin’s ‘second unbundling’. How long do we have to wait before the FOMC catches up with the BIS?

Standard
Thinking

How the affluent get $500 billion in tax giveaways each year

After I finished writing this post, I found these very useful tables here. They help triangulate the class structure and are more helpful at the beginning of my piece than at the end. 

Screen Shot 2017-06-12 at 3.34.01 AM

Screen Shot 2017-06-12 at 3.36.31 AM

BIG GAINS IN THE NEOLIBERAL ERA have largely been cornered by the wealthy. We may even have been underestimating the true wealth of the ultrarich by a factor of 2 because the truly wealthy hide nearly half their wealth in offshore secrecy jurisdictions. I have hitherto emphasized paying attention to the very top of the distribution—the 0.1 percent—because the concentration of material resources in the hands of oligarchs is a significant threat to democracy. Indeed, ultraconservative billionaires are behind the insurgency that used to be called the GOP.

But that is not the end of the story. The main driver of regional polarization is the two-tier polarization of the US economy into a high-productivity tradable sector that accounts for just 2 percent of new jobs but a third of new value added and a low-productivity non-tradable sector. Affluent, college-educated workers have managed to corner all the wage gains over the past generation due to their near-monopoly on jobs in the former. The rest have seen their incomes stagnate and their share of the national pie shrink.

Figure 1 displays the share of pretax income of the top 1 percent of income earners. We see that vertical income polarization has returned to levels last achieved in the roaring twenties. But affluence in America goes deeper. Not everyone in the 99 percent has lost ground in the neoliberal era. Those in the top 20 percent—roughly speaking, families earning six-figure incomes—have done relatively well. Figure 2 shows the share of the next 19 percent of income earners. We see that their share of the national pie has increased slowly but steadily over the past two generations.

 

Rational public finance would see the government lean against the inequity of the market. Through progressive taxation, tax credits, subsidies, and spending targeted at less fortunate families and regions, fiscal policy ought to be used to ensure a more equitable distribution of the national economic pie. Congress can’t stop talking about making life easier for hard-working Americans. In reality, as we shall see, tax giveaways largely benefit the affluent.

Budget1

Figure 3. US non-discretionary federal budget breakdown.

Figure 3 presents a top-level breakdown of the non-discretionary federal budget. Medicare, social security, and the military consume two-thirds of the US budget. But the largest component by far, accounting for a third of the budget, is “tax expenditures”—technical jargon for tax credits, subsidies, and other giveaways that is fiscal spending in all but name.

In the current fiscal year, tax expenditures account for nearly $1.5 trillion. The biggest of these giveaways is exclusion of employer contributions for medical insurance premiums and medical care, which will cost the public purse $2.7 trillion over 2016-25, according to the US Treasury. Preferential treatment of unearned capital gains (which are taxed at 15 percent instead of the 35 percent charged on earned income) will cost a cool $1 trillion over the same period. Exclusion of imputed rental income will cost $1.2 trillion, and the mortgage interest deduction will cost $950 billion. (All these numbers are from here.)

Who benefits from these giveaways? Figure 4 shows the distribution of the beneficiaries. The affluent, the top 20 percent of income earners, get 51 percent of all tax expenditures. The rest is split regressively among the lower classes.

budget2

Figure 4. Shares of tax expenditures by income quintile.

If we drill down further, we find that some of these giveaways are much less regressive than others. For instance, one-half of the $66 billion earned income tax credit goes to the lowest quintile and 95 percent of the $59 billion child tax credit goes to the bottom 80 percent. The employer-sponsored health insurance exclusion is somewhere in the middle. Two-thirds of this supermassive $258 billion giveaway goes to the bottom 80 percent. Pension contribution, capital gains, local taxes and the mortgage interest deduction are much more regressive. Some 94 percent of the $83 billion capital gains giveaway ends up in the top quintile, as does two-thirds of the $140 billion pension contribution exclusion.

Budget3

Figure 5. Distribution of selected tax breaks.

Figures 5 and 6 drills down into the most regressive giveaways. We have not included the $17 billion carried interest giveaway to ultrarich hedge fund managers and other such long-running scandals. But the picture that emerges is not pretty. The top quintile gets the vast bulk of the giveaways for capital gains, state and local taxes, mortgage interest, charitable contributions and capital gains exemption at death. All in all, the top quintile cornered $446 billion of the $873 billion given away in 2013, according to the Congressional Budget Office.

budget6

Figure 6. Percentage shares of quintiles for selected tax giveaways.

Beyond the regressive distributional impact, these giveaways distort incentives and harm the economy in various ways. For instance, Weicher notes that the mortgage interest deduction (MID),

…encourages taxpayers to pay for homes with debt rather than with cash or financial assets, causes wasteful and unproductive misallocation of physical and financial capital, and distributes benefits disproportionately to upper income households. Furthermore, the MID results in less economic productivity, reduced labor mobility and greater unemployment, depressed real wages, and a lower standard of living. The MID is so damaging to the economy that nearly every economist believes that “the most sure-fire way to improve the competitiveness of the American economy is to repeal the mortgage interest deduction.”

A truly progressive politics will have to take on not just the rich but the affluent as well.

Standard
World Affairs

Trump is Pushing Iran into Russian Arms

The most important consequence of the Bush demolition of the Iraqi state has been the reemergence of Iran as the most influential power in southwest Asia. The core of southwest Asia is now a vast zone of Iranian influence that General Suleimani ominously calls the “Greater Persian Gulf region.” Iran is now the dominant foreign power in Lebanon, Syria and Iraq, and has significant influence in Yemen and Afghanistan as well. With thousands of Iranian troops fighting in the Levant, Iran is projecting its power further west and more deeply than at any time since the peak of Safavid power in the seventeenth century.

Part of the reason is simply that Iran is arguably the most powerful state in the region. Figure 1 shows the distribution of war potential in the Middle East. All data is represented as national shares of selected power resources of the regional powers. Iran has a population of 80 million, a close second to Egypt’s 85 million. Its economy is comparable in size to Turkey’s and Saudi Arabia’s (although the latter is mostly income from oil sales on the global market and is not reflective of national capabilities). Iran has proven oil reserves of 160 billion barrels, second only to Saudi Arabia’s 269 billion. Its endowment of arable land is second only to Turkey’s. Most astonishingly, some 269,000 Iranians graduate with degrees in engineering or the sciences every year compared to just 212,000 in the rest of the regional powers combined.

WarPotentialMidEast

Figure 1. Distribution of war potential in southwest Asia. Source: CIA, World Economic Forum. 

Israel is barely visible in the spider chart of war potential—a major flaw of these metrics. Israel punches dramatically above its weight for a number of reasons. First, Israel is a settler colony of the crème de la crème of Europe. Perhaps as a result of sustained selection on cognitive ability in medieval Europe or the survival effect of the liquidation of the bulk of European Jewry (smarter Jews presumably escaped at higher rates than dumber Jews from the Nazis), Ashkenazi Jews have the highest IQs of any ethnic group ever recorded. Not coincidently, Jewish people are massively overrepresented among Nobel Laureates. Combined with the traditional Jewish emphasis on education (with universal literacy probably as early as the second century CE), the per capita skill-set and knowhow of the Jewish state has no counterpart anywhere else in the world. Second, Israelis are far more willing to fight for the flag—a very important factor in warfighting capabilities since the rise of nationalism at the end of the eighteenth century—than any other nation for obvious historical reasons. Third, like Prussia in the classical European balance of power, Israel’s geostrategic position has led to the development of a highly effective operational art of war that has made it into a modern day Sparta. Surrounded by hostile states and with neither the resources nor the manpower to win long, drawn-out wars of attrition, the militaries of both states cultivated an art of war that sought to front-load conflicts and seek the decisive victory. Fourth, Israel has successfully cultivated a close security relationship with the unipole—in no small part due to the influence of American Jewry. This has given Israel greater access to advanced weapons and military knowhow than any other regional power including Turkey (even though Turkey, unlike Israel, is a member of Nato).

Still, modulo the special case of Israel, Figure 1 provides a good approximation of the war potential of regional powers in southwest Asia. It shows that Iran has the most balanced portfolio of intrinsic power resources in the region. Saudi Arabia, by contrast, is a pure petrostate. Iran’s population is 2.7 times as large as Saudi Arabia’s. It has 5 times as much arable land, 4 times as many graduates, and produces 6.7 times as many engineers and scientists every year as Saudi Arabia. The Kingdom has been able to access and sell—with foreign expertise and knowhow—a much greater portion of its oil deposits and has, as a result, accumulated considerably greater financial resources than Iran.

Saudi Arabia has tried to convert its financial firepower into military might by spending gargantuan sums of money on weaponry. Figure 2 displays the real military spending of the regional powers as well as the real price of crude. (We start the clock in 1971 when the British left and the gulf RSC emerged.) The salafi oil monarchy is by far the biggest military spender in the region. Since 2003, Saudi military spending has grown rapidly along with the price of crude to reach levels dramatically higher than other regional powers.

MidEastMilSpend

Figure 2. Military spending by regional powers in southwest Asia. Source: SIPRI.

But it is extremely difficult, if not outright impossible if other ingredients of national power are lacking, to convert financial resources into warfighting capabilities simply by spending giant sums of money. The most important determinants of national warfighting capability are after all the size and skill-set of the populace and its willingness to fight for the flag of the nation-state. The Saudi populace is much smaller, much less skilled, and not nearly as motivated to fight for the flag as that of Iran. This is why a war between Iran and Saudi Arabia will be pretty much a one-sided affair. However, since Saudi Arabia is a US protectorate it is not at risk of being conquered by its stronger neighbor. Due to the presence of the US pacifier, security competition in the bipolar gulf region has instead been projected onto regional playing fields.

The dominant story of the region since 2003 has been the expansion of the zone of weakness. Three hitherto strong states of the region, Iraq, Syria, and Libya, have joined Lebanon, Palestine, Yemen and Afghanistan (the last is on the border of southwest and south Asia) as the playing fields of the regional powers. The regional players are Iran, Saudi Arabia, Egypt, Turkey, and to a lesser extent Israel. Although each regional power has their own particular security interests, the object of the regional game is to secure the orientation of weak states, or if there is no central authority, to secure influence in the polity or security zone by bankrolling and arming local security actors. Even more important than the push factors of regional security competition are the pull factors of sub-state actors seeking patrons. These features are manifest in the Syrian war but are no less true of other parts of the zone of weakness.

Some players are more in demand than others. No one except the Phalangists wants to be caught hobnobbing with the Israelis. Even the Kurds are tight lipped about their security cooperation with the Jewish state. More generally, transnational identities allow states in the region to mobilize opinion across borders. Sunni Arab groups, including many salafi jihadists, look to Saudi Arabia and the other Sunni Arab oil monarchies for support. Shiite actors seek Iranian support. Due to the rise in sectarian temperature—most dramatically as a result of the Syrian war—regional Sunni Arab actors, like the Palestinian resistance groups Hamas and Islamic Jihad, that used to be Iranian clients have pulled back. On the other hand, actors that were barely Shiite, such as the Alawi regime in Syria and the Houthis in Yemen, have become Shitte, and pushed further into Iranian arms. So the rise in sectarian temperature cuts both ways.

this-map-shows-the-brewing-proxy-war-between-iran-and-saudi-arabia

Figure 3. The regional game.

When the Syrian uprising began, Saudi Arabia saw a major opening to wrestle away Syria—a state that is central to the Sunni Arab imaginary—from the Iranian orbit. Weapons, money and fighters poured into the warzone through the Turkish rat line. Much of the flow originated in the oil monarchies and went to salafi jihadist groups such as ISIS, JN and Arhar al Sham. But the Iranian-Hezbollah intervention prevented the fall of Assad. Once the Russians intervened on the regime’s side, the great Saudi dream of rolling back Iranian influence in the Levant became tenuous. With the fall of Aleppo to the regime’s forces, all such hopes were dashed.

Meanwhile, the US-Saudi puppet in Yemen had been displaced by the Houthis with the support of the former Yemeni president (a Sunni). Saudi Arabia’s aggressive young leader Mohammed bin Salman al Saud (MBS), responded by launching an air war with the logistic and diplomatic help of the Obama administration.  There was a lot of brouhaha about Iranian influence in Yemen; Saudi Arabia’s backyard. But Iranian influence was always more imagined than real. The Houthi political movement, in fact, enjoyed broad-based, cross-ethnic support and was neither simply a Shiite group nor an Iranian proxy. The main consequence of the Saudi terror campaign in Yemen was to give a boost to Al Qaeda in the Arabian Peninsula (AQAP), one of the most dangerous and capable salafi jihadist groups in the region. (Yemen was not the only place where the main result of Saudi meddling was to strengthen salafi jihadism.)

Lost in the regional narrative was a potential gamechanger. This was an alliance between Russia and Iran—something that has never obtained ever before in history. Even though both were simply fighting together to save the Assad regime and there were no plans for a broader alliance, there was always the potential for one. The Obama administration was smart enough to know that it would not be in the US interest if Iran acquired a rival great power patron. (Obama went so far as to say that the Saudis and the Iranians would have to “share the region.”) As long as the United States could keep the door ajar just a little bit, Iran had more to lose from defying the Western alliance than gaining a great power patron.

In this trip, Trump has slammed the door in Iran’s face. It may further the interests of the oligarchs connected to the Trump White House. But it makes no sense in terms of US interests in the region. We should not be surprised if Iran gets closer to Russia and the Ruskies extend their influence in the Middle East as a result. I am not suggesting that this is a certainty. Russia has so far pursued defensive and limited aims—basically shoring up the Assad regime. But that is no guarantee that the Kremlin will not exploit this opening.

There was something deeply shameful about Trump declaring Iran to be a sponsor of terror whilst standing in the heart of terror finance; entirely bogus claims based on Iranian patronage of Hezbollah and Hamas, which for all their Islamic rhetoric are nationalist resistance groups; not Islamic terrorists. Islamic terrorists, like the one who murdered young kids in Manchester this week, are without a single exception salafi jihadists who are bankrolled by financiers in the permissive jurisdictions of the gulf oil monarchies that Trump just declared his eternal love for. In fact, Iran is the one Muslim power that is guaranteed to be an ally against salafi jihadism. If the United States was serious about tackling salafi jihadism, the place to start is to put the oil monarchies is a financial straightjacket—all financial flows out of the gulf ought to monitored by a terror finance task force set up by Western intelligence agencies.

It’s too easy to blame the Trump administration for following policies that are so manifestly against the US and Western interest. The truth is that the blame lies on a broad swath of the foreign policy community—including Democrats. Somehow the debacles of the Bush administration have failed to kill the rogue states doctrine that is at the root of America’s failed foreign policy.

Standard
Thinking

Why did the United States invade Iraq?

MidEast

Bush’s decision to depose Saddam has always perplexed the Policy Tensor. I have previously argued that US policy with respect to Iraq after 1990 was inconsistent with foreign policy realism; that, during the 1990s, US foreign policy was guided by the rogue states doctrine that served as the justification for the forward-deployment of US forces around the globe (and defense spending high enough to allow for garrisoning the planet after the threat from the Soviet Union vanished into thin air) by inflating the threat posed by confrontation states; that Saddam became a poster child of the rogues’ gallery that the foreign policy elite in Washington said they were determined to contain; and that the US policy consensus on the threat posed by the person of Saddam Hussein meant that Saddam was most at risk from a revisionist policy innovation in Washington.

So when George Bush went about “searching for monsters to destroy,” Saddam was the most tempting target. The consensus in policy circles against Saddam explains why the US invaded Iraq and not Cuba, North Korea, Iran or Libya; or any other confrontation state that could, more or less convincingly, be framed as a “rogue state”, “outlaw state”, “backlash state”, or “Weapon State” (as Krauthammer put it in Foreign Affairs). In short, Bush was following the path of least resistance when he chose to overthrow President Hussein.

But why did Bush want to depose Saddam in the first place? The US veto on potential rivals’ access to gulf energy was already secured by the United States’ impregnable maritime power in the region. That is, with or without a friendly regime in Baghdad, the US could deny any challenger access to gulf energy simply using its overwhelming maritime power.

Moreover, almost any conceivable US national interest could’ve been more easily secured by bringing Saddam in from the cold. If Bush wanted his friends in the oil industry to benefit from access to Iraqi oil, Saddam could easily have been brought in from the cold on that very condition. If Bush wanted to ramp up Iraqi oil production to lower oil prices (and perhaps undermine Saudi Arabia’s position as the swing producer and its hold on OPEC), the easiest way to do that would’ve been to allow Western oil firms to invest in Iraqi production capacity. If Bush wanted an Iraqi regime that was a geopolitical ally of the United States and Israel, even that was within the realm of possibility with Saddam at the helm in Baghdad.

Suppose that for whatever reason it was impossible for the United States to work with Saddam. Then, any conceivable US interest would’ve been better served by replacing the regime led by Saddam Hussein with a more compliant military junta. For a democratic regime in Baghdad was ethno-demographically guaranteed to fall within the orbit of Iran.

In fact, what I found after combing through the archives of the 1990s was that US-Iraq relations had been personalized to an extraordinary degree and that there was an overwhelming consensus in the foreign policy establishment that the ideal scenario would be a military coup by a more accommodative general. The idea was that if Saddam were deposed by a more accommodative general, we would get the best of both worlds. An iron-fisted junta would provide stability in the sense that Iraq would serve as a bulwark against Iran and keep a lid on both ethnic nationalism (Shia, Sunni and Kurdish) and salafi jihadism. And a more accommodative leadership in Iraq would remove Iraq from the ranks of the confrontation states and thereby enhance the security, power and influence of the United States and its regional allies.

These considerations explain why, after kicking Saddam’s army out of Kuwait, Bush’s dad left Saddam in power and watched from the sidelines as Saddam crushed the Iraqi intifada. Bush Senior later explained the decision in his book that he coauthored with Scowcroft:

While we hoped that a popular revolt or coup would topple Saddam, neither the United States nor the countries of the region wished to see the breakup of the Iraqi state. We were concerned about the long-term balance of power at the head of the Gulf. Breaking up the Iraqi state would pose its own destabilizing problems.

The core of the Bush revolution in foreign policy was the decision to break with this policy consensus. Specifically, Bush Jr’s policy innovation was to overthrow Saddam Hussein without replacing him with a more accommodative military junta. What possible US interest could be served by that policy? What did principals in the Bush administration hope to accomplish? What was their grand-strategy? I think I finally have an answer.

My interpretation builds on the findings and arguments of a large number of scholars. For the sake of conciseness, I’ll focus exclusively on the excellent anthology edited by Jane Cramer and Trevor ThrallWhy Did the United States Invade Iraq? In what follows, I’ll summarize their findings before presenting my interpretation. All quotes that follow are from this book unless otherwise specified.


Cramer and Thrall argue that the core foreign policy principals in the Bush administration were President Bush, Vice President Dick Cheney and Defence Secretary Donald Rumsfeld. It’s plausible to imagine that they came under the sway of neocons and to the neocons’ well-known strategy of regime change in Iraq in the heightened threat environment after 9/11. But that story is inconsistent with the facts.

The record indicates they did not even make a decision after 9/ 11; they apparently had already made up their minds so they did not need to deliberate or debate. Instead they discussed war preparations and strategies for convincing the public and Congress, with no planning for how to make democracy take shape in Iraq.

Cheney played an extraordinary role in the administration. In particular, he handpicked almost all the neocon hawks who led the drumbeat to war:

Cheney helped appoint thirteen of the eighteen members of the Project for the New American Century.… Cheney lobbied strongly for one open advocate of regime change—Donald Rumsfeld—who was appointed to be Secretary of Defense. And then, Cheney and Rumsfeld together appointed perhaps the most famous advocate for overthrowing Saddam Hussein in order to create a democracy in Iraq, Paul Wolfowitz, as Undersecretary of Defense. Cheney created a powerful dual position for Scooter Libby …John Bolton as special assistant Undersecretary of State for Arms Control and International Security; David Wurmser as Bolton’s chief assistant; Robert Zoellick as US Trade Representative; and Zalmay Khalilzad as head of the Pentagon transition team…. [Cheney appointed] Elliot Abrams, Douglas Feith, Richard Perle and Abram Schulsky.

But, Cramer and Thrall argue, quite convincingly in my opinion, that “the neoconservatives and the Israel lobby were “used” to publicly sell the invasion, while the plans and priorities of the neoconservatives were sidelined during the war by the top Bush leaders.”

The State Department and the oil industry were becoming increasingly alarmed about the neoconservatives’ oil plan and Chalabi’s open advocacy for it. In the eyes of the mainstream oil industry, an aggressive oil grab by the United States might lead to a destabilization of the oil market and a delegitimizing of the Iraq invasion. This was argued in an independent report put out on January 23, 2003 by the Council on Foreign Relations and the Baker Institute entitled Guiding Principles for U.S. Post-Conflict Policy in Iraq. The report cautioned against taking direct control of Iraqi oil, saying, “A heavy American hand will only convince them (the Iraqis), and the rest of the world, that the operation in Iraq was carried out for imperialist rather than disarmament reasons. It is in American interests to discourage surch misperceptions….

The State Department plan triumphed over the neoconservatives’ plan, and this helps demonstrate that Cheney, Rumsfeld and Bush did not allow the neoconservatives and the Israel lobby to dominate US foreign policy even from the inception of the invasion. In fact, Bush appointed Phillip Carroll, the former chief of Shell Oil, to oversee the Iraqi oil business. Carroll executed much of the oil industries’ preferred plans for Iraqi oil. Revealingly, when L. Paul Bremer, the head of the Coalition Provisional Authority, ordered the de-Ba’athification of all government ministries in Iraq, Carroll refused to comply with Bremer’s order because removing the Ba’athist oil technocrats would have hindered the Iraqi oil business. In the end, the Baker plan (aligned with US oil industry interests) was implemented in its entirety. The US official policy was to use Production Sharing Agreements (PSAs) that legally left the ownership of the oil in Iraqi government hands while attempting to ensure new long-term multinational oil corporation profits.

On de-Ba’athification, on Chalabi, on Iraqi participation in OPEC, on the privatization of Iraqi oil, on bombing Iran and Syria, on threatening Saudi Arabia or giving the Saudis access to advanced weaponry, the administration went counter to the neoconservatives’ proposals and policy desiderata. In fact, the “neoconservatives realized that they had been used to sell the war publicly but were marginalized when it came to the creation of Middle East policy. In 2006 prominent neoconservatives broke with the administration and resoundingly attacked Bush’s policies.”

So, if the neoconservative vision of an expanding zone of democratic peace was not the motivation for the invasion, what was? “Cheney, Rumsfeld and Bush,” Cramer and Thrall argue, “were US primacists and not realists.”

Cheney authorized Paul Wolfowitz to manage a group project to write up a new Defense Planning Guidance (DPG) drafted by various authors throughout the Pentagon in full consultation with the Chairman of the Joint Chiefs of Staff, Colin Powell (Burr 2008). The DPG was leaked to the New York Times on March 7, 1992 (Tyler 1992). The radical plan caused a political firestorm as it called for US military primacy over every strategic region on the planet.

The draft DPG leaked in 1992 was widely perceived as a radical neoconservative document that was not endorsed by the high officials in the George H. W. Bush administration. Dick Cheney sought to distance himself from the document publicly while heartily endorsing it privately. Pentagon spokesman Pete Williams claimed that Cheney and Wolfowitz had not read it. Numerous other Pentagon officials stepped forward to say that the report represented the views of one man: Paul Wolfowitz. The campaign to scapegoat Wolfowitz for the unpopular plan was successful and the press dubbed the DPG as the “Wolfowitz Doctrine.” However, recently released classified documents show that the document was based on Powell’s “base force” plan and was drafted with the full consultation of Cheney and many other high Pentagon officials (Burr 2008). In the days after the leak, Wolfowitz and others worried that the plan would be dropped altogether. But in spite of the controversy, Cheney was very happy with the document, telling Zalmay Khalilzad, one of the main authors, “You have discovered a new rationale for our role in the world.”

Cramer and Thrall conclude:

We think a gradual consensus is forming among scholars of the war that Cheney, and to a lesser degree Rumsfeld, were the primary individuals whom Bush trusted. These three leaders together shared the desire to forcefully remove Saddam Hussein, they made the decision, and they made the key appointments of the talented advisers who crafted the arguments to sell the war to the American people. We have shown that President Bush was a zealous participant in the decision to invade, but he was likely not a primary architect to the extent the much more seasoned Cheney and Rumsfeld were. We find that the recently released documents proving intentional intelligence manipulation (especially from the British Iraq Inquiry, see Chapter 9), combined with the long career paths of Cheney and Rumsfeld and the actions of these top leaders before and after 9/ 11, belie the perception that the administration was swept up by events and acted out of misguided notions of imminent threats, Iraqi connections to Al Qaeda, or crusading idealism. The United States did not emotionally stumble into war because of 9/ 11. On the contrary, the top leaders took a calculated risk to achieve their goals of US primacy, including proving the effectiveness of the revolution in military affairs, and strengthening the power of the president.


The Policy Tensor agrees with the characterization of principals in the Bush administration as primacists. The problem is that invading Iraq does not follow from the grand-strategy of primacy. The primacists’ argument is straightforward and indeed compelling. The idea is that it was in the US interest to prolong unipolarity as long as possible and that required an active policy to prevent the reemergence of a peer competitor. As the authors of the Defence Planning Guidance put it in 1992,

Our first objective is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union. This is a dominant consideration underlying the new regional defense strategy and requires that we endeavor to prevent any hostile power from dominating a region whose resources would, under consolidated control, be sufficient to generate global power. These regions include Western Europe, East Asia, the territory of the former Soviet Union, and Southwest Asia.

Separately, in combination, or even in an alliance with a near-peer, the so-called rogue states were never (and never would be) in a position to pose “a threat on the order of that posed formerly by the Soviet Union.” The combined GDP of the “rogue states”—Iraq, Iran, Libya, North Korea, and Cuba—never exceeded that of California, Texas, or New York. Even if Saddam conquered the Arabian peninsula and consolidated control over its oil resources, he would be in no position to “generate global power.” In any case, the unipole could quite easily deter an Iraqi invasion of the Arabian peninsula.

Even a nuclear-armed Iraq would be in no position to impose its will on US protectorates in the region, much less on the United States itself. Those who argue that a nuclear-armed Iraq or Iran cannot be deterred simply don’t understand the logic of nuclear deterrence. If Saddam has successfully acquired a nuclear deterrent, the United States would not have been able to invade and occupy Iraq. But the Iraqi deterrent would have been useless for the purposes of aggression, conquest, or regional domination. Had he retaken Kuwait, the United States would still have been able to kick him out simply because he would’ve been in no position to threaten the use of nuclear weapons against US forces for then he would be making the incredible threat of suicide to hold on to his conquests. Put more formally, extended deterrence is hard enough for the unipole; it is well-nigh impossible for a regional power like Iraq under Saddam.

If the United States under Bush had acted in accordance with the grand-strategy of primacy, she would have cared little about minor confrontation states and much more about actual potential rivals. In particular, the United States would have tried hard to thwart the emergence of a peer in the two extremities of eurasia. A more aggressive strategy to maintain primacy would see the United States not only preventing the consolidation of either of these two regions under a single power, but also undermining the growth rate of the only power that has the potential to become a peer of the United States without conquering a strategically important region. That is, if the Bush administration had followed the grand-strategy of primacy, it would’ve blocked China’s admission into the WTO, and more generally, prevented China’s emergence as the workshop of the world. That would’ve prolonged US primacy with much more certainty than the destruction of the entire rogues’ gallery.

So what was the grand-strategy that made the decision to invade intelligible?

Jonathan Cook has argued for a much more radical proposal in Israel and the Clash of Civilizations. He argues that it was in the Israeli interest to have its regional rivals disappear from the ranks of the confrontation states and be broken up into statelets that would not pose any significant threats to Israel’s regional primacy; and that the Israelis managed to convince principals in the Bush administration of the merits of their revisionist agenda for the region:

I propose a different model for understanding the [Bush] Administration’s wilful pursuit of catastrophic goals in the Middle East, one that incorporates many of the assumptions of both the Chomsky and Walt-Mearsheimer positions. I argue that Israel persuaded the US neocons that their respective goals (Israeli regional dominance and US control of oil) were related and compatible ends. As we shall see, Israel’s military establishment started developing an ambitious vision of Israel as a small empire in the Middle East more than two decades ago. It then sought a sponsor in Washington to help it realise its vision, and found one in the neocons. (p. 91.)

Yinon’s argument that Israel should encourage discord and feuding within states – destabilising them and encouraging them to break up into smaller units – was more compelling [than Sharon’s status-quo, state-centric vision of Israeli regional primacy]. Tribal and sectarian groups could be turned once again into rivals, competing for limited resources and too busy fighting each other to mount effective challenges to Israeli or US power. Also, Israeli alliances with non-Arab and non-Muslim groups such as Christians, Kurds and the Druze could be cultivated without the limitations imposed on joint activity by existing state structures. In this scenario, the US and Israel could manipulate groups by awarding favours – arms, training, oil remittances – to those who were prepared to cooperate while conversely weakening those who resisted. (p. 118.)

Israel and the neocons knew from the outset that invading Iraq and overthrowing its dictator would unleash sectarian violence on an unprecedented scale – and that they wanted this outcome. In a policy paper in late 1996, shortly after the publication of A Clean Break, the key neocon architects of the occupation of Iraq – David Wurmser, Richard Perle and Douglas Feith – predicted the chaos that would follow an invasion. ‘The residual unity of the [Iraqi] nation is an illusion projected by the extreme repression of the state’, they advised. After Saddam Hussein’s fall, Iraq would ‘be ripped apart by the politics of warlords, tribes, clans, sects, and key families.’ (p.133.)

I think Cook is mistaken about the importance of Israeli influence but he is onto something. Even if Israel managed to persuade principals in the Bush administration, there is no evidence to suggest that the Israel lobby, or even the neocons more generally (the lines between the two are blurred), had decisive influence over the Bush administration’s Middle East policy. (My position here is congruent with Cramer and Thrall’s). But what is clear is the frame of reference in which smashing Israel’s rivals would be in the US interest.

More precisely, I think principals in the Bush administration figured that Israel was nearly guaranteed to be a strong ally of the United States is a difficult region. After the reorientation of Egypt (mid-1970s) and the Islamic revolution (1979), three regional poles prevented total US-Israeli domination of the Middle East: Iran, Iraq and Syria. Smashing these confrontation states would guarantee Israel’s regional primacy and therefore, I think principals in the Bush administration reckoned, further the US interest in more easily dominating the region in a permanent alliance with its junior geopolitical ally. In other words, the grand-strategy of the Bush administration was to remove, by threats or by the use of force, Israel’s regional rivals in the Middle East.

They hoped to overthrow or cow into submission, the regimes of Iraq, Iran and Syria; and thereby establish unchallenged US-Israeli supremacy in the Middle East. What I am saying is that the United States’ grand-strategy was based on an ill-informed regional variant of offensive realism—one whose logic was conditional on a permanent alliance with a regional power—as opposed to the global and unconditional variant of offensive realism assumed by the grand-strategy of primacy (as put forward, say, by Mearsheimer).

It is clear that regional primacy was in the Israeli interest. It’s a bit of stretch to argue that it was it was also in the US interest. The problem is that, military primacy or not, Israel simply does not have that much influence in the region. Because it is a pariah in the Middle East, few actors try to seek its patronage (the Kurds are the main exception); most look to Iran, Saudi Arabia, or global powers. It is nearly impossible for Israel to play the role formerly played by Iran under the Shan or Egypt under Nasser. The United States has no choice but to work with other regional powers (Egypt, Turkey, Syria, Saudi Arabia and Iran) to work out regional problems. Moreover, from the perspective of a global power trying to minimize the costs of ensuring stability in a multipolar region of strategic significance, a balance of power is considerably more attractive than the precarious primacy of a pariah; perhaps even one guaranteed to be a permanent ally.

But the fundamental flaw of the grand-strategy pursued by the Bush administration was not the conflation of US and Israeli interest. (It can be argued, after all, that since Israel was basically guaranteed to be a permanent ally, Israeli regional primacy was squarely in the US interest.) No, the fundamental flaw of the revisionist strategy was the outright dismissal of the costs of the ensuing instability. No matter how far the prewar consensus was from foreign policy realism, at least the unbounded costs of regional instability were understood. When Bush broke with the consensus and smashed the Iraqi state, he clearly did not appreciate just how bad things could get.

Breaking up confrontation states into ethnic statelets and zones of weakness may sound like a splendid idea to half-baked geopolitical analysts. But instability and weakness are a source of insecurity, not power; as both the United States and Israel have since discovered.

To wrap up: The grand-strategy pursued by the United States when it invaded Iraq was to smash the regional poles that acted as confrontation states in the Middle East, whose removal from the equation promised unchallenged US-Israeli supremacy in this strategically-relevant region. Principals in the Bush administration simply did not appreciate the unbounded costs of the regional instability that would ensue.

Standard