Tycoons and Monopolies IV: Noam Lanir and Stef Wertheimer.22.04.13

Tycoons and Monopolies IV: Noam Lanir and Stef Wertheimer 22.04.13

by

Howard Adelman

Israeli billionaires come in many varieties and types. Noam Lanir stands in contrast to Dan Gertler. First, he is a hi-tech billionaire. Though also in his forties, Lanir does not run a myriad of offshore companies; he focuses on a few engaged in marketing services – gambling, translation and medical tourism. He is the CEO of the Livermore Investment Group. (Empire Online) of which he is the major shareholder. Instead of coming from an observant background of a family involved in a traditional Jewish business – diamond cutting and sales – his father was an Israeli pilot and hero. In the Yom Kippur War, his father’s plane was shot down over Syria when Noam Lanir was only six years old; his father was captured, tortured and died in captivity.

Lanir served in the IDF pioneering in training for guiding pilotless aircraft. As indicated in my blogs on drones, such a technology is based on calculations of probabilities to forecast trajectories. Gambling is also about risk calculation. However, when he was discharged from the IDF, he first went into the club business. In 1997, at about the same time as Dan Gertler entered the DRC. Lanir entered the gambling realm by becoming the marketing manager for a lottery for the Association for the Well-Being of Israel’s Soldiers – Aguda Lemaan Hachayal. A charitable organization, it provides R&R for soldiers, recreation and sports facvilities, educational centres and programs, help for bereaved families of fallen soldiers and a host of programs for veterans, including scholarships and a variety of assistance programs for soldiers with disabilities. Lanir has remained very active and supportive of this charity as his wealth has grown.

After leaving his stint at Aguda Lemaan Hachayal, the following year he registered Empire Online (EO) in the Virgin Islands not as a gambling site itself, but as a site to host gambling sites run by others and undertake the marketing for them. Lanir does not operate in Israel or provide access to Israelis who want to gamble. Empire Online is more accurately depicted as an internet technology and marketing company specializing in hosting and promoting gamling sites than operating any gambling site itself.

By 2005, there were 186,000 gamblers using the site, 70% of them Americans. EO referred them primarily to two gambling sites, PartyGaming (72% of its 2004 revenue of US$65 million) owned by the Parasol Group (Anarag Dikshit, Vikrant Bhargava and Russ DeLeon) and Casava (27%) owned by Ari and Aharon Shaked and and Shai and Ron Ben Yitzhak. PartyGaming founded in 1997 was a network of gambling sites with itsd flagship site, PartyPoker, launched in 2001.

Each of these gambling sites could terminate their contracts on short notice for a wide variety of reasons. Why were they willing to allow another site called a “skin” to skim off parts of their profits for simply a hosting and marketing service, particularly since those actual gambling sites encouraged gamblers to register directly on their sites? Why have Empire Poker serve as a gateway to Party Poker? There appear to be a number of reasons: 1) these clients were regarded as bonus gamblers, gamblers they might not otherwise have had; 2) since the sites were recommended by a third party that appeared to be neutral with respect to all gambling sites available, the hosting and marketing site enhanced the credibility of the actual gambling site for honesty and credibility, especially since players were wary of internet sites cheating by using improper shuffling of the cards, insider playing or collusion; 3) since the success of a gambling site depends on attracting a critical mass of gamblers, the function of luring gamblers to a gambling site is triply important; 4) most of the gamblers using those sites are American and American federal authorities consider online internet gambling illegal but then lacked a specific enforcement law – operating at two levels provided a degree of protection for the actual online gambling site for the site on which they register is not a gambling site and cannot be banned from taking credit cards under then current regulations; 5) Party Gaming was valued at US$8 billion is 2005, so why begrudge giving away some of its profits to another company which does so much to enhance its own value.; 6) the competition was already very tough among online gambling sites with up to 200 estimated competitors with giants such as Hurrah Entertainment and BetFair, so that anything enhancing the value of one’s own site is worth supporting.

In 2004 alone, 34,000 new gamblers enrolled on gambling sites through EO’s efforts. In 2004, on gross revenues of US$65.2 million with only 60 employees, it netted $US 37.7 million. That meant that with such revenues, especially given its growth potential – the existing world wide online internet gambling was then estimated to be worth $US!2 billion and growing rapidly – the company’s market value could be estimated to be almost a billion American dollars. Sure enough, by the time it was ready to go public on the London stock exchange, its IPO was valued at up to one million British pounds and when the flotation was about to be launched, it reached a value of US$928 million.

However, at about that time, EO’s relationship with Party Gaming began to sour. In mid-2005, Party Gaming began to “ringfence” its players from EO and upgraded its PartyPoker site to cut out EO from accessing its players. In November 2005, Party Player terminated its relationship with EO. EO sued in the High Court of Gibralter. In February 2006, the two companies agreed to an out-of-court settlement that paid $US250 million to EO. Further, in December 2006, Party Player agreed to acquire Lanir’s remaining shares in EO for $US40 million. It was estimated that Lanir ended up netting about a third of a billion American dollars.

The timing was propitious. In 2006, the United States Congress passed The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) to regulate online gambling. On 2 October 2006, PartyGaming suspended “all real money gaming business with US customers” when George Bush signed the act into law on 13 October. The value of the shares dropped by 60% in 24 hours.

To attract players to EO’s site from many different companies, EO had to develop a translation facility. Lanir purchased and retained ownership of Babylon Inc., an online dictionary and translation service. Using a database of 1400 sources, the company provides services in 75 languages. In addition to covering a wide variety of technical fields, it also offers audio pronunciation services. Listed on the Tel Aviv stock exchange, in 2012, annual revenues totaled US$178 million.

In 2010, Lanir entered the medical tourism business and started a company, Life Tree Marketing, to market high quality health services in Israel – initially surgical services and in vitro fertilization, a field in which Israel is a world leader. Life Tree Marketing initially targeted Eastern European clients. Increasingly, American patients have been attracted because of the significantly lower costs for equivalent service in the United States. Heart bypass surgery that costs $120,000 in the US costs $30,000 in Israel. In vitro fertilization that costs $30,000 in the US costs $3500 in Israel.

His company is in competition with International Medical Evaluation and Referral (IMER) owned by Hadassah Hospital or the Ramat Aviv Medical Center that also serves the medical tourism business. Like his gambling site, his is a marketing site and his company enters into partnerships with hospitals that actually provide the services from which Life Tree rakes off 20% of the fees charged to cover its costs of attracting clients and making the arrangements for them to get to the facilities in Israel. There are already contracts with the Shaba Medical Center, Tel Hashomer Hospital, Shaarei Tzedeck Medical Center and Wolfson Hospital. Annual revenues are already estimated to have reached $US20million.

Stef Wertheimer is a much older entrepreneur, twice the age of Noam Lanir and probably four times the wealth. He is worth at least US$4billion. Originally born in Germany, his fled the Nazis when he was eleven years old and settled in Israel. Although Wertheimer attended an excellent school, he dropped out at the age of 16, surprising in retrospect for someone who puts such a high value on training and education. During WWII, Wertheimer worked for and studied optics with a pioneering researcher in the field, Emmanuel Goldberg, and then joined the British airforce to repair optical equipment installed on British aircraft. After the war, he served in the Palmach and eventually served as a technical officer in the Yiftach Brigade.

ISCAR, one of the largest manufacturers of carbide industrial cutting tools with 6,000 employees worldwide; it was started by Wertheimer in 1952 as a backyard sheet metal cutting operation. It was sold to Bershire Hathaway in 2006 for US$5 billion. The Wertheimer family retained ownership and control of Blades Technology valued at US$1 billion. Sceptical of high tech companies and entrepreneurs or making money off natural resources, whether it be the discovery and export of gas from Israel’s new fields or from buying the raw materials of other nations, Wertheimer is a true believer in the old industrial economy as the backbone of a nation’s wealth. To develop that wealth demands providing workers with the necessary high level of skills to engage in manufacturing, and to ensure that all citizens, whether, religious Jews or Arabs, Haredi or secular, Druze or Circassions, are properly skilled. He is an equal opportunity employer.

Whatever the value of this wealth obtained from the older manufacturing centres, a great part of Wertheimer’s money has come from the development of industrial sites where manufaturing on all levels takes place. In the eighties, Wertheimer focused on comprehensive sites that included not only manufacturing, warehousing and shipping space, but educational, recreational and transport facilities as well. He has been a pioneer with Shimon Peres in using economics to promote peace by fostering co-ventures and cross border industrial parks. This initiative was successful in Nazareth but unsuccessful in Gaza once Hamas took control. Wertheimer envisions such parks, not simply as real estate plays, but as incubators of innovation, worker training and start-up companies. Wertheimer helped found the Democratic Movement for Change and was elected onits list in 1977 and joined Shinui in 1978 when DASH broke apart but left politics in 1981. Currently, he is an active member of Tzipi Livni’s Hatnuah.

He is a winner of the Israeli Prize and was given the Oslo Business for Peace Award in 2010. He is highly esteemed in Israel.

Tycoons and Monopolies. Ze’evi.21.04.13

Tycoons and Monopolies. Ze’evi. – Part II 21.04.13

by

Howard Adelman

Before I took time off to write blogs on films showing at the Toronto Jewish Film Festival, in my economic series on Israel, I wrote on tycoons and billionaires to get a sense of many of the top individuals who have driven their own stories of rags to riches as well as the story of Israel’s rise into the top tier of developed countries. In the first one of this series, I wrote about the political and social as well as economic impacts of a dozen or so Israeli billionaires — including Shari and Micki Arison, the Ofer brothers, David Azrieli, Noam Gottesman, Arnon Michan, Meir Doron, Joseph Gelman, Marc Rich, and Haim Saban, many of whom live outside of Israel and made a good part of their fortunes outside Israel. I also wrote about two impressive but very different Mizrachi billionaires, Shilvan Eliahu and Yitzhak Tshuva. Today and tomorrow I want to concentrate on a smaller group of Israeli billionaires who also made their fortunes primarily in Israel, but come from an Ashkenazi or Sabra background. On Tuesday, I will write about the East European Israeli billionaires.

Gad Zeevi is an Israeli born tycoon who was accused of stock fraud and money laundering in 2006, disappeared from the public eye, went through a long trial until the judge declared him NOT guilty in March of 2011, finding that the sale of his shares “was neither false nor unreasonable”. As Judge Daniela Cherizli concluded, “There was no conspiracy, and I therefore acquit the accused of all charges in the indictment.” I begin at the end of the story because if you read the ruling, it becomes clear that when there is smoke, sometimes there is no fire. There is just deep suspicion about people who are worth billions. Some rich people are certainly guilty of making their money through fraudulent means. But making money is not itself fraudulent. Further, even the ultra rich can be subject to bullying by zealous prosecutors convinced that something was amiss.

Further, bureaucrats sometimes interfere with entrepreneurial activities and initiatives even when they are not against the law. In the 1990s, when Gad Zeevi made a move to acquire the controlling interest in Bank Mizrachi, though there was no law at the time against his effort, Ze’ev Abeles, the supervisor of banks, kept insisting that he had to inquire further into the Zeevi group of companies activities in Africa, endlessly postponing a decision, until Zeevi just gave up. As it has been said, the problem in Israel is not one of a normal bureaucracy with too many rules and too many levels of decision-making, but government functionaries who are as entrepreneurial about their duties as any businessman. They make up the rules as they go. Israel is burdened with an anti-bureaucracy bureaucracy, where bureaucrats practice the art of creative decision-making.

This occurs at all levels. When I was in Israel in the late seventies as a Lady Davis Visiting Professor at Hebrew University, I knew I had to get my VW camper van out of Israel before a year was up or I would be subject to a huge tax. I was due to leave with my oldest son from the Port of Haifa two days after my year was up. So I drove the camper van down to Haifa two days before the expiry of the period, just to be safe, and put it into the export area from which I could drive it onto the ship when I was leaving four days later. When I did this, the port authorities informed me that a small licensing fee had been due at six months and that I should go to the Jerusalem office where I lived to pay the fee and when I showed them the receipt, I would be permitted to take the VW van out of Israel.

The official was very helpful and gave me instructions on where to go on King George Street in Jerusalem and how much I would be required to pay. I had two days to accomplish this task as well as complete our packing and preparations to move three days hence. Early the next morning – at 7:00 a.m. – I stood in line on King George Street. I was second in line when the office opened at 8:00 a.m. By the time it opened, there were about twenty people waiting to get in. When the door opened, I asked the person where to go and she directed me to the second floor to pay license fees. I scurried up and was no longer second in line but about sixth and it took me until 9:45 a.m. to get to the front of the wicket.

I then showed my license and had the exact amount of lira (money had not yet been changed to the new Israel shekel) in hand to pay. The clerk condescendingly told me that a license fee was not due, but an import duty was. That office had moved two years ago. She tersely gave me an address. It was in a new industrial area of Jerusalem. I ran outside and grabbed a cab. It took twenty minutes to get there.

The line had about sixteen people in it when I got there at 10:22. I despaired, but quickly cheered up when it seemed to be moving reasonably quickly. I learned later that the reason the line moved so quickly was that most people were sent away to get more documents in order to complete the transaction. Further, the son of the Imam from Jerusalem was standing behind me in line and we struck up a very enjoyable and interesting conversation. When my turn came – it was then 11:30 a.m. – I handed over the license and my money through the wicket – only it was not quite a wicket.

Curtly, the clerk asked what this was for. I answered that it was to pay the foreign vehicle fee that was due at six months and that I had not know about previously. The clerk asked for the ownership papers for the vehicle. I told the clerk that I was required to leave the ownership papers at the Haifa Port. He said that I could not pay the fee without the ownership papers. I told him my situation and that I was in a Catch-22. I was leaving in another two days and could not get my vehicle out of the port any longer nor retrieve the ownership papers that had to be left with the vehicle. Yet I could not get the vehicle again to leave until I paid this fee.

He said, “Next.” In Hebrew, of course! I said I was not leaving the line until I could pay the fee. The Imam’s son encouraged me. This was his third time back in line because each time he was sent away and asked to bring another paper. The Israelis further down the line, instead of telling me to get out of the way, yelled, “Start a sit in.” I seemed to have the whole line behind me totally sympathetic to my plight and supporting me. The clerk announced that he was going on a tea break and closed the wicket.
He returned in twenty minutes – I was getting desperate because I knew government offices closed at 1:00 p.m. for the day. It was now almost noon. The clerk, without looking up, said I would have to go upstairs. He directed me to an official upstairs. That person would take care of the problem. I ran up the stairs, found the room, and was ushered in right away to see this official. I explained my plight. He asked, “What size of engine did the VW have?” I said I had no idea. He said that VW vans had either a 1200 or a 1600 cc engine. Again I said I had no idea. When he kept insisting on my trying to recall a figure, I said it must have been the larger figure because the VW I drove had lots of oomph. He asked whether I was sure. I said that I was not sure at all, but thought that must have been the case. He asked again whether I was sure. After the third time, to get the matter over, I said that I was pretty sure. So he gave me a signed slip with instructions and told me to go to the front of the line and see the clerk. I would not have to line up again.

I went to the front of the line – it was now 12:25 – and waited until the person being served finished. The Imam’s son was no longer there and I hoped he had received his license this time. No one in the line objected to my jumping the queue. I handed over my license, the money and the signed slip I had been given. He took the papers, counted the money and said that it was not enough. I said that was the amount I had been told in the port. He said that that was the amount for a 1200 cc engine. I had a 1600 cc engine. The amount required to be paid for a 1600 cc engine was three times the amount for a 1200 cc engine.

I despaired at my stupidity and failure to get the hints of the official upstairs. I asked in despair, “What can I do?” I had traded in all my excess lira and would have to go a bank and exchange more money and come back and I was not even sure I had that amount of cash freely available as I had transferred most of my assets back to Canada already. He said, wait a minute. I, and everyone else in the line, waited ten minutes. I was so embarrassed. I knew that those near the back of the line – there were about eight still lined up – could not possibly get served by 1:00. When he returned he told me that he would reduce the fee by half. I still did not have enough lira. There were no ATM machines then and the nearest bank was probably a mile away – we were in the boondocks.

I agreed to return the next day. He told me I would not have to line up. And true to his word, after I went to the bank first thing in the morning to obtain the extra lira I needed, I went right to the front of the line and within two minutes I had paid the fee and had the longed for stamped slip I needed. I left amazed at both the initiative of the bureaucrats and their obduracy. They could not and were not cowed by academics, imams or, as we shall see, billionaires. They were equal opportunity obstacles and innovators.

Gad Zeevi was a multi-billionaire. He owned part of Haifa’s Grand Canyon Mall, and real estate throughout Israel, Eastern Europe and the USA, owns the largest and best equipped private hospital in Israel and has been a pioneer in health tourism. He has investments in the media and in new hi-tech apps. He runs the largest import and freight forwarding agency with offices throughout Africa, Eastern Europe and America. He has been an importer and gained control of Japanauto in the late nineties to become the dominant importer of cars and trucks into Israel. The Ze’evi group is also onto the production, refining, distribution and sales of petroleum products both in Israel and the USA as well as in the construction and management of electric power stations. He has been, nevertheless, treated with much more bureaucratic interference than I was fitting to his wealth. And, possibly, sometimes more help. In some ways, however, Israel, in spite of now ranking with countries with the greatest gap between rich and poor, is still an egalitarian society.

When the Berlin Wall came down and Eastern European states initiated the privatization of their assets, Eastern European groups with money turned to pick up those assets at bargain basement prices. The Polish Group (Bagsik and Gasiorowski) was one of them. They decided to sell off their assets to do so. One was Paz Oil in Israel. They approached Gad Ze’evi to see if he was interested. They offered Paz to him at US$10 million less than they themselves had paid a year earlier because they saw much greater and faster profits in Eastern European assets then for sale. Ze’evi put a down payment of US$7.5 million and agreed to pay for the balance in equal installements every six months over the next four years. A contract was signed.

But it did not work out. During the due diligence period, Ze’evi claimed that something was amiss and refused to close the deal. Instead of backing off and absorbing losses for the work put in, Ze’evi took the Polish Group to court for refund of his deposit and legal costs. The issue went first to an arbitrator as provided in the contract and then to the courts and, as usual, dragged out for three years. Paz was tied up and the Polish Group sufered significant opportunity cost losses in not having the funds to gain control of Polish government assets. At the same time, Ze’evi had his $US7.5 million tied up and very large legal fees. The Polish Group lost even more, not only the lost opportunities to make large sums in other ways, but they finally sold Paz at one-quarter of the price that Ze’evi had agreed to pay. Both sides were huge losers.

The losses were not only financial. Although both sides poured money into public relations as part of their legal suit, both sides’ reputations suffered enormously. Gad Ze’evi was portrayed in terms bordering on antisemitic stereotypes. Further, his legal troubles had just begun. In March of 2001, he was arrested, along with others, and charged with fraud by the Israeli International Crimes Unit in what was called the Bezeq Affair. When Ze’evi purchased his 17.6% stake in Bezeq from Cable and Wireless for US$600 million in 1999, he evidently, as required by law, did not properly disclose his source of financing from Mikhail Chernoy who had come onto a large stash of cash when he sold control of the Bulgarian cell phone company to MobilTel. (I will have more to say on Mikhail Chernoy and his connection with Avigdor Lieberman in my last blog on Tycoons and Monopolies focused on the Eastern European Israeli billionaires.)

In 1999, Ze’evi had borrowed US$643 million from a consortium of Israel’s six largest banks led by the First International Bank of Israel. US$500 million of the loan was secured by the shares that he had purchased as well as a guarantee provided by a Swiss account controlled by Mikhail Chornoy for US$143 million. Evidently Mikhail Chernoy had not been disclosed as the one providing the guarantee. The banks claimed that, had they known, they would not have approved the loan.

When Ze’evi could not meet the terms of the loan, largely because of his losses in the Paz affair, the banks in 2002 put him into receivership and he lost control of the Bezeq stake. The receiver sold the shares in Bezeq for NIS 4.7 billion for a healthy profit, repaid the banks in full, repaid Chernoy US$107million ($36million had already been repaid in 2000) and enough held in trust until the courts settled the amount of interest owing to Chernoy. The balance went to Ze’evi. The criminal action, on the other hand, dragged on until 2009. Then, Tel-Aviv District Judge Oded Mudrik instructed that the Prosecutor settle since no criminal intent was uncovered in Cherney’s loan to Ze’evi.

There are several lessons to be learned from this affair. First, as I have written before, when there is smoke, there is not always fire. Second, becoming involved with intelligent, persistent and suspicious prosecutors in Israel is dangerous to one’s health. Third, any business person has to do due diligence, not only on the business financial aspects of a deal but on the personalities involved. Fourth, the financial costs of slip ups are enormous. Hence the huge amounts entrepreneurs pay legal firms to minimize possibilities of exposure to possible mistakes. Legal costs and potential legal costs constitute a significant, but largely unproductive cost of engaging in business transactions. Any actions the state can take to ensuring financial deals are totally above board while also minimizing exposure to risk can be one of the most important contributions that the state can make both to the efficiency and integrity of business transactions.

Lev Leviev.30.04.13 30.04.13

Lev Leviev 30.04.13

by

Howard Adelman

I have been AWOL after visiting my two youngest children in Victoria and Vancouver. (In August, Daniel is getting married on Vancouver Island where he lives; Gabriel is just finishing film school in Vancouver and his film was showing at the student film festival, When we were there, we learned he was flying to Miami Beach this past Sunday to receive a film award.)

One recent piece of news relative to Obama’s use of small tactical moves to advance the peace process has emerged. In a meeting yesterday of Arab League members with US officials, including Vice President Joe Biden and Secretary of State John Kerry, at Blair House yesterday, the Arab League for the first time backed the idea of comparable mutually agreed territorial swaps in a land for peace deal.

This week I will finish my series of profiles on Israeli billionaires, in particular, the ones from Eastern Europe, and offer some summary observations. I will cover:

Lev Leviev (today)
Alexander Mashkevitch
Leonid Nevzlin
Vadim Rabinovich

Lev Leviev, like some other Israeli billionaires, relocated six years ago from Israel (B’nei Brak to London); he now occupies a US$70 million mansion in Hampstead. We already had a glancing acquaintance with Lev Leviev because of his association with Arkadi Gaydamak in Angola. Leviev and Gaydamak had become involved together in a joint venture to purchase a metallurgy plant in Kazakhstan in 1999 and subsequently when Gaydamak bought a 15 percent share of Africa Israel. As with most of Gaydamak’s partnerships, but very rare for Leviev, there was a falling out. In a London court last year (12 July), the High Court in London not only dismissed all legal claims of Gaydamak against Leviev (the suit was for a $1billion), but assessed legal costs against Gaydamak. The deal went back to 2001 when Gaydamak first entered the Angolan diamond market. Leviev brought to the deal his expertise in diamond cutting and conceived the idea of an Angolan controlled marketing of Angolan diamonds, a deal that has been very profitable for the Dos Santos family and his associates as well as for Leviev. There is no evidence that Leviev was involved in the arms for diamond trade, but the monopoly deal was, in part, designed to eliminate the trade in blood diamonds.

Leviev is a self-made billionaire. He arrived in Israel with his Lubavitcher family from Tashkent, Uzbekistan in 1971 at the age of fifteen but dropped out of school to learn diamond cutting. He lacked Dan Gertler’s family connections but his own inner ambition allowed him to master all eleven steps of diamond cutting without serving decades of apprenticeship. He paid his fellow cutters to teach him the requisite skills. By the age of 22, he had set up his own shop. By the age of 32, he had twelve of the most technologically developed diamond cutting and polishing plants. During that period of expansion, he established himself as a de Beers “sightholder” even though he was an outsider, a Bukharan Jew. He became one of the 100 or so individuals authorized by the de Beers cartel allowed to buy diamonds at fixed prices.

Just as he could not stand to be an outsider forced to buy diamonds from middle men rather than directly from de Beers, he soon chafed at having to buy rough diamonds through de Beers. In the upheavals in Eastern Europe, after receiving a blessing from Rabbi Menachem Schneerson, he convinced the Russian Minster of Energy to break the de Beers monopoly and, with his help by using the Lubavitcher network in the former Soviet Union, set up an indigenous cutting and polishing of diamonds operation in Russia so that the higher value polished diamonds could be exported. Leviev broke the de Beers monopoly. It was the same technique he would bring to Angola in 1997. In a joint venture with Alrosa, the Russian state diamond company, Leviev bought into the Catoca diamond mine. It helped that Dos Santos spoke Russian from his days as an engineering student in the Soviet Union so Leviev did not have to master Portugese.

Leviev now is the largest cutter and polisher of diamonds in the world. His company integrates the beginning of the business with the acquisition of rough diamonds to the retail level with high end stores in London, New York, Moscow, Dubai and other centres. His vertically integrated company gets its diamonds not only from Russia (Leviev is a personal friend of Putin) and Angola, but also Namibia, Alaska and the Northwest Territories in Canada where he was a pioneer in mining for diamonds.

Leviev’s diamond business is personally owned but he is also the controlling shareholder of Yehud, which owns Africa-Israeli Investments (AFI) in which he bought a 60% interest in 1996 for $400 million. AFI recently went through a financial restructuring that diluted his holdings from 75% to just under 53%. Like many other property developers, he got caught by the bursting American real estate bubble in 2007-2008 (just after the New York Times building and the Madison Avenue Clock Tower were purchased), the burst bubble in Europe – AFI owns property in Prague and London – and the more recent burst in the Russian bubble, ignoring that he bought his Hampstead home at the peak of the London market. Yehud also owns Gottex, the Israeli swimwear company, 1700 FINA gas stations in the American southwest, and a chain of 173 7-Elevens in New Mexico and Texas. AFI is a one-third owner of the Israel toll road, the Cross Israel Highway. It also owns the Russian language Israeli TV station, Vash Telecanal. Fortunately for him, AFI’s real estate investments in the USA, mainly in New York, have recovered a great deal of their lost value.

Leviev has mixed his political convictions with his investment strategies in assuming the role as the foremost developer in the West Bank with significant building projects in Har Homa, Maale Adumim, Zufim, Adam, Modiin Illit and Ariel. As a consequence, his jewellery stores have been the sites of pickets and protests and the British foreign ministry cancelled a prospective deal to rent space for its Israeli embassy in an AFI building in 2009 after a campaign led by Architects and Planners for Justice in Palestine. Some European Investment funds have also sold off their holdings in AFI, but it is not very clear in some cases whether this was because of perceived negative prospects of AFI or a response to protests. BlackRock, Investeringsforeningen Sydinvest, the Swedish AP1 pension fund and Dutch PFZW were joined by the US Teachers Insurance and Annuity Association College Retirement Equities Fund in selling their shares in AFI. Further, it is also not clear whether this sell off also precipitated the need for AFI to restructure.

Lev Leviev is possibly the most active philanthropist among the Israeli plutocrats and is certainly the foremost promoter of the restoration of Jewish life, culture and especially Jewish education primarily through the Jewish Learning Initiative in the former Soviet Union. He is President of the Federation of Jewish Communities of the CIS (FJC) representing the fifteen organized Jewish communities in the former Soviet Union. Leviev supports over 10,000 Jewish community civil servants, including 300 mostly Chabadnic rabbis as well as the extensive network of schools in which they teach..

Fathers are supposed to circumcise their own sons. Almost all hire a mohel or a certified doctor to perform the task. Not Leviev. One of the more interesting stories about Lev Leviev is that, without any training, at the age of 22 he followed his father’s practice and circumcised his own son, using his skills as a diamond cutter to get through. By now he has performed over a thousand circumcisions. Another is that he is a believer in women’s equality in the workplace. Two of his daughters have very high executive positions in his companies. Zvia, a daughter with four of her own children, runs the international marketing and mall businesses. Tomorrow, when Tamir Kazaz steps down as CEO of AFI, Leviev’s daughter, Hagit Leviev-Sofayev, a former executive of Deloitte in the economics department, is most likely to become CEO.

Leonid Nevzlin.01.05.13 01.05.13

Leonid Nevzlin 01.05.13

by

Howard Adelman

Leonid Nevzlin is from Moscow. As I shall explain, he is probably no longer the billionaire listed in Forbes in 2003, but he is included in this series because of the explanation. Nevzlin graduated from the Gubkin Institute of Oil and Gas in Moscow as a software engineer and worked as a computer programmer for the Foreign Trade Association (ZarubezhGeologia) in the Soviet Ministry of Geology. In 1987, he partnered with Mikhail Khordorkovsky and became Deputy Director of the Youth Centre for Scientific and Engineering Creativity just when Mikhail Gorbachev began his restructuring of the Soviet economy. He also headed the Center of Interdisciplinary Scientific–Technological programs (MNTP) that morphed into the Joint Company Menatep-Invest out of which the two partners established the Menatep Bank in 1990. Nevzlin became President. Menatep was used to found Yukos, where Nevzlin assumed the position of Vice-President. Yukos became the world’s largest non-state oil company in only five years.

The foundation of their wealth began with currency trading in the early nineties based on algorithms Nevzlin devised, and then buying up for cash the vouchers issued in the process of privatization, initially in state enterprises, and then in property at deeply discounted prices. The new Russian oligarchs, mostly Jewish, lent the money to the state Yeltsin ran, and the loans were secured by state assets. When the government defaulted on loan payments, the oligarchs seized the assets. Through buying vouchers and foreclosing on state loans, by the mid-nineties, Khodorkovsky and Nevzlin were very rich.

Nevzlin and Khodorkovsky bankrolled Yeltin’s re-election in 1996 for which Nevzlin was awarded the Russian Order of Friendship. In September 1997, Nevzlin became Deputy Director of the Russian news agency, ITAR-TASS, for a year. Nevzlin developed a plan to gradually transform ITAR-TASS into a joint-stock company. In 1999, Bank Menatep went belly-up in the Russian financial crisis of 1998-1999. Yukos was also in trouble, spending US$12 to pump oil with its outdated equipment that was only selling for $US8 per barrel. Nevzlin and Khodorkovsky not only saved the company by modernizing it, transforming the financial reporting to western methods to assure transparency and accountability, but mainly through the god’s of fortune as oil prices began their spectacular rise.

The two partners began to devote more time to the development of civil society and the two founded the Open Russian Federation to fund civil society projects. The two also funded a school for public administration. From March to December 2001, Nevzlin was president of the Russian Jewish Congress and he personally funded a number of Jewish historical and heritage research projects, including the establishment of the Moscow Jewish Cultural Center and the International Center for Russian and Eastern European Jewish Studies in Moscow. From November 2001 to March 2003, Nevzlin became a senator in the Federation Council of Russia representing Mordovia and became the first rector of a university without a PhD for the Russian State University for the Humanities. The two partners became the biggest supporters of civil society organizations providing at least 50% of the income of all of them while Khodorkovsky also donated a hundred million $US to the Russian State Humanities University.

In 2003, the political winds that had been changing over the previous four years became a whirlwind. Putin had assumed the presidency of Russia in 2000 after rising under Yeltsin as Acting President in 1999. By 2003 he was consolidating his power in preparation for running for president again in 2004. Though the economy had stabilized and had experienced enormous growth under his regime, fueled in good part by increases in the value of Russia’s oil and gas, Russia began also to regress in democratic terms. Part of that regression meant eliminating any economic centres of power that threatened Putin’s political power. You were either in bed with Putin or sentenced to the scrap heap of history. Putin targeted Vladimir Gusinsky, another Jewish oligarch, who owned a media company and two television stations. Gusinsky was charged and agreed to sign over his companies to the state and fled to Israel.

Khodorkovsky, in 2003 then the richest man in Russia, had as big an ego as Putin and challenged him in the political arena by funding civil society human rights and opposition groups. As an ex-KGB agent, Putin was wedded to doublespeak, doubletalk and double think while Khodorkovsky was a believer in saying what he thought without inhibitions. In February 2003, he refused in a direct meeting with Putin to buckle under. In fact, he directly challenged Putin at the meeting with a slide show arguing that political corruption was costing the Russian economy US$30 billion per year. Khodorkovsky and Nevzlin were true believers in the free market – he and Nevzlin had published a manifesto, The Man with the Ruble, extolling the virtues of capitalism. They wrote: “Our guiding light is Profit, acquired in a strictly legal way. Our Lord is His Majesty, Money, for it is only He who can lead us to wealth as the norm in life.” They had also become believers in free speech and human rights, transparency and accountability. However, Nevzlin, a more prudent man, was not willing to uphold his beliefs at the risk of his life.

Putin’s guiding light was power and Russian nationalism. He turned the power of the state apparatus against Yukos. At the meeting in February, Putin took umbrage at Khodorkovsky’s speech and in not very subtle terms issued his threat. “Some companies, including Yukos, have extraordinary reserves. The question is: How did the company get them? Your company had its own issues with taxes. To give the Yukos leadership its due, it found a way to settle everything and take care of all its problems with the state. But maybe this is the reason there is such competition to get into the tax academy?”

Nevzlin, who had mastered public relations, got the message and immediately went to take citizenship in Israel in 2003 and made efforts to move whatever funds he could salvage to safe havens. Khodorkovsky held his ground as other billionaires and millionaires fled Russia to save their lives (several were murdered abroad) and to avoid the wild west lawlessness of Russia where kidnappers and murderers in cahoots with the state ransomed children and killed at will, Khodorkovsky, as stubborn as Putin, refused to flee, even though Nevzlin warned him that the old laws still on the books could be used to prosecute them.

The squeeze began on 2 July 2003 when, their partner, Platon Lebedev, was arrested. Later in July, the head of security for Yukos, Alexi Pichugin, was also arrested and eventually sentenced to 24 years in prison for murder. Khodorkovsky could bend or flee. He not only stood his ground but ran a public campaign against Putin. By the time Khodorkovsky was arrested on 25 October at the Novosibirsk airport in Siberia at 8:00 in the morning as he was preparing to fly back to Moscow, Nevzlin was living in Israel where he fled with two other partners from Yukos, Vladimir Duvdov and Michail Brodno. Nevzlin has said that he had spoken to his friend just earlier and he seemed to know the consequences he faced.

So did Pavel Ivlev, a tax lawyer who never worked for Yukos or Khodorkovsky but was called as an expert witness at the trial even though he was the lawyer representing other Yukos employees who had been charged, a completely illegal move under any jurisdiction. In the pre-trial examination, he was told that he had to tell all – namely how the employees took sacks of cash out of Yukos to deliver to Khodorkovsky personally. Ivlev protested that he had no knowledge of that ever happening. He was told that if he said that, he too would be arrested. The next day, Ivlev fled the country and flew to Kiev and eventually his family joined him and they now live in New Jersey.

Three years after Mikhail Khodorkovsky was convicted of fraud and tax evasion after a ten month farcical trial, he was sentenced to nine years in prison and sent to Khodorkoovsky colony, YaG-14/10, a 9 hours flight and a 15 hour train ride from Moscow. In January 2004, an international warrant was issued for Nevzlin’s arrest, initially for evading US$930,000 in taxes for the 1999-2000 fiscal year, with illegal appropriation of shares in two Eastern Oil Company (VNK) subsidiaries, and, in July, for murder and attempted murder, specifically targeting businessman Sergei Gorin and his wife, and also Yevgeny Rybin, the president of the East Petroleum Company.

Moscow City Court tried Nevzlin in absentia and found him guilty of organizing five murders and sentenced him to life in prison. All efforts to extradite Nevzlin from Israel failed as the Israeli Supreme Court found that none of the evidence the Russian government presented was enough to even charge him let alone secure a conviction. The High Court of Justice in Israel ruled, “These are hearsay testimonies that do not even justify the appeal to extradite Nevzlin.” In the end, 42 Yukos employees were charged and sentenced. Yukos was sold at a bargain basement price to a company, Baikalfinansgrup capitalized at $US300 with no assets at all registered in a small town of Tver three hours drive from Moscow, the purchase financed by a US$9billion loan by the state oil company, Rosneft, to get rid of debt in return for Baikalfinansgrup’s shares as collateral. Ironically, the process that the partners had initially used to acquire the assets was now put in reverse gear.

While in prison, Khodorkovsky and Lebedev were charged in March 2009 with stealing Yukos’ oil between 1998 to 2003. The trial ended in December 2010 and the two were sentenced to a further 14 year prison term. It was clear that Putin had determined that the two would never again be out of prison.

Since leaving Russia, Nevzlin has repeatedly criticized the Putin regime and offered monies to opponents. He set up an institute on Eastern European and Russian Judaism, The Leonid Nevzlin Research Center for Russian and Eastern European Jewry, at the Hebrew University in Jerusalem. Twin institutions were funded in Moscow, Vilnius and Kiev. He has helped create an endowment for Beth Hatefutsoth, the Nahum Goldmann Museum of the Jewish Diaspora next to Tel Aviv University and became chair of its Board, funding the Nevzlin Program for the Study of Jewish Civilization at Tel Aviv University and the International School for Jewish Peoplehood Studies at Beth Hatefutsoth. He also helped saved the newspaper, Haaretz, by buying a 20% interest.

Two More Eastern European Israeli Billionaires: Mashkevich and Rabinovich.02.05.13

Two More Eastern European Israeli Billionaires: Mashkevich and Rabinovich 02.05.13

by

Howard Adelman

Lev Leviev originally came from Uzbekistan. Alexander Mashkevich was born in Kyrgyzstan, lived in Kazakhstan and still commutes between there and Israel where he moved and took out citizenship in 1991. He also has homes in Belgium and London where his family reside. Unlike Leviev, who was a school dropout, Mashkevich began as an academic teaching philology and became Dean of the Faculty of Linguistics at the University of Kyrgyzstan. Further, Mashkevitch has never invested in the Israeli economy except to buy a 10,000 sq. ft. condo for his daughter for $US31 million.

With two other partners, Muslims from Uzbekistan and Kyrgyzstan, he entered into the good graces of the President of Kazakhstan, Nur Sultan Nezdabayev. When the USSR imploded, the three obtained control initially of aluminum through Khazakhstan Aluminum and, subsequently, the chromium and gas operations in Khazakistan through the Eurasian Natural Resources Corporation (ENRC). When ENRC went public at the end of 2007 when the economy had already begun to dip, it was floated on the London stock exchange for over US$10 billion to the benefit mostly of the three partners. In 2009, ENRC earned almost US$1.5 billion profit on sales of US$3.8 billion, an unheard of 40% return on sales. ENRC invests in coal and transportation companies from Eastern Europe to Africa.

Patokh Chodiev, one of his partners in ENRC, was, like Leviev, an Uzbek, but, unlike Leviev, a Muslim and a scholar who studied international law and mastered Japanese when he lived in Japan. Chodiev later established the Chodiev Group and last week, through a nephew, Orifjon Chodiev, purchased one of the small commercial banks in Khazakistan, the TAIB Bank. For insurance, Chodiev acquired Belgium citizenship in 1997. The third partner, Alijan Ibrgimov, is a Muslim Uigur born in Kyrgyzstan.

Mashkevich followed the pattern established by Leviev and Nevzlin in becoming a plutocratic leader of the Jews in the Euro-Asian Jewish Congress and supports synagogues, even though, unlike Leviev, he is not deeply religious though he plays the role of an observant Jew. Further, he is a supporter of the Braslev Hasidim rather than the Lubavitchers. In 2011, in the Savarona Affair, he was caught by the Turkish police on a very wealthy yacht with other billionaires, but primarily with another Khazakh, Taufik Arif, who lives in Turkey and also owns a metal production factory in Kazakhstan as well as many properties jointly with Donald Trump. The group has more in common with Berlesconi of Italy and purportedly enjoys the pleasures of under-aged girls. In the Turkish press, Taufik has been accused of making money through trafficking in females from Eastern Europe.

Another Eastern European billionaire, Vadim Rabinovich, plays the same game. He is president of the United Jewish Community of Ukraine which he created in 1999. He previously led the All-Ukrainian Jewish Congress which he created in 1997 and dissolved in 1999 because it ostensibly was not willing to bend to his will. He is also Vice President of the European Jewish Union. He made his little fortune in the furniture business and his large fortune in the natural gas business. Like most of the plutocrats, he got in trouble with the law. As with Leonid Nevzlin, that can become a badge of honour. For much of Eastern Europe still has to learn that the rule of law does not mean using the law to rule and throw opponents in jail. However, how do we know when the accused are criminals or political victims?

In yesterday’s National Post, an article on p. A9 was headlined, “Jailing of ex-PM of Ukraine ruled rights violation”. Maria Danilova and Lori Hinnant told the story of how the current president, Viktor Yanukovych, used the judicial system as a club to keep the former president, Yulia Tymoshenko, a heroine of the 2004 pro-democracy Orange Revolution, in prison. Viktor Yanukovych, like the second president, Leonid Kuchma, advocates closer ties with Russia and was known for closing opposition papers and allegedly even having a journalist, Georgiy Gongadze, killed, the accusation that was the catalyst for the Orange Revolution. He was charged in 25 March 2011 but the case was dismissed in December of that year.

Tymoshenko, however, was sentenced to seven years for “exceeding her powers” and “negotiating a gas contract with Russia”. The European human rights court ruled unanimously that her jailing was politically rather than criminally motivated. Typically, as in the blog narrated yesterday, charges are also pending for embezzlement, tax evasion and murdering a politician and a businessman.

Rabinovich was also convicted of a variety of crimes and stripped of his citizenship for fleeing the country and taking out Israeli citizenship. The conviction was subsequently reversed and his citizenship restored. He had a criminal record from the communist period. In 1980, he was charged with stealing state property and spent nine months in jail. In 1984, he was once again arrested and that time sentenced to fourteen years in prison for black market activities but was released in 1990. He then took advantage of the opening up of the Eastern European economic system to quickly accumulate assets.

Like many other plutocrats, he is known for owning a football club, FC Arsenal Kyiv in Kiev, and for his contributions to Jewish charities. He put up the money for the restoration of the Hurva Synagogue, but when we went there to make a program for our show, “Israel Today,” the Hasidim who were given control of the synagogue would not give us access – even to see it let alone to videotape the restoration. The sign denoting the square outside the synagogue read “Vadim Rabinovich Z”L” (“may his memory be blessed”), a designation not only incorrect, since he was not dead, but completely illegal because Israeli public spaces cannot be named after people who are still alive. Public spaces in the old city must be named after people who died before 1500 AD. Rabinovich also donated a golden menorah ($US3 million) that now overlooks the Western Wall.

Two months ago, on 4 March 2013, a bomb was hurled by young man wearing a baseball cap at his car in Kiev near the Klovska metro station in Kiev but no one was hurt in the explosion. Six weeks earlier, a senior government official and famous Ukrainian businessman with close ties to the present government, Boris Podolsky Evseevich, visited his office and suggested that harm might come his way if he did not transfer his ownership of Jewish News One TV to the government within a week. JN1TV has tried to become the Jewish al Jazeera. In addition, Rabinovich-Katsman own the following newspapers: Stolychka, Stolichnye Novosti, Jewish Review (in Russian), Jewish Reviewer, Vek, Mig, and Zerkalo .

In the Ukraine there has been a noticeable rise in anti-Semitism recently, particularly with the increased representation of the far right Svoboda Party (“Freedom” in Ukrainian) in Parliament as a result of the elections in October 2012 in which they garnered over 10% of the vote. The party was expected to incite new waves of public protest to advance its social and nationalist messages. On 26 April 2013, the JTA reported that, “Marching in formation, six young men in dark jackets approach an anti-government rally in Cherkasy, a city some 125 miles southeast of Kiev. At the appointed moment, they remove their windbreakers to reveal white T-shirts emblazoned with the words ‘Beat the kikes’. Their jackets carry the name of Svoboda, the ultranationalist Ukrainian political party.” One of the men beat Victor Smal, a lawyer and human rights activist, so savagely that he is rendered barely recognizable. A website http://iamthewitness.com/Ukraine.html is headlined, “The French Connection: Who Controls the Ukraine?” and argues that it is the Jews. I quote generously from that site.

“In the early 1990s, backed by the financial power of international Jewish bankers, the vultures bought for pennies, and plainly seized, all major enterprises previously owned by the state, including the biggest factories and entire sectors of the newly ‘privatized’ national economy.” Four Jewish media moguls were then named and their pictures put up on the site: Gregory Surkis, Victor Medvedchuk, Vadim Rabinovich and Victor Pinchuk.

They do own many of the TV stations and newspapers in the Ukraine even though Jews constitute only .2% (103,000) of the Ukrainian population of 48 million. What is not stated is that Leonid Kuchma two term presidency was brought down largely because of that same media exposures of widespread corruption under his government.

Professor Vasyl Yaremenko, director of the Institute of Culturological and Ethnopolitical research at Kiev State University, wrote, “Ukrainians need to know that the mass media is completely in the hands of Jews, and everything that we watch or read is the product of Jewish ideology…” The site states that Leonid Kuchma, the second president of the Ukraine from 1994 to 2005 was put in office by the Jew, George Soros. The Jewish Ukrainian billionaire, Victor Pinchuk, who owns oil, gas and energy import/export companies, the nation’s largest steel mill and a chain of banks, is his son-of-law.

“Jew Victor Medvedchuk is Ukrainian President Leonid Kuchma’s Chief of Staff. The Medvedchuk-Surkis cabal controls Ukraine’s energy sector (8 regional energy companies), oil and gas market, alcohol and sugar production, shipbuilding, and athletic organizations. He is a member of the Ukrainian Parliament, and a leader in the Social Democratic party of Ukraine (SDPU).” “Jew Gregory Surkis is second in command of the SDPU. He owns a soccer team, Dynamo-Kiev, and is a president of the Professional Soccer League. He is CEO of Slavutich, a company that controls several regional energy companies (KirovogradEnergo, PoltavEnergo, etc). He too is a member of the Ukrainian Parliament.” And so it goes, on and on, naming one rich Ukrainian Jew after another.

Even Hollywood enters the fray. Mila Kunis is a Hollywood actress who was born in the Ukraine and migrated to the US when she was seven. The Ukrainian legislature member, Igor Miroshnichenko, called her a “zhydovka” on his Facebook page, a derogatory term used to refer to a Jewess that has not been publicly used since the Nazi era. In the debate in the Ukraine parliament, an anti-hate bill was defeated when only 208 votes were cast for the bill and 226 were needed for it to pass.

Professor Yaremenko claimed that 136 and possibly 158 of the members of the Ukrainian parliamentary members are Jews, more than in the Israeli Knesset. Professor Yaremenko asked: “Who voted for them?” “Who paid for costly election campaigns?” Yaremenko claims that 90% of Ukrainian banks are owned by Jews. The site claims that the infamous Ukrainian famine of 1933 was organized by Jews and that 99% of PCIA members––Stalin’s secret police––were Jewish. The site ends: “We cannot allow Zionists to destroy Ukraine.”

The story ends where is has always begun – Jewish economic, political, academic, professional success is connected with a Jewish cabal and ideology intent on power and control while sucking out the life blood of other nations. Jewish business successes may be the result of varied characters and different means, but it is always connected with a Medici-like hidden hand that wants worldwide control and power.

NEXT WEEK: Machiavelli, The Prince and the Jews

Tamar and Leviathan.09.04.13

Tamar and Leviathan 09.04.13

by

Howard Adelman

Renewable Energy

Israel was once a significant leader in the production and use of alternative energies, particularly solar energy. Just see the ubiquitous solar powered water heaters on the roofs of Israeli apartment buildings. The first prototype rooftop solar water heater was developed by Levi Yissar who launched the NerYah Company in 1953. However, only with the energy crisis of the 1970s and the passage of a law by the Knesset mandating solar thermal systems did solar energy become integral parts of 85% of Israeli households. 3% of Israeli energy consumption once came from renewable energy. Israel became the world leader in the use of solar energy on a per capita basis. At the end of 2012, the Eilat-Eilot Renewable Energy Conference featured Israeli-developed (as well as other country sources) renewable energy technologies.

However, on the outskirts of Kibbutz Ma’aleh Gilboa stands one of the few wind turbines in Israel. It has been there since 1996. Aside from a few isolated periods of activity, the turbine has generally been inactive. There is another environmental factor mitigating against the use of wind energy in Israel. Israel is the flight path for a billion bird flights migrating from Europe to Africa and back again. Unfortunately, unlike planes, windmills cannot fly around those flocks. An Israeli Zoologist at Tel Aviv University, Yossi Leshem, invented a system to track migrating birds resulting in a 76 percent drop in collisions as both military and civilian aircraft, with a two hour advanced warning, re-plan their flight paths to avoid the flocks.

Nevertheless, Israel is committed to developing renewable energy. Much to the surprise of the Israeli cabinet, President Shimon Peres pledged that Israel would reduce its greenhouse gas emissions by 20 percent by 2020 at the UN Conference on Climate Change in Copenhagen in December 2009. That commitment was retroactively endorsed by the Environmental Protection Ministry. An emissions reduction plan was developed. By 2014 Israel planned to produce 5 percent of its electricity from renewable energy and 10% by 2020. By the end of 2012, less that 1/2 percent of energy needs was in fact produced by renewable sources. The target remains as illusive as Middle East. The real developments in renewable energy have been in technological innovation. For example, Power-Mod solar tents have been developed for victims of war and natural disasters.

Oil

Significant parts of the oil industry that had been state owned have been privatized since 1988 – Paz Oil, Naptha Israel Petroleum, the refineries at Ashdod and Haifa. I will deal with the significance of that privatization in my blog on Tycoons and Privatization. Petroleum & Energy Infrastructures, a state monopoly in the energy field, imports, exports, stores, as well as transports and supplies petroleum products through its wholly owned subsidiary, Oil Products Pipeline (OPP).

The big story, however, is the immanent end of Israel’s dependence on external sources for fossil fuels belying Israeli Golda Meir’s famous crack that Moses led the children of Israel for forty years wandering the desert to search for the only place in the Middle East without oil. Israel used to rely on expensive sources through long-term contracts – Mexico, Norway and the UK (oil), Australia, Columbia and South Africa (coal). This has radically changed. Though most people now know about Israel’s huge offshore gas fields (the Tamar field came on stream at the end of March), many will be surprised to learn that Israel has the 3rd largest deposit of oil shale in the world covering 245 square kilometres in the Valley of Elah in the Shfela Basin in Israeli’s Adullam region near Beit Shemesh 1000 ft. below ground where a chalk layer 600 feet thick provides an impermeable barrier between the oil shale and the water aquifier.

According to Dr. Yuval Bartov, chief geologist for Israel Energy Initiatives (IEI), Prof. Carol Parish, of the Chemistry Department, University of Richmond in Virginia (17 December 2012) and Dr. Scott Nguyen, 250 billion barrels is a very prudent figure for the find. (http://www.newenglishreview.org/custpage.cfm/frm/99429/sec…/99429) By way of comparison, Saudi Arabia has 260 billion barrels in proven reserves. Further, Israel is a technological leader in the means of accessing oil from shale and has devised a technology that will actually produce water instead of using it up to access the oil. On 24 December 2012, the Israel Supreme Court denied a petition to prevent the start of a pilot oil shale extraction project by Israel Energy Initiatives (IEI). The first drop of oil from shale is expected this year and the test phase for production is slated to begin in 2014. By 2020, IEI expects to produce 50,000 barrels per day.

Electricity

The Israel Electric Corporation (IEC), a state owned firm (99.85%), operates generating stations and sub-stations as well as transmission and distribution networks and is very similar to Ontario Hydro. Israel is in the process of radically transforming its electricity production from coal to gas fired units. By the end of 2010, 40% of electrical production came from gas-fuelled power stations. By 2020, plans call for 80%. Further, Israel is planning to export electricity to Europe through an underwater cable via Cyprus and Greece to link up to the European electrical grid. As in other areas of energy, Israelis are leaders in technological innovation such as smart energy management, the use of smart grids to manage electrical usage by electrical companies. Bar Ilan scientists have developed and are now producing nano-scale superconductors to facilitate faster and more powerful electronic devices.

Gas

In 2009, Israeli imports of energy products amounted to over 5% of its GDP per year when enormous reserves of off-shore gas were discovered. Because of environmental interests, costs, resource diversification and a modest discovery of a 33 BCM small natural offshore gas field off Ashkelon, over the previous decade gas usage went from virtually nothing to 4.2 billion cubic metres (BCM) per year by 2009 by means of liquefied natural gas (LNG), the newly built Arish-Ashkelon pipeline from Egypt and the Ashkelon offshore field. The Israel Electric Corporation had already been charged with developing gas-driven power plants, creating a natural gas distribution grid and an LNG import terminal so the huge gas discovery seemed propitious since so much of the infrastructure was already in place. Within five years, use was expected to double that of 2009 to 8.1 billion cubic metres (BCM) by 2014.

Tamar, the offshore field 90 km. west of Haifa that began production at the end of last month, has proven reserves of 188 BCM and an anticipated 10 trillion cubic feet, came on stream in 2013. Four other fields are due to be developed over the next few years: Dalit (700BCM); Leviathan 18 trillion cubic feet; Dolphin (81.3 BCM); Tanin (1.2-1.3 trillion cubic feet). Tamar will supply Israeli needs for the next two decades while supplies from Leviathan will be exported. Even if use quadruples over the next two decades, Israel has enough gas reserves to last two centuries while also engaging in the export of gas.

The Shaul Tzemach Committee released a final report in August of 2012 which recommended placing no reserves on exports from sources with only 25BGM or less, permitting 75% of reserves between between 25-100 BCMs, 60% of reserves between 100-200 BCMs and 50% of reserves greater than 200 BCMs.

Self-sufficiency is a security issue as well since blowing up the Arish-Ashkelon pipeline a dozen times disrupted fossil fuel gas supplies to Israel. This supply source was subsequently suspended. Israel is now assured of security in both supply and infrastructure. Israel has a major initiative to expand its energy port facilities with additional sea-to-shore inlets, natural gas intake, the construction of a LNG plant and creating more and better handling facilities, expand its storage facilities by constructing strategic reservoirs and storage units, connecting the offshore reserves to the national distribution system and increasing the capacity, reach and security of that internal distribution system that will in turn facilitate the further development of industry.

Last year, the Israeli government decided to follow Alberta’s lead and set up a sovereign wealth fund with royalties to invest in education and defence as well as set up a capital fund with domestic and overseas investments.

Infrastructure

Massive infrastructure investment for pipelines, liquified natural gas plants and new oil exporting outlets are underway on both the Mediterranean and Red Sea, the latter for oil and gas exports to India and China. In addition to getting rid of the need to use Israeli shekels to pay for imported energy, in addition to a large capital inflow of investment for oil shale, gas and infrastructure development, in addition to the savings in foreign currency as Israel dispenses with its reliance on foreign sources of energy and shifts to self-reliance, in addition to large increases in job opportunities at well paid positions, the coal-fired electricity plants will be phased out much sooner and replaced by clean-burning gas fossil fuel.

As well, Israel will for the first time have energy security. As a downside, Israel will not likely be developing its renewable energy at nearly the rates planned. On the other hand, the large savings in subsidies will also benefit the economy since currently a kilowatt of gas-produced electricity costs 20 agorot (about 5 cents) versus 55 agorot for solar-produced energy without taking into account the indirect subsidies for gas production. Add to these savings the increase in investment and the offsets of energy imports, GDP will be boosted and the economy will also expand because of spillover effects from the demand for domestically-manufactured equipment and increased high-wage employment. The budget deficit will be eliminated and there will be a positive balance of payments assured well beyond its current balance surpluses from its value-added economy as exported gas is expected to bring in $3billion in 2017.

International Disputes

The gas and oil deposits offshore have created inter-state disputes. Though Israel has settled with Cyprus, the disputes with Turkey and Lebanon are ongoing with the Lebanese dispute the most serious. The latter is akin to the Beaufort Sea dispute between Canada and the U.S. An international law of the sea ruling on that dispute would predict the outcome of the Israeli-Lebanon dispute. The U.S. claims a border equidistant from the land border while Canada claims that the maritime border should simply be an extension of the land border. In parallel, Israel’s position is the same the American one while Lebanon takes the Canadian position. Precedent seems to favour an equidistant ruling.

There is one possible side effect on the peace front. As Israel’s need to protect its fossil fuel sources grow, as well as the export market that will be necessary to make the exploitation of those fields economically viable, peace with the Palestinians may become more imperative.

Tamar and Leviathan.09.04.13.doc

Current State of the Israeli Economy 03.04.13

Current State of the Israeli Economy 03.04.13

by

Howard Adelman

One of the most prominent issues in the run up to the election was the cost of living in general and the cost of housing in particular. Yair Lapid vowed to tackle that issue. Let me offer some examples.

Thus, a cheap restaurant in Israel is more expensive than in Toronto but a good restaurant costs about the same. Basics, like milk and bread, are cheaper in Israel, but eggs and cheese are surprisingly more expensive. Fruit and vegetables are much cheaper in Israel and so is transportation even though a litre of gasoline is 60% dearer in Israel. Brand clothes are much more money in Israel but apartments are almost 20% less to rent but more than 20% more to purchase. The latter figure is astonishing but I am somewhat sceptical of its accuracy for in my experience in Toronto the rents are higher and the costs of purchasing apartments I believe is also about 20% higher. But the most important revelation is that salaries in Israel are about 40% less when the cost of living overall, except for the cost of purchasing an apartment, is about the same.

Inexpensive restaurants are a bit more costly in Israel but good restaurants cost about the same.

The real issue in Israel is that salaries are not comparable to the cost of living. Other than the cost of housing, which I will deal with in a separate blog, it is not clear how Lapid can tackle this problem. Lapid raised several other issues in the campaign concerning government expenditures. He provocatively asked: “How dare they sit there with 34 ministers and deputies and then come to the middle class and tell them they’re taking another NIS 1,800?” He claimed that ministers without portfolio cost the taxpayers NIS 60 million, the same amount parents of autistic children requested in social aid. Lapid in negotiating with Netanyahu did succeeded in reducing the number of ministers and deputy ministers, but at the cost of clout for his party.

On another issue of what are called entitlements or tax loopholes in American political parlance, Lapid called for an end to the annual practice of “Hok Hasederim”, the distribution of large sums of money not provided for or allocated within the budget. Yet Lapid`s first action as Finance Minister on 21 March was to order $13 million transferred to the foundation to assist Holocaust survivors – the Foundation for the Benefit of Holocaust Victims. It is very hard for anyone to object to directing funds to meet quality-of-life needs for aging survivors, including at-home nursing care, especially since it was an integral part of the coalition agreement, but the process appears to me as a naïve outsider to be a continuation of “Hok Hasederim”. At least the cut of three hours of nursing services per week can be restored and no one surely begrudges that expenditure.

But these are small potatoes. One deep historic fear in Israel is of runaway inflation, the rise in prices based on the Consumer Price Index (CPI) indicating how much less you can purchase with the same number of dollars as the year before.. However, the fear seems exaggerated. Both in terms of historic inflation figures (the overall increase from the year before) and average inflation (the average rate of increase in each month over the full year), the rate of inflation in Israel is not that much higher than Canada`s.

Since interest rates are so low, those on fixed incomes who depend on interest from deposited monies to earn income are effectively earning no money since inflation wipes out the value of anything earned. In fact, deposit income in the current period is even less than the rate of inflation. So pensioners and others on fixed incomes suffer.

Israel also suffered from the global economic slump when its growth rate was only 2.4% in the final quarter of 2013, the slowest rate of increase in three years but one that many industrialized countries might envy in these perilous economic times. Israel has had a spectacular rate of growth and is a model of convergence for a country that not very long ago was poor and now has caught up and passed a number of developed countries. Economists long ago dispensed with the Solow model in which economic growth depended on physical and human capital. Total factor productivity (TFP), the measure of an economy’s long-term technological change or technological dynamism, is now perceived as the main agent for stimulating growth. Israel has and continues to excel in this area, particularly with respect to improving innovations along quality ladders more than simply expanding the variety of products made and sold. Further, productivity improvement also accelerates capital accumulation thereby multiplying the positive effects.

Further, Israel continues to expand its free trade regions that also may help stimulate growth since Israeli economists pioneered in the nineties in the research that demonstrated that a country gains more from another country in proportion to the R&D of the other country if you trade with this country more. Israeli institutions have also evolved to reinforce and enhance technological change, but there is a general fear that the institutions that foster the accumulation of knowledge are too underfunded, an issue that will be discussed in the blog on education. This is important because there exists a robust relationship between the quality of institutions and economic performance. Further, though economic incentives are widely in place to enhance knowledge accumulation, a side effect has been a growing disparity between those in the knowledge economy and those outside of it, a topic that will be discussed in the blog on disparities in the Haredim and Israeli-Arab sector.

As Deloitte reported in 2011, Israel excels in the supply of financial and business services and in high tech manufacturing in electronics, software, communications and pharmaceuticals as well as low tech industries such as chemicals and plastics. Where it enjoys the greatest comparative advantage is in the high levels of investments in education and R&D, particularly through the military which creates not only basic innovation and knowledge but networks that subsequently go on to create businesses and new qualitative improvements in products.

Israel once offered a myriad array of investment incentives that may have attracted capital but, at the same time, created economic distortions and a bureaucratic nightmare for some. The Encouragement of Capital Investment Law that came into effect on 1 January 2011 has eliminated most of the previous incentives, rationalized the tax rate, reduced the number of development zones, and simply reduced corporate tax rates for those businesses that export at least 25% of production. Corresponding changes were made in the distribution of dividends. With the rationalization of the taxation system, Israel has experienced enhanced rates of investment. However, middle class savings rates have declined as incomes have not kept up with increased costs.

The biggest change in the Israeli economy is on the doorstep and will be the subject of a separate blog. In the Deloitte 2011 report, Israel was described a country with few natural resources. With the discovery of the huge gas fields offshore with one on the verge of coming on stream, this is no longer the case. Israel will save US$2-3 billion in imported energy bills. This will have a tremendous impact on the Israeli economy but requires a separate discussion. The reality is that Israel has become a country of the energy equivalent of a land of milk and honey that will enhance its great lead in its booming high-technology sector complemented by the structural reforms that reduced controls on foreign currency exchanges and profit remittances.

However, Israel faces the problem of many other developed countries – a stubborn unemployment and underemployment rate, particularly among young people. Further, the 2011 unemployment rate of 5.6% rose to 6.3% in 2012 and currently sits at 6.5%. Though not as high as the American rate of 8% with America still not quite over the great recession, or even Canada`s rate, unemployment in Israel did reach a thirty year low in 2011.

As the last remaining item on the overview of the Israeli economy as the lead up to understanding the budget that Lapid can be expected to introduce, we come to the budget deficit. On 1 July 2012, the Former Finance Minister, Yuval Steinitz, received approval from the Israeli cabinet to double the 2013 targeted budget deficit from the initially proposed 1.5% of GDP with an absolute ceiling of 2.5% to a new target of 3% of GDP, with the expectation that it would come in at 3.5-4%. The actual deficit came in at about 4.2% of GDP or a 39 billion shekel budget deficit or AM$10.8 billion. The cabinet was accused at the time of being reluctant to cut spending and raise taxes ahead of the then October 2013 scheduled elections. The Bank of Israel governor, Stanley Fischer, warned that both inflation and interest rates would increase. The bank’s base interest rate had fallen to 0.5% in 2009 at the height of the financial crisis, rose to 3.25% in the middle of 2011 as Israel’s economy recovered, but has since been cut to and hovers around 1.75%.

The shekel immediately dropped from almost 4 to the dollar to 3.9 and continued to drop to its current exchange rate of 3.56 after having remained steady for a number of years. In a final meaningless rhetorical flourish, the cabinet then voted to set a 2014 budget deficit target of 2.75%, of 2.5% in 2015, of 2% in 2016 and 1.5% in 2019. There was never any discussion of a balanced budget. However, Israel’s debt-to-GDP ratio remains relatively stable and less than that of many developed countries – though that is not saying a great deal these days. The country’s debt burden, however, is higher than most developed countries because the government pays a relatively high rate of interest on government debt. The Israeli government is undoubtedly banking on the shekel strengthening when natural gas begins to glow from its offshore wells.

Yesterday, Stanley Fischer, while praising Israel`s economic performance and the monetary policy maintained by the bank, stated in its report on 2012 that Israel`s budget deficit was the main economic problem. (Moti Bossok Outgoing Central Bank Chief: Israel`s fiscal situation economy`s main problem, Haaretz, 2 April 2013.) He also urged the government to create a sovereign wealth fund from its anticipated new found gas wealth. Lapid may increase taxes to cover part of the deficit but he will have to do so without inhibiting business and prospects for economic growth.

Lapid`s main problem will be how to increase government revenues and where to cut expenditures. Certainly, defense will be cut. Netanyahu and Lapid already have agreed that defence cuts will cover 4.5 billion shekels over the next 18 months. Where those cuts will be made is yet to be determined.

Current State of the Israeli Economy 03.04.13.doc

A New Dawn – Israel’s Economy

A New Dawn – Israel’s Economy 01.04.13

by

Howard Adelman

Last night I went to bed just before midnight. This morning, I woke up at 7:00 a.m. It was already light. I slept for seven hours straight. I did not get up once. In university, I used to sleep from 1:00 a.m. until 7:00 a.m., but that was 55 years ago. Now, to sleep more than 4-5 hours during the night is unprecedented for me. It clearly has to do with my sleeping with a breathing mask. I have now gotten used to it and did not pull the mask off or turn the machine off in my sleep last night. I am curious about what this will do to my sleepiness during the day and my nap patterns. You will be probably pleased to know that I will consequently have less time to write. My blogs might even become shorter.

One thing that has not changed is that I go directly from a deep sleep to being wide awake. I’m at my desk working within two minutes of waking. I assume that will not change as it is a product of my different brain wave patterns. Those patterns have, until the last few years, been of great benefit to my productivity. However, they have more recently led to my current problems with sleep apnea with the side effect of high blood pressure which I never had before. Hence, the sleeping mask and supply of oxygen during the night.

Obviously, a number of factors go into having a good night of sleep other than wearing a sleeping mask. I do not drink coffee and generally do not drink alcohol so these have never affected my night of sleep. I also do not usually eat chocolate. However, Nancy made a batch of chocolate cookies for Pesach and I had several right after an early dinner with my four grandchildren who live in Toronto. Evidently the dinner was early enough – 6:00 p.m. – so that eating several chocolate cookies did not affect my sleep. Nancy cooked a terrific meal for the grandchildren. However, they were so rambunctious after dinner that one needs a good night of sleep after they leave. Further, the early dinner may have helped getting a full night of sleep because we usually eat several hours later.

I certainly do feel really refreshed. As usual, when I went to bed and put on the mask, I was asleep literally in seconds. I do not meditate or pray or use other measures to relax when I go to sleep. I lie down and am usually asleep within, at most, a minute. When I wake up, I wash my mouth, but otherwise go straight to work at my desk without eating for I like to have breakfast with Nancy when she gets up. I probably should exercise but I do not. In any case, I feel totally refreshed. I tend to shower later and work first.

I always wake up without an alarm and eager to get to work on whatever is on my mind. However, the most surprising part is to wake up when it is already light. What a delight! I not only do not have to feel my way around in the dark lest I wake up Nancy, but seeing the bright day is exciting in itself. The sky was clear blue and it looked glorious outside. Mornings have always been blissful to me and now they will be accompanied by light, though I think I will miss watching the sunrise.

All this is but a prolegomena to a new series of blogs on the Israeli economy which I will begin tomorrow in preparation for Israel tabling its new budget sometime in June. In part this is recognition that political affairs, in particular, relations with Palestinians both within Israel and in the occupied territories, will be primarily determined by economic interests rather than security issues, although there will clearly be an interaction between the two and both will be shadowed by ideology. Further, most foreigners, particularly Jews in the diaspora, know little about the Israeli economy other than the image of Israel as a start-up nation. Protests, then, over the cost of living in general and cottage cheese in particular, take them by surprise. Third, as in most advanced economies with the rising supremacy of the neo-liberal economic agenda, the disparities between the disadvantaged and those with money has grown. Israel once boasted the least amount of economic inequality, and was second only to Tanzania. The country now ranks among the highest in economic inequality. Fourth, all economies are buffeted by external economic crises, particularly those current in Europe with its series of monetary crises. Israel is very vulnerable, particularly since it has a very large trade with Europe. Finally, as most people are aware, the Israeli economy is in trouble with expenditures greatly exceeding state revenues. The electoral shift in the last election largely took place because voters had lost faith in Likud’s ability to manage the budget.

For background, the State Budget of Israel that sets out planned expenditures and sources of revenue must be tabled no more than 60 days before the beginning of the financial year. If the fiscal year is July to June, by law the budget should be tabled by the end of April. With a new government just recently formed and sworn in, this became an impossible deadline. The first meeting of the cabinet on 18 March 2013, in addition to approving the Security Cabinet immediately after it was sworn which I have already written about, unanimously approved amending this Basic Law for the State Budget to extend the deadline for approving the 2013 budget to 135 days from the date the 33rd government was established. Within 85 days from its swearing in, the government must submit a budget proposal to the Knesset, which will be about mid-June. The Knesset will have 50 days to pass the budget after three readings, or in early August.

I will follow the following rough initial agenda. First, I will review who in the cabinet controls the key economic sectors and what their current policies are. Second, I will take an overview of the current Israeli economy because, as is widely known, the deficit reached 4.2% of GDP instead of the targeted 2% and the new government must both make huge budget cuts as well as raise new revenues to prevent the budget deficit from spiralling out of control. This means spending cuts of at least $14B shekels or over $US3.5B and tax hikes of up to twice that amount again. Such changes can be calamitous especially given that Yesh Atid and its leader, Yair Lapid, now Finance Minister, promised to build large numbers of affordable rental apartments for young people. HaBayit HaYehudi led by Naftali Bennett, the new Economics and Trade Minister, promised to build new apartments and infrastructure for the settlements. Further, Uri Ariel from his party is the Minister of Housing. On the other hand, the growth of the Israeli economy has been a tremendous success story. Israel has moved steadily up the Human Development Index and now ranks among those countries in the very high development group, ranking 16th ahead now of Belgium, Austria, France and Finland.

Bennet also promised to break the concentration of economic power among the economic oligarchs in Israel and to sever the ties between financial corporations and non-financial ones to end the current pattern of cross-ownership. He has been put in charge of the cabinet committee charged with both reducing the cost of living and breaking up the monopoly controls of Israeli economic power. Nochi Danker the Koor Group, Yitzcahk Tshuva from both the Delek Grou and the El-Ad Group, the Ofer family which owns the Mizrachi-Tefahot Bank, Shari Aronson who owns Bank Hapoalim, and the other billionaire oligarchs will all be threatened. For though the Knesset debated a bill presented by former Finance Minister Yuval Steinitz along these lines to come into effect in six years, the bill, though it received preliminary approval did not come to a final vote and Bennett wants it to be toughened. It is not clear to me yet how the budget and these new moves against concentration of corporate power will affect one another, particularly since the tycoons are awash in debt and policies governing large-scale lending may undermine the stability of their enterprises. Yossi Maiman lost control of the Ampal Israel American Group and the Danker Group is rumoured to be at risk. However, we will soon see as this policies to break up the monopoly on corporate power are expected to be passed by the Knesset before the budget is tabled.

Further, now that the religious parties are excluded from the government, part of the savings and additional revenues will eventually come by putting the Haredi sector to work in the productive economy and reducing subsidies for the Yeshiva sector. We will explore the options available in this area and the anticipated economic, social and political implications. After all, the alliance of Yesh Atid and HaBayit HaYehudi has gone beyond a tactical alliance of convenience in negotiating with Netanyahu and has become a strategic alliance to lower the costs of housing and develop the economy. Further, both parties now see the possibility of an historic change and a new dawn first in uniting a hardline Orthodox party and a centrist secular/modern Orthodox party with a common agenda to draft Haredim and end their sweeping exemptions from military service, enhance their secular education and work-participation, and reallocate resources for an a fairer share of rights and responsibilities across all of Israeli society.

On another front, in the energy sector, the Tamar Offshore Gas Fields are expected to come into operation during the forthcoming fiscal period and the even larger Leviathan field about 2-3 years later. They will have a tremendous impact on the revenue side, on the balance of trade and on both business and consumer costs.

There is another area of the budget that will require separate attention, the defense budget amounting to one-sixth the budget. Everyone expects the defense budget to be cut and Ya’alon as Defense Minister supports such cuts. However, he and Lapid will inevitably come to blows as Lapid will push larger and more immediate cuts while Ya’alon would prefer smaller more spread out cuts.

For all sorts of reasons, there are wide expectations of a new dawn in Israeli economic policies. Though perhaps I may no longer be waking up before dawn, I can spend my time examining whether this in fact can be expected to be a new dawn or not.

Israel.Economics.A New Dawn.01.04.13.doc

Obama3. Obama as One of the Greats 31.01.13

Obama’s harshest critics continuously and mindlessly repeat that Obama is one of the worst presidents in American history – comparable to Jimmy Carter. Under Cater, there was virtually no economic growth while interest rates rose to 19%. Under Carter, the mullahs took over Iran and created a base for anti-Americanism for the next four decades. Carter gave away the Panama Canal and failed to prevent the Russians from invading Afghanistan. Merrill Matthews who advertises himself as exploring exposing liberal nonsense wrote a piece for Forbes (14 September, 2012) “Obama’s Jimmy Carter Redux On Economic and Foreign Policy”. “Carter inherited a bad economy, just like Obama, and then promptly proceeded to make it worse by adopting Keynesian spending policies. In four long years of the Carter presidency, the economy floundered.” As Robert Schlesinger scribbled in U.S. News and World Report, “Carter was a bad president, Obama is an awful president.” (12 September 2012)

Linking Obama to Carter carries a message well beyond the assessment of Obama. First, Bill Clinton, who remains highly popular, is bracketed. Second, the characterization allows Republican George W. Bush, who has the reputation as one of America’s worst presidents, to escape notice so one can conveniently forget that his ratings fell precipitously from the highest ever given an American president after 9/11 to one of the lowest by the end of his presidency. Third, the characterization allows Ronald Reagan, another Republican and initiator of supply-side Reaganomics, to be ranked among America’s greatest, thereby reinforcing the mantra of the economic right in support of tax “relief” to produce greater government revenue.

What ensues is the war of the Dung beetles, a war between the conservatives and the liberals in American politics. The evening before last I listened to an episode on CBC’s As It Happens (also heard on Public Radio in the USA). The host was interviewing Eric Warrant, an Australian zoology professor and researcher at Sweden’s University of Lund. His research focuses on dung beetles at the edge of the Kalahari Desert. In an ingenious experiment that involved putting dark visors on one set of dung beetles and see-through visors on another group, his team made the amazing discovery that dung beetles, after first dancing on their dung balls to get the lay of the land and establish a direction, then use the milky way to guide themslves. This allows them to roll their dung balls across the desert floor in a straight line to ensure that the results of their hard work are not stolen by lazy predatory competitors. Dung beetles that could not see the milky way ended up rolling their dung balls endlessly in a circle. Are you a blinded dung beetle who cannot see the milky way and end up circling the wagons endlessly, or are you clear sighted enough to be guided by the stars to move forward in a straight line? Which is the party of mythos and which the party of logos?

From the outside, the war over labelling who is the best and who is the worst president is a war between policy nerds playing with dung. But that is the appearance. Underneath is a war about which set of players has the advantage of celestial guidance so that a clear goal can be set and followed more or less in a straight line based on stamina, strength, persistence and determination to preserve what has been gathered through hard work and ingenuity. These are the measures of a successful president. Can the president lead a team that can roll the shit he encounters into dung balls and get those orbs of dung as far away in as fast a time to ensure that the lives of beetles can be sustained and improved?

Before we look at the record of Obama’s first term and the account of his cheerleaders that praise him as a heaven-sent leader, it is helpful if we first measure his task against the shit left behind by his predecessor. Whether one ranks George W. Bush with James Buchanan, Zachary Taylor, Warren Harding, Calvin Coolidge, Franklin Pierce — or whomever you choose as America’s worst president — there is a wide consensus among historians, though not among his defenders, that George W. Bush, unlike his father, was a bottom feeder. Ignore the one-off failures, such as his inept response to Hurricane Katrina. Do not overlook Bush’s successes – the provision of prescription drugs for the elderly and the prevention of any other attack after 9/11 by al-Qaeda terrorists on American soil. His intentions on educational reform in the No Child Left Behind program were widely applauded, though leaving its implementation totally in the hands of states was questioned. Bush Jr. tried to get immigration reform through Congress but failed. He was a free trader unable to get Doha supported. He even initiated a successful large six trillion dollar stimulus package when the economy got into trouble soon after he was elected. These successes are often overlooked and even buried because many of the other goals were viewed as misguided and the failures were so outstanding and egregious.

Though Bush won office on a program as a domestic policy president, and he initially instituted tax cuts, including large tax cuts for the rich, the general consensus is that Bush’s worst error was to take America into Iraq on the ostensible grounds that Iraq was building nuclear weapons and was in cahoots with the terrorists. Even if one accepts the argument that Bush sincerely believed Saddam Hussein had a program of producing weapons of mass destruction, Bush clearly spun some of the evidence. He also avoided taking the relatively small amount of extra time needed to test and falsify his beliefs.

His second largest error was in implementation. His administration dismissed both the Iraq civil service and the army, creating legions of well-trained enemies and reducing Iraq to anarchy and a horrific civil war. The third charge was that he mismanaged the economy, piled up deficit after deficit and failed to reign in runaway stock brokers and bankers. Then he went into Afghanistan, all the time authorizing torture techniques, including waterboarding (enhanced interrogation), and failed to prosecute these alleged terrorists in accordance with American law and principles of human and legal rights. Bush did very little about the almost two million refugees and IDPs in and from Iraq and failed to protect what was once a population of two million Christians now reduced to less than 100,000. (Obama has continued that neglect – Richard Russell “Obama Ignores the Fears of Middle Eastern Christians,” Crisis Magazine, 28 January 2013.) Iraq continues to be unstable as is Afghanistan.

Bush can be fairly charged with putting politics before sound policy processes and to have fumbled as badly on Iraq and terrorists as Buchanan did in the Dred Scott Case that denied rights to Blacks. Bush’s indecisiveness and procrastination over years and failure to fire Donald Rumsfeld as Secretary of War perhaps was not at the level of Buchanan’s indecisiveness and inaction on slavery and secession, but it came close. Bush went into Afghanistan which Obama characterized as a war of necessity in contrast to Iraq as a war of choice and a wrong one. It is difficult to know whether the failures in foreign policy can be considered greater than the economic mess he left behind.

By the time Obama was inaugurated, the US was in a downward economic spiral. The deregulation introduced under a democratic president, Bill Clinton, morphed into a financial wild west show under George W. Bush. So Obama entered office in a year in which the numbers of unemployed grew by two and a half million. The unemployment rate reached 10%. (It has since receded to 7.8%.) GDP shrunk. Instead of hovering around the average growth rate of GDP of just over 3%, by the last quarter of 2008, GDP went down by 8.9%. The housing market collapsed. Home values shrunk dramatically. Banks fell. Brokerages closed.

Instead of lauding the legislation that saved the auto industry and that launched the largest ever infrastructure program since the post WWII period under the Republican Eisenhower administration, Conrad Black bemoaned that a $10-trillion of national debt accumulated from 1776 to 2008 became a $16-trillion debt, ignoring that this is less as a percentage of GDP than the debt incurred during WWII and without acknowledging that the debt was an investment (admittedly a risky one) to save the nation from past follies to allow the country to grow in the future. Black left out the fact that $1.6 trillion of that debt was largely due to lower revenue because of the Bush tax cuts. $1.4 trillion of the debt was due to the higher interest charges because of the growth in the debt. Almost $3 trillion was the consequence of the costs of Bush’s wars in Iraq and Afghanistan without requiring the American taxpayers of the time to pay for those wars. Obama included those expenditures in the budget instead of expending those amounts as supplemental appropriations. The major changes in how indebtedness was recorded, not just the costs of war but future medicare liabilities and other obligations, alone accounted for a $2.7 trillion increase in the cost of the debt. The Obama stimulus was responsible for less than a trillion of that debt.

Further, Black failed to note that former Democratic Party presidents Truman, Kennedy, Johnson (even with the Vietnam War and the Great Society Program), Carter and Clinton all reduced the public debt, while the two Bushes, Reagan and Ford all increased it. At the end of the George W, Bush administration, David Stockman, a stalwart Republican who had served as Director of the Office of Management and Budget in the Reagan administration, opined that the ideological tax cutters were to blame for the deficit. (“Four Deformations of the Apocalypse,” The New York Times, 31.07.2007) The extra funds bailed out the financial sector, rescued the auto industry, invested in infrastructure (roads, bridges, etc.) in a way not seen since the Republican Eisenhower post-WWII administration, and invested as well in education and in clean energy. Obama appears at least to have led America back from the brink of a second great depression. But it is difficult to prove a harm that never took place or, to put it more positively, an unseen benefit. But like Black Matter, the evidence for its existence can be indirect.

So the economic war was a domestic one. On one side were the Democrats rooted in Keynesian counter-cyclical economic theory who voted for The American Recovery and Reinvestment Act. On the other side were Republicans who under George W. Bush’s first administration supported a stimulus to spur job creation and growth – that also worked -but were now wedded absolutely and strictly to trickle-down economics, tax cuts characterized as tax “relief”, reliance solely on the private sector to spur economic growth and, with the exception of the defence budget, offer dramatic cuts in the government sector. They promised that the debt would come down through extra tax revenues. It never did.

What were the results? Obama’s champions claimed his stimulus worked magnificently. It would have even worked better if it had not been shortchanged. In compromising with magic fears and protestations of the Republicans, the Democrats eliminated more funds for the Head Start and more investment in infrastructure, specifically high speed rail transportation (support was only $10 billion) that would have created even more jobs and allowed the economy to recover more robustly. The high-speed rail program nevertheless remained moribund until 2012 because of the resistance of Republican state governors. Instead of 13 high-speed rail corridors in 31 states, Americans will only have two – in California and in the Boston-Washington corridor. But if the Republicans were going to vote with ideological solidarity, and if Republican state politicians were going to ally with their Washington colleagues, why did the President not go for broke and push through a $1.2 trillion stimulus package?

As depicted in detail in Michael Grunwald’s 2012 volume The New New Deal: The Hidden Story of Change in the Economic Era (New York: Simon & Schuster), Obama’s champions lauded the stimulus package for its outstanding accomplishments in saving the financial industry, rescuing the auto industry, and creating 2.5 million private-sector jobs. The Obama Administration revamped the Student Loan Program and saved $62 billion while, at the same time, making the loans cheaper for students and making provision for repayment based on future earnings, a proposal we made as a University of Toronto student council before the Bladen Commission in 1960. According to Grunwald, the long term economic transformation was broad, deep and of unprecedented historical proportions both in relation to the past but, more importantly, as a new foundation for the future. According to Grunwald, the stimulus provided the: “biggest and most transformative energy bill in history”; “biggest and most transformative education reform bill since the Great Society”; “biggest foray into industrial policy since FDR”; “biggest expansion of antipoverty initiatives since Lyndon Johnson”; “biggest middle-class tax cut since Reagan”, and, of course, the greatest revolution in health care policy in America since WWII, an innovation that had been defeated so many times before. Obama managed to pass The Patient Protection and Affordable Care Act, but that Act did not even make provision for a single payer system as in Canada even as a test case. Support for new infrastructure was huge as it was for new green initiatives.

Of course the program greatly increased the economic power of the government in direct counterpoint to Republican ideology. But, according to the Republicans, economic growth was only a “meagre” 2.2% in contrast to growth which Obama’s critics claim was at double that rate under Republican presidents and even the Clinton administration. In fact, the growth rate under Reagan was almost the same as that under Jimmy Carter – 3.4% compared to 3.3% – while the growth rate under Bush Sr. was 2.2% and under Bush Jr. was 2.0%. (See the data quoted from the Bureau of Economic Analysis in the right-wing Liberty Bulletin “The Reagan Years: A Sobriety Test,” 26 January, 2012.) Unemployment rolls dropped by a million, though it still hovers at 7.8%, but Republicans complain that the real rate of unemployment is much higher as indicated by the drop in the labour force participation rate from just over 66% in the beginning of 2008 to 63.6% at the end of 2012. In any case, Obama had promised a maximum unemployment rate of 9% and it reached 10% for one month in October of 2009 and averaged 9.6% in 2010. In 2011 it hovered for most months at 9%, finally dropping to 8.5% in December. After that, the decline proceeded steadily. (U.S. Labour Board Statistics, US Department of Labour) Conrad Black could have contrasted the 50 million on food stamps with the 18 million before he took office. For in the process, the USA has become a much deeper and wider welfare state — but without the European tax revenues to support it.

So the Republicans agree that Obama has expanded government programs but Republicans characterize these as creating a more powerful, larger and more intrusive federal government that compromises the individual’s rights to life, liberty and the pursuit of happiness. Though it is difficult to argue from what did not happen, the Great Recession did not become the Great Depression which lasted longer with almost four years of steady decline compared to the 18 month decline in this recession (recall that the 1973-5 and 1981-2 recessions each lasted 16 months). In the Great Depression, GDP fell an unbelievable 27% compared to only a 5% decline in the Great Recession. Unemployment rose to 27% in the Great Depression and not the one month maximum of 10% of the work force in the Great Recession.

According to his cheerleaders, Obama has emerged as one of America’s greatest presidents whatever else he does in a second term facing an intransigent Republican controlled House of Representatives. He is great, not because he introduced more rather than less regulation that Black favours. He introduced regulation reform where it was needed: pay discrimination to protect women and unemployment benefits that did not discriminate against gay couples; regulation of automobile credit cards and tobacco advertising. Obama updated hate crime regulation to bring real criminal activity more in line with the way Canada treats (or used to treat) criminals. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 tightened capital requirements on banks and restricted predatory lending to prevent the abuses that were the catalyst of the 2008 crash in the housing market. One of the most forceful and pithy defences of Obama’s record can be seen and heard in a replay of Rachel Maddow’s rave on MSNBC on the eve before the election. See also the editors’ Comment in The New Yorker of 29 October 2012. Obama has certainly had many articulate champions.

If the economic stimulus was so successful and so revolutionary, if the defence was so clearly made, why did it not gain greater support, especially since the election campaign ignored the advice of James Carville and Stanley Greenberg not to run on his economic record but only on his economic promises for the future? (http://www.huffingtonpost.com/2012/10/19/james-carville-stanley-greenberg-obama-economy_n_1990403.html) Why did Obama’s approval just simply correlate with the votes he received unlike the situation of any other president on inauguration? If Obama had convinced voters to support him, including many as I will show tomorrow who did not agree with his economic package, why has his approval rating not improved?

Tomorrow: The Reluctant Obama Supporter

[Tags Obama, President, USA, Great]

Obama6 – Open Economic War

Obama6: Open Economic War – The Loss of a Uniting Metanarrative 06.02.13

by

Howard Adelman

I call it “war” deliberately. For Obama has come to recognize that the enemy has to and can be defeated; the Republican Party has intimidated its moderates too much so that they cannot be won over. The question is whether he recognizes that the Republicans can only be divided and turned against itself as part of victory strategy. The defeat may require dissemblance and continuation of the rhetoric of willingness to work with the other side. But the recognition has to be clear and unequivocal that the other side represents a dead end not simply as a negotiating partner but for America.

First it is important to establish why the economic republicans have adapted the same strategies as die hard ideological socialists did in the 1940s who backed themselves into a losing corner. The Republicans are the British socialists of the 1940s. The left was only saved by the abandonment of socialism and the adoption of social democracy as it went to bed with capitalism and with globalization. They had to adopt austerism to save themselves and Britain. The Americans do not have to become austerists. If they do it is only at their peril.

My last blog on Tony Judt included a brief summary of his depiction in The Memory Chalet of the austerity Britain introduced after WWII in order to allow Britain to pay the enormous debt the country had built up in fighting the war. Clement Atlee was the iconic expression of that austerity. As Michael Marrus noted in his excellent discussion of the book, Tony Judt was nostalgic for a period in which the total society, the whole community, shared in an austerian belief. That belief trumped individual desires. Even the Churchill household practiced austerity. Austerity united rather than divided the country for six years after the war. (See, for example, David Kyaston (2008) Austerity Britain: 1945-1951) Atlee had to adopt austerity and surrender British leadership to the Americans in order to bond with the British conservatives in a common metanarrative. That option is no longer possible for the Republican Party today. It was possible under George W. Bush. It is not possible under Barack Obama. The weak Obama supporters who merely concede that Obama is OK and still think that, though the republicans act crazy, they are still owed respect and recognition as His Presidency’s loyal opposition, simply refuse to recognize the reality of total war.

For the Department of History at the University of British Columbia, David James Gossen wrote “Winston Churchill’s The Second World War: Metanarrative, Markets, and the Politics of Memory” (Courtesy National Library of Canada) in 2001 as his a PhD thesis on Winston Churchill’s memoir on WWII amplified by the British press. The thesis focused on the intersection of memory and history and focused on how Churchill’s memoirs not only provided historians with insights into the character, motives and influence of political leaders, but Churchill’s narrative of legitimation also provided the political discourse of the immediate postwar period with a metanarrative that linked the recent past and the emerging professional historiography. Those memoires not only helped to shape how history was recollected but influenced history itself. It was a message of sacrifice in the present as a result of the war against past totalitarian regimes for a common noble cause, the greatest battle of all against the formidable forces of Eastern European communism. The whole community was enlisted in saving the nation through national unity and redemption by means of that sacrifice, a message that carried right though the entire Cold War and allowed Britain and America to be united as partners in a common battle as Britain was forced to surrender its position as lead partner to the Americans.

The proto-pop postwar artists in Britain were, on the other hand, not committed to sacrifice but preoccupied with the pleasures (and miseries) of everyday life. In this period of austerity, they were invading every home with popular culture and consumerism, initially through magazines and later through television that brought the brightness, variety and affluence of America into a colour-starved bleak and drab austere Britain. The seeds were being planted of a new consumer culture built on the American model through America’s fifth column of pop-artists and the new technologies of mass communication.

The undercutting of its own program of austerism was facilitated by the Labour Party in Britain that had given up any belief in common ownership and had capitulated to capitalism. The Labour Party was just that, no longer a socialist party. It was left with only ad hoc responses to crises and no coherent platform or even long range policies. The one uniting idea was to deal with the pre-eminent social question, the need to counteract two twin evils – poverty and unemployment – largely through palliative measures. Rather than confronting capitalism, the Labour Party believed that increasing the minimum wage would help capitalism since healthy workers would lose far fewer days to illness. Further, between the mechanism of regulating financial institutions and banks and ensuring that surplus wealth served the common good, a new society would arise from the wreckage of the old. Thus, the principle that the nation’s industry undermined by individual profiteering was to be re-organized on the basis of Common Ownership in Sydney Webb’s 1918 manifesto of social democracy, Labour and the New Social, was abandoned, but the rest of the manifesto which reinforced and allowed capitalism to survive and thrive was alive and not only kicking but had become he preeminent belief on the Left.

The shift from socialism to social democracy that had been emerging over the previous quarter century was consolidated in the postwar years and crystallized in the rise to supremacy of Keynesianism, in counter-cyclical principles of state debt, in the rhetoric of giving primacy of place to the reduction of unemployment while abandoning the goal of full employment as the most important domestic goal, and the construction of a safety net that would allow the working class to become a prosperous class of home owners and consumers. Along with those measures went efforts to counteract the barriers to trade that had grown up in the autarkic policies of the 1930s and to dredge the channels of exchange that had become choked and congested in that period. Progressive and mutual reduction of tariffs became the new mantra of international trade. Bretton Woods as developed by the leadership of the Canadian economist and future governor of the Bank of Canada, Louis Rasminsky, was endorsed.

For the new ruling Labour Party had crashed into the wall of the debt crisis. For with the defeat of Japan, America’s financing of Britain through Lend-Lease ended. Lend-Lease had allowed Britain to pay 60% of the cost of its trade deficit. How was Britain to pay for the imports of the new consumer society that was emerging when its manufacturing capacity had been so depleted that it could scarcely afford to produce quality products or pay for imported ones? Britain had to gradually surrender its regime of preferential tariffs, much to the benefit of freeing Canada from its mother’s apron strings, but with the loss of the privileges of the Sterling area that would gradually disintegrate under the weight and power of the rising American economic and military power and its new ideology.

Globalization was off and running with the foundations of the World Trade Organization and the International Monetary Fund. The institutions for international welfare capitalism were being put in place by the Americans and British Labour had to accede to them to survive. In return, Britain only had to repay the US $650 million for Lend-Lease and received an additional fifty year loan of $3.5billion at 2% over fifty years. America had saved Britain financially as well as militarily in exchange for sacrificing its socialist soul and buying into globalization. The myth of the market regulated by American dominated international institutions would now reign supreme. Britain also had to agree to allow the British pound to float and be freely converted into American dollars, the most important concession that necessitated the adoption of austerism as the new secular religion of Britain. The radical drop in buying power and the replacement of the British pound by the American dollar as the premier international currency and the loss of sterling as a world currency had to be paid for by the sacrifice of each and every British citizen. Keynes had to sell Britain to the Americans and to abandon the goal of full employment in order to make Keynsianism the foundation of the new international economic order. Efficiency not greater equality was to be the new Zeus ruling over all the other gods.

CF. Jim Tomlinson (1997) Democratic socialism and economic policy: The Atlee years 1945-1951 on which I have relied so much for a great part of the above analysis. See also his latest book co-authored with Carlo Morelli and Valerie Wright published last year: The Decline of Jute: Managing Industrial Decline. It offers an analysis of a single industry in Dundee (Winston Churchill had represented Dundee in Parliament) and tracks the economic, social and economic forces at work in the decades after WWII and the devastating impact of globalization that Atlee, to save Britain, had to buy into. The book provides a template for how manufacturing in the West, not just in Britain, was hollowed out and how it affected the new working middle class. Rather than offering a critique of the original sell-out and its subsequent effects as a bargain with the devil, the book is a positive credit card to those who managed the process so well by forcing the industry (both employers and workers) to consolidate and modernize with the goal of saving the community, at least up until the Thatcher years (1979-1990) and the policies the neo-cons of Britain put in place as doppelgangers to the American Reagonites when markets became totally unfettered, welfare capitalism was undermined on the alter of the new idol that had been elevated, “free markets”. The jute industry was allowed to totally evaporate in the 1990s and cooperative capitalism was sacrificed. But the real victims were the poor and the marginalized as the well-being of the working middle class also declined.

In the immediate Post War period, socialists and conservatives were joined in homage to that fundamental myth (in Britain, and I suggest, through variations in that metanarrative, in other western nation states as well) whatever divisions separated the contending right and left on specific disagreements over state policy. If that metanarrative helped link the past to the developing present and immediate future, the competitive Marxist metanarrative was much more prophetic in the long run. After all, in the metanarrative described above, it was the nation state that was redeemed while in the Marxist adumbration of the future, globalization increasingly subsumed the state beneath the constant and cascading need of capitalism to expand over the whole globe. In the left-right metanarrative of the west, it is not technology or communications that powers this redemption but self-sacrifice and service to the higher cause of the nation. Though the Canadians, Harold Innis and Marshall McLuhan, were initially outliers to this western myth that united left and right, both Innis and McLuhan shared with Marx the prescient vision that technology and communications served to pull everyone in the world into a common “civilization” as they moved from rural areas into mega-cities. The process entailed progressive political centralization. However, the message of Marxism had to be delivered by capitalism and not through a Leninist political totalitarian elite.

The result was the paradox that capitalism became the means to defeat communism to achieve the Marxist vision, but at the sacrifice of the supremacy of the nation to which so much blood, sweat and tears had been sacrificed for its redemption. As I will try to show in a subsequent blog, the economic and community conservatives are united in upholding the myth of the absolute supremacy of the nation-state. This obsolete metanarrative that unites the economic and the cultural conservatives is made possible by the economic conservatives allowing the worship of the supremacy of the market to slip into the status of a lesser god before the divine right of America. It is also made possible because the community conservatives need the state and raise it onto the highest pedestal to achieve their social agenda as they fight a rear-guard battle against creeping social globalization. So while the power of a metanarrative built around the nations unites the right, the power of the western metanarrative was lost as a uniting force between the left and the right before the pounding forces of capitalism. The metanarrative saved capitalism and that capitalism eventually consumed the metanarrative as a binding force.

Paul Krugman in an op-ed piece in The New York Times (“Looking for Mister Goodpin”, 31, 01, 2013) began with a discussion of prioritizing the unemployment issue versus reducing the debt by practicing austerity. He noted that the austerians (the economic conservatives in the Republican Party in the USA and more generally economic conservatives around the globe) advocated that austerity would “both avert crisis and lead to prosperity”. Krugman challenged them to offer just one case anywhere where austerity had worked. They have spent years, he asserted, looking for Mr. Goodpain with no luck.

In Krugman’s account, in 2010, Alan Reynolds of the Cato Institute and Jean-Claude Trichet of the European Central Bank in March of 2010 offered Ireland as an example of emerging success. At the time, Ireland’s unemployment rate was 13.3 percent. Last month, three years after the austerian pied piper played that tune, the unemployment rate was 14.6 percent. As a result of the policy of austerity, Britain is entering its triple-dip recession even though Britain at the beginning of this application of the austerian dogma had no need to practice austerity; it could still borrow at historically very low interest rates. Latvia, another country offered up on the altar to the god of austerity, has a current unemployment rate of 14%. In contrast to these states, Iceland, which was possibly one of the worst basket cases as a result of its overwhelming banking crisis, ignored the austerians and took another route and has today almost fully recovered. As Krugman concludes, “the doctrine that has dominated elite economic discourse for the past three years is wrong on all fronts. Not only have we been ruled by fear of nonexistent threats, we’ve been promised rewards that haven’t arrived and never will.”

Richard Longworth sent me a summary of Paul Krugman’s recent address to The Chicago Council on Global Affairs attended by 2000 people. It had the same message. So does Krugman’s current book End This Depression Now! Austerity efforts combined with other bad polices, such as the premature expansion of risk taking and the continuing lax regulations especially with respect to the financial sector, need to be introduced to avoid the even more dire political consequences that face the world if the policies of the economic conservatives are not abandoned and strenuous efforts to reduce unemployment are not urgently adopted to get unemployment in the USA down to 6%.

The issue is not that a fundamental division over economic policy and how to manage the economy divides Republicans and the Democrats, for that is a given now. The issue is that the two parties no longer share a larger metanarrative with the end of the Cold War. Bill Clinton succeeded as a moderate Republican president in democratic clothes, and, as I will try to show in a subsequent blog, as a hip Black leader, while George W. Bush dragged the country into the doldrums by trying to substitute Islamo-fascists for the old communist bugbear to keep the dead but not yet buried metanarrative alive. By combining those efforts with a neo-imperialist expansionist policy while pushing the payment for his military policies onto future generations, George W. Bush hawked the future of America to pawnbrokers, but principally the rising new economic power, China, just as Britain had to fight WWII by going into deep debt to America.

The first decade of the twenty-first century witnessed the emerging positions of two implacable parties without an overarching metanarrative to unite them. Just as the pro- and anti-slavery, states rights and the increasing power of a centralized state, divided America into two solitudes in the 1860s, now differences over economic doctrine reified into two warring camps but without a common myth of a more fundamental union. Anyone who expected cooperation and compromise between these warring factions had to be naive. The principles of social democracy, of counter-cyclical debt, of attacking unemployment without aspiring to full employment, of regulating and enhancing capitalism rather than replacing it, of a globalised and regulated international economic order, had already proven itself over and over, but those forces had to continually fight the myths of the absolute supremacy of the market place, the absolute supremacy of a military culture represented by the gun lobby, the absolute freedom of the individual who was independent of the need of the state to borrow and tax to build the necessary infrastructure. And they were myths with no basis in fact or reality and immune to falsification through analysis.

This was no longer merely a battle for voters between two rival sets of options but had morphed into an existential battle between the belief system that had been set in place in 1945 that brought America into its position as not simply the leader of the free world but as the leader of the whole world. Those who now held obsolete and dysfunctional myths were in the same position as those who believed in states’ rights and slavery in the 1850s. George W. Bush had the chance to do for the American right what Clement Atlee did on the British left in the 1950s. Atlee sold out the ideology of socialism on the best terms possible and forged a common metanarrative with the Tories that allowed the sell out of his party to social democracy and the supremacy of capitalism to take place. It permitted the sell out of Britain to the supremacy of the United States and the future of globalization.

George W. Bush did not do it. And Barack Obama, who built a reputation as a mediator and conciliator, is cast in the roll of having to defeat the dragon from without that George W. Bush failed to defeat from within. Romney offered a last hurrah for those who would economically unite the economic neo-cons and the community conservatives. When he claimed that Obama “takes his political inspiration from Europe, and from the socialist democrats in Europe,” he was not only correct but signalled Obama’s “otherness” and suggested that Obama’s liberalism is in conflict with a uniquely American strain of individualism. “The Republicans continue to insist on the ‘Atlas Shrugged’ fantasy of the solitary entrepreneurial genius who creates jobs and wealth with no assistance at all from government or society.”

Tomorrow: How the economic neo-cons stay potent as spoilers and dangerous through their alliance with the community conservatives.

[tags economic conservatives, Obama, Presdident, USA, politics]