vancones.org Blog

The Prospect Of Being Hanged

Administrator — Wed, 25 Mar 2009 18:18:55 +0000

Anybody who wants to pontificate about the economy, or the budget, or the deficit right now should think about three questions:

What changed the Depression from an ordinary recession into a worldwide catastrophe? (And how bad was it, anyway?)
Is this crisis the same or different?
If there’s risk of another depression, how do we stop it?

Most Americans regard the Great Depression as ancient history, about as relevant as the Civil War. From that perspective the current political firestorm over budget deficits, bailouts and bonuses makes perfect sense. But the Great Depression wasn’t a fantasy – it really happened, and the conditions which created it have reappeared for the first time since the 1930s. We should take the danger seriously.

Samuel Johnson said that “when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”

We need to concentrate.

How Bad Was The Depression?

We’re used to thinking of a recession as something that lasts for maybe 18 months, with GNP declining by 2 or 3 percent. In a bad recession unemployment might hit 8 percent for a year or two. In the deep recession of the early 1980s, unemployment peaked at 10.8 percent and stayed above ten percent for almost a year.

The Great Depression was a different animal.

During the 1930s, GDP fell continuously for four years, from the end of 1929 to the end of 1933, when it hit a low of about 26 percent below its 1929 level. The economy then began to recover, but even by 1938 had barely regained its 1929 level. (If GDP had grown at its normal rate, it would have been about 30 percent higher by then.) Unemployment peaked at just under 25 percent in 1933 and then fluctuated, falling to 14 percent in 1937. It was back at 19 percent in 1938, however. That’s ten years after the depression started.

And remember, people who get discouraged and stop looking for work officially don’t count as unemployed.

A very back-of-the-envelope calculation suggests that the US economy may have lost between 200 and 250 percent of 1929 GDP during the Great Depression, compared to a decade of normal economic performance and growth.

What would a similar event look like today? We had about 14 trillion dollars of GDP in 2008, but our “normal” growth rate now is a bit slower than it was during the 1920s. Conservatively, a re-enactment of the 1930s today might cost the U.S. somewhat over 200 percent of 2008 GDP, or maybe 30 trillion dollars. Let’s say 25 trillion, to be conservative.

But measuring a depression in terms of “lost GDP” doesn’t quite capture the pain. We’re not talking about people driving slightly smaller cars. We’re talking about 20 to 25 percent of the labor force being thrown out of work for up to a decade, and not being able to support their families.

The 1930s depression also collapsed the world economy. Among other effects, the flight of foreign capital destroyed the recovering German economy, with unthinkable consequences. When people despair, “isms” become more attractive.

Do we think the world is a lot more stable now? How much do we want to bet on that?

So Why Did The 1930s Get So Bad?

For a long time economists thought that the stock market collapse of 1929 caused the Great Depression. Milton Friedman took a different view, arguing that a contraction of the money supply turned a minor crisis into a major event. But in 1983, a smart young economist named Ben Bernanke published a paper which modified Friedman’s theory.

Bernanke showed that the collapse of the American banking system, including the “suspension” of some 9,000 banks between 1930 and 1933, froze the credit markets, contracted the money supply, and drastically reduced the flow of bank lending, converting the stock market collapse into a depression.

Subsequent events support the Friedman/Bernanke view – for example, the stock market collapses of 1987 and 2001 caused almost no economic contraction, probably because they did not directly attack the financial system. Banks remained solvent and continued to make loans, and the economy did fine.

It turns out that financial credit behaves something like the lubricating oil in an engine – without it the engine seizes up. In 1930 the Federal Reserve Bank refused to use public money to bail out bankers who had made stupid loans. But, with the credit system paralyzed by thousands of bank failures, many otherwise viable businesses also failed. These failing businesses laid off their workers, who stopped spending money, causing other businesses to close, making more loans go bad and causing more banks to fail.

We can all sympathize with the 1930 Fed’s desire to make bankers take the consequences of their own lending mistakes. But most of the people laid off during the depression never worked for a bank. And most of the people who died in WWII weren’t bankers.

Could This Crisis Become A New Depression?

Financial panics have always been a problem with capitalism, going all the way back to the 1600s. And they seemed to get worse as the economy got more complicated. Finally, in the 1930s, the problem caused so much damage that we “fixed” it by insuring the banks.

Since 1934, federal deposit insurance has prevented major financial panics in the U.S. Because depositors felt safe, the banking system no longer suffered the sudden, catastrophic withdrawals of credit which caused so much havoc in the early 1930s. That changed last year.

The financial system has evolved since 1934, with about two thirds of the credit to businesses and consumers in the U.S. now coming from sources other than insured deposits. The U.S. economy had become vulnerable again, and this crisis has targeted the financial system like nothing else since the 1930s.

Consider the banks and investment banks heading up the list of about 500 companies receiving TARP bailout money from the government. They include four of the six largest US banks — Citigroup, Bank of America, JP Morgan/Chase, Wells Fargo, and two of the five largest US investment banks — Morgan Stanley and Goldman Sachs. The other two top banks, Wachovia and Washington Mutual, were both forced into federally funded “rescue mergers.” Of the three remaining investment banks, Merrill Lynch and Bear Sterns have been forced into rescue mergers, and Lehman Brothers was allowed to fail outright, with catastrophic effects on financial markets. And TARP is only the tip of the bailout iceberg, as the Fed has extended massive amounts of emergency credit to financial institutions through many other channels. And then, of course, there’s AIG.

Would these institutions be insolvent without the bailout money? That depends on how you value the hundreds of billions of dollars of questionable assets on their books. It also depends on how much deeper the recession gets, and on who else fails — for example, Merrill Lynch and Goldman Sachs both hold billions of dollars of AIG-insured assets. But “solvency” doesn’t necessarily save you in a financial panic. Once the financial markets cut off the supply of short term financing to these institutions, they would have been forced into default, absent government intervention.

And the ensuing economic debacle would have justified the fears of investors who pulled out their financing. That’s one of the nasty things about financial panics – the investors who run for the door first may get out with their money while those who hang tough end up holding the bag.

Only the Fed’s aggressive emergency credit has prevented this scenario from playing out so far. Our economy is on life support.

And, unfortunately, the life support is not working very well.

While the bailouts have prevented a wholesale collapse of the banking system, the Fed has been unable to restart the credit markets. Business credit remains extraordinarily tight, even with the discount rate essentially at zero. In other words, even though banks can borrow money at no cost, many businesses can’t get financing at any cost.

The problem is that modern banks no longer hold most of the loans that they originate. In order to hold all of theses loans banks would have needed substantially more equity capital even before the crisis. And the crisis has now destroyed what capital the banks did have. Instead of holding loans, banks now package and resell them into a downstream secondary market. Or, more precisely, they did that until a few months ago.

The downstream market for packaged debt no longer exists, because investors have lost confidence not just in the existing debt, but in the whole mechanism for originating and vetting the loans. (Can you blame them?) This breakdown has isolated businesses and consumers from their major sources of private investment capital.

Bernanke and Geithner are struggling to redesign and restart a system which has developed major structural flaws. And they are doing this under time pressure, under political pressure, in the middle of a crisis.

Furthermore, Americans have lived beyond their means for a long time, fueling the world economy in the process. It’s only rational that we stop living on credit card debt, but our new found financial conservatism reinforces the downward economic spiral and makes recovery much harder.

Meanwhile the clock is ticking. Once a business has failed, defaulted on its contracts, laid its people off, and has its assets tied up in court, restoring credit flows may not help. It’s not so easy to put Humpty together again. If we don’t find a solution, and quickly, we will face a very serious problem.

What Worked Last Time?

Roosevelt’s spending programs appear to have helped during the 1930s. The Depression started at the end of 1929, when Herbert Hoover still had three years left to serve. Hoover did nothing. When Roosevelt took office in March of 1933 he initiated large spending programs, which were implemented later in the year. Real GDP, which was already down about 25 percent from 1929 levels, declined by another 1.3 percent in 1933, but then turned around and actually went up about ten percent in 1934. Thereafter Roosevelt had some very good years – GDP rose by 9 percent in 1935 and 13 percent in 1936. An abortive attempt to balance the budget in 1938 coincided with a contraction of 3.5 percent in GDP.

Roosevelt also introduced deposit insurance in 1934, so the economic turnaround coincided with both a big increase in government spending and a stabilized financial system.

But we finally got out of the hole with the mother of all “wasteful” government spending programs, starting in 1939 — building bombs to blow stuff up. We ended up with an extortionate top tax rate of 94%, a ratio of federal debt (held by the public) to GDP exceeding 100 percent (compared to less than 40 percent today). And we then entered a long, sustained period of economic growth and prosperity.

I’m not recommending either that we start WWIII or mimic Roosevelt’s programs, only that we should understand history.

So What Should We Do Now?

First, we have to give Bernanke and Geithner time, space and lots of money to find solutions. They’re making it up as they go along, which is what you do in uncharted water. It’s OJT (on the job training). Personally, I wouldn’t want their jobs.

Second, the Federal government should do everything possible to stimulate the economy – cut taxes, spend money, buy bullet trains to Las Vegas, whatever. There is an inherent tension between spending money quickly and spending it wisely, but we shouldn’t let that stop us. We should do both. Spending that comes on line several years down the line will still help — we’ll be very lucky if this thing is over by 2011.

I’ve always been a fiscal conservative. I have a PhD in economics and was on the faculty at the University of Chicago for several years before going into business. I am appalled by the increase in the national debt over the last decade, and by the prospects for the immediate future. But worrying about wasteful spending right now is a bit like arguing about the cost of running the pumps while the ship is sinking.

Let’s put this in perspective. If we completely waste a trillion dollars – say by digging holes and filling them in – that’s about four percent of the 25 trillion at stake here. If that spending reduces the severity of the crisis by five percent, we’ve come out ahead.

And when it comes to digging holes and filling them in, we can probably save money on the digging part – there are already enough potholes in the North Central US to absorb lots of budget money. We might repair a few bridges and fix some levies, too. Really, we don’t need to waste the money.

Have you noticed lately that people who sound confident about the economy are mostly talking head pundits with no practical experience and no responsibility? And that the people who know what they’re talking about, like Bernanke, Volcker, Geithner, Summers and Buffett, take a more cautious line – the situation is serious but things will be fine if we do what we need to do?

These folks face a delicate problem. They have to talk enough truth to justify spending trillions of dollars to stop this crisis, without saying things which might scare consumers and businesses into total paralysis.

When our country faces a serious crisis, Americans usually pull together. That’s not happening this time – instead we’re bickering, finger pointing and maneuvering for political advantage. I don’t question anyone’s patriotism, I just think that most Americans don’t appreciate the danger.

Obama’s economic advisors are solid, experienced professionals who understand what happened in the 1930s. They aren’t moveon.org radicals. We need to let them work. And we need to keep our minds on the big picture.

Concentrate or hang.

__________________________________

Kenneth Cone has a Ph.D in economics from Stanford University and was an Assistant Professor at the University of Chicago between 1983 and 1985, before leaving academics to spend 19 years in business and consulting. He has been a Senior Vice President at the Chicago Mercantile Exchange and a Senior Vice President at Lexecon. He is now retired.

Update on Iraq: December 2007

Administrator — Fri, 28 Dec 2007 05:43:00 +0000

By now most Americans probably would agree that invading Iraq was a mistake. And most would also agree that things have gotten better in the last few months. But most people do not appreciate the full significance of what has happened in Iraq -– namely that al Qaeda has begun to suffer a major strategic defeat there. We need to take account of this development as we think about what to do next. Iraq was a US mistake, but in war both sides make mistakes.

The US Mistake

The invasion of Iraq was a strategic blunder for several reasons. First, it got a lot of people killed. Second, it allowed al Qaeda jihadis to enter Iraq and bog us down in a protracted war in a Muslim country -– something Bin Laden had expected to do in Afghanistan –- while isolating us from our allies and bleeding us economically. Third, it allowed al Qaeda to exploit our greatest military weakness –- that the American public can’t stomach a fight if they don’t know why they’re fighting. (Some people would consider that a strength rather than a weakness.) Fourth, it gave Bin Laden an issue around which to recruit jihadis and rally the international Muslim community. Fifth, it empowered Iran, by removing their major enemy, Saddam Hussein, and by bogging our army down in a country with a large Shiite majority, where Iran has great influence. Sixth, it diminished our standing throughout the world.

But, in any fight, you have to remember that the other guy has problems too.

Al Qaeda’s War

Al Qaeda entered Iraq as a powerful ideological force in the Islamic world. Bin Laden and the other jihadis in Afghanistan had given Muslims their only strategic military triumphs against the West in centuries, first by defeating the Russian invasion of Afghanistan, and then by handing the US a stinging setback on 9/11. They also offered disillusioned Muslims a religiously “pure” alternative to the hypocritical, corrupt and decadent leadership in most Muslim countries.

If you want to understand why their movement has “legs,” try thinking of al Qaeda — with their criticisms of the corrupt Muslim establishment and their call to religious fundamentals — as a kind of parallel to the Protestant Reformation, albeit a bloodthirsty and militaristic one. They are not so much a centralized terrorist organization as a religious and political movement which seeks to rally the Muslim world against what they view as Western influence and oppression. They may sound crazy to us, but their message strikes a chord with lots of Muslims.

Such movements can unleash powerful passions — at least 7 million Europeans died in the religious wars following the Reformation. If even a small proportion of the world’s 1.2 billion Muslims become radicalized, we could be in for a long century.

Since al Qaeda has failed to strike inside the US since 9/11, it can be tempting for some Americans to dismiss the “war on terror” as a lot of hype. But our war with the Muslim fundamentalist jihad is quite real, and it isn’t over. Think about Pakistan, teetering on the edge with its nuclear weapons. (This morning, as this blog was going to press, al Qaeda — probably al Qaeda anyway — assassinated Benazir Bhutto.)

We can’t stop Bin Laden’s ideas just by killing jihadis, because there are hundreds of millions of potential jihadis. We can only win by discrediting al Qaeda’s ideology, so that it loses its force as a popular movement. In other words, we have to win the propaganda war. We don’t have to make Muslims like the US (a patently hopeless task), but we need them to stop wanting to join, or live under, al Qaeda’s brand of violent, fundamentalist Islam.

Now there isn’t a lot we can do about the propaganda war directly -– it isn’t a job for Madison Avenue. But oddly enough, even though the Bush administration has had about the most miserable public relations imaginable, al Qaeda may be doing even worse in Iraq.

Al Qaeda’s Mistakes

Iraq hasn’t been kind to al Qaeda. Their first leader there, Abu Musab al-Zarqawi, was a heavy handed terrorist with a pathological hatred of the Shiite Muslims. Bin Laden (who is much smarter than Zarqawi), views the Shiites as heretics, but he never made a priority of war against them. Killing fellow Muslims just doesn’t have the propaganda value of killing Christian “crusaders.”

But Zarqawi felt differently, and he launched a bloody civil war against the Shiites, slaughtering civilians in their markets and Mosques. Almost 4000 US troops have died in Iraq, but around 80,000 Iraqi civilians have also died. The US has to take the blame for the invasion, but the vast majority of these civilians have actually died at the hands of other Muslims, in the civil war sponsored by al Qaeda. And al Qaeda has typically been involved in the bloodiest attacks on civilians.

We killed Zarqawi in June, 2006, thereby improving al Qaeda’s leadership in Iraq . But the civil war had already developed its own momentum. So the Muslim world gets a daily dose of Muslims killing Muslims at the behest of al Qaeda, all broadcast on al Jazeera.

In the meantime, al Qaeda’s greatest weakness has begun to surface –- in practice, their totalitarian, utopian, anti-democratic ideology makes people miserable. Just as ordinary Afghanis chafed under Taliban rule, the Sunnis living in al Qaeda-controlled areas of Iraq have started to rebel.

This rebellion against al Qaeda started in Anbar province, of all places -– the heart of the Iraqi insurgency –- and has led to widespread fighting between former Sunni insurgents and al Qaeda “foreigners.”

Al Qaeda has fought back hard, using threats and assassinations to intimidate Sunni leaders, and concentrating their forces to destroy Sunni strongholds. The rebelling Sunnis, in turn, have sought help from the US military, leading to a strange cooperation between insurgents and Americans who were trying to kill each other a few months ago. The enemy of my enemy…

In September 2007, al Qaeda assassinated Abu Reesha, a prominent anti-al Qaeda rebel and a Sunni tribal leader. The assassination was a blow to the rebellion, but the funeral was a horrible propaganda disaster for al Qaeda. Thousands of Sunnis and former insurgents marched through Anbar province in the funeral procession, chanting a modified version of the usual Muslim prayer. Instead of “There is no god but Allah, and Mohammed is his prophet,” they chanted “There is no god but Allah and al Qaeda is his enemy.” Al Jazeera broadcast that news around the Muslim world.

Meanwhile the revolt has greatly reduced al Qaeda’s ability to take the war to the US and the Shiites. Unlike the US and the Shiite government, the Sunnis know who the foreign jihadis are, and where they live. Also, al Qaeda’s stream of new recruits into Iraq has diminished in the past few months and there is at least anecdotal evidence that potential jihadis are turned off by the prospect of killing other Muslims. (See “Where Boys Grow Up to Be Jihadis,” NYT Magazine, November 25, 2007, for example.)

So right now, today, al Qaeda hangs on by its fingernails in Iraq , desperately trying to avoid public rejection by its own Muslim allies and public defeat by a coalition of Sunnis, Shiites and Americans.

What Now?

I don’t think the Bush administration ever planned to discredit al Qaeda by allowing them to control and oppress large groups of Iraqis.

Furthermore, the Sunni revolt didn’t happen because of the US “surge” -– it happened because al Qaeda alienated the Iraqi Sunnis. Without the revolt I’m not convinced the surge would have made a long run difference. But the extra American strength may have encouraged the revolt, and it has absolutely, definitely improved our ability to support the Sunni rebels.

In other words, George Bush got lucky, because al Qaeda made mistakes and because his own last ditch, double or nothing gamble walked into a big change in Sunni attitudes. I would like to remind everyone that this is a GOOD thing. Our war with al Qaeda is real, and persistence and luck help to win wars. (Shrewd planning and foresight would also help –- maybe the next administration can supply those.)

I don’t see how we can walk away from Iraq just now. We have to help this revolt succeed, and we have to leave Iraq in a way that makes absolutely clear that al Qaeda, not the US, suffered the defeat. This isn’t stupid pride -– we cannot allow Bin Laden to recoup his propaganda disaster by claiming the enormous prestige (and recruiting power) of chasing the mighty US army out of Iraq. Can you imagine how invincible Bin Laden would look once he had defeated both the Russian and American superpowers? We should not let that happen. The fates of war have given us a chance to win here, and we have to take it.

None of this will turn Iraq into a peaceful democracy, although removing al Qaeda’s malevolent influence will certainly help. But we don’t necessarily have to stay until the Iraqi political scene looks like Switzerland . Once the foreign jihadis are well and truly defeated, we could have a sensible discussion about getting out. But not now.

In other words, I think that Barak Obama is the only major candidate who was right about whether to go into Iraq , but I think he is dead wrong about what to do next.

I will close by returning to something Bin Laden said in his January 2006 videotape, when he argued that we are going to lose in Iraq and Afghanistan for the same reason that the Russians lost in Afghanistan — because the Mujahadin have more will to fight than we do.

“Don’t let your strength and modern arms fool you. They win a few battles but lose the war. Patience and steadfastness are much better.”

Like the man said, patience and steadfastness…

Thoughts On Iraq

Administrator — Sun, 29 Jan 2006 17:00:05 +0000

PROLOGUE: THOUGHTS AFTER READING BIN LADEN’S LATEST STATEMENT

I just read a translation of bin Laden’s January, 2006 videotape, and I was struck (as I have been in the past) by what a shrewd enemy he is, and by how well he understands the U.S. The small excerpts published in the press don’t do justice to the whole two page diatribe (available at http://www.detnews.com/apps/pbcs.dll/article?AID=/20060120/NATION/601200301 which shows a virtuoso command of propaganda and psychological warfare. Basically, this guy has our number. We’d better get his.

Bin Laden’s pitch is that we are going to lose in Iraq and Afghanistan for the same reason that the Russians lost – because the Mujahideen have more will to fight than we do. “Don’t let your strength and modern arms fool you. They win a few battles but lose the war. Patience and steadfastness are much better.”

He then goes on to display a very nice grasp of hot button U.S. political issues. He says that the “unlucky quartet of Bush, Cheney, Rumsfeld and Wolfowitz” are headed for defeat, and cites “the results of your polls which show that an overwhelming majority of you want the withdrawal of American troops from Iraq .” (Probably an exaggeration, but hey – this is propaganda.) He says that the American occupation has reached “a point where there is no difference between this criminality and Saddam’s criminality”, and cites the allegations of torture in Abu Ghraib and Guantanamo . He points out that American casualties are much higher now than they were “when Bush announced the end of major operations in that fake, ridiculous show aboard the aircraft carrier.” He says that the war has resulted in “the wasting of billions of dollars which have gone to those with influence and merchants of war who have supported Bush’s election campaign with billions of dollars…” He also says “it would be useful for you to read the book Rogue State …” (I haven’t read the book, but it purports to discuss various ways in which the U.S. has been high handed or hypocritical in the past few decades.)

Bin Laden concludes by “offering you a long-term truce…” The terms aren’t spelled out, except that al Qaeda would get to “build Iraq and Afghanistan , which have been destroyed in this war…” He also cites terrorist successes in Europe and says “the delay in similar operations happening in America has not been because of failure to break through your security measures. The operations are under preparation and you will see them in your homes the minute they are through…”

Ok. You’ve got to admit that wasn’t bad for a guy living in a cave in a remote tribal region of Pakistan . This guy reads our press, looks at our opinion polls, reads our books and has a pretty good grasp of how to push our buttons. Do you think we have anything like the same understanding of him?

Anyway, on reading this I decided to resurrect an essay about Iraq that I wrote a few months ago. I shied away from putting it on the website originally, but Osama’s latest piece made me reconsider. My essay seems pretty middle of the road to me, but I guess everybody feels that way about their own views…

THOUGHTS ON IRAQ

When we got back to the US this June (2005), after having been out of touch with daily news reports for almost eleven months, I was struck by how discouraged most Americans had become about Iraq. Although I had been dubious about attacking Iraq in the first place, the current situation actually doesn’t look that bad to me. Anyway, I think that my status as an exile has given me a valuable perspective that was worth writing down before we took off again.

I have three observations. First, although Iraq probably had nothing to do with 9/11, and the invasion of Iraq was a diversion from our war against al Qaeda, the current fight in Iraq now has everything to do with 9/11. Because al Qaeda has entered Iraq to fight us, we now have an important stake in this war. Second, despite the obvious parallels to Vietnam , Iraq differs from the Vietnam war in one key respect – unlike Lyndon Johnson, George Bush managed to back the side that is going to win. Third, despite the unending litany of death and destruction, I think the situation actually has turned substantially for the better over the past year and a half. In August 2004, a comparison to Vietnam wouldn’t have been too far off. Now, whatever else happens, this thing cannot end like Vietnam . In fact — if you look closely – you can see that the war has probably started to hurt al Qaeda’s standing in the Muslim world.

Is This Our Fight?

Democracies don’t like war, and they need good reasons to fight long and costly wars. Popular support for the Vietnam war fell apart because we just didn’t have a strong enough stake in the outcome — Ho Chi Minh just wanted Vietnam and wasn’t interested in attacking Pearl Harbor or New York City . If you don’t think motivation matters, consider that we quit Vietnam in defeat after losing about 50,000 soldiers, whereas we suffered over 300,000 dead in WWII without even a thought of quitting. Democracies fight hard when they have a powerful reason, and not otherwise.

Personally I was dubious about invading Iraq because I didn’t think we had a strong enough motivation to support the war if things became difficult, and because I thought the cost to our popular legitimacy throughout the world was too high. (I felt this way, even though I believed firmly that Saddam had WMD.) But that was then and this is now. Questions of whether the administration behaved cynically or acted in good faith make reasonable issues for a political campaign but they can’t determine what we should do next in Iraq . Basically we only have two choices – we either persist until “our side” has the situation under control and asks us to leave, or we get out before that. So should we persist or should we get out?

I think we have to persist as long as we have a reasonable hope of victory. Once “al Qaeda in Iraq ,” in the form of Abu Musab al-Zarqawi and his followers, got in and began to direct a major part of the insurgency, we developed a stake in this fight. Saddam probably had nothing to do with 9/11, but al Qaeda certainly did. We have a legitimate beef with these folks. So why, exactly, should we back away from this fight with al Qaeda unless Zarqawi beats us militarily, which he has not done?

It’s tempting to argue that our presence in Iraq helps al Qaeda’s recruitment, and that we would be better off getting out. The first part of this argument is probably right – the presence of Christian soldiers in Iraq has given bin Laden a great PR tool in the Muslim world, and Zarqawi’s effective resistance has enhanced al Qaeda’s mystique and ability to recruit. (Not to mention the wonderful propaganda created by the Abu Ghraib scandal.) Since progress in the war on terror revolves around reducing Islamic extremists’ ability to recruit new fighters, these developments have been very bad for the U.S.

But do you think things would get better if we let bin Laden defeat us? Victorious armies attract recruits. We’ve already paid a high propaganda cost for our war in Iraq , but that’s mostly water under the bridge. Handing bin Laden a huge victory in a head to head fight with the biggest military power on earth would have morale and propaganda costs that would dwarf his current gains. And how could we let al Qaeda have Iraq , or part of Iraq as an unmolested staging area to train the new recruits that would come in after such a victory?

For better or worse, the U.S. and al Qaeda have both voluntarily staked their prestige in Iraq, and both our fortunes in the larger war on terror will rise or fall depending on the outcome there. Maybe it would have been smarter not to get into this fight, but here we are. And unlike Ho Chi Minh, these guys are not going to let us alone if we admit defeat and leave. (Unless you buy bin Laden’s January 2006 offer of a truce if we let him have Afghanistan and Iraq!)

Bin Laden stated his view about how to defeat the U.S. in a 1998 interview with Al Jazeera, well before the 9/11 attacks “ We believe that America is weaker than Russia and from what we have heard from our brothers who waged jihad in Somalia, they found to their greatest surprise the weakness, frailness and cowardliness of the American soldier. When only eight of them were killed they packed up in the darkness of night and escaped without looking back. ”

And he said it again in January 2006 “ Don’t let your strength and modern arms fool you. They win a few battles but lose the war. Patience and steadfastness are much better .”

He’s right about how to win wars, but I’m hoping he’s wrong about Americans.

Can We Win In Iraq?

So do we have a reasonable hope of victory in Iraq anytime in this century? Yes, absolutely, despite our present discouragement. In fact we almost can’t lose this thing to al Qaeda except by quitting prematurely.

By design or by accident, we are fighting al Qaeda (along with a large number of Sunni Arab insurgents) in one of the few Muslim countries where neither al Qaeda nor the Sunnis radicals have any hope of widespread popular support. That fact makes Iraq very different from Vietnam.

Al Qaeda is a Sunni organization that views the Shia Muslims as “apostate” — meaning heretics. In September 2005 Zarqawi actually declared “all out war” against the Shia. Not against the army, or the police, or the government – but against Shia Muslims, period. And he has delivered on that threat by slaughtering many thousands of Shia civilians. But the Sunni Arabs represent only about 20 percent of the Iraqi population. The Shia comprise about 60 percent, and the Kurds roughly 17 percent. (The Kurds are Sunni, but were brutally oppressed (gassed) by the Arab Sunnis under Saddam, and are hostile to the insurgents.) So even if Zarqawi could bring all the Sunni Arabs in on his side, he would still face four to one odds.

And unlike the South Vietnamese, many of whom viewed Ho Chi Minh as a nationalist hero, and who never really had their hearts in the fight, the Shia and Kurds will fight. South Vietnam couldn’t draft new soldiers as fast as they deserted. (And even the U.S. is now having trouble with recruitment at home.) But the new Iraqi armed forces have no shortage of volunteers. The Shia and Kurds may not love the U.S. , but they have no illusions about their fate under al Qaeda and the Sunni insurgents. They will win because we are helping, because they are fighting for their homes and families and because there are a lot of them.

Are Things Getting Better Or Worse?

When we returned to the States in the summer of 2005, (after a year away from the daily news reports) I was really surprised that most of my friends – Republicans, Democrats, whatever – saw the situation in Iraq as much worse than it had been a year earlier. The insurgents have made brilliant use of the media to discourage us with a daily grind of death and terror. But I think the big picture actually looks a lot better now than in August 2004.

When we left Chicago in August 2004, the Iraqi government had exactly as much popular legitimacy as the Thieu regime used to have in Saigon – both were appointed by Americans and kept in power by the American military. If the US had pulled out, the Iraqi provisional government under prime minister Allawi probably would have collapsed for lack of popular support.

Also in August 2004 we were engaged in a bloody shootout with the militia of Moqtada al-Sadr, a fundamentalist Shia cleric whose influential father died heroically resisting Saddam, and who has inherited a large popular following among the Shia Iraqis. Our tanks were shooting up Najaf, which is the holiest Shia city in Iraq , with some of its most important shrines.

And Zarqawi and the other insurgents were killing lots of Americans.

All of this was very bad. We would certainly lose in Iraq if we alienate the Shia – we would have Vietnam again, with most of the people against us and no strongly committed allies other than our appointed government. By imposing a non-democratic government for two full years of occupation, and by getting into a shooting war with a popular Shia cleric, we were skating on the thin edge of disaster.

Now fast forward to January 2006. Iraq has an elected government which unquestionably represents the will of the majority and which has solid popular legitimacy among the Shia and Kurds, as well as grudging participation by the Sunnis. The Bush administration had favored the secular, pro-western party of former Prime Minister Allawi, but the Shia and Kurds elected an Islamic government. Maybe that sounds like a bad thing for the U.S. , but it’s not – this government has legitimacy precisely because it wasn’t supported by the Americans.

And we also negotiated a ceasefire with Moqtada al-Sadr, who subsequently has limited himself (mostly) to peaceful political action.

Meanwhile Zarqawi and the other insurgents have gone off the deep end. Their attacks over the last year and a half have killed probably ten times as many Muslim civilians as Christian soldiers. And Zarqawi declared war on democracy (in January 2005), and on the Shia in general (in September 2005).

Zarqawi has gone much farther in his violence against the Shia than the more cautious (and probably smarter) bin Laden ever did, a development which is not good for al Qaeda. The more Zarqawi turns his bombs against Iraqi Muslims, the more he discredits al Qaeda in the larger war for Muslim popular support. A pole of Muslim countries by the Pew Global Attitudes Project, taken in July 2005, showed substantial declines in support for violence against civilians, when compared to results from earlier years, among Muslims in Lebanon, Pakistan, Indonesia, Turkey, and Morocco . ( Jordan went the other way.) It’s hard to know exactly how much weight to give this sort of data, but it’s encouraging. If we are going to win the war on terror, we have to win the war of ideas in the Muslim world against bin Laden and his allies. Remember, there are over a billion Muslims, only a few of which are committed terrorists. We want to persuade the rest, not fight them.

But Zarqawi doesn’t have much choice about whom to fight, and his options will only get worse over time. He has to attack the Shia before they get strong, build an Iraqi army and come after him. He might love to kill Americans instead, but the Americans are harder targets and they will become increasingly irrelevant as Iraqis carry more of the fight. So he must try to stop the Shia before they can get their act together, even though he probably can’t succeed and even though the effort hurts al Qaeda in the larger fight. And, given his dogmatic performance so far, he’s unlikely to admit defeat and back out. Quagmire goes both ways.

What Happens Now?

If we were to leave today, the Shia and Kurds might still come out on top, following a bloody civil war in which the half trained Iraqi army would take on the insurgents in what would probably become a nightmare of sectarian violence. In all likelihood Iran – the largest and most powerful Shia country in the Middle East – would take our place in supporting the Iraqi government, and it’s possible that the surrounding Sunni nations would step in to protect the Sunni minority. We would take (and deserve) the blame for this mess. And we would have confirmed bin Laden’s view that the best way to handle Americans is to kill as many as you can, to make the rest run away.

If we stay, Iraq may still have a bloody civil war, but there is some reason for hope that the Iraqis will find a compromise solution. The Shia leadership has so far shown restraint – offering the Sunnis a disproportionate role in the interim cabinet and avoiding any calls for violence against the Sunni minority. (Although the Interior Ministry has probably deviated from this policy of tolerance.) Also the general Shia population has also been pretty restrained. (Imagine what would happen in the US if an ethnic minority declared war on the majority and began a systematic campaign of killing civilians, blowing up churches and assassinating local political leaders, teachers and religious leaders.)

In addition, a civil war would be so bad for the Sunnis that cooler heads might prevail. Zarqawi wants a civil war (he said as much in an intercepted letter to bin Laden in 2004), but the Sunni Iraqis have a lot to lose. It’s certainly encouraging that the major Sunni parties decided to participate in the elections for a final government. Also Zarqawi’s forces recently assassinated a prominent Sunni, Nassr Abdul Kareem, apparently for negotiating with the U.S. A split between Zarqawi and the Sunnis would spell the end for al Qaeda in Iraq. So maybe the Sunnis will find a way out. But it’s hard to say – if cooler heads always prevailed, there would never be any wars.

With or without a war, an independent Iraq will not be a docile ally for the U.S. (Nor will any other Islamic government as long as the Israeli/Palestinian fight continues unresolved.) Also the Iraqi Shia probably will maintain cordial relations with their Shia neighbors in Iran . These facts may explain why the Bush administration tried to avoid early elections, in the hopes of installing a pro-American government. But if you bring democracy to an Islamic, Shia country, you are going to get an Islamic, Shia government.

For better or worse, once George Bush makes up his mind about something he doesn’t quit. So my guess is that we stay and this thing pretty much resolves itself by the next presidential election. Independent Iraq will not be a staunch ally for us, but it will not be a sworn enemy either, and the Iraqis will carry the fight to our mutual enemy, al Qaeda. The Shia and Kurds will end up better off than they were under Saddam, as might the Sunnis if they don’t insist on losing a civil war. Iraq might or might not succeed long term as a democracy. But, if it does succeed, an Iraqi democracy just might help us in the war on militant Islamic extremism. It takes an idea to beat an idea, and democracy is about the only idea we have to sell.

“Patience and steadfastness,” like the man said.