The Cost of Sochi

The Sochi winter games will soon open and whether by choice or sheer over powering much of the world’s attention will be directed to Russia. Although the opening ceremony and most of the athletic events will be carefully choreographed to display pageantry and the triumph of internationalism over politics, it is worth considering what the games are likely to cost us.

The formal price of Sochi has now been estimated at $50 billion. A figure far in excess of anyone’s imagination at that time that the Olympic Committee awarded the games to Russia. In theory the money has gone into transforming a relatively quaint resort into an international sports mecca. In practice most of the money, like much Russian wealth before it, has gone to line the pockets of oligarchs. Still, if the theft of Russian resources were the only cost of these games one could perhaps overlook it. Unfortunately, the games are likely to be costly in at least three more dimensions.

The first is in the integrity of the games themselves. Parading at Sochi requires deception on many levels; in pretending that shoddy infrastructure is first rate, in pretending that the imposition of a police state mentality is routine security, in pretending that the personal pursuit of an authoritarian ruler of a dying country represents the collective celebration of a rising nation, and perhaps most of all in pretending that the Olympic games themselves bear no responsibility for the tremendous financial waste and political repression that have accompanied them.

The second area of cost is likely to be the personal security of the athletes and spectators at the games. By voluntarily deciding to award the games to  Russia, the Olympic Committee inserted itself into a political climate built on repression and violence. It is virtually certain that groups will try to disrupt the games with violence. It is very possible that they will succeed. Security can move the barrier surrounding the games far from the arenas where they actually occur but only at a cost to the games themselves. Moreover, it cannot erase it completely. An attack at the barrier is an attack on the games and an attack on the games will affect them profoundly even if it does not disrupt the schedule.

Finally, the integrity of the events themselves is likely to suffer. This is Russia after all. Every Olympics has had its share of judging controversies but the Moscow games perhaps set the pace. The nature of hosting, especially in Russia means that the events are not totally under the control of the Olympic Committee. Having done so poorly in the last games and spent so much on Sochi, Putin’s government is unlikely to lose gracefully.

The lesson is that international sports bodies cannot be excused from taking responsibility for the decisions they make. There is an obligation to the athletes and fans to chose venues that are adequate and safe. But there is also an obligation to refrain from lending the credibility of major sports events to corrupt and incompetent governments whether they be in Russia, Bahrain, or Brazil. If these bodies want politics to stop while the games go on, they will have to wait until the poor are no longer hungry and the dissidents are no longer in jail.

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A Good Example of Bad Medicine

The New York Times reported on a recent decision by the American Board of Obstetrics and Gynecology to severely restrict the practice of their members. One of the key restrictions covers the ability of board-certified doctors to see male patients. This anti-competitive act should draw the immediate attention of antitrust officials and state licensing offices.

Although the Board recently backed off of a similar restriction on seeing males who are at a high risk of anal cancer, its broader determination to limit the practice of its members and thereby limit both competition among doctors and care for their patients should call into question the role of medical boards in licensing doctors.

The Board’s decision is not motivated by any evidence that doctors are delivering sub-standard care. There is no allegation that seeing male patients in any way detracts from the care that female patients receive. Rather, the decision seems to be driven by a desire to further separate the specialty from other areas of medicine. Why such as separation would benefit anyone but the leadership of the Board itself is unclear.

It is also not clear why private boards should possess such influence over licensing decisions, especially if the motivating factor in is self-interest rather than public welfare. Private boards may have an advantage in testing professionals for specific knowledge and then certifying the acquisition of that knowledge so that hospitals and patients can rely on it. Government agencies still need to oversee these standards to make sure that they are not hidden attempts to limit entry into a field. But boards should have absolutely no right to restrict doctors’ practice of that knowledge within arbitrary limits. The question of whether a given doctor possesses the somewhat arbitrary minimum amount of knowledge and experience needed to obtain board certification is totally unrelated to the question of whether the doctor should be allowed to use that and other knowledge to help any given patient. In fact, to be consistent with the ethical standards of medicine, the Board should encourage doctors to apply their knowledge to any patient that they can help.

The medical industry needs to demonstrate much higher productivity over the next two decades. To achieve this it will be necessary to break apart many of the institutional barriers that protect providers from competition to reduce costs and improve care. The Board has just provided an excellent example of the type of restrictions that need to be removed.

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Why the NSA Should be Uprooted (if not abolished)

The latest revelations make it hard for even the intelligence communities stanchest friends to continue to defend it. It is now apparent that the NSA spied on vast numbers of people, misled the courts, Congress, and (if Obama is to be believed) even the White House about what it was doing. Yet it continues to act in complete denial of the position it is in.

The damage done by the intelligence community is immense. The spying exceeds even the worst case imaginings of many civil liberties groups. Its scope, as well as the reluctant responses of the intelligence community, have shaken public confidence in the those who say they are defending us. The ability of Congress to oversee a major part of our defense establishment is severely compromised. America’s leadership in the Internet and cloud computing is threatened because the federal government apparently takes the position that it should have complete access to the data of foreign citizens who use Google, Facebook, and similar services. The National Institute of Standards and Technology’s role in helping to set encryption standards is jeopardized because the NSA apparently built a back door to one of the common standards. Our relationships with key allies has been set back because we apparently tap their leaders’ communications.

And yet, to hear the intelligence leaders talk, none of this is their fault. It is all Edward Snowden’s. Its as if you met someone who recently lost their job, their family, and their freedom because he watched child pornography and all he can talk about is how their secretary ruined his life by turning him in. An agency and a community that continues to be in this type of denial is probably beyond redemption. Since the beginning of these revelations, the response of Director of National Intelligence James Clapper and NSA Director General Keith Alexander remind me most of Anthony Comstock, whose single-mindedness in setting himself up as defending America against his own demons ruined many lives before the country regained its common sense.

The irony is that if the agencies had asked for this power openly and visibly subjected themselves to the type of strong controls needed to protect democracy, they probably would have gotten strong support for using most of the data they seek.

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Whither Syria (things I still do not understand)

I would appear that the Obama administration might have lucked into an out on Syria, but probably not. While the recent possibility of a Russian-coordinated transfer of chemical weapons into international control would be an very successful outcome for the president, there are several things that trouble me.

First, why would Syria agree to transfer the weapons? I can see why it might agree to say it will transfer them, but the actual transfer is something else. Assad realizes that for him and many of his backers this is a fight to the death. He knows what happened to Gaddafi. After two years of brutal warfare and over 100,000 dead, the cost to him of losing is pretty plain. He dies. All his family dies. All his top supporters die. And a significant portion of the Alawite community either dies or goes into exile. He strikes me as the type of guy that, when push comes to shove, takes as many of the opposition and those that supported him out with him.

The Administration’s hope for a negotiated settlement seems naive. We are way past that moment and I suspect that, even if Assad were losing on the battlefield, the Russians would not give him a safe haven. This will not be solved until Assad either wins or dies.

Second, why would Russia want to help Obama out of the corner he as put himself in? Neither they nor the Assad regime can be that confident that the tide of the war has turned enough to ensure their victory. Nor is it clear that a U.S. strike would have seriously degraded his capabilities. Doe Putin strike you as a guy who has our back?

Maybe most important, how does the transfer of weapons actually work? How do we ensure that, in the midst of war, Assad discloses all his weapons? How do we, again in the midst of war, safely handle and move them? And finally, what do we do with them? Although flying them out into a safe country for disposal might make the most sense, no country, including ours probably wants to take that risk. So we either guard them in Syria or destroy them there. Either way it is not exactly easy.

Lastly, how exactly did the firm threat of a strike pressure the regime and why postpone the Congressional vote? The obvious answer to the second half of that question was that Obama was apparently going to lose it. But if everyone knew that, why would Syria fear a strike unless Obama was going to order one even if Congress failed to approve it? In which case, why ask for a vote in the first place? I think the prospect of a negotiated solution might actually have made the vote closer as Congress tried to give the President more leverage. Apparently Obama believes that the failure of negotiations will change the minds of Congress and voters. I doubt it.

I suspect Obama wishes he had not drawn the red line. Having watched silently as a brutal dictator mowed down tens of thousand of his people with every weapon available except chemical weapons, it is a little hard to say that the U.S. now has a vital interest in avenging roughly a thousand deaths because they died differently or that this vengeance should be decisive, but not too decisive. The President should get Congress’ support on this vote, but it is not because Obama has put forward a sensible policy in Syria or outlined intelligent goals for a strike. It is because, contrary to what Obama said in his speech, the U.S. is the world’s policeman. We cannot stop every crime, nor should we try.  But no group of countries seems capable of solving any of the world’s major problems unless we lead the way. We derive tremendous benefits from this role and when we abandon it, the world and we suffer. It must mean something if the president draws a line in the sand, even if it is not a well-thought out one and even if his response is questionable.

There was a time long ago when decisive action by Obama might have tipped the balance in Syria and produced an outcome similar to those in Tunisia and Libya. That was before the involvement of Islamic extremists, before Hezbollah’s help, before 100,000 dead. Neither country is stable now, but both are preferable to the continuation of a brutal Assad-led regime hostile to the United States. Doing so might have continued the momentum into Iran. But the administration seemed more concerned with preserving the stability of Bahrain, Egypt, and Saudi Arabia than with seizing an historic opportunity to reshape the strategic map. Had we been this timid during the fall of the Soviet Union we would be facing a much different world.

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The Difficulty of Having an Honest Debate About Surveillance Programs

Earlier this week, the Information Technology and Innovation Foundation hosted a forum on the impact of the PRISM program on digital trade policy. This particular event did not deal with the merits of PRISM but rather its secondary effects on the efforts of American negotiators and companies to convince other countries not to discriminate against U.S. providers of advanced technology services. Those efforts have been severely damaged by the sudden awareness by both foreign users and their governments that use of U.S. companies gives the U.S. government access to the resulting data. Furthermore, because the users are not American citizens, Constitutional protections do not apply.

While foreign governments may overlook such dangers in exchange of their own access, their citizens may be less forgiving. Public resistance to American providers could cost U.S. companies billions of dollars. The best way to ensure that American companies compete on an equal ground is to have an open and honest debate about 1) what data can be collected, 2) who, including the government, can have access to it and for what purposes and 3) what controls will exist to make sure that the data are not misused and how those controls will be enforced.

The problem is that it is impossible to have that discussion when the U.S. government takes the position that 1) the public has no right to learn of these programs and should not have learned of them, 2) the national security agencies have the right to actively mislead Congress and perhaps the FISA courts in order to protect their interpretation of national security, and 3) although this is less certain, the current Administration seems to take the position that even if U.S. statutes clearly prohibited the gathering and use of certain information, the President has the inherent power secretly to override those limitations in the interests of national security.

We have long since past the point where the self-imposed costs of limitations on American freedom outweigh any likely threat that our enemies could inflict. A similar overreaction has followed every other military threat in our history. This one is driven not by Americans who are afraid, but by politicians who like power and security firms that like business. It is about time we grew out of it.

The ironic thing is that an honest debate might produce a program very much like the one we  have, except more open. Government officials would probably face a few more limits on what they could collect, how long they could keep it, and what they could do with it. More searches would require prior judicial approval. Most importantly, there would be public safeguards to ensure that the agencies respected the law. But again, how can we ever reach such an agreement as long as the Administration takes the position that security interests trump the law? And until we do, why would you ever believe that U.S. companies are not being forced to give the government access to your information?

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Obama Avoids the Law Again

U.S. law generally prohibits foreign assistance to “the government of any country whose duly elected head of government is deposed by military coup or decree.” You might think that this is a problem for Egypt, whose military recently deposed the elected head of government and is now beginning to crack down on dissenters. President Obama is not so sure.

In a bizarre interpretation of the law, the Administration has apparently decided that it does not have to decide what happened in Egypt. As one official told the New York Times: “We will not say it was a coup, we will not say it was not a coup, we will just not say.” The Administration is not releasing the legal reasoning behind this novel position.

President Morsi was an incompetent leader. But some in Obama’s party have said the same about recent U.S. presidents. We did not depose them. As bad as Morsi was, the generals are likely to be far worse over the long-term. Their suffocation of Egypt’s civil society and economy will continue, but now there is unlikely to be any democratic check against it. While the mandatory cutoff of aid may have inconvenienced the administration, the law is supposed to be the law.

This Administration has made a travesty of U.S. policy in the Middle East. Faced with an historic chance to side with the economic and political dreams of the vast majority of Arabs, it has time and again been paralyzed by fear and indecision. When so many in these countries hope for a life like ours, we have focused on the threat posed by a few Islamic radicals rather than on the tremendous benefits of having these countries become full participants in the modern world. And we have probably missed a rare opportunity to cleave the anti-American bloc of Iran, Hezbollah, and Syria by ensuring the fall of the Assad regime. Indeed by not acting we have helped ensure what we most feared: a steady dissent into prolonged broader sectarian conflict that threatens the neighboring countries.

Even if one were to overlook incompetence, illegality is another matter. This Administration has a strong disregard for any legal constraints that hamper its ability to pursue its goals. This cute refuge in blindness is only the latest insult to plain language and common sense. A democracy is not supposed to work that way.


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Initial Thoughts on the Detroit Bankruptcy

Over the past four months I have been working on a report that reviews both the economics and law surrounding state bankruptcy. I intend to summarize some of my findings once the report comes out. What I have learned suggests several important points about Detroit’s recent filing for bankruptcy.

First, Detroit’s case is likely to reaffirm the precedent that pension benefits can be cut in bankruptcy, even for existing retirees. This had already been established by Central Falls, RI where pensions were cut by up to 50 percent (although the state agreed to make up half of the cut for the first five years) . The cuts in Michigan are also likely to be deep. This is despite the fact that the state constitution protects pensions. Federal bankruptcy law governs. Unions, which have been assuring their members for decades that the pensions will never be touched, regardless of the level of underfunding, are likely to face a growing level of concern among their members. We may see unions placing relatively more emphasis on pension funding and less on wages in future negotiations.

Second, unions are benefiting from a curious turnaround in the calculation of Detroit’s liabilities. For years Detroit followed the standards set by the Governmental Accounting Standards Board and discounted future pension benefits by the assumed rate of return on pension assets, currently 8 percent. Most economists believe these obligations should be discounted at a much lower rate. Unions have strongly resisted doing this because it increases the estimated underfunding. In calculating Detroit’s liabilities, the Emergency Manager lowered the discount rate to 7 percent. This apparently had the effect of giving the pension plan an additional $3.5 billion in unsecured claims, thus ensuring that workers get a larger share of the total recovery. Had he used a risk-free rate as most economists advocate, retirees would have had an even larger claim. It seems that using a lower discount rate actually benefits unions as a city or state approaches insolvency.

Third, any final plan to emerge from bankruptcy is likely to include significant asset sales, possibly including the estimated $2 billion worth of art owned by the city. The law is not clear on whether Detroit’s creditors can force the city to sell these assets against its wishes. But the fact that they account for approximately ten percent of the losses that bondholders and pensioners are being asked to take and that many retirees will press for their sale in exchange for smaller cuts may influence the city’s position.

Fourth, it is interesting that retiree health benefits have been included in the list of claims against the city. Unions and governments have long argued that retirees do not have a legal right to these benefits. Since they can be withdrawn at any time, cities should not have to prefund them. But if this is true, then they should also not be listed as an unsecured asset in a bankruptcy proceeding. The fact that they have been indicates that governments should begin to set aside money to pay for future claims. This will add a new strain to city budgets.

Fifth, I expect this filing to move relatively quickly. Although a state judge issued an injunction ordering the city to withdraw its petition, federal law governs. If higher state courts do not remove the injunction, federal courts will. I do not think creditors will succeed in challenging the petition, since the city is clearly insolvent and has tried to negotiate a deal. The real test is how quickly the Emergency Manager can put together a plan for emerging from bankruptcy. I expect him to act quickly and to present a plan that is fair to all creditors, given the financial circumstances. If he does this, there are not many grounds for the court to refuse approving it, even if a majority of creditors object. This area of the law is still undefined, however.

Last, there should be no bailout. Steven Rattner, has recently argued to the contrary. His reasoning seems to hinge on the assertion that “the 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them.” This is false. The victims of Hurricane Sandy were hit by a natural disaster whose damage was largely beyond their control. Detroit’s failures are largely the result of decades of mismanagement and corruption by both elected leaders and union officials. If the residents of Detroit are not responsible for the quality of its elected officials, who is? And if city workers are not responsible for the positions taken by union leaders, who is? Democracy only works if people accept responsibility for the leaders they elect. Bailing out Detroit would dramatically reduce the pressure on other cities and states to reform their finances. The bailout of Wall Street is still preventing regulators from dealing with banks that are too big to fail. And the government’s interference in the auto bankruptcies set bad precedents that we may still someday regret, despite the strong rebound of the companies involved.

Finally, debt reform of one type or another was inevitable. The money simply is not there. The first rule of getting out of a downward spiral is to hit bottom as quickly as possible. Only then does the future become brighter than the past. Although bankruptcy can eliminate Detroit’s debt overhang, its real future will depend on a willingness to create an environment that is welcoming to all people and businesses. That has been a relatively foreign concept.

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