Archives: November, 2013

Jaw-Jaw versus War-War: Negotiating a Way out of the North Korea Impasse

Jaw-jaw is better than war-war said Winston Churchill, who led Great Britain during World War II.  Which is reason enough to hope that the interim agreement reached with Iran leads to a permanent settlement.  And that North Korea also eventually joins the normal community of nations.

While prospects of peace with Iran appear better—though the road ahead remains long and rocky—the possibility of a similar accord with the Democratic People’s Republic of Korea looks ever further away.  The Kim Jong-un government has reactivated the Yongbyon nuclear reactor and begun new excavations at the Punggye-ri nuclear test site.  Moreover, Pyongyang recently detained an aging American visitor, Merrill Newman, poisoning any discussions before they start. 

The best overall approach to the DPRK is to lower expectations.  Pyongyang has proposed nuclear negotiations “without preconditions,” but few observers believe that the North is prepared to give up its nuclear ambitions. 

Thus, Washington should take the Kim regime at its word when the latter opined:  “The legitimate status of the DPRK as a nuclear-weapons state will go on and on without vacillation whether others recognize it or not.”   The U.S. needs to recognize the North’s position de facto if not de jure.

Some would intensify sanctions in response.  However, as I point out in my latest Forbes online column:

the Kim dynasty has withstood not only steadily tougher sanctions but poverty and even starvation.  Absent a dramatic new effort, backed by the Peoples Republic of China, it is hard to believe the outcome of any new penalties would be any different.  To the contrary, the more committed the U.S. appears to be to regime change, the more obvious the case to the North to acquire not just nukes, but many nukes with missiles capable of delivering them to America.

A better strategy would be to defuse the threat environment.  The first step is to loosen rather than tighten the U.S.-ROK alliance.  The end of the Cold War has robbed the Korean peninsula of any claim to being a “vital” security interest for America. 

Moreover, the South’s rise—it now possesses an economy thought to be around 40 times the size that of the DPRK—has eliminated any need for U.S. military support.  Washington should extricate itself from the Korean peninsula’s interminable controversies.

The second step is to turn the lead for security developments on the peninsula over to regional powers.  If the North’s neighbors, including China, were unable to rely on the U.S., they would have to do more themselves. 

The third step for the Obama administration is to deemphasize denuclearization since nuclear negotiations aren’t going anywhere.  Indeed, a small North Korean arsenal is a problem much more for the region than for America.  Washington’s red line should be proliferation to terrorist groups. 

Lastly, Washington should start small-scale engagement with the North, official talks followed by low-key diplomatic relations.  An official relationship wouldn’t eliminate the dramatic differences between the two nations, but would open windows into each other’s societies and channels for contact. 

After six decades Washington should formally conclude the Korean War with a peace treaty?  Negotiation over such a document also would provide another venue for engagement, including South Korea and China.  Talks even could include the most difficult topics, such as human rights. 

Of course, nothing might change.  But there is little downside to opening official discourse, something enjoyed by virtually every other nation.

Frustrations with past efforts to variously conciliate or confront have led to little interest in new approaches toward the DPRK.  Washington should try a different strategy: modest diplomatic rapprochement with the North. 

In the meantime, Washington should emphasize Winston Churchill’s jaw-jaw over war-war.  If that reduced the possibility of conflict even a little bit, it would be a good deal.

A Better Way to Finance Infrastructure

An article on page 1 of Thursday’s Wall Street Journal describes the financial problems faced by some private infrastructure owners because of reduced demand from the Great Recession. The story features the Foley Beach Express bridge in Alabama built as a toll concession in the early 2000s. The bridge filed for bankruptcy in July after traffic volumes were lower than projections leaving taxpayers on the hook for millions.

How can private infrastructure financing manage demand uncertainty? Cato’s Regulation answered the question in 2002 with an article entitled “A New Approach to Private Roads.”  Traditional private infrastructure concessions utilize a Build-Operate-and-Transfer contract in which a private company builds and subsequently collects tolls and operates a facility for a specified term (20 to 30 years). At the end of the contractual term, ownership of the infrastructure is transferred to the government. The problem with this contractual design is that it involves a combination of “front-loaded investment and substantial uncertainty about demand for the road.” This demand uncertainty increases the probability that revenues fall short of required bond payments causing insolvency.

The authors replace the traditional contract with what they term “Present-Value-of-Revenues” franchising. This method gives the concession to the firm that bids the lowest present value of toll revenues.  The franchise is not for a fixed term but ends instead when the present value of the bid is reached.  If toll revenues fall short of projections, the term of the franchise lengthens and bond payments are delayed contractually.  If revenues are higher than expected, the government can buy out the concession for the difference between the revenues received and the present value bid. The latter contingency avoids the problems found in Orange County (California) Route 91, where traffic volumes were higher than expected, but contract terms barred the county from increasing the capacity of the toll road.

For a good overview of infrastructure and prospects for more private involvement see Chris Edwards’ recent essay at Downsizing Government.

Washington Risks War with China over Uninhabited Islands

A leading foreign policy scholar once described alliances as “transmission belts for war,” mechanisms for converting local conflicts into far wider and more destructive wars.  We now have a graphic example of that danger in the U.S. security treaty with Japan.

Tokyo is embroiled in an emotional territorial dispute with Beijing over a chain of uninhabited rocks in the East China Sea, which Japanese call the Senkaku Islands and Chinese call the Diaoyu Islands.  Although Japan administers those islands, Beijing insists that both maritime precedent and history confirm that the territory is rightfully part of China.

That dispute has existed for decades, but tensions have been escalating over the past two years, and have now spiked dramatically.  Late last week, Xinhua, the official Chinese news agency, published a map of a newly established East China Sea Air Defense Identification Zone, which includes the airspace over most of that body of water—including the disputed islands. China’s Defense Ministry also released identification rules for aircraft in the zone and stated that “China’s armed forces will adopt emergency measures to respond to aircraft” that don’t abide by those rules.  Over the weekend, the Chinese air force began patrols to emphasize the point.

It was hardly a surprise that Japan did not respond well to Beijing’s proclamation.  A Japanese Foreign Ministry spokesman stated bluntly that the islands were part of Japan and that Beijing’s actions were an unacceptable attempt to change the status quo.  The move was “very dangerous” and could lead to unforeseen, but clearly undesirable, outcomes.

A nasty spat between Asia’s two strongest powers, and the countries with the world’s second and third largest economies, is obviously troubling.  But Washington did not help matters by weighing-in immediately on behalf of its Japanese ally.  Secretary of State John Kerry not only admonished China to exercise restraint, but emphasized that the United States was “steadfastly committed to our allies and partners.” Officials provided pointed reminders of Washington’s position that the U.S.-Japan security treaty covers the Senkaku Islands.  Secretary of Defense Chuck Hagel rebuked China for “a destabilizing attempt to alter the status quo in the region.”

There are a couple of worrisome aspects about the U.S. position.  First, although China’s actions are needlessly provocative, Beijing is not the only party to disrupt the status quo.  The Japanese government’s decision last year to nationalize the islands from private owners certainly did so.  Yet U.S. officials had little to say about that move.  Second, Washington’s stance on the underlying territorial dispute is contradictory, if not disingenuous.  U.S. leaders simultaneously insist that they do not prejudge the resolution of the territorial matter and emphasize that the security treaty covers the islands.  But the treaty applies to the islands only if the United States regards them as Japanese territory.  That position definitely prejudges the issue.

Although Japan should be strong enough to defend its own security and national interests without U.S. involvement, one can make the case that protecting Japan and helping to keep it out of Beijing’s orbit is also a legitimate interest of the United States.  Whether it is important enough to risk war with China is a much more difficult question, but it is folly to risk such a war merely to back an ally in a murky territorial dispute over some uninhabited rocks.  Yet that is a danger we now incur.

This episode is a textbook example of why the United States should use only informal security arrangements, not written, long-term treaties.  The former approach gives Washington far greater flexibility regarding the best response to changing conditions.  History will not be kind to U.S. leaders if a security treaty causes this country to end up in a military confrontation with China over such meager stakes as the Senkaku/Diaoyu Islands.

America’s Liberal Persian Gulf Friend: An Uneasy Kuwait Confronts Domestic Critics and Regional Threats

Kuwait City, Kuwait—Kuwait is a shrimp among whales in the Middle East.  It lies among three much larger states, Iran, Iraq, and Saudi Arabia, all of which have the potential, noted one American diplomat, of swallowing the small Gulf kingdom.  Indeed, Baghdad attempted to do precisely that in 1990.

Although more than two decades have passed, Kuwaitis remain grateful to the U.S.  They know they would be the 19th province of Iraq absent American military support.  The Sheraton, where I typically stay, includes photos of the damage wreaked by Iraqi invaders. 

Today Iran looms as the larger threat, though Kuwaitis actually are less concerned about nuclear issues.  When your neighbor holds a gun to your head, who cares how big it is, quipped one.  With a heretofore well-integrated minority Shia population, most Kuwaitis actually worry more about the Shia-Sunni battle being fought especially vigorously by Iran and Saudi Arabia.

However, most Kuwaitis appear to back the Obama administration’s diplomatic approach.  They know that military strikes are an alternative to negotiations, and war would be disastrous.  Moreover, Kuwaitis hope future talks ultimately could ease tensions in other areas.  Kuwait’s assent offers an important affirmation of Washington’s strategy.

Regional events, not just Iranian threats but the Arab Spring bust, have helped reduce domestic political tensions.  Kuwait is among the Gulf’s most liberal societies, enjoying a powerful parliament, vigorous media, and independent population.  However, in recent years the political process ran aground, putting both openness and stability at some risk.

In July, Kuwait held the third National Assembly poll in 17 months.  Last year the opposition boycotted the election in protest over changed election rules.  Demonstrations erupted, sparking a sharp government crackdown.  Fractures in what remains a small political community seemed to widen dangerously.

However, the protests have stopped.  Enthusiasm is difficult to sustain, while small political communities possess powerful tools to discourage active opposition.  Moreover, noted one American observer, there appears to be increased fear of jeopardizing “this island of stability.”  There’s a lot to complain about in the current system, but far more could be lost.  Indeed, after Islamists won control of the National Assembly in February 2012, it was the hereditary monarch who blocked proposed legislation to base law on Sharia, bar construction of any new churches, and execute blasphemers. 

Dr. Sami al-Faraj, a well-connected consultant who advises the royal family, among others, believes that creating a vibrant, opportunity-oriented private sector is the key to permanently easing political tensions.  Abundant oil wealth has created a welfare society in which most everyone is dependent on the state, creating what one analyst calls “a transactional state.”  The royal family’s control of so much wealth discourages measures to promote private entrepreneurship and democratic governance.  As a result, al-Faraj says his country is “continually in a crisis management mode.”

The Middle East has dramatically demonstrated how democracy can become a minefield for liberal, tolerant societies.  While Kuwait is not Washington’s most important ally in the region, it is America’s strongest Arab friend.  And probably the Gulf’s most free society.  Kuwaiti success in moving in a direction that is both liberal and democratic would offer an important model for its neighbors.   We should wish the Kuwaitis well.

Congress Should Stand Firm on Spending Caps

Rumors abound that budget negotiators are nearing a possible deal to reverse spending cuts required under the 2011 Budget Control Act (BCA).

Senate Republican Leader Mitch McConnell is hoping his colleagues will stand firm and reject any deal. He told reporters last week that it would be “a bad idea to revisit a law that’s actually working and reducing spending.” But he is competing with military spending advocates such as Reps. Buck McKeon and Mac Thornberry. They claim that the dangers confronting the United States today are graver than ever, that the costs to address these threats are rising and cannot be contained, and removing the defense spending caps is necessary to ensure the United States remains safe and secure.

They are wrong on all counts.

First, some context on spending: The Pentagon’s base budget, excluding the costs of the ongoing war in Afghanistan, remains 26 percent higher than in 2000, in inflation-adjusted dollars. Under the spending caps established by BCA, Pentagon spending would average around $528 billion per year from 2013 to 2021, over 18 percent higher than during a typical year in the Cold War.

This is curious considering the threats facing the United States were far greater then. The threats today are declining, not rising. In fact, all forms of violence, from cataclysmic great power wars, to civil wars and ethnic conflicts, have declined to historic lows.

To be sure, some insurance against potential threats is wise, in the unlikely event that current favorable trends are reversed, but we can maintain our safety while spending less because technological advances allow today’s military to address possible threats with fewer people and fewer platforms. U.S. naval vessels have far more striking power than the early 20th century dreadnaughts, just as precision-guided munitions have rendered today’s aircraft at least 10 times more capable of striking targets as their dumb-bomb-dropping precursors. To be sure, these new platforms are much more expensive, but the military services and their suppliers are more cost-conscious today than a decade ago, as when the Air Force recently killed a plan to outfit the next-generation bomber with a $300,000 kitchenette. Such excesses might be resurrected if BCA opponents succeed in changing the law.

The reforms extend well beyond procurement. In 2011, then-Chairman of the Joint Chiefs of Staff Mike Mullen admitted that the military hadn’t been forced “to make the hard choices” because they had all the money they requested, plus a little more. Today, the spending caps are forcing the services to prioritize.

For example, austerity has focused attention on the military’s antiquated compensation system. Today’s soldiers, sailors, airmen and Marines are better compensated than those who served during World War II or the Cold War. And they should be. A modern military must compete to attract and retain the best and the brightest, and that costs money.

The current trajectory of personnel costs is unsustainable, however. Pay and benefits are already eating into other Pentagon spending accounts, including procurement, operations and maintenance, and training. The net effect may impair military readiness. Now, even outspoken military spending advocates, such as Reps. Duncan Hunter and Adam Kinzinger, both veterans of the post-9/11 military, have endorsed changes, including expecting working-age retirees to pick up more of their health care costs.

There is, in fact, broad, bipartisan support for proposals that touch what were once thought of as the third-rails of Pentagon politics. In addition to compensation reform for active-duty military personnel, a letter signed by scholars from the American Enterprise Institute, the Center for American Progress, and the Brookings Institution, among others, also calls for shrinking the Pentagon’s sprawling civilian workforce and reducing overhead, including eliminating excess base capacity.

The most important piece of the military spending puzzle remains the United States’ hyperactive foreign policy. Even if we were to implement the sensible reforms made politically realistic by spending caps, we would still spend more than we need to keep Americans safe. That is because today’s military is mainly geared toward defending others. By discouraging our allies from doing more to defend themselves and their interests, U.S. policymakers have ensured that U.S. troops bear disproportionate burdens, and U.S. taxpayers pay disproportionate costs. If we are going to spend less on the military in the next ten years than we have over the last ten, we must ask our smaller, cheaper military to do less. And we must expect others to do more.

The Budget Control Act, for all its flaws, has managed to deliver something once thought impossible: actual spending cuts. Our military remains second to none, despite those cuts, and might be stronger in the future because of them. A deal to cancel or reverse those cuts threatens to derail sensible reform proposals that could deliver far larger savings to taxpayers in the future.

Sen. McConnell is right: Congress should stand firm.

Iran: From Hyperinflation to Stability?

With the announcement on Saturday night that Iran and the P5+1 group reached a tentative deal over the Iranian nuclear program, the Iranian rial appreciated 3.45% against the dollar on the black market. The rial jumped from 30000 IRR/USD on Saturday November 23rd to 29000 IRR/USD on Sunday November 24th. A daily appreciation of this magnitude is rare. In fact, it has occurred fewer than ten times since the beginning of 2013. Indeed, this indicates that the diplomatic breakthrough is having a positive effect on Iranian expectations.

Over a year ago, I uncovered the fact that Iran experienced a period of hyperinflation (in early October 2012), when its monthly inflation rate peaked at 62%. Since then, I have been actively monitoring and reporting on the IRR/USD black market exchange rates and calculating implied inflation rates for the country.

Since Hassan Rouhani took office, on August 3rd, Iranian expectations about the economy have turned less negative. Thus far, it appears Rouhani has been successful in ending the long period of economic volatility that has plagued Iran, since the US imposed sanctions in 2010. This has been reflected in the black-market IRR/USD exchange rate, which

There are three main factors at work here. The first is a concerted effort by the Rouhani administration and the central bank to curb Iran’s inflation. This stands in stark contrast to the previous regime, whose strategy was to simply deny that inflation was a problem.

The second is that that Iran’s economy has proved remarkably “elastic” – meaning that the country has ultimately adapted to the sanctions regime and has found ways to keep its economy afloat in spite of them.

The third factor in the rial’s recent stability is an improvement in Iranian economic expectations. This is where the P5+1 talks come into play. Iranians recognized that easing of the sanctions regime would be a bargaining chip in any nuclear negotiations. In consequence, their economic expectations improved as the talks progressed. Indeed, Saturday’s announcement gave these expectations a shot in the arm.

In light of the rial’s recent stability, I have delisted the rial from my list of “Troubled Currencies,” as tracked by the Troubled Currencies Project. For starters, the rial no longer appears to be in trouble. And, on a technical note, implied inflation calculations are less reliable during sustained periods of exchange rate stability.

That said, we must continue to pay the most careful and anxious attention to the black-market IRR/USD exchange rate in the coming months. Like the P5+1 agreement, Rouhani’s economic progress in Iran is tentative and likely quite fragile. Since the black-market IRR/USD is one of the only objective prices in the Iranian economy – and perhaps the most important one of all – it will continue to serve as an important weather vane, as the diplomatic process continues, and as Iran’s economy gradually moves into a post-sanctions era. 

The Supreme Court Takes up Old-Timey Property Rights

In the 19th Century, when railroads were being built across the West, the federal government granted significant land and benefits to railroad companies. The Great Railroad Right-of-Way Act of 1875 empowered the government to grant railroad companies right-of-way easements to build tracks across others’ land to facilitate the expansion of the nation’s railways – that is, railroads were granted a right to use sections of another’s property for railroad purposes without owning title to the land underneath. In 1976, the government sold the Brandt family a parcel of land in Wyoming which was crossed by one of these railroad easements.

In 2001, the railroad that owned the easement formally abandoned all claims to it.  Typically, when this happens, the easement is simply extinguished and the owner of the land may then use the former easement however he or she wishes. But the federal government had different plans for the thin strip running through the Brandts’ land. In 2006, the government sued for title to the land lying under the former easement on the theory that it had retained a “reversionary interest” in the land when granting the railroad the right of way easement, even though it never actually set aside any interests when granting the easement.  The government thus claimed that after the railroad abandoned the easement (after only ever owning an easement and never full title to the land), full title to the land “reverted” back to the federal government. The Brandts argue that under the basic principles of the common law of property, the government had no such right, and that even if any legislative act allowed the government to somehow acquire their land, such an act would require payment of just compensation under the Fifth Amendment’s Takings Clause.

Although this may seem like a small, unique problem, the scope of the Old West’s railway system was huge and those old easements criss-cross the land of thousands of property owners. In 1983, Congress amended the National Trails System Act to allow the government to take abandoned railroad easements and turn them into land for public recreation and “railroad banking.” Landowners have been fighting the taking of their property under the Trails Act ever since, claiming, as here, that the government’s original grant to the railroads contained no residual right of possession for the government.

After the trial court rejected the government’s radical claims, the U.S. Court of Appeals for the Tenth Circuit split with the Seventh and Federal Circuit courts (and ignored some of its own precedent on the way) and held that the government did indeed have a reversionary interest in the land, even though it never actually carved itself an exception, as the law requires. The Brandts, faced with the uncompensated government confiscation of a strip of land cutting their property in two, have now brought their case to the Supreme Court in an attempt to keep the government’s hands off their land and off the land of thousands of other landowners in their same position.

After supporting the Brandts’ request for Supreme Court review, Cato, along with four other groups and several property law professors – including Richard Epstein – has now filed a brief supporting the Brandts’ fight against the government’s poorly justified land-grab. We argue that the Tenth Circuit’s decision threatens to unsettle longstanding presumptions of property law because it willfully ignores basic differences between easements and “fee estates” in land and other basic principles of property law like the “strip and gore” doctrine (which holds, for example, that land under a right-of-way is split down the center and owned by those who own the land on either side of the easement).

This case is important, because there are many thousands of miles of old railroad rights-of-way crossing the countryside that would be potentially subject to uncompensated government confiscation if the Court were to follow the Tenth Circuit’s approach.  In addition, some 3,000 to 4,000 miles of old railroad easements are abandoned every year. It’s not entirely surprising that the government would go full throttle on such a shoddy legal argument for the chance to be able to snatch this land back without having to pay for it. The surprising thing is that the Tenth Circuit green-lighted it. We urge the Supreme Court to switch tracks.

The Court will hear argument in Brandt v. United States on January 14.

Cato legal associate Julio Colombo co-authored this blogpost.