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An estimated 3.8 million need humanitarian aid (fully half the population), according to the U.N.’s Food Security and Nutrition Analysis Unit for Somalia, which calls the crisis the worst since 1991–92. In the past six months alone, the number of people forced from their homes by fighting—between the country’s barely functional transitional government and Islamist insurgents—has grown by 40 percent, to 1.4 million. Most live in squalid camps that a new report from Oxfam calls “barely fit for humans.”

It is, however, easy to miss the bigger picture in McLure’s story. I call it “the Somalia Syndrome.” Here is how I explained it in the Hazleton Standard-Speaker in January:  

“The trouble with fighting for human freedom,” wrote H.L. Mencken, “is that one spends most of one’s time defending scoundrels. For it is against scoundrels that oppressive laws are first aimed, and oppression must be stopped at the beginning if it is to be stopped at all.”

Try telling that to George W. Bush.

When Somalia, after fifteen years of violent anarchy, finally found a government that would bring a modicum of security and liberty to its citizens, the President supported regime change because, well, he didn’t like their style. The regime’s name was the Islamic Courts Union, and as you can probably guess, Washington didn’t expect them to join the War on Terror too readily.

The Bush administration turned to Ethiopia, who invaded, triggering a civil war that is now almost three years old. One-tenth of the population has been killed. In the United States, the equivalent body count would be about 30 million.

If the aim was to get the bad guys, they missed their target. The Islamic Courts Union may not have lived up to our ideal of the separation between church and state, but they made it very clear that their first priority would be bringing social justice and peace to the country—something Somalis haven’t seen in quite some time. Moreover, it was popularly supported and just might have been Somalis’ one hope for freedom. Not to mention hundreds of thousands of Somali lives would have been spared.

If the goal was to make the United States safer, they failed even more miserably. Terrorist groups have actually increased. Whereas Somalia had little, if any, connection to al Qaeda before 2006, now the Shabab, an openly pro-al Qaeda jihadist group, is flourishing.

So let’s see, we broke international law, cost millions of people their freedom, precipitated the death of thousands of innocent lives, and made our own country less safe. Even if the Islamic Courts Union conformed to our wildest nightmare—which would contradict all historical evidence about their intent—they would be hard pressed to match that record.

It’s nothing new.

Since the end of World War II, the United States has advocated regime change whenever we didn’t like a foreign government. (Okay, we’ve been doing it longer than that, but the Cold War was when we made it a regular part of our arsenal.)

Because such parts of our history have been covert or just unpleasant memories, we brush them aside as exaggerated yarns of international intrigue, maybe even political propaganda. And so, most Americans live comfortably unaware of Somalia-like military actions that have been proven by CIA documents and the like: Iran (twice), Guatemala (twice), Cuba, Democratic Republic of the Congo, Iraq (thrice), Chile, Afghanistan, Turkey, Nicaragua, Republic of Ghana, Venezuela, and the Palestinian Authority.

With the demise of the Soviet Union, one would think such operations would lose their allure. Sadly, it seems our government learned the wrong lesson when the Berlin Wall fell. Again, when it comes to American history, we have an uncanny ability to remember only what we want to.

The conventional wisdom goes like this: After forty years of détente and containment, Ronald Reagan swashbuckled into the White House, and the Soviet Union backed down. They knew he meant business. Reagan fought them on so many fronts that, when combined with his missile shield and increased military spending, they went bankrupt trying to compete.

But numbers don’t lie, and they tell a different story altogether. The Soviet Union’s defense spending did not change much throughout the 1980s. As a percentage of GNP, it stayed about the same. No, the Soviet Union collapsed for the same reason that economists said it would: Communism does not work.

After 9/11, Islamic terrorism became Enemy #1, and the old mentality—show our strength, beat back every advance, ramp up military spending, and rub out every last anti-American regime—took hold. Washington still hasn’t learned that unfriendly governments are best beaten just as the Soviet Union was—by internal instability, not military defeat.

Still, the myth persists.

New York Times columnist Thomas Friedman put it in different terms a few months ago when he said of Iran, “When you have leverage, talk. When you don’t have leverage, get some. Then talk.” If I tell you to do as I say or I’ll invade your country, that’s leverage—but it’s also illegal, immoral, and counterproductive if my goal is to create a peaceful community. Leverage did not bring down the Soviet Union, but it did increase the body count, drain the treasury, and multiply our enemies just about every time the United States overthrew a country in the last sixty years.

The empiricist in me says things need to change.

We can start by abiding by international law, openly conversing with all nations, and ending military aid to countries that are, in many ways, worse than the countries we criticize. If you’re worried that gas prices will increase when we stop propping up, say, Saudi Arabia, don’t be. With the money we save by ending military aid, we can cut taxes at home. Not only is that an implicit carbon tax swap that helps the environment without costing economic growth, but it makes the world a safer place.

Iraq, Iran, Pakistan, and North Korea may be the most talked-about foreign problems of the last eight years, but they are symptoms of a greater ailment that has gripped our country for over sixty years. May the new Obama administration be the beginning of the end to the Somalia Syndrome.

Unfortunately, nine months after I wrote this column, it is clear that the Obama administration has fallen under the spell of the Somalia Syndrome with its exploits in Afpak. (For more details on how this disastrous policy tempted and snared them, check out Rory Stewart’s July essay in the London Review of Books.) Council on Foreign Relations expert Bronwyn Bruton draws the conclusion perfectly at the end of McLure’s article:

I think that the main thing is recognizing how little capacity we have to solve the problem in Somalia. To solve the problem would require a nation-building effort, and there’s no reason to believe it would be more successful in Somalia than it has been in Afghanistan. I think the question is: what can the international community do to get out of the way?

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Coming from one of the world’s leading experts on econometric predicting, Hamilton’s improved mood says more than all of Jim Cramer’s rants put together. He cites increased activity in the auto industry, an uptick in home sales, a slight increase in consumption, increased expectations for third quarter sales in several large industries, and significant recovery in the Aruoba-Diebold-Scotti Business Conditions Index. (Full disclosure: Frank Diebold, one of the authors of the index, is a good friend and former teacher of mine. He is also a world-class econometrician, but I have not asked him for his outlook at present.) Indeed, those are most of the important measures of whether individuals and firms are starting to spend again, which is precisely what is needed to end a recession.

Hamilton is not taking a stand on whether the recession is over and cautions that the end of “Cash for Clunkers” could prick an artificial high in auto sales, personal income still hasn’t risen, and unemployment shows no signs of falling. But the latter two usually follow on the heels of the other indicators he cites, and the positives seem to greatly outweigh the negatives. So why isn’t Hamilton’s emoticon smiling?

A lot of it has to do with the “shape” of the recession, as economists have explained it to the public of late. A “V-shaped” recession, like we used to have in the 1960s and ‘70s, implies a sudden end to the recession and a sharp return to growth. A “U-shaped” recession, like we had earlier this decade, means growth will be slow and unemployment will continue to rise for awhile even after the recession technically ends. Because consumers are still “deleveraging”—that is, because they have more debt than twentieth-century consumers had—most economists predict the latter, as spending won’t return full-force until they pay off their debt. If nothing else, such an expectation warrants a neutral face instead of a smiling face. The economy may grow again, but it’ll be a long slog before we return to the good old days.

There is, however, a third possibility: a “W-shaped” recession. Granted, it’s rare and frightening, but several well-known economists warn it is very possible. The last time it reared its ugly head was the early 1980s, when the economy dipped into two recessions within the first three years of Ronald Reagan’s first term, and before that, it was the Great Depression, when the initial recovery was brought to a halt by deficit hawks who forced Franklin Roosevelt to raise taxes and balance the budget in 1937.

Investors disagree. All summer, the story has been the stock market rally that looks to be pulling us out of the recession. After a terrifyingly close call from the collapse of Lehman Brothers to the passage of fiscal stimulus, banks have raised capital, Detroit has escaped bankruptcy, and one-by-one economic data seem to be following the stock market’s lead and forming a bottom.

But something is amiss. “We’ve never had six-month period before where we’ve lost two million jobs and the market’s gained 50%,” says Wall Street expert Barry Ritholtz. “That’s simply unprecedented.” Ritholtz thinks the rally will reverse, and if today’s dismal performance is any indication, investors should pay attention.

So who’s right? Let me first say that you should never ever make a financial decision based on my opinions. If financial economics teaches us anything, it’s that the stock market is next-to-impossible to predict, and even if it weren’t, I’m not confident enough in my financial savvy to be responsible for your risk-taking. That said, I’m with Ritholtz on this one, for the following reasons:

1. As indicated above, unemployment will remain high for some time, and with unemployment comes…
2. …foreclosures, which show no sign of slowing down. Government intervention has helped many people, but if we want to make a dent in the larger economy, stronger intervention is required.
3. A whole slew of adjustable-rate mortgages still haven’t reset—which is to say, some homeowners are about to get hit with higher interest rates—so you can expect more defaults.
4. Repeated reports indicate banks still have too many toxic loans on their books. If the Obama administration had taken the advice of many of us and run the worst offenders through FDIC receivership, we wouldn’t have this problem, but alas investors will start to get worried if these reports keep coming.
5. September is historically a bad month for the stock market.
6. Far more insiders—people who know what’s under the hood, so to speak—are selling than buying.
7. The easiest way to measure valuation is the price-to-earning (P/E) ratio. If stocks are selling for a lot more than their companies are earning, beware. The historic P/E average is 15. Right now, it’s 100+! Even if you use the more stable “operating earnings” because you think reported earnings have been depressed too low by the credit crunch, it’s still overvalued at 20+.
8. The output gap—the difference between what we should be producing and what we are actually producing—is still significant. Some economists recommend another fiscal stimulus. I worry about dynamic timing, which is economist-speak for “It took you so long to spend the last stimulus, how do I know this one won’t be delayed until the recession is over?” The last stimulus clearly boosted the economy before most of it was even spent. John Maynard Keynes would call that the result of “animal spirits”: Consumers knew the economy was about to get a jolt, so they started spending again. If the stock market dips or foreclosures increase, however, another immediate stimulus should boost “consumer confidence” like the first one did. If Congress can’t get its act together fast, though, it’ll only add excess inflation after the recession ends.

Economists have two fears: (1) From March till now, we have been in a “bear market rally,” which means the rise in stock prices has been false hope amid a longer decline. (2) The entire economy will turn down again.

The first is a financial concern, the second a broader economic one—though of course the first affects the second. I am not predicting anything, but I am saying that we should be cautious for the 8 reasons above. And I am admonishing the Obama administration and Congress for failing to prevent these fears with mortgage cramdown, a larger stimulus with fewer tax cuts and more spending, and nationalization of certain banks. As James Kwak said earlier today, the fact that the TARP loans are showing profits—which Ritholtz rightly debunked as incomplete analysis—only indicates that the government made a bad bet and got lucky. I hope they (and we) continue to get lucky, but for now I’m with Jim Hamilton: I’ll smile when we’re sure this is all over.

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• Brooks’s Hit on Capitalism — David Henderson – Nice parable. Like a modern Adam Smith. If you’re wondering why, I’ll explain in my forthcoming book.
• Schwarznegger to Obama: Watch and Learn — Marshall Auerbach – Excellent analysis of a risky new proposal. You can’t blame the Governor for this one. The federal government and his own state legislature hung him out to dry, so he’s using one of the last-resort weapons in his arsenal to prevent the most devastating bankruptcy in American history. From a monetary, fiscal, and constitutional perspective, the federal government should intervene immediately. From a political perspective, they probably won’t.
• Looking for the Lenders’ Little Helpers — Gretchen Morgensen (New York Times) – I don’t know the law well enough to know if this type of claim will hold up, but it would certainly make one regulatory change easier — one which should be made, but as of now looks doubtful: shifting default risk away from investors to those who are better able to assess whether the homeowner will default. (The Obama administration, by contrast, is proposing a pathetically negligible equity stake for originators.)
• Why the #$%! Do We Swear? For Pain Relief — Scientific American – Makes sense. This article, plus the Pinker book they cite, is good reason to further our understanding of the morality of swearing. It’s worth reconsideration by our society.
• Marginal Thinking about Fiscal Stimulus — Paul Krugman – Krugman and Brad DeLong, along with the usual cadre of progressive voices, have been contesting the conventional wisdom that a second fiscal stimulus is unwise. This post summarizes their basic point. What it misses is the dynamic timing issue. The world does not operate in standstill frames like this MB/MC graph; it’s a moving picture, and a second stimulus would not take effect until well into the future. Since it looks as though the economy is beginning to recover, would a second stimulus come too late, by which point the natural growth of the economy has closed the output gap and brought us back to the intersection on Krugman’s graph? If the second stimulus comes after aggregate demand has already risen back to long-run aggregate supply, then it risks inflation and unnecessary debt. Don’t get me wrong: Inflation and debt are not our most pressing problems right now, but it’s hard to believe that a second stimulus would be designed/timed perfectly not to overdo it.
• Why Negative Nominal Interest Rates Miss the Point — Scott Fullwiler – You have to enjoy the intricacies of monetary policy to appreciate and follow this post, but for us econ-nerds it’s a much-needed look into the innerworkings that would play out under several unprecedented (or, as Fullwiler shows, precedented in ways we don’t usually consider) policy prescriptions for our current liquidity trap. If you plan to wade into the current fiscal-vs-monetary policy debate, this is a must-read. Of course, these are rare times, so no one is completely certain how aggressive monetary policy will fare.
• Honduras and Constitutional Democracy — David Fontana – Outstanding insights into the legal questions surrounding the coup!
• More Bonkers Bolton Legacy? — Gordon Prather – Great article! The vast majority of Americans have no clue about this history, but it’s completely accurate and extremely important. It is a journalistic crime that our continued debate about Iran ignores these facts.
• Luke Jerram’s Art Project Puts Pianos All Around London — New York Times – Ingenious. Makes me wish I knew how to play the piano.
• Who’s the Materialist? — Don Boudreaux – I’m working on a section of my forthcoming book that will deal with materialism and how economists measure value, especially in light of the recent consumption/saving and intertemporal problems. Boudreaux’s pithy thoughts are worth a read. Nice defense of capitalism.

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• Saudi Account of Khobar Bore Telltale Signs of Fraud — Gareth Porter – Porter continues his incredible investigative reporting (see yesterday’s post for the first article in the series). Reads like a great detective novel.
• Tobacco, Public Health, and the FDA — New England Journal of Medicine – It’s not often that I get to say this, so let me make it loud and clear: Bravo to Congress and the President!
• Justice for Rape Victims: Don’t Ignore Evidence — San Francisco Chronicle (via truthout) – This is unconscionable. Can we find out if this is the case in other cities too?
• US Automakers to Gain on New Gas Mandates — Associated Press – Just in case you wanted more evidence that GM dug its own grave: Their research told them to build fuel efficient cars, and they ignored it. How’d that work out for them?
• A Withdrawal in Name Only — Erik Leaver & Daniel Atzmon – We leave 50,000 troops but say we’ve withdrawn…Orwellian, no?
• Ingested Magnets — New England Journal of Medicine – Probably not a good idea to click this link if you get queasy. It’s just an X-ray, but if you let your imagination get the best of you, it’s hard not to wonder how this must have felt.
• Retrospective Voting: Worse Than Chance — Bryan Caplan – Sadly, this is very true, but it’s one thing this blog hopes to correct by raising the level of public debate.
• U.S. Objects to China’s Web Filtering – New York Times – Keep an eye on this. It seems like a trivial development amid everything else going on right now, but risking our relationship with our most important trading partner is a big deal. This could turn out very well (China opens the country to greater freedom of speech), very badly (we end up in a trading war and inflation goes through the roof), or ho-hum (China ignores or makes a useless promise that they never follow up on, and the Obama administration lets it go). This could turn into quite the poker game to see who blinks first.
• Egypt’s Young Unemployed — Yasser M. El-Shimy – Here’s the reason why our support of Egypt’s repressive regime and our tendency toward military over humanitarian assistance are both dangerous policies: “When 20 of every 100 young Egyptians spend most of their time hanging out at the local coffee shop, smoking shisha financed by the meager allowance their parents give them, they are unlikely to silently accept the probable transfer of power from Mubarak to his son. Additionally, they are likely to fall prey to all sorts of ‘isms’ that tell them why the world is such a nasty and an unjust place.”
• Making Financial Regulation Work: A Systemic Risk Regulator — Dean Baker – Baker’s analysis of the Systemic Risk Regulator is spot-on (full disclosure: I make the same argument in my forthcoming book), but his solution leaves something to be desired. Will firing the current regulators be enough to prevent regulators twenty or thirty years down the road from making the same mistakes with new financial innovations, the inevitable regulatory capture, and the go-go-go of the next boom? I doubt it. (For more long-term solutions, of course, you’ll have to read my book.)
• The President’s Press Conference: Climate Change – Keith Hennessey.com – Hennessey is a good economist, but he should be more careful when he takes President Obama to task for saying that efforts to reverse climate change “will lead to the development of new technologies that lead to new industries that could create millions of new jobs in America.” In fairness to Hennessey, his revulsion to this sort of language is not unwarranted. Politicians make these sort of claims all the time with little understanding of the economic implications of their policies. Hennessey is right to point out that the President does not guarantee a NET increase of jobs. But his counterargument, that taxing carbon necessarily implies a net decrease of jobs, is incorrect. If the government taxes the private sector and invests that money in projects that yield a higher return on investment than that money would otherwise have generated in the private sector, then it can easily lead to a net increase in jobs and GDP. The most likely time for this to happen is a recession, i.e. now.
• 20% of Teens Are Sexting – Why Is This a Surprise to Anyone? — Ryan Sager – “The adolescent brain is a risk machine.” Well said, but often forgotten. Environmental factors are undeniably important, but it helps to remember just how much of teenage behavior comes hard-wired.
• Partisan Bias in Evaluations of the Supreme Court — John Sides – File under “The Irrationality of Blind Ideology.”
• The Non-Debate over Non-Reform — Arnold Kling – I disagree with Kling’s solution, for reasons that I will explain in the next edition of “From the Editor’s Desk,” but his complaint about the current debate in Washington is right on the money: “Some form of restraint in our choice of medical procedures is going to be necessary. The debate we should be having is over whether restraint in our use of medical services should be initiated by government officials or left to consumers.”
• Fish Capable of Judgment Calls — Scientific American – We like to think we have superiority over the rest of the animal kingdom because we have emotions, judgment, and the like. The truth, though, is that we just have much greater brainpower. The actual elements in that brain aren’t much different from many other species.
• Weaponized Keynesianism — Paul Krugman – Kudos to Barney Frank on the phrase of the day. This kind of hypocrisy is rampant in Washington.
• Senate Democrats Share Plans for Immigration Reform — Washington Post – Climate change, health care, financial regulation, and now immigration? I love the energy — long overdue — but what are the odds that all 4 issues see comprehensive reform this year? Bravo to Congress for finally doing their job. We haven’t seen them work this hard in several years. I just hope they know what they’re doing (politically, I mean)…
• Evolutionary Origins of Your Right and Left Brain — Scientific American – Another facet of a point made earlier today (see below): The elements of our brain that we often think are so unique, in this case hemispheric division of labor (so to speak), are not unique at all, though our brainpower remains far above the rest of the animal kingdom. This article is full of gems, from stories about how different species use parts of their brain to how language evolved. Set it aside for when you have the time to enjoy it all.
• The Science of Economic Bubbles and Busts — Scientific American – Most of this is old news; behavioral economics is well-known by now. If you’re not up on all the cognitive biases of the investing mind, though, it is an excellent overview. The really hopeful point comes at the end: Adaptive-market models may be part of a bright future for finance and the right tool (once developed properly) for the Fed to use in pricking asset bubbles.

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