Comparative Advantage in a Changing World

Last Friday I attended a luncheon given by the International Business Association and the Long Beach Chamber of Commerce. The keynote speaker was business columnist James Flanigan; in the room were notables from the ports of Long Beach and Los Angeles. A recurring topic of conversation was the need for the ports to upgrade their infrastructure, especially for getting goods out of the harbor and on the road. Imports are coming in so quickly that Long Beach is slowly shifting to a 16-hour schedule to accommodate the traffic.

Much was said about the growth of China, and to a lesser degree India. The schoolteacher across from me spoke of a special magnet program at her school in which students studied international relations and trade, and learned to speak Chinese. The IBA was sponsoring a mission to China, following the lead of Gov. Schwarzenegger and Mayor Villaraigosa. China's growth is seen as a given.

Less openly stated was the fear that as China and India rose, the United States must fall to meet them. I spoke to one man who had just spent nearly four years in China consulting for an American manufacturing firm which had set up a new factory there, to avoid losing its contracts with the big computer makers. The difference in wages is so great as to outweigh many of the costs of doing business in less developed countries; must not the invisible hand relentlessly push down American wages until parity is reached?

Moreover, China and India are both turning out huge numbers of trained engineers and scientists, dwarfing our own output at a time when our whole education system seems to be imploding under the influence of faux-liberal-arts subjects involving no scientific knowledge or even general creativity, threatening to erode our technological edge.

Yet even with these discouraging signs, we still have the preeminent position for the moment and there is no reason why we cannot remain on top. At present, our greatest advantages are a massive pool of money for businesses to use, a well-developed physical infrastructure, and a society and legal system that encourage small businesses, at least to a point. We are uniquely positioned to benefit from the "next big thing," whatever it should be, because we have the resources to quickly transition over to new ways of doing business. The catch is that there must be a reason for the "next big thing" to emerge here first, and not elsewhere.

As I see it, technology is giving even small companies the capabilities once reserved to massive behemoths, at the same time as it penalizes those companies who do not keep up with the times—again, usually the larger companies. The future will belong to small and midsize companies, and we should encourage them and make it easier for such companies to work in the United States. This requires first that our laws stop discriminating against small companies, and second that our students be taught to develop their creative faculties and not to stifle them.

At present, a company with $100,000 in taxable income actually pays a higher tax rate than a company with $100 million in income. Even the larger companies must pay a 35% rate, which is much too high in today's globalized economy. (Highly-educated, English-speaking Ireland's corporate tax rates range from 10% to 12.5% for most businesses—part of why they have become the great success-story of Europe.) Small businesses are also unduly burdened with onerous regulations for accounting and payroll management that huge firms simply shrug off as annoyances. Furthermore, small companies are forbidden to issue public stock by the SEC, and if they are to raise money at all must do so via private placements (as I discuss here), tipping the playing field still further in favor of the big boys.

If we are serious about having a robust economy, we need to remove the shackles from small businesses, which already form the backbone of America. That means dramatically reducing corporate taxes (say to about 20%, for starters) and making them no less burdensome for the big companies as they are for their smaller competitors. It means eliminating the regulatory chokeholds small businesses must deal with, and making the business environment fair and open to all comers.

Fixing the legal environment is only part of the cure. We are presently educating our children using a model developed in the late 1800's, designed to produce good factory workers who knew how to follow directions. Now, we need other talents. We are still in the early stages of the Information Economy, where the skills for success are flexibility, creativity, and the ability to synthesize familiar data to reach novel conclusions. Our schooling must reflect this reality. In particular, at present we are so backward in our thinking that in times of financial shortfall, the first educational programs to get the axe are always fine arts. This even though the arts are the best method for developing just the skills we now need, particularly music. This was common knowledge back as far as the Greeks; Aristotle's Politics emphatically state that music is the best way to train students in proper thinking and morals.

If both of these pillars are in place, we can create an environment in which small businesses can thrive and proliferate. Even foreign companies will want to continue operating here if we can make it more attractive to do so than to operate in China or India instead. That, in turn, increases the chances that the next paradigm-shifting technological advance will occur here and not elsewhere, giving us the first chance to benefit. With our vast wealth and infrastructure, there is no reason why we should tamely submit to an inevitable economic downfall. We simply need to cultivate the proper comparative advantages: a fair regulatory environment and a populace taught to use their native gifts.


Nuclear Taboo?

In today's print Wall Street Journal, Thomas Schelling writes about the so-called nuclear taboo, the strong aversion to the use of nuclear weapons that has built up since Nagasaki. He considers this taboo to be a good thing, and shares it himself, asking: "Can we make it through another half dozen decades [without a nuclear war]?" On the face of it, one must wonder why a nuclear war would be so much worse than, say, a war conducted with machetes as in Rwanda; more on this later.

Schelling makes an odd argument in the last segment of his piece, regarding terrorist groups who might soon possess nukes:
[A nuclear program] will require at least six, probably more, highly qualified scientists and numerous machinists and technologists, working in seclusion… with nothing much to talk about except what the "bomb" might be used for, and by whom. They are likely to feel justified to have some claim in deciding the use of the nuclear device [!!!]…. They will discover, over weeks of arguing that the most effective use of the bomb, from a terrorist perspective, will be for influence…. Threatening to use it against military targets, and keeping it intact if the threat is succcessful, may appeal to [terrorists] more than expending it in a destructive act.
Schelling has a remarkably egalitarian image of terrorist decisionmaking, in which scientists may hold discourse with murderers from a position of influence. Additionally, he wildly misunderstands the mindset of the Islamic terrorist; they want power, not influence. Al-Qa'ida had a great deal of influence in Saudi Arabia, but attempted to overthrow the monarchy anyway. Now, they are being ruthlessly stamped out. Additionally, nothing excites a terrorist more than "destructive acts," as is clearly shown by their penchant for suicide attacks.

We must put Schelling's piece in perspective. The Bush Administration has long been muttering about the use of nuclear weapons against Iran's nuclear program, should it be necessary. Schelling, who is horrified by the thought of nuclear weapons used under any circumstances, is trying to turn aside such an approach, by arguing that it's not really so bad if the mullas get nukes anyway. Schelling specifically referred to Iran earlier in the piece, making essentially the same arguments as above.

What is the nuclear taboo based on? What special horror does nuclear weapons possess, that not even terrorists would use them? As I see it, the capabilities of a nuclear bomb are the following:

They kill many people. This, by itself, would not be special grounds for the visceral hatred many people have for nukes; the United States killed far more people in Japan through conventional means than at Hiroshima and Nagasaki, yet they are nearly a footnote in the eyes of the antinuclear brigade. Furthermore, in my lifetime there have been several genocides that have taken place with near-silence from the great powers, while nuclear tests in India and Pakistan harming no one momentarily turned both countries into pariah-states. At any rate, terrorists want nuclear weapons precisely because they kill people, a point which should be obvious.

They kill many people with a disproportionally small effort. Once you have invested the effort to create nukes in the first place, they can be deployed quite easily. This would, theoretically, make their use more attractive. A variant of the same argument is used against the private possession of firearms; for some reason, killing people with a knife is more acceptable, in a sense, than killing them with a gun. Similarly, killing people with tanks and infantrymen is somehow more acceptable than with nukes. Of course, the idea that one can "earn" the right to kill someone simply by expending more effort in the process is absurd. And again, terrorists want nukes precisely because of their ease of use.

They emit radiation. Again, terrorists would desire such an effect, to inflict lasting consequences on their enemies. And for the rest of us, the development of neutron bombs (called by their creator "The most moral weapon ever invented") makes this factor much less important, since such weapons do not produce persistent radiation. (Admittedly, neutron bombs have a limited shelf-life, and are thus more costly to maintain than more typical nukes that do produce radiation.)

In short, there is no reason outside of expediency why a terror group would refrain from using nuclear weapons. Indeed, having expended the vast effort necessary to create the bombs in the first place, terrorists would be under immense pressure to use them quickly and not risk their falling into the hands of an enemy power such as the United States, which would certainly be watching closely for any nuclear programs.

What about established nations? Why do we vest in nuclear weapons all the terrors of our imagination, when the truth is far more banal? With the exception of radiation effects, and the potential for a nuclear detonation to create a massive diplomatic crisis (unless we detonate against another nuclear power, in which case things could get much worse), nuclear wars are no worse than any other kind of war. Indeed, they save the lives of our own soldiers, as does any advance in technology.

I expect some country or other to employ a nuclear weapon within my lifetime. The benefits are just too great, and the drawbacks are meaningless to a country already on the brink of destruction. When considering the issue, we must not let our vision become clouded by wishful thinking of the type employed by Mr. Schelling.


Courting Disaster

Lately, the nation has witnessed a series of tremendous storms that continue to ravage the country, leveling all other activity before their gale-force winds.

In other news, we've been getting a lot of hurricanes.

Sadly, I was referring above to the present meltdown over the Harriet Miers nomination to the Supreme Court. A lot of people have had a lot of problems with her nomination, but things have gone far past tragedy and are rapidly becoming farce. Yesterday, when the Senate Judicial Committee read through her fifty-page questionnaire on issues of jurisprudence, they found it inadequate (and even "insulting" according to Senator Specter) and demanded that she do it over!

This isn't a college essay, this was a preparatory piece for becoming Supreme Court justice! This isn't supposed to be happening. How President Bush could have had the gall to nominate such a profoundly unqualified candidate to the bench is completely beyond my comprehension.

By this point, Miers has the distinction of having bipartisan opposition. It will only get worse once the confirmation hearings begin in earnest. Do us all a favor, Mr. President, and just end the misery. Next time try Judge Janice Rogers Brown.


History Appreciation

Via Instapundit comes this piece by Michael Barone that succinctly highlights many of the issues that have me worried about the fate of modern democracies:
[T]he military maintains old units so that soldiers will be motivated to match the deeds of those who came before and prove worthy to those who come after….Most Americans feel a shiver when they hear "The Star-Spangled Banner" played and reflect on the triumphs and tragedies that those serving under that flag have won and suffered over more than 200 years. You're part of something larger than yourself…

[But] elites on campuses [have begun] taking an adversary posture toward their own country. Later, with globalization, a transnational mind-set grew among corporate and professional elites. Legal elites, too: Some Supreme Court justices have taken to citing foreign law as one basis for interpreting the U.S. Constitution.
Read the whole thing.

[I have been asked to write a post summing up my experiences in Washington. It will come soon, I promise.]


The Essence of Humanity

[I'm presently getting packed for my trip back home for the holidays, where I'll finally go watch Serenity with my friends and family (woo hoo!), and put some new strings onto my violin (double woo hoo!). I never could figure out who decided to put the classical music capital of the world in a city with such vicious humidity and temperature swings; not a stringed-instrument player, that's for sure.

At any rate…]

In the future, what will define humanity? What will make it unique?

Soon, we will have the power to design our own DNA to specifications. If humanity is defined by a particular genetic legacy, when do we stop being human and become something else?

Soon, we will share the world with computer AI that would be increasingly comparable to human intelligence, and which will eventually pass us in terms of brute-force computing power. If we define humanity as meeting certain standards of intelligence, would a computer program that meets those standards be called human?

Soon, we will see tighter and tighter integration of organic and robotic components, entering into the realm of true cybernetics. People will enhance themselves with mechanical devices, perhaps replacing entire systems such as the skeleton with stronger or more efficient materials. Conversely, machines could be built around organic components. Can a human stop being a human and become a robot? Can robots ever become human? Are organic components even necessary to humanness?

Science has no answers, because science does not deal with such questions. These are questions of morality, of our understanding of humanity's place in the world. All the more reason to turn first to the Torah.

The commentators debate at length what made Adam the First different from all the creatures that preceeded him, some of whom were even manlike in form. Some say that Adam could create things; some say that Adam could name things, or communicate in general. The explanation that seems best to me, which I think was that of R' Samson Raphael Hirsch (or possibly derived from his teachings by someone else), was that Adam was the first physical being capable of prophecy. That is, Adam was a unique creation because he could transcend the physical world and reach up into the spiritual realms.

Without getting into complicated questions on the nature of the soul, I'll simply note that the experiences I have had (particularly with Tai Chi and the use of the Amidah prayer as meditation) force me to believe in a spiritual realm with which we interact. So I am willing to accept interaction with the spiritual as the definitive quality of humanness. I doubt machines could be spiritual beings; but more importantly, should a machine demonstrate transcendant spirituality, I would seriously consider whether it were not, in fact, human—or perhaps a distinct type of being on a similar level.

I am open to other suggestions, though the whole debate will remain academic for at least the next decade…


Iran Moves Closer to War Footing

The things I miss over a long Yom Tov:
Iran's new president, Mahmoud Ahmadinejad, has placed the military firmly in control of his nation's nuclear program, undercutting his government's claim that the program is intended for civilian use, according to a leading opposition group.

Leaders of the Islamic Revolutionary Guard Corps (IRGC), the force created specifically to defend the 1979 Islamic revolution, now dominate Iran's Supreme National Security Council, the country's top foreign policy-making body under the constitution.
To translate: military officers have effectively taken over the government. I have seen recurring reports of military officers replacing officials in every level of government over the past few months. Analyses I have read (I don't remember where) suggest that Iran is anticipating a US invasion from the north of Iraq, along with decapitation strikes against the leadership, and is preparing accordingly.

I do not know whether we actually intend a full-scale invasion, though it seems a ham-handed way to go about things given everything else going on. But if Iran believes that we will invade, it dramatically narrows the possibilities for ending the current standoff, and not in a good way. This could be another self-fulfilling prophecy for war in a depressingly long line of them throughout history.

The Failure of Societies

It has seemed to me for a long time that Judaism is in large part a mechanism for passing on moral principles to the next generation. Having a deep understanding of the nature of the world does little good if that understanding dies with you. It is just as well that Judaism focuses so much on educating the young, for it seems that we Jews have tended to neglect such things from the dawn of our history.

Our forefather Yitzhak (Isaac) favored his elder son Eisav over Yaakov, despite the elder son's incredible disregard for spiritual principles and exaggerated preference for the physical, as for example when he sold his birthright for a bowl of "this red, red stuff." Yaakov himself learned little from the experience, playing favorites among his twelve sons and exercising no control over them. Shimon and Levi felt free to exterminate the city of Shechem against their father's wishes; Reuven, though firstborn, apparently was never taught how best to lead and repeatedly used his authority poorly.

Later on we had King David, a warrior-poet and prophet. Yet for all of his prowess in battle and rulership he was remarkably lenient with his own sons, and suffered for it. Several of his sons rose up in rebellion against him; his son Amnon raped his own half-sister. Regarding Adoniyahu, who tried to usurp the throne from his brother Shlomo (Solomon) as David lay dying, the narrative says, "His father had never in all his days saddened him, saying 'Why have you done this?' " And Adoniyahu was born after the rebel Avshalom, so it seems that David had not taken the lesson to heart.

When it came time for him to decide the succession, he promised the kingship to the son of Bathsheva, before he was actually born! That Shlomo turned out to be a good ruler was due more to Divine intervention than anything else; yet even so, he was far too wise for his own good. And again, though Shlomo had 300 wives and presumably many sons, he chose as his successor Rechavam, who was so monumentally stupid as to say to his new subjects, "My father beat you with whips; I shall beat you with scorpions!" During his rule, the Northern Kingdom split off and became a perpetual breeding-ground of idolatry.

This chronic inability to pass on wisdom and security from one generation to the next was mirrored by the greater society. The Jews passed through seemingly endless cycles of descent into idolatry and the fertility cults; and God would threaten them with destruction at the hands of their enemies, at which point there would usually be a return to the Torah. Yet there came a point when this was no longer good enough, when the rot had set in too deeply. That point came during the rule of Menashe, descendent of Hizqiyahu (Hezekiah).

Hizqiyahu is widely praised by the rabbinic tradition, who hold that he merited to be the Messiah had the time been right. He oversaw a religious revival, fighting against the encroaching religion of Assyria. Yet he retained the Assyrian methods of organization and strong central government, which were useful for a monarch; and the upper class all spoke Assyrian more often than Hebrew. Hizqiyahu's son Menashe apparently learned the wrong lesson, for when he took power he began a 55-year campaign to eradicate Judaism and set up the Assyrian cults in its place.

Here, the prophets warned that something had changed. God had decreed that Judah would be destroyed and sent into exile, and could only be swayed to mercy by a total, all-encompassing return to Judaism such as had never happened in our history. Even the reign of Yoshiyahu (Josiah), renowned for his righteousness, only delayed the inevitable for the period of his lifetime. After he died, the Babylonians invaded.

Here it gets interesting. For though Jeremiah the prophet warned against resisting the Babylonians, most of the Jews were adamant in their opposition, continuing to fight even while suffering defeat after defeat. Jeremiah knew that the society as a whole was too diseased to merit rescue, and that the fervent nationalism of the people sprung more from reflex than any real moral and ethical vitality. He was proved right after the diplomat Gedaliah was placed as administrator over Judah for the Babylonians. Nationalists in the army assassinated Gedaliah and all of those with him, and then murdered a passing caravan of pilgrims for good measure, dropping the bodies into the city well and totally filling it up.

At this, the Babylonians razed almost all of Judah and exiled most of its inhabitants. The nationalists were allowed to escape into Egypt, where they became mercenaries and sunk into the worst sorts of heresies. Such was the character of their fervor.


Unless a society can consistently propogate its beliefs and principles to future generations, it will inevitably decay. There may well be an appearance of vigor, and often a prideful nationalism, yet it is ultimately built on sand. For the defenders of such a society are defending nothing deeper or more profound than the status quo, once they have lost contact with the principles around which their nation was formed in the first place.

This, perhaps, is the fatal flaw of democracy. Democracy holds no special reverence for tradition and history; such things quickly become irrelevant. Indeed, this ahistoricism is the source for much of democracy's appeal, given the sheer number of evil traditions in the world. Regardless, what must inevitably result is a society dedicated to nothing more than the needs of the moment, rather than any historical legacy or morality. Consider the overwhelming importance of the national economy in American politics, compared to the deafening silence greeting the rise in illegitimacy.

Can democracies endure? Probably. Can they endure as moral societies? I wonder.


Sobering Reading

Go read this Wall Street Journal op-ed by Charles Murray. In it, he examines the growth of what he calls the underclass, i.e. the part of the population that habitually commits crime. One key passage:
The crime rate has been dropping for 13 years. But the proportion of young men who grow up unsocialized and who, given the opportunity, commit crimes, has not.

A rough operational measure of criminality is the percentage of the population under correctional supervision. This is less sensitive to changes in correctional fashion than imprisonment rates, since people convicted of a crime get some sort of correctional supervision regardless of the political climate. When Ronald Reagan took office, 0.9% of the population was under correctional supervision. That figure has continued to rise. When crime began to fall in 1992, it stood at 1.9%. In 2003 it was 2.4%. Crime has dropped, but criminality has continued to rise.
The difference is that now, we lock up our criminals for far longer periods, preventing them from preying on the rest of us until they get out. Today there are more than 2 million prison inmates.

What does Murray mean by "unsocialized"? Later on, he draws a clear connection between the level of criminality and the rate of illegitimate birth, currently over 35% in America and 68% in the black population. He asserts that the problem is with childrn growing up without fathers, but brings little support to back up his assertion. This is too bad, because there is a lot of research out there he could have pointed to. (You can find a sampling of them cited here.)

I remember reading about one study, which unfortunately I can't find references to on Google. If memory serves, the study was looking at the reactions of young girls (about 6 years old or thereabouts). Each girl would sit opposite from a middle-aged man (part of the staff), and each would be given a bowl of ice cream—but only the girl would be given a spoon. As the girl starts eating, the man would say, "I can't eat my ice cream without a spoon." Now, either the girl could continue eating as if he had not spoken, or else she could lend him her spoon so that he can eat first (presumably demonstrating greater empathy and decency).

The researchers found that girls with active fathers overwhelmingly offered the man their spoons, while girls without active fathers overwhelmingly ignored him.

What will our staggering illegitimacy rate mean for us in ten years, or twenty? Part of what makes a democracy work is that citizens agree to a certain set of norms; otherwise, people simply try to abuse the system and the whole edifice breaks down. Is that what we have in store for us?