The Deconstruction of the West

What concerns me most from the following article is the misguided notion that pan-nationalism and global citizenship has displaced the sovereign nation-state international system. The sovereign nation-state is all we have to manage global affairs in a representative democratic, people-centered global society. Without it we are all vulnerable to constellations of power among political elites and authoritarians of all stripes.

Reprinted from The American Interest:

The Deconstruction of the West

ANDREW A. MICHTA

April 12, 2017

The greatest threat to the liberal international order comes not from Russia, China, or jihadist terror but from the self-induced deconstruction of Western culture.

To say that the world has been getting progressively less stable and more dangerous is to state the obvious. But amidst the volumes written on the causes of this ongoing systemic change, one key driver barely gets mentioned: the fracturing of the collective West. And yet the unraveling of the idea of the West has degraded our ability to respond with a clear strategy to protect our regional and global interests. It has weakened the NATO alliance and changed not just the global security calculus but now also the power equilibrium in Europe. If anyone doubts the scope and severity of the problem, he or she should ask why it has been so difficult of late to develop a consensus between the United States and Europe on such key issues as defense, trade, migration, and how to deal with Russia, China, and Islamic jihadists.

The problem confronting the West today stems not from a shortage of power, but rather from the inability to build consensus on the shared goals and interests in whose name that power ought to be applied. The growing instability in the international system is not, as some argue, due to the rise of China as an aspiring global power, the resurgence of Russia as a systemic spoiler, the aspirations of Iran for regional hegemony, or the rogue despotism of a nuclear-armed North Korea; the rise and relative decline of states is nothing new, and it doesn’t necessarily entail instability. The West’s problem today is also not mainly the result of the economic decline of the United States or the European Union, for while both have had to deal with serious economic issues since the 2008 meltdown, they remain the two largest economies in the world, whose combined wealth and technological prowess are unmatched. Nor is the increasing global instability due to a surge in Islamic jihadism across the globe, for despite the horrors the jihadists have wrought upon the peoples of the Middle East and North Africa, and the attendant anxiety now pervading Europe and America, they have nowhere near the capabilities needed to confront great powers.

The problem, rather, is the West’s growing inability to agree on how it should be defined as a civilization. At the core of the deepening dysfunction in the West is the self-induced deconstruction of Western culture and, with it, the glue that for two centuries kept Europe and the United States at the center of the international system. The nation-state has been arguably the most enduring and successful idea that Western culture has produced. It offers a recipe to achieve security, economic growth, and individual freedom at levels unmatched in human history. This concept of a historically anchored and territorially defined national homeland, having absorbed the principles of liberal democracy, the right to private property and liberty bound by the rule of law, has been the core building block of the West’s global success and of whatever “order” has ever existed in the so-called international order. Since 1945 it has been the most successful Western “export” across the globe, with the surge of decolonization driven by the quintessentially American precept of the right to self-determination of peoples, a testimony to its enduring appeal. Though challenged by fascism, Nazism, and communism, the West emerged victorious, for when confronted with existential danger, it defaulted to shared, deeply held values and the fervent belief that what its culture and heritage represented were worth fighting, and if necessary even dying, to preserve. The West prevailed then because it was confident that on balance it offered the best set of ideas, values, and principles for others to emulate.

Today, in the wake of decades of group identity politics and the attendant deconstruction of our heritage through academia, the media, and popular culture, this conviction in the uniqueness of the West is only a pale shadow of what it was a mere half century ago. It has been replaced by elite narratives substituting shame for pride and indifference to one’s own heritage for patriotism. After decades of Gramsci’s proverbial “long march” through the educational and cultural institutions, Western societies have been changed in ways that make social mobilization around the shared idea of a nation increasingly problematic. This ideological hollowing out of the West has been accompanied by a surge in confident and revanchist nationalisms in other parts of the world, as well as religiously inspired totalitarianism.

National communities cannot be built around the idea of collective shame over their past, and yet this is what is increasingly displacing a once confident (perhaps overconfident, at times) Western civilization. The increasing political uncertainty in Europe has been triggered less by the phenomenon of migration than it has by the inability of European governments to set baselines of what they will and will not accept. Over the past two decades Western elites have advocated (or conceded) a so-called “multicultural policy,” whereby immigrants would no longer be asked to become citizens in the true sense of the Western liberal tradition. People who do not speak the national language, do not know the nation’s history, and do not identify with its culture and traditions cannot help but remain visitors. The failure to acculturate immigrants into the liberal Western democracies is arguably at the core of the growing balkanization, and attendant instability, of Western nation-states, in Europe as well as in the United States.

Whether one gives the deconstruction of the Western nation-state the name of postmodernism or globalism, the ideological assault on this very foundation of the Western-led international system has been unrelenting. It is no surprise that a poorly resourced radical Islamic insurgency has been able to make such vast inroads against the West, in the process remaking our societies and redefining our way of life. It is also not surprising that a weak and corrupt Russia has been able to shake the international order by simply applying limited conventional military power. Or that a growing China casts an ever-longer shadow over the West. The greatest threat to the security and survival of the democratic West as the leader and the norm-setter of the international system comes not from the outside but from within. And with each passing year, the deconstruction of Western culture, and with it the nation-state, breeds more internal chaos and makes our international bonds across the West ever more tenuous.

Andrew A. Michta is the dean of the College of International and Security Studies at the George C. Marshall European Center for Security Studies. Views expressed here are his own.
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Brexit: Failure of the Central State

This is the best article I’ve seen on Brexit. Basically we’re witnessing the failure of statism, politically and economically…and a desperate reassertion of the principles of democracy, sovereignty and freedom.

Brexit: A Very British Revolution

The vote to leave the EU began as a cry for liberty and ended as a rebuke to the establishment

By FRASER NELSON
The Wall Street Journal, June 24, 2016 4:33 p.m. ET

The world is looking at Britain and asking: What on Earth just happened? Those who run Britain are asking the same question.

Never has there been a greater coalition of the establishment than that assembled by Prime Minister David Cameron for his referendum campaign to keep the U.K. in the European Union. There was almost every Westminster party leader, most of their troops and almost every trade union and employers’ federation. There were retired spy chiefs, historians, football clubs, national treasures like Stephen Hawking and divinities like Keira Knightley. And some global glamour too: President Barack Obama flew to London to do his bit, and Goldman Sachs opened its checkbook.

And none of it worked. The opinion polls barely moved over the course of the campaign, and 52% of Britons voted to leave the EU. That slender majority was probably the biggest slap in the face ever delivered to the British establishment in the history of universal suffrage.

Mr. Cameron announced that he would resign because he felt the country has taken a new direction—one that he disagrees with. If everyone else did the same, the House of Commons would be almost empty. Britain’s exit from the EU, or Brexit, was backed by barely a quarter of his government members and by not even a tenth of Labour politicians. It was a very British revolution.

Donald Trump’s arrival in Scotland on Friday to visit one of his golf courses was precisely the metaphor that the Brexiteers didn’t want. The presumptive Republican presidential nominee cheerily declared that the British had just “taken back their country” in the same way that he’s inviting Americans to do—underscoring one of the biggest misconceptions about the EU referendum campaign. Britain isn’t having a Trump moment, turning in on itself in a fit of protectionist and nativist pique. Rather, the vote for Brexit was about liberty and free trade—and about trying to manage globalization better than the EU has been doing from Brussels.

The Brexit campaign started as a cry for liberty, perhaps articulated most clearly by Michael Gove, the British justice secretary (and, on this issue, the most prominent dissenter in Mr. Cameron’s cabinet). Mr. Gove offered practical examples of the problems of EU membership. As a minister, he said, he deals constantly with edicts and regulations framed at the European level—rules that he doesn’t want and can’t change. These were rules that no one in Britain asked for, rules promulgated by officials whose names Brits don’t know, people whom they never elected and cannot remove from office. Yet they become the law of the land. Much of what we think of as British democracy, Mr. Gove argued, is now no such thing.

Instead of grumbling about the things we can’t change, Mr. Gove said, it was time to follow “the Americans who declared their independence and never looked back” and “become an exemplar of what an inclusive, open and innovative democracy can achieve.” Many of the Brexiteers think that Britain voted this week to follow a template set in 1776 on the other side of the Atlantic.

Mr. Gove was mocked for such analogies. Surely, some in the Remain camp argued, the people who were voting for Leave—the pensioners in the seaside towns, the plumbers and chip-shop owners—weren’t wondering how they could reboot the Anglo-Scottish Enlightenment for the 21st century. Perhaps not, but the sentiment holds: Liberty and democracy matter. As a recent editorial in Der Spiegel put it, Brits “have an inner independence that we Germans lack, in addition to myriad anti-authoritarian, defiant tendencies.”

Mr. Cameron has been trying to explain this to Angela Merkel for some time. He once regaled the German chancellor with a pre-dinner PowerPoint presentation to explain his whole referendum idea. Public support for keeping Britain within the EU was collapsing, he warned, but a renegotiation of its terms would save Britain’s membership. Ms. Merkel was never quite persuaded, and Mr. Cameron was sent away with a renegotiation barely worthy of the name. It was a fatal mistake—not nearly enough to help Mr. Cameron shift the terms of a debate he was already well on the way to losing.

The EU took a gamble: that the Brits were bluffing and would never vote to leave. A more generous deal—perhaps aimed at allowing the U.K. more control over immigration, the top public concern in Britain—would probably have (just) stopped Brexit. But the absence of a deal sent a clear and crushing message: The EU isn’t interested in reforming, so it is past time to stop pretending otherwise.

With no deal, all Mr. Cameron could do was warn about the risks of leaving the EU. If Brits try to escape, he said, they’d face the razor wire of a recession or the dogs of World War III. He rather overdid it. Instead of fear, he seemed to have stoked a mood of mass defiance.

Mr. Obama also overdid it when he notoriously told the British that, if they opted for Brexit, they would find themselves “in the back of the queue” for a trade deal with the U.S. That overlooked a basic point: The U.K. doesn’t currently have a trade deal with the U.S., despite being its largest foreign investor. Moreover, no deal seems forthcoming: The negotiations between the U.S. and the EU over the trans-Atlantic Trade and Investment Partnership are going slowly, and the Brits involved in the talks are in despair.

Deals negotiated through the EU always move at the pace dictated by the most reluctant country. Italy has threatened to derail a trade deal with Australia over a spat about exports of canned tomatoes; a trade deal with Canada was held up after a row about Romanian visas. Brexit wasn’t a call for a Little England. It was an attempt to escape from a Little Europe.

Many British voters felt a similar frustration on security issues, where the EU’s leaders have for decades now displayed a toxic combination of hunger for power and incompetence at wielding it. When war broke out in the former Yugoslavia in 1991, the then-chair of the European Community’s Council of Ministers declared that this was “the hour of Europe, not the hour of the Americans—if one problem can be solved by the Europeans, it is the Yugoslav problem.” It was not to be.

Nor did the EU acquit itself much better in more recent crises in Ukraine and Libya. Field Marshal Lord Charles Guthrie, a former chief of the British military, put it bluntly last week: “I feel more European than I do American, but it’s absolutely unrealistic to think we are all going to work together. When things get really serious, we need the Americans. That’s where the power is.” Brits feel comfortable with this; the French less so.

Throughout the campaign, the Brexit side was attacked for being inward-looking, nostalgic, dreaming of the days of empire or refusing to acknowledge that modern nations need to work with allies. But it was the Brexiteers who were doing the hardest thinking about this, worrying about the implications of a dysfunctional EU trying to undermine or supplant NATO, which remains the true guarantor of European security.

In the turbulent weeks and months ahead, we can expect a loud message from the Brexiteers in the British government: The question is not whether to work with Europe but how to work with Europe. Alliances work best when they are coalitions of the willing. The EU has become a coalition of the unwilling, the place where the finest multilateral ambitions go to die. Britain’s network of embassies will now go into overdrive, offering olive branches in capital after capital. Britain wants to deal, nation to nation, and is looking for partners.

Even the debate about immigration had an internationalist flavor to it. Any member of any EU state has had the right to live and work in Britain; any American, Indian or Australian needs to apply through a painstaking process. Mr. Cameron’s goal is to bring net immigration to below 100,000 a year (it was a little over three times that at last count). So the more who arrive from the EU, the more we need to crack down on those from outside the EU. The U.K. government now requires any non-European who wants to settle here to earn an annual salary of at least £35,000 (or about $52,000)—so we would deport, say, a young American flutist but couldn’t exclude a Bulgarian convict who could claim (under EU human-rights rules) that he has family ties in the U.K.

To most Brits, this makes no sense. In a television debate last week, Mr. Cameron was asked if there was “anything fair about an immigration system that prioritizes unskilled workers from within the EU over skilled workers who are coming from outside the EU?” He had no convincing answer.

The sense of a lack of control over immigration to Britain has been vividly reinforced by the scenes on the continent. In theory, the EU is supposed to protect its external borders by insisting that refugees claim asylum in the first country they enter. In practice, this agreement—the so-called Dublin Convention—was torn up by Ms. Merkel when she recklessly offered to settle any fleeing Syrians who managed to make it over the German border. The blame here lies not with the tens of thousands of desperate people who subsequently set out; the blame lies with an EU system that has proven itself hopelessly unequal to such a complex and intensifying challenge. The EU’s failure has been a boon for the people-trafficking industry, a global evil that has led to almost 3,000 deaths in the Mediterranean so far this year.

Britain has been shielded from the worst of this. Being an island helps, as does our rejection of the ill-advised Schengen border-free travel agreement that connects 26 European countries. But the scenes on the continent of thousands of young men on the march (one of which made it onto a particularly tasteless pro-Brexit poster unveiled by Nigel Farage, the leader of the anti-immigration UK Independence Party) give the sense of complete political dysfunction. To many voters in Britain, this referendum was about whether they want to be linked to such tragic incompetence.

The economists who warned about the perils of Brexit also assure voters that immigration is a net benefit, its advantages outweighing its losses. Perhaps so, but this overlooks the human factor. Who loses, and who gains? Immigration is great if you’re in the market for a nanny, a plumber or a table at a new restaurant. But to those competing with immigrants for jobs, houses or seats at schools, it looks rather different. And this, perhaps, explains the stark social divide exposed in the Brexit campaign.

Seldom has the United Kingdom looked less united: London and Scotland voted to stay in the EU, Wales and the English shires voted to get out. (Scottish First Minister Nicola Sturgeon has already called a fresh vote on secession “highly likely.”) Some 70% of university graduates were in favor of the EU; an equally disproportionate 68% of those who hadn’t finished high school were against it. Londoners and those under age 30 were strongly for Remain; the northern English and those over 60 were strongly for Leave. An astonishing 70% of the skilled working class supported Brexit.

Here, the Brexit battle lines ought to be familiar: They are similar to the socioeconomic battles being fought throughout so many Western democracies. It is the jet-set graduates versus the working class, the metropolitans versus the bumpkins—and, above all, the winners of globalization against its losers. Politicians, ever obsessed about the future, can tend to regard those left unprotected in our increasingly interconnected age as artifacts of the past. In fact, the losers of globalization are, by definition, as new as globalization itself.

To see such worries as resurgent nationalism is to oversimplify. The nation-state is a social construct: Done properly, it is the glue that binds society together. In Europe, the losers of globalization are seeking the protection of their nation-states, not a remote and unresponsive European superstate. They see the economy developing in ways that aren’t to their advantage and look to their governments to lend a helping hand—or at least attempt to control immigration. No EU country can honestly claim to control European immigration, and there is no prospect of this changing: These are the facts that led to Brexit.

The pound took a pounding on the currency markets Friday, but it wasn’t alone. The Swedish krona and the Polish zloty were down by about 5% against the dollar; the euro was down 3%. The markets are wondering who might be next. In April, the polling firm Ipsos MORI asked voters in nine EU countries if they would like a referendum on their countries’ memberships: 45% said yes, and 33% said they’d vote to get out. A Pew poll recently found that the Greeks and the French are the most hostile to the EU in the continent—and that the British were no more annoyed with the EU than the Swedes, the Dutch and the Germans.

The Brexit campaign was led by Europhiles. Boris Johnson, the former London mayor turned pro-Brexit firebrand who now seems likely to succeed Mr. Cameron, used to live in Brussels and can give interviews in French. Mr. Gove’s idea of perfect happiness is sitting on a wooden bench listening to Wagner in an airless concert hall in Bavaria. Both stressed that they love Europe but also love democracy—and want to keep the two compatible. The Brexit revolution is intended to make that point.

Mr. Gove has taken to borrowing the 18th-century politician William Pitt’s dictum about how England can “save herself by her exertions and Europe by her example.” After Mr. Cameron departs and new British leadership arrives, it will be keen to strike new alliances based on the principles of democracy, sovereignty and freedom. You never know: That might just catch on.

Unicorns, Tooth Fairies, and Free Markets

The most frequent criticism of free markets lies in their comparison to unicorns, fairies, and leprechauns. In other words, they exist only in our imaginations and thus are unworthy of serious discussion. This is sheer nonsense. It is like denying the value of Plato’s ideal forms as a means of comparison and judgment. Democracy also does not exist in its pure, idealistic form, so, is it a useless figment of our imaginations? I don’t believe so.

Free markets should be thought of as markets for free people, much like democracy is a political market for free people. In terms of exchange, people are free when buyer and seller can either mutually agree on an exchange or walk away. This freedom obtains best when there are lots of competing and comparable alternatives to any particular good or service. Also, voluntary action is enhanced when the terms of the transaction are transparent to both parties. Some markets offer better and more options than others, while some are more transparent than others, so markets are defined along a continuum from “free” to “unfree.” The whole thrust of free market theory is to point us in the right direction.

Oddly enough, the failure of unfree, or controlled, markets is often cited as proof that markets don’t work. This is like pulling the wheels off my car and then stating that since it can’t go anywhere, cars are a poor form of transportation. Such arguments should be the butt of jokes, not serious debate. Some may qualify this argument by saying some markets are easier to manipulate or control by narrow interests or are less transparent, and thus need to be regulated by a disinterested third party such as a government bureaucracy. But that just begs the more important question over what means will insure that any particular market becomes freer?

Regulation vs. Competition

We can’t really answer this question without a careful analysis of behavioral incentives, of both the economic and political variety. It is widely accepted that economic and political actors pursue their narrow self-interests, with economic behavior determined by loss aversion and profit/utility maximization and political behavior more influenced by power, status, and control. These behaviors dovetail in real people as we all seek to survive by pursuing wealth, power, and control over our own destinies. When we scrape beneath the surface we find that survival is more about not losing (loss aversion), than winning (big rewards).

We would assume from these incentives that most actors would like to manipulate markets to their personal advantage, so how do we constrain or redirect this?

Most people would look to contract law as the explanation for what keeps us honest, but that offers only a narrow understanding of how markets work. We make dozens, if not hundreds, of market transactions every day and very few ever reach that threshold where we feel the need to consult legal counsel or call our Congressperson in Washington. Instead, we rely on more efficient means, such as trust, reciprocity, the implicit value of repeat business, and competing alternatives to guide our choices.

This point about competing alternatives is crucial because while trust, reciprocity, and relationships help ameliorate the need for transparency, competition gives us freedom of choice. Anti-competitive monopolies are considered economic evils because they control the market for their product or service, so consumers must pay their price or go without. (Likewise why we despise political tyranny.) Critics often deride market capitalism as a competitive conflictual system, but that too is a myopic point of view. Markets foster cooperation as much as competition, and many of the transactions in economic markets are win-win positive sum games rather than win-lose zero-sum games.

Think about it: Sellers compete among themselves in order to develop a long-term cooperative relationship with their buyers and suppliers. Ever wonder why a department store takes back that dress or pair of shoes you bought last week because you changed your mind? That doesn’t seem in their immediate profit interest, but it does when you consider how the retailer values repeat business against the freedom you have to take your business elsewhere.

It is not laws or regulatory watchdogs but open competition under accepted market rules that constrains most of our selfish economic behavior. In addition, market competitors have the biggest incentive to insure all play by the established rules, thus they are the watchdogs. This implies the need for transparency. Third party regulatory agencies are inadequate to the task of monitoring the multitude of transactions in markets, especially financial markets. For example, the banking industry is the most regulated industry in the US, and yet the financial crisis of “too big to fail” revealed how ineffective that regulation was. So the test should not be regulation OR competition, but regulation FOR competition. Financial markets in particular need to be open, transparent, and competitive to constrain behavior that risks the integrity of the financial system. In financial markets, failure is a big inducement for prudence.

For an illustrative case, consider the policy response to the financial crisis of 2008, the 2010 Dodd-Frank law. Under that legislation, “too big to fail” banks have gotten even bigger, while 1,500 community banks—the source of half of all loans to local businesses—reportedly have been destroyed. The remaining community banks have had to hire 50% more compliance staff just to keep up with the regulations. That means far less competition among lenders to serve borrowers and more concentrated finance that does not respond to the bankruptcy constraint. It means a far less efficient and just credit market and far more control centralized in a financial oligopoly seeking to influence the policymaking process in its favor. According to the practice of regulatory capture – where lobbyists “buy” politicians with campaign contributions to formulate policy to constrain their competitors – we’ve discovered too often that big government mostly works for big business, the powerful, the wealthy and the well-connected to the detriment of open and honest competition among free people.

One could make the same argument against health care reform under the Affordable Care Act. Has policy made the market more open, transparent, and competitive, or less? Health care provision is really about competition and abundance in the supply of health care rather than the price and distribution of access. With an abundance of competitive health care providers, price and access take care of themselves.

The most important argument in favor of markets is the crucial role they play in providing information feedback signals. Free markets provide the most accurate and essential signals to consumers and producers needed to make efficient economic decisions, like comparing alternatives to maximize preferences, or where to invest and how much to produce, and how to adapt to changing market conditions. These signals are embodied in prices and inventory quantities and without these, producers are operating in the dark about what people want. Hayek was the first to point out the lack of private exchange markets would make central planning under socialism untenable over time. He was right.

Market failures do exist and we don’t live in a world of idealized free markets. But in addressing those failures we should strive not to make the perfect the enemy of the good, because free markets support free people and that’s the bottom line.

Besides, it would be heartbreaking to admit to our children that this is best we can do when it comes to unicorns and tooth fairies:

adult-unicorn-costume toothfairy1

Rethinking Inequality and Redistribution in a Free Society

taxtherich

Inequality has become a hot political topic these days and may be most contentious issue of the 2016 presidential election (unless a geopolitical crisis occurs before then). The study of economic inequality and what to do about it has a long history though, and not much has changed.

In this post I would like to suggest some different ways of looking at the problem and what to do about it from a policy perspective. Many people look at the distributional outcomes of success in a winner-take-all society and declaim the results as unfair. It probably is unfair, just like it is when all the tallest kids get chosen to play on the basketball team. But, more seriously, fairness is not an objective measure by which we can set policy.

Most people think they can define what’s fair and what’s not. I would tend to agree, but mine probably departs from the common sense definition. When looking at results in life, one person’s fairness (the winners’ bracket) is another’s unfairness (the losers’ bracket). So, should fairness be determined by who has the most political power and influence in society, even if that is a tyranny of the majority? I fail to see how that would be fair.

Fairness can actually be defined by the legal idea that consequence should follow action. In other words, the guilty, not the innocent, should pay for their sins. In finance, this idea of fairness is couched in the concept of risk and reward: he who takes the risk, reaps the reward (or the loss).

The question is how do we apply this objective idea of fairness (I would prefer the word “justice”) to policies to mitigate unequal outcomes? Or even should we?

I will argue that we should, but that we’re devising all the wrong policies because we are trapped in a conceptual maze. Economic inequality is truly a maze of confusion. There are many different factors that lead to unequal results and it’s quite easy and common to focus on the wrong ones. The factors that have become politically salient today are related to the diverging returns between capital and labor. This is at the root of all the hullabaloo over French economist Thomas Piketty’s work, a work that has been politicized to confirm the worse fears of labor advocates.

In short, globalization and technology has led to wage repression for the 99%, while increasing the returns to capital (the 1%). The keen-jerk solution is to tax capital after the fact and redistribute the funds to labor. The POTUS stated this proposal explicitly in his recent SOTU address: “Let’s close the loopholes that lead to inequality by allowing the top 1 percent to avoid paying taxes on their accumulated wealth.” In effect, he was advocating for tax reform, but he failed to specify details. But we have a good idea on what kind of economic policies Mr. Obama favors: free community college tuition, minimum wage laws, family childcare and education credits, paid sick leave. One can argue the pros and cons of these policies, but none of them really addresses the growing problem of inequality. My guess is that is because the administration really doesn’t have any new ideas about what to do about inequality except to wave it as a red flag during election season.

There is a serious problem with trying to tax capital to redistribute to labor that I would like to present here in the simplest of terms. Capital has dominant strategies to win any conflict with labor in a free society. If we tax capital, it can instantly move elsewhere to avoid the tax. Financial capital is fungible, it can change it’s use. Or it can lie dormant in the bank vault or a mattress. Labor enjoys none of these advantages: we can’t easily get up and move, we are specialized by skills and education, and we can’t be idle for long because we have to eat. In a class war between capital and labor, labor must capitulate, at least in a free society.

The political measures that seek to prevent this – such as repatriation laws, tax penalties, capital controls, crackdowns on tax havens and accounting rules – are largely ineffective because capital enjoys these freedoms that are partly incumbent to its nature. Eliminating capital mobility would require the complete coordination of the international community, which implies state control over the deployment of capital. This would be contradictory to a free society, as much as the complete state control of labor mobility would. In other words, state coercion is incompatible with a free society and thus any tax costs will fall mostly on labor. This is not the result we want.

So, are we stuck in an impossible situation where those who own and control capital dominate those who don’t? I don’t believe so, but the solutions lie outside the present constellation of policies.

The first lesson is that if capital dominates the distribution of returns, then success in capitalism requires access, ownership, and control of capital.  Simply put, in a capitalist society, why aren’t we all clamoring to become capitalists? (You don’t have to run a business to be a capitalist, you just need to buy into public corporate share ownership and control.)

The next objection is that capital ownership and control cannot be pried from the hands of the rich and powerful without coercion by a democratically-elected government. In other words, we’re back to tax coercion. It is certainly true that we can tax physical capital and wealth through property and estate taxes. A mansion cannot be moved or disappear because it is taxed and the tax cannot be avoided by selling the property since the sales price will instantly reflect the tax liability. Wealth taxes are probably necessary due to the massive transfer of wealth under the misguided policies of the past two decades, but we’re missing the larger point if we focus solely on this redistribution of wealth after the fact. (My proposal for estate taxes is that they could be avoided entirely if the estate distributed the capital in limited amounts voluntarily according to the wishes of the principal. This happens to a certain extent with charitable gifts, but I would broaden the idea to cover any beneficiaries.)

However, beyond wealth taxes, there IS a way to incentivize someone to surrender at least some of their capital voluntarily. In fact, we all do it all the time when we buy insurance. By paying insurance premiums we surrender capital wealth in order to reduce risk and preserve the remainder. The rich have long practiced capital preservation strategies to protect their wealth. So risk is exchanged with capital.

This is also how Wall Street bankers get rich – they assume risk, manage it successfully, and then reap the rewards. So, if those without capital assume the equity risks going forward, and their property rights are vigorously defended, they can reap the rewards of economic success through their labor and their capital accumulation. The rich willingly give up some of their control in return for reducing their risks. As a society we can redistribute wealth by redistributing and managing risk.

This happens now when we save and invest in new business ventures, or accumulate a portfolio of financial assets such as stocks and bonds. But to really make a dent in inequality we must broaden and deepen capital ownership with a range of policy reforms that consistently reward working, saving, investing, accumulating capital, and diversifying risk. In a free society the government was never meant to do all of this for us, especially when we can do it better ourselves. I also would not expect most politicians in Washington to someday wake up and discover these reforms by themselves.

 

 

 

 

Margaret Thatcher, R.I.P.

Thatcher

Great address delivered by Lady Thatcher at Hillsdale College in 1994. We ignore such historical wisdoms these days.

The Moral Foundations of the American Founding

History has taught us that freedom cannot long survive unless it is based on moral foundations. The American founding bears ample witness to this fact. America has become the most powerful nation in history, yet she uses her power not for territorial expansion but to perpetuate freedom and justice throughout the world.

For over two centuries, Americans have held fast to their belief in freedom for all men—a belief that springs from their spiritual heritage. John Adams, second president of the United States, wrote in 1789, “Our Constitution was designed only for a moral and religious people. It is wholly inadequate for the government of any other.” That was an astonishing thing to say, but it was true.

What kind of people built America and thus prompted Adams to make such a statement? Sadly, too many people, especially young people, have a hard time answering that question. They know little of their own history (This is also true in Great Britain.) But America’s is a very distinguished history, nonetheless, and it has important lessons to teach us regarding the necessity of moral foundations.

John Winthrop, who led the Great Migration to America in the early 17th century and who helped found the Massachusetts Bay Colony, declared, “We shall be as a City upon a Hill.” On the voyage to the New World, he told the members of his company that they must rise to their responsibilities and learn to live as God intended men should live: in charity, love, and cooperation with one another. Most of the early founders affirmed the colonists were infused with the same spirit, and they tried to live in accord with a Biblical ethic. They felt they weren’t able to do so in Great Britain or elsewhere in Europe. Some of them were Protestant, and some were Catholic; it didn’t matter. What mattered was that they did not feel they had the liberty to worship freely and, therefore, to live freely, at home. With enormous courage, the first American colonists set out on a perilous journey to an unknown land—without government subsidies and not in order to amass fortunes but to fulfill their faith.

Christianity is based on the belief in a single God as evolved from Judaism. Most important of all, the faith of America’s founders affirmed the sanctity of each individual. Every human life—man or woman, child or adult, commoner or aristocrat, rich or poor—was equal in the eyes of the Lord. It also affirmed the responsibility of each individual.

This was not a faith that allowed people to do whatever they wished, regardless of the consequences. The Ten Commandments, the injunction of Moses (“Look after your neighbor as yourself”), the Sermon on the Mount, and the Golden Rule made Americans feel precious—and also accountable—for the way in which they used their God-given talents. Thus they shared a deep sense of obligation to one another. And, as the years passed, they not only formed strong communities but devised laws that would protect individual freedom—laws that would eventually be enshrined in the Declaration of Independence and the U.S. Constitution.

Freedom with Responsibility

Great Britain, which shares much of her history in common with America, has also derived strength from its moral foundations, especially since the 18th century when freedom gradually began to spread throughout her society. Many people were greatly influenced by the sermons of John Wesley (1703-1791), who took the Biblical ethic to the people in a way which the institutional church itself had not done previously.

But we in the West must also recognize our debt to other cultures. In the pre-Christian era, for example, the ancient philosophers like Plato and Aristotle had much to contribute to our understanding of such concepts as truth, goodness, and virtue. They knew full well that responsibility was the price of freedom. Yet it is doubtful whether truth, goodness, and virtue founded on reason alone would have endured in the same way as they did in the West, where they were based upon a Biblical ethic.

Sir Edward Gibbon (1737-1794), author of The Decline and Fall of the Roman Empire, wrote tellingly of the collapse of Athens, which was the birthplace of democracy. He judged that, in the end, more than they wanted freedom, the Athenians wanted security. Yet they lost everything—security, comfort, and freedom. This was because they wanted not to give to society, but for society to give to them. The freedom they were seeking was freedom from responsibility. It is no wonder, then, that they ceased to be free. In the modern world, we should recall the Athenians’ dire fate whenever we confront demands for increased state paternalism.

To cite a more recent lesson in the importance of moral foundations, we should listen to Czech President Vaclav Havel, who suffered grievously for speaking up for freedom when his nation was still under the thumb of communism. He has observed, “In everyone there is some longing for humanity’s rightful dignity, for moral integrity, and for a sense that transcends the world of existence.” His words suggest that in spite of all the dread terrors of communism, it could not crush the religious fervor of the peoples of Eastern Europe and the Soviet Union.

So long as freedom, that is, freedom with responsibility, is grounded in morality and religion, it will last far longer than the kind that is grounded only in abstract, philosophical notions. Of course, many foes of morality and religion have attempted to argue that new scientific discoveries make belief in God obsolete, but what they actually demonstrate is the remarkable and unique nature of man and the universe. It is hard not to believe that these gifts were given by a divine Creator, who alone can unlock the secrets of existence.

Societies Without Moral Foundations

The most important problems we have to tackle today are problems, ultimately, having to do with the moral foundations of society. There are people who eagerly accept their own freedom but do not respect the freedom of others—they, like the Athenians, want freedom from responsibility. But if they accept freedom for themselves, they must respect the freedom of others. If they expect to go about their business unhindered and to be protected from violence, they must not hinder the business of or do violence to others.

They would do well to look at what has happened in societies without moral foundations. Accepting no laws but the laws of force, these societies have been ruled by totalitarian ideologies like Nazism, fascism, and communism, which do not spring from the general populace, but are imposed on it by intellectual elites.

It was two members of such an elite, Marx and Lenin, who conceived of “dialectical materialism,” the basic doctrine of communism. It robs people of all freedom—from freedom of worship to freedom of ownership. Marx and Lenin desired to substitute their will not only for all individual will but for God’s will. They wanted to plan everything; in short, they wanted to become gods. Theirs was a breathtakingly arrogant creed, and it denied above all else the sanctity of human life.

The 19th century French economist and philosopher Frederic Bastiat once warned against this creed. He questioned those who, “though they are made of the same human clay as the rest of us, think they can take away all our freedoms and exercise them on our behalf.” He would have been appalled but not surprised that the communists of the 20th century took away the freedom of millions of individuals, starting with the freedom to worship. The communists viewed religion as “the opiate of the people.” They seized Bibles as well as all other private property at gun point and murdered at least 10 million souls in the process.

Thus 20th century Russia entered into the greatest experiment in government and atheism the world had ever seen, just as America several centuries earlier had entered into the world’s greatest experiment in freedom and faith.

Communism denied all that the Judeo-Christian tradition taught about individual worth, human dignity, and moral responsibility. It was not surprising that it collapsed after a relatively brief existence. It could not survive more than a few generations because it denied human nature, which is fundamentally moral and spiritual. (It is true that no one predicted the collapse would come so quickly and so easily. In retrospect, we know that this was due in large measure to the firmness of President Ronald Reagan who said, in effect, to Soviet leader Mikhail Gorbachev, “Do not try to beat us militarily, and do not think that you can extend your creed to the rest of the world by force.”)

The West began to fight the moral battle against communism in earnest in the 1980s, and it was our resolve—combined with the spiritual strength of the people suffering under the system who finally said, “Enough!”—that helped restore freedom in Eastern Europe and the Soviet Union—the freedom to worship, speak, associate, vote, establish political parties, start businesses, own property, and much more. If communism had been a creed with moral foundations, it might have survived, but it was not, and it simply could not sustain itself in a world that had such shining examples of freedom, namely, America and Great Britain.

The Moral Foundations of Capitalism

It is important to understand that the moral foundations of a society do not extend only to its political system; they must extend to its economic system as well. America’s commitment to capitalism is unquestionably the best example of this principle. Capitalism is not, contrary to what those on the Left have tried to argue, an amoral system based on selfishness, greed, and exploitation. It is a moral system based on a Biblical ethic. There is no other comparable system that has raised the standard of living of millions of people, created vast new wealth and resources, or inspired so many beneficial innovations and technologies.

The wonderful thing about capitalism is that it does not discriminate against the poor, as has been so often charged; indeed, it is the only economic system that raises the poor out of poverty. Capitalism also allows nations that are not rich in natural resources to prosper. If resources were the key to wealth, the richest country in the world would be Russia, because it has abundant supplies of everything from oil, gas, platinum, gold, silver, aluminum, and copper to timber, water, wildlife, and fertile soil.

Why isn’t Russia the wealthiest country in the world? Why aren’t other resource-rich countries in the Third World at the top of the list? It is because their governments deny citizens the liberty to use their God-given talents. Man’s greatest resource is himself, but he must be free to use that resource.

In his recent encyclical, Centesimus Annus, Pope John Paul I1 addressed this issue. He wrote that the collapse of communism is not merely to be considered as a “technical problem.” It is a consequence of the violation of human rights. He specifically referred to such human rights as the right to private initiative, to own property, and to act in the marketplace. Remember the “Parable of the Talents” in the New Testament? Christ exhorts us to be the best we can be by developing our skills and abilities, by succeeding in all our tasks and endeavors. What better description can there be of capitalism? In creating new products, new services, and new jobs, we create a vibrant community of work. And that community of work serves as the basis of peace and good will among all men.

The Pope also acknowledged that capitalism encourages important virtues, like diligence, industriousness, prudence, reliability, fidelity, conscientiousness, and a tendency to save in order to invest in the future. It is not material goods but all of these great virtues, exhibited by individuals working together, that constitute what we call the “marketplace.”

The Moral Foundations of the Law

Freedom, whether it is the freedom of the marketplace or any other kind, must exist within the framework of law. 0thenvise it means only freedom for the strong to oppress the weak. Whenever I visit the former Soviet Union, I stress this point with students, scholars, politicians, and businessmen—in short, with everyone I meet. Over and over again, I repeat: Freedom must be informed by the principle of justice in order to make it work between people. A system of laws based on solid moral foundations must regulate the entire life of a nation.

But this is an extremely difficult point to get across to people with little or no experience with laws except those based on force. The concept of justice is entirely foreign to communism. So, too, is the concept of equality. For over seventy years, Eastern Europe and the Soviet Union had no system of common law. There were only the arbitrary and often contradictory dictates of the Communist Party. There was no independent judiciary. There was no such thing as truth in the communist system.

And what is freedom without truth? I have been a scientist, a lawyer, and a politician, and from my own experience I can testify that it is nothing. The third century Roman jurist Julius Paulus said, “What is right is not derived from the rule, but the rule arises from our knowledge of what is right.” In other words, the law is founded on what we believe to be true and just. It has moral foundations. Once again, it is important to note that the free societies of America and Great Britain derive such foundations from a Biblical ethic.

The Moral Foundations of Democracy

Democracy is never mentioned in the Bible. When people are gathered together, whether as families, communities or nations, their purpose is not to ascertain the will of the majority, but the will of the Holy Spirit. Nevertheless, I am an enthusiast of democracy because it is about more than the will of the majority. If it were only about the will of the majority, it would be the right of the majority to oppress the minority. The American Declaration of Independence and Constitution make it clear that this is not the case. There are certain rights which are human rights and which no government can displace. And when it comes to how you Americans exercise your rights under democracy, your hearts seem to be touched by something greater than yourselves. Your role in democracy does not end when you cast your vote in an election. It applies daily; the standards and values that are the moral foundations of society are also the foundations of your lives.

Democracy is essential to preserving freedom. As Lord Acton reminded us, “Power tends to corrupt, and absolute power corrupts absolutely.” If no individual can be trusted with power indefinitely, it is even more true that no government can be. It has to be checked, and the best way of doing so is through the will of the majority, bearing in mind that this will can never be a substitute for individual human rights.

I am often asked whether I think there will be a single international democracy, known as a “new world order.” Though many of us may yearn for one, I do not believe it will ever arrive. We are misleading ourselves about human nature when we say, “Surely we’re too civilized, too reasonable, ever to go to war again,” or, “We can rely on our governments to get together and reconcile our differences.” Tyrants are not moved by idealism. They are moved by naked ambition. Idealism did not stop Hitler; it did not stop Stalin. Our best hope as sovereign nations is to maintain strong defenses. Indeed, that has been one of the most important moral as well as geopolitical lessons of the 20th century. Dictators are encouraged by weakness; they are stopped by strength. By strength, of course, I do not merely mean military might but the resolve to use that might against evil.

The West did show sufficient resolve against Iraq during the Persian Gulf War. But we failed bitterly in Bosnia. In this case, instead of showing resolve, we preferred “diplomacy” and “consensus.” As a result, a quarter of a million people were massacred. This was a horror that I, for one, never expected to see again in my lifetime. But it happened. Who knows what tragedies the future holds if we do not learn from the repeated lessons of history? The price of freedom is still, and always will be, eternal vigilance.

Free societies demand more care and devotion than any others. They are, moreover, the only societies with moral foundations, and those foundations are evident in their political, economic, legal, cultural, and, most importantly, spiritual life.

We who are living in the West today are fortunate. Freedom has been bequeathed to us. We have not had to carve it out of nothing; we have not had to pay for it with our lives. Others before us have done so. But it would be a grave mistake to think that freedom requires nothing of us. Each of us has to earn freedom anew in order to possess it. We do so not just for our own sake, but for the sake of our children, so that they may build a better future that will sustain over the wider world the responsibilities and blessings of freedom.

The Wrong Vision

The following is the WSJ’s Peggy Noonan trying to explain the president’s agenda and his confrontational style of politics (full article here):

All the famous criticisms of him are true: He has no talent for or interest in sustained, good-faith negotiations, he has no real sense of alarm about the great issue of the day, America’s debt. He’s a chill presence in a warm-blooded profession.

but …

He is certain he is right in what he’s doing, which is changing the economic balance between rich and poor. The rich are going to be made less rich, and those who are needy or request help are going to get more in government services, which the rich will pay for. He’d just as soon the middle class not get lost in the shuffle, but if they wind up marginally less middle class he won’t be up nights. The point is redistribution.

The great long-term question is the effect the change in mood he seeks to institute will have on what used to be called the national character. Eight years is almost half a generation. Don’t you change people when you tell them they have an absolute right to government support regardless of their efforts? Don’t you encourage dependence, and a bitter sense of entitlement? What about the wearing down of taxpayers? Some, especially those who are younger, do not fully understand that what is supporting them is actually coming from other people. To them it seems to come from “the government,” the big marble machine far away that prints money.

There is no sign, absolutely none, that any of this is on Mr. Obama’s mind. His emphasis is always on what one abstract group owes another in the service of a larger concept. “You didn’t build that” are the defining words of his presidency.

He is not going to negotiate, compromise, cajole. Absent those efforts his only path to primacy in Congress is to kill the Republican Party, to pulverize it, as John Dickerson noted this week in Slate, to “attempt to annihilate the Republican Party,” as Speaker John Boehner said in a remarkably candid speech to the Ripon Society.

Mr. Obama is not, as has been said, the left’s Ronald Reagan. Reagan won over, Mr. Obama just wins. What Mr. Obama really is is Franklin D. Roosevelt without the landslides. He has the same seriousness of intent but nothing like the base of support.

Now, reasonable people can agree that the divide between the haves and have-nots, the 1% and the 99% (more accurately, it’s the 20% vs. the 80%), has become a political and economic problem. We do live in a Winner-Take-All economy and the winners have been setting policy in their favor. This invites a political crisis that challenges both parties and all national politicians. But this administration’s approach is the wrong one because it kills the goose that lays the golden eggs in a free society, which is economic freedom and individual autonomy. Mr. Obama sees a zero-sum world, where some people get ahead by taking from others. This is not the dominant rule of economic freedom, which is positive sum, or win-win.

If we think outside this box, we can design policies to deal with inequality without destroying our society’s historic basis in freedom. There are ways to accomplish these goals through win-win. More fundamentally, humans don’t live to be safe, they live to be free. Big government advocates believe we live to be safe, and that freedom is mainly freedom from fear. They have it backwards. Just ask a former Soviet citizen, who discovered they were neither safe nor free.

Zero-Sum Politics

I’ve reprinted an essay written by the satirist P.J. O’Rourke because it hits on a fundamental economic truth when it comes to the assumptions driving economic policy, and this blog is about economics, not partisan politics. Mr. O’Rourke reveals some economic fallacies that underlie the economic and political strategy the current administration is pursuing with redistributive tax and budget policies.

Zero-sum thinking not only fails as policy in a dynamic, changing world, it diminishes the very people it is hoping to lift up. Zero-sum economics is the stepchild of the dismal science in service to the naked pursuit of political power and exploitation, while positive-sum economics is the mother of shared prosperity and good will.

From the WSJ:

Dear Mr. President, Zero-Sum Doesn’t Add Up

Is life like a pizza, where if some people have too many slices, other people have to eat the pizza box?

By P.J. O’ROURKE

Given that hypocrisy is an important part of diplomacy, and diplomacy is necessary to foreign policy, allow me to congratulate you on winning a second term.

I wish I could also congratulate you on your conduct of international affairs. I do thank you for killing Osama bin Laden. It was a creditable action for which you deserve some of the credit you’ve been given. Of course the intelligence was gathered, and the mission was undertaken, by men and women who, although they answer to your command, answer to duty first. And it is difficult to imagine any president of the United States who, under the circumstances, wouldn’t have ordered the strike against bin Laden. Although there is Jimmy Carter. Thank you for not being Jimmy Carter.

But even though it violates the insincere amity that creates a period of calm following national elections, no thank you for the following, and it is only a partial list:

• Telling the Taliban to play by the rules or you’ll take your ball and go home;

• Leaving Iraq in a lurch (and in a hurry);

• Watching the EU go down the sink drain and into the Greece trap and wanting to take America along on the trip;

• Miscalculating human rights and strategic engagement in the Chinese arithmetic of your China policy;

• Being the personification of bad weather during the Arab Spring with your chilly response when you encountered its best aspects and your frozen inaction when you encountered its worst;

• Playing with Russian nesting dolls, opening hollow figurine after hollow figurine hoping to find one that doesn’t look like Vladimir Putin;

• Sitting and doing nothing like a couch potato watching a made-for-TV movie as the Castro and Chávez zombies continue their rampage;

• Hugging the door on your date with Israel;

• Putting the raw meat of incentives in your pants pocket when you go to scold the pit bulls of Iran and North Korea;

But the worst thing that you’ve done internationally is what you’ve done domestically. You sent a message to America in your re-election campaign. Therefore you sent a message to the world. The message is that we live in a zero-sum universe.

There is a fixed amount of good things. Life is a pizza. If some people have too many slices, other people have to eat the pizza box. You had no answer to Mitt Romney’s argument for more pizza parlors baking more pizzas. The solution to our problems, you said, is redistribution of the pizzas we’ve got—with low-cost, government-subsidized pepperoni somehow materializing as the result of higher taxes on pizza-parlor owners.

In this zero-sum universe there is only so much happiness. The idea is that if we wipe the smile off the faces of people with prosperous businesses and successful careers, that will make the rest of us grin.

There is only so much money. The people who have money are hogging it. The way for the rest of us to get money is to turn the hogs into bacon.

Mr. President, your entire campaign platform was redistribution. Take from the rich and give to the . . . Well, actually, you didn’t mention the poor. What you talked and talked about was the middle class, something most well-off Americans consider themselves to be members of. So your plan is to take from the more rich and the more or less rich and give to the less rich, more or less. It is as if Robin Hood stole treasure from the Sheriff of Nottingham and bestowed it on the Deputy Sheriff.

But never mind. The evil of zero-sum thinking and redistributive politics has nothing to do with which things are taken or to whom those things are given or what the sum of zero things is supposed to be. The evil lies in denying people the right, the means, and, indeed, the duty to make more things.

Or maybe you just find it easier to pursue a political policy of sneaking in America’s back door, swiping a laptop, going around to the front door, ringing the bell, and announcing, “Free computer equipment for all school children!”

However, domestic politics aren’t my first concern here. The question is whether you want to convince the international community that zero-sum is the American premise and redistribution is the logical conclusion.

I would argue that the world doesn’t need more encouragement to think in zero-sum terms or act in redistributive ways.

Western Europe has done such a good job redistributing its assets that the European Union now has a Spanish economy, a Swedish foreign policy, an Italian army, and Irish gigolos.

Redistributionist political ideologies, in decline since the fall of the Soviet bloc, are on the rise again. Will you help the neo-Marxists of Latin America redistribute stupidity to their continent?

The Janjaweed are trying to redistribute themselves in Darfur. The Serbs would like to do the same in Kosovo. The Chinese have already done it in Tibet. Al Qaeda offshoots are doing their best to redistribute violence to places that didn’t have enough.

And Russia and China would like the global balance of power to be redistributed. Since China has plenty of money to lend and Russia has plenty of oil to sell, your debt and energy policies should go a long way toward making the balance of power fairer for the Russians and Chinese.

While redistribution—or “plagiarism,” as we writers call it—is a bad idea, zero-sum is even worse. Zero-sum assumptions mean that a country that doesn’t pursue a policy of taking things from other countries is letting its citizens down. That’s pretty much the story of all recorded history, none of which needs to be repeated. It has taken mankind millennia to learn that trade is more profitable than pillage. And we don’t have to carry our plunder home in sacks and saddlebags when we’re willing to accept a certified check.

The Chinese don’t seem to understand this yet. They think trade is a one-way enterprise, the object of which is for China to have all the world’s money. They’ve got most of ours already. Mr. President, validating China’s economic notions isn’t a good thing.

A zero-sum faith in getting what’s wanted by taking it can extend to faith itself. In some places there is only one religion. If other people have a religion of their own they must be taking away from my religion. Give up that faith, infidels.

Speaking of infidel faiths, Mr. President, please consider the message of this Christmas week—a message of giving, not taking. And consider your prominent position as a messenger of peace on earth and goodwill toward men. When you embrace a belief in the zero-sum nature of what’s under the Christmas tree and propose to redistribute everything that’s in our Christmas stockings, you’re asking the world to go sit on the Grinch’s lap instead of Santa’s.

Friedman on Freedom

 

Good quote by Milton Friedman:

Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.