Ukraine, Russia, and the US

Matthew Rojansky, Director of the Kennan Institute of the Wilson Center, had some thoughts on this during a live interview on Fox News, and repeated in Fox’ online feed. These remarks were made in the context of a warning that Russia will use the Russian surrogates’/Ukrainian separatists’ situation as a pretext to invade Ukraine to resolve a cynically made-up “humanitarian crisis.”

We don’t want a war. We cannot win a war against Russia. You know, this is not Al Qaeda. This is not the government of Saddam Hussein. This is the Russian Federation, the inheritors of the Soviet Union’s nuclear arsenal. We cannot get dragged into this war. But by the same token, the Ukrainians can’t win it by themselves.

If we keep going with sanctions, it’s a dead-end process. We can continue to do it for moral reasons to show that we’re doing something, but we’ve also got to have an endgame negotiation that the Russians are part of.

He’s right, and he’s wrong. He’s right that we don’t want war; no sane nation does. He’s right that Ukraine can’t win their current war by themselves.

But he’s terribly wrong where it counts. Of course, we can win a war against Russia. Indeed, he implies that Ukraine can win such a war, if only they’re not alone. No, the only way we could not win would be for us to give it up before it starts—”we can’t win” is just a dangerously defeatist mindset.

It’s that mindset, too, that is contributing so heavily to Ukraine’s current strait. Russian President Vladimir Putin has the measure of President Barack Obama and of Obama’s key cabinet players, and Putin is confident he can act as he pleases and the US will make no meaningful response. Putin is confident that we’ll do something “for moral reasons to show that we’re doing something” but that something will be confined to more wrist-slap sanctions. Putin most carefully has observed the American administration’s penchant for “leading from behind,” which many people more accurately identify as leading the retreat.

Rojansky also is wrong that the endgame negotiation must be something of which the Russians are part. Certainly, it would be nice if the Russians were part, but they really have very little useful to say in the matter until they stand down from Ukraine’s eastern border; until they stop shooting at the Ukrainian army from within Russia; until they stop supplying the…separatists…with arms, artillery, SAMs, ammunition, and so on; until they withdraw from their occupation of Crimea.

No, the right answer is to ratchet up the economic pressure on Russia with real sanctions and openly and effectively helping Ukraine (and Europe) find non-Russian sources of oil, gas, and other goods, and to ratchet up the pressure on Russia by supplying Ukraine with arms and ammunition.

And to openly and publicly recognize that the Russian nuclear threat has only the credence we choose to give it. If we’re not threatened by it, it is no threat. It is no threat because Russia does not want a war with us, either, and especially, Russia will not go nuclear over eastern Ukraine.

Update: Corrected the second paragraph, beginning “If we keep going with sanctions…,” to indicate it was part of Rojansky’s remarks, and not part of my writing.  I apologize for the error.

Some More re Obamacare

The Wall Street Journal provided an interactive and a graph earlier this week in their online issue.

The Explorer, available here, allows you to quickly explore the highlights of what’s available in your county.  As I’ve mentioned before, what I can get in my little county in Texas would be vastly more expensive in terms of premiums required and deductibles to be paid by me before the health plan would begin to pay (only) some of my expenses, were I to have to replace what my wife’s employer provides due to the employer’s decision to cancel its program.

This (these) graph(s) shows the subsidies you’re paying, both in terms of additional Obamacare taxes and in terms of those higher premiums and deductibles in order to pay for someone else’s health plan.  I’ve broken the WSJ‘s single image into two parts for convenience.  Keep in mind that the example presented is for a single person (and for that person living in Ohio).  The first part gives the basis for subsidy calculations:

This second part gives the additional subsidies that are available under Obamacare:

I’ve written elsewhere about the poverty trap that is government welfare, and the rational nature of the economic decision to stay on welfare rather than take a wage increase which is that trap.  Here, we see that a person making $11,490 (a student, perhaps) who graduates and takes an entry-level job at $28,725 will see his health plan out-of-pocket costs skyrocket from $1,000/yr to $5,000 and his $100 deductible go to $1,500.  He’ll also see his monthly premium (heroically assuming that the two plans in these two graphs have identical premiums, but you get the idea) increase by $1,212 per year.  The total health plan cost increase of $6,612 per year represents nearly 40% of that wage increase—and this is before considering the other welfare subsidies which this man also loses from that wage increase.

What Does Russia Do for Us?

Or, more to the point, what’s the value of Russia’s good opinion of us?  After all, it’s this perceived need that’s among the barriers to providing meaningful aid to Ukraine in the face of the present Russian invasion of that country.

Max Boot, at Commentary, suggests that one aspect of the pseudo-thinking going on inside President Barack Obama’s head and that of his State Department Secretary is this:

Russia…remains an important power that Washington hesitates to antagonize because of a general feeling that we need Russian help to deal with Iran, Syria, Afghanistan, and other important issues….

What help?  How has Russia “helped” us in any way there, or anywhere else?  In Iran, the Russians are actively helping build nuclear reactors and actively blocking attempts to slow, much less stop, the Iranian drive to acquire nuclear weapons.  In Syria, the Russians are actively propping up Bashar al-Assad and sending him both arms to replace combat losses and SAMs with which to oppose the Israeli air force.  In Afghanistan, the Russians routinely interfere with (though they’ve not actually blocked, yet) our access to Kazakhstan, Turkmenistan, Tajikistan, and Uzbekistan, from which a major portion of our Afghan-based troop resupply flows.

Those “other important issues?”  Russia has replaced us in Egypt.  Russian is propping up a failed Venezuelan government that is antagonistic to us.  Russian is back to sending naval units, including electronic surveillance assets, to Cuba.  And now they’ve invaded Ukraine, with a view of anschluss and partition.  And so on.

Since Russia isn’t helping us anyway, what “help” will we lose if we support, materially, the nascent Ukrainian government?

Aside from the morality of the situation (the strong should protect the weak), and the improvement to our credibility, it’s in our national interest to actively support the new Ukrainian government, to facilitate their—and the bulk of their people’s—move to closer ties with Western Europe and the West generally.

It’s in our interest to do this regardless of what the Russians might think of us as a result.  Or even because of that.

Moral Hazard and Obamacare Welfare

The recent CBO report on the mid- and long-term effect on willingness to be employed of Obamacare hinted at the moral hazard of Obamacare and of welfare, generally [emphasis added].

In 2014, for example, a single person or a family whose income is 150 percent of the FPL [Federal Poverty Level] and is eligible for subsidies will pay 4 percent of their income for a certain “silver” health care plan purchased through an exchange; if their income is 200 percent of the FPL, they will pay 6.3 percent of their income for that plan.  An increase in income thus raises the enrollee premium (and reduces the subsidy) both because the percentage-of-income formula applies to a larger dollar amount and because that percentage itself increases.  People whose income exceeds 400 percent of the FPL are ineligible for premium subsidies, and for some people those subsidies will drop abruptly to zero when income crosses that threshold.

That’s the mechanism through which this particular iteration of moral hazard works.  It’s a tradeoff of a short-term gain of minor security in return for giving up the opportunity for better lives in the longer term and permanently through working more hours, including to the point of working full-time, thereby increasing their earned income.

This mechanism is, in fact, an enormous marginal tax on the next dollar of earned income, and it hits our poor and marginal citizens the hardest.  This tax reduces the net value of the income increase from taking a better job or working more hours.  It’s a cynical poverty trap.

It’s not that these folks are lazy—that’s a question only in the minds of Progressives trying to distract from their failure by demonizing Republicans and Conservatives.  It’s that this iteration of moral hazard has honest men making entirely rational economic decisions—to stay on the welfare program(s).

Beyond the damage inflicted directly on these subsidized people’s true welfare and their morality, the moral hazard inflicts a broader failure, too:

Apart from harm to individuals, ObamaCare is also wasting human potential because fewer workers mean a less prosperous, less dynamic economy.  Contrary to liberal patronizing, many near-seniors, moms, and the rest like their jobs and contribute to productivity.  The 2.5 million worker ObamaCare job exodus, CBO estimates, translates into a 1.5% to 2% reduction in the total number of hours worked, which means less growth.

That failure, that slowed growth rate, reduces the ability of those who do wish to work more, who do wish to make things concretely better for their families, to do so.  It hits hardest, again, our poor, but this effect extends to the lower- and mid-middle class man who is working and looking to work more and earn more.

Here’s a concrete example, courtesy of Keith Hennessy, via AEIdeas:

  • A family of four with one wage-earner has $35,300 of income this year and no health insurance through work. Because of the significant Affordable Care Act subsidies, this family can buy health insurance for only $1,410/year.
  • The other spouse wants to take a part-time job to supplement their family income. This part-time job would earn them an additional $12,000 per year (gross).
  • But this additional income would reduce their ACA premium subsidy, so they would now have to pay $2,970/year for the same health plan.
  • This reduced subsidy, a direct result of the spouse’s part time work and higher family income, reduces the value of the $12,000 of added income by $1,560 (=$2,970 – $1,410). That subsidy reduction is 13 percent of the gross income increase.
  • So maybe this spouse chooses not to take the new part time job because the net financial benefit of additional paid work just isn’t worth it.”

When all the welfare payments (means-tested, also) for which a family in this income stratum is eligible are included in this sort of calculation, the subsidy reduction becomes a much larger per centage of the income increase—and even can be larger than that increase: a net income reduction from earning more through working.

This is illustrated in the graph below from Pennsylvania State Secretary of Public Welfare that shows how public benefits interact with each other to create welfare cliffs—income cliffs—that “phase” out as income smoothly increases.

What this means is that as people in these low-end earner brackets make more money, they face massive effective marginal tax rates—sometimes the equivalent of 100%.  Every dollar they earn would lose them more than a dollar in public assistance.

Hennessey extended his example [emphasis his]:

My back-of-the-envelope calculation, using H&R Block’s tax calculator, is that the ACA increases this moderate income family’s marginal effective [federal] tax rate by 13 percentage points, from about 37% to about 50%. The 37% includes very little income taxes, but a lot of reduced EITC and reduced refundable child credit, as well as higher employer and employee-side payroll taxes.

Then, the moral hazard question Hennessy asked, but which the Progressives avoid:

Finally, the hard one: do the benefits of the premium subsidy to this family outweigh the costs of trapping this family at this income level by killing the financial benefit they receive from more work, education, training, or other professional advancement?

This is moral hazard.  It’s economically more efficient, at least in the near term—that paycheck to paycheck, welfare payment to welfare payment time frame in which our poor and working poor exist—to not work more, to not earn more, but rather to continue the welfare payments.  This is not a matter of laziness; this is that cynically created poverty trap.

Again, it reaches beyond the welfare recipient, too.  Those who do make the choice to work more are forced by that choice to pay for those who choose to work less: the former are the ones who must pay the taxes that partially cover the welfare payments, with government borrowing covering the rest (a future tax on those working men and their children).

Failure of the Euro—a False Fear from Moral Hazard

“The euro is in trouble and only Germany can fix it.”  That’s the meme—and the fear—described in a recent Spiegel Online piece.

Much of the euro zone and EU “leadership” is pushing for a “bank union,” a “debt repayment fund,” a communalization of (southern Europe) debt across Europe in the form of euro bonds.  Without one or more of these, goes the plaint, there is no way to stop the debt crisis.

But these worthies make no coherent case for why the taxpayers of one country should be held liable for the debts of other countries’ governments—or of other countries’ private institutions.  Indeed, this amortization across the sound and responsible can only damage, if not break, the sound and responsible economies and create an enormous moral hazard by indemnifying the irresponsible from the consequences of their profligacy.  This indemnification can only encourage yet more of the same.

Subsidizing anything only produces more of that thing, without making it any more accessible to the originally targeted population, and the schemes above only subsidize borrowing.  This is the way to prolong the debt crisis, it is not a solution to it.  These proposals do not even pretend to an imposition of fiscal discipline, either from within the fiscally irresponsible nations themselves or from without by the sound nations withholding further lending.  The courses proposed will only have the effect of punishing the sound for their soundness and they will reduce those sound nations’ own willingness (much less their ability) to maintain their own fiscal responsibility.

If euro bonds were introduced, goes one claim, countries like Italy and Portugal could take on large amounts of new debt without having to fear effective monitoring of their government spending.  Yet this is an aspect of moral hazard.  Jens Weidmann, President of the Deutche Bundesbank, the German central bank, points out that if debts were shared, “liability and control would have to be in conformity with one another.”  Indeed.  But if such unity were achieved, the empirical evidence demonstrates that it would be by loosening the discipline of the responsible countries, the direct opposite of the needed outcome.  The profligate borrowers, bailouts in hand, will have no incentive to mend their own ways, to seek discipline.

Italy, for instance, has a debt-to-GDP ratio of 120 percent. The proposed courses of action would mean that Rome could transfer a significant fraction of its debt to a shared euro debt fund, for instance.  The Italians thus would have even less incentive to introduce necessary structural reforms.   There’s that moral hazard.

For all this, Sabine Lautenschläger, Vice President of the Deutche Bundesbank, points out that when there is a crisis in a national banking system, “it may be necessary to use the money of taxpayers in other countries.”  This is moral hazard carried to the point of naked freeloading.  “I exist, and you have money.  Therefore, you owe me.”

The matter is emphasized by the current bailout of Spanish banks, long resisted by Prime Minister Mariano Rajoy, and the market’s recognition of the failure of such a thing: following news of the loaning of €100 billion ($126 billion) to Spain’s larger banks, the financial markets pushed Spanish borrowing costs to recent year record levels.  And of course the markets reacted badly: they correctly recognized this as simply adding debt to a debtor who has said he’s unable to repay existing debt.  Rajoy was correct to resist the bailout for as long as he did, and he was wrong finally to accept it.  He has only increased the danger to Spain.

That’s the moral hazard; now we get the Chicken Little act: “senior officials” in Berlin are openly discussing the possibility that the euro could fall apart, and Christine Lagarde, Managing Director of the International Monetary Fund, insists with a straight face that there remain only “three months” to save the euro.  A senior euro-zone diplomat in Brussels bleats, “If Germany doesn’t make a move, Europe is dead.”

There’s more: Germany already has billions of euros invested in preserving the currency zone says Spiegel