World Order, Failed States and Terrorism

HENRY C.K. LIU / Asia Times 3feb2005

 

PART 1: The failed-state cancer

It has been said that when economics turns serious, it becomes political. The Washington Consensus, a term coined in 1990 by John Williamson of the Institute for International Economics to summarize the synchronized ideology of Washington-based establishment economists, reverberated around the world for a quarter of a century as the true gospel of reform indispensable for achieving growth in a globalized market economy.

Initially applied to Latin America and eventually to all developing economies, the term has come to be synonymous with globalized neo-liberalism or market fundamentalism to describe universal policy prescriptions based on free-market principles and monetary discipline within narrow ideological limits. It promotes for all economies macroeconomic control, trade openness, pro-market microeconomic measures, privatization and deregulation in support of a dogmatic ideological faith in the market's ability to solve all socio-economic problems more efficiently, and to assert a blanket denial of an obvious contradiction between market efficiency and poverty eradication.

Financial-capital growth is to be served at the expense of human-capital growth. Sound money, undiluted by inflation, is to be achieved by keeping wages low through structural unemployment. Pockets of poverty in the periphery are the necessary price for prosperous centers. Such dogmas grant unemployment and poverty, conditions of economic disaster, undeserved conceptual respectability. State intervention has come to focus mainly on reducing the market power of labor in favor of capital in a blatantly predatory market mechanism.

The set of policy reforms prescribed by the Washington Consensus is composed of 10 propositions: 1) Fiscal discipline; 2) redirection of public-expenditure priorities toward fields offering high economic returns; 3) tax reform to lower marginal rates and broaden the tax base; 4) interest-rate liberalization; 5) competitive exchange rates; 6) trade liberalization; 7) liberalization of foreign direct investment (FDI) inflows; 8) privatization; 9) deregulation and 10) secure private-property rights.

These propositions add up to a wholesale reduction of the central role of government in the economy and its primary obligation to protect the weak from the strong, both foreign and domestic. Unemployment and poverty then are viewed as temporary, transitional fallouts from wholesome natural market selection, as unavoidable effects of economic evolution that in the long run will make the economy stronger. Neo-liberal economists argue that unemployment and poverty, deadly economic plagues in the short term, can lead to macroeconomic benefits in the long term, just as some historians perversely argue that even the Black Death (1348) had long-range beneficial effects on European society.

The resultant labor shortage in the short term pushed up wages in the mid-14th century, and the sudden rise in mortality led to an oversupply of goods, causing prices to drop. These two trends caused the standard of living to rise for those still living. Yet the short-term shortage of labor caused by the Black Death forced landlords to stop freeing their serfs, and to extract more forced labor from them. In reaction, peasants in many areas used their increased market power to demand fairer treatment or lighter burdens. Frustrated, guilds revolted in the cities and peasants rebelled in the countryside. The Jacquerie in 1358, the Peasants' Revolt in England in 1381, the Catalonian Rebellion in 1395, and many revolts in Germany, all served to show how seriously the mortality had disrupted traditional economic and social relations.

Neo-liberalism in the past quarter-century created conditions that manifested themselves in violent political protests all over the globe, the extremist form being terrorism. But at least the bubonic plaque was released by nature and not by human ideological fixation. And neo-liberalism keeps workers unemployed but alive with subsistence unemployment aid, maintaining an ever-ready pool of surplus labor to prevent wages from rising from any labor shortage, eliminating even the cruelly derived long-term benefits of the Black Death.

The Washington Consensus has since been characterized as a "bashing of the state" (Annual Report of the United Nations, 1998) and a "new imperialism" (M Shahid Alam, "Does Sovereignty Matter for Economic Growth?", 1999). But the real harm of the Washington Consensus has yet to be properly recognized: that it is a prescription for generating failed states around the world among developing economies. Even in the developed economies, neo-liberalism generates a dangerous but generally unacknowledged failed-state syndrome.

The economics of neo-imperialism

The United States is the leading advocate of the efficacy of free markets and the economic benefits of privatization of the public sector. It prescribes policy measures that aggressively weaken the state apparatus and that inevitably lead to failed statehood. At the same time, the US is also the leading proponent of superpower military intervention in failed states around the world. The number of victims caused by neo-liberalism far exceeds those from ethnic strife in failed states. Yet while neo-liberals, together with their strange bedfellows the neo-conservatives, advocate humanitarian military intervention in failed states, they adamantly oppose government intervention in failed markets that accept unemployment as necessary antidote for inflation (see Tackle failed markets, not failed states, March 26, 2002). )

Neo-imperialists identify failed statehood as the natural outcome of anti-imperialism. Historically, when power vacuums left by failed states threatened great powers, the ready solution was imperialist conquest. Such conquests were justified as necessary for imposing order and civilization over chaos and backwardness. But imperialism lost its legitimacy as a result of the disingenuous promotion of anti-imperialist sentiments by the warring imperialist powers of World War II. These warring powers were compelled to use anti-imperialism as incentives for mobilizing their colonial subjects to support their total war efforts. Imperialism became an unwitting victim of collateral conceptual damage in the second global war to end all wars.

The world order during the Cold War was a condominium of two superpowers who were opponents in dialectic ideological dispute as well as in conflicting geopolitical state interests. Toward the end of the Cold War, conflicting geopolitical state interests were overwhelming ideology disputes, driving communist China toward strategic convergence with the capitalist US against Soviet imperialism, in response to the Soviet alliance with anti-communist India against China. Localized ongoing superpower ideological wars by proxy states were wound down and local political struggles were frozen to avoid superpower conflict escalating into nuclear exchanges. The end of the Cold War diminished both the legitimacy and ability of former client states and satellites of the two opposing superpowers to control domestic rival factions, leading to failures of state power in several regions. At the same time, some states that had been divided by Cold War superpower geopolitics were reunited, some only after decades of violence, as in the case of Vietnam, others peacefully with the disintegration of the USSR, as in the case of Germany. Other divided states are still not reunited, such as the two Koreans.

The USSR itself broke up into separate states, held loosely together by a Commonwealth of Independent States (CIS) that comprise 12 sovereign states that were formerly Soviet republics. The CIS was formed on the basis of sovereign equality of all its members and that the member states are independent and equal subjects of international law. The CIS is not a state - it does not have supranational powers. In September 1993, the heads of the charter states signed a treaty on establishment of the Economic Union, in which they developed the concept of transformation of economic interaction within the commonwealth, taking into consideration residual realities. The treaty was based on the necessity of formation of a common economic space on the principles of free movement of goods, services, workers and capital; elaboration of concerted money and credit, tax, price, customs and foreign economic policies; rapprochement of the methods of management of economic activities; and creation of favorable conditions for development of direct production links.

Ukraine has since emerged as a danger point for regional peace in its effort to free itself from the Russian sphere of influence and reorient itself toward the West. In former Yugoslavia, a former Soviet bloc state, ethnic strife has embroiled NATO (North Atlantic Treaty Organization) members, primarily the US, in humanitarian intervention. The Middle East continues to be a smoldering powder keg that threatens global peace. In East Asia, US adventurism in trying to set up Taiwan as a separate state from China poses a threat to peace in the region and perhaps even the whole world by turning a long-dormant unfinished civil war into a new international war.

After the Cold War, with a new form of economic imperialism under the euphemism of neo-liberal globalization ravishing economies around the planet, the post-World War II restraint and the Cold War freeze against political imperialism are now being dismantled as disorder in ravished countries grows more threatening to the sole remaining superpower. The US now mistakes military and economic prowess for moral superiority and views itself as having earned the privileges of a benevolent hegemon. Thus the neo-imperialist formula for the new Pax Americana is a two-punch operation. The first punch uses neo-liberalism to cause a weak state's economy to collapse to produce a failed state. The second punch invades by force the failed state to delivery liberty as defined by the new imperialism to set it up as a US protectorate and economic colony.

Terrorism is only one of the threats that failed states allegedly pose to the sole remaining superpower, albeit it has taken center stage after the tragically spectacular events of September 11, 2001. Much of the world's illegal drug supply comes from alleged failed states, whether it is opium from Afghanistan or cocaine from Colombia. Yet in the mid-19th century, when Great Britain illegally shipped opium to China from British India and Yankee Clippers shipped opium from Turkey in violation of Chinese law, neither Britain nor the US was condemned as a failed state. Other kinds of criminal business, such as new forms of slave traffic through the venue of illegal immigration, flourish today under the aegis of what are now identified as failed states while the recipient strong states remain immune. Furthermore, the economy of the southern US had been built by slavery with blatant immunity. For a whole century and through half of its history, the US was in egregious violation of the most obvious and fundamental human rights with its institution of slavery without fear of being liberated by a self-righteous foreign power.

How the strong define 'failure'

In 1919, Woodrow Wilson presented his self-righteous Fourteen Points of utopian liberty to the world while at home, a series of immigration quota acts based of racial discrimination were passed; government persecution and deportation of leftists became the unconstitutional and illegal response when 4 million workers went on strike in 1919 and Nicola Sacco and Bartolomeo Vanzetti, both Italian immigrant anarchists, were arrested, convicted on insufficient evidence and executed in 1927; the Ku Klux Klan, dedicated to the persecution of "Negroes", Catholics and Jews", achieved a membership of 5 million by 1924 without being outlawed; and civil rights legislation would not be passed for another half century. A series of Chinese exclusion acts that banned all immigration of Chinese and denied the right of Chinese to become naturalized US citizens were not repealed until 1943 when the US needed China as an ally against Japan. Yet through all this, the US was never invaded in the name of foreign humanitarian intervention.

Today, the strong recipient states of illicit drugs from weak failed states are themselves excused from failed-state status even though state functions to eliminate such illicit traffic consistently fail. Failed states are generally said to be increasingly trapped in a downward cycle of poverty and violence. Notwithstanding that many of the ills of failed states have been caused by globalized neo-liberal market fundamentalism, neo-imperialists argue that the solution is for the sole remaining superpower and its subservient allies to resort to imperialism again for the good of the world.

The spread of AIDS has been associated with failed-state syndrome. Yet the responsibility for failing to contain the spread of the virus at its early stages lies squarely on the shoulders of US president Ronald Reagan, who saw it as God's righteous punishment for sinful sexual deviants. On the issue of AIDS eradication, the US has been in every sense of the term a failed state.

Failed and collapsed states are a structural trait of the contemporary international system, and not a temporary dysfunction of the Westphalian world order of sovereign states. Failed states are not always weak states. They are sometimes strong states that have voluntarily forfeited basic state functions as a matter of ideology, or allowed them to be usurped by special-interest groups. Strong failed states are states that possess powerful military/police power for advancing the narrow economic interests of a small class of citizens while sacrificing a significant segment of the population as failed market victims. In the US, socio-economic Darwinism is celebrated as indispensable for the survival of the economy in the market place, while scientific theories of evolution are challenged by Creationism in public schools. Those who believe God created man apparently do not believe he created all men as equals. These structural anomalies and conceptual inconsistencies produce tensions in the international system, with serious consequences for developed and developing economies alike.

In the Third World, the notion of "failed states" is problematic since many Third World states collapsed after decolonization simply because they were artificial Western constructs in the first place, and not true states. All failed states in the Third World are located in former Western empires. Some Third World states are deemed failed states by the hegemonic superpower if the state apparatus is unable to uphold an effective monopoly of coercion over its entire territory to prevent meta-state activities deemed dangerous to the superpower. Such failed states lack an effective judiciary system to safeguard the rights of foreign and domestic private property, or are unable to fulfill international obligations such as repayment of sovereign or private debts to foreign financial institutions, or cannot prevent and police transactional economic crimes or the use of asymmetrical warfare by meta-state groups against strong states.

On the other hand, market states with advanced economies increasingly do not consider most human aspects of societies as proper state concerns, such as the provision of a rising standard of welfare to their citizens, which has been conveniently assigned to the indifferent workings of the market, but confining themselves to guarding and strengthening no-holds-barred free-market conditions through which private wealth is generated for the benefit of the strong, leaving the weak to perish in a natural selection. Wealth-distribution functions are assigned to the market even though the structural maldistribution of market power is maintained by the state. This amounts to a selective exercise of state power of coercion to favor one segment of the population or one type of institutions at the expense of all others.

The popular will is repeatedly frustrated through inflated minority rights backed by distorted constitutional interpretation on the part of politically appointed and biased courts. In that respect, states such as the US can also be deemed as having failed through its rule by law, not of law. Other attributes of failed states, such as privatization of basic state functions, fit the ideological trends in super-strong market states such as the US today. Thus the ideological fixation prevalent in the US today can be seen as moving the US toward a failed-state syndrome. These market states try to coerce other states also to become market states to prevent them from exercising sovereign control over their national territories, protecting their economies from structurally predatory global markets that amount to economic tyranny, regulating the behavior and lives of their population for the common good and in general aspiring to be strong states in defiance of globalized market fundamentals that lock them in permanent victimization by strong market states.

The collapsed state

A collapsed state is a failed state in its advanced stage. It is identifiable by three features, according to neo-imperialists. The first is its colonial legacy and ineffective post-colonial state-building. States formed from residual colonial rule may be confronted with insufficient love or loyalty to and from their artificially constituted population, with their domestic and international authority based not on legitimacy but on dominance, either economic or police/military. The historical process in accumulating centralized power in these states consists of subordination and assimilation that tend to maximize popular resentment, resulting in polarization derived from disillusionment and dissatisfaction by disfranchised minority or even majority groups and their elites. Thus neo-imperialists consider collapsed states to be the illegitimate children of anti-imperialism. In a way, collapsed states are juvenile delinquents of the international system left from the wreckage of the imperialist world order. The proper response to collapsed states is to re-colonize them, so argue neo-imperialists.

The second feature of a collapsed state is the withdrawal of superpower sponsorship/protection. The world order during the Cold War was a condominium of two superpowers. Local struggles and conflicts were frozen to avoid bringing the two superpowers into nuclear conflict. The end of the Cold War reduced both the legitimacy and the power of the client states of the sole remaining superpower to control domestic rival factions. The solution to this unhappy state of affairs is for the sole remaining superpower to assert its irresistible power by imposing a new world order according to its superior values, camouflaged as freedom and democracy.

This is the neo-conservative agenda. President George W Bush says that free and democratic states are peaceful states, notwithstanding the historical fact that World War II was launched by an expansionist German Third Reich born of a democratic process and the resistance by a British coalition government born through the suspension of elections. What Bush really means is that when the whole world subscribes to US values and accepts US power, not only out of fear but also out of respect for its power-backed legitimacy, the world will be peaceful. Adolf Hitler sang the same tune and failed. The US under Bush is attempting an ambitious undertaking of universal ideological control that even Christianity under the Holy Roman Empire failed to accomplish with the Thirty Years' War, having to yield finally to the Peace of Westphalia of sovereign states.

The third feature of a collapsed state is the impact on it from neo-liberal globalization. Unlike globalization in the past, which was implemented through an empire structure, neo-liberal globalization is imposed through a network of failed states by weakening a state's sovereignty and the role of the state in socio-economic arenas. Imperialist globalization of the past did not recognize the sovereignty of protectorates or colonies. In contrast, neo-imperialist globalization today employs weak client states with restricted sovereign rights as proxies of the strong market state to enforce its exploitative agenda worldwide.

Neo-liberal ideology is implemented through a venue of integrated global markets, free flow of capital and credit, wholesale deregulation and mandatory structural pro-market conditionalities imposed on weak and poor economies. It strips states of their sovereign authority to intervene in markets on behalf of national interests, causing state authority to collapse in all area except the protection of foreign and domestic private property. Failed states depend on globalized market fundamentals to finance their state functions and inevitably fall into collapsed-state status for lack of funds. In a sense, whereas the age of imperialism used Christian values as a pretext for empire, the age of neo-imperialism uses neo-liberalism as its missionary calling. The relationship of the neo-conservatives to the neo-liberals today is similar to the relationship of the Emperor and the Church in history. Missionaries are the velvet gloves of the ruthless hands of imperialists.

How the strong define 'success'

Success in statism is measured by a state's ability to deliver political goods. Security, both external and internal, is a primary political good the provision of which is the state's primary function. It provides a framework through which all other political goods are delivered. The events of September 11, 2001, revealed that even the most powerful state cannot guarantee its citizen protection from terrorism, a fact since openly acknowledged by the Bush administration. The modus operandi of the "war on terrorism" and the Department of Homeland Security is based on the acceptance of spectacular terrorist attacks continuing in the future and their likelihood of repeated success. The aim is not to eradicate terrorism by removing its root cause, but only to make it more difficult to implement. It is a war lost before it begins.

Neo-imperialism detaches economic security from legitimate state functions. Freedom from want is not considered a state responsibility by neo-liberalism. Financial security is merely a market risk that should be faced by each individual market participant. Another political good provided by the state is the enforcement of law as expressed in a system of codes and procedures that equitably regulate the affairs and interactions of the population. The state is responsible for setting and maintaining standards for equity and acceptable conducts both domestically and in its foreign relations. Neo-liberalism relieves the state from such responsibility and assigns it to the market.

Friedrich A Hayek (1899-1992) wrote The Road to Serfdom (1944) to warn of the invasion of the welfare state in people's private lives, the fundamental conflict between liberty and bureaucracy. Hayek and his fellow Austrian economists who viewed the market economy working as the calculus of independent individual decisions differed with Milton Friedman and the Chicago School economists who thought macroeconomically in analyzing total quantity of money, total price level, total employment, etc, in aggregates and averages terms. Hayek's rejection of socialist thinking was based on his view that prices are an instrument of communication and guidance that embodies more information than each market participant individually processes. To him, it was impossible to bring about the same price-based order based on the division of labor by any other means. Similarly, the distribution of incomes based on a vague concept of merit or need is impossible. Prices, including the prices of labor, are needed to direct people to where they can do the most good. The only effective distribution is one derived from market principles. On that basis, Hayek intellectually rejected socialism.

In Hayek's social philosophy, value and merit are and ought to be two distinctly separate issues. Individuals should be remunerated purely on the basis of value and not in accordance with any concept of justice, whether it be Puritan ethic or egalitarianism. Hayek went as far as to deny that the concept of social justice has any meaning whatever, on the basis that justice refers to rules of individual conduct. Since no rules of the conduct of individuals can determine how the good things of life should be distributed, the question of justice is moot. Since a free market is the natural outcome of a multitude of individual decisions, how the market decides is amoral.

Accordingly, a spontaneously working market, where prices act as guides to action, cannot take account of what people need or deserve, because it operates according to a neutral distribution system that nobody has designed. Such a distribution system cannot be just or unjust. And the idea that things ought to be designed in a "just" manner means, in effect, that one must abandon the market and turn to a planned economy in which somebody decides how much each ought to have. And the price for that justice is the complete abolition of personal liberty.

Hayek's free-market ideas have been applied to much of unregulated globalization of the past quarter-century, and the socio-economic damage is now very visible. Notwithstanding Hayek's repugnant social philosophy, even his "scientific" claims on the effectiveness of free markets has not been substantiated by events. Hayek's fallacy rest on his blind faith in "spontaneous" prices that neglect the potential of long-term value through excessive instant sub-optimization.

Another political good is the provision of universal health care and education, the maintenance of a vibrant economy of full employment at living wages that will allow workers to afford decent housing and secure retirement, and a clean environment, without which all rhetoric about liberty becomes irrelevant. Freedom from want is a first freedom that neo-liberalism denies by imposing the tyranny of the market. The logic of a segmented health-insurance market based on tiers of risk profiles is fundamentally flawed. It assigns high premiums to high-risk customers, instead of universal protection for all. For those who are healthy, the fact that they do not need medical care is already worth a fortune; do they need also to deny financial support to others in the insured pool who are unfortunate enough to be ill? For the healthy, not needing medical care is itself the benefit. Who would wish to be ill merely to get their money's worth from insurance? If the healthy in a community do not help the sick, who will? There is no logical or ethical argument against universal health care.

To deliver such political goods, the state is granted police power and the power to issue sovereign credit to steer the economy toward rewarding activities that produce such political goods. The unregulated market rewards activities that externalize such political goods from their cost structure and siphons off the resultant surplus value as private profit. In fact, failed states are often generated by failed markets. The state has an obligation to preserve and protect its sovereign credit authority from being usurped by private interest groups. Capitalists use globalized finance markets to tilt a level playing field in trade to create private profit out of public poverty. This is done through the private control of money as a legal tender, through a monetary system under a central banking regime that ideologically accepts structural unemployment as the unavoidable means to combat inflation. Central banking is the policy of a failed state. A globalized foreign-exchange market dominated by dollar hegemony is the venue for US superpower financial imperialism (see US dollar hegemony has got to go, April 11, 2002).

A Bank of International Settlement (BIS) regime of global network of central banks whose main function is to protect the value of privately controlled money through unemployment and slave wages is a world order of failed states, not sovereign states. Dollar hegemony, the status of the dollar as a dominant reserve currency in international trade despite its fiat nature, operates in a globalized foreign-exchange market to rob sovereign states of their right and ability to issue sovereign credit for domestic development, by exposing their domestic currencies to market attacks. Since sovereign control over the monetary system and the economy is the sine qua non prerequisite of sovereignty, the BIS financial world order of failed states has in fact replaced the Westphalian world order of sovereign states through financial globalization

Both strong and weak states can be failed states. Successful states are those in full control of their territories and economies to provide rising-quality political goods to all their citizens. Failed states contain ethnic, religious, linguistic, or other tensions such as ideology that limit or decrease their ability to deliver political goods. The privatization of education, health care and social security is a formula for state failure. These smoldering tensions, if unattended, eventually explode into violent open conflicts. Some strong states became strong by failing. They abdicated normal legitimate state obligations in order to focus state resources on building up a strong military/police capability to disarm domestic and foreign opposition to their failed-state policies.

Failed states provide only substandard political goods, if any at all. Weak failed states involuntarily forfeit, and strong failed states do so voluntarily, the responsibility for delivering political goods, and leave it to non-state actors, ie the private sector through the market mechanism. Privatization of the public sector is more than the outsourcing of state functions. It is the selling off of state prerogatives.

In the military sphere, this is manifested in two ways: 1) the use of mercenaries within the regular army and 2) deferral of state-security functions to contractors. The killing and mutilation last April 2 in Fallujah, a Sunni stronghold 50 kilometers west of Baghdad, of four US contract security personnel - mercenaries in all but name - testified to the hate and rage of an occupied people. More than 30,000 mercenaries serve as armed security guards for foreign private contractors engaged in the rebuilding of Iraq for profit, taking over from the military the responsibility of providing security and maintaining order in a war zone. Even US civilian administrator L Paul Bremer sought protection by contract security personnel, not US soldiers.

These armed mercenaries are officially not engaged in offensive operations and are authorized to use their weapons only defensively if fired on. The distinction is only technical, since invaders can hardly claim self-defense against hostile fire from the invaded. The very presence of invaders is itself an offensive act that naturally draws hostile response from the invaded. The use of mercenaries is nothing more than the privatization of war, the ultimate epidemic of neo-liberal market fundamentalism. Mercenaries do not enjoy protection under the Geneva Convention on war crimes and the mutilation was not perpetrated by an enemy army but by an angry mob in a country under occupation. The television images of the burned remains of US mercenaries, brutal on one level, were symbolic of failed US policy on another. They represent violence against the crime of regime change for profit. Iraq after US invasion fell deeper into failed statehood.

The failure to provide security for all citizens is the first sign of a failed state, as is the use of state violence on its own citizens. So is a larger prison population or one that is racially or ethnically disproportioned. An economic infrastructure that failed to deliver income or wealth equitably is another sign of a failed state, measurable with the Ginni coefficient on income inequality. The absence of a universal health-care system is another sign, as is a dysfunctional public educational system primarily reserved only for poor children. An excess of per capita national debt is also a sign of failed statehood, as is pervasiveness of corruption and fraud in government and business. Hunger and food shortage for the poor while food surplus persists in the economy is another sign of failed statehood. Failed states often have a very rich minority that takes advantage of the failed system with the blessing of the state.

Collapsed states are failed states with a significant vacuum of central authority. They are political black holes with regards to all indicators of institutional health. It is much less costly to stop a state from failing than to reconstruct it after it has failed or collapsed. Neo-liberal efforts aimed at saving weak states have been mostly ceded to financial institutions (banks and funds) that focus their efforts either on profit incentives, returns from loans and investments or export expansion for Western producers, particularly of agriculture, arms and intellectual property. This is a form of blood-letting cure. There is not only no financial reward for populism, but in fact also heavy penalties of operational losses. Wealth and income maldistribution inevitably lead to impending economic collapse and subsequently state collapse. A system of rewards and punishment that leads a state to more populist policies can help to prevent state failure. Financial shocks frequently cause a state to fail, or at least its regime to fall.

World order in flux

Contemporary world order is a complex, contested and interconnected order. This world order, its rules and institutions that circumscribe the structures of power, is in a process of change, putting stress on the order. The traditional world order based on the primacy of interstate or geopolitical relations is being injected with other ordering principles such as the world order of global politics and global governance is one of such injections. Financial, economic and trade globalization is another. The voluminous literature on humanitarian interventions focuses mostly on security and force. Economic humanitarianism is neglected in favor of a "natural law" of market competition. The increased propensity of states to intervene is, then, on the one hand illustrative of a new world order where states put human-rights principles and norms above the classical principles of sovereignty and non-interference in another state's internal affairs. On the other hand, domestic human suffering from globalized economic exploitation is off limits to state intervention within its sovereign territory.

Russian President Vladimir Putin, who declared in 2004 that the collapse of the USSR had been a "national tragedy on an enormous scale", in trying to save Russia from the fate of failed statehood by reversing wholesale privatization of state-owned enterprises and media, is being accused by neo-liberals of trying to restore central state power as if that were a terrible thing. His policy on Chechnya is a crucial element in the US-led "global war on terrorism", while Russia's disastrous human-rights record in the breakaway republic conflicts with US standards.

While sovereignty is the organizing principle of the Westphalian world order, the legitimacy of international actions today is governed by Westphalian principles only if the state relinquishes it responsibility in economic affairs. A clear case of this is the way the sole remaining superpower treats oil-producing states. Nationalization of the oil industry by any member state of the Organization of Petroleum Exporting Countries (OPEC), if coupled with a state policy detrimental to the fundamental oil-import needs of the sole superpower, or measures that upset the pricing structure of oil, will run the risk of being invaded by the superpower.

Seen from a development-theory perspective, the failed-states phenomenon is based on a universal acceptance of the theory of teleological development of societies toward specific developmental goals. This implies progression from a simple toward a more complex form of society. To Western theorists, this points in the direction of emulating the Western model. To non-Western theorists, it points to development models with indigenous characteristics. The role of the state is crucial in these processes. Failed states have only attracted interest as part of a revisionist revaluation of colonialism, imperialism and dependency as benign blessings, but not as part of a critique of market capitalism, of the folly of universal application of Western democratic processes and social values, and of the destructive impact on community cohesion by a fixation on individual freedom. Superpower intervention seldom acts to prevent failed statehood in a weak state. Rather, it intervenes to stamp out resistance to superpower-instigated failed statehood.

In a fundamental way, terrorism is the weapon of last resort for resisters of foreign-instigated failed statehood. Historically, terrorism tends to end when terrorists are granted due recognition of their legitimate grievances and promises of equitable redress. The policy of refusal to negotiate with terrorists is a propaganda slogan of little logic or usefulness.

Since 1990, concerns for failed and failing states have occupied center stage in international politics because the Westphalian order of sovereign states has been challenged at the geopolitical convenience of the sole remaining superpower. States are put in a position of either not being strong enough to deal with their own internal problems and thus risking non-acceptance by other states as sovereign, or being labeled as failed states for violation of human rights in their attempt to maintain internal security. The structure of the Westphalian international system is based on states upholding one another as sovereign actors. Cross-border intervention on human-rights or economic issues is in conflict with that principle, particularly when the option of intervention belongs exclusively to strong states that on the basis of military strength also claim the privilege to define the standards of human rights and economic equity. The sole reason the US has not been a victim of humanitarian intervention is its military strength, not because it is free of human-rights violations. Humanitarian or human-rights or economic intervention are frequently acts of moral imperialism by strong states.

World-order principles have historically been crucial in setting the parameters for how failed-state intervention has been rationalized and conducted. With the end of the Cold War, different world-order principles have gained prominence as competing political cultures for how state power and national interests are to be translated into policy. World-order principles are products of political cultures. They form the structure of the international system, provide the content for state and national interests and add ideological meaning to state power.

The structure of the international system both in its political and socio-economic forms has historically set very different rules of the game for how failed states are identified and dealt with. The Roman Empire was seen as a model for later attempts to provide international governance. The idea is that a hegemonic system with dominant power can serve best as guarantor of world or regional order. The concept of the United Nations was a community of sovereign states governed by a Security Council of major powers.

In contrast to the strict notion of territoriality behind the Roman Empire, the Middle Ages saw several competing non-territorial organizing institutions: the Holy Roman Empire, the Church, and feudalism. In the early Middle Ages, world order was contested even though the non-territorial systems co-existed. There was no clear conception of sovereignty, and lines of authority were mixed at best. Failed and failing states made no real sense in such a system except in a religious sense as defenders of the faith.

It is with the growth of territoriality that an international order of sovereign states was constructed whereby states were empowered by recognition by other states, rather than by the Church. The coming of age of the nation-state in the 18th and 19th centuries gave enduring strength to the Westphalian system, with state sovereignty at its core. This sovereignty may be seen to have a constitutional and a functional dimension. On the one hand, the state is the actor in international relations. It alone has the political authority to deal with other states. On the other hand, the state has sovereignty over all functions in society and defines the rules of the domestic game. Thus states may vary in how they define their domestic setups and how they claim their functional sovereignty. Tyranny, even as repulsive as it has become in modern society, has not been a basis for disqualification of state sovereignty.

On this foundation of state sovereignty was built the system of balance of power as an ordering principle in international relations. Since states are sovereign with reference to one another, they must build alliances in order to guard themselves against the dominance of the powerful over the less powerful. The balance-of-power logic reflects both a systemic logic and a historical reality in the 19th century.

In this system, failed and failing states constituted a serious problem. The system had a dual logic with regard to failed and failing states. Outside of the European balance-of-power system, non-European states were subjugated and made into colonies in order to maintain stability. To prevent fighting over the colonies, the balance-of-power logic could be applied as it was with the founding in 1871 of the German Empire.

The European system was a rational system that matured during the age of reason when statesmen worked out the mechanics of power and balancing in order to create a stable international order. Beyond Europe, the state system was introduced in the colonies after the age of imperialism, and the international system was in fact created and based on the rules and functionalities of the European state system. In East Asia, the world order until the advent of European imperialism was one of tributary states to China as the central kingdom whose international relations were based on generous gifts from the central kingdom in return for meager tributes from lesser states. The Asian world order of a prosperous and benevolent center showering gifts on the less prosperous periphery was different from the European system of empire of the center exploiting the periphery. This was due to both the relatively advanced stage of Chinese civilization and the sheer size of the Chinese economy, which did not need much from outside. The West had to use force to open trade with China.

World order, then, is the network of economic and strategic pressures that both holds a system together and constrains its members to act in acceptable ways through commonly accepted rules and institutions. When those rules and institutions are set by a hegemon or an empire, failed-state status will be defined by those rules and institutions. When the rules of balance of power are dominant, state failure is a different phenomenon. Modern state failures are not associated with losses on the battlefield, but with fractional fighting and a crisis of legitimacy that feeds the fighting, or with the loss of sovereignty due to globalization. State failure is inseparably connected with the problems of authority and political legitimacy, as well of recognition of sovereignty. World-order principles define the sovereign foundations for legitimacy and authority. The type of world order is thus connected directly to why and how states fail, and how actions to remedy state failure are perceived.

 

 

PART 2: The privatization wave

The US Declaration of Independence issued on July 4, 1776, states that to secure "inalienable rights", among which are life, liberty and the pursuit of happiness, "governments are instituted among men". It goes on to accuse King George III of England of having "abdicated Government here, by declaring us out of his Protection". The declaration characterizes England as a failed state and justifies the separation of the American colonies from it to institute a new government. Yet privatization, a movement to abdicate government by declaring the people out of the government's protection and placing them at the mercy of the market, has since gathered much ideological support in the name of liberty.

In the shadow of the Great Depression and chastened by the horror of global modern war, Western societies sought to redefine social provision and the notion of public good. There was renewed concern with the rights of citizenship and entitlement to basic services (health care, education, public housing, subsidized mass transport and unemployment insurance) as part of a "social wage". These programs were purposely removed from the pressure of the market, to be funded by general taxation at progressive rates for the benefit of all. The strength of the welfare state varied from one country to another. It had its weakest foothold in the United States. But the rationale was the same: social cohesion and economic progress were furthered by a shared sense of community. Forty years later ideology took an about-face. The welfare state was under attack, and nowhere more so than in Britain, one of the countries where it was most advanced. Margaret Thatcher as prime minister privatized British Telecom (1984), bus transport (1985), gas (1986), British Airways and the Airports Authority (1987), water and electricity (1990) and, eventually, the coal industry and the railways. In the US, president Ronald Reagan viewed government as an enemy of the people. Instead of allowing government to protect the weak from the strong, Reagan wanted to protect the strong from government.

The meaning of privatization

The term "privatization" is generally defined as any process aimed at shifting government functions and responsibilities, in whole or in part, to the profit-driven private sector. Privatization of government responsibilities is touted by conservatives as the remedy for government inefficiency and corruption. Yet the record shows that both public and private sectors, given the opportunity, have shown equally high propensity to become corrupt and unethical. In recent years, corporate fraud and illegal machination have been making headlines, with names such as Enron, WorldCom, Tyco, Marsh & McLennan and Parmalat becoming glaring symbols of corporate malfeasance. New York state Attorney General Eliot Spitzer describes the 1990-era Wall Street business model of narrow institution interests in conflict with the best interest of its trusting clients, in which stock analysts worked hand in glove with investment banking operations of brokerage houses to defraud the investing public, as not only "fundamentally corrupt but in fact fraudulent". Yet few in the mainstream draw attention to the fact that such corruption and fraud are structurally traceable to the gradual easing and eventually repeal in 1999 of the Glass-Steagall Act of 1933 that, to prevent a repeat of the 1929 crash and to protect the investing public from fraudulent sales pitches, prohibited commercial banks (lenders to companies) from owning full-service brokerage firms (marketers of same company shares) and from operating investment-banking activities (creators of same company shares) because of inherent conflict of interest against their retail customers.

Spitzer's investigation on corrupt Wall Street practices led to a historic US$1.4 billion "global settlement" between regulators and 10 major Wall Street firms. The giant insurance brokerage Marsh & McLennan reached a $850 million settlement of civil fraud with the New York attorney general and the state insurance department as restitution for clients who were cheated when the company rigged bids for insurance contracts and steered business to insurers who paid Marsh special contingent fees. Enron not only committed fraud against its investors, but it also manipulated the electricity market to defraud the consumer public in the California market by manipulating electricity rates that resulted in statewide supply and fiscal crises (see Capitalism's bad apples: It's the barrel that's rotten, August 1, 2002).

"Privatization" is an expansive term covering virtually any action that involves exposing the operations of government to market pressures, ranging from contracting out janitorial services at government facilities to selling off the Naval Petroleum Reserve. The broader definition of "privatization" also includes a wide range of public-private partnerships, such as voucher systems to purchase public services from private companies. The military-industrial complex is a form of creeping privatization. The creation of public corporations, quasi-government organizations and government-sponsored enterprises falls under the general category of privatization through corporatization. In such organizations, it is often difficult to tell the difference between government service and private enterprise, since the motivation shifts from a commitment to public service to the corporate objective of earning a profit. Even non-profit corporations aim to make profits, albeit their profits are not distributed to private shareholders. "Not-for-profit" is not to be confused with unprofitability, particularly to the people running non-profit entities whose pay and benefits are tied to profitability. Activities that are governed by profit incentives inevitably place public service as a necessary evil. It is aptly described by the Chinese proverb qui di yang zu (kneeling to the ground to raise pigs), meaning to kneel not out of respect for pigs, but for the profit from such demeaning activities. Privatization is in essence the selling of failed government.

Government frequently allows or permits or even depends on the private sector to finance, build and operate public infrastructure such as roads, rail systems, container ports and airports, recovering costs and profitable returns on investment through user charges. Techniques commonly used for privately built and operated infrastructure include build-operate-transfer (BOT) arrangements in which a private entity designs, finances, builds and operates the facility over the life of the contract. At the end of the contract period, usually when private investment has been amply rewarded and totally amortized, ownership reverts to government. Often at the time of reversion, new investment will be needed to upgrade the facilities, leaving government with an asset of negative worth. Another variation is the build-transfer-operate (BTO) model, under which title transfers to the government at the time construction is completed at a value that includes the private entity's profit and is then operated by the private entity for further profit. Finally, with build-own-operate (BOO) arrangements, the private sector retains permanent ownership and operates the facility for profit as of right.

Under pressure

Governments at all levels in the US and around the world own enterprises that are under neo-liberal ideological pressure to commercialize, in such fields as electricity, water and waste management and disposal, parking facilities, insurance, tourist hotels and convention centers, postal service, hospitals, shipping companies, airlines, ports, airports, marinas, etc. Interest by public officials in privatizing such enterprises is growing as a way of relieving government performance accountability.

At the federal level in the US, one major divestiture was the sale of Conrail in 1987 for $1.65 billion via a public stock offering. The private rail sector, unable to compete with a heavily subsidized highway system, had lobbied for nationalization of the decrepit rail system earlier. Ironically, 19th-century rail barons had insisted on being private while demanding heavy government subsidy. When profitability evaporated for the rail industry as a result of the automobile age, it was time to demand nationalization to bail out private investment. When profitability returned as a result of auto-traffic congestion, it was time to privatize again. Privatization and deregulation have totally wrecked the air-transportation sector.

In 1995-96, the US Congress approved the sale of the Alaska Power Marketing Administration, the helium and naval petroleum reserves, the US Enrichment Corp (USEC), as well as auctions of the electromagnetic spectrum. Legislation was also introduced to sell Amtrak, the other four Power Marketing Administrations (PMAs), the air-traffic-control system, the US Postal Service, and the Tennessee Valley Authority (TVA).

The federal government produces 8% of the electricity consumed in the US and sells it through the TVA and the five PMAs of the Department of Energy. Two federal agencies, the Bureau of Reclamation and the Army Corps of Engineers, construct and operate the facilities that produce most of the power that the PMAs sell. About 60% of the government-owned generating capacity and all of the Reclamation and Corps capacity is hydroelectric. Private utilities and consumer-owned cooperatives dominate the United States' electric-power industry, supplying more than 80% of the nation's power needs.

Neo-liberal policymakers argue that the government should not be in the business of producing and marketing electric power because the private sector could handle those commercializable functions more efficiently, notwithstanding that this myth has been definitively disproved by the Enron smoke-and-mirrors accounting fraud and its unscrupulous manipulation of the California electricity market. Selling federal power assets would cut the size of government, which is the ideological fixation of neo-liberals. The claim that if the price was right privatization would ease the task of managing government fiscal deficits is pure bunk.

Selling government power assets is opposed by recipients of government-produced power, who get it at below-market rates and do not like the idea of losing the subsidy. Moreover, most government-owned facilities produce power as a by-product of other services: flood control, diverting and storing water for farms and cities, providing recreational parks and lakes, and protecting the environment. Some policymakers believe that government ownership is needed to make sure that those other functions do not suffer. There is little logic, other things such as good planning and management being equal, to the supposition that the private sector can deliver electricity to the public at a lower cost, given that private financing is generally more costly than government financing and private profit must be reflected in user rates. Private companies always aim to push rates up and rate wars among competitors cause financial distress in any industry, as has been evident in telecommunication and air travel.

Power plays

The Alaska Power Administration Asset Sales and Termination Act of 1995 authorized the sale of the Alaska Power Administration, the smallest PMA. Assets to be sold include two hydropower projects with their generating equipment, transmission lines, and administrative and maintenance facilities in small river basins that do not involve irrigation, navigation, or significant environmental considerations. Sales of other federal power facilities have been discussed, but these serve other purposes beyond generating electricity, such as providing water for irrigation which might be dealt with on a private, commercial basis, but flood control and some of the recreational and environmental functions are more difficult to deal with commercially.

During the Cold War, the government built up a huge variety of reserve stocks of various commodities. One of the oldest of those is the Naval Petroleum Reserve, at two sites in California and Wyoming. Those stocks of oil no longer have strategic value, and the oil is, in fact, sold into the commercial market today. Congress approved the sale of the California reserve in 1996. Another strategic reserve is the Federal Helium Reserve, which accounts for 90% of the United State' helium sales. That reserve has a market value of between $1 billion and $1.5 billion. Its borrowings from the Treasury, plus accumulated interest, total $1.4 billion, making net proceeds from the sale a wash. But the sale would provide a ready way of paying off the reserve's debt. In addition to oil and helium, the Defense Department acquired immense stockpiles of other strategic commodities during the Cold War. Privatization proponents warn that such stocks should be sold off gradually over a period of years so as not to depress sharply the market price of each commodity, making life difficult for commodity producers and speculators. Apparently, the aim of privatization is to keep prices high for the producers, not prices low for consumers. Such sales would remove the government's ability to help stabilize commodity prices to maximize consumer benefit.

The oil embargoes of the 1960s and 1970s led the US to create a huge civilian reserve stock of petroleum. Privatization proponents argue that while the reserve could prove valuable in a future situation of unexpected supply shortages, it is the existence of the Strategic Petroleum Reserve (SPR), rather than its ownership, that is critical. Private investors could buy out the operation of the reserve, and the release of stocks from the reserve in response to market price increases would be less subject to constraints than would releases under the current political management. If the objective is speculative private profit, why would a privately owned SPR have any incentive to keep oil prices from rising instead of maximizing speculative profit? The Congressional Budget Office estimated the market value of the SPR at $13 billion in a recent paper on its possible privatization. Fiduciary constraints within the rules of corporate governance would compel the directors of a privatized SPR to protect the interest of its shareholders by taking measures to raise the value of assets beyond its current market value.

The USEC saga

The notion that the private sector can run everything more efficiently and effectively than government was creeping into even the national-security arena. Joseph Stiglitz, former chairman of the Council of Economic Advisers in the administration of US president Bill Clinton, explains the trend only half-jokingly: "Why not privatize the making of atomic bombs - or at least the processing of the uranium that goes into atomic bombs?"

USEC Inc, a global energy company, is the world's leading supplier of enriched uranium fuel for commercial nuclear power plants. Revenues in 2003 totaled $1.4 billion. USEC operates the only uranium-enrichment facility in the US: a gaseous diffusion plant in Paducah, Kentucky. Uranium enrichment is a key step in the production of nuclear fuel, used by nuclear power plants around the world to generate electricity.

USEC is also the US government's executive agent for the Megatons to Megawatts Program, a 20-year, $8 billion, commercially funded nuclear-non-proliferation initiative of the US and Russian governments. The historic 1993 US-Russia non-proliferation agreement converts highly enriched uranium (HEU) taken from dismantled Russian nuclear warheads into low-enriched uranium (LEU) fuel. As US executive agent for this program, USEC purchases this fuel from Russian sources for its customers' nuclear power plants. This unique program aims to recycle 500 tonnes of weapons-grade uranium taken from dismantled redundant Russian nuclear warheads (the equivalent of 20,000 warheads) into uranium fuel used by USEC customers to generate electricity. The program, by providing funding to keep former Soviet nuclear specialists gainfully employed in recycling bomb material for peaceful uses, is expected to reduce greatly the prospect of Russian nuclear-arms technology falling into the hands of parties hostile to the US or terrorists of all colors.

Uranium enrichment for commercial nuclear reactors began in the 1960s, when the US government shifted some of its enrichment capacity from military to civilian use. In the early 1990s, USEC was created as a government corporation to restructure the government's uranium-enrichment operation and prepare it for sale to the private sector. USEC was privatized on July 28, 1998, and thereby global nuclear arms-control implementation was put on a commercial basis, held hostage to private profits.

The US government was encumbered by federal procurement rules that made the government-owned uranium-processing corporation vulnerable to foreign competition. By the 1980s, the US world market share had declined precipitously from the near 100% of its heyday to less than 50%. This downturn was of particular concern to two powerful Republican legislators. Senator Wendell Ford of Kentucky feared that it might lead to pay cuts or even layoffs at the large uranium-processing plant the government operates in his home state; New Mexico Senator Pete Domenici worried that as more and more uranium production moved overseas, the large number of uranium mines in his state would suffer. Ford and Domenici concluded that the solution was to make the government's uranium business more competitive by handing it over to private owners with simplified procurement rules. And as high-ranking members of the Senate Energy and Natural Resources Committee, they were in a position to put their views into action.

In the 1992 Energy Policy Act, passed less than two months after the United States and Russia had reached their preliminary agreement on the weapons-into-peaceful fuel deal, the US Congress directed the Department of Energy to transfer its uranium production activities to a newly created governmental corporation, dubbed the United States Enrichment Corp, or USEC, which would be charged with preparing itself for full privatization. The president would have the power to hire and fire USEC directors. However, in every other respect, company management would be autonomous from the government. As a further step toward privatization, USEC was also freed from many of the obligations that had been hampering the government's program. Corporatization shifted the mandate from serving national security needs to regaining market share in uranium enrichment. By September 1994, USEC was able to boast of achieving an all-time enrichment production record at both of its processing plants.

Even if a privatized USEC became financially more efficient, savings may not have filtered down to US nuclear power consumers. With an almost total monopoly on nuclear-fuel production in the US, USEC would have little incentive to lower its prices. So even on narrow economic merits, USEC was hardly a paragon nominee for privatization.

But even worse, USEC privatization could have dealt a devastating blow to the vital weapons-into-peaceful-fuel agreement with Russia. The whole idea behind the nuclear-dismantlement deal was to make it "budget neutral" by reselling the processed uranium purchased from the Russians to commercial nuclear-power companies. And since USEC inherited the government's long-term contracts with nearly all US and more than one-third of the world's power plants, it would be difficult for the Russian deal to be implemented unless USEC were charged with carrying it out. Thus even before it was officially created, USEC was envisaged by the administration of president George H W Bush as the deal's exclusive executor. But whereas the government's chief objective was to get as much bomb-grade uranium as possible out of Russia without losing money, as a private corporation, USEC's interest, in fact its fiduciary obligation to its shareholders, was to maximize its profits. The billion-dollar question, then, was whether USEC would be able to do so while still fulfilling the national-security goals of the weapons-into-peaceful fuel deal. Or, to put it more starkly, would US national security interests be held hostage by USEC profit motives?

One month after Clinton took office, the US and Russian governments officially signed off on the weapons-into-peaceful-fuel non-proliferation deal. Over the course of the next five years the US would purchase the diluted uranium from 10 tonnes' worth of bomb-grade Russian material a year. For the next 15 years after that, the United States would buy at least 30 tonnes a year. However, it was left to the USEC management team to work out the details with the Russians, including the price to be paid for Russian uranium. By January 1994, USEC completed those negotiations, and the company's chief executive officer, William Timbers, traveled to Moscow for an official contract-signing ceremony with Russia's minister of atomic energy, Viktor Mikhailov.

The new agreement was hailed as a historic achievement and promisingly titled the "Megatons to Megawatts contract". But in reality, the Russians, new to the workings of a market economy, had proved woefully inadequate in business negotiations. One American familiar with the negotiations said: "We snookered them."

As Harvard professor and nuclear-security specialist Richard Falkenrath notes in a comprehensive study, the Megatons to Megawatts contract contained three potentially problematic provisions. First, while USEC was given the option of buying Russian uranium, the contract did not actually obligate it to do so. Second, the contract established an initial price but stipulated that it was to be renegotiated each October. The Russians had wrongly assumed that the price would rise over time, while USEC took advantage of the annual price flexibility to push it down. Finally, whereas USEC would pay the Russians upon delivery for diluting the bomb-grade uranium themselves, it would not immediately compensate them for one of the key ingredients the Russians would have to use in the dilution process, namely the $4 billion worth of natural uranium needed to blend down the bomb-grade uranium into the lesser-enriched kind used for nuclear fuel. USEC would pay for the natural uranium that had been added in only after the company was able to sell or use an equivalent amount from its own reserves.

The Megatons to Megawatt provisions would have made perfect sense if the contract had strictly been a pact between the US and Russia as two sovereign states, since both had a common interest in preventing non-proliferation. Given Washington's strong interest in ensuring the success of the weapons-into-peaceful-fuel deal, it would have been counterproductive to take advantage of the contract's flexibility to try to fleece the Russians. In fact the price flexibility was intended to give the Russians continually reinforced financial incentives to stay with the deal for the long term. National security is an achievement worthy of spending money on, not to compromise in order to make small change in profit. Conversely, the priority of USEC was to make itself financially as attractive as possible to potential private buyers; and the leeway afforded USEC in the contract was a financial advantage it was obligated to exploit as a matter of fiduciary duty to potential private investors. USEC was saddled with a privatization mission that competed with US national-security objectives.

The conflict of interest surfaced at the very first annual price renegotiating session in October 1994. USEC claimed that, while not a money-losing proposition, buying uranium from the Russians at the initial agreed price was not nearly as profitable as producing it in the US. Thus USEC sought to slash the Russian price by nearly 20% to keep its profit constant. Non-proliferation, while a plus for US national security, was not a tangible asset to a private corporation. To make matters worse, USEC announced that, since US trade restrictions prevented it from immediately selling an equivalent portion of the natural uranium ingredient in the diluted uranium purchased from the Russians, and since the company also deemed it unprofitable to use that equivalent portion of natural uranium in its own processing activities, USEC would be unable to pay Russia for the natural-uranium ingredient until at least 2003, a decade later. The Russians were furious. "This is robbery in broad daylight!" fumed Mikhailov, who threatened to sell uranium to Iran instead.

As a profit-driven private corporation, USEC was within its commercial right to squeeze the Russians for every last financial advantage, even causing a breakdown in the non-proliferation schedule that dangerously delayed the removal of tonnes of bomb-grade material from unsafe Russian storage sites, leaving Russian specialists unpaid and exposing them to black-market beckoning from dangerous elements. By February 1995, the talks between USEC and the Russians remained at an impasse over money. From a financial point of view, the delay posed no loss to USEC, so the company felt no pressure to compromise. However, US national-security interests were clearly being compromised. By mid-1995, outside critics had begun to take notice of the near year-long delay. "The agreement's imminent breakdown, clearly Washington's fault, is a huge national-security blunder," wrote foreign-policy analyst Jessica Mathews in a Washington Post op-ed. The blunder was allowing national security to be endangered by private profit.

After months of stalemate, Senator Domenici began to question the wisdom of letting USEC implement the swords-into-plowshares deal. He devised a solution through which USEC would compensate the Russians with natural uranium from its own reserves rather than paying the Russians in cash, and US trade restrictions would be modified by the Senate so that the Russians could sell that uranium to prospective consumers for delivery at a future date. Domenici's scheme was set forth in the 1996 USEC Privatization Act, which also gave congressional approval for USEC privatization and requested that Clinton make a final determination on the matter on national security grounds. All that was needed was a nod from Clinton, and USEC could be put up for sale.

An interagency group of representatives of the National Security Council, the State Department, the Department of Energy, the National Economic Council and the Council of Economic Advisers was convened to decide whether and when Clinton should sign off on USEC privatization. Given the key role USEC played in the Megatons to Megawatts program, and its failure to prioritize national-security goals over corporate profit while still a governmental corporation, the national-security community might have been expected to be dead set against turning the public corporation over to private ownership. Instead, USEC privatization appears to have been regarded as inevitable. The only issue seriously considered by all the seasoned bureaucrats was how to limit its negative impact. "People tried to deal in the art of the possible," explained one official.

Complicating the picture, by this point anyone contemplating a halt to the privatization plan would have had to contend with an uncomfortable budgetary conundrum. The 1996 USEC Privatization Act was lumped into a larger appropriations bill called the "Down Payment Towards a Balanced Budget Act", in which the impending sale of USEC was counted as a $1.3 billion gain in revenues for the federal government. This was actually merely an accounting gimmick - at most the government would simply be getting cash up front in an amount equivalent to the value of the revenues USEC would have brought in over the years were it not privatized. In fact, for just this reason, in 1987 Congress passed a budgetary law prohibiting one-time sales of government assets from being counted as revenues. But in 1995, Congress changed its budget accounting rules such that USEC could be tallied in. As a result, a ruling against USEC privatization would have created a $1.3 billion gap in the budget, something many administration officials would be understandably loath to do. Domestic politics over bogus fiscal discipline was allowed to hamper national-security concerns and jeopardize world peace.

Yet the economists at the Council of Economic Advisers led by Stiglitz raised the possibility of vetoing USEC's privatization. The more the Stiglitz team analyzed the situation, the more convinced they became that privatizing USEC was folly. "You don't have to use a lot of imagination to see that the economic incentives are not there for USEC to import Russian uranium. So you're putting something that's in our national-security interests in direct conflict with USEC's private-property interests."

The more USEC became enmeshed in contracts with the Russians, the more impractical it would be for the US government to yank it out of the deal. Thus the threat of losing its status as executor of the Russian deal was hardly a powerful deterrent. Furthermore, once USEC was privatized, it would be difficult to monitor its internal communication and deliberation. Thus, noted Stiglitz, the company might be quietly sabotaging the uranium deal without even the government's knowledge.

As if on cue, even while still a government corporation, USEC provided Stiglitz with a perfect illustration of just this scenario. At a meeting in Moscow in January 1996, the Russians offered to sell USEC nuclear fuel from six more tonnes of bomb-grade uranium than the 12 tonnes USEC had already agreed to purchase in 1997. From a US national-security standpoint this was great news - those six tonnes were enough to obliterate about 300 Hiroshimas. Had the Russians been making their offer directly to the US government, the United States would have jumped at the opportunity. However, it was not in USEC's commercial interests to buy the extra uranium, so it declined.

The Russian offer and USEC's refusal were reported in diplomatic cables written by US Embassy officials who were present at the meeting, but key officials in the Department of Energy and the National Security Council were somehow not informed of both the Russian offer and USEC's refusal. The Russians mentioned their frustration to a group of visiting US nuclear-weapons experts who reported the exchange in their cables back to the US. Senator Domenici, upon learning of the outrageous incident, became incensed at the company's selfish behavior, despite being an advocate of USEC privatization. Domenici fired off an angry letter to deputy secretary of energy Charles Curtis, subsequently "leaked" to Peter Passell of the New York Times, in which the senator expressed his conviction that "USEC is acting directly contrary to the national-security interests of the United States". USEC, said Domenici, should "be immediately replaced as executive agent" of the Megatons to Megawatts program, which by that time was easier said than done.

Some Clinton administration officials also felt they had been deliberately kept in the dark by USEC. "You find out that when you went to a meeting where you were supposed to be discussing whether to privatize USEC, and you were weighing these incentive issues, at least half the people at the meeting don't even know" that USEC had refused to buy additional uranium, explained Stiglitz. At this point, Curtis urged USEC to buy the extra six tonnes. USEC quickly agreed and, not long after, negotiated a five-year contract with the Russians that locked in a price and increased the yearly amount of uranium that USEC would buy.

Despite USEC's bowing to national-security pressures, the danger of privatizing it was still considerable. What would happen once the five-year contract was up? And how well would the interagency group be able to monitor USEC once it was in private hands and protected by privacy laws? But the revelations about USEC behavior did not cause the privatization advocates in and outside of the Clinton administration to reconsider their position. The administration, as part of its ideological Third Way neo-liberalism, was clearly satisfied that enough safeguards had been put in place to justify continuing USEC's role in the Russian uranium deal, and to allow privatization to go forward. Assistant to the president for economic affairs Dan Tarullo and national security adviser Sandy Berger signed a joint memo recommending USEC privatization. Soon afterward, the president gave his okay and signed the privatization bill in April 1996.

As of December 31, 2004, the US-Russian Megatons to Megawatts program of recycling nuclear warheads into electricity had recycled 231.5 tonnes of bomb-grade HEU into 6,823.8 tonnes of LEU power-plant fuel, equivalent to 9,261 nuclear warheads eliminated.

KBR: Food for thought

The US military has also privatized the feeding and housing of its frontline troops, with disastrous results. NBC News reported last December 12 that the Pentagon repeatedly warned contractor Halliburton-KBR that the food it served to US troops in Iraq was dirty, as were as the kitchens it was served in. The report came as President George W Bush fended off Pentagon reports that Halliburton-KBR overcharged $61 million for gasoline it sold the US military in Iraq without competitive bids. Dick Cheney ran Halliburton for five years until becoming vice president of the United States. The company feeds 110,000 US and coalition troops daily at a cost of $28 per soldier per day. This adds up to "a company that arrogantly is overcharging when they can get away with it and not providing the quality of service that they agreed to do", Representative Henry Waxman, a California Democrat, told NBC.

The Defense Contract Audit Agency (DCAA) recommended that the Pentagon suspend a payment to Halliburton of nearly $160 million for allegedly overcharging for meals in Iraq in 2003. The company's subsidiary Kellogg, Brown & Root (KBR) supplied the meals to the military. Halliburton, which has been awarded more business in dollars than any other firm working in Iraq since the March 2003 US-led invasion and subsequent occupation, faces a number of investigations in the United States.

The New York Times reported that against the advice of its own auditors, the US Army said on February 5 that it would not hold back tens of millions of dollars each month from Halliburton until the company justifies bills for past work in Iraq. Under a logistics contract that could total more than $10 billion over time, the Halliburton subsidiary KBR provides meals, housing, fuel and other logistic services to the military in Iraq. In the rush that followed the US invasion of 2003, KBR started work without the detailed agreements on scope and reasonable costs that are normally required, and it handed in nearly $2 billion in invoices that Pentagon auditors said lacked proper backup.

Under federal rules, the government usually protects its interest in such cases by paying no more than 85% of invoices until costs are fully accounted for. But after months of public debate and disagreements within the Pentagon, the Army Field Support Command, which oversees the logistics project, said it would not automatically withhold money from payments to KBR. A spokesman for the command said it was concerned about disrupting vital services to troops in the field. Such concerns are the reason privatization is inappropriate for vital government services.

A citizen group that includes Global Exchange, CorpWatch and the Institute for Southern Studies released a report that calls Halliburton the "most unpatriotic corporation in America". It says the firm used high-level political connections and campaign contributions to win contracts that allow it to profit from the "war on terrorism" in Iraq, Afghanistan, Guantanamo Bay and elsewhere.

Texas-based Halliburton is one of the 10 largest contractors to the US military, with several lucrative guaranteed-profit deals in Iraq. It earned $3.9 billion from the armed forces in 2003, a whopping 680% more than in prewar 2002. Halliburton's business in Iraq is three times as much as that of Bechtel, its nearest competitor, based in California. The citizen group's report, "Houston: We Have a Problem", also provides numerous case studies of Halliburton's business dealings with governments that have been categorized by the US as failed states or rogue states, including Iran, Libya, Myanmar, Nigeria and Kazakhstan, and with the former Iraqi tyrant Saddam Hussein. "Many of these business deals were subsidized with corporate welfare checks from the World Bank and the US Export-Import Bank (ExIm Bank)," says the report. According to the document, since 1992, the World Bank has approved more than $2.5 billion in financing for 13 Halliburton projects. ExIm Bank is an even more significant financier of the company's global expansion: its board has approved more than $4.2 billion for 20 Halliburton projects since 1992, adds the report. The report also calls on Congress to investigate and penalize war profiteering and to adopt the War Profiteering Prevention Act of 2003, which would prohibit profiteering and fraud relating to military action, relief and reconstruction efforts in Iraq.

Privatization payoff check is in the mail

The United States Postal Service (USPS) is an independent establishment of the executive branch of the US government. It operates in a businesslike way through corporatization, which is the main cause of its problems. A national postal service, similar to a national transportation network, should aim to support the balanced development of the whole nation. Corporatization or privatization of such services under a deregulated regime favors population centers while neglecting the needs of small communities and remote locations, as a natural result of economy of scale and location. Privatization of the USPS has been proposed as a way to improve the organization's ability to survive and thrive in a rapidly changing market by allowing it to reduce unprofitable services to remote locations, thus rendering them more inaccessible and less profitable to service in a downward spiral. The unspoken penalty of uneven national economic development remains unaddressed.

Because its monopoly status lets the USPS subsidize new services with profits from monopoly functions, competitors object to any proposed new ventures by the postal service. Critics point out that the corporate culture of the USPS is still that of its predecessor government agency, as if public service and support for balanced economic development were undesirable objectives that yield no economic value. They claim that lacking shareholders who can hold management accountable for maximum commercial performance, and being constrained by its procedural rules and red tape, the USPS is simply unable to operate like a real business, ie, serving only those who can pay and discontinuing operations that are not profitable, externalizing all social costs, notwithstanding that such is not the mandate of the USPS. This attitude is not limited to the US. Sweden and the Netherlands have already privatized and deregulated their postal services; Argentina, Germany and Malaysia are planning to do so; and the United Kingdom and Canada are considering the idea.

Privatizers argue that the best way to address the concerns of postal workers and management over privatization is to give them partial ownership of the privatized firm. Earmarking for workers and managers a meaningful fraction (10% or more) of the shares in a firm being privatized has become routine around the world, especially for large, labor-intensive firms. Turning workers and managers into shareholders is sold as one of the best-known ways to change the institutional culture of a bureaucratic enterprise, giving every individual a tangible stake in its success as a profitable private enterprise. But in reality, minority employee ownership translates into self-imposed low-wage trade-offs for meager portions of corporate earnings. The pension funds of US workers have not been able to use their investing power to keep workers from losing their jobs to outsourcing to lower-wage economies.

Under neo-liberal pressure, federal, state and local governments in the US and around the world have considered or proposed the sale of state-owned airports, insurance funds, toll roads and water systems, power plants, waste collection and treatment plants, hospitals and parking facilities.

Recent sales at the state level in the US include the trade sale of the Michigan Accident Fund, which was privatized on June 14, 1994. A wholly owned subsidiary of Blue Cross/Blue Shield of Michigan (BCBSM), the Accident Fund Co is the largest workers-compensation insurance company in the state, with a market share of about 13%. It was at the time the largest privatization of a public agency, state or local, in US history. BCBSM paid Michigan $255 million to acquire the Fund.

Started in 1912, the Accident Fund of Michigan was far from being a costly social-welfare program. Rather, it was so successful that, during its last year of operation, it produced a $36 million surplus providing workers-compensation insurance to the nation's most industrialized state, the home of the US auto industry. It had become a model for other states workers-compensation systems. But the Fund's success rankled its commercial competitors in the insurance industry, who complained that the Fund enjoyed an unfair tax advantage. In response, Michigan in 1990 set in motion a plan to use a portion of the Accident Fund's surplus, equal to the amount that would have gone toward federal taxes had the fund been privately run, to support injured workers whose employers had no insurance, and to pay for workplace safety programs. However, the insurance industry continued to call for the sale of the Accident Fund. Meanwhile, between 1990 and 1994, statewide denials of workers-compensation claims jumped from 29% to 36%. According to a study of appellate decisions, workers were losing 65% of the time to private insurance companies in claim disputes, a rate considerably higher than that in a state-owned fund.

Profiting from tragedy

The Port Authority of New York and New Jersey, owner of the 6.5-hectare site on which the terrorist-destroyed World Trade Center (WTC) twin towers once stood, is a public body. Its revenue comes mostly from the tolls collected from the public on bridges and tunnels financed by agency revenue bonds, and from fees from the operation of the region's airports and ports. As of June 30, 2002, it had assets of $6.8 billion with a net of $5.6 billion after liabilities, mostly in the form of outstanding bonds. The mission of the Port Authority is to serve the public interest by providing transportation infrastructure and operating transportation facilities while staying within the bounds of sound public finance. This mission has become murky in recent decades, as is natural with long-standing public agencies. When the WTC was being planned in the 1960s, critics argued that the authority should reduce the tolls on bridges and tunnels that had long since been fully amortized, instead of investing in further institutional empire-building, such as venturing into development of commercial office space for profit.

Much of the land under the WTC, occupied mostly by discount electronics retail tenants with leases from small landlords, was condemned under eminent domain and assembled through street closings into a superblock by the city of New York and turned over to the Port Authority for the controversial project. Eminent domain is a well-established sovereign right to take private property for public use, with appropriate compensation, by virtue of the superior dominion of the sovereign power over all lands within its jurisdiction.

Yielding to neo-liberal pressure to privatize, the Port Authority in July 2001 granted developer Larry Silverstein and Westfield Holdings Ltd a 99-year lease on the WTC's 1 million square meters of office space and 42,000 square meters of retail space, at a total price of $3.2 billion. Some have suggested that this was a sweetheart deal for a politically well-connected developer, as the true worth of the 99-year lease was estimated to be more than $8 billion. Since the land was condemned, the $4.8 billion discount to Silverstein was actually money that could have been returned to the original small landlords. The lease gives the private leaseholders the legal standing to protect their private property rights should the public interest interfere with potential private profits over the 99-year period of the lease.

Some have suggested that the Port Authority should buy back the controversial lease from the Silverstein-Westfield team, which was merely two months old at the time of the September 11, 2001, attacks, so that the Port Authority can fulfill its public-interest mission as a public agency unencumbered by conflicting private profit interests. Silverstein has answered in a terse letter to the New York Times that the lease is "not for sale" - understandably, for if he should win his lawsuit against the insurance companies, he stands to collect $7.5 billion in claims, doubling the value of his lease, not to mention the 99-year stream of future profit from maximum development rights (see The towering challenge of the WTC project, February 12, 2003).

The tax-exempt World Trade Center Memorial Foundation is about to start on a $500 million fundraising effort. The events of September 11 were a national catastrophe, not a private tragedy. It is hard to understand why such a national memorial is to be financed by private donations. Similarly, the heavy dependence on private donation to fund relief efforts for the December 2004 tsunami is part of the global failed-state syndrome.

Social insecurity

Social Security privatization is currently the big controversy in the United States. Proponents hold out the promise of higher returns, but play down the commensurate higher risk. Congress may succumb to the urge to shift that risk to taxpayers rather than keep risk linked to return in the event of a market crash. Some recent projections indicate that expenditures on Social Security retirement benefits will begin to exceed payroll-tax revenues and trust-fund earnings before the year 2020, and the Old Age, Survivors and Disability Insurance (OASDI) trust fund will be depleted within roughly 10 years of that date. If substantial changes are not made in the Social Security system, then expenditures are projected to exceed revenues by more than 5% of the payroll covered by the Social Security tax.

Numerous analysts, commissions, business groups and labor organizations have studied this situation and made recommendations for changes in the system. One proposal is for changes in the investment strategy of the OASDI trust fund. At present, tax receipts beyond current outlays are placed into the trust fund, which is permitted to invest only in special-issue US Treasury "bonds", which are in essence accounting entries in the budget of the US government. Neo-liberal reformers favor some type of private investment of Social Security funds. Proposals include (1) retaining the current structure of Social Security benefits but investing part of the existing trust fund in private equities and corporate bonds, (2) establishing small individual accounts that would be centrally managed with some or all of the funds being invested in private securities, and (3) directing most of an individual's Social Security taxes into private accounts that would have a wide range of private investment opportunities. All these proposals have one thing in common: they all try to change social security into social risk. The only party to benefit will be the financial-services industry that provides the investment advice and trades.

Proponents of investing a portion of Social Security funds in corporate securities, or allowing workers to invest part of their Social Security taxes in corporate securities, point to the higher expected returns compared with current investment practices of investing in ultra-safe government bonds. If the funds were invested in the equity or liabilities of private corporations and if they earned returns similar to the average returns over the past 50 years, then Social Security recipients could enjoy greater retirement benefits at the same cost, or the same benefits with a lower tax burden, or some combination of the two. Depending on the proposal and the investment strategy, such a change in investment practice could partially alleviate the system's long-run financing problems.

Opponents of investing a portion of Social Security funds in private assets highlight the greater risk associated with private securities relative to federal debt. Those risks include greater variation in year-to-year returns, possibilities of large capital losses, and the risk of fraud and malfeasance in the management of the funds specifically and in financial markets more generally. Inevitably, with private investments some retirees may have lower pension benefits than they would have had if all funds had been invested in government bonds, whereas other retirees will have higher benefits, mostly the rich, who are more informed about market investing. Furthermore, while the long-term performance of the security markets historically rises, there have been down cycles nearly regularly every seven years or so. After March 2000, when the stock markets last peaked, investors saw $7 trillion vanished from their portfolios by July 2002. That was 70% of the gross domestic product of the United States. Bear markets have been known to last for several years and sometime take decades to return to their peaks, which would leave most retirees in dire straits over the short term. The idea of providing "social security" by exposing retirees to the volatility of the market is simply a risky gamble.

The market is reflective of the structural soundness of the economy. The US economy will be impacted adversely by demographics. The number of Social Security beneficiaries is growing faster than the number of workers paying taxes to support them. The number of elderly between now and 2050 will increase 100% while the number of workers will only increase by 22%. People are living longer and collecting more Social Security benefits. In 1940, life expectancy in the US was 61.4 years for men and 65.7 for women. By 2000, life expectancy was 74.2 for men and 79.5 for women; by 2050, life expectancy is expected be 79.2 for men and 83.4 for women. Families are having fewer children as the cost of bringing up children rises and government subsidy falls. For each generation to be the same size as the one before (the replacement rate), each women must have 2.1 children. In 1940, the US fertility rate was 2.23. Today, the rate is 2.07 and by 2050 it is expected to trend downward to 1.95. In 1940, there were 42 US workers per retiree. Today the ratio is 3:1; by 2050 it will be 2:1.

Social Security was originally structured as an inter-generational cash-flow scheme, notwithstanding that politicians have been telling the public that Social Security tax payments are taxpayers' own money. The reality is that the current taxpayers pay for the current retirees, and the future retirement benefits of current workers will in turn be paid for by future workers. Thus when demographics change, the Social Security system gets into trouble. But privatizing Social Security will not solve the problem. For increased returns on investment to neutralize the shortfall in demographics, the returns would have to be astronomical, at a level not achieved by even the most risky hedge funds. It is self-deceiving to expect the market to outperform a structural demographic imbalance between the number of workers and the number of retirees. An economy with a shrinking working population reluctant to support a rising retired population is not a sound economy and it will not produce a rising market. Furthermore, consumption by an expanding retired population is of critical importance to prevent shrinkage in aggregate demand in the economy. Thus cutting Social Security benefits will only add to the US economy's already serious problem of demand management.

Blue gold On October 16, 2002, the largest proposed municipal water privatization in the United States was rejected by the New Orleans Water and Sewerage Board. Private corporations trying to privatize water supply in the US were counting on New Orleans to serve as a model and pave the way for other privatization efforts from coast to coast. New Orleans citizens and officials rightly determined that the public's water should be kept in public hands.

In 1990, about 51 million people around the world got their water from private companies. Now, 15 years later, the number has grown to more than 300 million. Suez Lyonnaise, a French corporation and the world's largest water and wastewater business, operates in about 130 countries and serves 125 million people, 25 million of whom are in the Asia-Pacific region. Vivendi Environment of France operates in about 100 countries through 3,371 companies with a 110-million customer base. Thames Water, a British concern now owned by the German conglomerate RWE, has operated in the People's Republic of China since 1989 and has been operating in Hong Kong for decades since colonial days. As one of China's leading private water companies, it has built a customer base of 6.5 million. In 1995, the company won the contract for China's first privately funded water-treatment project in Dachang, Shanghai, and construction of the major water-treatment works for the city was completed in 1998, with Thames Water running the new plant. In July 2002, Thames Water acquired the largest single shareholding in the China Water Co, which has 4 million customers in China. Thames Water's involvement in Hong Kong includes the building of a major water-treatment plant for the new international airport. The company has also signed a memorandum of understanding with the Ministry of Water Resources in Beijing to perform integrated water-resource management activities across China.

Vivendi secured in March 2001 a 20-year contract to operate and renovate a water plant in Tianjin, China. In 2002, both Suez and Vivendi signed long-term deals, some for up to 50 years, to manage municipal water systems in China, which face huge water shortages.

In March 2002, ONDEO, Suez's water division, was given a 50-year contract worth 600 million euros ($769 million in today's dollars) to design, finance and manage water-treatment installations and services for the Shanghai Industrial Park's industrial wastes. Vivendi's Generale des Eaux and Marubeni Waterworks Co Ltd are involved in bulk water schemes in Chengdu, China, with "take or pay" contracts, which ensure profits by requiring consumption regardless of need. Saur, a French group serving 55 million people throughout the world, has been operating a drinking-water production plant in Harbin, China (225,000 cubic meters per day) since 1995 that serves 2.8 million people. The BOT project is a partnership between Saur and the Harbin Water Co for a contract term of 28 years. Since January 2001, SFSW (Shanghai Fengxian Saur Water), a Saur subsidiary, has been operating the Shanghai Fengxian drinking-water plant, which serves 700,000 inhabitants (southwest district of Shanghai), with a contract term of 28 years.

New Delhi's water supply is being privatized to Vivendi, which secured a $7.2 million drinking-water management in the state of West Bengal. Degremont, a subsidiary of Suez, is undertaking a 50-million-euro design-build-and-operate drinking-water production in Sonia Vihar, New Delhi, for 3 million people with water from Tehri Dam. Vivendi's Onyx, which specializes in waste management, was awarded the contract to manage garbage and street litter in Chennai, a major port city in southern India. The company is paid $13,700 a day to collect and dispose of garbage in three key areas in the city. Its sister organization, Vivendi Water, was given the contract to manage the water services in the city. This is in an economy where many have to live on less than $1 a day.

Thames Water has provided technical advice and assistance in India to improve Indian sewerage systems as part of the Ganga Action Plan. The company also worked on a major consultancy contract in Mumbai, a thickly populated city in India. The 18-month project will assess the operation and management of the water supply in Mumbai and develop a program to raise the technical and managerial capacity of the local company. Other projects in India include leakage control in Chennai and provision of training for senior officials on groundwater issues for India's Department of Rural Development and management of the urban river corridor.

In 2000, Vivendi Water Korea, a subsidiary of Vivendi Environment, was established, acquiring the industrial water-treatment facilities of Hyundai Petrochemicals for $125 billion, located in the Daesan Industrial Complex, South Chungchong province. In March 2001, Vivendi Water Korea established Vivendi Industrial Development by acquiring industrial water and wastewater treatment facilities at Hynix complex in Incheon. The contract with Incheon municipality provided for the construction and 20-year operation of two wastewater-treatment plants in partnership with Samsung Engineering. In the same year, Vivendi secured a contract with the province of Chilgok for the operation of two existing wastewater-treatment plants over a 23-year period and the design, financing and construction of a new plant. This project is in partnership with the Hyundai Construction. Both the Incheon and Chilgok projects were made possible after the introduction of legislation to attract foreign direct investment in the wastewater sector in South Korea. Expected revenues from the two contracts are estimated to be more than 20 million euros annually. In January 2002, ONDEO signed a BOT wastewater contract worth 200 million euros with Yangju, a city near Seoul. In April 2001, the South Korean city of Busan contracted ONDEO to manage its wastewater. There have been reports of worker protests in these projects.

Vivendi, a French transnational conglomerate that filed bankruptcy after defaulting on $7 billion of loans, is not so much a water company as it is an effective business lobby that hunts for overseas companies that it can exploit profitably. In 1998, the International Monetary Fund (IMF) conditionality forced the South Korean government to instruct Hyundai Electronics to sell its water-purification plant that provides water for semiconductors. Vivendi was the buyer. Since then, Vivendi has entered the wastewater-treatment business in a newly built city near Incheon, because it recognizes that it is difficult to drive out an existing company, and it is much easier to establish dominance in a new territory.

In 1997, the World Bank arranged the privatization of the water services in Manila. The contracts were awarded to Maynilad Water Services Inc (MWSI) and Manila Water. MWSI is owned by the wealthy Lopez family's Benpres Holdings, and partly owned by ONDEO, a subsidiary of Suez Lyonnaise des Eaux. Manila Water is owned by the Ayala family, and backed by Bechtel, a US construction conglomerate. French consultants were paid P168 million (about $3.1 million in today's dollars) by ONDEO. Of this amount, P110 million was for consultancy services. These consultants were taxed at a rate of 5% as opposed to the standard rate of 10%.

Similar privatization schemes were undertaken in Indonesia, Malaysia, Bangladesh, Vietnam, Japan, Singapore, Thailand and the United Arab Emirates. The world's private water industry is dominated by just three corporations: Vivendi and Suez, both of France, and Thames Water of England, owned by the German conglomerate RWE.

For the past decade, these three water companies have been on an explosive growth program. Just a decade earlier, they operated private water utilities in 12 countries. They now provide drinking water for profit in 56 countries, according to a new study by the International Consortium of Investigative Journalists (ICIJ). The water business has gone from a low-return utility to a source of "blue gold". Peter Spillett, a senior executive with Thames Water, has called water the petroleum of the 21st century. "There's huge growth potential," he said. "There will be world wars fought over water in the future. It's a limited, precious resource, so the growth market is always going to be there." Not if the people of the world take back the water that nature has given them.

"What's happening is that water itself is being carved up and will be parceled out according to people who have the ability to pay," said Tony Clarke, author of Blue Gold and a critic of global water privatization. The water companies claim they can deliver water more efficiently, which is far from their record of the past decade. Water is being manipulated as a scarce commodity for the maximization of corporate profit. The US became a rich nation mainly because the control and development of water resources remained under government control throughout its history. The state of New York under the liberal Republican administration of Nelson Rockefeller established a Clean Water Authority to provide its citizens clean water and revitalized rivers and lakes, financed with $1 billion Pure Waters Bond Act of 1965, later supported by the federal Clean Water Act of 1972 that imposed stiff controls on municipal and industrial waste and underwrote waste treatment along rivers and bordering lakes.

David Boys, who works for a federation of public trade unions, says the reason water is profitable is the same reason it shouldn't be a private business. Consumers are captive clients because they cannot survive without water. The ICIJ investigation shows cases where service and access can improve under private management, but that is because private management narrowly defines its responsibilities of serving its customers and often at the expense of the non-customers. Around the world, privatizations have also led to rising costs of clean water, cutoffs for poor people, and companies defaulting on contracts when they fail to make enough profit, leaving the population with a water crisis. Water preservation and purification should be financed by the economy as a whole, in which case the cost is financed by an expanding economy rather than the rich users. Until the recent rise in oil prices, bottled water was selling at a higher price than gasoline in the US. Water issues, its price and the distribution of its cost have provoked heated debates and violent protests in many countries. Though most privatizations so far have been in Asia, Africa and Latin America, top executives of the big three companies told the press that they plan to expand next in China and North America.

Privatization forces the poorest of the world to pay more for clean water. When water is privatized, the enterprises that take over the water supply do not invest in the renewal of the built infrastructure. That worsens the quality of the water supply and pushes up the cost of purification. Critics of the privatization of water observe that Suez and Vivendi form part of the World Water Council (WWC), which, together with international institutions such as the World Bank, has been advocating the privatization and commercialization of water through a worldwide private oligopoly. The international committee that studies the global problem of water is influenced by the companies that eventually would profit from the solutions the committee proposes. The "integrated water-resources management" proposed by the WWC strongly advocates "handling water as just another merchandise, whose just price can only be set by the market".

The World Bank has advocated the increase of water prices to force a reduction of demand, but it would also force the poorest people in the world to pay more for water needed for survival. The rich consumers in rich countries will always have enough money to wash their cars and fill their swimming pools. The World Water Forum defines access to water as a "universal need", not a basic human right, so as not to restrict the freedom of the private institutions involved in water management.

In a communique issued on the celebration of World Water Day, the United Nations Educational, Scientific and Cultural Organization (UNESCO) emphasized that access to water has always been a crucial element of any development strategy. UNESCO said that at any given time, about half the people living in developing countries suffer from water-related illnesses such as diarrhea, parasitic infections, river blindness and malaria. "These diseases kill about 5 million people each year, especially children under the age of five," UNESCO said. Therefore, UNESCO director general Koichiro Matsuura warned that a water crisis is looming, and urged to integrate "scientific, ethical and social sound principles [in the global management of water] to secure a sustainable water world for the generations to come". UNESCO recalled that the global demand for water has increased more than sixfold over the past century - more than doubling the rate of population growth. This disproportionate growth illustrates the water crisis, UNESCO said: "Without sound management of water resources and related ecosystems, two-thirds of humanity will suffer from moderate to severe shortages by the year 2025," which might lead to new inter-state conflicts.

State control over water sources has led to international wars, but states are failing to protect their control of water from privatization without the slightest resistance. Privatization of water is also related to rampant corruption. The long history of collusion between French water-management companies and the country's leading political parties is an example.

Vivendi, a media conglomerate floated on the back of a water utility, led by its CEO and former wunderkind Jean-Marie Messier, a former Lazard Freres investment banker and public official, had bet on emerging synergies among media assets, which would be fueled by the mass acceptance of broadband. The vision was the same as animated the AOL/TimeWarner merger. Messier's biggest deal was the acquisition of Seagram and its Universal media unit in 2001. Vivendi, groaning under the weight of $20 billion in long-term debt (with more off balance sheet) failed to sell assets, particularly its water empire, fast enough to reduce debt and slid into bankruptcy. French regulators are also now investigating Vivendi's financial disclosures. Like WorldCom, Vivendi had retained in recent years the services of Arthur Anderson, the accountancy firm of ill repute implicated in the Enron scandal.

Downward mobility The heart of class structure is the job market. Generally, one's job determines to a large extent one's lifestyle, one's politics and one's social values. Against this backdrop, the Bush administration announced in 2002 that it planned to privatize up to 850,000 federal jobs, approximately 46% of the federal workforce. Supporters of the plan claim that government privatization is cost-effective. Union leaders of federal workers bitterly denounce the plan as the administration paying back its corporate paymasters and question the legitimacy of the political system that fools ordinary people into supporting policies that will lead to their own economic downward mobility.

After a 30-day public review period, the president can impose new rules of competitive privatization without congressional approval to decide the fate of nearly a million federal workers. The administration's plan to transfer some federal work to private contractors comes during a protracted weak job market. Joblessness translates into low wages, as the demand for work exceeds the supply. It is a buyer's market for employers where job seekers have little market power. Privatization of government jobs in a high-unemployment market is in essence a legalization of scabs. The outsourcing of federal jobs to the private sector pushes down wages across the US job market and reduces wage income and aggregate consumption in an economy plagued with overcapacity, not to mention having adverse effects on workers' benefits and job security.

Government privatization of public jobs is forced on helpless governments of debtor nations by the IMF and the World Bank. In the US, the federal government oppresses its workers all on its own.

The privatization threat has been used repeatedly by the Bush administration, and particularly by Secretary of Defense Donald Rumsfeld, to neutralize congressional opposition to the administration's attempt to deprive federal workers of their collective bargaining and appeal rights, and to replace the federal pay and classification system with one that gives control over pay scales of federal workers to private company management. Rumsfeld has declared repeatedly that if the Defense Department cannot get the "managerial flexibility" over collective bargaining, hiring, firing, discipline and pay that it demands, it will simply outsource or privatize civilian jobs. Thus privatization is being used as an ideological device to weaken the labor movement and its hard-won collective bargaining powers.

The rules governing the privatization of US government jobs give great emphasis to private firms' ability to undercut federal employees on their pay and benefits. Privatization of government jobs has been shown to have a disproportionately negative impact on female and minority workers. Diversity in federal government employment has been a hard-won victory for the US labor movement, and women and minorities not only make up a larger share of the federal workforce than of the workforce at large, they are also more prominently represented in the upper ranks of professional, managerial and technical positions in the public sector than in the private sector. The Bush administration's privatization quotas affecting specific numbers and types of jobs as well as specific numbers and types of competitions have not been shown to produce either cost savings for taxpayers or improvements in the quality of service delivery.

The American Federation of Federal Employees (AFGE) has filed a lawsuit challenging the legality of the Office of Management and Budget's unilateral redefinition of what constitutes an "inherently governmental" job that should not be privatized. In an action that would increase the number and type of federal jobs vulnerable to privatization, OMB has attempted to narrow the definition of "inherently governmental" so that contractors will be able to take over work ranging from tax collection to levying fines to evaluating and adjudicating applications for citizenship to handling classified communications relating to national security to overseeing and administering other government contractors.

Privatization on the federal level is creating an environment that accelerates the drive for privatization on the state and local level, threatening the reliable and cost-effective delivery of goods and services in the United States. Privatization neither saves money nor improves services. If anything, the experience is the opposite. The risky proposal advocated by the Bush administration to open air-traffic control to privatization ignores the disastrous experiences around the globe, where airline near misses have soared and governments and consumers have had to bail out failing contractors. Many states and localities have ended contracts early: Oklahoma's for highway maintenance and the Connecticut city of Bridgeport's for sewer services, as only two examples, because of contractor failure to complete the work on time and safely and ongoing cost disputes that drain additional public resources. And despite a relentless ideological drive to divert public money into private school vouchers, there has been no improvement in student achievement but public school funding has suffered.

The American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) has joined with its affiliated unions that represent federal employees to work to defeat the pernicious quotas for outsourcing and privatization, and will support any coordinated efforts by public employee unions to defeat this attack on government and the public sector.

In the 388 parks in the US national-parks system, proponents of privatization maintain that by inviting competitive bids (outsourcing) for many of the 20,000 jobs, the best service will be provided in the most cost-effective way. Opponents argue it will actually cost more to privatize services already being provided by dedicated employees, who see not a job but a way of life in the National Parks Service. Cost-benefit analyses show that National Parks Service employees can provide most functions for half the price of what a private contractor could offer. For many National Parks Service employees, working in national parks is more than just a job; it's a calling. Their sense of commitment goes beyond a 9-5 job and a narrow job description.

The Bush administration demanded and won legislation allowing it to revoke the collective bargaining rights of 170,000 government workers as part of the legislation creating the US Department of Homeland Security. The workers, transferred from other agencies, include inspectors and other workers at the Animal and Plant Health Inspection Service, officers at Customs Service and Border Protection (formerly known as Customs Service) and the Bureau of Citizenship and Immigration Services (formerly known as Immigration and Naturalization Service) and emergency workers at the Federal Emergency Management Agency. This month the Bush administration stripped 1,000 workers at the National Imagery and Mapping Agency of their union representation and in January and took away the bargaining rights of 60,000 airport screeners in the Transportation Security Administration (TSA). AFGE is seeking to reverse the order issued by TSA administrator James Loy. In January 2002, Bush issued an executive order revoking the union representation for workers in the Justice Department's US attorney's offices, the Criminal Division, the US National Central Bureau of Interpol, the National Drug Intelligence Center and the Office of Intelligence Policy and Review.

In addition, Bush is pushing for new rules at the Defense Department that would eliminate annual pay raises, step increases, appeal rights and bargaining rights and reduce force protections for all Defense Department employees. The OMB's Office of Federal Procurement Policy is rewriting Circular A-76, the procedure that governs public-private competition, to encourage agencies to put more jobs up for competition and make the process more favorable to private contractors. At present, about $125 billion of federal work is contracted out; often with very little accountability for the contractors. The Bush administration believes that as much as half of all federal work can be contracted out and is working hard to make this a reality. Privatization also risks lowering national labor standards because the contractors are not required to provide the civil-service protection and benefits to private workers.

In Washington, DC, the privatization of the DC General Hospital led immediately to slashing of services for the district's poor and uninsured. Then, because the private contractor went bankrupt, low-income residents had to travel across town to another facility for critical care. In Kentucky, a recent state audit of publicly traded, for-profit ResCare, a company that serves the state's developmentally disabled, found that after ResCare's contract began in 1997, seven of 12 investigated deaths occurred in ResCare settings, two of its employees failed to provide needed medical attention, and ResCare received $8 million in improper Medicaid payments. Profit-driven Edison Schools, which opened its first school in 1995, with 150 public schools under its management nationwide, promised to deliver higher student achievement at lower costs. But so far, Edison management contracts for 40 schools have been terminated for cause. Dallas superintendent of schools Mike Moses terminated his district's contract with Edison after studies showed that students in Edison schools were not doing as well as students at district-run schools, and cost more per pupil, to boot. New Jersey has announced plans to end privatization of the state's Department of Motor Vehicles (DMV) initiated in 1995, citing poor consumer service, fraud and lax security. One of the sniper suspects in the Washington, DC, area registered a car in New Jersey without insurance, and several September 11, 2001, hijackers/terrorists obtained fraudulent New Jersey driver licenses. Under privatization, the number of Communication Workers of America Local 1037 members working at the DMV dropped from 350 to 60, and they waged a long campaign to expose its failures. "New Jersey's DMV is a total repudiation of privatization's false promises," said CWA Local 1037 president Hetty Rosenstein.

On the federal level, one of first post-September 11 actions by the US Congress was to guarantee the safety of the skies by transferring low-paid private contract workers who inspect luggage into the federal workforce, where they earn a living wage and can be expected to perform with more effectiveness. "It's ironic," said AFGE privatization policy analyst Brendan Danaher. "Clearly, [private] contractors couldn't guarantee public safety and make a profit. But rather than applying that lesson today, the Bush administration is rushing to privatize nearly a million government jobs."

Hard lessons Under the current globalized trade regime, once the door to privatization is open it may be nearly impossible to close it again. Multilateral trade agreements currently in place, such as the North American Free Trade Agreement (NAFTA) and the General Agreement on Trade in Services (GATS), are clearly tilted toward corporate rights. Set in legal language is a set of rules to facilitate corporate takeover of globalized services. This includes basic needs such as water, education, energy, communication and transportation but also fields such as tourism, entertainment, banking and finance, insurance, management, distribution and retail. Services are the fastest-growing sector in international trade. Western economies and Western-based transnational corporations account for about 80% of world service exports. Africa, by comparison, gets about 2%, mostly in tourism and mining. GATS rules relating to "national treatment" and "market access" can make privatization and deregulation in effect irreversible. Because many public services now have private-sector involvement, resistance to privatization can be labeled as "barriers to trade". This in turn could lead to destructive pressures on the public system, opening the doors to foreign firms wanting public services for profit. Privatization then is a key part of a strategy to promote the failed-state syndrome in all nations to install a global neo-liberal regime.

In US public schools today, little is safe from commercialization and privatization. A wide variety of companies and corporations are attempting to take over virtually all of the work traditionally performed by school district employees, from teaching to providing student transportation to cooking meals to cleaning and maintaining school buildings and grounds, and more. The attempted corporate takeover of education has its roots in support services - it is in this area that private contractors have been around the longest, and where contracting out is the most widely practiced. The National Education Association is strongly opposed to privatization because of the threat that it poses to the quality of education, the accountability of public schools to the communities they serve, and to the well-being of children in school.

Unfortunately, some US school districts have been contracting out various education support services for decades. Many of the tasks they perform are often erroneously viewed as "peripheral" services that are detached from the rest of the system of education and thus easily separated from "core" educational functions. There has been no shortage of private companies actively seeking to perform education support functions, particularly in transportation, maintenance, custodial and food services. In colleges and universities, the practice of contracting out is even more widespread. Public education has seen a growth in private-sector involvement with the emergence of an "education industry" composed of private companies that take over administrative and teaching functions for entire schools or even school districts. The steady growth of corporate commercial activities within US public schools, the voucher movement, which threatens to drain resources from public schools to subsidize private schools, combined with support-services contracting, amounts to a takeover of public education by forces driven by profit incentives. One shudders to contemplate what kind of society it will be when the education system is run like a fast-food industry, peddling intellectual obesity for profit.

 

 

PART 3: The business of private security

The prime function of a sovereign state is the provision of security, national and domestic. National security is concerned with protection from external threats, while domestic security is concerned with maintaining social order. For the United States, protected by two oceans, the line separating external threats and homeland security had been clearly delineated until September 11, 2001, after which direct foreign threats on the US homeland became a reality. Current US policy on the threat of terrorism focuses on preemptive wars on foreign soil and preventive measures within its borders.

Notwithstanding the current high-profile concern with the "war on terrorism", it is useful and necessary to remember that the central political aim of terrorism is not to annihilate its usually overwhelmingly powerful target, but merely to draw the world's attention to what terrorists consider legitimate grievances imposed and sustained by the targeted polity and hitherto ignored by the world. Terrorism by definition is a limited reactive tactic in that it aims to make its target cease and desist ongoing injurious strategic policies and actions that have become routine and normal. Even state terrorism, also known conventionally as war, does not aim to destroy an opponent country, merely to eliminate its political resolve to resist the invader's will. The political objective of the US "war on terrorism" is to deny the legitimacy of the grievances to which terrorists aim to draw attention and to present terrorist attacks as common criminal acts. "Terrorists hate us because they hate freedom," proclaimed President George W Bush. It is not a perspective that will reduce threats to US security. The fallback tactic, then, is preemptive strikes abroad and preventive measures at home.

Such an intransigent mindset grows out of the attitude that crime should be fought with increased funding for the police rather than by funding programs to eradicate poverty. Refusal to link terrorism to injustice comes from the same mentality as refusal to link crime with poverty. Increasingly, reflecting the proliferation of such a mentality, the US seeks to meet increased national and domestic security threats from terrorism by exploiting the efficiency that allegedly can be milked from privatizing state functions. It is ironically a march toward failed statehood in its acceptance of the superior effectiveness of the private sector in performing state functions. While security protection is outsourced to market participants, little effort is devoted to promoting policies that can reduce the need for security protection. Moreover, there is clear evidence that the global proliferation of marketization of basic social services, with its effect of denying needed services to the poor, adds to the proliferation of security threats from terrorism.

Social order and social security

Social order is the main component of domestic security. Social security is the foundation of social order. Henry J Aaron of the Brookings Institution calls the US Social Security system "the great monument of 20th-century liberalism". Privatization of social security is not a solution; it is an oxymoron. It merely turns social security into private security. Neo-liberal economics theory promotes as scientific truth an ideology that is irrationally hostile to government responsibility for social programs. Based on that ideology, neo-liberal economists then construct a mechanical system of rationalization to dismantle government and its social programs in the name of efficiency through privatization. Privatization of social security is a road to government abdication, the cause of failed statehood.

In 1935, the US Congress passed the Social Security Act as part of the New Deal, in response to inevitable market failures under finance capitalism. Social Security benefit payments not only helped recipients who were too sick or too old to work, but such payments also contributed to the stabilization of business cycles that regularly wreaked havoc on the market economy. Social security was a government program that helped keep markets operational by providing a baseline level of demand with a social safety net. Starting in 1937, government receipts into the Social Security trust funds have repeatedly contributed to the reduction of the federal deficit in an era when deficit financing was indispensable to demand management, with substantial socio-economic benefits to the whole system.

The Social Security program, by its very name, is not an investment program. It is a protection program. It is not even an insurance program, because all participants receive benefits on retirement. Rates of return on investment in a market economy are direct reflections of risk levels. The concept of risk is inseparable from the prospect of worst-case eventuality. The whole purpose of Social Security is to eliminate market risk for those citizens least able to afford to risk their well-being in retirement.

The fact that Social Security payments have gradually fallen into mere supplemental support for the full financial needs of retirees does not argue for encouraging workers to taking market risks with their retirement. One-third of America's retired elderly receive 90% of their income from Social Security payments, and two-thirds receive more than 50%. This argues for increasing government contribution to Social Security costs, to be paid for by taxing unearned gains that sprang either from private control of land and other natural resources, or from the exercise of monopoly power in all its subtle forms, including overreaching intellectual property rights.

How work is taxed

Journalist Jonathan Rowe and economist Clifford Cobb conducted a study highlighting the forgotten history of US income tax by pointing out that the payroll tax, which finances Social Security, is in essence a regressive tax on work. It fell exclusively on wages and salaries of working people on the first US$90,000 of annual income in 2004. The payroll tax constitutes more than half of the federal taxes that the average US taxpayer pays. But because of the ceiling on taxable payroll income, those making more than $90,000 in 2004 paid no additional payroll tax.

The Social Security tax rate today is double the top income-tax rate in 1913, when the income tax was first introduced. In payroll taxes alone, low-income workers today are paying twice the rate that millionaires paid in the original version of the tax that Congress first enacted. Obviously, fairness demands that the income ceiling for payroll tax should be removed and the fixed rate reduced correspondingly. According to the Social Security Administration's chief actuary, if the limit on wages taxed for Social Security, currently $90,000, were lifted altogether, the system would be kept fully solvent until 2077.

In the 1920s, corporate income tax yielded almost a third of US federal revenues. Today, corporations pay just a little over one-ninth despite widespread corporatization of almost every aspect of life. The New Economy, a buzzword describing the effect of new, astronomically high-growth industries that are on the cutting edge of technology and are expected to be the driving force of new economic growth, consists of industries such as the Internet dot-coms and biotech. "New Economy" notwithstanding, a large share of corporate income is still derived from ownership of land and other natural resources, from intellectual-property monopoly and from financial manipulation. As of 1990, these comprised more than 40% of the total assets of almost a third of Fortune 500 companies. So the decline of revenue share from corporate tax has been part of the larger reversal of the basic concept behind the original income tax. It is the key venue for the sharp increase in the number of millionaires and billionaires in the US economy while more and more workers fall below the poverty line to join the rank of the working poor. It is obscene to accuse the poor of not saving enough when they do not receive even a living wage. There is no other way to reduce poverty except to give the chronic poor money and the working poor more income.

Today, the US federal tax system is in essence a tax-on-work system. It falls hardest upon income of workers and penalizes work activities that an economy needs to encourage in order to remain healthy. Capital is merely idle assets without the opportunity to generate wealth through increasing the financial value of work provided by workers. Neo-liberal economics ideology places wealth creation, as manifested in asset appreciation, as the ultimate goal of economic activities. Yet there are internal structural contradictions in the economics of wealth creation through asset appreciation, which is achievable only by causing asset value to rise faster than value of work as expressed through income. When income from work rises faster than asset appreciation, it is perceived by neo-liberal monetarists as inflation, a wealth destroyer. Thus wealth can only be created through ownership of assets the value of which rises faster than the value of work. But in reality, when asset value rises faster than income from work, those who do not own assets will fall behind into relative poverty. Thus wealth creation through asset appreciation actually produces systemic poverty. Real aggregate wealth, or the wealth of nations as Adam Smith coined it, is created only from raising the value of work as expressed through rising income from work done by the working population. Neo-liberals betray Adam Smith, their ideology guru, by usurping government's power to ensure labor of its fair share of market power, by kicking government out of its regulatory role in maintaining a truly free market, by keeping the value of work on par with the value of assets.

There is no economic logic in reducing the monetary value of work by placing a tax on it. Taxes should be derived exclusively from surplus value, ie profits. When profit is taxed, it creates incentives for management to allow wages to rise to avoid excess profit. Taxing undervalued labor values as expressed in low income from work is similar to taking food from the hungry and the undernourished. Not only is it unjust, it is also uneconomic, since any arrangement that increases poverty is bad economics. Falling value of work, a path to systemic poverty, leads to perverse ways of creating wealth, through finance manipulation to generate financial bubbles camouflaged as economic growth. This ideology of taxing the wholesome (work) to feed the insalubrious (manipulation) is aptly expressed by the chairman of the US Federal Reserve, Alan Greenspan, when he proclaims that it is better to create wealth by thinking than working, in defense of neo-liberal globalization that ships underpaying US jobs overseas to still more underpaid workers. Such economic growth produces no additional real wealth, and in fact reduces global aggregate wealth by universally reducing the value of work, leading to the unsustainable phenomenon of consumption supported by debt, primarily because work is universally underpaid. This system of tax on work burdens unfairly those already struggling hardest to make ends meet because of a systemic undervaluing of their work. When work is taxed and thinking is not, wealth can only be created with financial bubbles because all who are able will avoid work. Yet ultimately, work is what produces the goods and services that wealth commands. Thinking not backed by adequate work, coupled with overpaying thinking and underpaying work, eventually leads to an erosion of the purchasing power of money.

Yet mainstream economic policy debate rarely acknowledges this fundamental perversity. For all the partisan polemics and chest-thumping about radical tax reform, there is little debate on why the federal tax burden should mainly fall on workers. Conservatives have a point in arguing for letting taxpayers keep more of what they earn, but they adamantly oppose taxation on unearned gains arising from the mere ownership of capital, land and other natural resources and intellectual-property monopolies, the high value of which are all derivatives of dysfunctionally low wages. The US capital-gain tax is a revenue sieve with a hole large enough for truckloads of gold to pass through undetected since much wealth nowadays is created by manipulating debt, involving no capital at all.

Accounting for an ethical society

It is useful to realize that the problem with the US Social Security system is not an economic issue. It is a political/ethical issue with a financial dimension. The economics of Social Security remains structurally sound. The problem is one of irrational and dishonest financial accounting. It is an ethical verity that a civilized society should assume responsibility for providing institutional guarantee for its elderly citizens' financial needs after retirement, particularly if retirement is made mandatory by the socio-economic system. In a sense, Social Security is inseparable from US national security, because social stability is a key component of national security. If Social Security is viewed as part and partial of national security, then privatization becomes as ridiculous a notion as privatizing the Department of Defense - which, incidentally, is also occurring with deliberate speed.

On November 11, 1999, the 80th anniversary of the World War I armistice, Milton Friedman, the leading guru of the Chicago School monetarists, published an op-ed piece in The New York Times titled "Social Security chimeras" in which he pointed out, correctly, that the Social Security trust funds and projected shortfalls and all the sturm und drang noise surrounding them are, in fact, mere accounting issues. He pointed out that, in real economic terms, it doesn't matter whether Americans save or not, whether there's a shortfall or not, points that most economists understand and agree. It is merely an accounting problem.

As Fed chairman Greenspan recently and repeatedly told Congress, funding Social Security benefits with cash is not a problem. The problem is maintaining the purchasing power of the cash. But the purchasing power of money is a systemic monetary issue, and not an accounting issue of any particular social program. Money enjoys more purchasing power when more goods and service are produced by work and work is created by strong demand for goods and services. What Greenspan did not say was that such strong demand comes only from high wages and full employment.

Friedman went on to argue that gradual, partial privatization of Social Security is unnecessary, since gradualist solutions are premised on attempts to "preserve" what amount to fictional balances anyway. But then, following his subjective ideology rather than his objective analytical mind, Friedman proposed what is in essence an ideological solution, one that is antisocial, as are most of his ideological positions in essence, crossing over from his respected role as a competent economist to the dubious role of a bungling political philosopher. Why not, he concluded, go all the way? Full, complete privatization right now. Let every citizen swim or sink in the market, where those not thoroughly initiated in its esoteric ways have as much a chance of survival as babes in a forest of dangerous beasts. What about today's Social Security recipients? Give them a check representing the present value of their promised benefits and wash our hands of them.

But Friedman did not explain why, if the shortfalls are mere accounting problems (which they are), why Social Security has a problem in the first place. Why not drop the whole argument and reaffirm our social commitment to a decent public pension system for all citizens, along with universal health care, the privatization of all of which is ruining many families? This question is particularly pertinent in a situation of underutilized overcapacity due to inadequate aggregate demand.

Faith and inefficiency

There is a fallacy about the magic of privatization. It is based on an unjustified faith in the market's unerring ability to generate wealth and growth and, more important, in the market's ability to channel such wealth fairly and to parties most in need for the good of the nation and society. Increasingly, markets are transfer mechanisms of wealth rather than creators of wealth, merely taking wealth from underpaid workers and handing it over to overpaid speculators. The fact is that markets have also been known to be generators of losses and economic contraction, as demonstrated by the crashes of 1901 (45% drop), 1906 (48%), 1916 (40%), 1929 (47%), 1930 (86%), 1937 (49%), 1939 (40%), 1968 (46%), 1973 (46%), 1987 (23%) 1998 (36%) and 2000 (37%). The data suggest that even exempting the big crash of 1929-30 in which the market lost nearly 90% of its peak value, the average crash can routinely lose 40% of its peak value. Such losses are often not borne by speculators, who can profit in both rising and falling markets, but mostly by the general investing public, whose portfolios are usually not hedged against systemwide declines. And even in cycles of growth, the market has a tendency to channel wealth to those who already have substantial wealth and least need more. The average investor seldom benefits fully even from a rising bull market.

In this era of instant electronic transactions and computerized program trading, eliminating market "inefficiencies", more than risk commensuration, produces most of the profits on Wall Street. Theoretically, under free-market principles, it should be unnecessary to have to choose the smart investment because all instruments are "priced" the Hayekian way to make return on investment come out equal in the long run, risk being always fairly compensated for with commensurate returns. When they do not come out equal, the situations are called market inefficiencies, which are in fact disjointed minor market failures. So, by definition, all opportunities for profit reside exclusively on correcting market inefficiencies and reducing risk by socializing it. This is what justifies the existence and proliferation of hedge funds and derivatives. They make the market more efficient and are richly compensated for it.

With increasing sophistication and complexity of new marketable financial instruments, be they securitized debt or equity or derivatives, the astute and legally qualified risk takers have a distinct advantage over the unaware and unqualified general public. This advantage constitutes a massive, systemic transfer of wealth to those who are rich enough to qualify for high-net-worth entrance requirements of hedge funds and private equity markets to a game of taking technical risks that are really not risky because of sophisticated hedging, to reap enviable and often obscene gains of up to 40% on investment. This systemic market transfer of wealth to the rich is greater than any government social-entitlement transfer to the poor. That is how millionaires are made into billionaires in the market, not by luck, not by skill, but by membership in the private club of the rich in what investment bankers call the private-equity sector. It is a blatant institutionalization of the "rich get richer" syndrome. It is the new feudalism.

Yet unlike the old feudal lords who provided order and security, or inventors or captains of industry who actually performed some positive economic function, these groups of the financially astute contribute not at all to economic production, only to financial expansion, a euphemism for finance-induced economic bubbles. The sad part is that in the US, this market is attracting the best and brightest of the nation's young minds, who are individually moral and ethical, but collectively are pushed by the system into the role of terrifying horsemen of financial apocalypse. They destroy because the name of the game is "creative destruction" and the highest reward goes to the one who destroys the most - jobs, companies, even whole industries. It is as if firemen were to get a handsome bonus several hundredfold of their salary every time they put out a fire, and if it were not illegal to start a controlled fire, all firemen would double as controlled arsonists. Controlled arson can be rationalized as economically expansionist, as it leads to constant rebuilding when it is most profitable, albeit not always where it is most needed by society. But then Margaret Thatcher insisted that there is no such thing as society.

This is the equivalent of what Wall Street traders do, in equity, debts, commodities, currencies, even weather derivatives. Whenever they can, they purposely create market inefficiencies in order to capture profit by removing the very "inefficiencies" they created. Citigroup, the world's largest financial-services company, is being investigated by German prosecutors and the Financial Services Authority for a manipulative multibillion-euro trade in euro-zone government bonds last August when it sold and then bought billions of euros' worth of debt in quick succession, making millions of euros in profit. According to news reports, a Citibank internal memo dated July 20 explained how the bank could "very profitably" destabilize the market.

The current normal daily volatility of stock prices represents ongoing examples of these manipulated inefficiencies. A whole science of technical analysis of market movements has grown up around the phenomenon. Others are less directly visible, such as the inverted interest-rate curves reflecting abnormal lower rates for longer terms that generally signals recessions ahead. It is a short-term inefficiency in the credit market imposed by Federal Reserve interest-rate policy. The Fed controls the supply of money but the market determines the growth of debt. As yields stay low, investors are pushed to seek higher yields by taking more risk, buying debts with low credit ratings. Since 2003, the Fed has been raising the Fed Funds Rate at a "measured pace", but the debt market has continued to expand, with yields on both sovereign and corporate bonds declining. Low-rated bonds now make up 20% of the outstanding supply of speculative bonds, more than twice the 1998 level when the Asian financial crisis and the Russian default abruptly ended the debt bubble. Consumer spending has been largely supported not by income, but by home-equity loans, particularly cash-out refinancing, at below-inflation interest rates.

The current Social Security proposals in the United States only highlight these pervasive manipulations that have gone on for a decade. Ironically, the Social Security privatization proposals are really sub-optimization measures, because, like the debacle of Long Term Capital Management (LTCM) that almost led to a massive collapse of the market, which required Federal Reserve intervention to prevent, when massive Social Security funds go into the equity market, it will be deemed too big to fail even if the market turns against it. So there is an anticipated implicit guarantee by the US Treasury/Federal Reserve that with Social Security funds in it, the market will not be allowed to crash, which is why Wall Street will embrace privatization proposals with open arms. It is a game where profits are privatized, and losses are socialized. In that sense, the US economy is already half-socialistic: the loss half. The question is: when is it going to socialize the profit half for balance?

The most significant factor of the booming war economy in the US during World War II was that about 10 million able and productive men, 25% of the workforce, were taken out of economically productive work and had to be supported at a high level of military consumption. In fact, another way of looking at it is that these soldiers were assigned the job of consumption. The lesson is that by a deliberate collective effort, an enormous expansion of production was effectuated through a planned war economy of full employment for a reduced pool of workers. Ironically, the new high-tech wars of today of minimizing manpower will reduce even the economic bonus of war on employment and the effectiveness of war as an anti-depression economic measure.

With a policy of full employment and rising wages, there is no reason the US economy cannot support its expanding population of retirees at a decent living level of consumption even with a shrinking pool of workers. Changing demographics, while factual, is not the cause of the problem in Social Security. Faulty ideology is. Young workers should be reminded that it is their parents' retirement consumption that will allow them to keep their own jobs with high pay.

Evolution of taxation

The first permanent US corporate income tax was enacted in 1909, four years before the introduction of the modern version of the personal income tax. The initial rate was 1% of net income. Both revenue and rate increased steadily until 1943, when it peaked at 7.1% of gross domestic product (GDP). But corporate income taxes have contributed a declining portion of federal revenue over the past six decades. This decline has been made up by the increasing share of revenue from social-insurance contributions, primarily the Social Security payroll tax. In 1943, corporate taxes comprised 39.8% of total federal revenues; social-insurance contributions contributed 12.7%. By 1996, the situation was nearly reversed; social-insurance contributions provided 35.1% of federal revenues, while corporate income taxes provided 11.8%. The Tax Reform Act of 1986 reduced corporate income tax from 46% to 34%, well below the 42% average rate of developed countries in the Organization of Economic Cooperation and Development. In the US, state corporate tax rates made up most of the difference.

The US economy grew faster than OECD economies, but the income of the lower quartile in the US declined in the past six decades. US prosperity had been paid for by making the poor poorer in the US and around the world. The US corporate tax rate stayed at 34% until the Clinton administration's first budget raised it to 35%. Meanwhile, with neo-liberal globalization promoted by Third Way politicians such as Bill Clinton and Tony Blair, tax competition among developed economies was driving worldwide corporate tax rates toward a downward spiral in a race toward the bottom, leaving the tax burden mainly on the working poor everywhere. Together with the race-to-the-bottom effect on wages from cross-border wage arbitrage, the global downward spiral of corporate tax rates causes a decline in government revenue and distress in government fiscal budgets, creating temptation for selling off public assets in a massive wave.

By 1994, the United States' 35% corporate tax rate was above the average OECD statutory rate of 29%. That meant that US-based trans-nationals would keep their profits overseas and save 6% in tax liabilities. In 1994, US corporate tax revenues amounted to just 2.5% of US GDP, a sharp drop from its 7.1% peak in 1943. The Tax Reform Act of 1986 eliminated many corporate tax preferences, including the investment tax credit enacted during the administration of president John Kennedy. However, preferential tax treatment is still provided for expenditures on research and development.

But while the creation of intellectual property is financed by tax deductions, the consuming public is not given any break on exorbitant patent royalties. This injustice is most glaring in the US drug sector, where high costs of drugs have driven many elderly patients into financial distress, drugs that their own tax dollars helped create earlier.

The payroll taxes that finance Social Security and Medicare are levied at a flat rate. For Social Security, the tax is 12.4%, half of which is remitted by workers and half by their employers. For Medicare hospital insurance, the tax is 2.9% divided equally between workers and employers. Workers earning more than the $90,000 threshold in 2005 will pay no Social Security tax on amounts over that, but the ceiling does not apply to the Medicare portion of the payroll tax.

The Social Security tax is highly regressive. Those earning $10 million a year pay the same Social Security tax as workers earning up to $90,000, and the rich receive a greater share of their income from investment earnings that are not subject to the payroll tax. And the person with a $10 million retirement nest egg receives the same benefit payment as the person with no nest egg.

Arguments for and against progressive taxation generally focus on income taxes, which can be easily manipulated to shift burdens among households with different levels and types of income. Advocates of progressive schedules argue that families should be taxed according to their ability to pay. The ability-to-pay principle states that each dollar paid in tax is a greater sacrifice for a poor family than a wealthy one, so the wealthy should pay a higher percentage to equalize the sacrifice. Moreover, a progressive income tax is needed to counteract the effects of the other flat federal taxes that weigh more heavily on the poor. The poor pay most of their taxes in payroll taxes, thus income-tax reform has little real meaning to the poor.

Many economists also argue for progressive scheduling as a way to counteract the increasingly structural inequality distribution of income in the US economy. The share of income received by the top quintile increased from 47% to 51% of all income in the US over the 1977-90 period, while the share going to everyone below declined. One-fifth of the working population commanded more than half of the income in the economy. Take-home wages have been declining as a share of total personal income, to a historical low of only 55%, because the cost of benefits, particularly health care, and payroll taxes have taken larger shares of total income of workers. Higher-income families also increased their real incomes substantially over this period, while families in the bottom 40% of the income distribution saw their incomes decline in real terms. In other words, those with the lowest incomes not only received an increasingly small share of the total income relative to the wealthy over this period, but the purchasing power of their incomes declined as well.

According to the "ability-to-pay argument", the dramatic increase in income inequality in the US in recent years indicates a need for more progressive tax scheduling, because the rich have become more able to pay relative to the poor. According to this argument, if "the problem is flat wages, then the solution is not flat taxes". Compliance rates are highest for wage and salary income, because these taxes are withheld by employers and forwarded directly to the Internal Revenue Service (IRS). On the other hand, compliance rates for self-employment, partnership, and sub-chapter S corporation income, which are not subject to withholding or reporting requirements, are estimated to be below 50% due to difficulty and complexity of audit. Because companies can deduct interest payments, the US tax code is strongly skewed toward encouraging firms to raise funds through the issuance of debt rather than equity. The tax-paying general public is in effect subsidizing corporate debt.

Another issue related to corporate taxation is the wide variation in tax liability from industry to industry. The effective tax rates in the oil, gas, and mineral-extraction industries, for example, are much lower than the rate for corporate investments generally. The commercial real-estate boom of the mid-1980s and subsequent bust was largely the result of preferential tax treatment. One of the main causes of the 1987 crash as explained by tax economists was a threat by the House Ways and Means Committee to eliminate the tax deduction for interest expenses incurred in leverage buyouts. These tax variations can be inefficient from a societal perspective, even though they were intended to address specific needs, because the resources used to build unneeded office space, drill dry holes in the ground, and merge companies to lay off workers could have been used more productively. The Tax Reform Act of 1986 eliminated some of the provisions that led to these types of distortions, but many still remain.

For the three-year period from 1996-98, Alcoa, the chief executive officer of which, Paul O'Neill, was secretary of the Treasury briefly under President George W Bush, paid an effective tax rate of only 15.9% on $1.7 billion in profits - less than half the statutory rate of 35%. A US worker making up to $58,100 is taxed at 15%, after which the rates rises progressively to 35% for income over $319,100.

The outsourcing question

Despite widespread perception of massive job loss to low-wage economies, there are no official figures on the total number of US jobs that have gone overseas. Domestic plant closures to be relocated overseas are no longer reported in the media as they are no longer news. Last May, the Labor Department made its first-ever report on the portion of "mass layoffs" attributable to "overseas relocation" of factories, which showed that only 2.5% of major layoffs in the first three months of 2004 were a result of outsourcing abroad. That survey only covered companies that laid off 50 or more workers at one time for 30 days or longer, and so admittedly may not be representative of all companies and all job loss.

Veteran Democratic economist Charles Schultze, senior fellow emeritus at the Brookings Institution, former budget director under president Lyndon Johnson in the 1960s, and former chairman of president Jimmy Carter's Council of Economic Advisers in the late 1970s, noticing that imports relative to the GDP had leveled off since 2000, concluded that "there is nothing in the data to suggest that large increases in ... offshoring could have played a major role in explaining America's job performance in recent years", and that offshoring has had a relatively modest impact on unemployment when compared with all the other economic factors that create and destroy jobs in the normal cycles in the US economy. But Schultze failed to point out that US GDP growth is caused in no small way by a persistent capital account surplus that is financing the massive US trade deficit. In other words, the US economy is creating new jobs to replace those lost to overseas outsourcing by borrowing from the low-wage workers overseas.

There is clear evidence that the US is trading low-paying jobs that it ships overseas for new higher-paying jobs at home. This explains the widening income disparity in the US economy and in the world economy. Offshore outsourcing has contributed to the stagnant wages and declining benefits in the US labor market.

Ben Bernanke, chairman of the economics department at Princeton University and also a governor of the Federal Reserve, estimated that over the past decade the US economy lost an overall total of about 15 million jobs each year for all kinds of reasons, while creating an average of about 17 million new jobs each year. Of that 15 million annual gross job loss, the portion due to outsourcing is less than 1%. Bernanke cited a 2003 study by the Wall Street firm of Goldman, Sachs & Co that estimated outsourcing abroad had averaged between 100,000 and 167,000 jobs per year since 2000. And he said offshoring would remain a minor factor even if the figure grew larger. Of course the study did not mention that by 2000, most of the manufacturing jobs that could be relocated overseas had been relocated, with the US having lost in essence the entire manufacturing sector.

When companies move some jobs abroad, the savings from low wages stimulate job creation at home. Matthew Slaughter, a Dartmouth economist, looked at foreign and domestic job growth in multinational corporations from 1991 to 2001 and found foreign affiliates of US companies added 2.9 million workers to their payrolls overseas, but at the same time those companies added 5.5 million US employees at home to their payrolls. And a study supervised by Lawrence Klein, a Nobel laureate and professor emeritus at the University of Pennsylvania's Wharton School of Business, and released by the private economic consulting firm Global Insight last March, looked at outsourcing in the information-technology (IT) sector and found that outsourcing generated a net gain of 90,000 jobs during 2003, in both IT and non-IT sectors.

Notwithstanding such findings, the question of why US unemployment stays so high remains unanswered. There are few job seekers in the United States who will challenge the general feeling that the job market has become increasingly gloomy, with wages low and benefits meager if offered at all. Still, the Klein study found that the cost savings of IT outsourcing lowered inflation throughout the US economy, increased consumer spending, and "contributed significantly" to the overall growth of US GDP. It claimed that by 2008, "real GDP is expected to be $124 billion higher than it would be in an environment in which offshore IT... outsourcing does not occur". Klein seemed uninterested in which segment of the population would get the projected additional GDP growth - surely not the workers whose jobs had been outsourced.

Democratic presidential candidate John Kerry pointed out correctly during his unsuccessful 2004 campaign that the US tax code creates an incentive for US companies to move jobs overseas. He tried unconvincingly to pin the fault on Bush. But tax experts know that the incentive has been there for decades, embedded even in the first version of the corporate income tax. The incentive exists because the US has been taxing corporations at rates higher than most other countries. This was possible before trade and finance globalization, when the huge US market could only be tapped by operations within US borders. Companies that wanted access to the huge US domestic market had no choice but to pay high US corporate taxes. The fault of tax-induced job loss lies with globalization, which the Clinton administration did much to promote. It allows trans-national companies to locate in low-tax regimes around the globe.

The Institute for International Economics reported that the effective rate for US corporations was more than 30% in 2002, while Britain's corporate rate was 18.2%, Mexico's 15.1%, China's 11.3%, and Indonesia's a minuscule 0.2%. In tax havens such as Hong Kong, the concept of residence has no applicability to Hong Kong tax law. Only Hong Kong source income is subject to Hong Kong tax. For this reason, Hong Kong is a suitable base from which to administer an offshore company without tax consequence provided that the company does not do business with other Hong Kong residents. This is one of the reasons the use of offshore companies by Hong Kong residents has proliferated to such a great extent. Offshore companies can conveniently have Hong Kong-based directors, a Hong Kong bank account and a Hong Kong office address without being brought into the Hong Kong tax net.

Most other countries of the world operate a residency-based tax system, and care therefore needs to be taken to ensure that the offshore company does not establish a permanent place of business within those countries or is managed and controlled from those countries. For example, an offshore company that had UK-based directors or that established a place of business within the United Kingdom might become liable to UK tax on its worldwide income. A Hong Kong company does not have to state its registered office address or place of incorporation on its letterhead. This would give the non-Hong Kong offshore company the added respectability of a Hong Kong persona combined with the added flexibility and ease of administration of an offshore company. There is a capital duty of 0.6% and an annual fee of HK$75 (just under US$10). There are no double tax treaties and no restrictions on dealings in currencies. Bearer shares are not permitted, registration takes three weeks, but shelf corporations are readily available.

The United States taxes US-based company earnings in other countries only when profits are brought back to the US. That means profits that remain overseas, perhaps invested in new factories in low-tax regimes, never get taxed at the higher US rates. And that's been true through both Democratic and Republican administrations. To fix the tax problem, Kerry came up with a proposal to tax businesses on their foreign income right away. Corporations would still get a credit for any taxes paid to other countries, as they do now, but would no longer be able to defer the US taxes indefinitely. At the same time, Kerry would have cut the corporate tax rate by 1.75 percentage points, to a top corporate rate of 33.25%. He also would have offered a one-year "tax holiday" to businesses that repatriated earnings that had been parked overseas for years, avoiding all US taxes. And he proposed a tax credit to companies when their US hiring exceeded previous levels. But Kerry did not win the election.

The Bush administration proposes giving US-based multinationals a larger tax credit on their overseas income. Democrats argue that this would only increase the incentive to move jobs overseas; the Bush administration argues that it would help US firms compete globally with foreign firms that avoid US taxes altogether. Yet companies argue that the main reasons they locate plants in other countries are lower wages and proximity to foreign markets, not taxes.

High US corporate tax rates discourage US companies from repatriating foreign-earned profits and reinvesting them into the US economy. A study produced by economists at JPMorgan Securities Inc estimates that the promise of a temporary window of a 5.25% corporate tax rate on overseas earnings could prompt US companies to bring home as much as $300 billion in foreign-earned profits, now sitting offshore. Thus a more equitable tax regime domestically, ie making corporations pay their fair share of taxes, harms the US economy as a whole. In other words, globalization forces the US economy to be a less equitable system. To put it another way, domestic income disparity is explained as a necessary condition for national survival in a competitive international arena.

If allowed by the absence of government regulations, trade tends to shift resources to industries where worker productivity relative to wages is greatest and return on investment highest. The same goes for technology. In the past, the limited and temporary dislocation caused by import competition had been outweighed by lasting long-term benefits that competition creates because superior imports forced complacent domestic industries to shape up, as evident by the US auto industry in the 1980s. Also, a substantial majority of US non-farm workers, about 85%, are employed in service industries, construction, and government, sectors where import competition was minimal and restriction on immigration and tradition of unionization foiled effective wage wars among competing workers. To such workers, imports were unambiguous blessings that spurred domestic innovation, expanded consumer choice, and lowered consumer prices.

Even in the more tradable sector of manufacturing, import penetration was low in most industries where domestic assembly was necessary. By 1994, however, 2.2 million US workers worked in manufacturing industries with an import penetration of 30% or more, most in the assembly of imported parts. Even so, workers in trade-sensitive manufacturing industries accounted for only 12% of total manufacturing workers and less than 2% of total non-farm workers. Technological change and other non-trade factors account for most of the workers displaced from their jobs each year. In the three-year period from 1995 through 1997, three-quarters of the 8 million US workers displaced from their jobs were in sectors that by their nature are relatively insulated from import competition. Only 23% were in manufacturing, and 2% in mining and agriculture.

But while the figures seem insignificant in national terms, job loss was significantly concentrated in terms of location to affect economic stability drastically in several regions, such as the rust belt in the Midwest and miracle growth areas such as Silicon Valley. Surging imports created demands in freight transportation, but hourly wages fell 0.8% nationwide. Retail jobs increased but weekly wages in the retail sector ($376), already 30% less than the national average, fell more than 11% in 2004, while corporate profit rose by 20%.

But outsourcing is a new and fast-growing phenomenon and is rapidly changing the dynamics of growth. With instant and low-cost communication, non-import-related service jobs are being lost at alarming rates in the name of a quest for productivity relative to wages. US customers of domestic sales now place their orders with US companies through employees halfway across the world for goods produced in low-wage economies and often shipped directly from foreign soil. In other words, jobs were going to offshore workers only because their wages were lower, not because they were better workers. That is rational only if the economic objective is to increase productivity relative to wage levels. What if the economic objective is to increase wages? The market will never by itself allow wages to increase unless government policy forces it to do so. And each government cannot do so within its own borders under a globalized regime of racing to the bottom with regard to wage competition. Thus a global contagion of failed statehood is in full swing in which governments are forced to abdicate their responsibility to protect the wage level and job security of their citizens, lest jobs would move to another country. Sovereign governments have become comprador governments.

A two-year study by the United Nations' labor organization produced a report that identified globalization as creating a growing divide between rich and poor countries, as well as a growing divide within every country. The report found that the current trading regime, including the World Trade Organization, is failing to speed the growth of global gross national product (GGNP), which is lagging behind the economic performance of previous decades. Titled "A Fair Globalization", the study was commissioned by the International Labor Organization and prepared by 20 officials and experts, including Joseph E Stiglitz, the newly reformed US economist who won the 2001 Nobel Prize in economics (see Globalizing poverty, IMF style, November 16, 2002). The report found that 188 million willing and able workers are unemployed worldwide, or 6.2% of the labor force; that the gap between rich and poor nations has widened, with countries representing 14% of the world's population accounting for half the world's trade and foreign investment; and that women have been harmed more than men by globalization in the developing world. The report also said that women's traditional livelihoods as subsistence farmers or small producers have been undermined by foreign subsidized agriculture or foreign imports but, as women, they face cultural barriers when looking for alternative occupations. These are the economic manifestation of failed statehood.

The gap between rich and poor has grown wider in rich countries as well, such as Britain, Canada and the United States. The United States posted the greatest gap between rich and poor, with the top 1% earning 17% of the gross income, "a level last seen in the 1920s". The report says that globalization has also affected the rate of taxes collected by countries. In the world's 30 wealthiest nations, the average level of corporate tax fell from 37.6% in 1996 to 30.8% in 2003. These rich nations may be rich but they are nevertheless infested with failed-state syndrome with their widening wealth disparity. The report argues that globalization is at a turning point and international institutions need to address social inequities as well as other consequences of open borders, which render sovereign states powerless to protect their citizens from economic and financial exploitation, both foreign and domestic.

During the seven years from 1995 through 2002, US manufacturing employment fell by 11%. Globally, manufacturing jobs fell by 11%. China lost 15% of its manufacturing jobs, and Brazil lost 20%. Globally, manufacturing output rose by 30% during the same period. Technological progress was the primary cause of the decrease in manufacturing jobs. Yet wages have not risen to reflect the rise in productivity. Most of the saving in wages for the same amount of production went to financing the cost of capital goods and higher return on capital. US workers are targeting the wrong enemy when they complain about Third World workers taking their jobs. The real enemies are their own pension funds, whose quest for high returns has kept global wages low and shipped US jobs overseas, and their government's failed statehood.

That same principle applies when outsourcing serves as the engine for not-so-creative destruction. Daniel W Drezner, assistant professor of political science at the University of Chicago, defending outsourcing in "The outsourcing bogeyman" (Foreign Affairs, May/June 2004), reports that for every dollar spent on outsourcing to India, the US economy reaps between $1.12 and $1.14 in financial benefits. US firms save money on wages and become more profitable, benefiting shareholders and increasing returns on investment. In the process, some US workers are reallocated to more competitive, mostly better-paying jobs, albeit seldom the same workers who were unfortunate enough to have lost their jobs. They are left as collateral damage of creative destruction concentrated in pockets of poverty in the land of milk and honey.

On February 9, 2004, US presidential chief economic adviser N Gregory Mankiw, who resigned just last month to return to his faculty post at Harvard, released the annual Economic Report of the President, praising offshoring of US service jobs as a "good thing". He told reporters that "outsourcing is just a new way of doing international trade". Government may try to protect you from incoming missiles, but don't expect government to protect your job.

Globalization and instability

In the era of financial globalization, nations are faced with the problem of protecting their economies from financial threats. The recurring financial crises around the world in recent decades clearly demonstrated that most governments have failed in this critical state responsibility. The economic benefits associated with the unregulated transfer of financial assets, such as cash, stocks and bonds, across national borders are frequently not worth the risks, as has been amply demonstrated in many countries whose economies have been ravaged by external financial forces. Cross-border capital flows have become an increasingly significant part of the globalized economy over recent decades. The US depends on it to finance its huge and growing trade deficit. More than $2.5 trillion of capital flowed around the world in 2004, with more than $1 trillion flowing into just the US. Different types of capital flows, such as foreign direct investment, portfolio investment, and bank lending, are driven by different investor motivations and country characteristics, but one objective stands out more than any other: capital seeks highest return through lowest wages. The United States is not only losing jobs to lower-wage economies, the inflow of capital also forces stagnant US wages to fall in relation to rising asset values.

Countries that permit free capital flows must choose between the stability provided by fixed exchange rates and the flexibility afforded by an independent monetary policy to stimulate economic growth. In countries with weak financial and legal institutions, poorly regulated banking systems or high levels of corruption, capital inflows may not be channeled to their most productive uses. One approach to limiting the risks from excessive capital flows when legal and financial institutions are inadequate is to restrict foreign capital inflows. Even in the US, which claims to have a sound banking system, massive capital inflow has caused overinvestment in telecommunication, Internet start-ups and real estate.

 

 

PART 4: Militarism and mercenaries

Beyond social and financial security, a sovereign state is responsible for the military security of the nation. In the US political system, foreign security and domestic security are clearly separated to prevent the emergence of militarism. Protecting the nation from foreign enemies outside of US borders is the responsibility of the US armed forces. Domestic or homeland security is the responsibility of the National Guard, the local police, the Coast Guard and the Border Patrol. The United States Border Patrol (USBP) is now the mobile uniformed law-enforcement arm of the newly formed Department of Homeland Security (DHS). USBP was officially established on May 28, 1924, by an act of Congress passed in response to increasing illegal immigration from south of the border. As mandated by this act, the small border guard in what was then the Bureau of Immigration was reorganized into the Border Patrol. The initial force of 450 officers was given the responsibility of combating illegal entries and the growing business of alien smuggling. Homeland security became a primary concern of the nation after the terrorist attacks of September 11, 2001. Domestic security now involves not just internal threats and illegal immigration but foreign terrorist threats within US borders. Border security has become a topic of increased concern with the "war on terrorism".

The United States Coast Guard, one of the country's five armed services, is also one of the most singular agencies of the federal government. Its history traces back to August 4, 1790, when the first Congress authorized the construction of 10 vessels to enforce tariff and trade laws, prevent smuggling, and protect the collection of federal revenue. Smuggling had been rampant and profitable. In times of peace the Coast Guard operates as part of the DHS, serving as the nation's front-line agency for enforcing its laws at sea, protecting its coastline and ports, rescuing distressed boats and saving lives at sea. In times of war, or on direction of the president, it serves under the Navy Department.

Foreign intelligence had been the responsibility of the Central Intelligence Agency (CIA) while intelligence on domestic threats was the responsibility of the Federal Bureau of Investigation (FBI). The separation had been maintained by law since the Central Intelligence Service (CIS) was created from the Office of Strategic Services (OSS) of World War II. The OSS was established in June 1942 with a mandate to collect and analyze strategic information required by the Joint Chiefs of Staff and to conduct special operations, such as espionage and covert action. During World War II, the OSS supplied policymakers with essential facts and intelligence estimates and often played an important role in directly aiding military campaigns. But the OSS never received complete jurisdiction over all foreign intelligence activities, with all older government and military departments retaining their own intelligence operations. Since the early 1930s, the FBI, in addition to domestic investigation, had been responsible for intelligence work in Latin America, and the military services protected their traditional areas of responsibility. Since the terrorist attacks of September 11, 2001, which forced the US to acknowledge the breakdown of the separation of foreign and domestic security, both the armed forces and the intelligence community have been impacted by the fact that the "war on terrorism" needs to be waged both inside and outside US borders simultaneously. A new position of director of national intelligence has just been created, with John D Negroponte, a veteran diplomat, overseeing a staff of more than 500.

September 11 was generally acknowledged as the worst intelligence failure in post-World War II US history, and revealed that US intelligence gathering and analysis needed to be restructured and vastly improved. Many proposals have since been put forward to improve US intelligence capabilities. The pre-September 11 framework for US intelligence had been created in a different time to deal with different geopolitical problems. The National Security Act of 1947 signed by president Harry Truman, which established the National Security Council and the Central Intelligence Agency, envisaged communist states such as the Soviet Union and the People's Republic of China as primary adversaries. It also recognized the importance of protecting citizen rights domestically. The result was organizations and authority based on clear distinction of domestic versus foreign threats, of law-enforcement versus national-security concerns, and of peacetime versus wartime conditions.

Rooted in the English and early colonial tradition of citizen-soldiers providing local protection and law enforcement, the Revolutionary War veterans and male descendants of their families organized themselves into local militia units. Reflecting the provisions of the US constitution establishing the need for "a well-regulated militia being necessary for the security of a free state", the federal government passed the Militia Act of 1792, which required all able-bodied men aged 18-45 to serve in their local militia units and provide their own weapons and equipment. It further authorized the governor of each state to appoint an adjutant general to enact the orders of the governor and to supervise unit training and organization. Reflecting the founding fathers' distrust of a large standing army, the act strictly limited the ability of the militia to serve outside of their state borders and placed effective control with the governors rather than the federal government.

With war looming, the Selective Service Act of 1917 was enacted, requiring the adjutant general of each state to set up local draft boards to institute military conscription. During peacetime the National Guard in each state answers to the political leadership in the 50 states, three territories and the District of Columbia. During national emergencies, however, the president reserves the right to mobilize the National Guard, putting them on federal duty status. While federalized, the units answer to the combatant commander of the theater in which they are operating and, ultimately, to the president. Even when not federalized, the Army National Guard has a federal obligation to maintain properly trained and equipped units, available for prompt mobilization for war, national emergency, or as otherwise needed. The Army National Guard is a partner with the Active Army and the Army Reserves in fulfilling the country's military needs. In reality, the regular army holds a low expectation of the combat readiness of national guardsmen.

The separation between the military and the civilian police is as fundamental as the separation of church and state in the US polity. The US constitution puts strict limits on the role of the military. The Third Amendment sets conditions for quartering of soldiers during time of peace or war. The Fourth Amendment protects civilians from "unreasonable search and seizure". These two plus eight other amendments to the constitution encompass the Bill of Rights, created to protect the people from government abuse and from inevitable encroachment on civil liberties. These amendments were written with the intent of protecting the population from government repression, a lesson learned after much suffering under British tyranny, including the forced quartering of British soldiers and military impunity to domestic civilian law. Other limits to the military's role in domestic activities were later written into law. The earliest and most far-reaching was the Posse Comitatus Act of the late 1800s, which placed strict restrictions on the US military at a time when they were repeatedly being used by incumbents during election campaigns.

Militarism at Little Rock

On May 17, 1954, the US Supreme Court ruled in Brown vs Topeka Board of Education that segregated schools are "inherently unequal" and must be integrated "with deliberate speed". In September 1957, as a result of that ruling, nine black students enrolled at Central High School in Little Rock, Arkansas. As popular opposition threatened violence and social disorder, governor Orval E Faubus ordered the Arkansas National Guard to surround Central High School to keep the nine students from entering the school to defuse social unrest and to maintain law and order. On September 2, 1957, the day before the nine black students were to enter Central High, national guardsmen surrounded the school. In a televised speech that night, Faubus explained that he had called the national guardsmen because he had heard that white supremacists from all over the state were descending on Little Rock. He declared Central off-limits to blacks and Horace Mann, the black high school, off-limits to whites. He also warned that if the black students attempted to enter Central High, "blood would run in the streets".

President Dwight D Eisenhower, after procrastinating for 18 days, federalized the National Guards. But fearing for the dependability of the local militia, the members of which were from the local community and were in sympathy with the segregationist governor, who had the overwhelming support of the local population, Eisenhower ordered 1,000 members of the 101st Airborne Division into Little Rock to ensure the safety of the "Little Rock Nine" and to prevent the breakdown of law and order. Thus the unpopular ruling of the Supreme Court was upheld in a hostile community with military intervention. Eisenhower, a southerner and personally sympathetic to segregation, publicly stated that he found the need for federal troops "repugnant" and he sent them not to support desegregation but to establish law and order and he did so not as president but as commander-in-chief of the armed forces, which incidentally had remained segregated until September 30, 1954. Eisenhower's entire distinguished military career took place under a segregated military and his years at West Point as a cadet were spent without ever encountering a black classmate. It was not until July 26, 1948, that president Truman signed Executive Order 9981 establishing the Presidents Committee on Equality of Treatment and Opportunity in the Armed Services. It was accompanied by Executive Order 9980, which created a Fair Employment Board to eliminate racial discrimination in federal employment. The entire Second World War to defend freedom and democracy was fought under strict segregation in the US government and armed forces.

Little Rock was the first time since the end of the Civil War and Reconstruction that federal troops had been sent to the south over racial issues. It was a classic failed-state syndrome through the exercise of militarism. The crisis was televised for the whole world to see.

Eisenhower said on a television broadcast on September 24, 1957: "At a time when we face grave situations abroad because of the hatred that communism bears towards a system of government based on human rights, it would be difficult to exaggerate the harm that is being done to the prestige and influence and indeed to the safety of our nation and the world. Our enemies are gloating over this incident and using it everywhere to misrepresent our whole nation. We are portrayed as a violator of those standards which the peoples of the world united to proclaim in the Charter of the United Nations." But he took the argument out of his own rhetoric by denying publicly that his actions were to support the moral principle of desegregation. Instead of being a committed leader of moral righteousness, he deferred to how the US might look bad to communists around the world if segregation, for which he publicly professed personal sympathy, were allowed to continue. The southern segregationists had a point: if desegregation was not the issue, then Eisenhower merely exercised the power of a police state by sending federal troops to Arkansas, since governor Orval E Faubus had sent in his National Guard also not to resist desegregation, but only to maintain public order.

Senator Richard B Russell of Georgia likened Eisenhower's paratroopers to "Hitler's storm troopers", a charge that could not be summarily dismissed by Eisenhower's own logic. What Eisenhower unleashed was not high moral principle backed by legitimate force, but militarism to preserve order in a power struggle between a governor who defended state rights under pressure of a pending democratic election and a president who was obliged to preserve the union once again by upholding the authority of the federal government. Eisenhower was revisiting Abraham Lincoln's dilemma almost a century after the Civil War, to bring the south once again to its knees over an issue of state rights by the pretext of a moral principle with which both he and Lincoln personally did not sympathize. George W Bush, a politician from Texas, that stronghold of state rights in domestic politics, was acting against his own political heritage when he violated sovereign state rights of self-determination in international relations to impose by illegitimate militarism a moral imperialism on an alien culture.

Russell served as governor of Georgia when falling state revenue was causing recurring fiscal deficits, with rampant unemployment, courtesy of the Great Depression, falling cotton prices and falling cotton production as a result of boll-weevil infestation. Between 1931 and 1933, Russell worked on reorganizing the government along New Deal lines, making it more effective and less corrupt, and began a vast program of road building and other public works to create jobs, as well as strong support for public education, albeit segregated, to revive the state's economy. Russell went to Washington as senator from Georgia in 1933. Over the next four decades, Russell became a major figure in Washington, especially as a powerful committee chairman. In the Senate, he became known as a supporter of a strong military, federal subsidy to agriculture, and state rights on the issue of segregation. He felt that Georgians could deal with race relations in their own ways with more sensitivity and effectiveness without coercive counter-productive federal intervention. Separate but equal was the defense of moderate southerners, and to them the segregated southern institution was more tolerant toward black Americans than the de facto segregation in the north. To support their view, southerners pointed to that fact that Georgia produced many distinguished black Americans in all fields under segregation, such as W E B Du Bois.

As the world prepared to celebrate a century of progress at the 1900 International Exposition in Paris, Du Bois, then a sociology professor at Atlanta University, was approached by Thomas Calloway, a black lawyer who called for black participation in the exposition, to illustrate progress made by black Americans since Emancipation. Du Bois, Calloway and Daniel A P Murray, a son of freed slaves and assistant librarian of Congress, compiled books, manuscripts, artifacts and some 500 photographs of people, homes, churches, businesses and landscapes that defied stereotypes. A Small Nation of People brings together more than 150 of these photographs in a single volume for the first time. The book is about "The Exhibit of American Negroes" shown at the 1900 World's Fair in Paris. The display included a set of charts, maps and graphs prepared by Du Bois recording the growth of population, economic power and literacy among blacks in Georgia. It also included photographs that exemplified dignity, accomplishment and progress, such as images of blacks attending universities and running businesses.

Segregation, while inherently wrong and unjust, was a complex issue that many northern desegregationists oversimplified as an abstract principle by imposing coercive corrective measures that in reality exacerbated violent resistance, at least over methods. The same oversimplification has infected the self-righteous, simplistic US crusade for universal democracy and human rights as pretext for neo-imperialism. Few in the world are against democracy or human rights, but many will resist to the end the way the US goes about imposing its preferred version through illegitimate militarism.

Russell was appointed to the Senate Appropriations Committee, which he chaired for years. Among the legislation he proposed were federal farm relief, soil conservation, rural electrification, the Agricultural Adjustment Act, the Farm Security Act, and the National School Lunch Act. He was a champion of state rights, and a crusader against government waste and corruption. Although a strong supporter of the military throughout his career he opposed the decision to send troops to Vietnam. He was a member of the Warren Commission, which investigated the assassination of president John Fitzgerald Kennedy. As president pro tem of the US Senate, he was third in line to ascend to the presidency.

In 1952, Russell ran for the Democratic nomination for president, having already won the New Hampshire primary. Over the next two months after New Hampshire, his stand in support of segregation would define this Georgia political icon. Growing up in the racially segregated south, Russell not only defended his conviction that segregation was a workable way of life for Georgia, he voted his conviction and, in the end, paid the price for his way of thinking. Russell actually had a good chance at the nomination, with strong support in the south and many Democrats privately supporting him across the United States. Realizing that segregation would not sell in the north or the west, the Democrats asked Russell to renounce his stand on segregation. Russell refused, stating that he believed ending segregation abruptly would destroy once again the fabric of southern society. The Democrats chose as their candidate Adlai Stevenson, who lost the election to Eisenhower, a war hero and a southerner who publicly declined to support desegregation.

From 1952 on, Russell, embittered by the high price he had paid for his gradualism on racial matters, turned reactionary to fight a hopeless battle, trying to preserve the institution of segregation as it was dismantled piece by piece. After the historic 1954 Supreme Court ruling on Brown vs Topeka Board of Education, Mississippi senator James Eastland stated: "The south will not abide by nor obey this legislative decision by a political court." Senator Russell, by contrast, took a more moderate approach: "Ways must be found to check the tendency of the court to disregard the constitution and the precedents of able and unbiased judges to decide cases solely on the basis of the personal predilections of some of its members as to political, economic and social questions." Texas senator and majority leader Lyndon Baines Johnson, a Russell protege, moved civil-rights legislation through the Senate in 1957. It was the first such legislation passed by Congress in 80 years. Russell and others formed a "southern bloc" of senators opposed to legislation giving equal rights to blacks. This bloc voted against the civil-rights legislation of 1964 and 1965, the programs of Johnson's Great Society, and many judicial nominations. If Russell had been president instead of Eisenhower, the Little Rock crisis might have been averted and racial integration might have proceeded more smoothly and with less violence and hatred, for the south might have moved voluntarily toward what it knew was moral and right, without rallying behind the shield of defending state rights. As the election of liberal southern governors such as Jimmy Carter and Bill Clinton to the presidency demonstrated, southern politicians can deal with racial issues more effectively and with more understanding of southern sentiments. The Little Rock crisis was a manifestation of failed statehood and a triumph for militarism.

The paratroopers stayed in Little Rock until the end of November 1957. The federalized national guardsmen stayed for one year. Eight of the nine black students stayed at Central High School for the whole academic year and one, Ernest Green, graduated to college. Another, Minnijean Brown, on December 17, dumped her lunch tray over the heads of two white boys who had been taunting her. Even though the boys later confessed, as most decent human beings would under calmer conditions, that they "didn't blame her for getting mad" after all the insults she had endured over the course of the year, Minnijean was suspended for six days. She was "reinstated" on probation on January 13, 1958, with the agreement that she would not retaliate, verbally or physically, to any harassment but would leave the matter to the largely indifferent school authorities to handle. But she was expelled in February after she called a girl who was mercilessly provoking her "white trash", while none of her white tormentors were disciplined for racist insults yelled at her constantly. The whites in the school were jubilant, making up cards that said, "One down ... eight to go!" The nine black students during their year were regularly spat on by their fellow white students. Acid was thrown on the face of one. The school's principal had his life threatened and threats were made to bomb the school.

A photograph taken by Will Counts, of a subdued but determined Elizabeth Eckford walking to enter Central High, taunted by white students, with Hazel Massery behind her shouting with hostility, circulated all over the world, illustrating the ugliness of the event. Eckford recalled her experience: "I stood looking at the school - it looked so big! Just then the [national] guards let some white students through. The crowd was quiet. I guess they were waiting to see what was going to happen. When I was able to steady my knees, I walked up to the guard who had let the white students in. He too didn't move. When I tried to squeeze past him, he raised his bayonet and then the other guards moved in and they raised their bayonets. They glared at me with a mean look and I was very frightened and didn't know what to do. I turned around and the crowd came toward me.

"They moved closer and closer. Somebody started yelling, 'Lynch her! Lynch her!'

"I tried to see a friendly face somewhere in the mob - someone who maybe would help. I looked into the face of an old woman and it seemed a kind face, but when I looked at her again, she spat on me. They came closer, shouting, 'No nigger bitch is going to get in our school. Get out of here!' I turned back to the guards but their faces told me I wouldn't get any help from them."

Hazel Massery was one of the white students who attempted to stop Elizabeth Eckford and the other eight blacks from entering Little Rock's Central High School. She was interviewed by Peter Lennon in The Guardian on December 30, 1998: "I am not sure at that age what I thought, but probably I overheard that my father was opposed to integration. I vividly remember that the National Guard was going to be there. But I don't think I was old enough to have any convictions of my own yet. I was just mirroring my adult environment. I wasn't following Elizabeth. She happened to come along, the crowd shifted and I was standing in that spot, so I just went along with the crowd. I'd soon forget about it all. I married as a teenager, right out of school. I was not quite 17. But there were Martin Luther King's civil-rights activities and gradually you began to think that even though he was a trouble-maker, all the while, deep in your soul, that he was right.

"I think motherhood brings out the protection or care in a person. I had a sense of deep remorse that I had wronged another human being because of the color of her skin. But you are also looking for relief and forgiveness, of course, more for yourself than for the other person. I called her [Elizabeth Eckford]. The first meeting was very awkward. What could I say to her? I thought of something finally and we kind of warmed up.

"The families are not at ease about this relationship. Housing is still strictly segregated in Little Rock. There is some tension regarding our safety. On one side there are blacks who feel Elizabeth has betrayed them by becoming friends with me, and certain whites feel that I have betrayed them by becoming friends with [her], and certain whites feel that I have betrayed our culture. But we have become real friends."

Many southern political leaders were ahead of the general population on the race issue, but the institution of democracy prevented them from voicing their conscience, lest they should be voted out of office. The fact that governor Orval E Faubus was facing a second-term election had much to do with his actions in the Little Rock crisis. In 1954, Faubus had run for governor as a liberal promising to increase spending on schools and roads. In the first few months of his administration, Faubus desegregated state buses and public transportation and began to investigate the possibility of introducing multi-racial schools. This liberal program solicited political attack from Jim Johnson, leader of the ultra-conservative wing of the Democratic Party in Arkansas. This attack caused Faubus to reconsider his political position for the upcoming election and led him to oppose the 1954 Brown vs Board of Education decision by the US Supreme Court that separate schools were unequal and therefore unconstitutional. Democracy is merely a process that reflects majority opinion; it does not always yield good or moral outcomes if the majority hold views that are not moral. President George W Bush's assertion that democracy brings peace is merely cheap sloganeering.

In a 1991 booklet called The Faubus Years, Orval E Faubus offered this explanation and defense of his actions in the 1957 Central High School integration crisis:

 

Following my election in 1954, I was inaugurated as governor on January 11, 1955. The US Supreme Court decision nullifying the separate but equal doctrine in the public schools was handed down on May 17, 1954. During my first term some public schools proceeded with integration. These included Fayetteville, Bentonville, Charleston, Hot Springs, Fort Smith and Hoxie. Opposition developed at Hoxie, the federal authorities intervened and the district was torn apart by the conflict. Another district, Sheridan in Grant county, made an early announcement that it would integrate the schools. The opposition was so intense that the decision was rescinded. Still, by 1957 Arkansas had more integrated public schools than 11 other states combined which had a comparable problem with the change from the separate but equal school system ...

In Little Rock a small band of white integrationists began the discussion of a plan to integrate Central High School ... The plan was never clear as to how many students, who they were and from whence they came. Those who sought to gain the information were put off with indefinite answers. The sponsors always claimed the plan would have only a limited number of black students. It was widely discussed day after day for months by radio, television and the print media, and from pulpits, schools and all manner of meetings.

Finally, it began to be widely disseminated that the integration of Central High School would set the pattern and the example for all the state and for all the south. Editorials to that effect appeared in a number of newspapers.

Those who opposed integration of the schools by court order and by compulsion, which was the great majority in Arkansas, became concerned. They thought, "If the Central High School case is to set an example that affects us, then we better be concerned about the outcome."

Thus the anti-integration meetings began. There were rallies with great attendance in various places with prominent people as speakers. Out-of-state speakers were brought in and the interest in Central High School, a local school, spread beyond the state borders.

The small band of white integrationists, who hoped to become overnight celebrities, while denying their integrationist sentiments, saw their hopes and plans jeopardized by the rising tide of opposition. They redoubled their efforts and became more determined.

Thus, Central School in Little Rock became a focal point of contest. It became a key point of conflict, not just for the city, not just for the state, but for a wider field including the nation.

I have always felt, and still firmly believe, that if the school authorities in Little Rock had handled the affair quietly, the intense conflict over integration at Central High would never have developed. If the school authorities had said, "This is our own local problem. We'll handle it the best we can based on our local conditions. This does not concern any other school. Just us." If they had said that and the media had followed that lead, there would have been no Central High School Crisis as we now know it.

There were other forces at work, other unusual factors in the Central High School situation.

The little band of white integrationists had seen themselves as instant celebrities, their names became household words. They were to receive credit and praise for a plan and an accomplishment that had been achieved by no others. In their impractical dreams and misguided views, they saw their acclaim in the publicity, for which they had already arranged, about to be swept away in the rising tide of opposition. They became more desperate in their demands for help from higher authority.

I could not then, nor could I in the years that have followed, detect any such attitude in the black leaders who were involved in the controversy. I give them full credit for sincerity in their efforts, for the faith that their cause was just, and for honest hope that their goals would be achieved. In later years some black leaders have emerged who might be regarded as extremists, but no such black leaders were apparent then.

Another factor was the oft-expressed thought that Little Rock was deliberately chosen as the place to bring about court-ordered integration in the South. There is now some concrete evidence to bolster that thought.

Osro Cobb, a native of Arkansas, a longtime resident of Little Rock and a prominent Republican leader in the state, was the US attorney for the Eastern District of Arkansas. In that position he represented the federal authorities during the so-called Central High School crisis. Since that time, Mr Cobb has written a book entitled Osro Cobb of Arkansas in which he discusses his role in the controversy. In Chapter 21, page 175 of his book, Mr Cobb writes:

"I operated from the eye of the hurricane that enveloped the city, representing the federal government as chief law-enforcement officer with the responsibility of collaborating with the Justice Department to cope with the situation.

"Thurgood Marshall, who later became a justice of the US Supreme Court, participated in some of the court hearings regarding Central High School. During a recess in one of the hearings, he volunteered the information to me that Little Rock Central High School had been picked as a target for testing integration because the Little Rock community had exhibited a remarkable tolerance in race relations."

At the time of the Little Rock crisis, Thurgood Marshall was the chief counsel for the National Association for the Advancement of Colored People. Evidently Little Rock was chosen in the highest circles of some national organizations.

Another major factor, perhaps the most important, was the attitude of the national Republican administration in Washington, which was then quarterbacked by attorney general Herbert Brownell. It is conceded by almost everyone, if not all, that Brownell was calling the plays for the national administration in the Little Rock Central High School Crisis.

On June 6, 1990, at a symposium on civil-rights issues held at the Dwight D Eisenhower Library in Abilene, Kansas, in which both Brownell and I participated, the former attorney general in a speech to the symposium made the following statement:

"Over a period of months we in the Justice Department had the growing realization that a clash of historic importance between the president, who was required by the constitution to enforce the law of the land, and political leaders in the south was inevitable. We had engaged in 'contingency planning' so we would not be caught unprepared. Thus, by the time the groups from White Citizens Councils from various parts of the south converged on Little Rock, Arkansas, we had completed our studies ..."

At another point in his speech, Brownell, in speaking of sending federal troops to Little Rock, said: "He [the president] ordered the 101st Airborne Division, which he knew had crowd-control experience, to go to Little Rock."

The Brownell statement tends to confirm the reports we had from soldiers in the 101st Division that they had been training for several days at their home base of Fort Campbell, Kentucky, in preparation for their dispatch to Little Rock.

Now it becomes clear why the Central High School Crisis occurred. Because of the widespread publicity of a "plan" to integrate the school and make it an example for all the state and the South, it became a focal point of contest. Even Brownell in his speech at Abilene, and Mr Cobb in his book, speak of gathering forces at Little Rock.

It was now apparent that Little Rock was deliberately chosen for integration and a confrontation if necessary. It is clear that more than the local integration leaders were involved in the decision.

And now it is clear that the federal authorities did not want a quiet, peaceful solution to the Central High problem. Brownell wanted "a clash of historic importance" and he wanted it in Little Rock, the capital of a state that had only eight electoral votes, which were always cast in the Democratic column.

Now it is clear why Brownell did not respond to my phone calls from Little Rock seeking information and a way to avoid violence. Now it is clear why congressman Brooks Hays, a man of infinite goodwill, and I had our efforts for an amicable settlement torpedoed by the attorney general at the Newport conference when we had made genuine progress with the president.

In this situation with the opposing forces gathering at Little Rock, with no assistance available from federal authority to prevent disorder, or restore order if violence occurred, I placed a small force of national guardsmen on duty to preserve the peace. They were to be assisted by the state police.

Although crowds gathered, everything was peaceful with the few guardsmen in control. In the course of events a federal judge, at the request of the Justice Department (Brownell), ordered me to remove the National Guard. I promptly complied with the order. The next school day there was disorder and the president sent 1,100 troops of the 10lst Airborne Division to Little Rock and placed 10,000 federalized national guardsmen on duty. Brownell had what he had planned, "a clash of historic importance".

As the opposing forces were gathering before school began, I conferred with my counsel, W J Smith. He advised me to let violence erupt and then call out the National Guard.

I could not wait for violence because the evidence I had from the state police and others with whom I conferred had convinced me that an incident similar to the one that later occurred at the University of Mississippi would occur at Central High School. I could have been blamed for any blood that was shed because of my failure to take preventive measures. It could have been said that I had blood on my hands, so to speak. I had served with a front-line infantry division in all five major campaigns on the continent of Europe in World War II and participated in the major battles of Normandy [and] Mortain and the Battle of the Bulge and I knew something about bloodshed. This I could not permit when it was in my power to see that it did not happen. I told my counsel that I had a duty to perform and I would not shirk from it, even though my actions would place me at a disadvantage in the controversy.

I am fully convinced that my handling of the situation, and my advice to the people once the school and the city were occupied by the federal troops, helped to prevent violence and disorder.

School was conducted the entire year of 1957-58 with federal soldiers on the school grounds and in the rooms and hallways of the Central building. Then the people of the Little Rock district voted to close the senior high schools rather than submit to another year of classes under the control of federal troops or US marshals. The senior high schools only remained closed for a year. All other schools operated normally ... Classes were resumed in all Little Rock schools in the school year 1959-60.

In all that two-year period, there was no property damage, no one was injured sufficiently to be hospitalized and no one was killed. Contrast that record with the racial riots that followed in more than 200 American cities, none of them in Arkansas, in which many lives were lost, thousands were injured and property damage ranged into the millions of dollars, and Little Rock and Arkansas came out remarkably well.

 

Faubus was undeniably on the wrong side of the issue. Yet his point that outside forces and federal military intervention created the crisis is not without merit. The issue was not desegregation. The issue was a federal attack on state rights through the problem of desegregation. Faubus was re-elected for another four terms as governor of Arkansas and became a heroic figure of state rights in US politics. After the 1965 Voting Act made it easier for black Americans to vote, the political climate in Arkansas changed. Faubus was defeated in the 1966 Democratic primary by the segregationist Jim Johnson, who was then defeated in the general election by liberal Republican reformer Winthrop Rockefeller. In 1992, Arkansas governor Bill Clinton defeated incumbent George H W Bush for president with the help of the black vote.

In the academic year 1958-59, Little Rock voters voted to close all public schools rather than accept desegregation, and president Dwight Eisenhower did not act to protect the civil rights of Little Rock children to receive public education. In this sense, Faubus lost the battle of Little Rock to federal militarism, but he won the war on state rights. Though there is no doubt that segregated schools are inherently unequal, the all-black Horace Mann School in Little Rock was of relatively high quality. Thus the closing of all public schools in the city hurt all students in the state, particularly blacks and low-income whites who were generally unable to afford private schools. Central High did not open up with a desegregated school population until 1960. As late as 1964, only 3% of black American schoolchildren attended desegregated schools nationwide. The battle then moved on to the issue of busing in blacks to all-white suburbs to combat de facto segregation of education by housing patterns and household income, most contentiously in the north.

On September 25, 1997, the 40th anniversary of the Little Rock crisis, president Bill Clinton, who had come to the White House from his governorship in Arkansas, welcomed the "Little Rock Nine" to Central High School through the same doors from which they had been barred, saying: "If those nine children could walk up those steps 40 years ago, all alone, if their parents could send them into the storm armed only with schoolbooks and the righteousness of their cause, then surely together we can build one America, an America that makes sure no future generation of our children will have to pay for our mistakes with the loss of their innocence." He did not give credit to the militarism imposed by Eisenhower. The issue was not whether desegregation should be implemented, but whether it should be implemented through state militarism.

The real defenders of freedom were the "Little Rock Nine", not the paratroopers nor the national guardsmen nor the politicians of a failed state. The lesson is clear: Let the US send its young men and women into the storm of injustice around the world with schoolbooks to promote real American values of freedom and democracy, instead of with tanks and precision missiles to promote neo-imperialism, paid for with the loss of their innocence. Much injustice remains to be removed inside the US before it earns the right to promote anything outside with state militarism.

Militarism at Wounded Knee On December 29, 1890, at Wounded Knee Creek, on the Pine Ridge Reservation, South Dakota, some 500 soldiers of the US 7th Cavalry opened fire on approximately 350 Lakota (Sioux) native Americans of chief Big Foot's Miniconjou band. At the end of the confrontation, some 300 Sioux men, women and children, including chief Big Foot, were dead. This event marked the end of Lakota national resistance until 1973, eight decades later. Apart from the few minor skirmishes that followed, the Wounded Knee massacre of 1890 ended the "Indian Wars".

The Ghost Dance movement was led by a Paiute named Wovoka who held a vision that the "Old Earth" would be destroyed and a new one created in which native Americans could again live as they had before the coming of the white man. He preached that the only way to survive the impending apocalypse would be to perform faithfully the Ghost Dance and the ceremonies associated with it. Wovoka's movement began as a peaceful one, which did not exclude other races from participating. Some followers, most notably Kicking Bear, a member of the original Lakota delegation sent to learn of Wovoka's teachings, radicalized the non-violent message into a call for the repulsion of the white man that resonated with many members of the Lakota tribes of South Dakota. Many of the more traditionalist Lakota, with memories of better times and white people's treachery still fresh in their minds, took up the Ghost Dance on these militant liberation terms.

In October 1890, the Ghost Dance movement reached Sitting Bull's Hunkpapa Lakota nation on the Standing Rock Reservation in northern South Dakota. The powerful Lakota chief welcomed the movement that revived the morale and spirit of his people. US government officials became deeply concerned about the popularity of the Ghost Dance movement and its increasingly militant message. Sitting Bull was identified as a major political leader of the movement. On December 12, days after Sitting Bull had asked for permission to leave the Standing Rock Reservation to visit with Ghost Dancers, General Nelson Miles issued an order for his capture.

Sitting Bull, a Sioux, had been a Hunkpapa chief since 1866. He was a warrior, spiritual leader and politician. He refused to attend the treaty at Fort Laramie in 1868 and fought surveyors over the route of the Northern Pacific Railroad in 1872. On June 25, 1876, Sitting Bull fought Colonel George Custer at the Battle of the Little Big Horn. The victory of that battle created much hatred in US official circles for Sitting Bull. In May 1877, he retreated to Canada and stayed with his tribe until 1881, when he was detained as a prisoner of war at Fort Randall from 1881-83 under harsh treatment. In 1885, Sitting Bull was forced to travel around the world as a performer with Buffalo Bill Cody and his Wild West Show as "the slayer of General Custer". He supposedly first shot with a rifle the Cheyenne chief Yellow Hair, then stabbed him in the heart and finally scalped him "in about five seconds", according to his own account. Cody characteristically had the event embroidered into a melodrama - Buffalo Bill's First Scalp for Custer - for the autumn theater season. Hearing of the warrant for Sitting Bull's arrest, Cody volunteered to facilitate the arrest, presumably to assure Sitting Bull's safety. He was rebuffed by the Bureau of Indian Affairs (BIA) agent at Standing Rock, James McLauglin. Then on December 15, a scuffle erupted outside of Sitting Bull's home between Ghost Dancers and BIA agents sent to arrest the Lakota chief. During the fight Sitting Bull was shot and killed by BIA officer Red Tomahawk. When the shooting ended, eight Lakota and six BIA officers lay dead.

Sitting Bull's death created confusion and anger among many Lakota bands. Big Foot, leader of one of the most fervent bands of Ghost Dance practitioners, feared that the US Army was ready to retaliate forcefully against the movement. To avoid capture, he and his followers wandered through the South Dakota Badlands for several days. Once his people's supplies became scarce, he began a trek toward the Pine Ridge agency. His ultimate goal was to reach the protection of chief Red Cloud, who had a reputation for negotiating effectively with the US government. On December 28, during what would have been the last leg of their journey to Pine Ridge, Big Foot and his followers were intercepted by cavalry troops under Major Samuel Whitside and escorted to the Wounded Knee army camp. There the Lakota camped under a flag of truce, surrounded by 7th Cavalry troops under the command of Colonel James W Forsyth.

On the morning of December 29, Forsyth ordered the disarmament of Big Foot's band. The disarmament proceeded slowly as the Miniconjou were reluctant to give up their only means of protection. The slow progress of disarmament frustrated the cavalry officers, increasing the already heightened tension. The conflict came to a head when a young deaf Sioux named Black Coyote resisted the seizure of his brand-new rifle. In the ensuing struggle the rifle discharged into the air. Almost immediately after this first shot, the cavalrymen returned fire with an opening volley that struck and killed Big Foot. Hearing the firings in the Sioux camp, soldiers posted on the ridges overlooking the camp unleashed a barrage of light artillery. US soldiers fired indiscriminately on unarmed men, women and children fleeing the battle scene. The Lakota suffered hundreds of casualties; 25 soldiers perished, mostly from their own crossfire. One Lakota survivor was an infant who was found at her dead mother's side. Named Lost Bird, she was adopted by Brigadier-General Leonard W Colby, commander of the Nebraska National Guard.

More than 80 years later, on February 27, 1973, a group called the American Indian Movement (AIM) seized control of Wounded Knee. Led by AIM leader Russell Means, the liberation/occupation began as a protest against the reservation's officially sanctioned puppet government under the leadership of Dickie Wilson. Two people were killed during the 71-day occupation, 12 were wounded, including two US marshals, and nearly 1,200 were arrested. Inspired by the civil-rights movement of the 1960s, AIM put the issue of native American rights into the national spotlight. The siege at Wounded Knee began as Native Americans stood up against century-long US atrocities, and ended in an armed battle with US armed forces.

Corruption within the BIA and Tribal Council having been at an all-time high, tension on the Pine Ridge Indian Reservation was white-hot and quickly got out of control. In despair and faced with no options, elders of the Lakota Nation turned to AIM for assistance, bringing to a head more than a hundred years of racial tension and government corruption. On that winter day in February 1973, a large group of armed Native Americans reclaimed Wounded Knee in the name of the Lakota Nation. For the first time in almost a century, Oglala Sioux regained self-rule, free from foreign intervention, in their ancient tradition. This would become the basis for a TV movie, Lakota Woman, the true story of Mary Moore Crowdog and her experiences at the Wounded Knee liberation.

During the months preceding the Wounded Knee liberation, civil war brewed among the Oglala people. A division emerged between traditionalists and collaborationists. The traditionalists wanted more independence from the United States, as well as forcing the US to honor the 1868 Sioux treaty, which is still valid, according to which the Black Hills of South Dakota belong to the Sioux nation, and return of the sacred hills to the Sioux people. Another severe problem on the Pine Ridge Reservation was the strip-mining of the land. The chemicals used by the mining operations were poisoning the land and the water. People were getting sick, and children were being born with birth defects. The puppet tribal government had encouraged strip-mining and the sale of the Black Hills to the US government to lease to private mining companies.

For decades, the tribal government had been not much more than puppets of the BIA. The sacred Black Hills, along with many other problems, had become a wedge that would tear apart the Lakota nation. Violent confrontations between traditionalists and the US puppet agents, or GOONs (Guardians of Our Oglala Nation), became everyday occurrences. The young AIM warriors, idealistic and defiant, were like a breath of fresh air to most Native Americans, and their ideas quickly caught on. When AIM took control of Wounded Knee, more than 75 different native nations were represented, with more supporters arriving daily from all over the continent.

Soon US armed forces in the form of federal marshals and national guardsmen surrounded the large group. All roads to Wounded Knee were cut off, but still people slipped through the lines, pouring into the liberated area. The liberation forces inside Wounded Knee demanded an investigation into misuse of tribal funds and the GOON squad's violent aggression against people who dared speak out against the puppet tribal council. In addition, they wanted a Senate committee to launch an investigation into the BIA and the Department of the Interior regarding their handling of the affairs of the Oglala Sioux tribe. The liberation warriors also demanded an investigation into the 371 treaties between the native nations and the United States, all of which had been broken by the US.

The liberation warriors that occupied Wounded Knee held fast to these demands and refused to lay down arms until they were met. The US cut off electricity to Wounded Knee and kept all food and supplies from entering the liberated area. For the rest of that winter, the men and women inside Wounded Knee survived on minimal rations while they fought the armed aggression of US forces. Daily, heavy gunfire was issued back and forth between the two sides, but the native freedom fighters refused to give up.

During the Wounded Knee liberation, the warriors lived in their traditional manner, celebrating a birth and a marriage, as well as mourning the death of two of their fellow warriors inside Wounded Knee. AIM member Buddy Lamont was hit by M16 fire and bled to death inside Wounded Knee from lack of medical care, in clear violation of the Geneva Conventions. AIM member Frank Clearwater was killed by heavy-machine-gun fire inside Wounded Knee. Twelve other individuals were intercepted by the GOON squad while backpacking supplies into Wounded Knee; they disappeared and were never heard from again. Though the US government investigated by looking for a mass grave in the area, when none was found the investigation was soon abandoned.

Wounded Knee was a great victory for the Oglala Sioux as well as all other native nations. For a short period of time in 1973, the Oglala Sioux were a free people once more. After 71 days, the siege at Wounded Knee had come to an end, with the US government making nearly 1,200 arrests of participants as common criminals, not as prisoners of war. But this would only mark the beginning of what had come to be known as the "reign of terror" instigated by the FBI and the BIA. During the three years following Wounded Knee, 64 tribal members became victims of unsolved murder, 300 were harassed and beaten, and 562 illegal arrests were made, with 15 convicted of criminal offenses. None were treated as prisoners of war, let alone freedom fighters.

A persecuted people regained their freedom for a brief 71 days on the land of their ancestors at a heavy price after being victims for 80 years of systematic ethnic cleansing. British and US atrocities committed against Native Americans over a period of four centuries remain unmatched in scale and duration by anything in history, including the despicable decade-long Nazi atrocity against the European Jews.

 

 

PART 5: Militarism and the war on drugs

The 1878 Posse Comitatus law that barred US federal troops from engaging in arrests, searches and seizures within US borders did not cover the use of the National Guard to quell "civil disorders", but it virtually eliminated the military's role in normal police work. The logic is that while the National Guard is the nation's militia, composed of citizen soldiers, each state unit is under the separate command of its governor for the purpose of maintaining domestic order within each state, without infringing on the principles of local community control of police power. Laws enacted since the early 1980s have weakened Posse Comitatus restrictions, enabling military and police bodies to collaborate in law enforcement. The shift toward militarism began with seemingly innocuous loans of military equipment to civilian agencies for drug control. US ground troops then began conducting training exercises along the border for the interdiction of drug traffic. The introduction of the military into police work invariably escalates the degree of violence in the maintenance of order.

In 1989, at the urging of the administration of president George H W Bush, the military consolidated its role in law enforcement by creating Joint Task Force-6 (JTF-6), based at Fort Bliss in El Paso, Texas. The task force's initial mission was to coordinate military support for anti-drug efforts along the Mexican border.

JTF-6 matches police requests with military units; police agencies get free assistance while the military gets extra funds and real-life, off-base training. For the Border Patrol, JTF-6 provides a variety of military aid, including equipment, construction assistance, intelligence support, vehicles and aerial surveillance. The task force also coordinates training in small-unit tactics, raid planning and execution, interrogation, pyrotechnics, target selection, booby-trap techniques, rappelling and more.

The military's anti-drug missions along the Mexican border always have been difficult to distinguish from immigration control. The administration of president Bill Clinton erased the line completely for 90 days in 1996, ordering the military to participate in "enhanced enforcement" of immigration laws in Arizona and California. In 1995, the military broadened JTF-6's geographic focus to the entire continental United States. Since then, more than half of JTF-6 missions have been devoted to police forces outside the southwestern US. By 1998, JTF-6 had coordinated more than 72,000 troops on some 3,300 missions in 30 states.

An example of militarized law enforcement within US borders was the federal siege of the Branch Davidian compound in Waco, Texas, that ended with 86 deaths on April 19, 1993. Specious drug and illegal-firearm allegations against the Branch Davidians became the pretext for military units aiding the Federal Bureau of Investigation (FBI) and the Bureau of Alcohol, Tobacco and Firearms (BATF) in their raid to eliminate a religious cult. The Branch Davidians had their origins in the Seventh-Day Adventist Church, which in turn had its origin in the "Millerite" movement, a group who followed the teachings of Baptist William Miller, who in 1833 concluded that Bible prophecy told the date for the end of the world. JTF-6 arranged for military equipment and for Army Special Forces troops to assist with deadly raid preparations. The task force also arranged for armored vehicles retrofitted for gas warfare and tank-like army vehicles used in the assault. Some aspects of the military role, including the FBI's use of military incendiary devices, flammable CS gas grenades that killed 86 people, including 17 children, were concealed from the public until years later. After the disclosure, attorney general Janet Reno appointed former senator John Danforth, a Republican from Missouri, to investigate the military involvement. Danforth's report concluded that the involvement was technically legal, without addressing whether it ought to be legal.

On May 20, 1997, camouflaged on a surveillance mission for the Border Patrol, a team of four marines hiding in bushes near the village of Redford, Texas, shot and killed 18-year-old Mexican-American Esequiel Hernandez, who was herding his family's goats more than 180 meters away. Hernandez' death came only a year after the US "see no evil" policy on Nicaraguan Contra drug dealers had been exposed. The incident was the first time military troops engaged in drug control had killed a civilian on US territory. The case led to the first attempted civilian prosecution of military soldiers on a drug mission, but defense lawyers successfully argued that the troops had performed appropriately "in defense of national interests". The incident sparked no congressional hearings over the military's role in law enforcement. On the contrary, just three months after the shooting, the House of Representatives overwhelmingly voted to send 10,000 federal troops to the border, but the Senate did not take up the measure.

The military, for its part, suspended the use of armed ground troops along the border while reviewing their role in the drug war. In January 1999, the Pentagon announced that such troop deployment would require explicit authorization by the secretary or deputy secretary of defense. The change did not affect other JTF-6 anti-drug support: aerial surveillance, training, equipment loans, construction and so on. The defense secretary can reintroduce ground troops at any time, and the Pentagon is not required to report JTF-6 missions, not even to Congress, even though they occur on US soil and even though their stated purpose is to enforce domestic laws.

The policy change did not affect the National Guard, which could fill any ground-troop void. In Arizona, where illegal crossings have become endemic, property-owning vigilantes rounded up thousands of illegal immigrants and demanded that Governor Jane Hull send the Guard to aid the Border Patrol, but she refused.

If border tensions continue to increase, and anti-illegal-immigration sentiments turn ugly, fanned by the likes of CNN journalist Lou Dobbs, frequent military deployment to restore "order" can be anticipated. Sandia National Laboratories, an Energy Department nuclear-weapons facility in Albuquerque, New Mexico, that works closely with the US military, assessed border "security" for the Immigration and Naturalization Service (INS) in 1993, depicting all unauthorized crossers as "adversaries". A 1997 military intelligence mission for the Border Patrol designed a "threat assessment" for undocumented immigrants. At a higher level, the Pentagon's Center for the Study of Low Intensity Conflict helped design the Border Patrol's "Strategic Plan: 1994 and Beyond". The plan is almost entirely devoted to immigration enforcement, under cover of the drug war. It designed the blockades to close off preferred crossing points. The model was Operation Hold the Line, set up in El Paso, Texas, in 1993. Three other blockades were set up, with "Gatekeeper" being the largest. United Nations human rights secretary Mary Robinson and Amnesty International USA both condemned "Gatekeeper" for human-rights abuse, saying it "maximizes the physical risks, thereby ensuring that hundreds of migrants would die".

Under the strategic plan, the number of armed Border Patrol officers has doubled, making the agency larger than even the FBI. The military has built nine walls and dozens of fences, and provided an array of equipment, from trucks and helicopters to searchlights and heat sensors. Since 1994, the INS budget has tripled to US$4.3 billion, and the United States spends $6 billion annually on enforcement along its southern border. The show of force has been deadly. A University of Houston study estimated that 1,600 migrants died while trying to evade the border blockades from 1993-97. The American Friends Service Committee says the blockades have led to more than 1,300 deaths since 1995. Most of the victims drowned in the Rio Grande, the river that separates Mexico from Texas. Southeastern California and southern Arizona, meanwhile, have seen sharp increases in deaths as immigrants try to traverse that harsh land. The militarization also seems to encourage police mistreatment of immigrants. Complaints of misconduct by Border Patrol agents doubled between 1995 and 1998; the accusations include entrapment, illegal searches, brutality, sexual assault and excessive firearms use. Militarization has created a warlike atmosphere in which hate groups and vigilantes feel free to attack all immigrants, legal and illegal.

The "war on terrorism" has also become a license for domestic anti-immigrant hysteria. As a result, numerous legislative proposals have been made and laws passed targeting undocumented immigrants with racial and ethnic profiling. Former governor Pete Wilson of California proposed denying citizenship to US-born children of undocumented parents. California has recently passed legislation that denies driver's licenses and identity cards to undocumented immigrants. In California, a state with little public transportation, to be denied a driver's license is to be denied a livelihood. New York state is currently embroiled in the issue. Meanwhile, large sectors of the US economy survive through the open exploitation of illegal-immigrant laborers, who are left with no legal protection. The US immigration policy and operational abuse contribute significantly to the status of the US as a failed state.

For the most part, border-control operations remained a civilian law-enforcement operation until Operation Wetback in the 1950s. This military-style operation by the Border Patrol and other elements of the INS was led by an ex-general who participated in John Joseph Pershing's expeditionary force in World War I. It was the most massive roundup and deportation of undocumented Mexican immigrants in US history. This was not the last time ex-generals would be involved with the INS. President Jimmy Carter, in response to concerns about undocumented immigration and drug trafficking, appointed another ex-general to head the INS in efforts to strengthen the Border Patrol. Under the administrations of Ronald Reagan and George H W Bush, this "concern" grew to be called the "war on drugs", or what many would call the "war on immigrants". In 1981 the US Congress amended the Posse Comitatus Act , loosening the military's restriction on involvement with domestic law enforcement. In 1986 Reagan declared the narcotics trade a "national security" threat and shortly thereafter launched Operation Alliance, a multi-agency law-enforcement initiative targeting the border area.

Bordering on racism

In 1993, Canada, Mexico and the United States signed the North American Free Trade Agreement (NAFTA), which became effective in January 1994, bringing the three countries together to create the world's largest free-trade area. The purpose of NAFTA is to reduce trade barriers and promote cross-border investment in the region and thus increase economic and job development throughout North America that may affect immigration by changing the regional economy.

NAFTA itself discussed the temporary entry of the three signatory parties in Chapter 16. The provisions for temporary entry were modeled after those under the US-Canada Free Trade Agreement (USCFTA). However, the US immigration advantages extended to Canadians under USCFTA are not available to Mexican citizens under NAFTA for unspoken racial, ethnic and cultural reasons.

The greatest controversy over NAFTA's immigration provisions is the 5,500 limit on the number of Mexican professionals who can be admitted to the US in one year, while there is no number limit on Canadians. NAFTA also states that admission could be refused to a person whose entry might affect adversely the settlement of a labor dispute or the employment of a person involved in such a dispute.

NAFTA proponents expected Mexican migration, especially undocumented immigrants, to decrease as soon as the agreement was signed. Former Mexican president Carlos Salinas de Gortari explained the relationship between NAFTA and migration in this way: "Today, Mexicans have to migrate to where jobs are being created, the northern part of our country. With NAFTA, employment opportunities will move toward where people live, reducing drastically migration, within the country and outside the country" (San Diego Tribune, November 14, 1993). However, NAFTA did not reduce, let alone eliminate, illegal immigration to the US from Mexico.

NAFTA displaced about 1.4 million rural Mexican workers, largely due to changes in Mexican farm policies and freer trade in agriculture products. With jobs not being created for these displaced farmers in the areas where they live, they are forced to emigrate to where the jobs are, mainly across the border to the US. One study estimated that about 600,000 NAFTA-caused illegal migrants to the US would be added to the "normal" flow of legal and illegal Mexican worker arrivals. The driving factor behind NAFTA-increased illegal immigration to the US is free trade in corn. Between 30% and 50% of all days-worked in rural Mexico are devoted to the production of corn and beans. US farmers can produce both crops cheaper than Mexican farmers; the US corn price of $95 per ton early in 1994 was less than half of the Mexican price of $205 per ton. Liberalizing trade in corn over the 15-year NAFTA phase-in is expected to shift North America's corn production northward, since Iowa alone produces twice as much corn as Mexico at low US prices.

Some sectors of the US economy have great demands for cheap, Mexican immigrant labor, legal and illegal. Illegal labor is made even cheaper to US employers by the fact that these employees receive no benefits and necessitate no payroll-tax contributions from employers. Decades ago, the US did little to discourage the entry of illegal workers from rural Mexico. US employers were not punished by law for employing illegal low-wage Mexican workers. Legalization in 1987-88 permitted Mexican workers to become significant components of the labor force in food processing, construction, service and manufacturing throughout the US. Welfare reform and continued immigration continued to add unskilled workers to the US labor supply in the 1990s. On the other hand, the US unemployment rate dropped to its lowest level in 1997 and there were reports of labor shortages, especially in low-wage labor markets in areas with unemployment rates of less than 2%. Alan Greenspan, chairman of the Federal Reserve Board, warned Congress that a labor shortage would drive up wages and inflation rates unless lawmakers relaxed immigration restrictions. With Mexican-born workers spreading throughout the US in a period of rapid job growth and low unemployment, networks bridging the border were strengthened, increasing the availability to meet the rising demand for immigrant workers and making Mexican immigrant workers a permanent enough feature of many US industries and areas to temporarily delay the inevitable outsourcing of jobs to low-wage locations.

Another factor in NAFTA-increased illegal immigration is massive unemployment. Recurring Mexican financial crises, peso devaluation, and International Monetary Fund (IMF) "conditionalities" imposed on Mexican fiscal policies as well as neo-liberal prescriptions such as privatization of government-owned industries all resulted in mass layoffs. The economic restructuring of rural Mexico made small-scale farming unprofitable. In some areas of west-central Mexico, illegal migration to the US has become a way of life. Another factor that affected Mexican immigrants is the diverse networks of friends and relatives, employers, labor smugglers and moneylenders who can tell potential migrants about conditions in the US and provide them with the means to take advantage of illicit opportunities abroad.

Most industrialized nations realize they should prevent the depopulation of rural areas. The European Union and the United States pay farmers directly to stay on the farms - though gross domestic products (GDPs) would rise faster if they left the land. The 2002 Farm Bill pays US farmers a record $190 billion over 10 years, with big farmers getting the biggest checks. Mexico is too poor and has too many farmers to subsidize at European or US farm rates. US farmers, 2.7% of the workforce, receive an average per capita subsidy of $20,000 annually. EU farmers, 4.8% of the workforce, receive $16,000. Mexican farmers, 20% of the workforce, receive $1,000. Chinese farmers, 80% of the workforce, receive $35.

What is missing in NAFTA is precisely the element that makes the EU work as a free-trade bloc. The EU's regional policy pays money directly from wealthy industrialized nations such as Germany to less wealthy agricultural nations such as Italy, Greece, Portugal and Spain. The result is that EU farmers stay on their farms. Like the US Farm Bill, EU subsidies violate the principles of free trade and comparative advantage, but do so for a higher cause: social stability. The absence of a regional stability mechanism in NAFTA is its great weakness. Unlike the rural nations of Europe (which included France and Italy when the EU treaty was signed in 1955, and later Spain), Mexico lacked the political muscle to insist on a regional pact when NAFTA was signed. Washington, unfortunately, was not farsighted enough, or did not care enough, to see the need for one. The result is that Mexico now faces an agricultural crisis that affects the United States as well. The pressures NAFTA puts on Mexico as farm tariffs are gradually removed and as the date for still-broader reductions comes nearer can only be solved bilaterally. The administration of President George W Bush should propose negotiations leading to a transfer of funds that helps Mexico's farmers stay on their farms and reduces illegal immigration. Instead, the US opts for using illegal immigrant workers to fight inflation and for increasing the budget of the Border Patrol through militarization to prevent illegal immigration. NAFTA contributes to the advent of failed statehood for both the US and Mexico.

The war on drugs: A poor example

Because the US National Guard is both a state and federal militia, it may be exempt from the limitations of the Posse Comitatus Act when acting under the authority of a state governor. That is, the Posse Comitatus Act does not apply to state militias. A proposal by Senator Barbara Boxer of California takes advantage of this loophole by placing the Guard's new immigration role under the auspices of the state governor. The National Guard, in addition to the army and the marines, has taken a more prevalent role along the border. Using high-tech equipment, it carries out reconnaissance missions and other technical border-control activities. In addition, it provides much labor in the inspection of cargo at the border, building and repairing fences and metal walls along the border, etc. The National Guard, in addition to providing support for the Customs Service, the Drug Enforcement Administration and other federal law agencies in the interception of drugs, will now augment the Border Patrol in its campaign against undocumented immigrants. Drug and immigrant interception are new and precedent-setting roles for the National Guard, whose traditional missions have been to fight in wartime and help states during natural disasters or civil disorders.

US drug czar John Walters announced on February 22 that the US would employ in its war on drugs some of the techniques it has been using to fight international terrorism. In his annual drug-strategy document, President Bush proposed spending a total of $12.4 billion in fiscal 2006, an increase of 2.2% over fiscal 2005. The anti-narcotics budget had increased from $1 billion in 1980 to $17 billion in 1998 and has continued to climb since. The number of drug offenders imprisoned in the United States has increased 800% since 1980, helping the US achieve the highest imprisonment rate in the industrialized world: 550 per 100,000. Under the banner of the war on drugs, a kind of creeping totalitarianism tramples more human rights and civil liberties each year: tens of millions of "clean" citizens are subjected to supervised urine tests at work; hundreds of thousands are searched in their homes or, on the basis of racist "trafficker profiles", at airports or on highways; possessions are seized by the state on suspicion alone. The protection of the innocent is forfeited as part of the collateral damage of homeland security. Americans are protected at the expense of their liberty. Such tradeoffs are the standard rationalization of dictatorial governments and failed states.

Official US surveys show that illicit drug use by American youth has increased in five of the past six years. The US Drug Enforcement Administration admits that hard drugs are more available, less expensive, and more pure than ever on the streets. Hard-drug abuse and addiction among the urban poor remains widespread. Cocaine continues to be a deal-making substance in Hollywood and investment banking. Some judges have even refused to apply harsh drug laws, such as the Rockefeller drug laws in New York state, the reform of which is supported by organizations such as Human Rights Watch. Critics have called the Rockefeller drug laws and the mandatory imprisonment of minor offenders a form of institutional racism. Opinion polls now show that a majority of Americans do not believe the war on drugs can be won. More and more people are voicing their opposition and seeking alternatives to punitive prohibition. The drug-policy reform movement in the US is growing larger and more diverse. The "war on terrorism" needs to take to heart the dismal record of the "war on drugs", rather than the war on drugs placing false hopes on applying the techniques of the war on terrorism. The very concept of waging war on anything as a solution is fundamentally flawed.

An army of mercenaries

One of the systemic propositions about the capacity of the US military being tested in Iraq these days has to do with the staying power of its all-volunteer force for long conflicts. The end of the US draft in 1973 and the conversion to an all-volunteer force fundamentally changed the force structure of the US military designed to prevail on short and narrowly focused conflicts in a peacetime environment. For long, drawn-out wars, volunteers tend to lose their enthusiasm and become increasingly reluctant to enlist. The draft supplied the citizen soldiers for the two World Wars, Korea and Vietnam. Ten million of the 15 million US soldiers who served in World War II were drafted. An all-volunteer force also changed the nature of the military, in essence to a mercenary force. Mercenaries can often be effective fighting machines, as demonstrated by the French Foreign Legion. But mercenaries, fighting for pay, lack the strong commitment to national values that is necessary for winning an all-out war.

The father of the all-volunteer force was allegedly economist Milton Friedman, 1976 Nobel laureate in economics for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy. In fact, it was largely the doing of his friend and fellow economist, W Allen Wallis, president of the University of Rochester, who died in 1998. On November 11, 1968, Wallis was asked to speak to the local chapter of the American Legion, a veterans' organization, on the 50th anniversary of the Armistice that ended World War I. The title of his speech was "Abolish the Draft". The backdrop was, of course, the escalating opposition to the Vietnam War. President Lyndon Johnson had announced a military-selection lottery in hopes of reducing resentment of America's burgeoning commitment in a senseless war. Presidential candidate Richard Nixon responded, "It is not so much the way they are selected that is wrong, it is the fact of selection."

Wallis was a graduate-school classmate of economists Friedman and George Stigler at the University of Chicago in the early 1930s. Stigler later became the 1982 Nobel laureate in economics for his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation. During World War II, Wallis had, at the age of 30, organized the Statistical Research Group at Columbia University for his teacher Harold Hotelling, under contract to the War Department. Its stellar cast included Friedman, Frederick Mosteller, professor of mathematical statistics Abraham Wald, the founder of the field of statistical sequential analysis, and Jack Wolfowitz (father of now Deputy Defense Secretary Paul Wolfowitz, a chief architect of the present-day war in Iraq). The elder Wolfowitz developed with Wald the Sequential Probability Ratio Test (SPRT). Sequential analysis is a branch of statistical experimentation in which observations are taken sequentially, one at a time or in groups. After each observation, a decision is made based on all previous results whether to continue sampling or stop. At termination, an inference is made, for example, an estimate or hypothesis test, concerning the distribution of the observed random variables or some parameter(s) or functional(s) of it. Wald and Wolfowitz were the pioneers of modern sequential analysis, proving the optimality of the procedure.

After the war, Wallis returned with Friedman to Chicago. As dean of its business school, he recruited Stigler to Chicago before moving to Rochester in 1962. Friedman and Stigler (and Friedrich Hayek, 1974 Nobel laureate, Ronald Coase, 1991 Nobel laureate for his discovery and clarification of the significance of transaction cost and property rights for the institutional structure and functioning of the economy, and elsewhere, James M Buchanan, 1986 Nobel laureate in economics for his development of the contractual and constitutional bases for the theory of economic and political decision-making) then proceeded to overturn much of the view of government that had underpinned Franklin D Roosevelt's New Deal and sowed the seed for the lasting anti-government ideology that followed in its wake.

In his Armistice Day speech in 1968, Wallis put forth his objections to conscription: "First, it is immutably immoral in principle and inevitably inequitable in practice. Second, it is ineffective, inefficient and detrimental to national security." A month later, Wallis saw Arthur Burns, an economist at Columbia University who was head of Nixon's transition team and who later became chairman of the Federal Reserve Board. Burns told Wallis that if it could be shown that a volunteer force could be instituted for less than $1 billion in its first year, he would put the matter before the incoming president. Wallis quickly assembled a research team to create a blueprint, formed a bipartisan presidential commission, including liberal economist John Kenneth Galbraith, with enlisted pay quietly raised to market levels. In 1973, the volunteer army became a reality. The last draftee was discharged in September 1975 as the Vietnam War ended.

By most accounts, the volunteer force, a euphemism for a mercenary military, has been a success as a peacetime military, though recently, as the US has applied the doctrine of preemptive war, it has been showing signs of strain. One-third of those entering fail to complete their enlistments, compared with one out of 10 among draftees. The retention of highly skilled personnel requires periodic pay and benefit adjustments. Blacks compose about a third of army enlisted ranks, but less than 10% of its combat arms, so the service represents far more of an opportunity to get ahead for those shut out of the civilian economy than a chance to serve as cannon fodder, as had been feared. Some 85,000 Hispanic-Americans are on active duty, representing about 7% of all active-duty personnel. Latinos represent more than 6.2% of the army, 8.1% of the navy, 11% of the Marine Corps, and 4.4% of the air force, numbers that should continue to increase as all three branches of the armed forces step up their recruitment of minorities.

The most significant aspect of the all-volunteer army is that it had not had to face any major war of long duration until the second Iraq war in 2002. In a fundamental way, a nation that relies on a mercenary force instead of a people's army is a failed state, especially when volunteerism is motivated mostly by the search for income and job training by the poor.

From 1989-93, Paul Wolfowitz served as under secretary of defense for policy under then-secretary Dick Cheney for matters concerning strategy, plans and policy, with responsibilities for the reshaping of strategy and force posture at the end of the Cold War, the essence of which was to shift from a strategy for being prepared to fight a global war, to being focused on two possible regional conflicts, and to downsize the US military by some 40%. The first Gulf War in 1991 showed the US military to be very good at what it does. The recent wars in Afghanistan and Iraq have shown it to be mismatched with postwar aims of occupation to spread freedom and democracy. These wars of regime change pose critical challenges to the all-volunteer army. If the volunteers realize they are no longer volunteering for a peacetime army but for long-term occupation assignments in distant and hostile lands, will they demand higher pay and benefits for re-enlistment? And if a volunteer is a specialist, even among common soldiers, what happens to the military culture of all for one and one for all? Can a volunteer army motivated by money sustain a long war?

In Vietnam, the US Army explicitly contracted with its drafted troops beforehand for a one-year tour of duty. Grunts who made it that far, whether on the front line or in the rear, and usually some of each, could go home - no ifs, ands or buts about it. But the Iraq tour of duty has been happening on the fly, and now many troops who began their training a year ago have been told that they cannot go home. The stop-loss policy prohibits a volunteer from leaving his or her unit to return to civilian life even though his or her term of enlistment has expired. This policy has been invoked for people in units that have received notification of being sent to Iraq or Afghanistan or are already in one of those countries.

Now the Pentagon is planning to call up two 5,000-soldier National Guard brigades to begin 13-to-16-month deployments in 2005 in relief of soldiers and marines. Also in Vietnam, a little-noticed concomitant of the draft was never in doubt. It was understood that the military was a planned social organism. Like the family, the university and the church, it was almost entirely free of market forces or economic logic. Its organization was communitarian, ironically communistic: "from each according to his ability, to each according to his need". Its ethic was one of absolute ends: to win in war. Its motto was: whatever it takes, do the necessary. As a result, those who became involved in military service learned to attach a great deal of importance to respect for the opinions of others, even if it were grudging respect, at least in the early years of the conflict, before morale faltered in an aimless and unwinnable war. True, orders were given, often unpopular and senseless orders, but it was recognized that commands would lose their effectiveness if troops were unwilling to obey. Combat effectiveness was measured not in competence or loyalty, but by sheer willingness to fight, or at least remain in place under extreme hostility and hopelessness.

Nearly two years into an Iraq war has left more than 1,500 US troops dead and another 11,200 wounded. Recruiters are having difficulty as the US Army strives to sign up 80,000 recruits this year to replace soldiers leaving the service. The army in February, for the first time in nearly five years, failed to achieve its monthly recruiting goal. It is in danger of missing its annual recruiting target for the first time since 1999. Recruiting for the army's reserve component - the National Guard and Army Reserve - is suffering even more as the Pentagon relies heavily on these part-time soldiers to maintain troop levels in Iraq. The regular army is 6% behind its year-to-date recruiting target, the Reserve is 10% behind, and the Guard is 26% short. The Marine Corps, the other service providing ground forces in Iraq, has its own difficulties. In January and February, the marines missed their goal for signing up new recruits - the first such shortfall in nearly a decade - but remained a bit ahead of their target for shipping recruits into basic training.

Iraq marks the first protracted conflict for US forces since the end of the draft in 1973, which ushered in the era of the all-volunteer military. If the military fails to attract enough recruits and the US maintains a large commitment in Iraq, the nation may have to consider some form of conscription, predicts Cato Institute defense analyst Charles Pena. The question is whether the "war on terrorism" can survive the domestic politics of a general conscription.

A top-to-bottom audit of the effectiveness of the all-volunteer force is unavoidable in the coming years, in the context of the current "global war on terrorism", where the opponent is not another army but local insurgents. In gauging the success of the US Army's experiment with market ways, it's important to keep in mind not just its performance as a fighting unit, but the role of the military in manifesting the basic values of society at large. Most of the political leadership of the generation born after 1955 lacks any battlefield military experience, and defense of the United States is reduced to a commodity that can be purchased at the lowest possible price.

The pervading importance of the army

The key mission of the US strategy of wars to implement regime changes in rogue or failed states around the world rests squarely on the army. The other services serve important offensive functions, but it is the army and only the army that can bring about the end game with manpower-intensive operations. The US Army currently is composed of more than a million volunteers. About half of these men and women are on full-time active duty. The other half is in the reserve component, which is composed of the Selected Reserve and the Individual Ready Reserve. These three groups compose the total army. The Selected Reserve, sometimes known as the Drilling Reserve, consists of people who belong to organized units that train or drill one weekend a month and spend at least two weeks a year on active duty. The army's Selected Reserve has two branches: the Army National Guard and the Army Reserve. Both components serve as backups to the active-duty army.

Army National Guard units, which are in all 50 states, can be used by the states as militias for natural disasters or civil disorders when they have not been mobilized by the federal government, which pays for more than 90% of their costs and thus has first call on their services. It comprises combat and combat support units such as civil affairs, transportation and military police. Army Reserve units are under the control of the Department of the Army and can be mobilized by the secretary of the army. The Army Reserve is composed mainly of combat support units.

The Individual Ready Reserve (IRR) is composed of individuals who have completed their active-duty service and have not joined a Selected Reserve unit, but who still have time left on their eight-year military-service obligation, which, by law, they incurred when they joined the army. For example, a person who enlisted in the army for four years in 1998 would have been released from active duty in 2002, but would remain in the IRR until 2006. Members of the IRR receive no pay, training or benefits. Currently there are about 100,000 people in the IRR.

Special Operations forces, elite or commando units from the army, navy and air force, are trained to perform clandestine missions behind enemy lines. Currently, there are about 50,000 personnel in these units. About 8,000 Special Operations forces are deployed in 54 countries.

The active army is organized into 10 divisions and the Army National Guard into eight. Each division has between 10,000 and 18,000 people organized into at least three brigades or regiments composed of 3,000-5,000 people. These brigades, in turn, consist of battalions of between 500 and 800 people each.

The ability of any military to perform its missions depends on smart people more than on smart bombs. As Melvin Laird, Richard Nixon's secretary of defense and the architect of the all-volunteer army put it this way: "People, not hardware, must be our highest priority."

The priority given to the men and women of the US armed forces today, especially those in the army, appears to have diminished, as overextension and overuse, as well as inattention to quality-of-life issues, place severe strain on the troops. Operations in Iraq and Afghanistan have revealed deeply troubling cracks in the organization and structure of the million-strong volunteer US Army. These problems have been exacerbated both by the current challenges of the global international-security environment and the way in which the Bush administration has used the active-duty and reserve components since September 11, 2001. As a result, the US is closer to breaking its volunteer army today than at any other time in its 30-year history.

Since September 11, 2001, the volunteer US Army has been called upon to assume greater and broader responsibility than ever before. US soldiers are needed to battle terrorism around the globe, protect the US homeland, and engage in occupation, peacekeeping, stabilization, and nation-building operations. Few imagined that the total volunteer army would be used in such a manner when it was designed 30 years ago, and the Bush administration has failed to make the appropriate changes to reflect the new environment. Defense Secretary Donald Rumsfeld's famous defense was, "You go to war with the army you have, not the army you wished you had." As a result, the active-duty US Army is not large enough and it does not have the mix of skills necessary to meet current needs; moreover, the reserve component is being used at unsustainable levels. This threatens not only the quality and readiness of the all-volunteer army, but also its ability to recruit and retain troops.

The Total Force

Richard Nixon put the all-volunteer model into place in 1973, in response to widespread public dissatisfaction with conscription and its use during the Vietnam War, when most of the United States' elite managed to avoid service in what Colin Powell has referred to as an "anti-democratic disgrace". While the draft had allowed the government to pay subsistence wages, the creation of the all-volunteer force required a dramatic increase in military salaries at a time when it was also necessary to increase spending on military equipment and technology. To keep costs under control, the Pentagon decided it had no choice but to reduce substantially the size of its active-duty military to some 2.2 million people, or about 18% below its pre-Vietnam level of 2.7 million. Because finding volunteers was always harder for the army than for the other services, the army bore the brunt of these reductions, dropping from more than a million people before the Vietnam War to 780,000 in 1974, its lowest level since before the Korean War. Yet the new task of wars to implement regime changes place heavy demand on US Army manpower.

To compensate, the Pentagon developed the concept of the "Total Force". Under this plan, the US military's Selected Reserve component would, theoretically, receive enough resources to make it a full-fledged part of the military. The National Guard and Reserves were given separate accounts, and the Selected Reserve's share of the budget was doubled. To prevent a repetition of Vietnam, where successive presidents managed to avoid the political costs of waging an unpopular war by using only the active-duty force and not calling up the Reserves, General Creighton Abrams, as army chief of staff, put fully half of the army's combat units (divisions and brigades) in the reserve component. In addition, certain non-combat components that were deemed to be in essence civilian functions, such as military police, engineers and civil-affairs personnel, were allocated almost entirely to the Reserves. These skills would be needed only for postwar stabilization, or what is now called "peacekeeping".

By the mid-1980s, the all-volunteer force became the most professional, highly qualified military the United States had ever fielded, and a high-tech fighting machine at that. One of the reasons for its success is that norms and standards were established for the use of both the active and reserve components. When reservists were called up for the first Gulf War or for peacekeeping duties in the Balkans or the Sinai, they were not kept on duty for more than six months, which most analysts felt was necessary to get and keep people in the reserve component. This was in keeping with a long-standing Pentagon personnel policy that forces should not spend more than one-third of their time away from home. In fact, many reservists actually volunteered to go. Moreover, active-duty forces sent on peacekeeping missions were rotated home after six months and were not deployed overseas again until they had spent at least a year at home. These standards and norms for the use of the volunteer army began to break down after September 11, 2001, however, due in part to extremely poor planning for the postwar transition in Iraq and the inability of the United States to get substantial combat-troop contributions from other nations.

When Donald Rumsfeld took charge of the Pentagon in January 2001, he did so with a mandate to transform the military by ensuring that its weapons systems and tactics took advantage of advances in technology. He did not, however, focus on the question of the size of the army and the balance between active-duty and Reserve soldiers, which became critical issues only once the United States launched the "global war on terrorism" and went to war in Afghanistan and Iraq (see The war that could destroy both armies, December 23, 2003). http://www.atimes.com/atimes/Middle_East/EJ23Ak01.html

Thomas Hall, the assistant secretary of defense for reserve affairs, indicated two years ago that the Pentagon's civilian and military leadership was aggressively studying such issues. In his first press briefing of 2004, Rumsfeld admitted that rebalancing the way reserve forces are used should be his first priority for the coming year. The army has begun the process of shifting the duties of some 100,000 personnel, but this process is not yet complete. Thus the percentage of military functions currently allocated to the Reserves is substantially the same as it was in 1973 - and better represents the challenges of that era than of the present one. Reserves currently account for 97% of the army's civil-affairs units, 70% of its engineering units, 66% of its military police, and 50% of its combat forces. Moreover, the size of the active-duty army has shrunk: at about 480,000 soldiers, it currently makes up a smaller proportion of the total US military, about 35%, than at any other point in US history. As a result, the all-volunteer army is being overstretched and misused in an effort to meet the new challenges presented by national and homeland security threats.

By the numbers

The US Army currently has about 350,000 soldiers deployed in more than 120 countries around the globe. The bulk of these troops - about 200,000 - are in Iraq, Afghanistan, South Korea and the Balkans. In 2004, 26 of the active-duty army's 33 combat brigades (or almost 80%) will have been deployed abroad. Nine of the 10 active-duty divisions in the army were deployed to, getting ready to deploy to, or returning from Iraq or Afghanistan this year. About 40% of the 140,000 troops in Iraq are from the reserve component, as are almost all of the US troops in the Balkans. All told, three combat brigades from the Army National Guard are currently in Iraq and four are preparing to be deployed to Iraq in the next year.

According to a Defense Science Board study presented to Rumsfeld last August 31, the US military does not have sufficient personnel for the nation's current war and peacekeeping demands. This overstretching leaves the US potentially vulnerable in places such as South Korea. In fact, one of the two US Army brigades stationed in South Korea has already been sent to Iraq. It also means that combat units have been sent on back-to-back deployments or have had their overseas tours extended unexpectedly beyond the duration that had been promised. For example, the 1st Brigade of the 82nd Airborne Division spent December 2002 to August 2003 in Afghanistan, was deployed to Iraq only five months after its return, where it served until April 2004, and is now slated to return to Afghanistan for at least another year. The 3rd Infantry Division, the 1st Armored Division, and the 2nd Infantry Division's 2nd Brigade had similar experiences. In July 2003, the military announced that army units would have to spend a full year in Iraq, double the normal tour for peacekeeping duties.

Experience over the past 30 years shows that retention rates will decline if the army keeps soldiers away from home for more than one year out of three, especially among mid-career personnel such as army captains, senior non-commissioned officers, and seasoned warrant officers, most of whom have not made a lifetime commitment to the army. This is how the career army was broken in Vietnam. Not retaining sufficient numbers of mid-career personnel will result in a hollow army that will be less capable and less ready to carry out the demanding challenges it currently faces and challenges that are expected to intensify in the future, with flashpoints such as Iran, Syria, Lebanon, Taiwan and North Korea.

Since September 11, 2001, more than 400,000 reservists have been called to active duty. Several National Guard and Reserve units have been kept on active duty for longer than anticipated, sent overseas to Iraq and Afghanistan without effective training for the missions they are expected to carry out, and mobilized without reasonable notice. This practice not only undermines the readiness of the reserve soldiers to carry out their tasks, it also puts an unfair burden on the families and the employers of the reservists by leaving them with very little time to adjust to the absence of the soldier. Members of the Michigan National Guard, for example, were sent to Iraq with only 48 hours' notice. In another example, the Maryland National Guard's 115th Military Police Battalion has deployed three times since September 11, 2001, and by the end of their last tour, some of these soldiers had been on active duty for more than 24 months. All of this has occurred in spite of the fact that Lieutenant-General James Helmly, the commander of the US Army Reserve, has stated that a reserve soldier ideally should be given at least 30-day notice before being mobilized and not be kept on duty for more than nine to 12 months in a five-year time frame.

The Bush administration has been forced to notify about 5,600 Individual Ready Reservists that they will be called to active duty in order to replace casualties in the Guard and Reserve units deployed to Iraq or to fill out understaffed units that have been mobilized to go to Iraq. These are men and women who have completed their active-duty service and have not joined a Guard or Reserve unit but who still have time left on their eight-year military-service obligation. In addition to facing the unfairness of being called back involuntarily after having already served their country, many of these individuals are being sent to combat zones without any recent training. Thirty-seven percent of those Individual Ready Reservists who were to report to duty by last October 17 failed to show. All told, more than 2,000 of these former soldiers have resisted returning to active duty. The trend can be expected to continue if not escalate as initial patriotic sentiment for the war subsides.

The Bush administration has compounded this problem by invoking its stop-loss authority for individuals in both active-duty and reserve units. This policy prevents an individual in a unit that has been notified that it is being deployed to Iraq or Afghanistan - or is already in one of those countries - from leaving the service until three months after the unit returns from overseas. To date, more than 40,000 men and women have had their enlistment extended or retirements put on hold, some for as long as two years, because of stop-loss. On December 6, eight of these soldiers challenged this army policy in court. And on December 8, a soldier in Kuwait who was headed to Iraq publicly asked visiting Secretary of Defense Rumsfeld how much longer the army will continue to use its stop-loss power to prevent soldiers from leaving the service who are otherwise able to retire or quit.

Many of the reservists who have been called up without appropriate notice and kept on duty too long are police officers, firefighters and paramedics in their civilian lives, that is, first responders who are vital to the safety of their local communities. When these personnel are called up for military service and kept on active duty for long periods, it can reduce the ability of their communities to deal with terrorism. In addition, the fact that National Guard units have been deployed overseas undermines the ability of states to deal with natural disasters as well as potential terrorist attacks on the homeland. For example, Governor Dirk Kempthorne, a Republican from Idaho and departing chairman of the National Governors Association, said recently that he was worried because 62% of Idaho's National Guard had been called up to active duty by the Pentagon. Like his colleagues in California, Washington, Oregon and Alaska, where wildfires are a significant problem, Kempthorne was concerned that he would not be able to use the Guard troops to help with firefighting.

The current system has led to a decline in the overall operational readiness of the US Army. In fiscal year 2003, the army canceled or postponed 49 of its 182 scheduled training exercises because the units were either going to or returning from Iraq or Afghanistan. In December 2003, a senior army official informed reporters that four divisions due to rotate back from Iraq in the spring of 2004 would not be fully combat ready for as long as six months. This, in turn, would leave only two of the army's 10 active-duty divisions ready for conflict outside Iraq and Afghanistan. Furthermore, the army has decided to send the 11th Cavalry Regiment, its elite training unit, to Iraq this year, taking them away from their mission of training other units.

Personnel readiness, which depends on the experience level of the soldiers in a unit, is also declining. According to a survey of US troops in Iraq by the military's own Stars and Stripes newspaper in late 2003, the Bush administration's approach to Iraq risks doing to the all-volunteer force what Vietnam did to the conscript service. After polling almost 2,000 troops, Stars and Stripes found that about one-third of them thought the war against Saddam Hussein had been of little or no value and that their mission lacked clear definition. A full 40% said their missions had little or nothing to do with what they had trained for. And, most ominously, about half of the soldiers surveyed indicated that they will not re-enlist when their tours end and the Pentagon lifts the stop-loss order that prevents troops from retiring or leaving the service at this time. A survey of Guard and Reserve units conducted last May by the Defense Manpower Data Center had similar findings. According to the survey, fewer than half of the Army and Marine Corps reserve personnel who served in Iraq say they will likely or very likely stay in uniform. Compared with a similar survey from May 2003, even non-deployed personnel are less inclined to stay in because of the threat of being recalled, and the morale of all reservists declined over the past year.

Were it not for the stop-loss policy, which even high-ranking US officials admit is inconsistent with the principles of voluntary service, the all-volunteer force and the Total Force would be in severe jeopardy, lacking the necessary personnel to complete their missions. For example, one infantry battalion commander deployed in Kuwait and headed for Iraq said he would have lost a quarter of his unit over the next year were it not for the stop-loss order. Through a series of such stop-loss measures, the army has prevented more than 24,000 active-duty troops and 16,000 reservists from leaving its ranks. Yet even with these rules in place, the Army Reserve failed to achieve its re-enlistment requirements for fiscal year 2003. The Army National Guard fell 12% short of its overall recruiting requirement for 2004 and missed its goal of reactivating people from the active force by 44%. The active-duty army, meanwhile, met its recruiting requirement for 2004 only by dipping into its delayed-entry pool of people scheduled to go on active duty in 2005, and lowered its educational and aptitude standards for the new recruiting year.

The Pentagon is also having difficulty keeping enough experienced Special Forces personnel on active duty as more and more of these elite warriors are beginning to accept offers from private security contractors who are performing military functions in Iraq and Afghanistan. Ironically, the US needs to use so many private security contractors because the Special Forces are not large enough to carry out all of the functions they are assigned. The US taxpayer thus ends up paying twice, once to train the personnel for the Special Forces and then again for contractor services. These contractors pay up to $1,000 per day for work in war zones such as Iraq, far above the average military salary for generals. Currently, the Special Forces units are manned only at the 85% level. The experience and capability level of the army has also been hurt by the discharge of thousands of men and women for being openly homosexual and violating the "don't ask, don't tell" policy. A number of those discharged were soldiers with critical skills, such as Arab-language abilities and operators of special equipment.

The Bush administration has exacerbated personnel problems by attempting to cut back benefits that members of the volunteer military and their families need. The timing of these cuts fueled the perception of disregard for the well-being of the same troops that the administration relies on to execute its foreign policy. For example, the administration proposed cutting imminent danger combat pay by one-third for US troops in the war zones in Iraq and Afghanistan. It also proposed cutting family separation allowances by nearly two-thirds for those troops away from their home base. Public pressure ultimately forced Congress to reject the White House proposals. In addition, thousands of US soldiers have been injured abroad, yet fewer than one in 10 applicants to the military's disability compensation system is receiving the long-term disability payments they request. Almost one-third of sick or injured National Guard and Reserve veterans returning from Iraq and Afghanistan are forced to wait more than four months to find out if they will be compensated. The majority of those who do receive disability pay leave the military with a one-time, lump-sum payment that is inadequate to make up for the loss they have suffered. David Chu, the Pentagon's under secretary for personnel and readiness, announced on February 1 that the lump-sum death gratuity of $12,420 would be increased to $100,000 in the 2006 budget. Life-insurance payments for deaths in the two "combat zones" would be raised from $250,000 to $400,000, with the government paying the extra premiums necessary.

Finally, the Bush administration also requested a 14% cut in assistance to public schools on military bases and other federal property. In what one army commander called an act of betrayal, the civilian leadership at the Pentagon is considering closing or transferring control of the 58 schools it operates on 14 military installations. These decisions threaten not only the quality of education for the children of soldiers, but also the morale and support of military families. Ultimately, these decisions threaten the long-term viability of the all-volunteer force.

The Pentagon 2005 Third Quadrennial Review (QDR3) put together by the Rumsfeld team is focused on four core challenges that resemble a matrix of future threats, identifying four types of dangers - conventional warfare, "irregular" challenges such as the insurgency in Iraq, "catastrophic" attacks employing weapons of mass destruction, and "disruptive" breakthroughs that give adversaries a sudden gain in capabilities. The matrix assumes that the likelihood of major conventional combat is receding, while the probability of the other, unconventional dangers is rising. Defense contractors and analysts will parse QDR3 debate for hints of which weapons programs might be favored, cut or terminated, strongly impacting the future of the defense industry. The US Air Force, for example, will press its case for restoring cuts made in the Lockheed Martin Corp F/A-22 fighter program. The Pentagon's fiscal 2006-11 budget forecasts savings of $10.4 billion by ending the program in 2008 and cutting 96 aircraft, bringing the total down to 179. But the air force suggests the plane might be useful in countering China's growing inventory of new Russian-made aircraft. The F/A-22 fighter will upgrade US capability to counter growing threats in the Pacific from China.

If the US plans to spread democracy unilaterally by destroying, occupying and rebuilding countries such as Iraq around the world, in essence by itself, while also meeting its other global commitments, protecting its homeland, and treating the men and women of the military fairly and in a way that ensures that they will join and remain in the volunteer army, it must increase the army's budget, taking funds from other parts of the overall 2005 baseline defense budget of $420 billion. Defense experts have suggested that programs that can be reduced without undermining US ability to wage a "global war on terror" include the national missile defense program, new nuclear-weapons research programs, and Cold War-era programs such as the F/A-22 fighter and the Virginia Class submarine. The cost of adding to the army budget can also be offset by reducing the number of people on active duty in the navy and air force, both of which are currently exceeding their target end-strengths.

'China threat' to the rescue

Supporters of threatened programs are seeking justification for preserving them. They have found it in the issue of China's alleged military ascendance. With Central Intelligence Agency support, the Pentagon is preparing to ratchet up its assessment of the threat of China's expanding military, in a signal that the Bush administration is increasingly concerned about China's growing ambitions in the region. The CIA, battered by intelligence failure related to the September 11 terrorist attacks, is desperately seeking to identify new dangerous enemies. Reaching into its overused bag of tricks, the new CIA director, Porter Goss, pulls out China as the reliable standby target. "Beijing's military modernization and military buildup is tilting the balance of power in the Taiwan Strait," Goss told the Senate Select Committee on Intelligence on February 16. "Chinese capabilities threaten US forces in the region," he said. It was more than a casual warning. The Taiwan Relations Act, a US domestic law, stipulates that the United States must sell more arms to Taiwan to maintain a balance of power.

The 2005 QDR3, the formal assessment of US military policy, is expected to take a more gloomy view of the challenge posed by an emerging Chinese superpower than the 2001 overview of four years ago. Douglas Feith, under secretary of defense for policy, identifies the rise of the People's Republic of China (PRC) as one of the most important issues being examined in QDR3, which is expected to be completed this September. A Pentagon spokesman stated that the manner in which national-security capabilities are organized to address the "global war on extremism" will continue to dominate ongoing activities, but it is important to step back and examine the strategic landscape beyond these ongoing activities, and "the PRC's emergence as a global actor is one undeniable reality".

The CIA report and QDR3 are dismissed by China as overreaction. Beijing insists that the theory of the China threat is unsupported by data. Citing Western media, Chinese Foreign Minister Li Zhaoxing at a press conference on March 5 took note that US defense expenditures had reached $455.9 billion, 3.9% of its GDP in 2004, while China spent 211.7 billion yuan ($25.5 billion) on national defense, 1.6% of its GDP. In 2003, US defense expenditures took up 47% of the global total, exceeding the accumulated expenditures of the following 25 biggest defense spenders. "China is a staunch force for peacemaking, and it's ridiculous to accuse China of [being] a threat," Li said.

After the US-Japan Security Consultative Committee in Washington held by the foreign and defense ministers of the two countries, the United States and Japan issued a joint statement on February 19 listing for the first time "encouraging" the peaceful resolution of issues concerning the Taiwan Strait through dialogue as one of their common strategic objectives. In their joint statement, the US and Japan tried to mollify China by listing development of a "cooperative relationship" with Beijing as another strategic goal. The US and Japan have agreed on a new joint security arrangement, which calls on China to increase transparency in reporting its military expenditure and expansion. For the first time, Japan publicly identified Taiwan as a shared security concern with the US. China denounced the joint statement as interfering in China's sovereign rights, internal affairs and territorial integrity. The US-Japan security alliance has shifted from a Cold War-era anti-Soviet posture to a post-Cold War era anti-China focus. Japan's 2000 White Paper on defense said for the first time that Chinese military development poses a threat to Japan. In its 2004 White Paper on defense, Japan claimed that it is facing direct missile threats from China. Beijing is deeply concerned about Tokyo's increasingly assertive approach to security issues, a concern that has become an obstacle to improved relations between the two Asian neighbors.

Washington and Tokyo have never before explicitly listed Taiwan as a bilateral strategic issue, and Japanese officials have generally avoided public discussion of cross-strait issues while privately calling for a peaceful resolution. China has repeatedly served notice that Taiwan's move toward independence will trigger an immediate military response. Washington is legally committed by the Taiwan Relations Act to supplying Taipei with adequate arms for defense, and has long hinted that the US will "help" Taiwan defend itself in the event of a military threat from Beijing. Whether that means direct US involvement remains ambiguous.

In response, China has passed its own domestic law against secession as a countermeasure for the United States' Taiwan Relations Act. Now, both governments are obliged by domestic law to military confrontation over the issue of Taiwan independence, with China committing itself by law to use force to stop Taiwan from any move toward independence and the US committing itself to help Taiwan defend itself. Thus the Taiwan issue is taken out of the flexible sphere of diplomacy to the fixed realm of a conflict between the domestic laws of two nations. It is a conflict that leaves little room for diplomacy and will lead to war.

There is also a change on the issue of Taiwan for Japan. In the past Japan had said that war across the Taiwan Strait would have an impact on East Asian security. Now it says China's use of force to prevent Taiwanese independence will "threaten" Japan directly. For Japanese strategists and politicians, it is vital that Japan can hold back an overall strategic challenge from China by the so-called curb on China's use of force in solving the Taiwan question.

With this background, the February joint statement evidently forecasts a new development of the US-Japan military alliance. In the past, Japan had not stated explicitly that it would involve the issue of Taiwan. Now, the present statement is saying that the Japanese government will join hands with the US to cope with the Taiwan Strait situation militarily. Although the statement is ambiguous, its significance lies in its timing to coincide with the current readjustment of US military disposition in East Asia to strengthen developing preventive measures pointing at the issue of Taiwan. The statement is aimed at military coordination and will give a political guarantee of use of US military bases in Japan, not for defense of Japan but against a third country.

The joint statement reflects a readjustment in Japanese policy on China. The previous Japanese position of taking an ambiguous stand between the US and China over Taiwan has been replaced by a new position that, on the issue of East Asian security involving the Taiwan question, the US and Japan are allies against China. It is natural that China will counter this new US-Japan alliance with security links with anti-US forces in Central America, the Middle East and elsewhere. This development will not only threaten the balance of power in East Asia but also will impact the entire post-Cold War world order. The US needs to ask itself whether keeping Taiwan from returning to China is worth all its dire consequences. To defuse the time-bomb, the US needs to rescind the Taiwan Relations Act to avoid giving secessionist elements in Taiwan misleading signals for unconstrained support for dangerous adventurism that will threaten world peace.

The European Union is looking to lift its embargo on selling arms to China at a time when Washington is increasingly nervous about the expansion of China's armed forces and the advance of its military technologies. US defense and intelligence officials focus on the increasing number of missiles that are being deployed across the Taiwan Strait, the acceleration in Chinese defense spending, and the rapid increase in the size of Beijing's navy. Chinese Foreign Minister Li Zhaoxing characterizes the EU arms embargo on China as "obsolete, useless and harmful" and a form of political discrimination. China poses no threat to any other country and is committed to a peaceful resolution even on the Taiwan problem, using force only as a last resort against Taiwanese independence.

US President George W Bush came to office in 2001 vowing to treat China as a "strategic competitor". But after the downing of a US spy aircraft over Chinese territory and as the White House became consumed by the unfolding war in Iraq, the Bush administration muted its criticisms of China toward the end of its first term. His administration has since sought to forge a cooperative working relationship with China, recognizing that it needs Beijing's help in its "war on terrorism" and in helping to resolve tensions on the Korean Peninsula over nuclear proliferation. But US defense officials appear to be using the fantasized future threat from China to justify expansion of America's own military to meet the need of a foreign policy of preemptive regime change in other nations.

The private sector to the rescue

The Tail-to-Tooth Commission to promote outsourcing and privatization of Department of Defense (DOD) support functions is a coalition of private chief executives and former government officials. Former New Hampshire senator Warren Rudman and Automatic Data Processing Inc chairman Josh Weston co-chair the group, which is sponsored by Business Executives for National Security, a coalition of business leaders with an interest in national-security policy and the private-sector claim to it. The "tooth" refers to combat troops and weapons systems, the core war-fighting capabilities of the military, ie the kill machine, while the "tail" refers to infrastructure and functions that support the military mission. The commission argues that the tooth is happily becoming lean and mean, but the tail remains too big and bureaucratic and should be privatized.

Commission members pledge not just to issue a report and then disband but to lobby for defense privatization and downsizing in Congress, in the Pentagon and in the White House. The commission has released one report so far, "Outsourcing and Privatization of Defense Infrastructure", in which it argues that the Pentagon should follow the private sector's example by focusing on its core competencies and outsourcing all other activities. The report also acknowledges that it's easy to identify programs that can be outsourced, but it's difficult actually to do, in part because Pentagon leaders lack a sense of urgency.

"Defense [Department] officials lack an appreciation of the relationship of time to money that drives the private sector's bottom line," the report says. "Too many bureaucratic layers prevent the department from taking advantage of the pace of business. Time is lost; money wasted." Yet the report ignores the fact that bureaucracy is instituted to handle the orderly resolution of complex deliberations that often must take into account opposing doctrines, competing turf, and sub-optimization fallacies. The private sector simplifies life by measuring all by the maximization of profit. The purpose of government cannot be simplified into profit incentives. The purpose of a nation's military is not to make its private contractors profitable, but to protect the nation from threats.

Secretary of defense William Cohen, a Republican cabinet officer under president Clinton, in a speech to Business Executives for National Security in October, sounded his support for the group's efforts. The Tail-to-Tooth Commission was one in a series of groups focused on DOD infrastructure downsizing. The Defense Science Board called for privatization of numerous functions, including accounting, information systems management and commissaries. The Quadrennial Defense Review regularly called for infrastructure streamlining as well, and the Defense Reform Task Force looked at ways to re-engineer the Office of the Secretary of Defense. In addition, the 1998 Defense Authorization Bill, passed by the House, called for the continued outsourcing of thousands of positions in the secretary's office and in the defense acquisition workforce. Will the day come when after-hour phone calls to the secretary's office are answered by operators in Indonesia, or when Defense Department software is run and maintained by programmers in India?

Unlike outsourcing, which involves contracting support services to outside sources while retaining responsibility for them, privatization involves transferring responsibility for planning, organizing, financing and managing a program or mission or activity from the government to private contractors.

The warfare environment of the future will require expensive and highly trained personnel operating costly and sophisticated weapons. These assets will require significant allocations of public resources, affordable only if the military reduces spending in non-core areas. If it does not, it will have either to rely on old equipment or reduce the number of new weapons it procures.

Congress established the Military Housing Privatization Initiative (MHPI) in 1996 as a tool to help the military improve the quality of life for its service members by improving the condition of their housing. The MHPI was designed and developed to attract private-sector financing, expertise and innovation to provide necessary housing faster and more efficiently than traditional military construction processes would allow. It is a very peculiar development since the military construction units had spun off their military expertise to the civilian sector after every war. Napoleon Bonaparte said that an army marches on its stomach. Any army that fails to maintain a first-rate logistics arm cannot win a war. The Office of the Secretary of Defense has delegated to the military services the MHPI, and they are authorized to enter into agreements with private developers selected in a competitive process to own, maintain and operate family housing via a 50-year lease.

MHPI addresses two significant problems concerning housing for military service members and their families: (1) the poor condition of DOD-owned housing, and (2) a chronic shortage of quality private housing, at a price affordable by military pay. Under the MHPI authorities, DOD works with the private sector to revitalize military family housing through a variety of financial tools - direct loans, loan guarantees, equity investments, conveyance or leasing of land and/or housing/and other facilities. Military service members receive a basic allowance whereby they can choose to live in private-sector housing or privatized housing. Can a military that cannot house its forces adequately be expected to defend the country effectively? Can a soldier be expected to risk his life to defend his country merely to leave his surviving family a 50-year mortgage?

Next: Outsourcing public security

 

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