Real inflation cycle theory

Noah Smith has a good post on what, from a certain perspective, is kind of a puzzle. Why do real wages usually decline during inflations?

In theory, some economists imagine, inflation should be neutral. The nominal price level is just an arbitrary unit. If tomorrow we redenominated cents as dollars, and passed a law that updated previously defined contracts and prices to the new unit and let people exchange old currency for new, we’d expect nothing much to change. Sure, in “dollar terms”, prices would have risen by 100 times! But so also would have wages, and bank account balances, and everything else, so who cares. If we think of the real economy as fundamental and inflation as just a slipping of the nominal price unit, we’d expect wages and prices to rise simultaneously. Absent formal redenomination, there are some rigidities. Unexpected inflation redistributes from creditors to debtors, as debt contracts made in nominal dollars fail to adjust. But as Smith points out, wages are not thought to be rigid (“sticky”) upwards. So why, in most durable inflations, don’t wages rise at the same pace as prices?

This is a puzzle if you think about inflation as basically arbitrary, a symptom of mismanagement by central banks of purely nominal units. But that’s entirely the wrong way to think about stubborn inflations. Demand mismanagement can lead to some inflation, but it’s rarely durable. When there are not fundamental reasons for the inflation, moderate monetary and fiscal tightening quickly ends it. That happens a fair amount. Team transitory wins.

Stubborn inflations occur when there are in fact deep reasons why the inflation, or else some alternative form of unpleasantness, is necessary. Generally, inflation is the answer to a question: What do we do if we are not as rich as we thought we would be? More precisely, what do we do when the expectations of the labor force, in real terms, cannot be satisfied by the output we are capable of producing? Then we have to cut real wages relative to prior expectations somehow. If the shortfall is large, given the reality of downward nominal wage rigidity, we must resort to some mix of inflation and unemployment.

Inflation bounces around. We have lots of little spikes, the central bank and the fisc fine-tune, over time wages usually do keep up with prices through all of it. But when we have a serious inflation, it almost always accompanies a mismatch between what the labor force expects and what the economy, on the “supply side”, is capable of delivering. The functions of serious inflations are to (1) reprice real wages downward; and (2) allow for redistributions within the labor force, via repricings of relative wages that downward nominal wage rigidities would otherwise prevent.

Until February of this year, team transitory was right. In 2022, the fiscal impulse of the COVID era was going to collapse as quickly as it had arisen (and it has). That, and some monetary tightening, and unsnarling some temporary supply-side SNAFUs, would have ended the inflation. Last winter, we were seeing some redistribution of real wages within the labor force (towards the lower end), but not a steep decline in real wages. Then shit happened. February and early Spring brought three big shocks: the Ukraine War, the impact of Omicron on COVID-Zero China, and, in response to the Ukraine War, accelerating mistrust and hostility between China and the West. As Wolfgang Munchau points out (ht E.E. Reed), the old factory we have relied upon is shutting down. Over the next few years, we may have to radically reorganize the global supply side. The global demand side will have to adjust, at best, to a pause in the growth we might have expected from iterative improvements to that once humming machine. More likely we will have to adjust to some impoverishment in real terms, as businesses try to build a new machine from parts of the old one while the old one is struggles to sputter on. Patterns of sustainable specialization and trade that we have long depended upon are likely to be, well, no longer sustainable.

Globally, real wage expectations are out of kilter with what the global supply-side will be able to deliver. Locally, there will be winners and losers from the changes, which will entail redistribution of real wages from prior patterns within the global labor force. We are enduring a global inflation now because we require one. We don’t like it, so we are countering it with fiscal and monetary tools. But those can’t restore real wages the economy is unable to deliver. What fiscal and monetary tightening will do is trade some of the inflation for unemployment. Instead of everyone’s real wages falling, if we destroy demand for some superfluities, we can cut some of the labor force out from a share of the impaired flow of core goods and services that the global machine is now able to produce. That leaves more for the rest of us, higher real wages. As long as the supply side of the economy is impaired, our choice is whether to share the burden more broadly (tolerate inflation) or concentrate it on subgroups of workers (accept unemployment).

We are likely to do a bit of both, and oscillate between the two, until expectations of the labor force are realigned with expected (and much less uncertainly expected) global output. We won’t solve our macroeconomic problem until we find patterns of specialization and trade that are, in this new era, actually sustainable, and then accommodate our expectations and arrangements (wages, rents, etc.) to the actual production those new patterns can manage. Our problems are real. Neither Jay Powell nor Janet Yellen can fix them. Governments can, by finding a durable peace and building politically sustainable foundations for international trade and migration (which, I think, will be quite different from the arrangements of the past few decades), or by spurring domestic production of core goods and services.

Besides wage earners, there is another group of claimants who can share the burden of the real product shortfall. People who receive capital income might also adjust their real consumption. Under inflation they do, to a degree. Inflation will cause people “on fixed incomes” to consume less, and that will “help” in the sense that their discomfort will contribute to the burden sharing. Crashing portfolio values, declining home equity, higher mortgage payments (for those not on 30-year fixed rate mortgages) will reduce expenditures of the global “upper middle class”, helping limit the inflation and the decline of real wages. But in dollar terms, the vast majority of capital income goes to the very wealthiest, who did not spend much of it in good times, but who won’t adjust their spending downward in bad times, absent near total collapse of their wealth. Perhaps the main privilege of being fabulously rich is, under almost all circumstances, you get to opt out of “adjusting”.

At a macro level, the problem with capital isn’t that firms raise prices to pad margins. Those funds get paid mostly to people whose spending is decoupled from their earnings, so who don’t put pressure on global production. The expanded profits are like a tax, directly inflationary but disinflationary going forward as wage earners will afford less and less. The problem is when capital has the ability to increase profit by raising prices, that displaces the alternative strategy of increasing profit by expanding production. Expanding production is the happiest way of addressing a shortfall of core goods and services relative labor force expectations, and reduces the need for inflation and unemployment. In economic (as opposed to political) terms, the problem with capital is not that it takes too much money, but that it takes all that money while delivering too few goods. Which is why antitrust, or, excess margins taxes, or public options, should be at the very top of our inflation reduction agenda.

Update History:

  • 7-Nov-2022, 4:10 p.m. EST: “Patterns of sustainable specialization and trade that we have long relied depended upon are likely to be, well, no longer sustainable.” [eliminate repetitive use of “relied upon”]
  • 7-Nov-2022, 7:15 p.m. EST: “We don’t like it, so we will are countering it with fiscal and monetary tools.”; “Crashing portfolio values, declining home values equity, higher mortgage payments…”
  • 9-Nov-2022, 11:00 a.m. EST: “Under inflation they do, to a degree. There are people whose marginal consumption is affected by capital income or wealth effects.

Immigration, exploitation, and social democracy

A simple, amoral, model of an immigrant is a pair of hands attached to a mouth. From the selfish, amoral, perspective of incumbents, in aggregate, immigration is desirable if the value produced by the pair of hands is greater than the value eaten by the mouth.

However, as always in social affairs, the phrase “in aggregate” is home to many devils. From the perspective of many incumbents, immigrants are undesirable not because they are lazy scroungers, but precisely because their hands are willing to work so hard relative to what their mouths are fed. Exploitable, exploited, immigrants compete with domestic workers, and threaten labor bargaining power writ large. Exploiting immigrants domestically then comes to parallel exploiting comparative advantage internationally (where, of course, comparative advantage often means exploitable labor in foreign lands). It creates a bigger (domestic) pie “in aggregate”, but creates winners and losers. In a political system that enfranchises the potential losers, especially one with lots of veto points, exploitative immigration that would be valuable in aggregate may be blocked.

This can be understood as a kind of coordination problem among incumbents. If the winners from exploitative immigration would compensate the losers for their loss of bargaining power and so income, then all incumbents could be made better off. But institutionally, what kind of mechanism could be made to do that? Well, suppose we tax the increment of real income that employers gain from both exploiting new immigrants and hiring native workers on more favorable terms, and use the resulting revenues to fund benefits for the poor? No, that wouldn’t do it. Domestic full-time workers, even under somewhat less favorable terms than they might have faced without immigration, are unlikely to qualify under the society’s definition of “poor”. Households anchored by such workers define the bulk of the public. In relative terms they are typical, median. So a state that redistributes from the richest to the poorest won’t solve the coordination problem that prevents incumbents in aggregate from seeking to exploit new immigrants. A “liberal welfare state” isn’t enough.

Suppose instead we tax the increment of real income that employers gain from both exploiting new immigrants and hiring domestic workers on more favorable terms, and use the resulting revenues to fund universal benefits? These do reach, and so can compensate, the incumbent workers whose bargaining power has been reduced by exploitative immigration. States that redistribute into universal benefits, rather than help for the poorest, we describe as social-democratic.

Often social democracy and immigration are thought to be in tension with one another. The assumed basis for the tension, however, is that social democratic benefits will enable immigrants’ mouths will eat more than their hands produce. When immigration and immigration policy are framed in humanitarian terms, and if immigrants are provided social democratic benefits immediately and on the same terms as incumbent citizens, then yes, there are tensions between social democracy and immigration.

But if immigration and immigration policy are framed in selfish terms, then soft, pink social democracy becomes a hard-nosed solution to the coordination problem that prevents enrichment of incumbents by exploitative immigration. The mistake made by actual social democracies, with respect to immigration, hasn’t been their openness to it. On the contrary, it’s been their passivity, allowing mass immigration to be defined in reaction to humanitarian crises elsewhere rather than designing voluntary pathways for large numbers of people to migrate under terms that support rather than undermine the social democratic benefits enjoyed by incumbents.

What might these pathways look like? First, in order to minimize their effect on incumbent worker bargaining power and so discontent, immigrant workers might be employed in domains that are distinct from the occupations of incumbents, “they only do the work that we don’t want to.” Then, in oversimplified, completely amoral and antisocial terms, you might imagine a permanent, growing corps of guest workers, who come voluntarily to be employed on openly exploitative terms, because despite the exploitation they still earn more when employed productively in developed countries than they would earn at home.

We do see this kind of policy, in Middle Eastern countries especially. However, wiser polities will not craft policy in completely amoral and antisocial terms. Antisocial policy might make a polity wealthier temporarily but also weaken it, increasing the costs (economic and social) of maintaining domestic security and cohesion, while creating reputational and diplomatic vulnerabilities. Social democracies in particular flatter themselves as solidaristic and virtuous polities. Policy that undermines that often self-fulfilling self-perception should be scored as very costly.

So a canny social democracy will craft institutions of gradual integration. New immigrants would begin highly exploited in sectors of the labor market segmented from incumbent workers, but over time the exploitation and segmentation they face would decline. Second generation immigrants, or those who migrate as children, would be integrated as fully and quickly as possible. Incomplete integration and continued exploitation of second generation immigrants is a source of social instability and often a security concern, as unlike first generation immigrants, second generation immigrants have not chosen their status and have no lived experience of opportunity or escape, gratitude for which might compensate for the fact of exploitation.

Slow integration out of segmented, exploitative labor markets into the more comfortable mainstream is a tried and true formula for value extraction by immigrant-accepting nations. It’s been the formula the United States has used, when it has best succeeded as a “nation of immigrants”. Interestingly, it is also a formula urban China has stumbled into, accepting internal migrants from rural areas on exploitative terms, but working increasingly to integrate their children. Usually this strategy is tacit rather than open. In the United States, some categories of legal immigrants have full rights, but nevertheless wield limited bargaining power due to language barriers and various forms of ghettoization. Some categories of legal immigrants (seasonal workers, H-1B visa holders bound to a sponsoring employer) face formal restrictions that limit their bargaining power and constrain the domains in which they work. Illegal immigrants, of course, lack nearly all legal protection and so work under extremely exploitative terms.

It would be better for all concerned if de facto policies of exploitative immigration were formalized and their terms rendered explicit. So long as immigration into developed countries is perceived by incumbents as costly and altruistic, the large fraction of such countries’ populations that struggles to afford the costs they face already will oppose it. While the terms of exploitation-until-slow-integration remain tacit and denied, societies will be needlessly riven by conflict between justice-oriented activists, who will point to the exploitation and proclaim it illegitimate, and business interests whose capacity to benefit from exploitation drives the opportunity to immigrate in the first place. Developed country populations should understand how accepting and in fact competing for immigrants is in our direct material interest. With segmented labor markets and social democratic benefits, that “our” can include the whole incumbent population. Immigration is what makes universal health care affordable, one might point out, if inexpensive nurses’ assistants are drawn from the new arrivals. Migrant construction workers let us build social housing. Immigrants should understand in advance the exploitation they will encounter, but also its duration and limits. If the terms of both temporary exploitation and eventual full integration are explicit, they become a basis for competition among destination countries to attract migrants. New immigrants might start off enjoying somewhat threadbare public benefits, but graduate into full citizenship with full benefits over an agreed period of time. A path to full citizenship is essential on social grounds, for societies that do not wish to become divided into oppressively sustained permanent castes.

Under this policy regime, developed countries come to compete over the rate of exploitative immigration they can attract and tolerate. Since the surplus from exploitation declines over time with each cohort of immigrants, sustaining the surplus requires continual new entrants. Different countries’ social capacity to accommodate or integrate immigrants will always be a limiting factor, and quite legitimately. But countries that find ways to ramp up their capacity to continually accept immigrants with minimal social or cultural disruption would benefit, directly and visibly, from doing so.

We began with a simple, amoral model of an immigrant, a pair of hands attached to a mouth, and a very economistic view of a polity as an aggregation of people seeking material value. We might add to our model of an immigrant a soul. An immigrant is not a mere object that produces surplus or costs, but a subject whose welfare we care about and whose fellowship we enjoy. Our polities are not mere aggregates of selfish people but also nations, groups that seek to thrive together and forge a common future. Accepting immigrants in ways that materially strengthen our polities is good for both the humans that join us and the nations that we constitute together. Obviously we can get it wrong. If we are too exploitative, or fail at our promise to integrate over time and (especially) generations, we can harm both migrants and the fabric of our societies. If we are too generous, or if we fail to distribute widely the surplus that immigrants generate, accepting newcomers may not be politically sustainable, and rather than integration we may end up with interethnic recrimination. But between those two hazards lies huge potential opportunity, for migrants, their children, and for the societies capable of accepting and, only temporarily, exploiting them.

Update History:

  • 30-Dec-2023, 4:20 p.m. EST: “but over time the exploitation and segmentation they face”

Peace as war by other means

I remain adamantly in favor of ending the war in Ukraine now. I also adamantly favor Ukraine in the war. Despite apologetics from various quarters, Russia is straightforwardly the aggressor. A just settlement would repel the Russian Federation entirely from Ukraine’s internationally recognized borders, including Crimea. Russia plainly is not going to agree to a peace under which it slinks away from the territories it has just flamboyantly claimed to annex, let alone from Crimea, which it claims to have annexed in 2014. So how can I reconcile my continuing call for peace now with a just outcome for Ukraine (and the world)?

Let’s start with a commonplace. War is a profoundly negative-sum game. It kills and destroys. Whatever might be contested between the parties, if there were a form of adjudication that would yield the same distributional outcome as prosecuting the war, but without all the destruction, that would be strictly better for all parties. Of course, in real life, we never know what the outcome of warfare will be. When we think we know how a war is going to go, we often find ourselves catastrophically surprised. War is unpredictable. It compels an adversarialism so determined, our models are confounded. The contours of rationality itself curve like space at the edge of the event horizon.

We do not have some magic form of single combat guaranteed to yield the same outcome the war would have yielded, except without the mess. Alas. However, what we sometimes do have is a party with an upper hand. When one party in a conflict seems to have the upper hand, an extrapolatory expectation, unreliable and oversimplistic in fact, becomes nevertheless psychologically compelling. Party A has momentum! With determination, grit, time, and attrition, surely, say Party A partisans, we will win completely! Party B, during these times, is demoralized. Party B partisans cannot openly accede to extrapolatory logic. Instead, they must constantly work to persuade their publics, and their soldiers, that a corner is about to be turned. Somehow this darkest hour can portend a brilliant dawn. It’s hard work, for Party B propagandists. It often doesn’t work very well as, day by day, territory and lives are lost, national symbols are desecrated. Party B struggles to resist the gravitational pull of a joint consensus, the die is cast, we will lose, Party A will rout us.

It is during times like these that Party A has an opportunity, not to impose a victory but to propose a new, less terrible, form of conflict. From Party B’s perspective, this is a lifeline. We were losing the war, now here’s an alternative game, maybe this one we can win, at least maybe we will have a better shot. But of course this alternative proposed by Party A must be one Party A believes they are capable of winning. As long as Party A is pretty sure, they lose little in terms of the final outcome by shifting from war to this less destructive form of conflict. But they gain a great deal, because there will be much less destroyed when they eventually do win.

So the opportunity for peace here is not to propose a final settlement, or some precarious armistice that might, like the one that “ended” the Korean War, suppress hostilities cross-fingers indefinitely. The opportunity is to propose a new form of conflict, an alternative to and replacement of the war, by which the same issues can be adjudicated.

At the moment, in the current conflict, it is Ukraine that is Party A. Ukraine is the party that is winning and so can hope that some alternative game they propose will be accepted. So it’s Ukraine that could propose this sort of “peace”. But what would it look like?

I think it could be very simple. First, Ukraine and the West have a for-this-moment redline that Russia should not have gained by force any territory relative to the February 24, 2022 status quo ante. Russia has a for-this-moment redline that Crimea will not be surrendered. So, for this moment, we should revert to the February 24 status quo.

Russia claims that, by virtue of referenda, a merger into the Russian Federation of Crimea, Kherson, Zaporizhzhia, Donetsk, and Luhansk is legitimate. The first point to make is that even if those referenda were free, fair, and expressive of the “will of the people” (which, whatever that means, they were not), secession is not any people or geography’s unilateral right. Secession, like divorce, implicates long-standing commitments and investments by the broader nation-state, not just the prerogatives of the local population. Referenda may be a part of a secession process, but they are never sufficient to force one. Ultimately reorganization of national borders must be mutually agreed by all of the parties to it. A nation-state’s obligation is to uphold the rights of all of its citizens, in every geography and of every ethnicity. A nation-state has no obligation to accede to secession, although it may choose to agree to part ways with a territory under mutually negotiated terms.

I think that Ukraine, Russia, and these territories should negotiate something like the following terms: For a period of ten years, administration of the contested territories will be according to the February 24 status quo ante. Crimea and the portion of the Donbas then controlled by separatists will be administered by Russia. The rest of the disputed territory will be administered by Ukraine. Citizens of all of the territories shall have the right of dual citizenship. They can obtain Ukrainian passports, Russian passports, or both.

At the end of the ten-year period, the UN will supervise referenda as to the final status of the territories. As part of the settlement, Ukraine and Russia agree upon how that will work for each territory under either result. If Crimea chooses Russia, under what terms does Ukraine supply the peninsula with water?, for example. It might be prudent to merge Crimea and Kherson into a single territory for the purpose of the eventual referendum, in order to foreclose the possibility of a discontiguous Ukrainian Crimea, which would be provocatively vulnerable.

The war over territories and populaces then reverts to a war between the parties for hearts, minds, and bellies over a period of a decade. If Ukraine, with help from the West, is redeveloping into a new Poland or Czech Republic while Russia stagnates, then the territories, including Crimea, will likely choose to be a part of Ukraine. Russia, if it wants to actually win the territories it claims are its own, will have to compete with the quality of its own development, or else make its taunts of cultural superiority to the decadent West extraordinarily compelling to the publics it would rule. The terms of the conflict would now be positive sum. As with the war, eventually some party will win and some party will lose each of the territories. Whatever the outcome, it won’t be fully just from the perspective of parties who have mutually irreconcilable conceptions of justice. But the fight to win the territories will render the territories themselves and the countries that mean to host them better off, rather than catastrophically worse off. The parties will have to compete in their effectiveness at doing good, rather than doing evil, and either side might win.

Security arrangements will have to be negotiated, so that a party losing the fight for hearts and minds is not tempted to reneg in favor of what they perceive to be an easy military workaround. Ukraine will not be demilitarized. Ukraine will require reparations, given the destruction that Russia has wrought on its territories. Fortunately, there are hundreds of billions of dollars of Russian assets already seized by the West, already lost to Russia indefinitely absent a settlement. It should not be too hard to persuade Russia that surrendering these now hypothetical assets to Ukraine as reparations would be in its interest, if that will purchase an end to this war that is bleeding them and help restore tolerable relations with its most important historic trading partners.

The competition for territories between Ukraine and Russia will not have ended. Indeed, it will have just begun. This peace would not be the end of the Ukraine war, but rather its continuation by other, much better, means. It would only be the end of the killing.

Update History:

  • 15-Oct-2022, 2:20 p.m. EDT: “It would only be the end of the killings killing.”

Liberalism vs democracy

It’s a habit, almost a tic, for many of us to put liberalism and democracy together. We live, or like to think we live, in a “liberal democracy”. This combination has seemed so natural that Francis Fukuyama famously argued it might be “the end of history”, the telos towards which human affairs are inevitably drawn. In our current politics, it is people who think of ourselves as liberals in a broad sense of the term who feel like democracy is under attack by a motley mix of populists, reactionaries, post-liberals, integralists, and fascists. We are the democrats. They are threats to democracy.

Within the vanguard of that they, there are intellectuals and leaders who gleefully accept that role. Everything they say we are we are and we are very proud of ourselves. The neoreactionaries are overt monarchists. It is the law that must teach the public, rather than the other way around, according to “common good constitutionalists”. Right-wing pseudohistoricists proclaim “We are a republic not a democracy.” Peter Thiel, who bankrolls so much of this stuff, declared democracy and freedom incompatible, and that he was for freedom, as early as 2009.

This colorful troupe of outcasts and intellectuals would matter very little but for the fact that much of the public votes for political candidates enthralled by their ideas. But the vast majority of these voters — let’s call them the Trumpists — are not overtly antidemocratic. On the contrary. Trump doesn’t proclaim, as some of those intellectuals might, that democracy is a feeble system that should be discarded so that our betters can rise to the service of rule. Trump appeals to his supporters in the name of democracy. The election was stolen! The voice of the people was muzzled by the ventriloquism of a shady and, yes, liberal elite.

Many Americans, I think, perceive liberals as the enemies of democracy, and quite plausibly, because liberalism can yield plainly antidemocratic outcomes! Who voted for shutting down the mills and factories of the midwest and sending that work to China? I didn’t. Did you?

Liberalism, or at least the version of liberalism to which we’ve subjected ourselves over the last few decades, stands in real tension with democracy. In both economic and social affairs, it valorizes and places above interference by the demos certain freedoms that have profound effects beyond the individuals who consent and choose. The state could not pick winners and losers, with respect to the location of industry. That was for business leaders and shareholders to decide. Then they were the winners, and the rest of us losers. The state should not impose parochial norms over gender identity, and now the most basic stuff we used to take for granted — this is the Ladies’ Room, this is the Men’s Room, you are either he or she — is overthrown. Nothing makes sense and the governor says they are mutilating our kids. “If you like what you have you can keep it” is the claim liberals always make, you do you but let other people make very different choices. Fine, you said. It’s a free country! But we are not in fact atoms, we live in a society. The domain of privacy that liberalism constructs is artificial and always leaky. It is not neutral. Some freedoms are assiduously protected, while others must give way. It turns out you can’t actually keep what you had, you never can, even though you liked it. The bathrooms are changing. Aspects of humanity so fundamental they are embedded in the very structure of language are obsolete and offensive. Now you must learn new language or be relegated a bigot, by your own children even, whose schools (that your tax dollars paid for) have assimilated them into this brave new world you do not recognize and cannot navigate. That seems weird, ugly, just plain wrong. What happened to your freedom? Your choice? Your rights? Did some majority actually vote for this? No they did not, as far as you can tell.

The issue, to be very clear, isn’t that there is anything wrong with trans rights. It’s that what begin as private rights claims under liberalism carry social implications that create wedges between outcomes and democratic preferences. This divergence becomes especially acute subnationally, within communities upon whom the rights claims themselves are imposed in the name of universality rather than embraced democratically. Illiberal political entrepreneurs will predictably polemicize these ruptures between democratic choice and outcome, rather than work to manage and reconcile them.

Liberals say they — we — are the democrats, on procedural grounds. Yes, we had the elections and wanted everybody to vote. But we constructed a system that took much of what the demos might care about out of reach. Vote for whom you like, it’s a free country! But whomever a majority chooses, government has no right or capacity to deliver the society that a majority actually wants. In both the economic and social sphere, every liberalism (many are possible) carves out particular, critical domains and makes them exempt from deference to the public. Liberalism emasculates democracy even while it sanctimoniously attends to the bureaucracy of it. Should this really count as democracy, or just a fig leaf for its opposite? The system is rigged. Perhaps Viktor Orban’s “illiberal democracy” is the more natural conjunction after all, and “liberal democracy” an oxymoron?

I don’t think so. I am still a strong enthusiast of liberal democracy, and would argue that “illiberal democracy” in practice collapses to ugly autocracy. But we have to continually work to reconcile these ideas, liberal and democracy. They are not mutually reinforcing. Quite the contrary. Respecting and celebrating individual choice while also tethering broad outcomes to the interests and (evolving) values of the demos is, I think, achievable. But it is not automatic or preordained. We have to be clever, and much more careful than we have been, if we hope to mitigate and manage the contradictions. Who knew that preserving the end of history would demand from us so much agility?

But if we don’t do this work, much of the public will perceive liberals to be the real threat to democracy. And they won’t be entirely wrong.

Update History:

  • 9-Oct-2022, 11:55 a.m. EDT: “But whomever a majority chooses, government has no right or capacity to deliver the society that a majority actually wants.” [comma inserted]
  • 11-Oct-2022, 11:20 a.m. EDT: “…what begin as private rights claims under liberalism carry broad and powerful social implications that create wedges…” [too wordy (ha!)]

What is not separable from how

Like most of what I write (when it is not satire), this should be an obvious point. Nevertheless. In social affairs, what should be done cannot be separated from how we choose to do it. A policy that would succeed and be widely lauded if chosen in one manner might crash and burn if chosen in a different way. This is a problem for technocracy, for the notion that academics and think-tankers can work out the best policy, persuade politicians via white papers and working groups to implement it, then watch the public enjoy virtuous outcomes. Even when (much more rarely than proponents claim) research is good and reliable, social affairs just do not work this way.

For identifiable policy choices that are high-stakes in terms of values or outcomes, it’s pretty obvious why this approach often fails. It is a old joke in politics that whatever choice you make will be wrong. After the fact, the sun will set, the sun will rise, and stuff will happen. Humans being humans, the good stuff will seem normal, what ought to happen, what might have happened anyway, who knows?. The bad stuff will seem like something somebody did wrong and should be held accountable for. And your political opponents will be driving that home and blaming you for the choice.

There will be corruption. There is no human enterprise of significant scale in which people do not or do not appear to sometimes place self-interest above the broader mission to which they are ostensibly engaged. This is as true in the private sector as in the public. But in the private sector people are supposed to be pursuing their self-interest. “Agency problems” are ubiquitous, and understood to be a cost of doing business. If excessive, they reflect error by management or shareholders who should have arranged incentives more cleverly or built a more cohesive culture. However, in the public sector, the same behavior is corruption, sin, contagion. Even a drop potentially rots the foundations of our institutions. Every public enterprise is corrupt, while private enterprises are just well or poorly managed.

Identifiable, consequential policy choices must be resilient to the likelihood that salient bad outcomes will be linked, in good faith or bad, to the policy, while positive effects will be vigorously contested. Absent either strong ideological “buy in” from the mass public or concrete, material benefits to a politically influential constituency, opponents will often succeed at undoing or undermining the policy, however successful your honest research suggests the nascent outcomes to be. Of course opponents will have their own disingenuous research. In the public mind and most history books, your policy will have failed.

Durable policy requires either populism ex ante or payoff ex post (or effective use of institutions like a judiciary that can remove issues from political contestation, for better and for worse).

Among liberals and technocrats “populism” has become a bad word, a synonym for a kind of vicious, collective id that demagogues like Donald Trump destructively conjure. (Thomas Frank usefully demurs.) It's much better to understand that populations are subject to systematic passions. Models that treat human groupings as mere aggregates of agents with isolated preferences and interests are badly incomplete. We must design institutions that productively accommodate what we might bloodlessly call correlation. Markets civilize greed, marriage civilizes lust. Democratic institutions are supposed to civilize populism.

Marriage is not a chastity belt, and markets do not demand vows of poverty. It is not enough to blunt or “check” the passions of the masses, as the US Senate is ostensibly designed to do. Good democratic institutions encourage a productive populism, give it effect through intelligent action then succeed in part because of the legitimacy and durability and adaptability enabled by the public’s enthusiasm. There must be traction, some channel of transmission, between public passions and the actions of governing institutions (state and parastatal). And vice versa! “Burn it all down" populism results from a loss of this traction, from a sense that governing institutions are alien, imposed, that rather than mechanisms of cautious transmission there are bales of insulation thrust between public passions and political outcomes.

Governance is a whole-of-society enterprise. It’s not enough for the metaphorical head to be smart. (That the metaphorical head tries so often to outsmart its own metaphorical body suggests that it is not really very smart at all.) Policy choices that will succeed when there is legitimacy—a sense of collective agency, widespread “buy-in”—will not when there is not. Under the institutions of contemporary liberal democracy, it is political parties and their coalitional choices that reify and render legible the passions of the public, that bind those passions to choices by government, and also reshape them as a consequence of their choices. It’s symptomatic of a failure of our institutions that more than 40% of Americans have no political party to which they are willing to make the (bidirectional!) link of identification. And no, a “none of the above” party will not solve this problem.

Technocrats do the best they can and we are where we are. Sure, we’d be better off with a multiparty democracy designed to engender four-to-six medium-tent parties. That’s not the country we live in. But your research is so promising! If it’s true that salient, controversial policy choices are unlikely to be durable without popular passion or ex post payoffs, maybe the way to go is the "submerged state”? Kludgeocracy may not be so bad after all?

You can take heart, I suppose, in my defense above of the public sector from unfair double standards surrounding “corruption”. But in a kludgeocracy you’d at least expect a lot of mismanagement. Looking at the existing submerged state, there do seem to be patterns of stakeholder payoffs that might not accord well with most of of our understandings of the mission of the state. Last year, liberals invested a lot of hope in “secret congress” (which, unfortunately, did not refer to the sort of thing that needs to be civilized by marriage). In this moment's fallen world, when you want to get some particular smart thing done, quiet may indeed be the way to go.

But there is an accountability problem. We’ve been doing the submerged state a lot, and it’s brought us to the crisis of democracy that we're in. In aggregate our skein of tax expenditures form a misshapen blob from which the broad public feels excluded and alienated, but each one was somebody's idea of smart policy. The best lobbyists have a talent for persuading themselves that the interests of their employers and those of the public are happily aligned. If only the public could be made to understand. Of course you are different.

There is no alternative to an effective state, which both makes good choices and makes them via institutions that recruit broad legitimacy for those choices, within which members of the public feel a sense of collective agency.

If you are about getting policy right, good on you. (Really!) But it isn’t enough. We need a better state.

Effective Life Loving

Suppose that you Love Life, but you live in a world where a mysterious Hunter is felling the beasts. This saddens you. You Love Life. So you embark on a program of Effective Life Loving, and try to work out interventions that would Maximize Life as Efficiently as possible with the resources you personally have at your disposal.

There is, you realize, a sad opportunity in all of those corpses the mysterious Hunter generates. Corpses themselves can be the source of much Life! You are smart, creative. You have a scientific background. You realize that if you were to genetically engineer certain flies and fungi you could dramatically improve the efficiency with which old life—those dead beasts—are converted to new. You toil in your laboratory, and the improvement in production of biomass over time is dramatic and satisfyingly measurable. You devote yourself to collecting corpses left behind by the Hunter, wandering far and wide, so that you can site them and seed them to maximize production of new Life. You encourage other smart, creative people—most of whom also Love Life!—to join your project. Many don’t, but some do, and you take some satisfaction in this secondary Effectiveness you can attribute to your efforts. You are well and truly an Effective Life Lover.

A thought, an irritation of the mind, fails to gnaw at you. Wouldnt it be much better, you mercifully fail to think, if the Mystery of the Hunter could be solved, so that rather than seeding new Life on the corpses, Life could just continue without so much need of heroic remedy? Yes. But here is the world. It is what it is. Rationality—it has somehow seeped from graduate economics programs into your very bones—consists of optimizing subject to constraints. The Hunter hunts. You optimize subject to that constraint. You cannot be accused of having caused the Hunter. But as you earn accolades, in your own mind, among the community of Life Lovers you have fostered, does it trouble you that your Success—no no you are much too modest to be successful, it was important that you grow rich to build the laboratories you needed of course but this isn't about you this is about Life—nevertheless does it trouble you that your entire project is framed by the existence of the Hunter? That if the Hunter somehow were stopped, that your work would become obsolete, superfluous, worthless? Are you and the Hunter in some sense collaborators?

No, of course you don’t think these things, because these things are absurd! You didn’t make the Hunter. You would be delighted—sincerely, absolutely delighted—if somehow the Hunter could be tamed. It’s a big, diverse world! Let solving the mystery of the Hunter, reigning them in, be the project of other people. You wouldn’t know where to start. You could not weigh biomass to measure progress. How would you know whether your approach to Life Loving was even Effective? No, that is a project for other people. You—but not just you, also the people you’ve persuaded, and they have made themselves quite unusually rich and well resourced because of course they must be well resourced to be Effective—will work on maximizing biomass in this world as it is.

It occurs to you that the Hunter must be pretty rich too, to do what he does. Perhaps you or some of your peers know them? Perhaps they are somehow among you?

No. Preposterous. You are Lovers of Life.

And of course, though it will not be your thing, you will do what you can to help other people tame the Hunter. Your thing, of course, is rigor. Although you shied away from making Hunter hunting your thing, precisely because it could not be rigorously pursued, you can contribute to others’ work by calling out ways in which the approaches they are taking cannot be rigorously supported and so might fail to be Effective. They will be grateful for the critique, as your faculties of critcism are perspicacious and capable. Well, they would be grateful, if only they were rational and data-driven and open-minded like we are. If it is true that nothing they are pursuing can withstand the rigors of rigor, why should they be so prickly about it? If their lack of rigor, relative to the presence of ours, causes resources to flow disproportionately in our direction, isn’t that only Rational? Give well, right?

Some of them even accuse us of protecting the Hunter. They succumb to weird conspiracy theories that we are the Hunter! What sane person would devote resources to people like that?

Our biomass grows and grows. It may not be as pretty as the beasts who were killed. It is a shame the beasts were killed. But we are restoring a great deal of biomass.

Update History:

  • 16-Aug-2022, 11:55 a.m. EDT: “…you live in a world where a mysterious Hunter is shoouting felling the beasts.”
  • 16-Aug-2022, 12:05 p.m. EDT: “no no you are much to too modest to be successful”
  • 16-Aug-2022, 4:50 p.m. EDT: “they would be grateful, if only they like you were rational and data-driven and open-minded like we are.”; “…consists of optimizaton optimizing subject to constraints…”

When to tax excess margins

Comments at interfluidity are always great, and the previous post was no exception. I want to quickly address some critiques by commenters, and make clear something that was perhaps not so clear in the prior post:

As commenter Effem points out, taxing margins in the way I’ve proposed is similar to imposing a price control, except that it won’t leave goods priced into shortage (as long as the tax above the price threshold is not 100%). The simplest way to understand it is as an exercise of government-coordinated monopsony power to counter the monopoly power that enables firms to profit from imposing scarcity and raising prices. It’s only an appropriate remedy in this case.

Commenter Somebody offers the very straightforward argument that high prices contribute to supply by bringing higher-priced production on line, which taxing price rises should discourage. If a commodity is being competitively produced such that lower cost sources are fully exploited, preventing price rises would indeed impair supply. But if lower cost sources are not being exploited because an oligopoly industry prefers to profit from scarcity instead, it’s more efficient to eliminate the oligopoly rents and get the cheap production online then to hope price rises bring new entrants into more resource-intensive forms of production. To use the commenter’s example, we don’t want to tap Canadian tar oil sands while cheaper sources of oil remain available but unexploited by producer choice. If industry incumbents are intentionally limiting supply, letting prices rise would only bring out this supply if it would provoke competition by new entrants somehow immune to the barriers preventing exploitation of the more accessible sources.

What if, however, a commodity may occasionally be able to command very high margins, but over a full cycle, its price is very volatile and often below average cost? Then clipping high margins may render the commodity entirely uneconomical to exploit. This is Effem’s concern. One way to deal with this is to let the industry consolidate during downturns, and then let it extract oligopoly rents, so that good times cover the bad. But that is not a great approach. It distributes costs unpredictably, and an industry monopolistic enough to make this work may not confine itself to pricing in a normal rate of profit over the full cycle. Another way to manage this is to incentivize storage when the commodity is cheap that can be mobilized when the commodity is dear to blunt the cycle. Futures markets are supposed to do this to a degree: “spiky” commodities tend to go into backwardization, representing a negative cost of storage net of a convenience yield. But obviously futures markets and the storage they incentivize have not been sufficient to prevent destabilizing swings in the price of oil. For really important commodities, state interventions like the Strategic Petroleum Reserve should probably be expanded. But storage can only be a buffer, sufficiently sharp volatility will break it. And there are services that cannot be stored also subject to high fixed costs and feast/famine cycles, like airlines. These industries are always a regulatory challenge: If you manage to create textbook levels of competition, price falls to marginal cost, which in ordinary times with flush capacity means price does not cover average cost, and everybody goes bankrupt. If you let the industry consolidate into pricing power, it grows predatory, and uses prior cycles’ bankruptcies to launder progressively higher scarcity rents. Laissez-faire simply does not work for industries like this. The solution, broadly, is to subsidize these industries through famine, while clipping the potential scarcity rents in good times by, e.g. taxing unusual margins. We just subsidized the airlines in famine. Now, they seem to be enjoying scarcity rents, and are not overly urgent about expanding capacity. We need to routinize a full-cycle theory that serves the broad public, rather than our current practice under which industries panic us into bailouts during rough patches, then enjoy scarcity rents during recoveries.

On Twitter, @InquisitiveUrsa suggests using a price collar around forward commitments to encourage petroleum supply. The state could promise to purchase very large quantities of crude to refill and expand the strategic petroleum, promising to pay at least, say, $80 per barrel but requiring a commitment to sell for no more than say $100 per barrel from domestic suppliers. This is a great example of a full-cycle stabilization approach, rather than a half-cycle panicked subsidy or ad hoc price intervention. (I would prefer pairing the committed price floor with an excess margins tax, to eliminate a screw-the-government-we’ll-take-our-scarcity-rents revolt by industry.)

Commenter Brett worries that taxing excess margins would be bad for innovation. There are a bunch of cases to think about there. Innovation can yield high margins in three ways: (1) A market is broadly competitive, but a first-mover enjoys temporary pricing power during the lag time between the introduction of the innovation and when competitors are able to efficiently reproduce it; (2) A market is intentionally uncompetitive because we have used patent, copyright, or other so-called “intellectual property rights” to grant an innovator the capacity to price at high margins; and (3) no formal intellectual property right protects an innovator but network effects or some other barrier to competition vouchsafes persistent pricing power to one or a few key players. Case (1) is the least problematic. High margins won on new products for which there are no obvious barriers to competition should be celebrated, and certainly not taxed. As time passes, competition should discernibly come to reign in prices and margins. If that does not happen, we may eventually consider it an example of case (3). But we should give the innovator the benefit of the doubt for some time. With respect to case (2), as Dean Baker has pointed out, we are already talking about taxes. Intellectual property rights amount to a grant to private parties to use the coercive power of the state in order to receive what are effectively excise taxes on particular goods and services that otherwise would be provided more cheaply. This is intended as a reward to innovation, though I think that intellectual property rentiers have expanded it into an overly costly and poorly targeted incentive to innovate. Rather than layering a new tax on persistent excess margins derived from a thicket of IP rights and an army of lawyers, perhaps it would be better just to pare back the IP rights and let competition compress the margins. But in our fallen world, perhaps restructuring and optimizing legal arrangements rabidly defended by powerful interests just won’t happen. In which case, taxing persistent excess margins might be a good backstop, letting innovators fully enjoy their intended monopoly for a some period, but creating hazard for those who don’t let up over the long terms intellectual property lobbyists and lawyers are now able to extend exclusivity. Under case (3), where network effects or some other intractable barrier prevents competition over a long term regardless of our collective choice to reward or not to reward the innovator, one way or another of course we should reign in the pricing power and excess margin. That may involve taxing it, or regulating more directly to ensure “natural monopolies” are managed in the public interest. The permanent winner-take-all network effects that have let Facebook, Google, Amazon, and Apple so thoroughly dominate have been terrible, not good, for innovation.

Longtime commenter benign brodwicz argues excess profits should be transferred to firm workers, rather than taxed. The Whitehouse / Warren proposal would have the tax dividended to individuals, which I think is a fine idea (though a hard sell in an inflationary moment, and unfortunately with a phase-out by income). I don’t think transferring scarcity rents to firm workers is a great idea. The transfers would partially substitute for salary, and the result would be worker interests more strongly aligned with shareholders’ to pursue and exploit monopoly.

Taxing persistent excess margins is in the same family as antitrust regulation. It’s a regulatory idea that in application has to be tailored to the particulars of an industry. In some industries, competition works fine, high margins are transient rewards to innovation until competitors catch up, and nothing should be done. But much of our economy is now concentrated or captured by conglomerations of various sorts who squeeze. It is time to squeeze back. Fundamentally, what we want is a regulatory regime that discourages firms and investors from aspiring to monopoly or tacit cartel. We want firms to understand that even if they achieve persistent monopoly rents, they won’t be able to keep them. Just as it is in the interest of the New York Yankees that their league be regulated so not even they can permanently dominate, we want firms in industries to work proactively with regulators to ensure continuing competition. They should understand the alternative will not be a lucrative stagnation but real risk of expropriation.

Update History:

  • 8-Jun-2023, 5:15 p.m. EEST: “and users uses prior cycles’ bankruptcy bankruptcies to launder progressively higher scarcity rents”; “Rather than layering a new tax on persistent excess margins”

Tax excess margins

With prices of commodities like oil soaring, there have been calls for a so-called “windfall-profits tax” from people like Sheldon Whitehouse and Elizabeth Warren. Matt Yglesias brings up the usual objection: If prices are soaring, it’s because producers aren’t producing enough to satisfy demand. Further taxing profits, the story goes, would only blunt incentives to produce, and so would be counterproductive. Yglesias suggests imposing a tax designed to be “inframarginal”, that would tax profits at levels beneath those producers are pretty sure to generate, but leave higher levels of profit untouched to preserve incentives to produce. I agree with Josh Barro that for a variety of reasons, this proposal is “too clever by half”. It would be hard to get right, especially considering how the precedent it sets would be perceived over a longer timeframe.

Nevertheless, it is good that Yglesias moves beyond the neoliberal reflex to assume taxes must always reduce incentives to produce. In theory, a reliably inframarginal tax wouldn’t affect those incentives at all. But we can do even better than that! We can design a profit tax that actually improves incentives to produce!

Holding the cost of goods sold constant, firms have two broad strategies to increase profits: They can increase the quantity of goods that they sell, or they can increase the price. Shareholders may be pleased either way, but the rest of us have a preference for the first strategy. We would like firms to seek profits by increasing production at moderate prices, rather than imposing scarcity and charging high prices. If markets were subject to textbook competition, firms could never choose the second strategy. One firm’s scarce production at high prices would become other firms’ opportunity to expand quantity and market share. But in concentrated industries, or say, an industry dominated by an international cartel and a few large producers, firms may tacitly coordinate to choose the second strategy. Call it “capital discipline”.

When competition does not prevent firms from resorting to scarcity and pricing power, a tax can. The key is not to tax profits per se, but profit margins. Then firms are free to be as profitable as they want to be, if they increase the quantity they produce and sell at customary margins. But if they try to shirk producing and just raise prices, the gravy gets taken away.

You wouldn’t want to tax accounting-derived profit margins. Firms would just raise prices anyway, and find ways to pad costs to keep margins low. But for commodities like oil, we know how expensive oil has to be for even high-cost producers, like US-based frackers, to turn a decent profit on each barrel of oil sold. So all we have to do to penalize the scarcity strategy is tax revenue collected at a fair margin above that price. Suppose the all-in cost to frackers per barrel produced is $80/barrel. We simply impose a tax on revenue above $100/barrel. Once the price of oil rises to this level, it does no good for producers if the price jumps even higher, to $120 or $140. The state takes the extra $20 or $40 away. The only way, then, to increase profits is to sell more barrels, or produce them more efficiently. And that is the incentive structure we want. Rather than blunting incentives to produce, taxing excess margin restores the incentives that, in a textbook economy, competition would provide. The same approach could be applied to refiners’ “crack spreads”. (See David Dayen.)

Not all of our politicians are idiots. If you read the details of the Whitehouse/Warren proposal, it is structured largely this way. It would tax 50% of the difference between current prices and prices known to be profitable for producers during an earlier period. It’s designed to hold producers harmless, if they increase quantities, but reduce the benefit they receive from a higher price. It even exempts smaller producers, to encourage competition to do the work and obviate the tax.

There’s no reason to get too clever by half. Sure, as you’d expect from Elizabeth Warren, a so-called “windfall-profit tax” (that is really an excess margins tax) has a populist stick-it-to-the-price-gougers vibe. But it is also a well designed levy from a technocratic perspective that would enhance incentives to produce when competition is insufficient to discourage industries from seeking scarcity rents. If such taxes are imposed regularly, the threat of them would reduce the incentives for industries to consolidate in the first place. Taxing persistent excess margins is in the sweet spot where good politics and good policy intersect. We should do more of it.

Update: See also “When to tax excess margins” for more, and for responses to common criticisms of this proposal.


Postscript regarding climate change: I am terrified of climate change. It feels perverse to be writing about fossil fuels as an ordinary commodity whose quantity of production at lowest possible cost we should seek to maximize. Over as short a term as possible, we would like fossil fuels not to be produced at all, to be left in the ground. But I broadly agree with Matt Yglesias that, as a practical, political matter, kneecapping supply is a bad approach to this end. The material pain that unusually high energy prices produce, unless mitigated by some sweetener (like a carbon dividend), provokes backlash that undermines political coalitions serious about climate. High fossil fuel prices not due to an overt tax make the people who work to sabotage climate solutions richer and more powerful. These political circumstances may change, perhaps very soon unfortunately, as each summer is deadlier and more frightening than the last. But for the moment, high fossil fuel prices provoke political reaction more effectively than they promote desirable efficiencies. As long as this remains true, the key to weaning ourselves must be to render fossil fuels expensive relative to carbon-neutral alternatives, rather than in absolute terms. That is, we need to drive down the perceived cost of substituting efficiencies or alternative energy sources so that reduced use of fossil fuels is not painful. This is a political rather than ethical claim. From an ethical perspective, we ought to be willing to tolerate large standard-of-living sacrifices (and the redistributions that would be necessary not to starve people) in order to preserve a habitable planet. Politically, however, we are not there yet, so we must invent spoonfuls of sugar to help the medicine go down.

Update History:

  • 15-Oct-2022, 2:35 p.m. EDT: Add bold update about followup post.

No peace, no justice

“No justice, no peace” is a chant commonly heard at protests. The meaning is that there can be no social peace until the injustices being protested are addressed. And there is truth in that. Social arrangements widely perceived as unjust will and should make it difficult to keep the social peace.

But the converse is also true, “no peace, no justice”. There is no justice in the heat of conflict. Nearly every act in a violent conflict is a perpetration of injustice. Even in nonviolent political contestation, when it is hot, the imperative to act in ways partisans believe will advance the cause often overwhelms concerns about justice. Whatever harm some controversy provokes to the people who happen to find themselves in the spotlight becomes secondary to the role of the event in the broader dispute, the ways that partisans can make use of it, weaponize it. That is all quite the opposite of justice.

If you say you stand for justice, you must also stand for some path to social peace. Partisans on all sides of our contemporary disputes seem to have forgotten this. However our controversies shake out, we will all have to live together. If you essentialize partisans on the other side of your disputes as implacable, evil, you leave no hope whatsoever for justice or for peace. In a society that we share, unless you mean to expel or incarcerate or kill large groups of people (in which case you are neither for peace nor for justice), your politics must create space for redemption, cooptation, reconciliation. If your politics does not envision and work towards a decent outcome for your “enemies” as well as your allies, the cause you serve is not just.

On the cultural right, people who essentialize race and assume that demographics are destiny, and so must become the battleground on which political disputes are fought, serve the cause of neither peace nor justice. Demographic difference is inescapable without recourse to atrocity. The turn-of-the-millennium triumphalism of Democratic partisans based on demographics trends was both morally bankrupt and empirically dumb. US history is a recurring story of the identity and politics of various groups changing as they transform from outsider new immigrants to more comfortably American identities. Democrats have belatedly realized that they cannot pocket “Latinx” voters, who can and will often vote Republican. Unfortunately, the bad intuitions of the discredited “emerging Democratic majority” have transmogrified into “replacement theory” on the right, still empirically wrong but even more socially vicious.

On the cultural left, the essentialization of “whiteness” or “white supremacy” as an evil, almost supernatural, force inextricably bound up in the DNA of the United States but that must be “dismantled” similarly leaves no room for peace, and so no room for justice. If the United States is irredeemably white supremicist, then dismantling white supremacy means dismantling the United States. Insurrection was a bad idea on January 6, 2021, and it remains so today. If you claim that “whiteness is a disease”, your plain language leaves little room for full and equal inclusion of people who think of themselves as white in the better society you hope to build, and so sabotages any hope of social peace, and therefore any hope of social justice. People are people. Our humanity transcends demography and so too must our politics. The United States does indeed have a long and shameful history of white supremacy, but it also has a long, imperfect, history of struggling to overcome race-based caste and resentment, from the Civil War to the Civil Rights Movement to George Floyd protests and the contemporary foibles of corporate HR. If, as Aleksandr Solzhenitsyn wrote, “the line dividing good and evil cuts through the heart of every human being” then it surely has not conveniently set itself to one side or the other of giant nations of human beings. Even the United States can, perhaps, be redeemed.

But there is no redemption, and no virtue, in warfare or atrocity. To seek justice, we must also seek peace. The frameworks, theories, words we use to envisage, evangelize, enact a better future are not handed down to us by God or nature or empirical sciences. We create these ideas, we devise, choose, and develop them. I beg you, when you build your theories, remember that you must include a hopeful future for everyone, even the people who for the moment you may imagine are “on the other side”. It is your work to persuade them, not to destroy them. “A defense of your convictions should never require or permit cruelty,” writes David French. There are no devils in this world, only humans. Both justice and peace demand that all us humans live and thrive and love together.

Sweetening a peace

I. Introduction

In the West, there’s a debate between those who think the Ukraine war should simply be vigorously supported until Ukraine wins a decisive military victory and Russia is further weakened, and those like me, who think that some kind of a peace should be arranged immediately, with remaining conflicting claims and aims to be resolved through negotiation. It is not really an answer to say the Ukranians should decide. Of course they, and Russia, ultimately do decide. But those decisions cannot help but be affected by the views of partners whose support is essential now and will become the basis of Ukraine’s reconstruction, whether or not provision of support is made explicitly contingent. One way or another, “the West” is and will be involved in decisions that surround resolving to fight or seeking a peace.

Those of us who’d like to see an urgent settlement are immediately presented with a pretty damning question: How much of their country are the Ukrainians supposed to give up for your peace? On deontological grounds, the answer should be “none” — Ukraine is entitled to all of its internationally recognized territory, including Crimea. On consequentialist grounds, settling for nothing less than a certain, immediate recovery of everything might mean years of destruction, bloodshed, and impoverishment, would risk a broader, even more terrible war, and might not ever succeed. Before the Bucha atrocities were known, and before the Russian cruiser Moskva was sunk, Ukraine and Russia seemed close to terms for some kind of peace that “set aside” certain territorial questions, or maybe would defer them to some distant referendum. A compromise between consequentialism and deontology was on the table. But Ukrainian outrage and the wounded pride of Russia’s military apparently put an end to those talks.

II. Not Munich, not anymore

I don’t have an answer to the question of what Ukraine should or shouldn’t accept to avoid the carnage of continuing war. I do strongly believe that the interest of the West, and indeed of all the world, is in the shortest conflict possible. Crimea 2014 may have been Munich, but Ukraine 2022 will not be. Far from grabbing territory on the cheap, any territorial gains they achieve will be minimal, and won at a high cost in blood, materiel, and prestige. Rather than preventing a broader mobilization by antagonistic powers, Russia has guaranteed one, as the Eastern flank of NATO will now be heavily militarized. This war may leave Russia aggrieved or ruthlessly determined for revenge, but it will not be emboldened by a belief that it can invade neighbors cheaply and escape consequences for aggression. It is continued grievance, not ebullient confidence, that might render Russia a danger following a peace.

The West’s interest, then, should be to seek a peace that is good for Ukraine and diminishes Russian grievance and isolation. US Secretary of Defense Austin emphasized in remarks diminishment of capacity, but without diminishment of grievance that is at best a short-sighted. Russia is a large, resource-rich, nuclear power, with trade and military relationships that continue throughout the world. We’ve not been able to isolate North Korea enough to prevent dangerous militarization. Over even a medium term, we won’t be able to prevent a determined Russia from rearming. As we reach for World War analogies, it’s Versailles much more than Munich that should trouble us now.

III. Acknowledge multipolarity

Russia ought not be permitted to “win” in the sense of amputating much of Ukraine, but it ought not be defeated in a manner that leaves it isolated, aggrieved, and vengeful. Are there ways this war could end that would leave Ukraine whole but Russia in some sense satisfied and reintegrable into Europe?

I think that there are. There’s an opportunity in the fact that, from Russia’s very public perspective, this war is as much about punching back at a putatively domineering West as it is about achieving goals within Ukraine. I do not think Russia’s complaints about its own treatment by the West are particularly justified. Western powers were quite conciliatory towards Russia, until its 2014 annexation of Crimea and fomenting of separatism in Eastern Ukraine. Remember the 2009 “reset”?

Russia, however, perceives itself as a great power, and it is fair to say that Western powers did not treat it as one. We simply ignored Russian objections to military operations in Serbia, Iraq, and Libya. We had “statesmen” publicly dismiss Russia as a “gas station masquerading as a country”.

To a large extent, this war seems to be motivated by Russia’s desire to be recognized as at least an equal of the nations that have insulted and ignored it, especially the United States. (Go back and read your Fukuyama!) Recognition as an equal is something we can give in a peace settlement while betraying no territory or value.

Russian media accidentally published a weird, triumphalist statement a few days after the war began, written on the assumption that Russia would have achieved a rapid and complete victory. The statement concludes:

A multipolar world has finally become a reality… China and India, Latin America and Africa, the Islamic world and Southeast Asia – no one believes that the West leads the world order, much less sets the rules of the game. Russia has not only challenged the West, it has shown that the era of Western global domination can be considered completely and finally over.

The new world will be built by all civilizations and centers of power, naturally, together with the West (united or not) – but not on its terms and not according to its rules.

There is nothing objectionable in the idea that all must work together and have a hand in ordering the world. “The West”, and the United States, should openly and publicly welcome that. We have sometimes flouted them in practice, unfortunately, but those ideas formed the basis for the rules-based order and multilateral institutions we strived to craft after World War II.

There are and perhaps always will be real power differentials in the world, so some states will in practice have more sway than others. Russia, for example, has a military presence in Syria protecting port access to the Mediterranean that it craves. Very few countries have any sort of arrangement like that. When there is a civil dispute in Kazakhstan, Russia intervenes, but not vice versa.

De facto power is unequally distributed, a circumstance that Russia, the United States, and other powerful states, take advantage of. But at a normative level, we want to be a world of equals, all of whom work together to define our collective future. And at a practical level, we should all seek to create a more equal world, but one that extends the security that has been enjoyed by only a portion of the world to inhabitants of all nations, rather than one that extends insecurity to all.

A settlement with Russia could include a statement signed by, say, the American President and the leader of NATO affirming that the “world will be built by all civilizations and centers of power, naturally, together with the West (united or not) – but not on its terms and not according to its rules.” Russia might not have succeeded at its territorial aims, but it would have struck a blow against The Man, while the cost to Western powers would be simply to affirm aspirations that we all share.

IV. Recommit to the UN

More concretely, we could use the Ukraine settlement to acknowledge that the era of unilateralism in addressing global security challenges has proved a failure, and we must recommit to a multilateralism centered around a UN process. That process must be reformed to be more accountable, and less afflicted by the paralysis that provoked the United States and NATO to circumvent it in the first place. The catastrophic consequences of interventions in Iraq, Libya, and Afghanistan, as well as Syria and Ukraine, have proven that letting independent powers or “coalitions of the willing” freelance global security invites accidents, abuses, and disputes. But the conditions that left the world helpless to prevent the catastrophes of Rwanda and Bosnia, not to mention the conflicts in Ethiopia and Yemen today, must also be addressed. [*]

V. Mutual regime change

I am absolutely opposed to “regime change” as an ambition of foreign policy. How a polity is to be governed is a matter for its own citizens to decide. However effective or poor a state’s institutions might be at enabling and ensuring consent of the governed, perceived foreign aggression or interference in the process provokes reactionary nationalism that may entrench a bad government and excuse its repression. It seeds mistrust and division that badly damages civil society. Even when it is “successful”, it rarely produces a government with enough legitimacy to govern well. Who is to govern Russia and how is for the Russians to work out.

Unfortunately, given the perception in the West now of Putin as a dangerous and aggressive dictator, it strikes me as unlikely that sanctions will be reversed while he remains Russia’s leader. Sanctions will not yield regime change, any more than they have in Iran or North Korea, and it will be very difficult to reintegrate Russia as a neighbor and friend while Putin remains in power. But a permanent “fortress Russia”, like a North Korea on steriods, is a terrible outcome, for Russia and for the world.

I think people in Russia quietly understand this dilemma. Perhaps even Mr. Putin himself does. But surrendering to a demand of regime change by hostile foreign powers is a humiliation, politically unthinkable.

What if, however, a settlement were to require mutual regime change? It would be very simple. What if Russia’s President Putin, Ukraine’s President Zelenskiy, and perhaps even America’s President Biden all agreed not to stand for a further term of office? That would be a kind of mutual recognition that existing leadership failed to preserve the peace and good relations, and a very terrible catastrophe occurred on their watch. It would constitute a remarkable act of statesmanship by each President. For democracies like Ukraine and the United States, regime change is regularized in the form of term-limited elections. Russia would, by its institutions formal and informal, work out its own succession.

There would be a risk that Putin would choose his own successor, perhaps a person still under his effective control. But there would also be a strong national interest in choosing a new government not so abhorrent to Russia’s neighbors that ending the country’s forced isolation remains impossible. A new government in Russia would be a true reset, a new hope for a warm peace rather than a cold war on the Eurasian continent, “from Lisbon to Vladivostok”. And that, according to former President Dmitry Medvedev, was one of Russia’s objectives in the war.

VI. Sanctions relief

The most straightforward sweetener of all is sanctions relief. Putin allegedly discounted the threat of sanctions in his decision to go to war, because he views Western powers as so implacably hostile that whatever sanctions his invasion might provoke would eventually have been imposed in any case. There was then little to lose in “striking first”.

I would like to see the West prove his thesis of permanent hostility wrong, and quickly reopen to Russia when a settlement is reached. If there is a change of government, failing to do so would unhelpfully validate Putin’s paranoia. For some period of time, the West will probably maintain controls on exports of dual-use technology to Russia, but as relations normalize and improved, hopefully those too can be loosened.

VII. An extended hand

In general, I think it is critical that Western leaders remind the Russian public that we will not hold a grudge against the people for their leader’s awful choice. We must express hope and optimism that Russians can become full fledged members of a Europe, a Eurasia, whole and at peace. This is a moment where love must temper judgment.

Whatever complicity you want to attribute to ordinary Russians for their failure to stop their leaders or their acquiescence to a ginned-up chauvinism, preventing or disrupting this war — under conditions of great risk and repression, when Vladimir Putin was resolved to prosecute it — would have been an extraordinary challenge. Given the risk, the degree of public protest and dissent has been astonishing. Perhaps there is room to offer the Russian public some credit for that. It would be a good outcome if nearly all Russians look back to this time and see themselves as having quietly been objectors, regardless of whether or not you think that is true.

VIII. Embrace Ukraine

Sweetening a peace is not just for Russia, but especially for Ukraine. Ukraine is the country being bombed and shelled and shot, whose people have been displaced and so much worse. Peace itself will be a profound reward for Ukraine. But with any settlement that is not complete and total victory, the sweetness will be tinged with the bitterness of terrible injustice and loss. Ukraine’s friends and partners should help ensure the most delicious peace possible for the country. Ukraine’s accession to the EU should be accelerated, and that should only be the beginning.

IX. Marshall plans

Europe and the United States should jointly provide extraordinary investment in Ukraine’s reconstruction, a new Marshall Plan. No doubt this investment will be expensive, but Ukraine is owed the support for its role and extraordinary valor in protecting the Europe’s postwar order.

If there is new leadership in Russia, a Marshall Plan should be undertaken there as well. The value of preventing the emergence of a vast, hypernuclear North Korea would far exceed the cost of the investment, as it did with Germany after World War II. Russia is a state beset with the “resource curse”, the infamous phenomenon whereby resource rich countries prove liable to corruption and difficult to govern well. It would be wonderful if a new investment program for Russia would look to neighbor Norway, among the most successful countries in the world at managing resource wealth for the benefit of its citizens.

X. Conclusion

All of this may sound difficult and unlikely, perhaps absurdly idealistic. But please consider the alternatives. Perhaps Russia’s nuclear saber rattling is just that, and there is no great medium-term threat. I am far, far from comfortable with that risk, but let’s say. What does a world look like over time in which Russia remains aggrieved and isolated, however badly it is beaten in this war? If North Korea and Iran can’t be coercively prevented from rearming over time, can Russia be? In an angry, isolated, still nuclear Russia, can we be confident that some even madder regime won’t emerge? Perhaps the best case scenario is that Russia becomes more comfortably, less bitterly, enmeshed in a reasonably rational, China-led bloc. But is that really likely? And can we do no better than a new cold war, with China and Russia on the other side, as our iffy very best-case scenario?

This war must come to an end quickly not just because every day it continues means death and destruction in Ukraine and risk to human life on all the planet. The war must come to an end quickly because we must start the work of building a future that is hopeful both for Ukraine and for Russia, upon which a hopeful future for the entire world depends. The longer and more bitterly the war drags on, the harder it will be to create that future.

Let’s work to end the war now, and build a durable prosperous peace, for Europe, the Americas, and also for Asia, Africa, the Indo-Pacific. We will always have our rivalries, but we can work together to make them constructive rivalries. We can no longer afford major war, between existing large powers, or with emerging powers like Iran. We cannot keep sleepwalking through history in habitual hostility, until something breaks that threatens all of our lives. We are too powerful to be so reckless and survive. Instead, let’s all survive, and thrive, in peace.


[*] A simple reform would be to impose obligations along with the right to veto upon permanent members of the Security Council. When the Security Council would have approved some action but for one or several permanent members’ veto, the power(s) that exercised the veto would become obliged to take a leadership role in ensuring a humane resolution of the crisis at issue diplomatically, without Council-authorized action. An independent inspector would simultaneously be convened, staffed by appointees of nations that would have acted, to report on and evaluate the vetoers’ diplomatic efforts. The intent of this would be to force vetoing powers at the Security Council if they act to shield their friends (Israel for the US, Serbia for Russia, etc.) to take some responsibility for their friends’ actions after the shielding. Another perhaps overdue reform might be to add a special joint permanent membership for India and Pakistan, so that when those two powers are agreed (and only then), they too have veto power. The world’s most populous nation should be a permanent member. But elevating post-partition India alone would empower one side of ongoing conflicts, for which maintaining some balance at the level of global diplomacy remains important.

Update History:

  • 17-May-2022, 1:40 p.m. PDT: “It is continued grievance, not ebullient confidence, that might render Russia a continuing danger following a peace.” Fix extent of blockquote, which mistakenly incorporated a paragraph of my text.