118. The Poor Man in the Coffeehouse
Nasruddin saw a stranger in the coffeehouse who looked very sad.
“Is something the matter?” Nasruddin asked him.
“I used to be rich!” said the man. “I lived in a mansion, and I had many servants. But I’ve lost it all: money, mansion, servants, everything. I can barely pay for this coffee. Soon I’ll be begging on the streets. I’m sick with worry.”
“Oh, you won’t have to feel like this for long,” Nasruddin assured him.
The man looked at Nasruddin eagerly. “Do you mean I’ll get rich again?”
“No,” said Nasruddin. “I mean you’ll get used to being poor.”
This Tale is from “Tiny Tales of Nasruddin” by Laura Gibbs. The book is licensed under the CC BY-NC-ND 4.0 license. © 2019-202The2 Laura Gibbs
The quote below is from The Gift of Sanctions: An Analysis of Assessments of the Russian Economy, 2022 – 2023 by James K. Galbraith at the Institute for New Economic Thinking. Like Emmanuel Todd, which I quoted in the last post, he does not agree with the Narrative that the West has been repeating for years. The article is long but the conclusion is very much to the point.
Conclusion
Sanctions have been a tool of US economic warfare for decades. Their effectiveness has always been subject to debate, but there is little doubt that they have been capable of inflicting substantial damage on small economies, such as Cuba, and on countries whose adaptive capacity was small, such as Iraq or Venezuela. Larger and industrial economies, including Iran, South Africa under apartheid and Serbia under Milosevic, are another matter. Russia is of a different scale entirely.
In the Russian case, sanctions were imposed on an economy deeply penetrated by foreign firms in almost every civilian sphere, and with domestically-controlled activity heavily weighted toward giant resource-producers, such as Gazprom – and these too often had Western partners. Any visitor to Russia in recent years would have noted the preponderance of non-Russian automobiles, consumer durables and luxury products of all types in the Russian market, not to mention big-box stores and fast-food restaurants. These producers and distributors were deeply integrated into Russian life, and they operated with full legal rights within the framework of the Russian economy. If they helped to develop indigenous competencies – as they surely did – those competencies remained subordinate to the foreign branding, foreign components, and foreign control of key technologies.
The economic theory behind the sanctions appears to have held that this structure stemmed from the inherent superiority of the Western economic model and the incapacity of Russian businesses and the Russian state to perform basic economic functions with Western levels of efficiency. That view, in turn, was apparently informed by the Soviet era and by the disorder of the 1990s transition.
Prominent voices within Russia, including from leading independent institutions, namely the Russian Academy of Sciences and the Free Economic Society, have for decades advocated a mixed economic model, with a strong focus on reindustrialization led by national firms and guided by the state. Their success in persuading the government to follow this path was, at best, episodic. The oligarchs, who were strongly Western-oriented, maintaining residences and investments abroad on a large scale, stood for openness and integration. So did important academic institutions and international forums.
To break the grip of non-Russian actors on Russian economic life would, therefore, have required extra-legal measures reminiscent of a mafia state, incompatible with a commitment to orderly and lawful markets and business practices inside Russia – matters on which gains since the 1990s have been substantial and hard-won, if not complete. It would have required imposing tariffs, quotas, limitations on foreign ownership, even expulsions of successful and honest enterprises working on Russian soil. Internal opposition would have been strong. The short-run effect on living standards would have undermined the legitimacy of the regime. The condemnation from the West would have been extremely, and justifiably, harsh.
Thus, had the sanctions not been imposed, it is difficult to see how the opportunities now open to Russian companies and entrepreneurs could have come about. Politically, administratively, legally, ideologically, even in early 2022 it would have been extremely difficult for the Russian government to initiate comparable measures, such as tariffs, quotas, and expulsions, given the unbroken grip of freemarket economics on Russian policymakers, the influence of the oligarchs, and the purportedly limited nature of the “special military operation.” In this respect, despite the shock and the costs, the sanctions imposed on the Russian economy were, evidently, in the nature of a gift.
Meanwhile, the forced-draft nature of high-volume military production necessarily leads to rapid turnover of underlying machinery and advancing technologies, as well as the training of a new echelon of technical personnel. Though some techniques remain to be mastered, Russia is not short of any underlying ingredients – food, fuel, materials, scientific and engineering talent. Whether its economic leadership is of a caliber to use these resources effectively is an open question, but so far, the contrary evidence is not compelling. And, one has to ask, compared with whom?
This has been said by Mauldin before and also said by many others but no one that can do anything about it is willing to act. There will come a time however when someone will be forced to act in spite of their desire to avoid the problem.
I’ve noted this before but it’s worth saying again. In the early 2000s we were on the way to actually reducing or at least stabilizing this debt growth. The post-Cold War “peace dividend” and higher tax revenue from the 1990s tech boom, along with some small but helpful fiscal reforms, had us on the right path. But in short order we strayed from that path and fell off the cliff.
The reason neither did so, in my view, is they are responding to voters and donors who, even if they say the right words about “fiscal responsibility,” don’t really want fiscal responsibility. They want their share of the action, whether it be defense contracts, welfare benefits, agricultural subsidies, free healthcare, loan guarantees or whatever. There is no significant constituency for actually making the kind of changes that would alter our debt trajectory. Just a few old curmudgeons like me.
Unfortunately, this won’t stop the changes from coming. They will come. They’ll cause a lot of pain we could have avoided. Then eventually, we’ll come out better on the other side. But getting there will be tough. — Global Debt Addiction by John Mauldin