ISIS and Saudi Sectarianism

This morning, a car bomb exploded outside a mosque in Saudi Arabia, the second such attack in a week. The attacks, which have killed at least 25 people, were aimed at the minority Saudi Shi’a community. In doing so, ISIS is expertly capitalizing on Saudi Arabia’s internal sectarian divide, which is worsened not only by domestic repression, but by the propaganda supporting Saudi Arabia’s activist foreign policy in Syria, Yemen and elsewhere. Saudi rulers should remember that sectarianism, though convenient for political purposes, also carries substantial risk.

In an interview shortly before the recent Camp David summit, President Obama committed the faux-pas of pointing out the internal problems faced by many of the GCC states. He noted that these states contain “populations that, in some cases, are alienated, youth that are underemployed, an ideology that is destructive and nihilistic, and in some cases, just a belief that there are no legitimate political outlets for grievances… The biggest threats that they face may not be coming from Iran invading. It’s going to be from dissatisfaction inside their own countries.”

He’s not wrong. Saudi Arabia is well-known as one of the world’s most repressive states, with little political representation and no rights for women or minorities. Further, oil prices remain low, and while the Saudi state has massive cash reserves, the rise of shale oil has diminished its role as the world’s main oil producer. Saudi Arabia also has a growing youth population, with 51% of the population under the age of twenty five.

This is itself less concerning than the inability of the oil-dependent Saudi state to provide stable employment opportunities; the unemployment rate for those between fifteen and twenty-five years of age is at least 30%. It is no wonder that many of the unemployed youth of Saudi Arabia are attracted by movements like ISIS. Indeed, by some estimates, more than 2,500 of the foreign fighters in Syria come from Saudi Arabia. The newest iteration of this threat is seen in attacks like those of the last week, as young men susceptible to ISIS avoid travel to Syria, and instead carry out attacks inside Saudi borders.

Yet the ISIS attacks also highlight the pernicious influence of state-supported sectarianism. The bombers astutely aimed the bombings not at Sunnis, but at the state’s minority Shi’a population. While targeting Sunnis would likely have increased resolve among Saudi citizens, targeting Shi’a mosques instead served to cast worshippers as heretics, highlighting domestic sectarian tensions.

The attacks remind Saudi Shi’ites that their own government uses sectarian messaging on state TV, and has close ties to clerics which rail against Shi’a heretics. Shi’ites in Saudi Arabia don’t even enjoy the same minimal political rights that their Sunni compatriots do, and the state has repeatedly cracked down on calls for increased representation.

These tensions are being further inflamed by the war in Yemen, which is being presented by Saudi state TV as a crusade against Houthi Shi’ites. The same applies to the state’s newly activist foreign policy, which is portrayed broadly as a challenge to Iranian and Shi’a interests across the region. The high civilian death toll in Yemen – as many as 2,000 people – and the reticence of the Saudi government to seek a political settlement with the Houthis also contributes.

In short, the ISIS attacks targeted a potential cause of instability within the Saudi state, requiring Saudi rulers to strike a delicate balancing act. They must show support for the attacked communities, while avoiding upsetting the hardline Sunni clerics which support the royal family. Balancing these factors while continuing to use sectarian language to justify the state’s wars in Yemen and elsewhere may prove impossible.

As the Arab Spring illustrated, even states which appear relatively stable can suffer from instability and chaos. It also showed that once the Pandora’s Box of sectarianism has been opened, it is extremely difficult to shut. As ISIS attacks within Saudi Arabia seek to increase tensions between Sunni and Shi’a populations, this is a lesson Saudi Arabia’s rulers would be wise to bear in mind.  

The Folly of Centralized Spending

I’ve argued that the centralization of government spending in Washington over the past century has severely undermined good governance. Citizens get worse outcomes when funding and decisionmaking for education, infrastructure, and other things are made by the central government rather than state and local governments and the private sector. The problem is the same in the European Union, as a new article in Bloomberg on the funding of Polish airports illustrates:

Local authorities are spending some 205 million zloty ($58 million), including more than $44 million in EU subsidies, to build runways and a new terminal that could accommodate more than 1 million passengers a year. The Olsztyn Mazury Airport is scheduled to open next January, but traffic and revenue forecasts developed by the project’s backers are “very far from reality,” says Jacek Krawczyk, a former chairman of LOT Polish airlines who advises the EU on aviation policy through its European Economic and Social Committee.

Szymany adds to a burgeoning supply of costly new airports across Poland. Since 2007, the EU has spent more than €600 million ($666 million) to build or renovate a dozen Polish airports.

… Mostly, though, Poland’s new airports have been a financial bust. A report in December by the European Court of Auditors found that EU-subsidized airport projects in Poland, as well as others in Estonia, Greece, Italy, and Spain, had “produced poor value for money.” Traffic at most airports fell far short of projections, and there was little evidence of broader economic benefits, such as job creation, the report found.  

With respect to U.S. infrastructure, there is ongoing pressure to increase federal investment, despite decades of experience on the inefficiency of it. Politicians and lobby groups constantly complain that America does not spend enough on infrastructure. But they rarely discuss how to ensure efficiency in spending, or cite any advantages of federal spending over state, local, and private spending.

I’ve discussed the many downsides to federal aid for infrastructure and other local activities here and here. But I was alerted to an additional argument against aid from this Regulation article by William Fischel and this book by James Bennett. Federal aid encourages local governments to expropriate private property, often for dubious purposes.

The article and book discuss the expropriation of Detroit homes for the benefit of General Motors in the 1980s. The “Poletown” project would not have happened without $200 million in federal and state loans and grants to the city. So Fischel makes the point that (abusive) government uses of eminent domain—such as the Kelo case in New London, Connecticut—are encouraged by the flow of federal and state funds to cities. That is, money for “economic development” and the like.

State and local governments would make better decisions if they were responsible for their own funding of programs and projects. The annual flow of more than $600 billion in federal aid to state and local governments should be phased out over time and eliminated.

Life In One D.C. Suburb: “Town Has Become Farcically Overregulated”

Discontent at a land-use control process perceived as “condescending and obnoxious” helped fuel a surprise voter revolt in affluent Chevy Chase, Md., just across the D.C. border in Montgomery County, reports Bill Turque at the Washington Post. Aside from intensive review of requests to expand a deck or convert a screened-in porch to year-round space, there are the many tree battles:

[Insurgents] cite the regulations surrounding tree removal as especially onerous. Property owners seeking to cut down any tree 24 inches or larger in circumference must have a permit approved by the town arborist and town manager attesting that the tree is dead, dying or hazardous.

If turned down, residents can appeal to a Tree Ordinance Board, which applies a series of nine criteria to its decision, including the overall effect on the town’s tree canopy, the “uniqueness” or “desirability” of the tree in question and the applicant’s willingness to plant replacement trees.

MorePhilip K. Howard with ideas for fixing environmental permitting. [cross-posted from Overlawyered and Free State Notes]

Good Precedents against NSA Spying

With debate about NSA spying continuing in the Senate, it’s worth looking at some of the historical and modern precedents for protecting our communications and communications data. A few highlights:

  • The earliest precedent for protection of communications in the United States is the treatment of mail. The founders used postal mail to communicate their revolutionary ideas and even to plan their insurrection against the tyranny of King George, so they prioritized protecting the privacy of the mail. In the Act of Feb. 20, 1792, passed a few short years after ratification of the Constitution, the U.S. Congress enshrined protections for mail in the law, creating heavy fines for opening or delaying mail.
  • The Supreme Court confirmed the existence of constitutional protection for postal communications in Ex Parte Jackson. In that 1877 case, the Court described the Fourth Amendment’s guarantees in very interesting and clear language: “Letters and sealed packages … are as fully guarded from examination and inspection, except as to their outward form and weight, as if they were retained by the parties forwarding them in their own domiciles.” Though we place mail in the hands of government agents, the Fourth Amendment protects it like it’s inside our homes.
  • The year Ex Parte Jackson case was decided, both Western Union and the Bell Company began providing voice telephone service. The Supreme Court addressed constitutional protection for phone calls some decades later in 1928. The Olmstead case was wrongly decided, we now know. It found that telephone communications weren’t protected by the Constitution. So the dissents are where to look for precedential language. Justice Brandeis’s famous dissent spoke of the “right to be let alone,” but Justice Butler provided thinking and language that should have more lasting value: “The contracts between telephone companies and users contemplate the private use of the facilities employed in the service,” he wrote. “The communications belong to the parties between whom they pass.” The communications belong to the parties. That’s a fasacinating and important way to think about our communications, as property that we own.

Proven Reforms to Restrain Leviathan

Back in March, I shared a remarkable study from the International Monetary Fund which explained that spending caps are the only truly effective way to achieve good fiscal policy.

And earlier this month, I discussed another good IMF study that showed how deficit and debt rules in Europe have been a failure.

In hopes of teaching American lawmakers about this international evidence, the Cato Institute put together a forum on Capitol Hill to highlight the specific reforms that have been successful.

I moderated the panel and began by pointing out that there are many examples of nations that have enjoyed good results thanks to multi-year periods of spending restraint.

I even pointed out that we actually had an unintentional - but very successful - spending freeze in Washington between 2009 and 2014.

But the problem, I suggested, is that it is very difficult to convince politicians to sustain good policy on a long-run basis. The gains of good policy (such as what was achieved in the 1990s) can quickly be erased by a spending binge (such as what happened during the Bush years).

Republicans Should Welcome Trade’s “Burgeoning Bromance”

The skepticism was evident in conservative talk-show host Laura Ingraham’s voice when she referred to the working relationship between President Obama and Senate Majority Leader McConnell as a “burgeoning bromance.” Her sentiment is shared by a number of Republicans in Congress, who are unhappy that Senate and House leadership is working with the president to secure Trade Promotion Authority.

Perhaps it’s no longer axiomatic that trade divides Democrats and unites Republicans.  According to Politico, “about 40 to 45 of the 245 Republicans in Congress are hard ‘nos’ on [TPA]” with many asking: Why would Republicans want to give this president, who has aggrandized his authority and disregarded congressional prerogatives, any more power?  Well, they shouldn’t.  However, TPA would not give the president any power to make mischief.

Trade Promotion Authority is neither a congressional capitulation nor an executive power grab.  It is a compact between the branches, which effectively deputizes the president to negotiate trade agreements on behalf of Congress, which meet parameters and fulfill objectives spelled out by Congress, which are put to votes in both chambers of Congress. 

If the concluded trade agreement meets Congress’s parameters and fulfills its objectives, legislation to implement the agreement is considered without amendments on an expedited timetable by an up-or-down vote.  If the agreement fails to meet Congress’s parameters or fulfill its objectives, it can be taken off the so-called fast-track through a resolution of disapproval.  And, ultimately, members and senators can always vote “no” if they don’t like the deal.  

The Futility of Stimulus

George Selgin has recently focused on the failure of Federal Reserve policy to finance a normal recovery. The Fed has greatly expanded its balance sheet and created a large quantity of excess reserves, which, for a variety of reasons, commercial banks have not mobilized into credit creation. Instead, banks seem content to earn the 25 basis points of interest the Fed now pays on reserves.

This anomalous behavior shows up in the M1 money multiplier, which is at record lows – less than half its value before the financial crisis. The Fed is creating reserves, but commercial banks are not creating as much bank money as has been historically true. Compounding this is the fact that the velocity of M1 – the rapidity with which each dollar is spent annually – has hit a 40-year low. Consequently, the Fed’s efforts to produce monetary stimulus have failed.

(A similar story can be told for other money supply measures. Data and charts can be found at FRED, the online data center at the Federal Reserve Bank of St. Louis.)

I do not think economists fully understand all of the factors contributing to this policy failure. But Selgin has surely identified one relevant factor, the payment of interest on reserves. On the margin, it creates a disincentive for commercial banks to create money and credit in a normal fashion. There are also fiscal reasons for ending the payments, as they reduce the payments the Fed makes to the Treasury. As it is, the payment of interest on reserves constitutes a fiscal transfer from taxpayers to commercial banks. In a normal world, I would endorse his call to end the interest paid on reserves.

We do not live in a normal world. The Fed has replaced liquid, short-term assets on its balance sheet with illiquid, long-term assets. Normally, to raise the Fed Funds rate, the Fed would sell Treasury bills. It has none to sell. Analysts and pundits speculate on when the Fed will raise interest rates. They should be asking how the Fed will raise interest rates.

Stanford’s John Taylor thinks the Fed will need to increase the interest rate paid on reserves to accomplish that goal. Markets through arbitrage would then increase the interest rates banks pay each other to borrow reserves. I suspect he is correct, with two caveats. First, there is no longer much of a market for federal funds. Banks aren’t lending each other reserves. Second, there are other possible mechanisms for raising short-term interest rates like the tri-party, reverse repo facility at the New York Fed. This, and other facilities, are untested as a means to implement a policy change. Their use would put monetary policy in unchartered waters.

To sum up, monetary policy has failed to simulate economic activity. It has failed even to finance a normal economic recovery. In pursuing a failed stimulus policy, the Fed has tied its policy hands going forward. At some point, interest rates will need to rise. The Fed will need to rely on novel means to accomplish a turn in policy. Paying higher interest rates on bank reserves may be one method. It is an unpleasant reality. It is only one consequence of the Fed’s experiment with extraordinary monetary policy.

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