Terrorist Babies Attack!

While last summer US Democrats were conspiring to kill off sick seniors, this summer, flocks of pregnant foreign females are flying all over the US and dropping babies, which upon touchdown start sucking up public resources and multiplying at an astonishing pace! Depending on who you believe, these offspring are either created to eventually provide US citizenship for their parents, or they are being planted as terrorist sleeper cells only to blow up when they reach the age of 18 or when they are fed after midnight, whichever comes first. It’s August in America and everything is possible!!

"People come here to have babies. They come here to drop a child. It's called “drop and leave.” To have a child in America, they cross the border, they go to the emergency room, have a child, and that child's automatically an American citizen. That shouldn't be the case." These were the words of Lindsey Graham, the Republican Senator from South Carolina, who at the end of July suggested that Americans should rethink the 14th Amendment of the Constitution which grants US citizenship to anyone born in the US. And thus the principle of birthright was brought into the spotlight, creating much ado during these hot summer months.

This debate is as inconsequential as it is unsurprising. It’s lack of consequence is twofold: procedurally, it is impossible in the present political climate to amend the US constitution, so any suggestion to do so is unlikely to go anywhere; substantively, the number of children born to two foreign parents on the US soil - let alone to parents who come here specifically for the purposes of giving birth - is so comically small that the amount of attention it receives is wildly disproportionate. In other words, the debate is a ridiculous waste of time and attention span for everyone involved.

And yet no one should be surprised that it surfaced now. Ever since the state of Arizona passed a stringent immigration law in April, immigration has gone from being just another big national problem (next to health care, financial crisis, climate change, national debt, etc) to being a hotly debated issue. And any time a major complex issue comes to the forefront of collective consciousness, someone, somewhere manages to cut out a tiny sliver of the problem and completely blow it out of proportion - often reducing the entire complex issue into this one pseudo-controversial bit.

Those who paid attention to the health care reform debate last year will recognize a pattern. Back then, after months of committee hearings and negotiations on various aspects of the health care overhaul, some opponents of the proposed bill picked up on a paragraph which called for paying physicians for end-of-life counseling. This provision was distorted and portrayed as a “death panel” which will decide whether or not we should “pull the plug on grandma.” Very quickly, the hysteria over death panels became the defining element of the debate, and almost killed the nascent reform entirely. Anchor babies are the new death panels.

The amount of attention that the narrow issue of birthright receives is unfortunate because it takes away from other critical aspects of the immigration debate, namely: what should be done with roughly 11 million illegal immigrants already in the US? And how should the law governing immigration be revamped and modernized to reflect the realities and needs of the country? For a nation of immigrants, the US has a fairly spotty record in the its treatment of foreigners, and for every wave of immigrants, there is a corresponding wave of anti-immigrant backlash - anti-Chinese laws in the late nineteenth century and depression-era deportations of Mexicans are just a few examples.

But no matter which way the winds blow at any given time, immigrants are a vital component of the US, not just conceptually, but also economically: according to a landmark study by the National Research Council, the average immigrant and her immediate descendants contribute $80,000 more in taxes than they receive in benefits. The reason for this is twofold: even though they are not eligible to use benefits due to their status, most illegal immigrants actually pay income and social security taxes - the tax authorities have smartly figured out that there is no harm in collecting money from them and don’t ask too many questions of those using fake documentation. Legal immigrants, on the other hand, have to earn above-average incomes in order to be eligible for work visas or permanent residency (so as not to compete with natives on the basis of lower pay), so by design they actually end up on the top end of the income scale, paying a disproportionate amount of taxes relative to the rest of the population.

Despite these contributions, when the economy goes south and millions of Americans lose their jobs, immigrants are almost inevitably portrayed as an existential threat. The current recession is no exception. It is one of the great ironies of this debate that while rising unemployment seems to inflate the anxiety about foreigners, immigration - legal and illegal - has actually been on the decline: according to the Department of Homeland Security, the number of illegal immigrants dropped almost 1 million in 2009, the second consecutive annual drop and the largest such drop in three decades. And it is not just illegal immigration that has been on the decline - the demand for work visas for foreign workers has dropped so much when the current recession began that in 2009 the quota for visa applications was unfilled - for the first time since 2004. So, while the opponents of immigration reform often talk as if the country was bursting at the seams with an ever-growing influx of foreigners, the recent experience - largely due to the weak economy - has been quite to the contrary.

An ever greater irony is that the US not only benefits from immigrants - it needs them desperately. The population is aging due to the generation of baby boomers growing older and reaching retirement age. What that means is that the number of people who qualify for benefits like Medicare and social security is rising dramatically - and much faster that the number of young productive people who pay for these benefits with taxes. The situation is getting even grimmer with the birth rate is dropping to the lowest level in US history in 2009, according to recently released statistics from National Center for Health Statistics. What these trends add up to is roughly $100 trillion (as in, $100,000,000,000,000) in unfunded liabilities - the difference between projected payments to beneficiaries and projected tax payments by working adults. Of course, the situation could be remedied by cutting benefits or raising taxes. But neither one of those seems possible or likely. Benefit cuts are a political suicide in a country with such a large - and politically active - senior population. Tax increases are not a slam dunk either - with one party opposing them religiously and the other party scared to do anything that might hurt the economy. In fact, it seems like replenishing the population with productive immigrants who can support the burgeoning geriatric class is the most viable option.

So while Americans are passionately debating the pros and cons of birthright citizenship, they are entirely misguided: the challenge is not how to reduce immigration - something which is happening on its own - but rather how to bring in immigrants as fast as possible. The steps taken in Congress so far demonstrate this confusion: earlier this month, Democrats in the Congress passed a bill which finances $600 million in border security funding through substantially higher visa fees for companies that hire foreign workers. Because border security is a big concern for Republicans, these anti-immigrant measures are being interpreted by some as a negotiating tactic by the Democrats to facilitate broader reform down the line. That would make sense, but only if I had been asleep during the year-long health care reform negotiation: time and time again, we saw such strategic concessions by the Democrats yield no results except to move the debate further to the right. So while it might be unwise to write off immigration reform at this point, I worry that given the direction in which this debate is going the final reform - if it ever happens - will totally miss the point.

Not Funny.

Instead of the usual "omigod-I-haven't-blogged-in-forever" I will just paste in my new article for Zahranicna Politika that has kept me busy, on a topic that has been a lot on my mind. Arguably I am not an expert on Afghanistan and therefore never had a strong view on what the US should do there, which has historically prevented me from writing about it. But that's really a cop out. If you care about something you can always become more informed and form a firmer opinion. And since the US military involvement in Afghanistan is the longest active war ever, and chances are it will be an increasingly important component of the political discourse, there are plenty of reasons to care about it. So after the recent faux pas with General McChrystal I read a lot of stuff from different people on the war and my article reflects a viewpoint that I formed as a result. Anyway, here it is.

Not Funny

The idea of a top US army general agreeing to be the subject of a magazine profile that ends up getting him fired seems almost comical. The hubris necessary to allow being followed and showcased by a magazine (one with a clear anti-war record, no less) and in the process opening up to a reporter who happily transcribed every incriminating quote - that just seems like something taken out of an episode of M.A.S.H., a black comedy TV show based on the Korean and Vietnam wars.

And yet, when General Stanley McChrystal was forced to resign from his position as Commander of US forces in Afghanistan due to a profile published in the Rolling Stone magazine, no one was laughing. Apart from comments mocking several civilian officials which were the reason why the article attracted attention in the first place and ultimately why McChrystal was replaced, the article offered a rather depressing portrayal of the state of affairs in Afghanistan and a rather scathing criticism of the whole operation, concluding with the following assessment: “So far, counterinsurgency has succeeded only in creating a never-ending demand for the primary product supplied by the military: perpetual war. There is a reason that President Obama studiously avoids using the word "victory" when he talks about Afghanistan. Winning, it would seem, is not really possible. Not even with Stanley McChrystal in charge.”

And so, a mere 8 months since President Obama pledged to increase the number of troops in Afghanistan - upon McChrystal’s urging - this episode has forced many to reexamine the operation in Afghanistan.

Whether one agrees with the war or not, there are good reasons to believe that the current strategy of counterinsurgency (COIN) - a two pronged approach of taking over areas from insurgents, replacing them with Afghan government while infusing the local population with monetary aid - is not working. First, judging from the number of troops employed and lost, the vast expense, and the sheer amount of time spent in Afghanistan it seems like the US is simply not getting any smarter in fighting the insurgency. And even in the event of clearing an area from insurgents, the job is not over. One of the key components of the strategy is for the Afghan government to establish administration and ultimately take over security from US and NATO forces. Peter Galbraith, who served as deputy Special Representative of the Secretary-General of the United Nations to Afghanistan in 2009, wrote that this strategy can only work if the Afghan government can provide honest administration to win the loyalty of the local population. However, “in too many instances, the nominal government authorities are powerless, corrupt, working with both sides in the conflict, or all of the above. Karzai’s national government cannot remedy any of this. It is corrupt, ineffective, and widely seen as illegitimate.” Clearly, it doesn’t help that Hamid Karzai came to office through an election that was unmistakably fraudulent. And because the US embraced Karzai they are now relying on his government to fulfill a critical function, something it cannot do due to its shady origins.

The second prong of COIN - pouring aid to the local population - might not be effective and could be making the situation worse. Research by Andrew Wilder and Stuart Gordon on the ground in Afghanistan found “little evidence of aid projects winning hearts and minds or promoting stability.” What they observed was the main reason given by the Afghans they interviewed for the growing insurgency was the “corrupt and unjust government.” Additionally, they observed that “the single overriding criticism of aid was the strong belief that it was fueling massive corruption, which undermined some of the positive impacts it may have otherwise had.”

Still, even if the counterinsurgency strategy is not terribly effective, that doesn’t necessarily mean the US should pack up and leave. It is, however, instructive to ask, why is it that the US is in Afghanistan in the first place. One almost forgets that the answer is not “bringing peace and prosperity to the Afghans” but rather “9/11 and al-Qaeda”. In light of that original objective, it was interesting to hear the CIA director Leon Panetta recently admit that “we're looking at 50 to 100, maybe less” al-Qaeda in Afghanistan and that most of the terrorist network is operating from the western tribal region of Pakistan. Certainly, it seems odd to spend $100 billion in 2010 alone to target such a small group. Indeed the objective of the war seems to have shifted as the primary enemy fled to another country altogether. The US is no longer hunting down al-Qaeda in Afghanistan; instead they are making sure that Afghanistan can never again serve as the breeding ground for terrorism against the US.

For many who insist on US military presence in Afghanistan the need to prevent the creation of a security “vacuum” is probably the most compelling argument. Even those who oppose the war in principle, are hard pressed to advocate a withdrawal, often citing this reason. On the surface the argument makes sense: before 9/11, the Taliban harbored al-Qaeda; if the US were to withdraw from Afghanistan it would be leaving behind empty ground for the enemy to come back to. In other words, the US is stuck. In reality, it is not at all clear that the presence in Afghanistan did not contribute to a greater security threat by potentially destabilizing Pakistan. The last terrorist attempt in the US, after all, seems to have been organized by the Pakistani Taliban. Besides, even in the event of a complete success in Afghanistan (and, by extension, Pakistan) who is to say that al-Qaeda won’t find a new base somewhere - and if they do, how many countries can the US afford to invade, rebuild from scratch and immunize from potential terrorist-harboring - especially when the track record in Afghanistan is as terrible as it is?

In reality, it is hard to envision the US civilian leadership going against the recommendations of the military and suggest a withdrawal from Afghanistan any time soon - the politics of the situation offers little reward for wanting to skimp on counter terrorism measures and high costs for any potential failure. Our best hope, as Matthew Iglesias of the Center for American Progress Action Fund suggested, is that the leadership redefines success: instead of shooting for a full blown transformation in Afghanistan, they need to reframe the problem and stake out smaller achievable goals that will allow them to declare victory at some point in the foreseeable future and put them on track for downsizing the US involvement. Otherwise we might be looking at another Vietnam war - a lengthy expensive and painful conflict with no discernible accomplishment to speak of - except maybe some equivalent of M.A.S.H.

Void.

New article for Zahraničná politika. My other articles for them are here.

Void.

At the end of March, the United States Congress passed the long-debated health care reform legislation. Regardless of whether one supported or opposed the bill, everyone agreed that this was one of the most significant pieces of legislation to become law, on par with the Civil Rights Act of 1964 - which abolished racial discrimination and segregation - and the Social Security Act of 1965 - which created Medicare and Medicaid, the health programs for the elderly and poor families.

The new law far from guarantees health care for everyone - illegal immigrants, not a negligible group, will be excluded from participation, for example. The mandates for everyone to purchase health insurance, we are finding out, are not particularly easy to enforce, and therefore probably not as draconian as they might sound. It is also far from a "government takeover" of health care - a common criticism levied against the new plan by its opponents - because for the most part it relies on the currently existing market mechanisms to expand health coverage. Far from the earth shattering vehicle it was often painted as, the law is in essence a relatively centrist collection of incremental steps. And yet - considering the decades of trying and the number of failed attempts - this was a giant leap towards universal health care in America. Obama himself probably described it best during the signing ceremony when he said that the law is not "radical" but "major".

As one might expect after such a major event - following months of obsessive tracking of the issue aided by virtually non-stop media coverage - I went through several emotional stages in the aftermath of reform: first, there was immense joy. It seemed almost unbelievable that against all odds the Democratic leadership managed to pass reform. I have predicted the death of reform in this column multiple times precisely because it was so difficult to pass. And yet, at the 11th hour, due to a unique congruence of forces, it happened. After joy, came relief. Finally, we can move on to other things, I thought. Health care has been sucking the air out of every room in DC for the last year and now we can deal with other pressing issues. And after relief, came sadness and void. Whether you're for it or against it, health care reform became the lingua franca in US politics, the political equivalent of weather talk. As complex an issue as health care may be, over the year that it was on the forefront of political conversation it became intimately familiar to anyone who paid any attention at all. Politicians, newsmen, commentators, bloggers - many developed a level of fluency on the topic that elevated it to national urgency the same way I imagine the country once debated slavery or the war in Vietnam. It was sad to see that go. However, the bigger part of this void is also due to the nagging question: what next?

Don't get me wrong - there are plenty of issues for the Congress to take up. Take finance reform. In the aftermath of one of the greatest economic downturns in history, the great minds in DC are wondering what could be done to prevent the same kind of meltdown from happening again. Many blame the near collapse of the financial system on the deregulation of the banking industry and are thus seeking to impose new regulatory oversight; others blame it on the unrestricted growth and risks the banks took and thus want to impose certain statutory limits or taxes on the banks. The banks - surprise! - are lobbying heavily to water down any attempt at reform: "You don't understand our business", they say, "anything you do could threaten our ability to provide liquidity to the economy!" To some, the more that can be done to decrease the size and the profitability of the banking sector - and thereby its political power and ability to draw talent from the rest of the economy - the better. The House of Representatives already passed its version of financial reform in December, while the Senate is currently developing its own bill. However, if three unsuccessful efforts to start the debate of the bill of the floor of the Senate are any indication, it's going to be a long battle.

Then there is climate change. Another priority of the Obama administration is to pass energy and climate legislation that would set America on a path to reducing emissions, increasing the share of energy that comes from renewable sources and lessening the dependence on fossil fuels. While the House of Representatives has already passed a bill in June of last year, the Senate has not even considered the issue due to its preoccupation with health care and more recently with financial regulation. However, a language of the Senate bill - cosponsored by both Democrats and Republicans - could be announced soon. This would be great news for the bill - having a Republican co-sponsor would virtually guarantee passage in the Senate. Perhaps climate change could pass relatively painlessly?

Or .. not. Releasing a bipartisan proposal was indeed the plan - at least until an entirely different issue suddenly emerged out of nowhere and quite possibly derailed everything: immigration. One lovely April day, the state of Arizona passed a harsh law to deal with illegal immigrants, namely by authorizing the local police to verify citizenship of suspicious people and arresting and fining those failing to prove their legal status in the US. The resulting national outcry - combined with large Hispanic population in several key states - created an interesting opportunity for the Democrats. Why not take up immigration on the Federal level to court a key constituency? The seeds of such an idea must have been planted in some Democratic heads because the Senate leadership quickly made it clear that they are debating weather they should act on climate or immigration first. As a result, the key Republican co-sponsor of the climate legislation threaten to withdraw his support for the effort, which could kill the bill before it even hits the Senate floor. And as for immigration reform - the grave need for it is only eclipsed by its contentiousness. If the Senate really goes down that path, we are looking at another long battle.

Financial regulation, climate change, immigration - there is no shortage of critical domestic issues. So why do I still feel the void I described above? Simply because there is a decent chance that none of these issues will see any resolution in the foreseeable future. First, any vote in the Senate requires a lot of cross-party cooperation and deal making. Democrats do not have the votes to pass anything without at least a handful of Republicans. While deal making isn't impossible, it is not easy. If health reform showed anything, it was that despite rhetoric to the contrary, Republican cooperation simply cannot be relied upon. Perhaps, given the popular support for financial reform, they will tread more cautiously this time around. However, the early signs are not good: recently they voted three times in unison against starting debate of the bill in the Senate. The other takeaway from health reform is that a bipartisan process is extremely time consuming. And that is the second reason why none of these issues are likely to see resolution during this Congress: shortage of time. The mid-term election in the fall means that all legislation needs to be considered before the summer. Once we reach the August recess, there will be no appetite among lawmakers to pass legislation, both because they will want to focus on campaigning and because they will try to avoid any controversial votes. Which leaves them with roughly 3 months to do anything. In DC time, that's an eye-blink. As a reminder, it took 3 months for the Democrats in the House of Representatives to take a vote on the Senate version of the health care bill. Something that should have been an easy step but wasn't because nothing is easy and quick in the Congress.

Maybe with some combination of luck and Herculean efforts the Democrats can muster the energy and drive to act on one of these very important issues. I'd like to be positively surprised. However, the window to pass legislation on the Democratic agenda before the mid-term elections is closing rapidly. And the currently predicted losses in both the House and the Senate during those elections won't help the Democrats' ability to do anything thereafter. Thank God for the existence of the executive branch, of without it we would be looking at some pretty uneventful years ahead.

What Now?

New article for Zahraničná politika. Other articles here.

What Now?

On January 19th, 2010, the good people of Massachusetts were voting to elect a US Senator to replace the deceased Ted Kennedy, a Democrat who held the seat since 1962. Ever since the Republican candidate Scott Brown was announced the winner of that election, the Democrats have been in a crisis that is threatening to completely dismantle the young Obama administration.

First some background is due. Prior to this election, the Democrats (in combination with the independent Joe Lieberman) held 60 seats in the Senate, and the Republicans held 40. Because a Republican won the seat, the Democrats lost their 60-vote majority. Now, in most legislative bodies, a 59% majority is still a perfectly good majority to pass a bill. Not so in the US Senate, where the rules require that in order to take a vote on a bill, the debate has to be formally brought to conclusion by 60 or more votes. Therefore, losing the 60th seat amounted to losing the ability to pass anything in the Senate. While Democrats technically still have a majority of seats in the Senate, what matters more is the other 41 seats occupied by Senators that represent 37% of the US population, who can bring the Senate to a halt any time they wish. If you thought that the US was a representative democracy, you might want to rethink that.

There is no area that illustrates better the effects this has had on American politics than healthcare. Prior to the special election, before the Democrats lost their 60th seat in the Senate, both the House of Representatives and the Senate passed their version of reform. Like they would with any other bill, after passing their respective versions, the representatives of the two bodies started negotiating a compromise bill that could be put to vote and passed in both chambers of Congress, thus finally enacting health reform, after nearly a year of hearings, negotiations and compromises - and a century of failed attempts. Indeed, when the President set the date for his first State of the Union speech for January 27th, 2010, it was commonly expected that he will list health reform as one of his first year accomplishments.

The situation changed dramatically on January 19th when a Republican won the Massachusetts senate seat. The implications of this loss quickly reverberated throughout DC. On a practical level, the loss of the 60 vote supermajority meant that the standard route that everyone envisioned prior to the election - passing a compromise bill in both chambers - was no longer a viable option, since the Democrats were now one vote short of the necessary supermajority in the Senate. As a result, the only option to still pass reform was for the House to simply adopt the bill already passed by the Senate prior to the special election. (Remember, as long as both chambers of US Congress pass the same legislation, it becomes law.) With a Democratic majority in the House and a simple majority required to pass a measure, one might think that concluding this saga would be a breeze.

However, what happened in Massachusetts had a much more profound impact than simply losing a seat in the Senate. With a solidly Democratic state like Massachusetts suddenly voting Republican, the narrative that quickly developed in the media was that the election in Massachusetts was basically a litmus test for Obama, his administration and the Democrats at large. The failure of a Democrat to secure the seat despite hugely favorable position in the polls just a few weeks prior to the election was being interpreted by many as a sign of meaningful dissatisfaction in the electorate. Even more specifically to healthcare, many commentators insisted that popular opposition to the current reform effort occurring in the Congress was behind the downfall of the Democratic candidate. Whether or not these theories have any truth to them, it is understandable that all Democrats in the Congress must have asked themselves what this means for them and their prospects during the midterm elections in November. After the loss in Massachusetts, which no one saw coming, are they risking their reelection by voting for the health bill? Something along these lines must have been happening, because by January 21st, the speaker of the House Nancy Pelosi declared that she doesn't have the votes to pass the Senate bill.

This chain of events clearly had an effect on Obama's State of the Union speech. Instead of taking a victory lap for passing health reform, Obama felt it necessary to urge the legislators: "Do not walk away from reform. Not now. Not when we are so close. Let us find a way to come together and finish the job for the American people." Certainly, these are not words of someone confident in the imminent passage of the bill; on the other hand, some optimists in the pro-reform crowd might have rejoiced: he still cares about reform, despite what happened in Massachusetts! Clearly, Obama did not drop the issue entirely; however, the fact that he spent barely 5 minutes in the second half of his 69 minute speech on something that he and the Congress spent a whole year deliberating would suggest that he would rather not risk being remembered as the president who went down in flames in his first term due to his aggressive insistence on health reform. Instead, Obama used the speech to outline new priorities - the economy, financial sector reform, and the deficit.

At this point, many have written off health reform as dead. The irony of the situation is that not many envisioned the process getting this close - and its path certainly was not easy. After the August recess and a wave of attacks from all sides this column all but predicted its failure. Which is why after passing through both chambers of the Congress, it seemed all but inevitable and very few could see what would stop its momentum - until that fatal election in Massachusetts.
So what does this all mean for Obama, the administration and Democrats generally? On the one hand, it is hard to make a bulletproof argument that the Democrats should keep on marching fearlessly without a second thought about public preferences - an arrogance that was the staple of the last two administrations. On the other hand, it is not exactly obvious that letting health reform fail will save them from the anger that is brewing in the American public and that was at least part of the reason for the Democratic loss in Massachusetts. Yes, health reform has become less popular - a quick look at the polls can prove that (http://www.pollster.com/polls/us/healthplan.php). Still, will simply reversing course on health care be the saving grace for the Democrats? Unlikely. A recent survey by Public Policy Polling shows that the Democrats' chances at the midterms are not necessary better if reform fails - in fact, fewer people are likely to vote Democrat if reform fails. It seems that whatever damage health care is doing to the Democrats has already been done and retreating from it now can only do more damage. As Jonathan Cohn at the New Republic pointed out, letting reform die would have a threefold effect: first, it will discredit the party in the eyes of those who supported the effort - their base; second, it won't prevent the Republicans from campaigning against them as supporters of reform (they voted for it once before!) - and flip-floppers (they keep changing their minds!), and third, it will rob them of the chance to point to one big accomplishment. The last piece is the most critical one, not only in a symbolic sense (passing bills means "getting things done") but also in a practical sense, that is, there were enough concrete positive measures that would become effective immediately and be perceive positively. And so, even if the public is now riled up against reform, once they started experiencing its early benefits, they would quite possibly appreciate it.

Thinking about the current situation more broadly, if the result of the special election is the failure of health care, I deeply worry about the next 3 years and the ability of this administration to do anything at a time when crucial reforms are desperately needed in America. For if this one road block has the power to create such paralysis among the Democrats that they are not able to take the roads that are still widely open to them to deliver on a key domestic priority, what are their chances to tackle their next agenda items that are just as important yet controversial, like the economy, financial sector reform, climate change? And more importantly, if they fail on this one occasion, why should they deserve to even have the chance to try? After all, how can the country and indeed the whole world face the challenges of the post-Great Recession era with an impotent US government? My message is simple: wake up, Democrats, or die.

Ridiculous Conclusions.

And since I'm all about blogging again, why not post my upcoming article in Zahraničná politika? I'm back on Obama, with gloves off.

Ridiculous Conclusions

Sometimes the tactical decisions that Obama makes make one wonder what the man really believes in. And, increasingly, they don't even seem to produce their purported goals.

When the President received criticism for being the first president since 1991 not to receive the Dalai Lama during his most recent visit to Washington in October, the press was promptly educated by his senior adviser Valerie Jerrett that "it is not a signal of any lack of commitment to human rights .. that's a ridiculous conclusion to draw." At the same time, Jerrett admitted it is "a fair point to make" that the decision to postpone the meeting was made out of respect to Chinese sensitivities to Tibet. In other words, it was a tactical move, not a principled move; the appearance of bending over backwards to please the Chinese should not be disconcerting - the President knows what he's doing - trust him.

To be sure, America's dependence on China is hardly a secret. With some $2 trillion in US government bonds, China is the largest holder of the US debt and thus the largest funder of its massive deficits. Amicable relations with China are therefore a clear priority for US foreign policy. And yet, this sort of diplomatic calculus could hardly justify not meeting with the Dalai Lama. For one thing, even George W. Bush received him during his visit in 2007 (and awarded him the Congressional Gold Medal) and other Congressional leaders, including Nancy Pelosi, met with him during his most recent visit in October. Of course, this was enough to make the Chinese dissatisfied: shortly thereafter, China accused the US of interfering with their internal affairs. In the end, Obama's tactical move not only enraged those who think the US should take a principled stand on human rights in China, but it also failed to deliver the goal of pleasing the Chinese government, instead encouraging them to make even more ambitious demands.

To anyone who has been watching Obama's presidency with a little bit of a critical eye, this scenario looks eerily familiar. In fact, we witnessed a similar tactical blunder even before the Obamas moved into the White House, when then president-elect asked Pastor Rick Warren to deliver the invocation at his inauguration ceremony. For the sake of context, this choice was controversial due to Warren's widely publicized support for Proposition 8, an anti-gay marriage ballot measure in California during the November election. The choice of an extremely conservative pastor was widely seen as Obama's attempt to reach out to the conservative base and passionately criticized by his largely progressive supporters. In the end, it did very little to improve national cohesion (as evidenced by the largest partisan gap in Obama's job approval ratings, according to PEW) and at the same time offended his socially progressive supporters.

Fast forwarding to last summer, we saw the same pattern emerge during the health care reform debate. As the debate quickly focused in on the question of the public plan - a government run insurance option - the legislators increasingly looked to the White House for guidance. At this critical juncture, in an apparent attempt to bring some Republican support on board, the President and his advisors, through interviews and press conferences communicated the message that while the President supports the public plan, it is "not the entirety of health-care reform" and "not the essential element". Ironically, this telegraphed flexibility did not make Republicans any more constructive in the reform efforts. In fact, despite the president's soft-pedaling on one of the key components of reform, it seems likely that if reform passes, it will happen with no Republican votes.

Obama's willingness to make sacrifices to achieve greater goals - Dalai Lama vs the Chinese, progressive issues vs national cohesion, public option vs bipartisan support - is theoretically understandable as shrewd political calculus. However, it is then imperative to judge his effectiveness in making these trade-offs and, so far, it seems to be very limited. In fact, it seems that every time the President decides to give something up, he receives very little in return. The impression it creates is one of an almost pathological desire to please his opponents even if this disregards the sensitivities of those that might be hurt in the process.

It is certainly understandable how his predilection for compromise and trade-offs would make Obama appealing to a certain committee in Norway. At home, however, he is testing the patience of his liberal base. It is ironic that one of the common criticisms of George W Bush was his inflexibility. These days, Democrats sometimes wish that Obama would exhibit some of that stubbornness, at least when it comes to defending their interests – the promises he made a year ago.

Health Reform in America – Why It Should, Could and Probably Won't Happen

A super belated installment of my article in Zahranicna Politika. It was meant to be a "US Health Reform 101" for readers outside the US who may not be familiar with the problem. Of course a few things have changed since the time it was written but the conclusion still rings true, especially when one looks at the Senate Finance Committee bill.

Health Reform in America – Why It Should, Could and Probably Won't Happen

The story of US health reform is a complicated one and a thorough analysis of the topic is beyond the scope and scale of this column. However, it has become increasingly difficult to ignore given the prominence it has risen to in the last few months. Not only has it become the number one domestic issue that the president, lawmakers, lobbyists, news reporters and policy analysts are occupied with, but it is also quickly becoming the gauge for the Obama administration's success and potentially one of the determinants of the mid-term Congressional elections (in November 2010) and the next presidential election (in November 2012). Even more broadly, it has been a fascinating study in the functioning (some would say, malfunctioning) of the US political system and its many quirks. In short, for anyone interested in US politics, there are many reasons to care about health reform.

So what is all the fuss about? Why all the talk about reforming a system which is defined by spectacular innovation and some of the most advanced treatments and therapies? The standard answers to that question typically involve three aspects of the system: access, cost and outcomes. Quite simply, with all its high technology and innovation, the US health system leaves many people uninsured, and despite being the most expensive in the world, it produces worse outcomes. Specifically, while almost a fifth of non-elderly Americans don’t have any health insurance, the cost per capita is roughly twice that of most developed countries, and yet life expectancy is remarkably below average while infant mortality is astonishingly high. Underneath all these characteristics lies the fact that health care in America is an amalgam of disjointed systems of financing and delivery with little coordination of care, no incentives for prevention and wellness and plenty of room for duplication and errors.

(Source http://ucatlas.ucsc.edu/health/spend/cost_longlife75.gif)

If this brief description of the complexity of US health care and its flaws in and of itself doesn’t make it obvious how much of a fool’s errand trying to revamp the system is, consider the fact that during the last reform effort, led by Hillary Clinton, the backlash from all stakeholders was so strong that for the last 15 years most lawmakers treated health care like a bag of toxic waste they wouldn’t touch with a ten foot pole. And yet, given the ambitious nature of Obama’s agenda, it seemed almost natural that he would try to find the Holy Grail.

Interestingly, despite the obvious difficulty of the task and the discouraging historical precedent, as recently as in June, there was a widespread sense of confidence on Capitol Hill that this time around things are different and something will get done. For starters, in the 15 years since the last attempt, healthcare spending has ballooned 160%, while the ranks of the uninsured have swelled from 41 million to 47 million. In fact, according to the CNN exit polls from the presidential election, while the economy was the number one issue for the vast majority of voters, healthcare ranked as number one for as many as did the issues of terrorism and Iraq. Even more specifically, two thirds of voters said they were worried about health care costs (and 60% of them voted in favor of Obama). In addition to having an apparent mandate and greater urgency, the new Democratic administration was also equipped with an expanded Democratic majority in both chambers of Congress - the first time such power alignment occurred since 1993. Perhaps more importantly, unlike in 1993, there seemed to be an agreement among key stakeholders, including the for-profit healthcare industry, about the need for reform. This was a major difference from the Clinton era, when the lobbying and advertising efforts of the health insurers, pharmaceutical manufacturers and doctors killed reform in its infancy. The new administration, trying to prevent Clinton’s mistakes, kept the process as open and collaborative as possible so as not to ignite hostile opposition from any of the key groups, instead making deals with each of them. The premise was that if we can fix the system and expand coverage, all of the participants will benefit and should therefore contribute in their own ways towards making the overhaul affordable. In short, for a very long time it seemed like the stars were aligning for the impossible to occur.

In hindsight, it was only a question of time when the fairy tale would turn into a mean fight. Once the committees in Congress started drafting bills – there are 3 of them in the House of Representatives and 2 in the Senate with jurisdiction over health care – the details got in the way of noble goals. The reality is that while most agree on the need for reform, there are numerous starkly different ideas about both how it should be accomplished and paid for – and each of them has a different set of proponents and enemies. The obvious goal is to find a solution that upsets the smallest number of participants – which isn’t very consistent with the objective of revamping 16% of the US economy. To make matters more complicated, the differences of opinion do not necessarily fall along party lines, rendering the Democratic majorities in Congress largely useless. As an example, a major portion of the debate has been around the possible introduction of a government-run health insurance option that would compete with private health insurers. While progressive democrats perceive this as an essential part of the reform, the conservative block of the party is vehemently against it. Recognizing the complexity of these diverging interests, Obama has been smart in keeping his demands as vague as possible and instead putting out broad parameters for reform – it has to expand coverage, improve quality and save money. This strategic vagueness, however, didn’t prevent the opponents of reform from poking holes in the proposals and the proponents of different solutions from engaging in hostile debates.

And so here we are in August and the whole reform effort appears to be on life support. Why? If reform fails, history books will probably trace its death to the August congressional recess. The recess is a month-long break during which lawmakers typically go back home to meet with their constituents. Early on in the month it became clear that having a bunch of health care proposals sitting around for a month was like leaving a carton of milk on the table for a few days. The news became quickly dominated by reports of contentious town hall meetings in which lawmakers encountered anger and even violence, often fueled by outrage over the supposed attempt to nationalize healthcare and over particular provisions in the health care bills, some of which were completely made up. The famous example was the rumor that Obama’s reform would create government-run “death panels” that would determine which patients are worth living – which turned out to be a gross misrepresentation of actual proposals to include funding for voluntary end-of-life counseling. Another example of populist hysteria was the accusation that the reform will force preferential hiring of homosexual hospital administrators and includes funding for sex change operations, when in fact none of the proposals include any such language. Absurd or not, these protests have a good chance of making lawmakers uneasy about their support for reform especially if they are Democrats in conservative districts or states and thus vulnerable in the next election.

So does this mean that health care reform is dead? Probably not entirely. Obama has made the issue so central to his domestic policy that a complete failure could harm the future prospects of both his party and his own. However, given the lack of legislative will and mounting opposition in the electorate, the most viable alternative is to settle for some smaller incremental changes such as expanding some public programs like Medicaid to cover more poor people and children and pay for it by cutting spending in a few targeted areas. This would be very far from a comprehensive reform of financing and delivery of care, and it will certainly anger the progressive Democratic base. However, faced with the prospect of getting nothing at all, the progressives will likely take whatever “reform” they can get. In the end, it seems quite possible that this will all have been yet another exercise in the realpolitik in the US legislative process and perhaps another lesson for those who believed in Change: it’s slow, painful, full of compromise and ultimately not very satisfying.

Just Dance.

Eh, not particularly timely but here's another installment of my column in the Slovak journal Zahraničná politika. I have to say, using a night out at Vandam as inspiration and a Lady Gaga reference .. that's a first for me.

Just Dance.

Starting a column with a personal anecdote like “when I went out last Sunday it occurred to me” is probably not particularly professional. And yet, at the risk of diminishing the respectability of this piece, I can't help myself: When I went out last Sunday it occurred to me that for a city in the epicenter of the greatest economic decline since the Great Depression, everyone seems to be having an unusually good time. Granted, this was the night before Memorial Day, one of the few national holidays in the US, also considered an unofficial start of the summer. But it struck me as somewhat representative of the overall mood around me – not just in my social interactions, but also at my work in the financial markets – that could generally be summed up with three statements: the world is not coming to an end; it's going to be ok; just dance. And the skeptic in me has to wonder: is this for real or are people just fooling themselves, diluting their worries with a cocktail of green shoots, only to wake up with a massive hangover of reality the next morning?

The term green shoots in this context was coined by the Federal Reserve chairman Ben Bernanke during an interview in March to describe what he believed were some early signs of economic recovery. Since then, many analysts have been obsessed with identifying these encouraging data points. Suddenly, it mattered less that many data points were still bad or worsening; it became fashionable to point out that as bad as things may seem – or deteriorating even – they are getting worse at a slower rate, the implication being that we are close to hitting a bottom. The market responded accordingly: between early March and the end of May, the S&P500 index has climbed 35%. And this sense of optimism has clearly infected American households: the Conference Board consumer confidence index in May showed a stunning improvement since the previous month to the highest level since last September, when the crisis broke out. Even more telling is the fact that the increase was driven by a pop in future expectations – to the highest level since December 2007, the month when this recession started. In other words, while people's assessment of the current situation is still not particularly rosy, their view of the future is as good as it was before the recession started. Similarly, in the stock market, one earnings report after another, investors have been looking through mediocre near term trends, and propping up prices of stocks in the hopes of an economic recovery.

Now, let me spell out my main source of skepticism clearly: none of the fundamental negative trends that were at the core of the downturn that clearly broke out last fall has reversed. Here's a quick survey of some macroeconomic factors: the housing prices keep going down (15% in April, according to National Association of Realtors, while the inventory of homes climbed 8.8% and mortgage delinquencies hit a record high, said Mortgage Bankers Association), the true health of banks remains unclear, unemployment continues to go up, even if at a slower pace. In other words, there is plenty of negative data pouring out, if one only pays attention.

At this point, you may ask yourself: why insist on highlighting the negative and ignoring the positive signs? Shouldn't we be celebrating the improving sentiment? These questions aren't entirely unfounded. The economic cycle is, after all, a self-feeding mechanism to some extent: if sentiment recovers, businesses will plan for higher output, increase investment, hire workers, and so on and so forth. And yet, while confidence is an essential element of recovery, it doesn't actually pay for much. So while consumers may be feeling more bullish, the real question is how much stuff will they be able to buy when all is said and done. And if you think about the fact that much of the spending in the last decade was driven by a massive expansion of credit – which is unlikely to make a comeback soon, I have to wonder what the true buying power of Americans – and people around the globe – will be when the dust settles. Put bluntly, without credit cards, how many millions of people will find it essential in the future to get the latest iPod every 6 months?

And so, while it would be nice if this jolly spring became the foundation for the next boom, I am finding it difficult to ignore all the signs that tell us otherwise. What's more, the precedents are not very encouraging: even during the Great Depression the economy did not fall apart immediately. After the initial drop, there was a brief period of recovery during which the market rallied 50%, only to start an extended decline during which stocks lost 80% of their value. And while I am nowhere near making that kind of prediction, when I look around today and see everyone dancing again, I fear how surprised everyone will be when the music stops.

American Dream, Interrupted

The third installment of my column in Zahraničná politika, a Slovak foreign policy magazine, touches on the less obvious yet very troubling effects of the economic crisis.

American Dream, Interrupted

There has been a lot of talk about change lately, including in this column, as a result of the election of Barrack Obama and his arguably progressive agenda. And yet the most striking changes occurring all over the place are not happening because of Obama and his agenda, but rather around him and despite him. I am talking about the current economic crisis / recession / depression and how it is slowly redefining the US in ways that are far reaching and profound. And increasingly I have to wonder, what is left of America as we know it?

The US banking system is only a few steps away from nationalization - it has been saved for now simply because the administration wants to try every avenue possible first. Several major car manufacturers are only a few miles from bankruptcy, temporarily held afloat by loans from the government. The real estate market continues to melt down and that the government is trying to revive it seems like par for the course. In short, not only are some of the key symbols of American capitalism - banks, cars, houses - are under serious stress, but also the essence of their rescue plan could be labeled un-American: government intervention and control. And yet, even those who criticize big government, higher taxes and deficit spending, have had little to offer in term of alternatives. In fact, the US - and by extension, the world economy - is lucky that the largest economic contraction since the Great Depression is occurring under the watch of a President and Congress that don't seem philosophically opposed to taking bold pro-active steps.

Yet, as ironic as all these extraordinary circumstances may seem, they do not make me wonder about the future of American capitalism and its position in the global economy. Time, simple forces of supply and demand, and presumably the current government intervention, will eventually sort out the problems in banking, autos and real estate one way or another. No, the changes that should make Americans more worried are much more quiet and subtle and are affecting some of the core fueling forces of America and, as cheesy as it may sound, shattering the idea of the "American dream."

The first issue I have in mind here is immigration. While the topic of illegal aliens is consuming the attention of the mainstream media and the President, there is an entirely different battle going on - against legal immigrants who have been living in the country on working visas. Due to a special skill or high level of education, these foreigners have been sponsored by a US company to live in the country. Over the years, many of these individuals have contributed greatly to the US economy - for example, Microsoft says that 35% of their patents came from new inventions by visa and greencard holders. In other words, this program - and immigration in general - has been the feeding channel to attract and retain the hardest-working, brightest minds from all over the globe to the US.

And yet, the visa program has come under criticism from those who argue that during a recession, American companies should not be giving jobs away to foreigners. The most vivid assault on the program came in the economic stimulus plan which imposes severe restriction on any company receiving federal funding and their ability to hire foreigners. However, even outside of the companies directly affected by the stimulus restrictions, the popular backlash against the visa program has led to a drop in applications for new visas as companies are becoming shy about sponsoring foreign workers. It was in that spirit that Wells Fargo, a major US bank, has decided to discontinue sponsorships for some of the foreigners they already employ. And Microsoft, after it announced it will continue sponsoring immigrants, had to quickly soften its stance amid criticism from media and lawmakers and declared it will file "substantially fewer" applications - this despite having clearly stating how crucial hiring from the global talent pool is for them - and the US.

Education and research are another defining element of America that is being threatened as a result of the current crisis. On one end of the spectrum, the institutions relying on public funding are facing a tough future as 36 states have either enacted or proposed budget cuts for elementary or higher level education. On the other end of the spectrum, private institutions which are not solely dependent on public funding are dealing with massive declines in the values of their endowment portfolios - 23% during the 5 months ended in November of last year, according to the National Association of College and University Endowments. Even Harvard - with its breathtaking endowment that peaked at $37 billion in 2008 but is expected to decline 30% as a result of the market meltdown - is planning to reduce its budget by $220 million over the next two years. Moreover, in the US education goes hand in hand with research: American universities are not just educational institutions, but also powerhouses of invention and progress. In fact, universities now perform about 60% of all basic research in the US, according to National Science Foundation. And the math is quite simple: fewer education dollars equals less research.

Perhaps most profoundly, however, shrinking higher education budgets translate into fewer dollars available for financial aid for students from lower income families at a time when increasingly more students are in need of such aid due to the economic downturn and market losses. Because attending college is impossible for the poor without outside assistance, the reductions in funding could have a meaningful impact on social mobility. In other words, kids from lower income families will have fewer chances to get higher education and move up on the socio-economic ladder.

While funding for higher education is dropping, it is hard to imagine any other country replacing the US as the leader any time soon. It is telling, however, that the US stands to capitalize less on its investment in education than ever before, as foreign students are increasingly likely to return home after graduation. This is not some insignificant group we're talking about: according to National Science Foundation, foreigners received nearly 60% of all engineering doctorates and over 50% of all engineering, math, computer sciences, physics and economics doctorates awarded in the US. And today, they are planning to return home in greater numbers than ever before. As the Kauffman Foundation found in its report "Losing the World's Best and Brightest", 58% of Indian, 40% of European and 54% of Chinese students surveyed would stay in the US if given the choice, which suggests a meaningful drop in the appeal of the US given that historically as much as two thirds of foreigners overall stayed in the US after receiving a doctorate, more specifically 92% of the Chinese and 85% of Indians. And while the availability of economic opportunities in the home country was the most important reason for returning (other than family ties) - a stunning revelation in and of itself - the ability to obtain a visa was also an important factor. Stated differently, it would seem that the aforementioned backlash against working visas is making it harder to stay in the US for the shrinking portion of those that find it appealing in the first place.

And so, in 2010 (or any time between 2011 and 2020, depending on which pessimistic economist you believe), when the US recovers from this recession, it will probably be very different - not because its banks will operate under different regulations and a few car companies will no longer exist but rather because some of its key competitive advantages, like ever replenishing diversity and investment in human capital, will have fallen prey to the economic meltdown. Will those naturally recover as the economic engine goes back into full speed and will other countries capitalize on America's weakness in the meantime? That remains to be seen. But for now the American Dream is on hold.

Change Light.

Second article for Zahranicna Politika, a Slovak foreign policy journal.  Once again, feels a bit dated, as it was written in mid-February.  The original English text of the article posted below.

Change Light

If anyone thought that American political scene would suddenly become boring or ordinary after the departure of George Bush, they were sorely mistaken. Indeed, even before the inauguration of Barack Obama as the 44th President of the United States, it became clear that while Change may have been Obama's campaign moto, it certainly is not what we have witnessed in the American political culture. In fact, scandals and sensations - large and small - have been filling the front pages of newspapers including a governor who tried to sell Obama’s senate seat and several cabinet nominees who forgot to pay their taxes - particularly embarrassing given that one of them was nominated (and eventually confirmed) to be the Treasury Secretary - the head of the agency responsible for the collection of taxes.

Admittedly, while these scandals make for good gossip, they do not necessary say much about the Obama presidency as such. Mishaps and misbehaviors always happen and Obama cannot control everything. So what can we conclude from the moves that he has taken so far, that were solely in his control? Change is probably not the first thing that comes to mind. Those who voted for Obama as a clear-cut alternative to Clinton and as a candidate who wants to move away from the "politics of the past" were astonished to find out that a good portion of his appointments were in their past affiliated with the Clinton administration. Thus, a new pro-Obama narrative developed: it wasn't necessarily the people that would change but rather the substance and the style of the presidency. What else was he going to do anyway – beam a whole new Democratic party in from space?

So how about that substance and style? One might highlight Obama's early steps after the inauguration as signs of a new era in Washington. First, he introduced ethics guidelines that would shut the revolving door between government and industry by placing restrictions preventing those with a lobbying record from working in the government – and vice versa. Surely a bold step - at least until it became clear that Obama reserved the right for exceptions: Deputy Defense secretary nominee William Lynn used to be a lobbyist for Raytheon, a military contractor, and the Health and Human Services secretary nominee Tom Daschle - while not technically registered as a lobbyist - has earned large amounts of money from companies in health care - an industry he was tapped to regulate and reform. Speaking of ethics, nominating cabinet members with questionable tax records didn’t seem particularly kosher either, yet Obama fully stood behind them.

Another immediate move during the first few days in office was to make good on his campaign promises and shut down Guantanamo Bay - a symbolic move to end the questionable extrajudicial practices perpetrated by the Bush administration. It did not take long before it came under criticism as being a bit too symbolic: he delayed the closing of Guantanamo for a year and seemingly left open the door to extraordinary renditions - the practice of apprehending and transferring suspects to other countries. Even more important to many critics of torture was that Obama has shown little interest in prosecuting or even investigating the activities of the last administration. In short, instead of true groundbreaking steps, it seems that the few moves that Obama has made so far have come off as somewhat half-hearted and unconvincing.

As substance and style of presidency goes, one of the key aspects of Obama's vision during the campaign was post-partisan politics - putting aside differences and working toward mutually agreeable goals. There was probably no better way to test this lofty goal than to attempt to pass a trillion-dollar stimulus package to revive the US economy. It must have been disheartening to the new president when, despite his best effort, not a single republican voted for the stimulus bill in the House of Representatives. Clearly, Obama's attempt at bipartisanship has resulted in nothing of the sort. If anything, it has shown that the legislative process is inherently partisan and expecting anything else is not realistic.

All these instances of words speaking louder than actions – ethics, Guantanamo, bipartisanship - seem to have one important element in common: reality. The problem with implementing a lot of these goals is that, sooner or later, one is bound to run into complications: that really qualified guy he really wanted to hire who used to be a lobbyist (and forgot to pay some taxes); those prisoners some of which are probably terrorists yet we have no idea how and where to prosecute them; the Republican party he wants to work with amicably that has no incentive to cooperate with him. Suddenly a lofty goal becomes an obstacle, something that needs to be circumvented or exempted from. And that, in short, is how ideals seemingly die in Washington.

And so, three weeks into the age of Obama, Hope, another slogan from Obama campaign, is certainly running high: according to the New York Times/CBS News poll, 79% of respondents were optimistic about what the new president can accomplish, higher than any of the previous five presidents at the outset of their time in office. Change, however, even with the best of intentions, has so far been quite elusive. With plenty of time left in his presidency, it would be premature to declare Obama's mission a failure, but it will be interesting to observe how the reality of governing will temper his ability to deliver on his idealistic promises, or even his appetite to do so. In the meantime, it seems like we will have to settle for Change Light.

Debut.

A very belated link to a very belated article that I wrote for Zahranicna Politika, a Slovak foreign policy journal.  The original English text of the article, which was translated and published in Slovak, is posted below.  The chart that I am referencing in the article appears in this entry.  It was written immediately after the election with an audience in mind that did not follow all the events as they unfolded.  Yet even for me it is interesting to reread it now after some time has passed and the events of last fall are a bit more blurry.  

In the aftermath of the historic presidential election, commentators around the world are often interpreting the election of Barack Obama as a rejection of the policies of G. W. Bush and the triumph of social progress in the United States. Some have proclaimed we are living in the “post-racial” age, others have concluded "It's the economy, stupid!" However, as the initial electric excitement cools, it is essential to remember that Obama's victory was neither obvious nor a given as late as the beginning of September, when the economy was already slowing down and quickly heading for a downturn. So how did he close the deal?

As the Republican convention came to a close in the first week of September and McCain's recently chosen running mate Sarah Palin exploded into national consciousness, the polling data triggered a sense of helplessness and many headaches among Obama supporters. According to the Gallup Poll from September 7, 48% of voters indicated they would vote for McCain, 3% more than Obama and more than ever before. After 8 years of Bush, with a deteriorating economy and a massively unpopular war, Obama was losing in the polls. During those early September days, it looked like despite the lowest approval ratings of the incumbent president on record, Republicans had a solid change of winning. This contradicted all conventional wisdom: only once since 1856 has the Party in the White House managed to retain the presidency during a definable economic downturn. McCain's lead in the polls was truly mind-boggling: how could this be and what happened since then that catapulted the Democratic ticket to victory?

The answer to both those question can be summarized by two words: Lehman Brothers. On September 14th, the bankruptcy of one of the largest investment banks set off a chain of events that completely redefined the landscape of the race. The same day, another major bank, Merrill Lynch, was saved from the same fate by being acquired by Bank of America. Two days later, the US government seized control of AIG, one of the world's biggest insurers. Shocked by the failure of these institutions, the credit markets completely seized up and borrowing practically evaporated, creating a real threat to the functioning of financial markets and their ability to support the daily operations of businesses far from Wall Street. If there was any hesitation about the seriousness of the situation, it was all but gone when the treasury secretary and the chairman of the Federal Reserve unveiled their massive $700 billion proposal to bail out the troubled banks. The public was stunned and outraged.

These unprecedented events did more than just expose the fragile state of the financial system. The credit crisis completely changed the discourse about the economy, which until then was commonly defined by a heavy dose of sugarcoating and denial. It needs to be clarified that it was no secret that the economy was ailing at least since the summer of 2007. In the first two quarters of the year, 1.4 million US homes were foreclosed on and by the end of August the economy shed roughly 700 thousand jobs at the same time when energy and food prices were skyrocketing. And yet, until Lehman's failure, the policy makers had a habit of underplaying the seriousness of the problems. The Treasury Secretary Henry Paulson was on record multiple times as saying that the problems in the sub-prime mortgage market did not pose a serious problem to the economy and were contained. The investors were seemingly not particularly worried either and the stock market was happily chugging along: until August, the Dow Jones index was not too far off from its all-time highs. Even as economists were increasing their odds of a recession, it was still a subject to debate, not a given. On the campaign trail, the candidates themselves did not pay much attention to the economy over the course of the summer. Perhaps it was this denial corroborated and fueled by the administration that allowed voters to defy conventional wisdom and seriously consider the incumbent party candidate, despite the clearly deteriorating conditions. However, during that dramatic week in September, the luxury of sticking their heads in the sand was taken away from the electorate. No longer was the administration able to sugar coat things. On the contrary: if they wanted to pass a bailout package quickly, they needed to convince everyone as fast as possible how extremely dire the circumstances were. In short order, the band aid was ripped off and the wound it exposed was deep and ugly.

To understand how shaken the public was from these events in the weeks that ensued, one needs to look at the consumer confidence indicators. While consumer confidence has already declined significantly in 2008, in October, the Conference Board index dropped 23%, the third largest month-over-month decline ever, and reached the lowest level on record. In more real-life terms, the impact of this plunge on confidence could be observed in the sales of retailers, the ultimate gauge of Americans’ well-being: while shopping saw a significantly reduced growth in September, by October, most retailers were reporting a decline in spending, with some as large as 17%. In a matter of weeks, Americans went into panic mode and the discourse about the crisis increasingly involved comparisons with the Great Depression. According to Google Trends, the mention of "Great Depression" in the US increased more than tenfold in September.

In the context of the election, the September meltdown was not only an escalation of an already dreary economic picture. It gave voters a new set of lenses through which to assess the two candidates and provided them a unique chance to observe the two men responding to a crisis. When McCain declared that the fundamentals of the economy were strong the day after the bankruptcy of Lehman Brothers, his critics immediately seized it as an example of him being disconnected from reality. McCain's apparent denial of reality closely resembled the manner in which the Bush administration talked about the economy right until then – a rather unfavorable association which McCain needed to avoid at all cost. It is probably no coincidence that on that very day, Obama's chances of winning the presidency, as evidenced by the Intrade prediction markets, turned around sharply and never stopped going up (chart at the end). A little over a week after the crisis started, McCain announced a dramatic suspension of his campaign to focus on the bailout negotiations in the Congress and called on Obama to postpone the upcoming debate. Instead of helping his campaign, McCain ended up looking like the panicky and unfocused one when Obama responded cool-headedly: "It is going to be part of the president's job to deal with more than one thing at once. It's more important than ever to present ourselves to the American people." By the time of that first debate, Obama’s chances improved by 9% to 56% and the polls indicated a significant reversal from early September – Obama was leading by 4%.

As the terrifying economic news was coming out, the media was increasingly exposing news on McCain's running mate, Sarah Palin. Her first media appearance – the interview with Charlie Gibson on ABC – aired a few days before the credit crisis started. Just as the first bailout package was being negotiated in the Congress and John McCain suspended his campaign, the Katie Couric interviews on CBS were released. While Americans were contemplating the onset of the second Great Depression, they witnessed the Republican VP candidate unable to remember the name of a single newspaper. Not only did that dampen the enthusiasm about Palin, but it also brought into question McCain's decision-making. The critics wondered: how could he be trusted to safeguard the economy if the one big decision he made so far was so rushed and irresponsible? Most importantly, right when experience could have proven to be a tremendously reassuring attribute to the American people, McCain could not play that card due to his relatively inexperienced and seemingly ignorant running mate. The day after the first Palin interview aired on CBS, Obama's odds went up almost 3 points to 55%.

By the end of September, the debates were McCain’s last chance to prove himself as capable of dealing with the country's economic woes and reverse Obama's momentum. However, no such turnaround materialized. Not only did Obama score better in all three debates (and increasingly better – 51, 54 and 58%, according to CNN's polls), all three also portrayed McCain as lacking the likeability, temperament and coolness that Obama possessed. In the first debate, McCain struck all the wrong cords by barely looking at his opponent in addition to linking Russia's president Putin to KGB. In the second installment, he further damaged his likeability scores by memorably referring to Obama as "that one" and in the final debate he got carried away during the abortion discussion and spoke about women's health in air quotes, a gesture which did not go unnoticed by the commentariat and a key voter group – women. As if that was not enough, the Republican campaign launched a series of negative ads against Obama – his questionable affiliations, his supposed socialistic ideas. Not only was that a clear betrayal of McCain's own principles (he himself was burnt by similar tactics in the 2000 primary race against George Bush), but also a distraction from what the electorate probably cared more about – the collapsing economy. In the days following the final debate on October 15th, Obama improved his odds to 85% and his lead in the polls expanded to 6-7%.

While the campaign kept everyone in suspense until the very end, McCain’s team was never able to close the advantage that the Democratic ticket received in the month that started with the Lehman bankruptcy and ended with the last debate. As tempting as it may be to conclude that after all it was all about the economy, it should be remembered by historians and politicians in the future that the deteriorating economy did not seem to matter until very late in the race – and it took a near collapse of capitalism for that to kick in. In that sense, the election was not only historic because it symbolized the end of a racial barrier in American politics, but because it nearly led to the most counter-intuitive outcome. As strategists and political scientists ponder future electoral outcomes, they are well advised to use the “It’s the economy, stupid!” mantra carefully, because as the 2008 election showed, it may not be relevant until the circumstances are just right.