Sunday, August 23, 2009


PART 1: The failed-state cancer
By Henry C K Liu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NEXT: The privatization tsunami

Henry C K Liu is chairman of the New York-based Liu Investment Group.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

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PART 2: The privatization wave
By Henry C K Liu

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Next: The business of private security in failed states

Henry C K Liu is chairman of the New York-based Liu Investment Group.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

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(Nov 20, '04)

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(Aug 11, '04)

Globalizing poverty, IMF style
(Nov 16, '02)

Enron's Asian misadventure
(Jan 29, '02)

PART 3: The business of
private security
By Henry C K Liu

PART 1: The failed-state cancer
PART 2: The privatization wave

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Next: Failed statehood, militarism and mercenaries

Henry C K Liu is chairman of the New York-based Liu Investment Group.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

PART 4: Militarism and mercenaries
By Henry C K Liu

PART 1: The failed-state cancer
PART 2: The privatization wave
PART 3: The business of private security

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Next: Militarism and the war on drugs

Henry C K Liu is chairman of the New York-based Liu Investment Group.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

PART 5: Militarism and
the war on drugs
By Henry C K Liu

PART 1: The failed-state cancer
PART 2: The privatization wave
PART 3: The business of private security
PART 4: Militarism and mercenaries

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Next: Outsourcing public security

Henry C K Liu is chairman of the New York-based Liu Investment Group.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

PART 6: Outsourcing public security
By Henry C K Liu

PART 1: The failed-state cancer
PART 2: The privatization wave
PART 3: The business of private security
PART 4: Militarism and mercenaries
PART 5: Militarism and the war on drugs

Public security is the prime function of government. Public security is supposed to be provided by government to all citizens equally regardless of levels of wealth. It is one of the basic political goods government is obliged to provide equally to all. It is as sacred to democracy as the principle of one person, one vote.

When public security is privatized, there is a structural danger that adequate protection, or at least added protection needed to meet newly perceived threats, is available only to those who can afford to pay for it. When the rich and the corporate population can get additional needed security from private contractors for a fee, political pressure on government to provide adequate public security for the general public is invariably weakened, just as the proliferation of private education reduces political pressure to improve public education. With income disparity increasingly institutionalized in market economies, the privatization of public security amounts to institutionalizing inequality in government protection, just as the privatization of other government services institutionalizes inequality in the delivery of other basic political goods by government. The US Supreme Court has long since declared the segregation of education by race unconstitutional, yet segregation of education by wealth continues to be widely accepted in the United States, despite an obvious coincidence between race and poverty.

In response to increasingly inadequate security protection provided by government against rising levels of threat from terrorism and crime, a key characteristic of failed statehood, private security services have emerged as a major business sector. Government policies in recent decades have institutionalized income disparities, leading to trends of increased needs for government protection from threats generated by breakdowns in social cohesion; yet such increased needs are left unequally met by trends to privatize government services. Such a combination of trends erodes the role of government at both ends and is the most glaring evidence of the failed-state syndrome.

Security in the homeland
In recent years, the US government has escalated its commitment of funding to homeland-security needs. Including supplemental funding, the federal budget allocated only US$17 billion ($62 per capita) to homeland security in fiscal year 2001, which ended on September 30, when, until September 11 of that year, massively destructive threats from terrorism had still been just a theoretical proposition. The homeland-security budget after September 11, 2001, increased to $29 billion ($105 per capita) in fiscal year 2002. In fiscal year 2003, the federal budget for homeland-security activities was $38 billion ($135 per capita). In fiscal year 2005, it was $45.9 billion ($164 per capita). President George W Bush administration's budget request for fiscal year 2006 calls for $49.9 billion ($169 per capita) in total funding for homeland security, an increase of approximately 8.6% in real (inflation-adjusted) terms over the fiscal year 2005 budget. While the rate of rise in federal expenditure has moderated, the rate of increase in the need for homeland security has not. The slowdown in the rise in the federal budget for homeland security can only be explained by a shift of the cost to the private sector.

A 2003 review by the Federal Reserve Bank of New York (FRBNY) suggests that the economic impact of increased homeland-security spending will be relatively small, and that it is unlikely to have major effects on the fiscal discipline of the government or on productivity in the private sector. Government spending on homeland security accounted for 0.35% of gross domestic product (GDP) in 2003 - an amount only one-tenth the size of national-defense outlays. In conjunction with this spending, even if the private sector were to double its security-related inputs, the report estimates that the total annual direct costs of homeland security would be only $72 billion, or 0.66% of 2003 GDP. Moreover, such a doubling of inputs would at most reduce the private sector's labor productivity level by only 1.12%.

The report attaches two caveats to its conclusion. First, the results do not suggest that the economic damage of the September 11 terrorist attacks is negligible. The findings focus solely on the economic effects of the expenditures undertaken to prevent and prepare for future incidents. Second, the results do not suggest that homeland security is unimportant. The study is in essence focused only on the cost side of a cost-benefit analysis. The benefits of homeland security are not easy to measure. One simply cannot estimate or verify how many terrorist activities, if any, are being prevented because of increased security measures, or that if and when an catastrophic attack does take place, how much of its likelihood of occurrence would have been reduced by added security spending.

Clearly, it is difficult to put a value on the heightened sense of safety that the homeland-security program provides. If such a program is viewed as insurance against loss from terrorist catastrophe, then the absence of catastrophe will have justified the cost of the insurance. Yet the value of prevention is not automatically positive. A false sense of security can come from the power of suggestion that when something is being done, some positive effect will result. It is known as the Hawthorne Effect, named after the General Electric Co experiment in Hawthorne, New York, to search for optimum lighting levels for highest efficiency in productivity by varying the levels of lighting. The experiment discovered that changes in lighting levels caused productivity to increase more than any fixed level of lighting. Workers are energized when they feel that they are being fussed over.

However, real prevention depends on the real effectiveness of the spending. If directed toward wrong targets, spending may not prevent anything. Worse yet, it may divert focus and resources from the real targets. Nevertheless, given the relatively small expense of prevention as compared with the cost of failure, proponents of the homeland-security program argue that even if it should prevent just one major incident over the next several years, the return on homeland-security expenditures would more than justify the cost. Further, spending buys political coverage from criticism of officials and administrations. Unfortunately, the same generous rationale is not applied to the expenditure of removing the root causes of terrorism, ie, global socio-economic injustice.

Privatization of homeland security reduces government expenditure by shifting part of the cost to the private sector. Private security spending contributes more than government spending to increases in GDP, and thus it minimizes the economic burden of security. The way the US plans to keep the increased cost of homeland security to minimum adverse economic impact is through the voodoo magic of input-output econometrics. When homeland security is privatized, its expenditure becomes a growth industry. Thus, by the rules of econometrics, preventing loss from threats to homeland security is an input, and security spending becomes an output that adds to GDP and creates little adverse impact on the economy as a whole, albeit the price is systemic inequality of protection. Further, econometric analysis ignores the fact that if the need for security is reduced, the output could have been directed toward more constructive uses.

For example, after September 11, the US Congress provided the pharmaceutical industry with incentives to develop drugs for terrorism-related illnesses, including protection from normal product liability and proposals to extend patent rights on medication unrelated to homeland security. This reduces the expenditure of government research, but raised the price of drugs generally by delaying the entrance of generic drugs that are cheaper than brand-name drugs.

The measure of economic failure
The science of econometrics deals with economic measurements used to estimate the magnitude of quantitative relationships among economic variables within a model of the economy. It is used to test hypotheses and forecast outcomes, with wide application to business forecasting and market planning. There are two kinds of economic variables in a model: endogenous variables that are found within the model; and exogenous variables that are introduced from outside the model. Security threats are exogenous variables in an econometric model since their levels and intensity are independent of the internal construct of the model. Economists seek insights by examination of data. This is known as the inductive approach. They also attempt to validate or disprove existing theories by comparing theoretical claims against empirical data. This is known as the hypothetical approach. The two approaches are not mutually exclusive, their difference is analogous to different starting points in a conceptual circle.

William Stanley Jevons (1835-82), an English economist and logician, simultaneously with Viennese economist Carl Menger and French economist Leon Walras launched the Marginalist Revolution of 1871-74 (diminishing marginal utility) that gave rise five decades later to neo-classical economics, which emphasizes the phenomenon of exchange over production. Marginalist theory of value puts forth the idea that the "natural value" of a good is determined only by its subjective scarcity, ie the degree to which people's desire for that good exceeds its availability. When clean water was in abundance, it had no economic value, even though its value to life is paramount. When industrialization pollutes the Earth's water supply, clean water commands a high price. Thus pollution, like security threats, serves an economic function in neo-classical economics. Privatization of water depends on water pollution for its economic justification.

The focus on scarcity is behind the rise of market capitalism where price is not determined by the cost of production but by scarcity of supply. The cost of oil production remains around $4 a barrel on land and $7 a barrel offshore. It is scarcity that has driven the price of oil above $50 per barrel in recent months. The cost of production for additional copies of Microsoft's Windows is near zero, yet each copy can sell for $200 because Microsoft controls the supply through its intellectual property rights.

Marginal utility gives rise to market failure through the emergence of monopolies and cartels whose purpose is to keep prices high by limiting supply rather than increasing production. It robs society of the material benefits of rising productivity from advanced technology. Surplus food from efficient agro-technology is dumped in the sea to keep prices high while billions starve around the world. Money is constantly kept scarce to maintain its value while poverty is kept widespread in a world of idle production overcapacity made possible by technological progress. If overcapacity were to be fully utilized, prices would have to fall or wages would have to rise to increase public purchasing power to absorb the added products. Both options are destabilizing to the state of scarcity without which the entire science of economics would have to be rethought. Thus workers are kept unemployed or underemployed to cut down on the production of goods they cannot afford on their low wages. The concept of marginal utility has created as much misery for mankind as racism, by keeping basic human needs at a constant level of scarcity. States that tolerate a failed market are by definition failed states.

In 1803, Jean-Baptiste Say (1767-1832), in examining the evolution of trade between Britain and Brazil, observed that demand for a particular set of goods can only be expressed by equivalent supply of another set. Supply, therefore, "creates" its own demand. Almost all of classical and most neo-classical theory is based on this simple, even tautological, assertion. Say's Law concludes that general gluts cannot exist. Classical economists assert that unemployment and market failures were due to excess supplies over demands of particular commodities and not excess supplies (or gluts) of commodities generally as a whole. David Ricardo (1772-1823) notes: "Mistakes can be made, and commodities not suited to demand may be produced - of these there may be a glut" and that "it is at all times the bad adaptations of the commodities produced to the wants of mankind which is the specific evil, and not the abundance of commodities. Demand is only limited by the will and power to purchase." John Stuart Mill (1806-73) concurs by noting that in these situations, "production is not excessive, but merely ill-assorted". Ricardo and Mill extended this proposition to savings and investment. If one produces more than one consumes, then the surplus is saved and, by definition of terms, invested. No one would produce in excess of consumption needs if one does not have a desire either to exchange it or invest it. Supply, therefore, generates demand. This relationship virtually all the classical economists held to be an irrefutable truth.

Thomas Robert Malthus (1766-1834) and French economist J C L Simonde de Simonde (1773-1842) are the exceptions who believed general gluts could exist. They reasoned that income is distributed among workers, entrepreneurs and landowners receiving wage income, profit and land rents respectively. And landowners will receive a portion of income, but they may choose not to consume it. And when they don't, there will be a general glut (excess supply of goods) even though the investment-savings identity still holds. Thus all classical economists, except for Malthus and Simonde, were generally in agreement over the validity of Say's Law, at least in the long run. They all also agree on the identity of savings and investment as well as the separation of output from price theory. The most famous under-consumption cycle theory was laid out by John Maynard Keynes in his General Theory (1936).

The neo-classical story is often captured in diagrammatic form by the idea that equilibrium prices and quantities of goods are determined jointly and simultaneously by the demand and supply for goods. Yet demand is blocked by the need to skim off surplus value in the form of return on capital through profits, which can only come from lowering wages before the level of cost of material and capital needed to produce goods. Price is always the sum of cost of material, capital and labor. Of the three costs, labor is the only flexible variable. Yet if wages consistently fall below the level of prices for goods, a downward spiral of overproduction and unemployment will result, which is the basis of business cycles and long waves.

According to the theory of marginal utility, since fear drives up demands for security, the demand and therefore the price for private security will rise if the supply of government provided security is reduced. Higher prices for private security are not inflationary if the value of the benefit (perceived safety) also rises. Thus rising fear from terrorism is good economics in that it creates rising demand for private security services at rising prices that are not inflationary because of rising fear, and contributes to a rising GDP. Such is the warped logic of econometrics employed by the FRBNY review on the economic impact of terrorism-induced homeland-security expenditure.

The inductive approach has a long history of producing esoteric, at times bizarre theories. Jevons discerned from data evidence of a sunspot-driven business cycle (1875, 1884). Clement Juglar (1819-1905), a French doctor, statistician and father of business-cycle theory, was an early proponent (1862) of the development of an economic theory of the business cycle by identifying the "Juglar seven-to-11-year industrial cycle" that has since been associated with his name. His findings on credit cycles spurred the subsequent efforts of overinvestment theorists. Juglar saw in financial tables evidence for a credit-driven cycle. Similarly, Henry Ludwell Moore (1869-1958), a student of Menger in Vienna and an early disciple of Walras in France, was the only American member of the original Lausanne School grouping around the Frenchman Walras and the Italian Vilfredo Pareto. The central attribute of the Lausanne School was its development of general equilibrium theory and its extension of the applicability of the neo-classical approach to economics. Moore also delved deeply into discovering the connection between commodity business cycles and equilibrium theory. His theory of the cycle was externally driven by eight-year cycles of rainfall. His magnum opus, Synthetic Economics (1929), was a Herculean attempt to estimate Walras' general equilibrium system. Moore used the inductive approach in 1914 to argue for a weather and astral-driven cycle.

The hypothetical approach was also used by economists to attempt to fit data to demand curves, as represented by Nikolai D Kondratiev (1892-1931?), Russian economist and founder of the Moscow Institute for Business Conditions. Kondratiev identified the half-century "long wave" in his famous 1922 tract and 1926 article "The Long Waves in Economic Life". One of the architects of the first Soviet Five Year Plan, he was imprisoned in a Siberian camp in which he died some time in the 1930s. Wesley C Mitchell and the National Bureau of Economic Research (NBER) used the hypothetical approach in their research. NBER today is the official diagnostician of recessions in the US economy. The measurement of business cycles was the main topic in the hypothetical approach. The NBER does not record Kondratiev Cycles (or "long waves") as its researchers do not believe these cycles exist. Nonetheless, four Kondratiev waves have been identified:

1. The Industrial Revolution (1787-1842) is the most famous Kondratiev wave: the boom began in about 1787 and turned into a recession at the beginning of the Napoleonic age in 1801 and, in 1814, deepened into a depression. The depression lasted until about 1827, after which there was a recovery until 1842. As is obvious, Kondratiev rode on the development of textile, iron and other steam-powered industries after 1842.

2. The Bourgeois Kondratiev (1843-1897): After 1842, the boom re-emerged and a new Kondratiev wave began, this one as a result of the railroad age in Northern Europe and the US and the accompanying expansion in the coal and iron industries. The boom ended approximately in 1857 when it turned into a recession. The recession turned into a depression in 1870, which lasted until about 1885. The recovery began after that and lasted until 1897.

3. The Neo-Mercantilist Kondratiev (1898-1950?): The boom began about 1898 with the expansion of electric power and the automobile industry and lasted until about 1911. The recession that followed turned into depression in about 1925 and lasted until around 1935. This third wave entered into a recovery immediately afterward, which one might suspect lasted until around 1950.

4. The Fourth Kondratiev (1950- 2010?). There has been much debate among believers on the dating of the fourth wave, largely because of the confusions generated by the low fluctuation in price levels and the issue of Keynesian policies, and hence this debate is yet to be resolved. Perhaps the most acceptable set of dates is that the boom began around 1950 and lasted until about 1974, wherein recession set in. When (and if) this recession fell into its depression phase may be more difficult to ascertain (circa 1981?), but what has been more or less agreed upon is that in 1992 (or thereabouts) the recovery began and has been projected to give way to a boom, and thus a new Kondratiev wave, around 2010 or so.

Simon Kuznets (1901-85), neither a Keynesian nor an econometrician, took his cues from Mitchell's institutionalism. His initial work was on the empirical analysis of business cycles (1930) - a 15-20-year cycle he identified was later attached to his name, the "Kuznets Cycle". Kuznets was also one of the earliest workers on developmental economics, in particular collecting and analyzing the empirical characteristics of developing countries. His major thesis, which argued that underdeveloped countries of today possess characteristics different from those that industrialized countries faced before they developed, helped put an end to the simplistic view that all countries went through the same "linear stages" in their history and launched the separate field of development economics - which now focused on the analysis of modern underdeveloped countries' distinct experiences. Among his several discoveries that sparked important theoretical research programs was that of the inverted U-shaped relation between income inequality and economic growth; he also discovered the patterns in savings-income behavior. Kuznets won the Nobel Prize for economics in 1971 while he was at Harvard University.

Private security industry giants
Wackenhut Services, a subsidiary of the Wackenhut Corp, provides security services to private and public clients, including facilities operations and maintenance, emergency preparation and response, fire protection, hazardous-material management, and security and law-enforcement services. The company also operates a homeland-security division that provides border security, information analysis, and emergency response for situations involving chemical agents, biological warfare, and weapons of mass destruction. US government and public agencies, including the Internal Revenue Service, the National Aeronautics and Space Administration (NASA), the Department of Energy, and the US Army, are paying clients.

The late George R Wackenhut, a former US Federal Bureau of Investigation (FBI) agent, built the Wackenhut Corp into an international security firm that promoted the use of private guards at prisons, airports and nuclear power plants. From the McCarthy era on, when a communist could be found hiding under almost every bed in the United States, the country's appetite for private security escalated into hysteria. George Wackenhut cashed in by persuading thousands of communities and government agencies to put private guards in public jobs, a move long resisted in vain by law-enforcement officials. Started in 1954 as a three-man detective agency in Miami, the struggling company turned to providing guard services to stay afloat and later earned contracts with Lockheed Martin and the Kennedy Space Center in Florida to protect classified projects from communist spies. To impress potential clients, Wackenhut dressed his guards in helmets and paratrooper boots, and he recruited former members of the Central Intelligence Agency (CIA), the FBI and elite military forces to join management and the company's board. Over the next four decades, Wackenhut personnel guarded corporate buildings during labor strikes, managed security for airlines at nearly 90 airports, and supplemented municipal services such as fire fighting and emergency medical services in several small communities. Its guards patrolled the Atomic Energy Commission's nuclear test site in Nevada and even a handful of US embassies.

The company's expansion into prison security and other correctional operations in the 1980s became its most profitable move. It was one of the first private security firms hired by the Federal Bureau of Prisons and has since received federal contracts from the US Marshals Service and the immigration and customs enforcement division of the Department of Homeland Security. The privatization of prisons has had its critics and Wackenhut's guards have been accused of abusing inmates in Florida, Texas and Louisiana. The Wackenhut Correction Corp, the company's prisons subsidiary, now manages more than 40,000 prison beds, mostly in the United States, the United Kingdom, Australia and New Zealand.

According to a head count taken in the middle of 2002, the 50 US states, the District of Columbia and the federal government held 1,355,748 prisoners (two-thirds of the total incarcerated population), and local municipal and county jails held 665,475 inmates, with a total of more than 2 million inmates. US jails held one of every 142 US residents. Males were incarcerated at the rate of 1,309 inmates per 100,000 men, while the female incarceration rate was 113 per 100,000 female residents. Of the 1,200,203 state prisoners, 3,055 were younger than 18 years of age. In addition, adult jails held 7,248 inmates under 18. As of June 30, 2002, state and federal correctional authorities held 88,776 non-citizens, a 1% increase from the 87,917 held a year earlier. Sixty-two percent were held in state prisons and 38% in federal institutions. Privately operated prisons held 86,626 inmates. By comparison, the US has 983,000 hospital beds, less than half of the number of prison beds. That is a failed-state syndrome if there were ever one.

As his company grew, Wackenhut recruited prominent directors such as Clarence M Kelley, former head of the FBI; James J Rowley, former director of the US Secret Service; and Frank C Carlucci, former US defense secretary and former CIA deputy director. Before president Ronald Reagan appointed him director of central intelligence, William J Casey was Wackenhut's outside legal counsel. Such connections fueled speculation that the company was a front for the CIA, which Wackenhut denied.

Wackenhut, outspoken in his conservative politics, was occasionally seen as overly zealous in his investigative assignments. In 1967, when governor Claude R Kirk Jr of Florida appointed him chief of a private police force to investigate organized crime, Wackenhut was criticized for saying publicly that he and his officers would not limit themselves to suspected criminals but would "investigate everyone and anyone who needs investigating". The police force was short-lived, but the company's tactics created a dispute again in 1991, when a congressional inquiry found that it had spied on an environmental advocate by installing miniature cameras in his hotel rooms and illegally taking documents from his home in his absence.

Kroll is another major private security company. Its experts in security, protection, engineering, business continuity and emergency management help clients prevent, prepare for and respond to the many threats they face at home and abroad that the state fails to provide. Kroll's approaches are designed to respond quickly to changing threat conditions and ensure operational continuity in the wake of a crisis. Global threats are forcing companies to take a harder look at their security programs. From assessment to implementation, clients are told they can benefit from Kroll's seamless integration of services, resulting in a more efficient, cost-effective security program, albeit at times outside the law even if technically not illegal. Kroll experts develop proactive, tiered approaches that can respond quickly to changing threat conditions and help ensure operational continuity in the wake of a crisis. Private security programs can be free of civil-rights restraints. Kroll's 2003 sales were $485.5 million, with year-on-year sales growth of 67.9%. Last May 18, Kroll Inc and Marsh and McLennan Companies (MMC), the insurance broker now under investigation, announced that they had entered into a merger agreement under which MMC would acquire Kroll Inc in a $1.9 billion cash transaction. In October, New York Attorney General Elliot Spitzer sued Marsh & McLennan, the world's largest insurance broker, accusing it of rigging bids and fixing prices while steering business to insurers that paid the highest placement fees. In January, Marsh agreed to pay $850 million to settle the suit, in line with placement fees it collected in 2003, and agreed to change its business practices. Marsh took a pretax charge of $618 million in the fourth quarter for the settlement, in addition to a $232 million charge taken in the third quarter. The New York-based company reported a 2004 fourth-quarter loss of $676 million, or $1.28 a share, compared with a profit of $375 million, or 69 cents a share, a year earlier. In essence, US taxpayers paid for MMC settlement costs.

Washington Group International Inc, based in Boise, Idaho, with approximately 27,000 employees at work in more than 40 US states and more than 30 countries, provides professional, scientific, management, and development services in more than two dozen major markets. Founded in 1964 by Dennis R Washington in Missoula, Montana, the company rose to the top of the civil-construction market in Montana, and expanded into mining, industrial construction, and environmental clean-up work. As his company grew into a major regional firm, Washington's vision for the future continued to expand also, leading to a series of acquisitions that produced the international powerhouse the company is today. In 1993, Washington Construction Co expanded its heavy civil-construction operation when it merged with Kasler Corp, a California-based firm with large-scale operations in heavy civil construction. In 1996, Washington Construction acquired Morrison Knudsen, gaining an 84-year heritage of mining, engineering and construction globally. With the acquisition, the company had capabilities and services that reached across five markets: infrastructure, mining, industrial/process, energy and environment, and power. In 1999, the company acquired the government-services operations of Westinghouse Electric Co, becoming a science and technology services leader. In 2000, the company expanded its market leadership by acquiring Raytheon Engineers and Constructors to produce one of the largest companies in the industry.

Today, Washington Group holds leading positions in six top markets and a service offering that spans the entire range of its clients' needs, unifying a vision that has been 10 years in the making. Being the undisputed leader in the destruction of US stockpiles of chemical weapons, Washington Group has contracts with the US government worth more than $4.2 billion to design, build, operate, and close chemical-weapons destruction plants at four sites in the United States. Washington Group's Westinghouse Savannah River Co has operated since 1989 the 803-square-kilometer Savannah River Site (SRS) for the US Department of Energy (DOE). The site is home to the Defense Waste Processing Facility, the largest high-level radioactive-liquid stabilization plant in the world. The site's approximately 9,000 employees are engaged in environmental remediation and maintenance of the nation's nuclear stockpile. Washington Group's involvement at SRS is ever changing from production of weapons-grade plutonium and tritium during the Cold War to cleanup and disposal today. The SRS continues to meet the changing needs of the DOE.

Cold War nuclear deterrence was based on the doctrine of mutually assured destruction (MAD) with long-range delivery systems armed with independently targetable re-entry warheads. The SRS in South Carolina was constructed in the early stages of the Cold War. The site's main purpose was to produce basic materials used in the fabrication of nuclear weapons, primarily tritium and plutonium-239. The five reactors built at the site produced weapons-grade nuclear materials that were used in weaponry as well as plutonium-238 for power sources for NASA deep-space missions. The SRS has operated for almost half a century. When Westinghouse Savannah River Co took over the site in 1989, its task was to re-engineer and upgrade three of the five 1950s-era nuclear reactors that produced plutonium and tritium.

By the end of the decade the global balance of power had shifted. With the end of the Cold War, and the dissolution of the Soviet Union, the role of the Savannah River Site and other DOE defense-related facilities changed.

Washington Group's history at the SRS is one of dealing with the changing needs of the DOE. It is a large and complex site and one of the many challenges the company tackles is how to adapt to new DOE missions and changing national priorities. As a result of privatization of DOE functions, private profit became a legitimate factor in the deliberation in the nation's nuclear policy.

With the passage of arms-reduction treaties, the need for plutonium and tritium declined. The SRS mission shifted from nuclear armament to disarmament in areas such as groundwater remediation, cleaning up inactive waste sites, and waste management, pollution that had been part of the armament process. By the middle of the 1980s, construction was started on a major facility that would immobilize high-level radioactive waste and convert it into a durable glass form through a process called vitrification. The Defense Waste Processing Facility (DWPF) would become the world's largest system for stabilizing radioactive waste in glass.

The terrorist attacks of September 11, 2001, heightened the United States' awareness of the wide-ranging consequences of such attacks. To reduce America's vulnerability to terrorism and other disasters, President Bush issued the National Strategy for Homeland Security (NSHS) to protect public health and safety and key assets vital to US government, economy and morale. Its mission is twofold: 1) to mobilize the entire nation in a concerted effort to protect its homeland from terrorists and 2) to ensure a high level of security in a free and ever-changing society.

Washington Group International sees itself playing a crucial role in homeland security, helping to prevent, protect, and prepare for catastrophic threats to the US as well as developing recovery techniques should such attacks occur. These efforts are focused on protecting military bases, both at home and abroad, securing critical infrastructure against modern threats, such as dirty bombs, by utilizing innovative detection and mitigation systems. Washington Group provides a wide range of engineering, construction, and threat-analysis services to government customers. These specialized services include: Real-time threat simulation; security vulnerability analysis and mitigation; emergency and crisis response; security-related technology integration and deployment; hazard assessment; and threat and consequence assessment.

Washington Group International claimed a leading role in ridding the US and the world of weapons of mass destruction (WMD) when operations began last August 9 at the Anniston Chemical Agent Disposal Facility (ANCDF) in Alabama. Over the next seven years, Washington Demilitarization Co and its subsidiary, Westinghouse Anniston, is scheduled to destroy hundreds of thousands of chemical weapons stored at the Anniston Army Depot.

In the former Soviet Union (FSU), Lugar-Nunn legislation is providing funding to help former Soviet states dismantle their arsenals of WMD. Washington Group International is the first foreign organization successfully to license and design, construct and operate a Cooperative Threat Reduction (CTR) facility in the FSU. Washington Group was awarded six contracts by the US Defense Department's Defense Threat Reduction Agency (DTRA) to build a Neutralization and Dismantling Facility (NDF) in Dniepropetrovsk, Ukraine, where the company disassembled, eliminated, disposed and salvaged SS-19 missiles.

After the collapse of the Soviet Union, Ukraine, a country of 52 million people, inherited the world's third-largest nuclear arsenal. There were more than 180 intercontinental ballistic missiles (ICBMs) with more than 1,200 warheads on Ukrainian territory. The stockpile consisted of 133 SS-19s and 46 SS-24s armed with nuclear warheads. There were an additional 14 SS-24s present in Ukraine but not deployed with warheads. Ukraine also inherited several dozen bombers with nuclear capabilities that were armed with approximately 600 air-launched bombs and more gravity bombs. As many as 3,000 tactical weapons rounded out the arsenal that totaled about 5,000 strategic and tactical weapons. A trilateral agreement signed in January 1994 by the US, Russia and Ukraine that would send the nuclear warheads back to Russia was the first step in making Ukraine a nuclear-free nation.

Washington Group went to Ukraine in 1994 in a partnership with Thiokol, a rocket-motor maker. Thiokol needed a company with construction and engineering experience for work in the FSU. The US partners won the contract that turned into a disassembly and elimination project with the Defense Nuclear Agency, later renamed the Defense Threat Reduction Agency. From 1994 through 2003 the Department of Defense awarded Washington Group a series of contracts to disassemble, dispose, eliminate, salvage and store Soviet ICBMs for the DTRA. An early contract called for the design, construction management and operation of a 2694-square-meter Neutralization and Dismantling Facility (NDF) in the southern oblast of Dniepropetrovsk, a Soviet industrial/technology center that had produced trucks from 1944 until May of 1951, when production switched to ballistic missiles. During the final stages of the Cold War, Leonid Kuchma directed operations at the Dniepropetrovsk plant that produced missiles, space-launch vehicles, satellites and rocket engines. In the waning years of the Soviet regime, maintenance on the facility diminished as the Soviet economy collapsed. After the dissolution of the USSR, Kuchma became Ukraine's prime minister (1992-93) and then its second president in July 1994. He remained in power until January 23, 2005, when his hand-picked successor, Viktor Yanukovych, lost the presidential election to Viktor Yushchenko.

Guardsmark is the world's largest employer of former FBI agents and also one of the largest security firms in the United States. Guardsmark operates in some 400 cities in North America, where it provides security services to the financial, utility, transportation, and health-care industries. The company offers security guards, private investigation, and drug-testing services. It consults with architects and builders to design security programs. Guardsmark also conducts background checks (employment, education, and criminal history) and provides outsourcing services (Peoplemark). Chairman and president Ira Lipman owns the company, which he founded in 1963.

Allied-Barton Security Services, formerly Allied Security, is one of the largest private security firms in the US. The company serves more than 2,100 clients through more than 60 offices in 37 states. The company primarily provides security guards and staffing services for shopping malls, office buildings, hospitals, corporate complexes, and universities, but also offers 24-hour alarm monitoring, closed-circuit television systems, access-control systems, and burglar- and fire-alarm systems. In addition, Allied Security provides consulting services and facility assessment. The company, which is owned by MacAndrews and Forbes Holdings, has acquired and merged with Barton Protection Services. Sales in 2003 were $550 million, year-on-year sales growth was 10%, and it had 23,000 employees, boasting year-on-year employee growth of 21.1%.

Inter-Con Security Systems, one of the largest private security consulting firms in the US, provides custom-designed security programs for commercial, governmental, and industrial clients in 25 countries on four continents. Its services include security consulting, protection, investigations, and training. It also provides security-guard and patrol services. Inter-Con's clients have included NASA, the Academy Awards, and the US government. The company, founded in 1973, is owned by chief executive officer Rick Hernandez and the Hernandez family. Sales in 2003 were $1 billion, and the company had 25,000 employees.

Run by former US Secret Service agents, Vance International, a part of SPX's Security and Investigations Unit, offers executive protection, uniformed guards, investigations and training. It also provides asset protection and temporary labor for companies during strikes or natural disasters. Serving corporations and government agencies, as well as the occasional celebrity, Vance International has been called the "Rolls-Royce" of security firms; clients have included Bill Gates, Nelson Mandela and Arnold Schwarzenegger. President and chief executive officer Chuck Vance founded the firm in 1984, acquired by SPX in 2002.

Security on the cheap
By September 2001 there were an estimated 1 million to 2 million workers in some 13,000 private security companies in the US, and some say there are now twice as many private security workers as police officers. The number of workers in the industry grew nearly 20% in the last decade, and according to the Bureau of Labor Statistics, it will continue to increase as companies beef up security to allay fears of crime, vandalism and terrorism.

These guards, however, are not police officers. Instead, they are uniformed watchmen, usually unarmed, who patrol airports, shopping malls, private businesses and college campuses. As companies downsize, they often have their security personnel - typically provided by third-party contractors - perform two jobs at once. These "guards" also double as receptionists or customer service workers. Even the government, in efforts to cut costs, sometimes subcontracts security in prisons and federal buildings to private security companies.

And of course, these companies have been used to break union picket lines and defend strikebreakers. Public-sector unions are also keeping a wary eye on the small but growing trend of private security guards replacing unionized public employees. Unlike their public-sector or in-house counterparts, these private security guards are not highly trained or well paid.

And while many in the security industry, including the managers of some security companies, are pushing for national standards concerning training and skill level, the industry does not pay enough to attract and maintain qualified personnel. Richard Marinaro, Long Island director of Boston-based Unico Security Services, told Newsday in 1998 that the security companies "can't get people at these wages, and we're in competition with the McDonald's and the Wendy's [fast-food chains] of the world". Yet the jobs that these guards are asked to do - working eight-hour shifts without a lunch break, showing restraint and judgment when dealing with the general public, serving as witnesses in court - require more skill, training, and dedication than working in fast food.

Stories of shoddy work and/or theft by the security guards who are supposed to protect people and property are surprisingly commonplace among the companies that specialize in providing private security in the US. For example, workers for Argenbright, a company that provides workers for security checkpoints in airports, were involved in four airport security breaches in less than a year in 1997-98, as well as one that required an evacuation of the United Airlines terminal at Chicago's O'Hare Airport in 1999. In April 2000, federal prosecutors also found that Argenbright officials at Philadelphia International Airport routinely falsified records, hired convicted felons, and provided low-paid employees with answers to federally required tests for baggage screeners.

One trend that has coincided with the increase in incidents involving private security and their low wages is the industry's drift toward consolidation. Last August, Pinkerton, a subsidiary of Sweden-based Securitas, merged with Burns International Corp, another industry leader, to create a private security giant with more than 600 offices internationally and annual revenue of more than $2.5 billion. Two Pennsylvania companies, Allied Security and SpectaGuard, also merged in 2000, making the company the largest independently held security company in the country and giving it business in more than 250 cities across the US.

With consolidation has come corporatization of the industry, something that in the eyes of some industry insiders has led industry leaders to sacrifice quality service for an image that sells. "Pinkerton sold out to a low-end, minimum-wage type of service," said Roger Schmedlen, president of Loss Prevention Concepts Ltd, a Michigan-based security consulting agency, as he described Pinkerton's entry into lower-level watchman service in the early 1980s. "They put out all of these slick brochures and took on a national advertising campaign, and it changed the industry. They have some great pictures of guys that look like Superman, but government studies show that the typical security guard doesn't have much more than an eighth-grade education, and is elderly." But Pinkerton, and most other companies, also offer more "high end" security guards - ones who are better trained, more skilled, and better paid. "There are some really good guards out there," Schmedlen noted. "But a lot of these companies just go for the low bid and take it."

Ultimately, these companies, which have reaped the benefits of exploding demand for security guards in the US, have skimped on wages whenever possible to maximize profit. "They're profit-making enterprises, and they have stockholders and shareholders," explained one industry observer. "In any kind of safety operation, the bulk of the expense goes towards personnel compensation. So if you want to try to make a profit, the first thing you make cuts in are wages and benefits."

With its low wages, low standards, and poor working conditions, the private-security industry is one that, on the surface, seems ripe for unionization. But a provision of the National Labor Relations Act stipulates: "No labor organization shall be certified as the representative of employees in a bargaining unit of guards if such organization admits to membership, or is affiliated directly or indirectly with an organization which admits to membership, employees other than guards" (source: Section 159, Title 29 of the US Labor Code). This provision, known more commonly as the "Guard Law", gives management the right to refuse workers' petitions to join a union such as the Teamsters, the Service Employees International Union (SEIU), or any other international union that has members outside of the security sector. While it was originally written to prevent potential conflicts of interest in labor disputes (if United Auto Workers guards were assigned to defend against a UAW plant strike, for example), it also serves to undermine efforts by unions to gain an organizing foothold in the industry.

There is, however, a loophole that unions can use to gain recognition. Management can voluntarily choose to recognize guards as part of a larger union, as some have in card-check elections. Argenbright airport workers in Los Angeles and San Francisco were able to do this when they voted to join the SEIU. Mitigating circumstances, such as public pressure or the fact that many companies prefer to deal with a union instead of individual employees, have helped international unions gain recognition from some of these security companies. And while other security guards have the option of joining other small, unaffiliated unions that represent only security personnel, still less than 10% of the US industry is organized.

As with many of the increasing number of low-paying service jobs that have sprung up in the past decade, the growing ranks of private security guards represent another challenge for organized labor. If they are going to maintain their foothold among the blue-collar workforce, unions need to adapt and adjust to the realities of exploitative industries that will continue to sacrifice both quality service and decent wages until their workers gain a decent voice on the job.

The employees of the private security sector, in essence a private army, are greater in number than the soldiers in the US Army. This private army thrives on social instability and state failure. These private security companies have no financial incentive to promote peace and stability. The dependence of the state on their contracted service gives them an influential voice in formulating state policies. Security threat is big business and any reduction of threats in fact threatens the economy.

Markets provide a variety of incentives to producers, their customers, and local communities to guard against a wide range of risks, including the possibility of terrorism. Private producers of goods and services generally will benefit from safe operating practices (including physical security) and the purchase of insurance to help limit any financial losses. But the incentives for private businesses to reduce their vulnerability to attack, and the potential losses for those who would be affected, may be inadequate when the private costs of the threat of terrorism are lower than the social costs, or equivalently, when the private benefits from security measures are less than the social benefits.

Private costs would be closely associated with damages to production and distribution facilities and the harm to industry workers, as well as the potential loss of business. But the total social costs could go further and include the harm or loss of life to individuals such as the neighbors of a targeted facility or the consumers of a tainted product, damage to the local environment, and negative effects on other businesses dependent on the targeted industry. If the product of the targeted industry became a potential weapon in attacks elsewhere, the social costs could be broader still. For example, stolen chemicals could be used to attack an office building. If the disparity between private costs and social costs is significant, the result is that private firms have insufficient incentive to meet social objectives.

Many of the US government programs that existed before September 11 are intended to bring private and social costs into line. Many firms had long been subject to extensive government intervention because of the dangers that those industries' operations or products can pose to public safety, environmental quality, and local economies.

Existing government programs provide a starting point for examining possible new efforts. Those programs may be adequate to prompt businesses to address much or all of the increased terrorist threat. But if private efforts are inadequate, policy options for prompting additional efforts will probably build on the incentives generated by existing requirements. Cost-effective policies for enhancing homeland security may involve expanding some programs that have non-security goals while reducing others. For example, programs that were intended primarily to help protect the public from relatively common threats, such as industrial accidents or food contamination, could be expanded to help address the terrorist threat. But programs that were intended to disseminate information on critical industries, such as the production and storage capacities of hazardous facilities, might need to be curtailed to keep that information out of the hands of terrorists.

If a chemical-production facility were subject to an attack, for example, the ensuing fire or explosion could expose the surrounding community to dangerous toxins. That added exposure would represent a social cost that the private firm would not face - especially if the damage exceeded the limits of the owner's insurance coverage and other financial resources. As a result, the owner would have less incentive than otherwise to guard against such attacks, scale back operations, or relocate. Current government programs affecting the safety of chemical-plant operations and supporting local emergency preparations are a response to that social cost and also contribute to homeland security. However, the increased awareness of the terrorist threat since September 11, if not the threat itself, also may indicate a need to step up security efforts since the social benefits of spending on security have increased.

The type of intervention that would force industry to internalize the costs of security and for which it would bear the immediate costs would include requirements to take preventive measures, assessment of penalties for failing to take certain actions, or imposition of taxes on certain activities or products.

The type of intervention that would have the government socialize the cost - so that everyone paid for the enhanced security - would include new programs that rewarded industry for taking measures to protect vulnerable facilities or make those facilities less dangerous, for example, by supporting the adoption of safer production processes or the use of safer chemicals. Alternatively, rather than force or pay industry to make certain changes, new programs could help inform nearby residents of the dangers of an attack or inform industry of currently available options for reducing its vulnerabilities.

The use of mercenaries in war
The Guardian reported that with the casualty toll ticking ever upward and troops stretched thin on the ground in Iraq and Afghanistan, the Bush administration is looking to mercenaries to help control Iraq. These soldiers-for-hire are veterans of some of the most repressive military forces in the world, including that of the former Chilean dictator Augusto Pinochet and South Africa's apartheid regime. In February 2003, Blackwater USA, a North Carolina-based Pentagon contractor, began hiring former combat personnel in Chile, offering them up to $4,000 a month to guard oil wells in Iraq. The company flew the first batch of 60 former commandos to a training camp in North Carolina. These recruits will eventually wind up in Iraq where they will spend six months to a year.

"We scour the ends of the Earth to find professionals - the Chilean commandos are very, very professional and they fit within the Blackwater system," Gary Jackson, the president of Blackwater USA, told the Guardian early last year. While Blackwater USA is not nearly as well known as Halliburton or Bechtel - two mega-corporations making a killing off the reconstruction of Iraq - it nevertheless is doing quite well financially thanks to the White House's "war on terror". The company specializes in firearms, tactics and security training, and in October 2003, according to Mother Jones magazine, the company won a $35.7 million contract to train more than 10,000 sailors from Virginia, Texas and California each year in "force protection".

Business has been booming for Blackwater, which now owns, as its press release boasts, "the largest privately owned firearms training facility in the nation". In an interview with the Guardian, Jackson said: "We have grown 300% over each of the past three years [before March 2004] and we are small compared to the big ones. We have a very small niche market - we work towards putting out the cream of the crop, the best."

The practice of using mercenaries to fight wars is hardly new, but it has become increasingly popular in recent years. During the first Gulf War (1990-91), one out of every 50 soldiers on the battlefield was a mercenary. That number climbed to one in 10 during the Bosnian conflict (1996). Currently there are thousands of Bosnian, Filipino and US soldiers under contract with private companies serving in Iraq. Their duties have ranged from airport security to protecting Paul Bremer, the former head of the Coalition Provisional Authority.

Apart from Chile, the other popular source for military recruits is South Africa. The United Nations recently reported that South Africa "is already among the top three suppliers of personnel for private military companies, along with the UK and the US". There are more than 1,500 South Africans in Iraq today, most of whom are former members of the South African Defense Force and South African police.

According to the Cape Times, among the South African companies under contract with the Pentagon are Meteoric Tactical Solutions, which "is providing protection and is also training new Iraqi police and security units", and Erinys, a joint South African-British company, which "has received a multimillion-dollar contract to protect Iraq's oil industry," the Cape Times reported early last year.

The recruitment of its citizens, however, leaves the Chilean and South African governments less than happy. The Regulation of Foreign Military Assistance Act prohibits South African citizens from direct participation as a combatant in armed conflict for private gain. Michelle Bachelet, Chile's former defense minister, ordered an investigation into whether such recruitment was legal under Chilean laws. Bachelet also was troubled by stories that soldiers on active duty were leaving the company to sign up as mercenaries.

It is also only a matter of time before US soldiers grow unhappy with the presence of mercenaries in their midst. The high salaries and shorter terms of employment offered to mercenaries will inevitably make a serious dent on the military's budget. As Blackwater's Jackson acknowledged in the Guardian, "If they are going to outsource tasks that were once held by active-duty military and are now using private contractors, those guys [on active duty] are looking and asking: Where is the money?"

Raenette Taljaard, a member of the South African parliament, has describes the ubiquitous reach of this "booming cottage industry" of private security companies: "In addition to becoming an integral part of the machinery of war, they are emerging as cogs in the infrastructure of peace. US-allied military officials and civilians in Iraq and Afghanistan are quickly becoming familiar with the 'brand services' provided by companies." In the era of neo-liberal globalization, war has become just another industry to be outsourced.

Next: Lessons of the Thirty Years' War for the "war on terrorism"

Henry C K Liu is chairman of the New York-based Liu Investment Group.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

PART 7: History lesson for
the 'war on terror'
By Henry C K Liu

(Click here for previous parts)

The world order of sovereign states began with the Peace of Westphalia of 1648 which ended the Thirty Years' War (1618-48) during which the German Protestant princes struggled, with the self-serving help of foreign powers, against the unifying central authority of the Holy Roman Empire, which was under the Hapsburgs in alliance with the German Catholic princes. The Peace of Westphalia established a new world order based on the principle of sovereign states through the recognition of the independent sovereignty of the more than 300 German principalities in the 17th century. These princely states, recognized internationally as sovereign states by the peace, were not nation-states, as they were all of German nationality.

The Peace of Westphalia represented a foreign-policy triumph for France and its Swedish and Dutch allies, since it immobilized political unification of the German nation and delayed it for two centuries. There are clear indications that the "war on terrorism" today aims for a foreign-policy triumph for US imperium that will immobilize the political unification of Arab states as envisaged by Pan-Arabism.

The Peace of Westphalia advanced the modern Staatensystem or the system of sovereign states in international relations and law. From the 17th century to the unification of Germany by Otto von Bismarck in the aftermath of the failed democratic revolutions of 1848, French foreign policy was to keep Europe divided by the sovereign state principles of the Peace of Westphalia, preventing a unified Germany from emerging to threaten France and the other established big powers. To achieve this aim, France, although a Catholic nation, opposed the centralization aims of the Holy Roman Emperor.

German unification was not achieved until after the defeat of France in the Franco-Prussian War of 1870-71 when Bismarck (1815-98) united Germany by having a group of German princes gathering in the French Palace of Versailles proclaim the victorious William I of Prussia emperor of the German Empire. But Bismarck also divided Germany by leaving one-sixth of the Germans outside of the new German Empire, a condition that led a century later to another world war. Bismarck opposed liberalism and advocated the unification of Germany under the aegis of Prussia. Bismarck suppressed socialism with repressive laws that prohibited the circulation of socialist ideas, legalized police power to put down socialist movements and put the trial of socialists under the jurisdiction of police courts. Yet the persecution of social democrats only increased their strength in parliament. To weaken socialist influence and to implement his policy of economic nationalism, Bismarck introduced sweeping social reform. Between 1883 and 1887, despite strong opposition, laws were passed for health, accident and retirement social insurance, prohibiting female and child labor exploitation, and limiting working hours. These laws allowed Germany to circumvent the evils of the Industrial Revolution that beset Britain.

Universalist ideologies, wars of religion
The ideology behind the "war on terrorism" is universal democracy, and in that respect it is analogous to the Holy Roman Empire ideology of universal Catholicism. Yet with the invasion and occupation of Iraq, US foreign policy has challenged the four-century-old Westphalia principle of state sovereignty. This principle has kept the Middle East divided to prevent a unified Arab state from emerging to threaten the superpower status of the United States and the national interests of its neo-imperialist allies. The US invasion of Iraq, while satisfying the myopic mania of the neo-cons who temporarily captured US policy, unwittingly gives legitimacy to pan-Arabism to unleash a frenzy of regime changes unrestrained by the Westphalia principle of sovereign states. The rise of pan-Arabism brought about by the demise of the Westphalia principle of sovereign states in the Middle East will be resisted by the neo-imperialist powers and will inevitably lead to a new global war that will make the Thirty Years' Year look like child's play.

The Thirty Years' War was fought on German soil, carried out by soldiers of fortune who aspired to create principalities of their own with their own political agendas. The "war on terror" today is fought on Islamic soil, carried out by mercenary units and opportunistic local factions hoping to carve out religious or ethnic fiefdoms. The Thirty Years' War dragged on because the warring parties feared each other's success and regularly changed alliances and war aims to keep the conflict going. Peace was not an objective because the purpose of war was to prevent any one party from winning, and as soon as peace was at hand, the potential winner would be neutralized by a new balance of power. Peace is also not an objective in today's "war on terrorism" because the purpose of the war was to prevent indigenous political cultures from overwhelming the injudicious push for universal democracy and collateral US hegemony, which is enhanced by continuing local conflicts with the US as a half-hearted peacemaker and arbitrageur with a not-so-hidden self-serving agenda.

The "war on terrorism" today shares many parallel attributes with the Thirty Years' War of four centuries ago. Both are global religious conflicts conducted with geopolitical maneuverings. Both serve as unwitting cradles for new world orders. While the Thirty Years' War was fought to enforce universal Catholicism, today's "war on terror" is being fought to spread universal democracy based on Judeo-Christian values. Like the Thirty Years' War, the "war on terror" today is also complex and multidimensional. US President George W Bush has repeatedly served notice that it will be a protracted and difficult war. Like the Thirty Years' War, the "war on terrorism" today also has no clear single objective, not even the elimination of terrorism. So far, the war has used the threat of terrorism as a pretext to invade sovereign states not to the superpower's liking. The administration of president George H W Bush launched the first Gulf War to protect the tangible principle of sovereign states by driving Iraq from its reincorporation of Kuwait, thus putting the principle of state sovereignty above the intangible principle pan-Arab nationalism. Yet in the second Gulf War to invade and occupy Iraq, the abstract principle of universal democracy was used to overrule the tangible principle of state sovereignty.

Terrorism is as old as civilization itself and many political movements have been forced to resort to it in varying degrees, especially in their early stages of struggle. Powerful, established political powers regularly resort to state terrorism, known euphemistically as war conducted by overwhelming force applied with shock and awe - in other words, terror. Thus the "war on terror" is in fact fought with state terror. Even the most heinous war is always rationalized with high moral justification.

In its most current manifestation, the "war on terrorism" today is a religious war between a faith-based Christian nation and Islamic extremists, both groups controlled by fundamentalists, not unlike the struggle between the Roman Catholic Church and emerging Protestant movements during the Thirty Years' War. It is an unevenly matched conflict between a powerful state military machine and clandestine cells engaged in asymmetrical warfare reminiscent of the early phases of the Thirty Years' War. It is an unbalanced game between an organized system with visible and open targets everywhere and a vast network of disjointed cells that are impossible to find until after they surface with an attack. The same was true with the Holy Roman Empire in its effort to rein in the Protestant German princes and their religious zealot advisers during the Thirty Years' War.

The "war on terrorism" today is a violent neo-imperialist strategy that unwittingly enhances the unifying aim of pan-Arabism, by threatening the sovereignty of the numerous small Arabic failed states created by the imperialist powers of the last century to frustrate pan-Arab nationalism. Just as the prevention of the unification of Germany played a key role in the strategy of foreign powers during the Thirty Years' War, the eventual emergence and prevention of pan-Arabism will play a key role in the "war on terrorism" today. It is too early to discern how the geopolitical implication of the development will shape up.

The "war on terrorism" is a unilateral war waged primarily by the sole superpower that is putting strains on residual Cold War alliances, forcing Europe to seek independence from post-Cold War US unilateralism. It pushes Cold War US nemeses such as Russia, China and India to converge if not unite in support of a multipolar world order. The Holy Roman Emperor was in a similar situation in its relations with the major powers of Europe at the time of the Thirty Years' War.

Bourbons, Bonaparte and Bush
The Peace of Westphalia that began in 1648 after 30 years of destruction and slaughter marked the triumph of the doctrine of the balance of power. The doctrine was directed against Hapsburg supremacy, which was successfully blocked by a France on its path toward superpower status. Later, when King Louis XIV of France advanced the doctrine of "universal monarchy", or still later when Napoleon Bonaparte expanded the same idea to a multinational, multi-ethnic Empire of the French (not a French empire) based on universal citizenship in the imperial Roman sense, the balance-of-power doctrine was directed specifically against France. Today, there is clear evidence of the balance-of-power doctrine being directed against a hegemonic United States that attempts to construct, by violent regime changes in distant sovereign states, a world order of compulsive neo-liberalism. Unlike the Roman Empire or the Empire of the French, US neo-imperialism has yet to adopt an inclusive citizenship policy. US-led neo-liberal globalization promotes only the cross-border free movement of goods and capital, but not of people.

One and half centuries after the Peace of Westphalia, Napoleon co-opted the democratic ideals of the French Revolution and applied them to the concept of a universal empire ruled by a Bonaparte dynasty consisting of members of his family. The people of Spain proved to be less docile than their aristocratic leaders to the Pax Napoleon. Even before Joseph, Napoleon's brother, was proclaimed king of Spain with alacrity by a Spanish Council of Regency, spontaneous anti-French insurrection had broken out in every province of Spain, without central leadership, systemic organization or preparation. Spain was by that time a mere shadow of its former greatness and, in every sense of the term, a failed state. The popular insurrection was not explainable by any aversion to a foreigner on the Spanish throne. The Spanish Bourbons were a foreign dynasty. Joseph Bonaparte came to Spain with an impressive record of liberal reforms as king of Naples and he had the support of a substantial segment of the Spanish elite, nobles, prelates, financiers, officials and intellectuals who looked to France, even Napoleonic France, as a bearer of the liberal principles of the French Revolution. Had Joseph been allowed to rule in peace, such aspirations might not have been wrong.

The Spanish Church had little to fear from Catholic France, but the monastic orders that controlled the conscience of the masses had vested interest in keeping fanaticism alive, forcing Napoleon to limit the number of priests while appeasing the church elites. The large landowners in Spain could afford to toy with liberal reform, for they also had commercial interests and their income from rent was not threatened by reform. The lesser nobles, on the other hand, were ruined by the abolition of entails and suppression of feudal dues. To them, the Napoleonic Code, a progressive instrument of the rule of law, was a direct threat. They wanted no part of Napoleon's liberation. President Bush's call to liberate the world from tyranny will meet with resistance not from tyrants but from a natural aversion to imported liberty. Like Napoleon's, Bush's bogus liberty is a smokescreen for installing puppet proxies all over the world to support a new American empire that thrives on structural disparity of income and wealth. Like Napoleon's efforts in Spain, Bush's drive for global democracy will be foiled by popular resistance unless and until neo-liberalism is purged from the institution of democracy.

Although guerrilla tactics have been used since time immemorial, the term "guerrilla" gained currency only during the Napoleonic wars, particularly in Spain, where it had been highly effective in the six years between 1808 and 1814. France had 320,000 troops in Spain at the height of its presence in 1810 and a low of 200,000 troops in 1813. During the six-year campaign, French forces lost 240,000 men: 45,000 were killed in action against conventional forces, 50,000 died of illness and accident, and 145,000 were killed in action against guerrilla forces. French losses in Iberia approached 1% of the entire French population. Indeed, Napoleon lost more French troops in Spain than in Russia. These were large numbers that France could not afford, numbers that had they not been lost might have turned the strategic tide at Leipzig or at Waterloo to prevent French defeat. A similar fate is falling on US forces in Iraq and whatever other regime-change plans the neo-cons in the US government are planning.

Military analysts have calculated membership in Spanish guerrilla bands to have been about 50,000. Even if these are added to the Duke of Wellington's regular force in Spain of 40,000 and 25,000 attached Portuguese forces, the French still enjoyed a favorable force ratio of almost 3:1. In spite of their numerical force advantage, however, the French were defeated badly. Some historians see the fall of Napoleon as having begun in Spain, where 320,000 French troops were tied down and demoralized by guerilla warfare. But the real damage suffered by Napoleon in his disaster in Spain was the challenge to his image of invincibility.

Similarly, Iraq will tie down more than 150,000 US troops and Afghanistan 50,000 for the foreseeable future. It the US were foolhardy enough to invade Iran, a country four times the size of Iraq and much less secular, it had better be prepared to send a million troops to deliver its gift of exported liberty. But the real damage is to US prestige of invincibility, following a pattern that began in Korea, then Vietnam, and now Iraq.

Napoleon told the Spaniards: "I have abolished those privileges which the grandees usurped, during the times of civil war, when kings but too frequently are necessitated to surrender their rights, to purchase their tranquility, and that of their people. I have abolished the feudal rights, and henceforth everyone may set up inns, ovens, mills, employ himself in fishing and rabbit hunting, and give free scope to his industry, provided he respects the laws and regulations of the police. The selfishness, wealth, and prosperity of a small number of individuals, were more injurious to your agriculture than the heat of the dog-days. As there is but one God, so should there be in a state but one judicial power. All peculiar jurisdictions were usurpations, and at variance with the rights of the nation; I have abolished them. I have also made known to everyone what he may have to fear, and what he may have to hope."

Yet the Spanish people, long oppressed under the foreign Spanish Bourbons, decisively turned down Napoleon's offer of liberation. It should be an object lesson to the United States' offer of liberty to Afghanistan and Iraq and elsewhere around the globe. President Bush's second Inaugural Address defined the unity of US national interest with the spread of liberty around the world as a "calling of our time". While no one can argue against liberty, one can question whether liberty can be spread by force, or imposed by occupation and economic domination. It is a well-known fact that liberty can only be taken by the oppressed themselves, never delivered by a liberator from outside.

Incongruent issues, overlapping battlefields
The Thirty Years' War was a protracted, complex, multidimensional conflict in a splintered Germany, with much similarity to today's Middle East. It was a German civil war fought over Protestant-Catholic religious issues. It was also a violent civil conflict over constitutional issues regarding the central authority of the Holy Roman Emperor and centrifugal forces of state sovereignty. The two separate issues were not congruent, yielding overlapping battlefields and shifting alliances and adversaries. The religious wars among Catholics, Lutherans and Calvinists were fought by secular monarchs who saw religious schisms as political opportunities. Ferdinand II and his primary ally Maximilian I represented the re-Catholicizing zeal of the Jesuit Counter-reformation, while Frederick V of the Palatinate represented the equally militant forces of Calvinism. Unspoken is the socio-economic struggle behind the religious dispute, with the Counter-reformation trying to preserve agricultural feudalism while Calvinism agitated for the emergence of capitalism.

The "war on terrorism" today will also be a protracted, complex, multidimensional conflict in a splintered Islamic Middle East and Central Asia. It will be a struggle between Christian fundamentalism and Islamic fundamentalism, and a struggle between unipolar US imperium and a multipolar world order of sovereign states. It will also be a struggle between neo-liberal market fundamentalism and humanist socialism. The fall of Soviet socialist imperialism should not be mistaken as the death of socialism or the end of history. The triumph of anti-imperialist socialist and populist forces through democratic processes in Central and South America will spread to other regions. The day will come when the US will regret its disingenuous push for democracy all over the world. True democracy will emerge as an effective vaccine against neo-liberal market fundamentalism.

One of Germany's main problems in the 16th century was that the northern states were still divided over religion, though, ironically, it was division among the Protestant states. After the Religious Peace of Augsburg (1555), Protestant states had split along two different lines. There were those states that wanted a flexible approach to Protestantism. These states, known as the Phillipists, saw value in some of the ideas of John Calvin and Huldreich Zwingli and saw no harm in adopting a combination of Protestant beliefs. Opposed to these states were the hardline Lutheran states. In 1577, these states produced the "Formula of Accord", which clearly stated their position, and the Phillipist states responded to this by switching openly to Calvinism. Therefore, there was a visible split among the Protestant world in Germany and there was a failure to create a common front against the Roman Catholic Church. Similar splits in Islam, perhaps even more complex, also cause a failure to create a common front in modern times against the Judeo-Christian evangelicals. In modern politics, the split in the socialism camp between communists and social democrats has similarity to the split among the Protestants.

This Protestant split allowed the Roman Catholic Church some gains in Germany. The socialist split has also allowed market capitalism some gains in many parts of the world in recent decades. In the 1580s, the archbishop of Cologne wanted to secularize his land. This would have been very lucrative for him but it also broke the terms of the Imperial Reservation in the 1555 Augsburg Settlement, which forbade such a move. He was removed from his position by the Holy Roman Emperor, who sent Spanish troops to enforce his authority. This was a perfectly legal move by the emperor. A more orthodox Catholic replacement was installed.

But Spanish troops so near to the western French border were not well received in Paris any more than Soviet nuclear missiles in Cuban were welcomed by Washington. The Protestant Evangelical Union was founded in response to this foreign intrusion. It was a defensive alliance of nine princes and 17 Imperial Cities. It was led by the Elector Palatine and its general was Christian of Anhalt. This union was predominantly Calvinist, and many Lutheran leaders stayed away from it as they felt that its existence could lead to anarchy.

In response to this union, Maximilian of Bavaria founded the Catholic League in 1609. Ironically, he did not ask the Catholic Austrian Hapsburgs to join it - a symbol of just how far the status of the Hapsburgs had fallen, to a level similar to US Defense Secretary Donald Rumsfeld's disparaging reference to uncooperative Western European allies and the "old Europe". Phillip III of Spain sent financial aid to maintain some Hapsburg influence but his involvement in a central European issue was bound to provoke the French. The "war on terrorism" today also brings forth an opposing coalition against US hegemony and unilateralism, such as a new European relationship with China and, more significantly, the Shanghai Cooperation Organization (SCO) process.

The Shanghai Cooperation Organization
Unilateralism in US foreign policy, highlighted by US rejection of the Kyoto Treaty and the Anti-Ballistic Missile Treaty, the hardline approach toward North Korea and China, and until September 11, 2001, support for anti-socialist terrorism in the name of human rights and democracy, has solicited efforts by targeted countries to form their own sets of cooperative multilateral mechanisms that exclude the US. The SCO process, the most significant of such mechanisms, has quietly but steadily built up its economic, military and diplomatic relations, seeking to present itself as more viable counterweight to emerging US hegemony in Central Asia.

The SCO consists of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and, most recently, Uzbekistan. Until that sixth member joined, the group was known as the Shanghai Five. The group emerged from a series of talks on border demarcation and demilitarization which the four former Soviet republics held with China. Since 1996, when the group held its first presidential summit meeting in Shanghai, the five-country group has held annual summits. The statement from the July 2000 Dushanbe summit notes the establishment of a "Council of National Coordinators" that would further foster regularized cooperation among the member states. In addition, the joint statement expressed the group's view of the international security situation both within and beyond their borders. The Dushanbe statement pledge the member states to crack down jointly on secession movements, terrorism, and religious extremism within their borders and to oppose intervention in another country's internal affairs on the pretexts of humanitarianism and protecting human rights; and support the efforts of one another in safeguarding the member states' national independence, sovereignty, territorial integrity, and social stability. China has called for strengthening mutual support in safeguarding the national unity and sovereignty of the SCO member nations and jointly resisting all kinds of threat to the security of the region, particularly from outside the region.

With these aims in mind, the SCO defense ministers meet annually along with their foreign ministers, and their militaries conduct joint exercises and training, exchange information about peacekeeping operations, and hold conferences and other exchanges on security issues. The Dushanbe statement also noted the group's opposition to the use of force or threat of force in international relations without United Nations Security Council approval, a direct reference to recent US undertakings in Iraq. The group also opposes any attempt by countries or groups of countries to monopolize global and regional affairs out of selfish interests. In similar terms, the Dushanbe statement also expressed its opposition to US missile-defense strategy by stating its strong support for the Anti-Ballistic Missile (ABM) Treaty of 1972 and its opposition to "bloc-based" (ie, US alliance-based) deployment of theater missile defense systems in the Asia-Pacific region, particularly in Taiwan and Japan.

The SCO maintains that it is not an alliance, and is not aimed at any third parties. Indeed, the group has a number of internal differences that will likely prevent it from becoming like a North Atlantic Treaty Organization (NATO). The two biggest countries in the group, China and Russia, have enjoyed much-improved relations over the past decade, but still harbor mutual long-term strategic distrusts. In addition, individual members of the group differ over other important issues, such as relations with various neighbors such as India, Pakistan and Afghanistan, and over how best to exploit the rich reserves of energy and other natural resources in Central Asia for common use. Russian President Vladimir Putin appears to welcome additional members to the group (such as Uzbekistan; Pakistan, Iran and India have expressed an interest), which, if admitted, would certainly complicate the achievement of consensus within the group. China and India are engaged with serious efforts to improve relations.

The SCO process has resulted in impressive achievements, such as settling border disputes, introducing confidence-building measures, and moving in cooperative ways to combat illicit activities in their region such as terrorism and drug smuggling. It has also issued increasingly pointed statements in opposition to US hegemony. The SCO is indicative of efforts around the world seeking security-related mechanisms independent of US participation.

End of the Thirty Years' War
The Thirty Years' War was also an international war between France and Spain and a dynastic war between the Bourbons and the Hapsburgs. Foreign powers opposed to the Hapsburgs could not look with equanimity on developments in Germany. The French, English and Dutch formed a league to oppose the Hapsburgs. They found their champion in Christian IV of Denmark, who also had extensive possessions in northern Germany. Christian IV invaded Germany in 1626, but was crushingly defeated in 1627 by the army of the Catholic League and a new Imperial force under the enigmatic Bohemian condottiere Albrecht Wenzel Eusebius von Wallenstein. Emboldened by victory, Ferdinand, Holy Roman Emperor and king of Bohemia, issued the Edict of Restitution, requiring the return of all lands expropriated from the Roman Church since the 1550s. Fearing Wallenstein's rising power, the territorial rulers forced the emperor to remove him from power and reduce the size of the Imperial army. Concerned by growing Hapsburg power along the Baltic, Gustavus Adolphus of Sweden, the Lion of the North, invaded northern Germany in 1630. Cardinal Richelieu of Catholic France wanted an alliance with the Protestant Gustavus to form a counterweight to Hapsburg power in Europe. If Gustavus could also enlist the help of Maximilian of Bavaria and the Catholic League, then so much the better. Both Gustavus and Richelieu were pragmatists. Though they held opposite views on religion, they both realized that they needed each other if they were to form a realistic opposition to Ferdinand, Holy Roman Emperor and king of Bohemia. Gustavus was not welcomed by his fellow Lutherans in Germany. His sole significant ally was the French, who subsidized his army.

After the Swedish-allied city of Magdeburg was destroyed by an Imperial army, the Protestants grew concerned and began to arm. When the Imperial forces moved against Saxony, the elector of Saxony threw in his lot with the Swedes. The Swedish army met the Imperials at Breitenfeld near Leipzig and annihilated them. The Swedes promptly took over most of southwestern Germany. Ferdinand, Holy Roman Emperor and king of Bohemia, had no choice but to recall Wallenstein. The Swedes and Wallenstein's new army met near Leipzig at Luetzen on November 16, 1632. The battle was a draw, but Gustavus was killed. Fearing Wallenstein's rising power, and concerned by his intrigues with hostile powers, the emperor had him killed. With some imagination, one can see Saddam Hussein as a modern-day Wallenstein who was first used by the US against an Islamist Iran and then destroyed to punish his intrigues with hostile powers.

The Imperial and Spanish armies joined and inflicted a crushing defeat on the Swedes at Noerdlingen. All the Swedish gains in southern Germany were lost. After Noerdlingen, most of the German territorial rulers made their peace with the emperor. Under the resultant Peace of Prague, most of the church lands in Protestant hands in 1627 were allowed to remain so.

After the invasion of Iraq, most of the Arab states also made their peace with the US, most notably Libya's Muammar Gaddafi. The Financial Times reported on March 26, 2003, that Libya brought to an end decades of international isolation as a pariah state with a promise to join forces with the United States and the United Kingdom to fight the "global war against terrorism". It promised to provide intelligence to help root out al-Qaeda and secured a gas-exploration deal with Shell that could be worth billions of dollars. Tony Blair, UK prime minister, held two hours of talks with Gaddafi in a bedroom tent a few kilometers outside of Tripoli, the first time a British leader had set foot in the country since 1943. He emerged to declare the Libyan leader an important ally of the neo-imperialists and urged other Arab countries to follow Tripoli's example.

In May 1635, 17 years after the beginning of the Thirty Years' War, France declared war on Spain and increased the scope of its interventions in the Empire, and gradually weakened the Imperial forces. Earlier, in October 1634, the Holy Roman Emperor, the king of Spain and the Roman Catholic princes of Germany had agreed to a joint attack on France. Louis XIII was simply preempting the inevitable: attack before France itself was attacked.

The military prospects of France were not good. Its troops were undisciplined and lacked experience in the newer forms of fighting. France, therefore, needed alliances. In July 1635, France signed a treaty with Savoy, Parma and Mantua for a joint campaign in northern Italy. The French Huguenot general, the Duc de Rohan, was sent to help the Swiss Protestants in a campaign to overthrow the Valtellina. In October 1635, Bernhard of Saxe-Weimar and his army were taken into French service.

To sustain the above alliances, Richelieu needed improved finances by taking loans, selling government offices to the highest bidder (though not necessarily the most talented) and to place government tax inspectors (intendants) on permanent location in the provinces to ensure tax collection. French military involvement in the Thirty Years' War got off to a poor start. The Spanish made timely and generous concessions to the Swiss Protestants in the Valtellina and therefore stability was brought back to the area. Rohan was abandoned by the Swiss rebels and had to withdraw to France.

In 1636 came the expected attack on France by the major Catholic powers of Europe. The high taxes in France had made Richelieu a very unpopular man and the invading Catholic forces hoped to capitalize on this and be seen as a liberating force with religious righteousness. France had to endure a three-pronged attack. The Cardinal-Infante Ferdinand attacked through Picardy. An Imperial army led by Graf von Gallas attacked through the Vosges and Phillip IV of Spain led an attack from the south.

The Cardinal-Infante was especially successful and many Parisians feared that their city would be occupied. It was commonly thought that Richelieu would be dismissed as a concession to the Cardinal-Infante but Louis XIII stood by him and asked Parisians to be patriotic and supply money to the government in the defense of Paris. Bernhard of Weimar pushed back Gallas and the attack by Phillip IV failed to materialize. The Cardinal failed to maintain his push and he too was pushed back from Paris.

Though the attack on France failed, the prestige of France as a nation had suffered. It had proclaimed itself as the savior against the domination of Europe by the Holy Roman Emperor, but a nation that had been invaded could hardly claim the status of protector of European liberties.

The German electors had no faith in France. In the autumn of 1636 they were summoned to Regensburg by Ferdinand, Holy Roman Emperor and king of Bohemia. Here, they duly elected his son, Ferdinand, king of the Romans. In February 1637, the elder Ferdinand died and his son succeeded him as Ferdinand III. Like any new emperor or king, Ferdinand had to prove himself, but his start was less than auspicious. France took control of Alsace and much of the Rhineland while the Swedes took over or neutralized northern Germany and carried the war into Bohemia. Over the final four years of the war, the parties were actively negotiating at Osnabrueck and Muenster in Westphalia. On October 24, 1648, the Peace of Westphalia was signed, ending the Thirty Years' War.

Reorganization and compromise
No true Diet or Reichstag had been assembled since 1613. The emperors, Ferdinand II and III both, had ruled by fiat and the consent of the electors. While they had hoped to resolve matters themselves, the electors, at the Kurfeurstentag opened in Nuremberg on February 3, 1640, agreed that a Diet should be called. It was to debate a broader amnesty than that granted by the Peace of Prague in the hopes of at last bringing peace to the Empire. The Diet actually opened at Regensburg on September 13, 1640. At first all went according to the Imperial plan. A safe-conduct was issued to emissaries from Hesse-Cassel and Brunswick-Lueneberg and even to the Winter King's relict, Elizabeth Stuart. The Diet agreed to a general amnesty. And to put some force behind these pacific plans, the current size of, and subsidies to, the Imperial army were agreed.

In 1640 a short pamphlet, Dissertatio de ratione Status in Imperio nostro Romano-Germanico, was published under the pseudonym Hippolithus a Lapide, but generally attributed to the Swedish court historiographer Bogislav von Chemnitz. This widely read work demonstrated the limits of the authority of the emperors under the Imperial constitution and the manner in which the Hapsburgs had exceeded their legitimate authority in pursuit of power.

In December 1640, Georg-Wilhelm, elector of Brandenburg, died and was succeeded by his son, Frederich-Wilhelm, as the Great Elector who in January 1641 removed his late father's adviser, the pro-Imperial Schwartzenberg. During the summer of 1641, the Swedes and French had shown that, regardless of the emperor's wishes, they were not going to disappear from the Empire, nor were they going to permit any solution to be reached of which they were not a part.

On June 30, 1641, they entered into the Treaty of Hamburg, which renewed their 1638 treaty of alliance, which was set to expire. Unlike prior treaties, which had run for a specified term, this was to last until the war was over. In July 1641, Frederich-Wilhelm concluded a two-year truce with Sweden. He then announced to the shocked Diet that he did not consider the Imperial proposals, grounded on an extension of the Peace of Prague and seeking a purely domestic solution to the wars of the Empire, worthy of his support. The lesser Protestant princes immediately began to distance themselves from the emperor and rally to the Brandenburger.

The Swedes and French issued an invitation to the emperor, Spain and the Estates of the Empire to peace conferences to be held in Westphalia. On December 4, 1642, Armand-Jean du Plessis, Cardinal Richelieu, died. His health had long been weak and he had persisted in his labors only by dint of his preternatural will. He was succeeded as Louis XIII's chief minister by the Sicilian Giulio Mazarini, more commonly known as Cardinal Mazarin.

Even though the convening of peace conferences, both domestic and foreign, had been set, peace did not come swiftly to the Empire. After the close of the Reichstag of Regensburg and the signing of the Treaty of Hamburg, a structure for negotiation was in place. In theory, the purely domestic quarrels of the Empire were to be settled at Frankfurt in a meeting of the Princes of the Empire, the Deputationstag. The international dimension of the war was to be settled by negotiations at Muenster and Osnabrueck.

According to the Preliminary Treaty of Hamburg, the Congress of Westphalia was to open on March 25, 1642. However, this was rendered impossible by delays in ratification of the treaty: the emperor delayed his approval until July 26, 1642. As a result, the official opening date was revised to July 11, 1643. Even then, only the Imperial representatives were there on time. As they had no one with whom to negotiate, no progress was made.

On May 14, 1643, Louis XIII died. His widow queen, Anne of Austria, a Hapsburg and sister to Philip IV, was appointed regent to the infant Louis XIV. Hopes of a softening of policy toward the Hapsburgs were misplaced. Anne was far more zealous in the protection of her son's interests than her brother's. She confided the running of France to Mazarin, who continued Richelieu's anti-Hapsburg policies unabated. While the diplomatic front remained static, the war did not.

The Peace of Westphalia represented a compromise rather than an unconditional surrender. Each of the combatants had experienced abrupt reversals of fortune during the course of the war: thus neither was willing to proceed on the assumption that the emperor's dire military straits would continue. Further, the interests of the Swedes and the French were sufficiently divergent that the emperor was able to play one off against the other. For example, the Swedish desire for a guarantee of Protestant rights in the Hapsburg domains was scotched by the French at Imperial insistence. The peace thus concluded had something for everyone and everything for no one, the classic outcome of a balance of power. The primary component of the peace from the international perspective was a complex series of land transfers within the Empire. This was particularly true of the Swedish acquisition of eastern Pomerania, which led to a complex chain reaction of land transfers, mostly representing re-secularization of bishoprics returned to the Catholic Church under the Edict of Restitution.

After these transfers, all dreams of the Roman Church of its re-establishment in northern Germany were ended. The constitution of the Empire was so adjusted as to render its already loose structure utterly incoherent, with a particular laxity imposed in matters of religion. The Princes of the Empire were granted an expanded version of their German liberties, the Landeshoheit. They could make military alliances among themselves and with foreigners, could wage war and make peace, only provided the alliances and wars were not directed against the emperor. As the future was to display, this was an empty proviso. To protect against the emperor and Catholic electors using the machinery of the Imperial state to advance the old religion, Protestants were to be admitted as judges in the Imperial courts in numbers equal to the Catholics, and in any matter before the Diet that had religious implications, unanimity of decision was required. The followers of John Calvin were at last to be considered followers of the Augsburg Confession, and thus receive the same rights under the Imperial constitution as the Catholics and Lutherans.

Within the Empire, a broad amnesty was granted to all.

The Edict of Restitution was finally laid in its grave. The Peace set the normaljahre to January 1, 1624, with all lands in Protestant hands at that date to remain so for at least 40 years. Since this date was before the Imperial advances in northern Germany attendant upon the Danish war, the north German Protestant lands were to remain secularized.

The pope protested the loss of lands, but purely pro forma, in order to preserve the Church's rights should the war rekindle. Even these mild protests were met with a provision in the final treaty in which the parties agreed to ignore any formal protest the Church might lodge. The papacy itself was unwilling to endanger the fragile peace through excessive vigor in preservation of its rights: the bull formally protesting the settlement, Zelo Domus Domine, was not issued until August 20, 1650, although it was backdated to November 26, 1648.

The Catholics received confirmation that there would be no more creeping secularizations accomplished by changes in the religion of holders of bishoprics. The Protestants were to recognize the reservatio ecclesiasticorum, and any prelate converting to the reformed faith would henceforward lose his benefices. Various of the parties received monetary settlements, either to compensate them for losses of lands, or to assist in payment of the long-suffering soldiery.

The results of the war and the two peace treaties were highly significant. France replaced Spain as the greatest power in Europe. With Sweden, France had blocked the Hapsburg efforts to strengthen their authority in the Empire. At Westphalia, the right of the individual states within the Empire to make war and conclude alliances was recognized. In theory as well as in fact, the most important of these states became virtually autonomous, and German unity was postponed for more than two centuries. The Empire was further dismembered by the recognition of the independence of Switzerland and the seven northern provinces of the Netherlands. Two new powers emerged in northern Germany. Sweden received part of Pomerania and the bishoprics of Bremen and Verden; Brandenburg-Prussia added the rest of Pomerania and several secularized bishoprics to its possessions. In southern Germany, the Bavarian rulers were permitted to keep the upper Palatinate and the title of elector, but the Lower Palatinate was restored to Frederick's son and an eighth electorate was created for him. France received most of Alsace by the Treaty of Westphalia, and by the Treaty of Pyrenees parts of Flanders and Artois in the Spanish Netherlands and lands in the Pyrenees.

The religious settlement at Westphalia confirmed the predominance of Catholicism in southern Germany and of Protestantism in northern Germany. The principle accepted by the Peace of Augsburg of 1555 that Catholic and Lutheran princes could determine the religion practiced in their territory was maintained, and this privilege was extended to include the Calvinists as well.

The Austrian Hapsburgs had failed in their efforts to increase their authority in the Empire and to eradicate Protestantism, but they emerged from the war stronger than before. In Bohemia, they had stamped out Protestantism, broken the power of the old nobility, and declared the crown hereditary in the male line of their family. With Bohemia now firmly in their grasp and with their large group of adjoining territories, they were ready to expand to the east in the Balkans, to the south in Italy, or to interfere once more in the Empire.

The above detailed summary of the complexity of the Thirty Years' War presents a glimpse of how unpredictably the "war on terrorism" will affect the shape of world order over its anticipated protracted course of decades. Rising powers such as China, India and Brazil, as well as a revitalized Russia, will eventually become major players, as will a European Union and Japan increasingly independent of US domination. There is also the unstoppable spread of socialist movements in Central and Latin America as a major factor in the evolution of new balance-of-power configurations. If the US persists with its faith-based foreign policy for an extended period, it may fall into the danger of repeating the fate of Catholic Spain.

The real losers in the Thirty Years' War were the German people. More than 300,000 had been killed in battle. Millions of civilians had died of malnutrition and disease, and wandering, undisciplined troops had robbed, burned and looted almost at will. The population of the Empire dropped from about 21 million to 13.5 million between 1618 and 1648. Today, the real losers so far in the "war on terrorism" are the Iraqi people and their Islamic brothers. The Thirty Years' War remains one of the most terrible in history. The long-range result of the war, which was to endure for about two centuries, was the enshrinement of a Germany divided among many territories, all of which, despite their continuing membership in the Holy Roman Empire up to its formal dissolution in 1806, had de facto sovereignty. After the fall of imperialism, the Westphalia principle of sovereign states has been deviously used by Western neo-imperialists to rule the region through a proxy of puppet sovereign states to oppose pan-Arabism. As unnatural fragmentation of the German nation has been identified by analysts as a long-term underlying cause of later German militarism, the unnatural fragmentation of the Arabic nation is also an underlying cause of Islamic terrorism.

Next: Militarism and failed states

Henry C K Liu is chairman of the New York-based Liu Investment Group.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

Looking faceless terror in the eye (Aug 21, '03)

Bush should heed lessons of Vietnam
(Feb 22, '03)

PART 8: Militarism and failed states
By Henry C K Liu

(Click here for previous parts)

Militarism is the doctrine that military might is the basic source of all security. In its mildest form it argues that military preparedness delivers peace through strength. The doctrine leads inevitably to the militarization of peace as a form of permanent preparation for war. Militarism disparages peace movements as utopian and naive.

Yet militarism can be self-defeating. It can threaten national security by energizing compensatory militarism in other countries as dictated by the doctrine of balance of power. Militarism is the doctrinal fuel for arms races, not only among hostile nations but also among allies who can be expected to change sides in the future, since international relations are affected by shifting national interests, and not based on permanent friendship. National interests of different nations converge and diverge over time, particularly in an international geopolitical architecture built on the principle of balance of power. There is strong logic in the premise that peaceful relations with neighboring states will enhance rather than diminish a nation's overall power and security, which extend beyond the confines of the military. Militarism rejects this self-evident proposition. Militarism is not exclusive to dictatorships or authoritarian states. Liberal democracies are frequently proponents and willing victims of militarism.

In his book The New American Militarism, Boston University Professor Andrew J Bacevich, West Point graduate, Vietnam veteran, professional soldier for 23 years, and a conservative scholar, identified Albert Wohlstetter and Andrew Marshall, both life-long civilians, as having transformed a Cold War strategy of nuclear deterrence that regarded war as a last resort to be avoided into a proactive war strategy of superpower aggression. The resultant "marriage of a militaristic cast of mind with utopian ends has committed the United States to waging an open-ended war on a global scale".

Herman Khan, while at Rand Corp - the US Air Force strategic think-tank - was by far the most dominant figure in nuclear-deterrence scholastics based on the concept of terror. Khan worked out the logic of MAD (massive mutually assured destruction) as an effective deterrence to nuclear war that would not allow any winners. Wohlstetter was a minor voice at Rand who worked on the theory that tactical nuclear war would be winnable even under the general rules of strategic deterrence. Both Khan and Wohlstetter subscribed to the use of terror; the difference between them was that Khan was strategic and Wohlstetter was tactically inclined. Khan would prevent war unleashed by first strikes with the terror of doomsday war machines that would also destroy the first-strike party even after the target party had been obliterated. Wohlstetter advocated the use of tactical wars that would gain geopolitical advantage without setting off the doomsday machines. Both had supporters in the Pentagon as long as both themes provided ample circular rationalization for rising defense spending. Khan's nuclear-deterrence strategy is part of an arms-control approach that requires a concurrent buildup of conventional arms. Conceptually, arms control is the deadly enemy of disarmament. Weapons are acquired to create a condition of military stalemate under which their use will produce no advantage to any one side. That condition is ultimately anchored in the terror of global nuclear holocaust.

Deterrence moves the prevention of war from an "if, then" to an "either, or" and finally to a "neither, nor" stability based on paralyzing terror. Stability is enhanced when the dialogue of restraint among enemies moves from "if you transgress, then you will be attacked" to "either you desist, or we will outdo you" to "neither would you start, nor would we start". It is a concept of peace through strategic terrorism.

The turning point came after Khan's death and when strategic deterrence based on the balance of terror ran out of steam in its justification for further military spending when both sides had more than enough to destroy the whole world several thousand times over, and more tanks and planes than any army can use without the prospect of recurring shooting wars. Strategic deterrence operates in a world of two superpowers. After the dissolution of the Soviet Union, the balance of terror was destabilized with the existence of only one superpower, albeit Russia is still a formidable nuclear power.

Under US president Ronald Reagan, tactical-weapon development spending took over as the main driving force, propelling Wohlstetter's tactical theories on to a pedestal of doctrinal respectability. The argument of "what's the point of having all these sophisticated and expensive weapons systems without reaping some geopolitical benefit?" began to attract support from the military-industrial complex. The technological imperative in arms races is augmented by the stockpile imperative. Stockpiles need to be depleted regularly in real battles and refilled with new, improved generations of weapons based on real battle feedbacks. This is illustrated by Defense Secretary Donald Rumsfeld's statement that "you go to war with the weapons you have, not the weapons you wish you had". The birth of new weapons systems requires the midwife support of real shooting wars to accelerate the rate of weapon obsolescence and highlight the awareness of the need for updating.

For Wohlstetter and his followers, the function of weapons is not to deter war, but to enable war with impunity to deter challenges to US national interests. Peace through strength is supplanted by democracy through war. The United States, with its superpower resources, is in a position to use war to impose its world view on smaller nations to make the world safe for the US values. This approach solicits two responses: 1) the revival of the doctrine of balance of power in international relations among sovereign states to replace the doctrine of balance of terror between two superpowers and 2) the emergence of asymmetrical warfare from the powerless in failed states in the form of terrorism.

Andrew W Marshall, known as Yoda in defense circles, co-author (with Zalmay Khalilzad and John P White) of Strategic Appraisal: The Changing Role of Information in Warfare, had been named director of the Pentagon's Office of Net Assessment by president Richard Nixon in the 1970s and reappointed by every sitting president since. Today, Marshall, along with his star proteges Vice President Dick Cheney, Rumsfeld, and Deputy Defense Secretary Paul Wolfowitz (who has just been appointed president of the World Bank), has been drafting President George W Bush's plan to upgrade the military. Put in charge of the Bush administration's proposed major military overhaul by Rumsfeld, he has sharply polarized the defense community on the nature of future wars and the military's role in fighting them.

Nicholas Lehman, political correspondent, in "Dreaming about war" published in The New Yorker on July 16, 2001, writes: "People with decoder rings knew that Bush's speech at the Citadel had been drafted by Marshall's corps of allies and that it endorsed Marshall's main ideas." Bush said "the best defense can be a strong and swift offense - including ... long-range strike capabilities". The comment implied that in future conflicts the US might be denied access to US bases on ally soil near the conflict. Bush noted that "power is increasingly defined not by mass or size but by mobility and swiftness ... The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to a close." In other word, the approach of "shoot first, ask questions later" would govern the Bush administration's security policy. And this was a full year before the terrorist attacks of September 11, 2001. In his campaign speech in September 1999, Bush promised that, as president, he would order up "an immediate, comprehensive review of our military" and give the secretary of defense "a broad mandate to challenge the status quo". Within weeks into the new Bush administration, it was reported that the secretary of defense, Donald Rumsfeld, would conduct a broad review of the military. Unreported was the fact that Andrew Marshall would be the main force behind the review.

Since the 1980s, Marshall has been an advocate of an idea first posited in 1982 by Marshal Nikolai Ogarkov, then chief of the Soviet general staff, called Revolution in Military Affairs. RMA asserts that technological advances have changed the very nature of conventional war. Rather than conflict conducted by ground troops, the new conventional war will be conducted with the same control and command of a nuclear war, managed by computers at remote locations targeting missiles at enemy military assets and infrastructure in accordance with strategic defense doctrines. The battlefield would be transformed into a vast virtual reality, utilizing military assets from great distances. War, in RMA lexicon, would be conducted by spy satellites and long-range guided missiles with precision targeting capability, by computer viruses and laser beams that would disable enemy offensive and defensive systems, and by a "layered" defense system that would make US defense impenetrable. Military adventurism is enhanced by impenetrability of one's own defense. It is a doctrine that focuses not on deterrence by balance of terror, but on winning in war by remote control from a safe haven. Yet the doctrine neglects the more important problems of enforcing the peace after military victory. It reduces war to no more purpose than a barroom brawl where the fighting itself was the game.

The US Army War College's Strategic Studies Institute in its seventh Annual Strategy Conference in April 1996 examined China's ability to participate in RMA. Dr Bates Gill of the Stockholm International Peace Research Institute (SIPRI), on a panel called "Seizing the RMA: China's Prospects", argued that there is more to participating in RMA than securing or producing high-tech weaponry. A revolution is an all-encompassing phenomenon with socio-cultural as well as purely technological aspects. China's prospects for seizing the RMA lie not so much in the development of technology as in the restructuring of concepts and organizations. History, culture, and philosophical values will make it problematic for China to participate in the RMA. The same of course applies to the military of all nations, including the US, where RMA continues to have its skeptics. Gill believes that China may be able to develop an "RMA with Chinese characteristics" much as it took Marxism-Leninism, a Germanic-Russian innovation devised for proletarian revolution, and modified its tenets to be relevant within a peasant revolutionary context with a level of success unseen in Europe or elsewhere in the Third World. Through sheer determination and by optimizing technology and expertise available from outside sources, China might approximate a less sophisticated RMA entirely suited to its own needs. US Army Lieutenant-Colonel Lonnie Henley argued that over the next decade, China will deploy a dozen or so divisions possessing relatively advanced systems, but that overall, the People's Liberation Army (PLA) will remain about a generation behind the US Army in terms of its ability to participate in a fully developed RMA. Furthermore, capabilities within the air and sea forces of the PLA will be even more limited with relatively small infusions of advanced aircraft such as the Su-27 and naval vessels such as Kilo-class submarines. These modern weapons will make up only a fraction of what will be otherwise seriously dated forces. According to Henley, by 2010 the PLA may be able to achieve for its elite force the kind of capabilities demonstrated by US forces in the first Gulf War. That does not mean that the technological gap between the military capabilities of US and China will be closed, as the US is not expected to stay still and will have advanced technologically significantly by 2010.

These papers, written a decade ago, painted a picture of China with limited potential to become a peer competitor of the United States in the two decades following their writing. Nonetheless, there was little doubt that China's relative power in Asia and globally would grow sharply in that period, a prediction that has been borne out by fact. Even partial success in pursuing advanced military technology and organizing concepts could enhance the speed and impact of that rise in Chinese power.

US Army Colonel Richard H Witherspoon, director of the Strategic Studies Institute, sees the exploration of the issues surrounding the RMA as having only just begun, and being worthy of consideration by anyone interested in the role that China may play in the strategic military balance early in the 21st century.

Michael Pillsbury, an alumnus of Rand, former special assistant for Asian affairs in the Office of the Secretary of Defense, reporting to Marshall, director of net assessment, edited for the Institute for National Strategic Studies at the National Defense University a volume titled Chinese View of Future Warfare. The report grew out of a process that began in 1995 when the Chinese Academy of Military Science hosted in Beijing a delegation of the Atlantic Council of the US, with extensive reprint of papers by high Chinese military officers and analysts. It shows that the views of Marshall are highly influential within Chinese military planning circles. It is a vivid example of militarism in one government stimulating counter militarism in other governments.

Throughout the 1980s, the US Central Intelligence Agency purchased arms from China for the mujahideen in their war against the Soviet Union. The USSR-Afghan war was the beginning of US-China military cooperation, a policy advocated by US right-wing Republican senators Orrin Hatch and Gordon Humphrey and defense secretary Caspar Weinberger, and carried out by State Department intelligence head Morton Abramovitz and the Pentagon's Pillsbury. The Afghan mujahideen freedom fighters later evolved into the Taliban, who harbored Osama bin Laden, the hunt for whom was the pretext of the 2001 US-Afghan war after September 11.

Professor Bacevich argues that the greatest threat to US security is not from terrorists but the neo-conservative belief, to which President Bush is firmly committed, that US security and well-being depend on US global hegemony and the imposition of US values on the rest of the world. This belief resonates with a patriotic and paranoid public manipulated with the help of the mainstream media. Persistence in these misconceptions will lead the United States to "share the fate of all those who in ages past have looked to war and military power to fulfill their destiny. We will rob future generations of their rightful inheritance. We will wreak havoc abroad. We will endanger our security at home. We will risk the forfeiture of all that we prize," argues Bacevich, who sees the problem as not how to deal with terrorism but how to deal with the hubris, laden with catastrophe, that the US is God's instrument for bringing history to its predetermined destination. Being assigned such an exalted role creates the delusion that US virtue is unquestionable and its use of preemptive coercion is infallible, a delusion that led to the "cakewalk war" that would entrench democracy in the Middle East and have US troops home in 90 days with "mission accomplished". War is not much more than an adrenaline-filled college spring-break orgy with fanatic purpose.

Paul Craig Roberts, former assistant secretary of the Treasury in the Reagan administration, associate editor of the Wall Street Journal editorial page and contributing editor of the conservative National Review and co-author of The Tyranny of Good Intentions, and reviewer Bacevich's The New American Militarism, observes that US hubris, which flows so freely from Bush's rhetoric, explains why half the US population seemed unconcerned over the US slaughter of Iraqi civilians and torture of Iraqi prisoners. The "cakewalk war" is now more than two years old and has claimed more than 10% of the US occupation force as casualties. Yet the delusion persists that the US is prevailing in Iraq and that democracy is firmly planted in the Middle East.

In Chapter 7 of Marshall's The Changing Role of Information in Warfare, Brian Nichiporuk wrote of Emerging Asymmetric Strategy: "The lopsided American victory in Desert Storm featured a clear display of the vast margin of superiority the US Air Force holds over any conceivable adversary. Most analysts agree therefore that, in future wars, hostile regional powers will use asymmetric options to counter the US advantage in air power."

Yet asymmetric warfare decidedly puts a superpower at a disadvantage. The logic of asymmetric response is based largely on its economy, which suits the poorer adversary. It costs exponentially less to foil a sophisticated system with virus and laser than to build the system and its defense. This fact is demonstrated by the exponential growth of anti-virus software companies such as Symantec. In fact, the higher the level of sophistication, the greater the cost differential between attack and defense and the penalty of failure by each. Thus the financial advantage lies with the asymmetric attackers. This is the basic economics of terrorism, with an astronomical cost:effect ratio beyond the wildest dream on defense analysts. Asymmetric warfare accelerates the effective neutralization of superpower prerogatives.

Nichiporuk observed that work on asymmetric strategies has revealed three types of enemy options the US needs to be concerned about: 1) increasing hostile capabilities in selected niche areas; 2) enemy strategies that target key US vulnerabilities that are difficult or costly to protect, and 3) creation of domestic and international political constraints that hinder US force deployments flexibilities.

The emergence of enemy homeland sanctuary in wartime protected by nuclear deterrence would have serious implications for US Air Force planners and operators. Specifically, the enemy's leadership, command and control structure, and internal security networks could all become off-limit targets for fear of touching off a wider nuclear war. This is why tacit cooperation from all nuclear powers to refuse nuclear protection to targeted non-nuclear nations is needed by the US before hostile action can be launched anywhere. Despite the dissolution of the USSR, Russian nuclear protection remains the key reason the US does not attack Cuba. Diplomatic concession by the United States to other nuclear powers, both allies and non-allies, is the price the US pays for such tacit cooperation. That is the strongest argument against US unilateralism. This special treatment of nuclear powers gives irresistible incentive for non-nuclear nations to go nuclear, not for self-defense, but to gain diplomatic respect and attendant concessions from the hegemonic superpower. Nuclear proliferation will continue unless the US begins to stop treating non-nuclear nations as second-class nations in a nuclear age and pledges a guarantee that non-nuclear nations will be not be subject to attack by conventional forces by nuclear nations. This is in fact what North Korea demands and the US rejects as preconditions for abandoning the former's nuclear capability. Until and unless the US adopts the doctrine of no first use, non-proliferation will fail.

Supply and communications for enemy ground forces could not be disrupted and the enemy's industrial war-making capacity (including electric-power generation and telecommunications capacity) would in essence be off limits to the orthodox offensive use of air power if the enemy were under a nuclear umbrella. This limitation was clearly demonstrated in the Korean War, where the US had the capacity to attack Chinese air and ground bases inside the Chinese border but was prevented from doing so by the Soviet nuclear umbrella.

The US is in a position to deny the enemy a homeland airspace sanctuary if the US leadership itself is protected from risk of attack. Under such circumstances, the US could deal with enemy possession of weapons of mass destruction (WMD) in more direct ways of preemption other than offensive information warfare. The United States could, as it did in Iraq, threaten massive nuclear retaliation for any nuclear power protecting any adversary use of WMD by a non-nuclear nation and then proceed to carry out a massive conventional air campaign against the non-nuclear enemy homeland under the assumption that the threat of escalating dominance by the superior US nuclear arsenal cancels out the enemy's sub-par nuclear capability or that of its nuclear protector. Another option would be to mount a conventional counterforce campaign aimed at destroying the enemy's WMD before they could be employed and before nuclear deterrence could be put in play, as Israel did with the Iraqi Osirak reactor in June 1981, albeit that the Orirak reactor was considered by experts not to be a weapon-producing facility. A third option is to protect the US homeland with a strategic defense initiative (SDI).

A US president could well select any of these approaches in dealing with nations without the protection of a nuclear umbrella. However, if the US leadership is highly risk-averse from non-nuclear terrorism or any other form of asymmetric non-nuclear warfare in a future major theater war (MTW), it would force the US Air Force to plan to deal with scenarios in which much of an enemy's homeland is off limits to sustained aerial attack even without nuclear protection. Thus, according of Marshall and his colleagues, homeland security is not a just defensive strategy, but a platform from which to launch offensive wars in an era of asymmetric warfare.

The new American militarism is nursed by militant evangelical Christianity. Christian doctrine of love and peace has always been accompanied by the theme of "Onward Christian Soldiers", as evidenced by the Crusades and numerous expeditionary campaigns in the colonial world to protect or avenge attacks on Christian missionaries. Professor Bacevich, along with others analysts with similar views, explains that evangelicals, aghast at Vietnam-era protests of the US war against "godless communism", turned to the military as the repository of traditional US Christian virtues. Of course, the images of Buddhist monks setting themselves on fire to protest government-sponsored persecution from Catholics in Vietnam generally failed to disturb US Christian evangelicals, nor the centuries of anti-Semitic programs in Christian nations. For Christian evangelicals, end-times doctrines join US national security with eschatology, the belief in the end of the world coinciding with the second coming of Christ. Biblical prophecies clearly merge US fate with Israel. Unlike Islam, Judaism is not evangelical. In fact, it is self-restricting in its exacting exclusivity. Anti-Semitism is more secular than religious. Islam on the other hand is a fanatic and expansionist infidel sect in the Judeo-Christian world view. Islam inherited the role of godless communism as the post-Cold War target of a Christian holy war against satanic evil. The US emerges with the "same immensely elastic permission to use force previously accorded to Israel". Traditional isolationism was pushed aside by the events of September 11, which served the role of a new surprise attack at Pearl Harbor in justifying a holy war. What US evangelicals overlook is that the end of the world may bring the second coming of Christ, but the price may be the end of the United States as a nation. By that standard, US evangelism is conceptually anti-patriotic. In World War I, the European monarchies lost their thrones in a war to defend their empires, and in World War II, the "democratic" imperialists lost their colonies in a war of intra-imperialist rivalry to gain more colonies. The next world war, launched by superpower neo-imperialism to spread bogus universal democracy, will have similar self-destructive ironic outcomes. Democracy with local characteristics, based on universal equality, will rid the world of neo-imperialism and superpower hegemony.

Rejection of the Peace of Westphalia by NATO
The Peace of Westphalia ended the Thirty Years' War, a secular war with religious dimensions. Subsequent wars were not about spiritual issues of religion, but rather revolved around secular issues of state. The "war on terrorism" today is the first religious war in almost four centuries, also fought mainly by secular institutions with religious affiliations. The peace that eventually follows today's "war on terrorism" will also end the war between faith-based Christian evangelicals and Islamic fundamentalists. Westphalia allowed Catholic and Protestant powers to become allies, leading to a number of major secular geopolitical realignments. The "war on terrorism" will also produce major geopolitical realignments in world international politics, although it is too early to discern its final shape. Westphalia laid rest to the idea of the Holy Roman Empire having secular dominion over the entire Christian world. The nation-state henceforth would be the highest polity, subservient to no supranational authority.

Both the League of Nations and the United Nations were international institutions based on the concept of sovereign states. They enjoyed no supranational authority. The only creeping supranational trend comes from institutions such as the International Monetary Fund (IMF), the Bank of International Settlement (BIS), the World Trade Organization (WTO), the World Health Organization (WHO) etc, through neo-liberal globalization after the Cold War. This trend is fueled by US ideological assertion that capitalist free markets, inseparable from Western capitalistic democracy, are the sole venue for prosperity. Out of ignorance and cultural prejudice, such a biased assertion rejects socialist or tribal democracy and cooperative community in societies with historical roots different from those of the individualistic and materialist West. This assertion forms the self-righteous rationale behind US global aggression, ironically from a self-proclaimed modern people who irrationally cling to the primitive myth that a man born of a virgin was the son of God who had been killed by followers of a rival sect only to rise from the dead before ascending to heaven and is expected to return to Earth at its apocalyptic end. Just as the Holy Roman Empire, even with the allegedly one true God on its side, brought about its own demise by trying to impose religious universality on a Christian world, the United States will bring about its own demise by trying to impose its version of universal economic-political laws on the modern world. Cultural relativity and diversity is not suppressible even in a shrinking world of universal standards.

After the Peace of Westphalia, the concept of balance of power among sovereign states governed the shape of world order for subsequent centuries. The "war on terrorism" today will eventually lay to rest US hegemony and end the age of superpower, possibly through a new balance of power by sovereign states otherwise not particularly hostile to the United States as a peaceful nation. It is ironically inconsistent for the US, a culture that values individuality, to aim to impose universal values. While everyone can have the same weapons, he or she will use these weapons to defend their separate individuality.

This trend of moral imperialism is not limited to the United States. The North Atlantic Treaty Organization (NATO) after the Cold War, looking for a rationale to continue, has transformed itself from a defensive security alliance against Soviet expansion toward Western Europe to an offensive alliance of force projection beyond Europe in the name of spreading humanity and democracy.

In a 1998 Symposium on the Political Relevance of the 1648 Peace of Westphalia, then NATO secretary general Javier Solana, a Spanish socialist, said that "humanity and democracy [were] two principles essentially irrelevant to the original Westphalian order" and criticized that "the Westphalian system had its limits. For one, the principle of sovereignty it relied on also produced the basis for rivalry, not community of states; exclusion, not integration." Within days of Solana taking up his NATO post on November 30, 1995, the NATO-led, multinational Implementation Force (IFOR) was deployed in Bosnia-Herzegovina to enforce military aspects of the Dayton peace agreements. A year later, in December 1996, IFOR was replaced by the Stabilization Force (SFOR) in Bosnia. Solana himself visited Sarajevo and other localities in Bosnia many times, paying calls on NATO and non-NATO forces there.

Solana's appointment as NATO secretary general in 1995, a post he held until 1999, was a surprise to many, including 52 US congressmen who telegraphed a protest because of his alleged Marxist views and open sympathies for Fidel Castro. Solana had once been on the United States' subversive list. He was one of Spain's most vocal and most prominent opponents of NATO and had once written a pamphlet, "50 Reasons to say NO to NATO". Scratch a Marxist, you will often find a Trotskyite under the skin who despises cultural relativism and professes firm commitment to universality. The neo-cons in US politics are Trotskyite rightists while the social democrats in European politics are Trotskyite leftists.

The NATO secretary general normally has a ministerial role, passing on instructions from member-nation consensus to the organization's military components. NATO was not conceived as a supranational organization. Charles de Gaulle took France out of the NATO military command in 1967 to pursue France's own nuclear defense program and expelled all foreign-controlled troops from the country, which rejoined in 1992. During his 1995-99 NATO tenure, Solana was given sole unusual powers to make military decisions over Yugoslavia and the order to commence bombing against Yugoslav targets was subsequently given solely by Solana. He is part of the so-called Third Way Movement whose members include Bill Clinton of the United States, Tony Blair of the United Kingdom, Romano Prodi of Italy and Gerhard Schroeder of Germany.

In 2001, German Foreign Minister Joschka Fischer, whose radical past was well known with political trouble from allegations that he had once harbored a key member of the extremist Red Army Faction terrorist group, referred to the Peace of Westphalia as obsolete in his Humboldt Speech: "The core of the concept of Europe after 1945 was and still is a rejection of the European balance-of-power principle and the hegemonic ambitions of individual states that had emerged following the Peace of Westphalia in 1648, a rejection which took the form of closer meshing of vital interests and the transfer of nation-state sovereign rights to supranational European institutions." Fischer supported German participation in the Kosovo war by NATO, which did not have the backing of the United Nations, with the justification of "international humanitarian emergency".

Rumsfeld's disparaging reference to the European Union as "Old Europe" was not off the mark, albeit for the wrong reasons, based on his displeasure with French and German opposition to the second Iraq war. NATO wanted to revert back four centuries to pre-Westphalia world disorder. In many ways, the Kosovo war was the opening shot of a new Thirty Years' War.

NATO's bombing campaign lasted from March 24 to June 10, 1999, involving up to 1,000 aircraft operating mainly from bases in Italy and US aircraft carriers stationed in the Adriatic Sea. Tomahawk cruise missiles were also extensively used, fired from aircraft, ships and submarines located hundreds of miles from their targets. The US was, inevitably, the dominant member of the NATO coalition against Serbia, although all of the NATO members were involved to some degree. Over the 10 weeks of the conflict, NATO aircraft flew more than 38,000 combat missions, setting a world record.

A less official reason for the war was given by then US secretary of state Madeleine Albright when she said, "What's the use of having the world's best military when you don't get to use them?" - a remark that allegedly caused the US Army Chief of Staff to question her sanity. The lady summed up the weapon-stockpile imperative argument for war. It was been suggested that a small victorious war would help NATO find a new role.

There was, however, criticism from all parts of the political spectrum for the way NATO conducted its "clean war" of precision weapons. The US Department of Defense claimed with pride that, up to June 2, 1999, 99.6% of the 20,000 bombs and missiles used had hit their targets. That meant 160 bombs and missiles hit innocent victims, not counting collateral damage of the direct hits. Moreover, the use of technologies such as depleted uranium and cluster bombs was highly controversial for a humanitarian operation, as was the bombing of oil refineries and chemical plants, which led to accusations of "environmental warfare". Many deformed babies were reported born after the war, and the British Broadcasting Corp (BBC) reported that health experts estimated that about 100,000 cancer deaths would result from this pollution. The Chinese Embassy in Belgrade was "accidentally" bombed on purpose, causing a temporary rupture in US-China relations, despite sham apologies from the US and NATO.

The Kosovo war violated the NATO Charter that limited its role exclusively to the defense of its members within their borders. In Kosovo, NATO was used to attack a distant non-NATO country that was not directly threatening any NATO member. NATO countered this argument by claiming that instability in the Balkans was a direct threat to the security interests of NATO members. This line of argument has now extended to the "war on terrorism". The far left saw the NATO campaign as an act of US aggression and imperialism, while the far right criticized it as being not central to the country's national-security interests. The liberal left and the neo-cons were strange bedfellows in their quest to spread freedom around the world. The term "moral imperialism" came into general use in policy debates over Kosovo.

Poland, Hungary and the Czech Republic, former Warsaw Pact members, made history by becoming NATO members on March 2, 1999. Slovenia, Slovakia, the former Warsaw Pact countries of Bulgaria and Romania, and the former Soviet republics of Estonia, Latvia and Lithuania officially acceded to NATO on March 29, 2004.

On September 12, 2001, NATO invoked, for the first time in its history, the collective-security clause of its charter, Article 5, which states that any attack on a member state is considered an attack against the entire alliance, in response to the September 11 attacks on the US.

On February 10, 2003, NATO faced a crisis when France and Belgium vetoed the procedure of silent approval concerning the timing of protective measures for Turkey in case of a possible war in Iraq. Germany did not use its right to break the procedure but said it supported the veto.

On April 16, 2003, NATO agreed to take command that August of the International Security Assistance Force (ISAF) in Afghanistan. The decision came at the request of Germany and the Netherlands, the two nations leading ISAF at the time of the agreement. All 19 NATO ambassadors approved it unanimously. The handover of control to NATO took place on August 11, and marked the first time in NATO's history that it had taken charge of a mission outside the North Atlantic area.

On June 19, 2003, a major restructuring of the NATO military commands began as the Headquarters of the Supreme Allied Commander, Atlantic, was abolished and a new command, Allied Command Transformation, was established in Norfolk, Virginia. On March 29, 2004, Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia join NATO. Many argue that NATO is in conflict with the prospects of deeper European integration in the fields of foreign policy and security within the framework of EU institutions. Advocates for a strong EU Common Foreign and Security Policy (CFSP) would like to see NATO dismantled and would create common defense and foreign policy within the existing EU institutions. After the re-election of President George W Bush in 2004, Norway publicly questioned whether it would gain by strengthening her defense relations with the EU, reflecting a spreading attitude that NATO is a politically dead organization.

Peace of Westphalia rejected by Islamic regionalism
Islamic regionalism and pan-Arabism hold the view that the international system that has splintered Islam and the Arab nation into a large number of separate states will collapse. This system had been constructed by Western imperialism under the sovereign-state principle of the Peace of Westphalia. A new world order will rise with all Islam under the leadership of a mighty Islamic confederation and a unified Arabic nation. Neo-liberal globalization is bringing about an evolution of the international system that threatens the principle of sovereign states that has been enshrined by the Peace of Westphalia and coopted by US neo-imperialism. This globalization also provides the opening for global Islamic unity and Arab nation-building.

Within the balance-of-power framework, failed and failing states created by collapsing imperialism are too destabilizing for the hegemonic superpower to tolerate. Since self-determination had been denied to nationalities separated into colonies of Western imperialist powers as a result of balance of power, the post-colonial era's newly independent sovereign states inherited territorial arrangements that were convenient to the need to maintain a stable postwar balance of power system for the benefit of the victorious great powers. At the Congress of Vienna in 1815, France was punished for the Napoleonic Wars, but was maintained as a major player in the ensuing concert of Europe. Indeed, the practical settlements in Vienna all attempted to create as stable a balance of power as possible among the European states. The German Confederation was established and Sweden took charge or Norway. After World War I, Imperial Germany fell not from defeat in war, but from internal revolution. After World War II, both West Germany and Japan were made into key allies in the Cold War against the spread of communism.

Klepto-imperialism is another cause of failed states. Germany and Japan are examples of klepto-imperialist victimization in that their new constitutions were imposed on them by the foreign victors in war to mimic the victor's own neo-imperialist character. These new constitutions fundamentally limit the sovereign authority of the two defeated nations by limiting the state structure to that envisaged by the victors as desirable, denying the popular will until it could be molded into desirable shape under the label of "de-Nazification" in Germany and "demilitarization" in Japan or "nation-building" in weaker states in the Third World.

Germany was artificially divided into two failed states of opposing ideologies, both imposed from the outside. Both Germany and Japan still are unable to forge fully independent foreign policies, rid their soil of foreign troops, or free their politics from alien ideologies imposed by the victors even six decades after their separate unconditional surrenders. This is the geopolitical aim of the US "war on terrorism" - the spread of political institutions deemed desirable by the hegemonic superpower into sovereign states around the world. It is the ultimate Clausewitzian view of war: to deprive of the enemy not only the ability, but the will to resist, in the complete sense of the term "hegemony". Support from these two subservient states for US policy was Pavlovian until the second Iraq war.

Militarism and the doctrine of balance of power
The doctrine of balance of power among sovereign states is rooted in militarism, for it is through military force or the threat of force that the balance is maintained. It has several aspects, all of which are based on a common objective of anti-hegemony. One is political equilibrium in which power is distributed among many independent sovereign states so that none can be a hegemon. A second aspect is the natural tendency of weaker states to unite against a rising dominant power to prevent it from becoming a hegemon, or to demolish an existing hegemony. A third aspect denotes the status of a state whose membership in a coalition is necessary, such status being recognized as holding the balance of power between competing coalitions.

The aim of statesmen in the 17th and 18th centuries was generally to preserve their own maximum independence and utmost flexibility of action in a fluid world. Hence the basic rule was to ally against the dominant state, regardless of common language, culture, values or economic interests. A world order created by balance of power was one where states threw their weights toward where it was most needed, so that its own importance was enhanced. The purpose of balance of power was not to enhance peace or prosperity, but to preserve sovereignty and independence of states, as the term "liberties of Europe" was generally understood. War was often necessary to maintain or achieve a balance of power. The doctrine was in essence anti-hegemonic and imperialist rivalry.

As the ambition of Louis XIV grew bolder, and as the capacity of Spain to resist withered away, the balance of power to oppose the Sun King was engineered by the Dutch. William II, prince of Orange, who in his late years would be king of England and Scotland as well, became France's tireless enemy. In 1609, the Dutch founded the Bank of Amsterdam, the first modern national bank. European money was in a state of chaos - coins were being minted not only by great sovereigns, but also by minor states and principalities in Germany and city-states in Italy and by private banks and persons. Under continuous inflationary pressures, money issuers habitually debased their money with cheap alloys. Money in all forms represented uncertain and fluctuating value. The Bank of Amsterdam provided a needed service by accepting all forms of money from all holders, accessed their true content value and allowed depositors to withdraw equivalent value in gold florins minted by it at exchange rates fixed by it. By providing such monetary order, Amsterdam became the center of world finance. Under their republican government, the Dutch enjoyed unprecedented freedom, but the Dutch nation was not a modern state. The Prince of Orange was simply first among equals of many noblemen in the country. As finance became a national industry, the aristocracy was being outdistanced by the rising bourgeoisie and public affairs were generally managed by the burghers fixated on making money and lowering taxes, rather than preserving feudal traditions. Private, civilian and decentralizing tendencies prevailed to keep a strong state from emerging except in times of imminent foreign threat. It was the original prototype of modern neo-liberalism.

In 1661, the revolutionary government of England re-enacted the Navigation Act, first passed in 1651 but lapsed into invalidity during the Restoration, upon which a series of follow-up measures were introduced that formed the foundation of the British colonial empire. The act, the first anti-trade-liberalization measure in modern history, was aimed at destroying Dutch carrying trade. It stipulated that all goods imported into England and its dependencies must be brought in English ships or in ships belonging to the goods' country of origin. In the Act of 1663, the importation principle required that all foreign goods be ship to the American colonies through English ports. In return for restrictions on manufacturing and regulation of trade, colonial commodities were often given a monopoly of the English market and preferential tariff treatment. The American colonies benefited when tobacco cultivation was made illegal within England; and British West Indian planters were aided by high duties on French sugar. These trade restrictions were a focus of popular agitation that preceded the American Revolution and laid the foundation for the north-south conflict that led to the American Civil War.

Since the Dutch were too small a nation to be producers or origin exporters, they had to trade by carrying the goods of others. Three indecisive wars over free trade erupted between the two nations from 1652 to 1674 in which the British annexed New York. On land, the Dutch were threatened by France, which in 1667 claimed the Spanish Netherlands and Franche-Comte. To save their own lot, the Dutch aristocrats granted the 22-year-old William III centralized sovereign power, restricted feudal liberties and constitutional checks, to move in the direction of absolute monarchy by abandoning liberalism.

The Westphalia world order of sovereign nation states that survives to the present is based on the concept of inviolable sovereignty. One of its key functions had been to resist free international trade that threatened national economies. Britain was against free international trade until the Industrial Revolution propelled it to the status of world power and empire builder. The US went through a similar transformation, from a policy of Hamiltonian economic nationalism to a policy of neo-liberalism as the two world wars propelled the US to the status of superpower. The theory of comparative advantage in free trade does not contain an equalization element. In his National System of Political Economy (1841), Friedrich List asserts that political economy as espoused in England, far from being a valid science universally, was merely British national opinion, suited only to English historical conditions. List's institutional school of economics asserted that the doctrine of free trade was devised to keep England rich and powerful at the expense of its trading partners and it must be fought with protective tariffs and other protective devices of economic nationalism by the weaker countries. Henry Clay's "American system" was a national system of political economy.

As List pointed out, once a nation falls behind in economic competitiveness, free trade only exacerbates the resultant wealth gap. The causes of wealth are something totally different from wealth itself. A person may possess wealth, ie exchangeable value; if, however, he does not possess the power of producing objects of more value than he consumes, he will become poorer. A person may be poor; if he, however, possesses the power of producing a larger amount of valuable articles than he consumes, he becomes rich. The power of producing wealth is therefore infinitely more important than wealth itself; it ensures not only the possession and the increase of what has been gained, but also the replacement of what has been lost. Under "dollar hegemony", a term describing the status of the dollar, a fiat currency, as the major reserve currency for international trade, free trade produces absolute advantage for the dollar economy, not comparative advantage for all trading economies. One should not be misled by the dollar-denominated trade deficit the US runs with the rest of the world, particularly Asia, for dollar hegemony has become the most effective power of producing wealth for the United States, despite dislocations in selected sectors of the US economy. These dislocations, in the form of unemployment in sunset industries, actually strengthen the US economy structurally in the long run in a globalized economy. When US Federal Reserve Chairman Alan Greenspan warns about the adverse effect of the deficit on the US economy, he is talking exclusively of the government budget deficit, not the trade deficit.

Within a world order of sovereign states, for one state to attack another with legitimacy, the target state needs to be deemed as having failed as a political institution. Failed states are defined as those that can no longer perform basic governance functions such as providing security, livelihood, public health and education, usually due to fractious violence or extreme poverty. Within this power vacuum, common citizens fall victim to warring factions and runaway crime. Sometimes, an international institution such as the United Nations, or a coalition of neighboring states, intervenes to prevent a humanitarian disaster that would spill across borders. However, states fail not only because of internal factors. Foreign powers frequently purposely undermine a minor state by fueling ethnic warfare or supporting rebel forces, or destabilizing its economy, or assassinating its leaders, causing it to collapse. Humanitarian intervention often rings hollow when starvation is frequently caused by superpower sanctions or embargoes brought on by geopolitical motivation. Economic sanctions, generally recognized as acts of war, caused the death of an estimated 2 million Iraqi civilians, mostly women and children, between the two Iraq wars, which Madeleine Albright, as US secretary of state, declared publicly on television as being "worth it".

The general attributes of failed states are that they are small, underdeveloped and poor and helpless to stop foreign interference in their internal affairs. Yet a case can be made that large states with advanced social infrastructure and developed economy can also qualify as failed states, by virtue of ideologically driven trends to disable basic state functions.

Next: Sovereignty, democracy and militarism

Henry C K Liu is chairman of the New York-based Liu Investment Group.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

The New American Militarism
Part 1: The normalization of war
(Apr 22, '05)

Part 2: New boys in town
(Apr 26, '05)

PART 9: Sovereignty, democracy and militarism
By Henry C K Liu

(Click here for previous parts)

US President George W Bush has frequently used post-war Germany and Japan as examples to support his claim that democracy could be successfully imposed on nations previously under autocratic governments. Yet both Germany and Japan had strong social democratic traditions prior to being taken over after World War I by fascist parties that promoted militarism as a means of national revival. After World War II ended with the defeat of fascist militarism in these two nations, the early election returns in both under United States occupation so favored socialist candidates that US occupation authorities had to quickly release fascist war criminals from prison and back them with funds and political support in order to save both Japan and West Germany from democratically elected leftist governments. Fascism was reconstituted under the guise of capitalistic democracy to fight socialism, notwithstanding that the pre-war rise of fascism was brought about by the same flawed strategy that eventually led to World War II.

In August 2003, six months into the US invasion of Iraq, Secretary of State Condoleezza Rice, then assistant to the president for national security affairs, and Defense Secretary Donald Rumsfeld both compared the post-invasion bedlam in Iraq to that in post-war Germany in 1945. Rice, in a speech at the 104th National Convention of the Veterans of Foreign Wars in San Antonio, Texas, said: "SS officers - called 'werewolves' - engaged in sabotage and attacked both coalition forces and those locals cooperating with them - much like today's Ba'athist and Fedayeen remnants." The insurgent attacks in Germany eventually died down as Nazis were released from prison by the Allies to run Germany under US occupation and supervision. Perhaps Rice was suggesting by her comparison between Iraq and Germany that Ba'athists should be reconstituted to run post-invasion Iraq with a reversal of the US policy of regime change, even if Ba'athism is not at all comparable to Nazism. And there are signs that Ba'athist rehabilitation is quietly happening in Iraq.

The marginalization of the Ba'athists was the most serious error made by the US in its post-war policy on Iraq, along with the decision to disband the Iraqi military. These errors arose from the flawed war objective of regime change. Regime change for the enemy is an innate purpose of holy war and it has no place in secular war aims. Victory in a secular war between states is achieved by coercing the government of the defeated nation to submit to the will of the victor. To achieve that aim, the enemy government needs to be preserved as a functioning polity. A regime change in a defeated nation provides an opening for a new government to reject the terms of surrender, an undesirable political development for the victor. Only a holy war will fashion regime change as a war objective, on the basis of a good-versus-evil struggle to the death, rather than secular political gains.

In Germany, the successor regime that signed the unconditional surrender documents after Hitler's death was immediately dissolved afterwards by the victors, raising questions on the validity of the surrender, since the government that agreed to the surrender had since ceased to exist, thus dissolving all government-to-government obligations. Unconditional surrender as a coherent statement of political objectives has two competing definitions. The first definition does not mean absence of terms, but that whatever terms are imposed would not result from bargaining with the defeated enemy. The victor lays down all the terms of surrender and for the vanquished, the terms are unconditional. In the second definition, the surrender is not subject to conditions or limitations. In this case, the victor has absolute freedom over the vanquished because, as diplomats put it, the enemy is actually signing a political blank check; there are no contractual elements whatever in the agreement. But even a blank check is collectable only if the signatory survives. In either definition, death cancels all obligations. Secular wars are against governments, not nations. Wars against nations are acts of genocide. The Allies had made clear repeatedly during the conflict that the war was not against the German nation, only the Nazi government. Yet the requirement of unconditional surrender of the Axis powers as a condition of ending the war, adopted by the Allies at the Casablanca Conference, was unprecedented in the history of war. It could not be justified even as a posture of moral outrage, for active official response to the Holocaust occurred only after German surrender.

In the official Casablanca Conference Communique issued on January 24, 1943, the part dealing with plans for "unconditional surrender" reads: "Borrowing a phrase from a letter of General US Grant to the Confederate Commander of Forts Henry and Donelson during the American Civil War, the president called the sessions the 'unconditional surrender' conference. The one hope for peace he asserted, lay in depriving Germany and Japan of all military power."

There is little doubt that the unconditional surrender requirement prolonged the war unnecessarily and added to otherwise avoidable bloody casualties on all sides in the final phase of hostility for no political purpose. It might have even intensified the despicable Nazi program of methodically liquidating Jews toward the final years of the war. On August 14, 1941, US president Franklin D Roosevelt and British prime minister Winston Churchill signed the Atlantic Charter. On January 1, 1942, representatives of the Allies - the World War II coalition of 26 nations fighting against Germany and Japan - signed the declaration of the United Nations accepting the principles of the Atlantic Charter. The declaration included the first formal use of the term "United Nations", a name coined by President Roosevelt.

Extermination camps for Jews, as opposed to concentration camps for all undesirables, were established by the Nazis in March 1942. On December 17, 1942, nine months later, the Allies finally condemned the extermination of Jews and promised to punish the perpetrators upon victory. But it was not until April 19, 1943, that the Bermuda Conference was held to carry on fruitless discussions between US and British delegates on deliverance of Nazi victims, and only after the Archbishop of Canterbury William Temple stood up in the House of Lords in London on March 23, 1943, and pleaded with the British government to help the Jews of Europe. "We at this moment have upon us a tremendous responsibility," he said. "We stand at the bar of history, of humanity, and of God." The Vatican remained conspicuously silent.

The British Foreign Office had one fear: that the plan to rescue Jews might be too successful. In an internal memo the Foreign Office pointed out there were some "complicating factors": "There is a possibility that the Germans or their satellites may change over from the policy of extermination to one of extrusion, and aim as they did before the war at embarrassing other countries by flooding them with alien immigrants." Thus the Bermuda Conference was organized in a way that prevented it from producing results. Both the British and the US governments carefully restricted what their delegates could promise before the meeting even opened. The US instructed its representatives not to make commitments on shipping, funds or new relief agencies. Additionally, the Roosevelt administration warned that it had "no power to relax or rescind [US immigration] laws", despite all its sweeping war-time powers. US immigration laws at the time were openly racist. The British government imposed the additional restriction that its policy on admitting refugees to Palestine could not be discussed, out of concern for British geo-political interests in the Middle East.

When the Bermuda Conference finally wrapped up its 12 days of secret deliberations very little had been achieved. Jews in the US met the disappointing news from Bermuda with outrage. One Jewish organization took out a three-quarter page advertisement in The New York Times with the headline: "To 5,000,000 Jews in the Nazi Death-Trap, Bermuda Was a Cruel Mockery." There is no way of measuring how many Jews died as a result of the procrastination at Bermuda. However, two days after the conference opened, the Allies received news that yet another savage calamity was unfolding in Europe. The Jews of the Warsaw ghetto, who had begun their heroic uprising the day the conferees first met in Bermuda, flashed a four-sentence radio message to the West. It ended with the words: "Save us." The war between the Axis and the "Democracies" was not a war between good and evil; it was a war between raw evil and sanitized evil. Despite popular belief, World War II was far from being the "good war", if any war could ever be.

The Atlantic Charter a fraud
The Atlantic Charter contained eight points of "common principles in the national policies of their respective countries on which they base their hopes for a better future for the world", the third of which stated: "They [US and Britain] respect the right of all peoples to choose the form of government under which they will live; and they wish to see sovereign rights and self government restored to those who have been forcibly deprived of them." The eighth point stated: "They believe that all of the nations of the world, for realistic as well as spiritual reasons, must come to the abandonment of the use of force. Since no future peace can be maintained if land, sea or air armaments continue to be employed by nations which threaten, or may threaten, aggression outside of their frontiers, they believe, pending the establishment of a wider and permanent system of general security, that the disarmament of such nations is essential. They will likewise aid and encourage all other practicable measures which will lighten for peace-loving peoples the crushing burden of armaments."

The Atlantic Charter was a fraud because one of the two original parties never had any intention of observing the principles it proclaimed. Churchill's foreign policy consisted of three essential goals: 1) preserving the British Empire, 2) smashing the Axis (Nazi Germany, Fascist Italy, and Imperial Japan) in order to eliminate threats to the British Empire, and 3) preventing the spread of communism and Soviet domination of Eastern Europe. The preservation of the British Empire was carried out under the guise of defending democracy and a desperate strategy of turning the crumbling empire over to an expansionist US with Britain hanging on as a submissive junior partner. The defeated Axis powers were molded into post-war neo-fascist regimes as bulwarks against communism. Self government was permitted on condition of suppressing socialism and implementing subservient foreign policy. Full sovereign rights have yet to be granted to Germany and Japan after six decades of occupation. Disarmament has been all but forgotten.

Churchill's absolute silence policy
Throughout 1938-39, London refused to pledge that it would cease hostilities in the event of a coup in Germany to topple the Third Reich. When Roosevelt and Churchill met at Casablanca in January 1943, the president emerged from the meeting to tell the world that the US and Britain would accept nothing short of unconditional surrender. Churchill was surprised and later claimed that he had not been consulted but had to go along for the sake of the Atlantic Alliance. Churchill had in the back of his mind the use of Germans to resist post-war communist incursion into Europe, and was interested in preserving the Wehrmacht for that purpose. He knew that no Wehrmacht officer would support a coup against Hitler only to be invaded, occupied, and humiliated by the enemy. Better to stand by Nazi Germany, even if it meant following Hitler's madness toward total destruction, than to commit such dishonorable high treason. But Roosevelt left Churchill no room to maneuver.

Coming when it did in January 1943, the same month the German 6th Army surrendered at Stalingrad, the unconditional surrender proclamation prompted Ulrich von Hassel to conclude that the Allies had bailed out Hitler from his disaster at Stalingrad. Hassel was a conservative lawyer and career diplomat who served in Spain, Denmark, Yugoslavia, and finally as German ambassador to Italy from 1932 to 1938 when he was dismissed for opposing Germany's military alliance with fascist Italy. He opposed Hitler's foreign policy from the outset, predicting that it would lead Germany to war. During World War II, Hassel used his international contacts to arrange secret meetings with British and American officials, and hoped that a successful coup would translate into an honorable peace treaty with Britain and the US. He also worked closely with co-conspirators Dr Carl Goerdeler, who in 1937 resigned his post as mayor of Leipzig in protest over the removal of the statue of Jewish composer Felix Mendelssohn, finance minister Johannes Popitz who submitted his resignation over Hitler's persecution of Jews, and army chief-of-staff general Ludwig Beck who was the leader of the planned coup, to lay the foundations of the new Germany they hoped to build after a successful coup. Like Goerdeler, Hassel dreamed of uniting Europe into a family of nations under the principle of mutual respect and adherence to international law. He joined the inner circle of the conspiracy and became intimately involved in the political planning of the coup.

Operation Valkyrie was the official code name for an emergency contingency plan designed to protect the Nazi regime against the potential threat of serious internal disturbances or uprisings during World War II. The presence of millions of foreign workers, compelled to work as forced laborers, was the most likely reason for such concern. Valkyrie was the brainchild of General Friedrich Olbricht who served under Home Army Commander General Friedrich Fromm. What Hitler did not know was that Olbricht and later home army chief of staff Colonel Claus von Stauffenberg were secretly transforming Valkyrie into an elaborate coup d'etat plan to overthrow the Nazi regime.

A number of British and US government officials, diplomats, intelligence officers, and even generals, opposed the unconditional surrender demand, including General George C Marshal and secretary of state Cordell Hull. But Roosevelt was adamant because he understood that the US public, with its long isolationist tradition, only went to war to fight evil, which required unconditional surrender. There was a divergence between Roosevelt and Churchill in their separate world views. Roosevelt envisioned a post-war cooperative alliance with the Soviet Union to prevent the emergence of neo-fascism while Churchill saw the need to use a conservative if not neo-fascist Germany as a post-war bulwark against communism. In deference to the more powerful partner, Churchill throughout his tenure as prime minister during World War II never dared deviate from his policy of absolute silence toward the German resistance from both the left and the right and the conservative conspirators who sought to overthrow Hitler. Despite repeated appeals from such conservative figures as Dr Carl Goerdeler, Churchill's government gave no quarter to any peace overtures from the German conspirators for fear that Stalin could offer a better deal to the German left.

The fact that the Soviet Union was bearing the brunt of the war against Nazi Germany was undoubtedly the overriding factor in Churchill's policy of absolute silence and Roosevelt's unconditional surrender demand. For Roosevelt, it was vital not to give Stalin any incentive that would tempt him to strike a separate deal with Nazi Germany that would lead to a separate peace. Generals Paul Von Hindenberg and Erich Ludendorff had pulled off such an affair with new Soviet Russia in early 1918, but too late to allow them to move their forces westward to smash the Anglo-French lines before US forces arrived. It was very likely that the Allies might never have won if Stalin, having regained the 1939 Soviet border, suddenly backed out of the war.

The fact that the Western powers had not yet opened a second front (and would not do so until June 1944) was tempting enough for Stalin to seek a separate peace. Churchill and Roosevelt were fully aware of this. Moreover, the United States was eager to get the Soviet Union to declare war on Japan since the Manhattan Project to develop the atomic bomb was still years away from completion in 1942 and success was not totally guaranteed.

Throughout 1942-43, Hitler irately refused to negotiate a ceasefire with the Soviet Union. But the staunchly anti-communist German conspirators were far more intent on securing peace first with the West. Stalin made no effort to conceal his peace feelers to Germany, most likely to frighten his Western allies into speeding up their opening of a second front. Thus an obstacle to a negotiated peace with Germany was locked in place by a balance of calculations from both the left and the right among the Allies.

In Japan, the unconditional surrender requirement that included the prospect of eliminating the emperor led to the need to use nuclear weapons to end the war. In the end, the US kept the emperor despite his less-than-titular role in the planning and prosecution of the war, which had been the key condition in Japanese overtures to surrender before Hiroshima. There was no regime change in Japan after the war as in President George W Bush's aim for the "axis of evil" - Iran, Iraq and North Korea.

German sovereignty delayed
World War I ended ended without a decisive battle and the Imperial Government of Germany accepted an armistice while its troops were still occupying enemy territories from France to the Crimea. With the US landing 250,000 troops every month in France, the German High Command notified the Imperial government that the war could not be won and the German Foreign Office made peace overtures to US president Woodrow Wilson. An armistice was arranged and on November 11, 1918, the guns went silent on the Western Front. The German military caste, at the moment of national crisis, decided to save its honor rather than the nation. Under pressure from the German High Command, Kaiser William II abdicated on November 9 and slipped across the frontier to Holland where, despite demands to put him on trial as a war criminal, he lived quietly until his death in 1941.

No fighting ever took place on German soil in World War I. This paradox led German nationalists and militarists to blame the defeat in World War I on traitors in the home government. The German Imperial Government fell not from popular discontent or social revolution, not even from demand for regime change from the foreign victors. It fell from pressure on the Kaiser from General Erich Ludendorff of the German High Command to appease president Wilson's fixation on democracy by casting the Kaiser as an obstacle to peace.

The Weimar Republic came into existence to ward off radical revolution at home, not from defeat in war, or from foreign-imposed regime change, but from misplaced German hope that a democratic government would stand a better chance for more liberal peace terms from the Allies. But it was not to be, as the Peace of Versailles was exceedingly harsh on the German nation and blamed it unfairly for the sole responsibility for the war. In fact, the victors, including many in the United States who did not support Wilson's utopian ideology, were generally unhappy about the success of undesirable revolutions in both Russia and Germany. The German military leaders shied away from the dishonor of surrender, and the armistice signing was left to two little known civilians.

World War I was decidedly not a class war, but a war of intra-imperialist rivalry. But Wilson had obtained a rousing declaration of war from Congress on April 2, 1917, with his speech: "We shall fight for democracy, for the right of those who submit to authority to have a voice in their own government, for the rights and liberties of small nations, for a universal dominion of right by such a concert of free peoples as shall bring peace and safety to all nations and make the world itself at last free." Democracy then became a factor in the terms of the Armistice while the war to make "the world at last free" was not at all interested in eliminating Western imperialism and colonialism around the world. Wilson's Fourteen Points-proposal was not supported by the Allies or by Congress at home.

The Nazis, after staging a regime change in defeated Germany, rejected all the surrender terms agreed to in the armistice by the German Imperial Government and honored by the Weimar Republic, with considerable sympathetic support from the West where opinion had shifted from fear of German militarism to fear of Bolshevism. The idea of using Germany as a bulwark against communism in Europe was gaining currency and kept alive by Churchill throughout World War II. The US reaped enormous geopolitical and economic benefits from entering the war at its late stage, as it did once more in World War II. US troops faced combat for only four months while the other nations fought for four years. In the last year of the war in 1918, for every 100 artillery shells fired, the French fired 51, the British 43 and the US only 6.

Germany's rapid economic recovery during the decades after World War II masked its failure to retain full sovereignty as a state or to regain it quickly, as defeated France had done at the Congress of Vienna in 1814, or even defeated Imperial Germany had done at the Versailles Conference in 1919. In 1945, the German economy had been shattered by war, and its cities, housing stock and industrial plants destroyed by carpet bombings from Allies air raids. A good part of what survived was later dismantled and carried off by the victorious Allies. The Nazi party, which had dominated German politics and government, was outlawed and a new political regime had to be constructed from its ashes. The war that had begun as a contest over territories had ended up as a contest over ideology mainly because the US needed a moral purpose to overcome popular resistance to involvement in a foreign war. The German nation was required by the victors to go through total de-Nazification to cleanse itself of a genetic immorality, not just to atone for a virus of fanatic aberrations. A contest over ideology leads to a religious war with a demand for unconditional surrender and subsequent regime change in the conquered nation.

The Allies, not unlike victorious Napoleon in Moscow on September 14, 1812, could not find a legitimate government from which to accept an unconditional surrender in 1945. The Third Reich had ceased to exist with the suicide of Hitler and the unconditional surrender was signed by Admiral Karl Doenitz, a non-entity in German politics and history, except among U-boat enthusiasts. Doenitz's fame came from his secret build-up of the German submarine fleet in the years following the Treaty of Versailles. He was given command of submarine operations by Hitler in 1935, and made chief naval commander in 1943, by which time the German navy was only a club of sailors without surface ships. Having sunk more civilian vessels than enemy warships, Doenitz's stature among the German military establishment was not much higher than that of Hitler, the World War I corporal.

In his last will and testimony signed at 4am, April 29, 1945, a day before his suicide, Hitler wrote: "Before my death I expel the former Reichsmarschall Hermann Goering and deprive him of all the rights he may enjoy by virtue of the decree of June 29, 1941, and also by virtue of my statement in the Reichstag on September 1, 1939. I appoint in his place Grossadmiral Doenitz as president of the Reich and Supreme Commander of the Armed Forces.

"Before my death I expel the former Reichsfuehrer-SS and minister of the interior Heinrich Himmler from the party and all offices of state. In his place I appoint Gauleiter Karl Hanke as Reichsfuehrer-SS and Chief of the German Police and Gauleiter Paul Giesler as Reich minister of the interior.

"Goering and Himmler, by their secret negotiations with the enemy, without my knowledge or approval, and by their illegal attempts to seize power in the state, quite apart from their treachery to my person, have brought irreparable shame to the country and the whole people."

The Third Reich essentially died with Hitler on April 29, 1945.

On the announcement on May 1, 1945, that Hitler was dead and had designated Doenitz as his successor devoid of a functioning government, the U-boat admiral formed a new cabinet and ordered the unconditional surrender of Germany to the Allies effective May 7, not withstanding the fact that Goering and Himmler had both been sacked by Hitler for secretly negotiating with the enemy and that Hitler's last will and testament clearly expected Doenitz to carry on with resistance. Doenitz' new government, at Kiel, was summarily dissolved by the Allies before the ink on the surrender documents was dry. The Third Reich did not fall from German internal politics. Like Hitler, the successor government committed suicide by signing its own death warrant in the form of unconditional surrender and was immediately dissolved afterwards by the victorious foreign powers. Doenitz was imprisoned for 10 years (1946-56) for war crimes. Legally, the surrender became void with the dissolution of the signing government.

On May 8, 1945, a military surrender of the German armed forces (Wehrmacht) was signed by Field Marshal Wilhelm Keitel in Berlin, ending all formal resistance. Keitel was a loyal supporter of Hitler's policies and after the invasion of Poland he issued orders to the Schutz Statteinel (SS) and the Gestapo to exterminate the country's Jews. In May 1941, Keitel signed the commissar order that instructed German field commanders to execute Communist Party officials immediately after they were captured on the Eastern Front. In July 1941 he signed another order giving Himmler the power to implement his racial program in the Soviet Union. After the surrender, Keitel was immediately arrested and later tried at Nuremburg as a major war criminal. In court, his main defense was that he was merely obeying orders. Found guilty, he was executed by hanging on October 16, 1946. His request to be shot by firing squad as befitting his rank was denied.

On V-E Day, Allied supreme commander General Dwight D Eisenhower had 61 US divisions, 1,622,000 men, in Germany, and a total Allied force in Europe numbering 3,077,000. When the shooting ended, the divisions in the field became occupation troops, charged with maintaining law and order and establishing the Allied military presence in the Western occupied part of the defeated nation. This was a military occupation, the object of which was to control the population and stifle insurgent resistance by putting troops into every part of the occupied nation. Divisions were spread out across the countryside, sometimes over great stretches of territory. The 78th Infantry Division, for instance, for a time after V-E day, was responsible for an area of 3,600 square miles, almost twice the size of the state of Delaware, and the 70th Infantry Division for 2,500 square miles. Battalions were deployed separately, and the company was widely viewed as the ideal unit for independent deployment because billets were easy to find and the hauls from the billets to guard posts and checkpoints would not be excessively long. Frequently single platoons and squads were deployed at substantial distances from their company headquarters.

There is no indication that the US Defense Department has any such plans or intentions for the occupation of rogue states facing regime change from pending US invasion. Iraq with an area of 437,072 square kilometers (168,800 square miles) will take more than 100 divisions to carry out the type of occupation the US devised for post-war Germany. Currently, some 70,000 US troops are assigned to Germany, although the army's First Infantry Division and First Armored Division are now in Iraq, leaving about 40,000 US Army troops, the equivalent of two divisions, in Germany.

The Allied occupation of Germany is approaching its sixth decade, and in the eyes of many Germans it has not yet ended. Foreign armies are still based on German soil and Europe's largest and most prosperous "democracy" still does not have a constitution and a peace treaty putting a formal end to World War II. Its temporary constitutional instrument is the Grundgesetz (Basic Law) adopted on May 23, 1949, last amended August 31, 1990, by the Unification Treaty of August 13, 1990, and Federal Statute of September 23, 1990.

If the German model is applied to Iraq, there may never be a formal end to the war in Iraq. Because there is no formal peace treaty between Germany and the Allies headed by the US, German sovereignty is compromised. On October 20, 1985, John Kornblum of the US State Department told Germany's provisional Reichskanzler Wolfgang Gerhard Geunter Ebel: "Until we have a peace treaty, Germany is a colony of the United States." Ebel headed the provisional government that claims to be the legal successor to the Second German Reich, which was replaced by Hitler's illegal Third Reich (1933-45). The Second German Reich was never restored by the Allies after World War II. The legitimacy of the current German government is an open question and can be exploited in a future national crisis.

In 1945, the German people were suddenly confronted by a situation never before experienced in their history. The entire German territory was occupied by foreign armies, cities and infrastructure were largely reduced to rubble, the country was flooded with millions of refugees from the east, and large portions of the population were suffering from hunger and the loss of their homes. The proud and prosperous nation-state unified by Otto von Bismarck in 1871 lay in ruins and deprived of self government. Germany did not just lose the war, its people lost their state and have yet to regain full sovereignty as a fully independent state after more than half a century.

Within Germany, there was much discussion about what kind of government should emerge out of the political vacuum and chaos and how to rebuild the collapsed economy. But the principle of the Atlantic Charter notwithstanding, it was soon clear that the decision was not for the German people to make, but for the victors to impose. De-Nazification came to a screeching halt and a neo-fascist regime was put in place under four years of US occupation that eventually transformed itself into the Federal Republic of Germany (FRG) in 1949. West Germans could have any type of government they wanted as long as it was not communist. Democracy in Germany was to serve the Cold War purposes of the victorious United States. Germany was positioned in 1949 as the focus of geopolitics in a global ideological conflict that resulted in the emergence of two separate German states, each being forced by its contesting superpower sponsor to play new roles in a geographically and ideologically divided Europe.

In the post-war debate on the proper path for West German political and socio-economic reconstruction, German socialists argued for a democratic government with a central distribution system, extensive state controls, and the nationalization of banks and industry. The opposition came from Ludwig Erhard, a liberal economist appointed by the Allies to head the Office of Economic Affairs in the US-British Bizone; he later became minister for economics and ultimately chancellor of the Federal Republic of Germany (FRG) (1963-66), succeeding Konrad Adenauer, co-founder of the Christian Democratic Union (CDU), who had been elected chancellor of the FRG in 1949 with US backing. Kurt Schumacher, leader of the Social Democratic Party (Sozialisttischer Parti Demokratic or SPD), ran against Adenauer, the former mayor of Cologne, whom the US, not wanting to see socialism of any kind in Germany, was grooming for leadership. Adenauer united most of the prewar German conservatives into the CDU. Schumacher campaigned for a united socialist Germany, and particularly for nationalization of heavy industry, whose owners he blamed for having funded the Nazi rise to power. When the occupying powers opposed his ideas, he denounced them with Marxist rhetoric. Adenauer opposed socialism on principle, and also argued that the quickest way to get the Allies to restore self-government to a sovereign Germany was to co-operate with them. The quick way turned out to be half a century.

Schumacher also wanted a new constitution with a strong national presidency, confident that he would soon occupy that post. But the first draft of the 1949 Basic Law provided for a federal system with a weak national government, as favored both by the Allies and the CDU. Schumacher absolutely refused to give way on this, and eventually the Allies, keen to get the new German state functioning in the face of the Soviet challenge, conceded some of what Schumacher wanted. The new federal government would be dominant over the states, although there would be no strong presidency.

The Federal Republic of Germany's (West Germany's) first national elections were held in October 1949. Schumacher was convinced he would win, and most observers agreed with him. But Adenauder's new CDU had several advantages over the SPD. Some of the SPD's strongest areas in pre-war Germany were now in the Soviet Zone, while the most conservative parts of the country - Bavaria and the Rhineland - were in West Germany. In addition both the American and French occupying powers favored Adenauer and did all they could to assist his campaign; the British under a Labor government remained neutral.

Further, the onset of the Cold War produced an anti-socialist reaction in all US-controlled territories, including West Germany. The SPD would probably have won an election in 1945, but by 1949 the tide had turned. The result was that the SPD won 30% of the vote with the CDU winning 25%. But the CDU formed a coalition with the conservative Christian Social Union and two other minor parties to win a plurality of seats in the legislature, and was able to form a majority government. The German politicians, both Christian Democrats and Social Democrats, by their coerced opposition to communism and thus refusal to accept neutrality in the Cold War, allowed the US to institutionalize the division of Germany for half a century.

The basic tenets of Erhard's economic policy were what he called social market economy principles. Social market economy as established by Erhard in 1948, one year before the creation of FRG, or West Germany, has been credited by US historians as having fundamentally changed the West German economy, and with it the whole of post-war German society, presumably for the better, at least in terms of US geopolitical interests. It unleashed enormous mercantilist and competitive energies that brought West Germany the economic miracle of the 1950s, which was welcomed by the US as long as West Germany stayed firmly in the US camp in the Cold War. Economic success from competition with foreign economies in turn generated dynamic nationalistic social developments at home - a fact acknowledged by Chancellor Helmut Kohl at the CDU party convention in Hanover in 1996, where he also declared that the task for the future was to reform European security systems to safeguard their efficiency and funding, in other words, a revival of militarism.

When Kohl was elected West German chancellor in 1982, he inherited a difficult political situation. The country was suffering from mass unemployment inherent in market capitalism, and was deeply split over US deployment of nuclear weapons on German territory without German control, which Germany had been forced to accept since the end of the war. He presided over the unification of Germany during his 16 years in office. Kohl saw German unity and European unity as two sides of the same coin. In a bid to allay fears about the emergence of a united Germany as the new power in Central Europe, he pushed for closer European integration. He camouflaged German rearmament through its membership in the North Atlantic Treaty Organization.

Adenauer had been forced to accept integration with the West as the only option for a defeated Germany in the context of an East-West conflict. Willy Brandt's Ostpolitik consolidated the FRG with normalizing relations with the communist world. Yet Brandt had to repeatedly emphasize that conciliation with the East was only possible, or tolerated by the US, for a German Republic securely integrated with the West and firmly under US leadership. The election of 1969 that put Brandt in power marked a new chapter in German politics. Through it the Federal Republic finally had a president and a chancellor who had been actively associated with the resistance to Nazism. Brandt said as the results came in that "tonight, finally and for ever, Hitler lost the war". Brandt was not overly melodramatic. Post-war Germany had been visibly neo-fascist. In view of recent developments in the Vatican, Brandt's proclamation might have been premature. Both Adenauer and Erhard had been more willing to be reconciled with ex-Nazis than with the full consequences of defeat.

Helmut Schmidt's leadership earned West Germany international respect. Yet, the West Germans had to accept two constraints: First, they had to restrain themselves from projecting power outside the Alliance; and second, they had to defer not only to US leadership but also to US dominance. In the decade of the 1980s Schmidt set the stage for increased West German self-confidence. Although Germany and the US could never totally agree on all issues, friction had risen to new highs under Schmidt. In fact, Jimmy Carter, in his memoirs, described one of his encounters with Schmidt as "the most unpleasant personal exchange I ever had with a foreign leader". By the end of Schmidt's tenure as chancellor, the West German public was strongly questioning the underlying motives of US foreign policy. In a 1981 public opinion poll, only 38% of the German population felt the Federal Republic should adopt US president Ronald Reagan's hard-line course toward the Soviet Union, while 60% spoke in favor of distancing itself from Reagan's foreign policy. Yet the German government was not yet free to follow the popular will of the German nation.

The West German media described Reagan as a neo-conservative, an extremely pejorative term in German, implying propensities for war-mongering. Reagan's "messianic promise" to redesign US military power to support a moralistic and belligerent US foreign policy was viewed by a large majority of Germans as threatening to world peace. It simply reminded many of the last world wars, the destructive impact of which was still felt by Germany as a nation, and especially the city of Berlin. Reagan's embrace of neo-conservative values was thus interpreted as reactionary and as a move backward. A nation once victimized by Nazism was aghast by the embrace of neo-fascist values by the former slayer of the Nazi dragon.

The counterculture that developed in West Germany spread fears of the future and of progress in the context of the Pax Americana. There was also a lot of pessimism, which has a long tradition in German culture. The consequences of the failure of the 1848 movements to solve the problem of unification in a liberal and constitutional way left Germany with a less benign form of nationalism and contributed to a fateful estrangement between Germany and the liberal West. Massive migration of liberal Germans to the US, known as the "forty-eighters" brought the new nation a refreshing ripple of revolutionary agitation as well as a rich wave of talents in politics, science, medicine and the arts. The resultant depletion of liberal minds in German culture contributed to the rise of fascism decades later in Germany.

German materialism holds that all mental, spiritual and ideological concepts grow out of physical or physiological forces. German positivism holds that reliable knowledge is based on concrete facts, not abstract ideas. In 1818, Arthur Schopenhauer (1788-1860) published his profound work: Die Welt als Wille und Vorstellung (translated in 1958 as The World as Will and Representation), which was ignored during the first three decades of its appearance. Schopenhauer holds that the underlying reality of the universe is Will, a blind, instinctual dynamic driving force to live, which needs to be restrained for the sake of civilization. Ideas are shadowy representations projected by Will for its own purposes. Out of this emerged German Realpolitik, rejecting the notion of government action guided by ideology or any desire to promote a particular world view, in favor of a foreign policy of practical purpose, an approach practiced to great effect by Otto von Bismarck.

Neo-fascism and German terrorism
The 1968 radical student protests around the world affected Germany deeply. During the years of 1968-1977 Germany lived in fear of extremist terrorism. Three terrorist groups were dominant - the Red Army Faction (RAF) or the Baader-Meinhof gang; Movement 2 June (an anarchist group that named itself after the date on which a young pacifist named Benno Ohnesorg had been killed by police during a 1967 protest in Berlin), and the Revolutionary Cells, formed in Frankfurt am Main around 1972-1973 and organized into semi-autonomous cells, each aware of the group's overall mission yet mostly unaware of the identities of other group members. In 1968, the prominent German journalist Ulrike Meinhof joined Andreas Baader and Gudrun Ensslin to launch the most terrifying era in German postwar history.

As in the United States, the student anti-war protests of 1968 at times turned into full-scale riots, with some elements evolving into various extreme groups that attempted naively to start a world revolution by taking to terrorism, starting with bank robberies and turning to kidnappings and killings. Most of the leaders of the most famous West German terrorist group, Baader, Ensslin, and Jan-Carl Raspe of the Baader-Meinhof Gang, were captured by mid-1972. Their followers continued kidnappings and killings over the next five years in repeated unsuccessful efforts to secure the release of their leaders from prison. The German government used the terrorist crisis to push through new laws that granted it broad powers in fighting terrorism. Radical leftists protested the loss of civil liberty, but the majority of the German people were firmly on the side of the government.

The context of the formation and activities of the Red Army Faction in Germany evolved from three events: the bombing of South Vietnam by the US Air Force in 1963 and North Vietnam in 1965; the visit of the Shah of Iran to Berlin in the summer of 1967; and the April 11, 1968, assassination attempt on Rudi Dutschke, the leader of the student movements of the 1960s. The would-be assassin was Joseph Bachmann, a young neo-Nazi who along with his pistol was carrying a copy of Bild-Zeitung, an extreme right-wing newspaper with the headline: "Stop Dutschke now!" During the court trial, it became evident that Bachmann, an unskilled worker, was influenced by the intense propaganda campaign of the mass media owned by Alex Springer, especially the Bild-Zeitung newspaper.

Dutschke recovered sufficiently to play an important role in the formation of the Green Party in 1980, by inspiring many student protesters, including Joschka Fischer who later became foreign minister in Chancellor Gerhard Schroeder's government, to join the Green movement. Dutschke died in 1979 from complications of the assassination wounds.

All violence is despicable. Yet violence is never an isolated act, neither are its political manifestations: war and terrorism. All acts of terrorism are points in a cycle of terrorism that escalate and beget more acts of terrorism. Many of the leaders in the Red Army Faction were not involved in violence at the beginning of their activism, but were gradually radicalized into full-fledged terrorists. Baader's trouble with the law began over motor vehicle offences. Meinhof was a journalist/editor for Konkret, a leftwing student newspaper. Ensslin started out as a student pacifist. During the demonstration against the Shah of Iran on June 2, 1967, a fellow student pacifist, Benno Ohnesborg, was shot dead by the police. That incident of state terrorism precipitated the June 2 Movement. After the protest, Ensslin went to the local office of the Students for Democratic Society (SDS) and screamed hysterically: "This fascist state means to kill us all! Violence is the only way to answer violence!"

Though unconnected to its US counterpart that shared its acronym, the German SDS occupied a parallel place in German society. It was the leading left-wing student organization throughout the 1960s. Originally, the SDS was the student wing of the Social Democratic Party, but the SPD disassociated itself from the SDS in 1960 when the SDS began advocating an anti-nuclear weapon stance.

Baader and Ensslin met, became lovers and began to plant bombs in department stores in response. At her trial for arson on October 4,1968, Ensslin explained: "We have found that words are useless without action!" On July 8,1970, the "June 2 Movement" was organized. At the start of the 1970s, the RAF, the June 2 Movement and the German state were at war. On July 15, 1970, Petra Schelm was shot and killed in a shoot-out with the Hamburg police. Her death caused shock waves throughout Germany as many Germans found themselves horrified at the violent death of the young innocent hairdresser. A national poll taken shortly after the death of Schelm revealed that 20% of the German population felt some sympathy for her cause. On October 22, 1971, during another shoot-out in Hamburg, Norbert Schmid, a policeman, was shot dead. The chronology of events becomes ever bloodier. Baader explains his viewpoint in 1973: "The gun livens things up. The colonized European comes alive, not to the subject and problem of the violence of our circumstances, but because all armed actions subjects the force of circumstances to the force of events. I say our book should be entitled 'The Gun Speaks!'"

Gerhard Richter's 15-painting cycle, "October 18, 1977", now in the permanent collection of the Museum of Modern Art (MOMA) in New York, is a collection of black and white oil paintings drawn from ubiquitous photographs of the Baader-Meinhof era. Robert Storr, the curator of the MOMA collection who recommended the purchase of the "October 18, 1977" cycle, as well as organized the Richter retrospective, considered Richter to be among the most important contemporary artists. Storr's 152-page book about the "October 18, 1977" cycle provides an explanation on the importance of the artist and this work.

The student protests of 1968 that promised positive hope for a new society quickly degenerated into violent street riots and misguided terrorism. Many leftist students would be inspired by Dutschke to begin their "long march through the institutions". A decade later, many of these former radical students were the main force behind the Greens party. But a handful of the more radical wanted "revolution now", and resorted to revolutionary terrorism in response to state terrorism.

Post-war West Germany had been created as a loose confederation of states, with no federal police force on the order of the FBI, only the disconnected Lander police forces. In the early 1970s, terrorists were able to take advantage of this decentralization by constantly traversing different states, whose police forces seldom coordinated their work or shared information.
On January 10, 1972, Der Spiegel published a letter by 1972 Nobel laureate for literature Heinrich Boll, in which he decried Baader-Meinhof coverage in the the Springer Press' Bild as not "cryptofascist anymore, not fascistoid, but naked fascism, agitation, lies, dirt". Boll, a devout Catholic, attacked the materialistic values of the post-war German society. Boll was born in Cologne where his father was a cabinetmaker and sculptor, whose ancestors had fled from England to escape the persecution of Roman Catholics. Boll started to write poetry and short stories in his youth. He was one of the few boys in his school who did not join the Hitler Youth movement, unlike the new German Pope. Boll himself had experienced harassment by the media and his house was searched by police when he proclaimed that Meinhof deserved a fair trial.

Film directors Volker Schlondorff and Margarethe von Trotta adapted Boll's book, The Lost Honour of Katharina Blum, (1974) which attacked yellow journalism, onto the screen the following year. In 1985, von Trotta made a film about Rosa Luxemburg with Barbara Sukowa in the title role. Boll's The Safety Net (1979), translated from German by Leila Vennewit in 1982, was inspired by the sensational press coverage of the Baader-Meinhof gang. Right-wing critics, particularly in the popular press, accused Boll of sympathizing with social dissidents and even condoning the aims of terrorists. Boll actually was of the view that bungling terrorists inadvertently and ironically helped big business. By 1973, the German state imprisoned gang members under conditions so horrid that Amnesty International lodged a complaint. After 1973, radicals justifiably protested the inhumane prison conditions. In November 1974, Jean-Paul Sartre interviewed Baader in Stammheim Prison at Meinhof's request which resulted in an article "The Slow Death of Andreas Baader", published in Liberation, December 7, 1974. The first sentence Baader made to Sartre was: "I asked for a friend and they sent me a judge," reflecting his disappointment with Sartre's comments made on German television the night before Sartre had a chance to hear what Baader had to say.

The government adopted "Lex Baader-Mainhof" or the "Baader-Meinhof Laws" as amendments to the Basic Law, West Germany's quasi-constitution, to allow the courts to exclude a lawyer from defending a client merely if there is suspicion of the lawyer "forming a criminal association with the defendant", denying the basic concept of attorney-client confidentiality. The new laws also allow for trials to continue in the absence of a defendant if the reason for the defendant's absence is of the defendant's own doing, ie, they are ill from a hunger strike. As the Baader-Meinhof trial dragged on, Meinhof reportedly hanged herself in her cell on Mother's Day 1975, according to official records, but many suspected she was killed by the state.

The Baader-Meinhof era ended with the "German Autumn", a name given to the 44 days in the fall of 1977 when all Germany was gripped in a terrorist crisis. It began on September 5, when the industrialist Hanns-Marin Schleyer was kidnapped in Cologne by the RAF. For the next month and a half, his kidnappers attempted to secure the release of the imprisoned leaders of the RAF. On October 17, 1977, Palestinian terrorists hijacked a Lufthansa plane, demanding, among other things, the release of Baader and his fellow prisoners. The Grenzschutzgruppe 9 (GSG-9 or Border Guard Group Nine), the newly formed German anti-terrorist force, ended the hijacking by killing the Palestinian hijackers when the plane landed in Modagshu, Somalia. Upon hearing the news, the gang leaders Baader, his girl friend Ensslin, who was a descendant of Hegel, and Raspe reportedly all committed suicide in prison, bringing the German Autumn to an end. Many suspected that the gang leaders were killed by the authorities to prevent future attempts to free them. Schleyer's body was found in an abandoned car.

The name "German Autumn" evoked the notion that German society was at an end of an era; that the progressive optimism of the late 1960s had degenerated into a ruthless situation. "It wasn't just about killing Americans, and killing pigs, at least not at first. It was about attacking the illegitimate state that these pawns served. It was about scraping the bucolic soil and exposing the fascist, Nazi-tainted bedrock that propped up the modern West German state. It was about war on the forces of reaction. It was about Revolution," wrote Richard Huffman in The Gun Speaks: The Baader-Meinhof Gang at the Dawn of Terror.

The liquidation of the leaders of the Baader-Meinh gang by the German state did not end terrorism. A police shoot-out took place with suspected RAF terrorist Wolfgang Grams, and then there was the bomb killing of prominent banker Alfred Herrhausen (1989) and Treuhand head Detlev Rohwedder (1991). Treuhand is the government privatization agency. Herrhausen fell victim to a deadly terrorist bomb shortly after leaving his home in Bad Homberg on the November 30, 1989. He was being chauffeured to work in his armored Mercedes, with bodyguards in both a lead vehicle and another following behind. At the time of his death Herrhausen was a key director (Vorstandssprecher, literally, "speaker of the board") on the Deutsche Bank board. He had been with Deutsche Bank, Germany's largest, since 1969. From 1971 on he was a member of the bank's board of directors. The laser-triggered bomb seemed too sophisticated for so-called fourth generation RAF terrorists to deploy. In a CNN Berlin bureau chief's report on November 8, 1999, reference was made to the unsolved murder of a prominent West German businessman who headed the Treuhand, without mentioning any suspected RAF involvement. Detlev Rohwedder was fatally shot on April 21, 1991, days after he announced a plan that placed social restrictions on privatization.

An article by Helga Zepp-LaRouche, wife of Lyndon LaRouche (perennial US candidate for president), in the December 10, 2004, issue of Executive Intelligence Review, "Unmasking the Secret War by the 'Economic Hit Men'" (by John Perkins), dealt with the murder[s] of Alfred Herrhausen ... and Detlev Rohwedder:

The two political economy-motivated murders which, more than all others, set the stage for this catastrophe, in which the German economy for 15 years has been destroyed in both East and West, were the killings of Alfred Herrhausen on November 30, 1989, and Detlev Rohwedder on April 21, 991. In a manner similar to John Perkins today, during the 1990s the former high-ranking Pentagon official Fletcher Prouty, in an interview with the Italian publication Unita, said that the murders of Herrhausen, John F Kennedy, Aldo Moro, Enrico Mattei, and Olof Palme were all the consequences of the fact that they did not want to subjugate themselves, one by one, to be minor consuls of the ruling pax universalis ... Real terrorists do not kill the president of a bank without a special reason. Most terrorists are paid agents and instruments of larger power centers. A certain such power center wanted, for a certain reason, the leading spokesman of the Deutschebank, on this day and in this manner, eliminated, in order to teach a lesson to others. Thus, there was a message in the way and manner in which he was brought down. Prouty said that the key to the explanation lay in 11 pages of a speech, which Herrhausen was to have given one week later in New York, on December 4, 1989, before the American Council on Germany, and which would now go undelivered. In this speech, Herrhausen was to have laid out his vision of the new organization of East-West relations, which would have steered history after 1989 into a dramatically different course. Herrhausen, at that time, was the only banker whose proposals for the development of Poland as a model for the other Comecon nations, according to the model of the Kreditanstalt fur Wiederaufbau, went in the same direction as the ideas of Lyndon LaRouche. Let us recall the dramatic events of Autumn 1989: On November 9, the Berlin Wall came down; in documentation later made public, the Federal government admitted that it had not had the slightest plans for the unforeseen eventuality of German reunification. On November 28, Helmut Kohl took the only sovereign step of his entire time in office. He proposed the 10-point program for the formation of a confederation of both German states, and indeed, without consultation with the Allied Powers or his coalition partner, the Free Democratic Party (FDP). Two days later, on November 30, Herrhausen was assassinated by the so-called Third Generation of the RAF, whose existence was described in an ARD TV broadcast as "Phantom". This "Phantom" then appeared once more in the assassination of Rohwedder, and has since then vanished into thin air ... There was yet another leading industry representative, who had far-reaching visions for the development of Germany: Detlev Rohwedder. As head of the Treuhand, he was in charge of the transformation of publicly owned businesses in eastern Germany. In 1990-91, he came to the conclusion, that a reckless privatization of the real - economic - and still completely useful - industrial firms would have unacceptable social consequences. Therefore, he resolved, in the first months of 1991, to change the concept of the Treuhand into "first restoration, then privatization" - always with a view to the social effects. This was the moment, when the Phantom-RAF struck again. His successor at the Treuhand, Birgit Breuel, the daughter of a banker from Hamburg, did not have the same scruples as he did: Under her leadership severe privatization took its free course.

Why did both of these men have to die? Were they the symbolic figures of the "fascist capital structure," of which the RAF speaks in its statement taking credit for the Herrhausen assassination? On the contrary: Both committed the mortal sin against the system of the financial oligarchy by expressing moral misgivings regarding the consequences of this policy. Thus, in his book, Alfred Herrhausen, Power, Politics and Morality, Dieter Balkhausen describes how Herrhausen, already in 1987 at the funeral of his fellow board member Werner Blessing, expressed the view that the debt crisis of the Third World could no longer be met with silence. A discussion with President Miguel de la Madrid in Mexico about the debt crisis of the developing nations had affected him deeply, and he began to think about partial debt relief. Balkhausen reports further that during the Evangelical Church-Conference there had been a discussion about why the international banks, up until 1987, had made available to the semi- or under-developed states the gigantic sum of $1.2 billion, whereas they otherwise cut off credit lines with a "explosive harshness" and auctioned off the houses of the poorer classes. Perkins' revelation, that the EHMs (economic hit men) had the task of luring the developing nations into the condition of indebtedness, in order then to be able to exploit them the more mercilessly, provides the answer to this apparent contradiction. In a television broadcast on "Arte" on November 18, 2002, a Catholic priest who was a friend of Herrhausen's, reported that Herrhausen had come to the conclusion that a system, in which a few make a very high profit from the economy, while it crushes many others, cannot endure. Herrhausen struggled with the idea, that he perhaps had protected something that he should not have protected, did not want to protect and morally was not permitted to protect. With that, Herrhausen committed a mistake in the eyes of the financial oligarchy, which was to cost him his life: He came to the idea that the economy had something to do with morality and with the image of humanity.

Neo-fascism and militarism
Anti-war protest movements in post-war Germany evoked anti-Reagan demonstrations against the deployment of Pershing II and ground-launched cruise missiles. Under the umbrella of the peace movement, the ideologically divergent groupings, ranging from communists to concerned Christians, propagated neutralism and self determination. By the 1980s, the Federal Republic of Germany had become ambiguous as a dependable ally in the eyes of US neo-conservatives. In addition, the 1985 Bitburg affair, the 1986 Waldheim affair, as well as the renewed debate on Germany's past and its significance for national identity, have stirred up deep-rooted emotions in the US and West Germany, as well as all of Europe.

The Waldheim Affair began with revelations about the Austrian presidential candidate's "brown past" in the weekly Austrian magazine Profil that soon surfaced in the Western press. The allegations that Kurt Waldheim may have been a war criminal, that he had been involved in savage reprisals against Yugoslav partisans in the Balkans and in the deportation of Greek Jews from Salonika, were never actually proved. What was demonstrated beyond doubt was that Waldheim had systematically lied about his past in the Third Reich and that he knew far more than he had ever cared to reveal about atrocities against partisans and Jews. His supporters, however, chose to treat the evidence against Waldheim as a "Jewish inspired" campaign, and Michael Graff, the abrasive secretary-general of the Austrian People's Party, accused the World Jewish Congress of indulging in hate-filled attacks and deliberate defamation. The campaign against Waldheim, he suggested, was provoking "feelings that we don't want to have".

Robert S Wistrich wrote in the American Jewish Committee: "The Waldheim Affair had repercussions far beyond the tensions and conflicts it created between Austrians and Jews. At stake as well was Austria's image and standing in the international community. The Affair epitomized postwar Austrian unwillingness or inability to confront the implications of the Nazi Holocaust, bringing to the surface a stream of discourse about Jews that had been taboo in theory, if not in practice, since 1945. A new space was now opened for fantasies about an international Jewish conspiracy against Austria. Anti-Semitic attitudes dating back to pre-Nazi Austria and the Third Reich could now be expressed more openly, with the mass circulation press (most notably the Neue Kronen-Zeitung) reinforcing and also shaping popular prejudices. The notion that the Jew was at the root of any given problem (the Iudeus ex machina), well-rooted in Austrian history, could once more be utilized, this time for the political ends of the Waldheim campaign. This resurgence of anti-Semitism was undoubtedly linked to the justification of Austria's past in the Nazi era and to fears of Jewish revenge. During the Waldheim Affair, stereotypes of world Jewish power, negative Christian images about the Jews, and the notion that Jews were themselves responsible for anti-Semitism became part of a "we-they" confrontation pitting little Austria against international Jewry. The effects could be seen in a survey of Austrian attitudes sponsored by the American Jewish Committee and conducted by the Gallup Institute in the summer of 1991. It showed that substantial portions of the Austrian population still had strong negative attitudes toward Jews and believed it was time to forget the Holocaust." Waldheim won the 1986 election for president of Austria, despite the war crime scandal. His tenure as president was marked by international isolation, and he did not run again in 1992.

At Kohl's request, made only weeks after Reagan's landslide 1984 US presidential reelection victory, Reagan, whose approval rating at home had plummeted to 35% by January 1983, visited Bitburg Cemetery on May 5, 1985, less than four months into his second term, to honor the German victims of World War II and to celebrate the reconciliation between the US and West Germany. A great deal of controversy surrounded Reagan's visit to the German military camp at Bitburg, which also contains graves of Nazi soldiers of the Waffen SS. Honoring war criminals by neo-conservative political leaders has since become respectable, as Japan has also recently followed suit. It was the beginning of a resurgence of militarism. For balance, Reagan also visited Bergen-Belsen concentration camp, as if the SS and murdered Jews were both equal victims of war. On the same day, the Reagan administration acknowledged the "Reagan Doctrine" of sponsoring armed insurgencies, or terrorists by another name, against leftist governments in the Third World. The Reagan Doctrine was essentially war by terrorism.

After Kohl was elected West German chancellor in October 1982, he tried to redefine the basics of US-German relations, claiming fundamental common values. In his farewell speech for a Reagan state visit on June 12, 1987, Kohl noted that US-German relations were based on "our commitment to freedom, the common heritage and civilization of our peoples, which rest upon the principles of democracy, individual freedom, and the rule of law". Many cultural historians did not have the faintest idea what he was referring to. To many, the birth of both the Weimar Republic and the Federal Republic of Germany governments had been externally imposed to counter historical German militarism. Bilateral differences in opinions, Kohl stated, only follow naturally from major differences in size, geography, and global significance and could not shake the foundation of common values. However, for Kohl, the West Germans had to consciously realize that these values that they shared with the US were also their own values. It was the classic utterance of a house slave.

By focusing on the gap between political ideals and actual institutions, Kohl highlighted US-German conflict to be rooted in German national identity. While the Federal Republic's Basic Law, its temporary constitution, mandated adherence to German national identity, decades of geopolitical reality and Germany's recent past had stifled natural feelings of German history and culture. A gap existed between the constitutional ideal of one German national identity and the Cold War reality of two German states. In the post-World War II decades, West German national identity had only been defined in terms of economic growth and social security. Determined to close this identity gap, Kohl developed a new program called "national identity and moral re-orientation", which included a different approach to reunification. It was both an internal and an external concept. West Germans must strive to identify with positive historical and cultural values, while assuaging the mutual suspicions of both West and the East and their fears of a revival of German nationalism and militarism.

Next: Nazi Economic Recovery and Post-WWII German Economic Miracle

Henry C K Liu is chairman of the New York-based Liu Investment Group. (Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

PART 10: Nazism and the German economic miracle
By Henry C K Liu

(Click here for previous parts)

The term "social market economy" was coined by one of German chancellor Ludwig Erhard's close associates, economist Alfred Mueller-Armack, who served as secretary of state at the Economics Ministry in Bonn from 1958-63. Mueller-Armack defined social market economy as combining market freedom with social equity, with a vigilant regulatory regime to create an equitable framework for free market processes. The success of the social market economy made the Federal Republic of Germany the dominant component in the European Union. Focusing on the social aspect, Erhard himself shied away from praising free markets. He felt that social rules of the market-economy game must be adhered to as a precondition in order to prevent unbridled pursuit of profit from gaining the upper hand.

Erhard's concept of a socially responsive regulated market economy was based on a fusion of the Bismarck legacy of social welfare and US New Deal ideology of demand management through full employment, price control, state subsidies, anti-trust regulations, state control of monetary stability, etc. It was aided by the infusion of foreign capital through the Marshall Plan. It proved to be effective for rapid and strong recovery of the West German economy via guaranteed access to the huge US market during the Cold War, culminating in the postwar economic miracle (Wirtschaftswunder).

Yet Erhard's program bore a close resemblance to the early economic strategy of the Third Reich. The main difference was that while the Third Reich's program was one of economic nationalism, the Erhard program was subservient to US geopolitical interests in the context of the Cold War. By relying on US capital and US markets, chancellors Konrad Adenauer and Erhard accepted the delay of German independence from US domination for more than half a century. In contrast, Nazi economic policy aimed at the reconstruction of the German economy without the need for foreign capital, as a program for total and immediate national independence.

Hitler's economic miracle
The Nazis came to power in Germany in 1933, at a time when its economy was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit. Yet through an independent monetary policy of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest economy in Europe within four years, even before armament spending began. In fact, German economic recovery preceded and later enabled German rearmament, in contrast to the US economy, where constitutional roadblocks placed by the US Supreme Court on the New Deal delayed economic recovery until US entry to World War II put the US market economy on a war footing. While this observation is not an endorsement for Nazi philosophy, the effectiveness of German economic policy in this period, some of which had been started during the last phase of the Weimar Republic, is undeniable.

There were major differences between the German situation in 1933 and that in 1945. Not having been a battlefield in World War I, Germany in 1933 was not physically in ruins, as it was in 1945. What lay in ruins was its political and economic institutions. But in 1933, Germany not only did not have the benefit of the Marshall Plan, it was saddled with ruinous war reparations and an inoperative credit rating. What Germany had in 1933 was full sovereignty through which the Third Reich was able to adopt policies of economic nationalism to full effectiveness. In 1945, Germany was deprived of sovereign power and national policies had to be adjusted to comply with US and Soviet geopolitical intentions. Economically, the dependence on foreign investments and credit forced West Germany into an export economy at the mercy of its main market: the United States.

After two and a half decades of economic reform toward neo-liberal market economy, China is still unable to accomplish in economic reconstruction what Nazi Germany managed in four years after coming to power, ie, full employment with a vibrant economy financed with sovereign credit without the need to export, which would challenge that of Britain, the then superpower. This is because China made the mistake of relying on foreign investment instead of using its own sovereign credit. The penalty for China is that it has to export the resultant wealth to pay for the foreign capital it did not need in the first place. The result after more than two decades is that while China has become a creditor to the US to the tune of nearing China's own gross domestic product (GDP), it continues to have to beg the US for investment capital.

The period between World Wars I and II, like no other period in modern European economic history, saw the success of centrally planned economies in Germany and the Soviet Union, two major states. The United States as the dominant victor of World War II was determined to perpetuate its hegemony by suppressing national planning everywhere to prevent the emergence of economic nationalism and socialism. It promoted global market capitalism and neo-liberal free trade to keep all other economies subservient to the US economy. It is the economic basis of the Pax Americana.

Stalin's New Economic Policy
In the Soviet Union, Josef Stalin's planned economy had followed the New Economic Policy (NEP) of 1921-28. NEP was in essence a mixed market economy; the main part of the market was in state possession (banks, industries, foreign trade, etc), while the peripheral part was owned by collective or private entrepreneurs. NEP, while successful, did not give the Soviet economy sufficient growth in the capital-goods sectors (ie coal, steel and electricity, transportation, heavy industry, etc), nor did it provide adequate food for the urban population even as the middle peasantry managed to feed itself. To overcome such structural obstacles and to combat general economic backwardness inherited from centuries of Czarist rule, Stalin introduced central planning as a strategy of national survival.

Starting from 1928, the Soviet economy was put under a system of planning whereby all modes of production were socialized and foreign trade was de-emphasized in favor of an autarkic system of domestic demand and supply. The irony was that Soviet central planning adopted much of its effective techniques from successful US experience. It was a system of planning focused solely on unit end-results while externalizing social costs. The key distinction was that the Soviets rejected and bypassed the corporate structure and replaced shareholders with state ownership. Stalin brought about "revolution from above". Its main features were: strengthening of political dictatorship in the name of the proletariat (equivalent to enhancing management authority in the US in the name of shareholders), collectivizing kulak peasants (equivalent to agri-business development in the US), emergency measure authority (equivalent to government bailouts and regulations in the US), introduction of a five-year plan structure (adopted from US corporate strategic planning) and rapid expansion of urban labor force (equivalent to urbanization in the US), and tight state control over agriculture (equivalent to farm subsidy programs in the US), heavy industry (equivalent to defense contracts in the US) and finance (equivalent to central banking in the US). Between 1934 and 1936 the Soviet economy achieved a spectacular economic growth rate that continued despite political purges of Trotskyites between 1936 and 1938. Economic growth was unfortunately interrupted by war in 1941. German invasion of the Union of Soviet Socialist Republics was not independent of apprehension of continued Soviet economic success.

Propaganda works. It worked in the USSR, in Nazi Germany, in imperial Japan and in the capitalist US, each to instill in the general public an acceptance of its system as being the suitable one if not the best, despite visible shortcomings. It helped achieve optimal effectiveness and stability in the overall economy in all these countries.

Nazi Germany provided another example of successful inter-war economic planning. One of the main differences between the Nazi and the Soviet economic systems was that the Nazis' was a mixed economy with strict state control while the Soviets' was a state-owned economy. Furthermore, being heavily influenced by the ideas of Walter Rathenau (1867-1922), German economic planners did not seek to build anew with revolutionary zeal as the Russians did, but rather to reform, molding the existing form of decentralized capitalism into a more effective centralized system with massive combines to support national aims.

The Rathenau factor
Rathenau, German industrialist, social theorist, and statesman, was the son of Emil Rathenau (1838-1915), founder of the gigantic German public utilities company Allgemeine Elektrizitaetsgesellschaft (AEG). He directed the distribution of raw materials in World War I and became minister of reconstruction (1921) and later foreign minister (1922) of the Weimar Republic. He represented Germany at the Cannes and Genoa reparations conferences and negotiated the Treaty of Rapallo in which Germany accorded the USSR de jure recognition, the first such recognition extended to the new Soviet government. The two signatories mutually canceled all prewar and war debts and renounced war claims. Particularly advantageous to Germany was the inclusion of a most-favored-nation clause and of extensive free-trade agreements. The treaty enabled the German army, through secret agreements, to produce and perfect in the USSR weapons forbidden by the Treaty of Versailles. A Jew, Rathenau was assassinated in 1922 by anti-Semitic nationalist fanatics who opposed his attempts to fulfill war-reparation obligations to the Western victors. A strong nationalist who played an important role in Germany's war efforts in World War I, Rathenau was also a strong proponent of postwar international cooperation and his diplomatic initiatives played a key role in breaking Germany's postwar diplomatic isolation.

In his writings, Rathenau criticized free-market capitalism and argued that technological change and industrialization were pushing civilization toward a stage of high mechanization, in which the human soul would be under threat. In an attempt to find an alternative to laissez-faire capitalism that did not involve state socialism and Marxism, Rathenau proposed a decentralized, democratic social order, in which the workers would have more control over production and the state would exert more control over the economy. His translated works include In Days to Come (1921) and The New Society (1921). Despite his great contribution to the German economy, Rathenau epitomized the living target of Adolf Hitler's accusation of internationalist Jewish treachery that betrayed the German nation. Hitler's rejection of the loyal nationalist support of the German Jews played an undeniable role in his own defeat. Jewish contribution to the flowering of German economy, culture and civilization had been the strongest in any European nation. Nazi persecution of the Jews was a strategic error more fundamental than the Nazi invasion of the USSR. The emigration of German Jews to the West, particularly to the US, played a critical role in the defeat of Germany in World War II. It is a lesson that the Arab nation in general, and Palestinians in particular, have yet to learn.

The economic power of full employment
From the very outset of his rule, Hitler, whose main short-term goal was the economic revival of Germany with the help of German nationalist bankers and industrialists, won popular support of the nation. Hitler adopted an aggressive full-employment campaign. Between January 1933 and July 1935 the number of employed Germans rose by a half, from 11.7 million to 16.9 million. More than 5 million new jobs paying living wages were created. Unemployment was banished from the German economy and the entire nation was productively engaged in reconstruction. Inflation was brought under control by wage freeze and price control. Besides this, taking into account the lessons learned during 1914-18, Hitler aimed at creating an economy that would be independent from foreign capital and supply, and be well protected from another blockade and economic war. For Germans, all of the above was proof that Hitler was the one who had not only brought Germany out of economic depression but would take it directly to prosperity with new pride. German popular trust in the Fuehrer rose dramatically.

In September 1936, British economist John Maynard Keynes, whose ideas had been credited as behind US president Franklin Roosevelt's New Deal, prepared a preface for the German translation of his book, The General Theory of Employment, Interest and Money. Addressing a readership of German economists, Keynes wrote: "The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state, than ... under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that [justify] the fact that I call my theory a general theory. Although I have, after all, worked it out with a view to the conditions prevailing in the Anglo-Saxon countries where a large degree of laissez-faire still prevails, nevertheless it remains applicable to situations in which state management is more pronounced." Keynes clearly understood that the greater the degree of state control over any economy, the easier it would be for the government to manage the levers of monetary and fiscal policy to manipulate macroeconomic aggregates of total output, total employment, and the general price and wage levels for purposes of moving the overall economy into directions more to the economic-policy analyst's liking.

The radical Spartacists in Germany regrouped themselves as the Communist Party in 1920. They continued their opposition to the liberal government of the Weimar Republic. From 1923-29, the Communists always obtained about 10% of the seats in the Reichstag. Unlike elitist Italian Fascism, Nazism had a high regard for the German peasant. Unlike Fascist Italy, Nazi Germany, while imposing sweeping government control over all aspects of the economy, was not a corporate state.

In four short years, Hitler's Germany was able to turn a Germany ravaged by defeat in war and left in a state national malaise by the liberal policies of the Weimar Republic, with a bankrupt economy weighted down by heavy foreign war debt and the total unavailability of new foreign capital, into the strongest economy and military power in Europe. How did Germany do it? The centerpiece was Germany's Work Creation Program of 1933-36, which preceded its rearmament program. Neo-liberal economists everywhere seven decades later have yet to acknowledge that employment is all that counts and living wages are the key to national prosperity. Any economic policy that does not lead to full employment is self-deceivingly counterproductive, and any policy that permits international wage arbitrage is treasonous. German economic policies between 1930 and 1932 were brutally deflationary, which showed total indifference to high unemployment, and in 1933 Hitler was elected chancellor out of the socio-economic chaos.

The financing of Nazi economic-recovery programs drew upon sovereign credit creation techniques already experimented prior to Hitler's appointment as chancellor. What changed after 1933 was the government's willingness to create massive short-term sovereign credit and the its firm commitment to retire in full the debt created by that credit. Short-term sovereign credit was important to change the general climate of distrust on government credit. The quick rollover of short-term government notes created popular trust within months in German sovereign credit domestically.

Hitler told German industrialists in May 1933 that economic recovery required action by both the state and the private sector. The government's role was limited to encouraging private-sector investment, mainly through tax incentives. He expressed willingness to provide substantial public funding only for highway projects, not for industry. Investment was unlikely if consumers had no money to spend or were afraid because of job insecurity to spend money to buy products produced, and Hitler understood that workers needed decent income to become healthy consumers. Thus full employment was the kick-start point of the economic cycle. To combat traditional German fear of the social consequences of appearing better off than their neighbors, Nazi propaganda would psychologically stimulate the economy by developing a lust for life among consumers.

Hitler stressed on May 31, 1933, that the Reich budget must be balanced. A balanced budget meant reducing expenditures on social programs, because Hitler intended to reduce business taxes to promote needed private investment. To avoid reducing social programs, a large work program without deficit spending had to be financed outside of the Reich budget. Hitler resorted to "pre-financing" (Vorfinanzierung) by means of "work-creation bills" (Arbeitsbeschaffungswechseln), a classic response of using monetary measures to deal with a fiscal dilemma.

Under the scheme of "pre-financing" with work-creation bills, the Reich Finance Ministry distributed these WCBs (three months, renewable up to five years) to participating credit institutions and public agencies. Contractors and suppliers who required cash to participate in work-creation projects drew bills against the agency ordering the work or the appropriate credit institutions. These credit institutions then accepted (assumed liability for payment of) the bills, which, now treated as commercial paper, could rediscount the bills at the Reichsbank (central bank). The entire process of drawing, accepting and discounting WCBs provided the cash necessary to pay the contractors and suppliers. The experience of successful rollover every three months quickly established credit worthiness. The Reich Treasury undertook to redeem these bills, one-fifth of the total every year, between 1934 and 1938, as the economy and tax receipts recovered. As security for the bills, the Reich Treasury deposited with the credit institutions a corresponding amount of tax vouchers (Steuergutscheine) or other securities. As the Treasury redeemed WCBs, the tax vouchers were to be returned to the Treasury. Hitler increased the money supply in the German economy by creating special money for employment.

In the US Banking Panic of 1907, J P Morgan (1837-1913) did in essence the same thing. He strong-armed US banks to agree to settle accounts among themselves with clearinghouse certificates he issued rather than cash and thus illegally increased the money supply without involving the government, and ended up owning a much larger share of the financial sector paid for with his own paper, ironically with the gratitude of the government. The difference was that the economic benefit went to Morgan personally rather than to the nation as in Nazi Germany and the private money was used to save the banks rather than to save the unemployed.

Nazi economic experts understood that sovereign credit creation for purposes of job creation posed no inflationary threat and that it would be a far more responsible policy than the conservative approach of tax increases and welfare cuts to balance government budgets. The idiotic policy of monetary restraint and social-spending reduction to balance government budgets in order to pay foreign debts is still being advocated by the International Monetary Fund (IMF) in debtor nations around the world - except for the United States, the world's largest debtor nation, which uses dollar hegemony as an escape hatch or, more to the point, escape hedge. Redeeming WCBs did burden the 1934-39 Reich budget, but the decline in Reich expenditure for welfare support and other tax subsidies as a result of full employment recovery more than offset the redemption payments. The surplus was then used to reduce public debt and taxes further.

There were legal, political and institutional restrictions unique to Germany on the scope of the Reichsbank that virtually dictated resources to WCBs as a way of putting 6 million unemployed Germans back to work. But the principle of WCBs can be applied to the US or China or any other country today to combat unacceptably high levels of unemployment. Alas, this common-sense approach is faced with firm opposition rationalized by obscure theories of inflation in most countries. The real reason is that the banking sector can reap excess profit by treating high unemployment as an externality in the economy that translates high unemployment and low wages directly into corporate profits. The profit from high unemployment is kept in private hands, while the cost of high unemployment is socialized as government expenditure.

In 1933, Hitler sought to reassure Germany's business leadership that Nazi rule was consistent with the preservation of the free-market system, because he needed the support of the industrialists. He could buy that support by keeping wages down during the recovery, but any rigorous effort to curb prices and profits would alienate the business community and slow down economic recovery. Instead, Hitler sought to restore profitability to German business through reduced unit cost achieved by increasing output and sales volume, rather than through a general increase in prices (Mengenkonjunktur, niche Preiskonjunktur - output boom, not price boom). Adoption of "performance wage" (Leistungslohn - payment on a price-rate basis) increased labor productivity, thereby driving costs down and profit up. Some upward price movements were permitted to adjust price relationships between agricultural and manufactured products and between goods with elastic and inelastic demands, also to prevent price wars and below-cost dumping. These principles of "output boom, not price boom" and "performance wage" could also work in combating inflation today in many economies generally and China specifically.

Hitler saved the German farmers from their heavy debt burden through relief programs and through subsidized farm prices. The stable farm income came at the expenses of the middlemen institutions, but Hitler sustained popular support by the provision of living income to consumers. Had Nazi Germany been a member of the World Trade Organization (WTO), this option would have been foreclosed to it. Hitler sought price stability only in sectors critical to the national economy and to the ultimate goal of rearmament. Germany had no overall price policy until the 1936 Four Year Plan, which concentrated economic authority in the hands of Hermann Goering for war production and put an end to regulated free-market policies.

Business managers generally make investment and employment decisions based on their judgment of the prospect for new orders. The difference between German economic recovery under Hitler and US economic stagnation under Roosevelt in the 1930s was the degree of uncertainty for new orders for goods. Hitler made it clear that after 1936, a major rearmament program would make heavy demand on German durable-goods and capital-goods industries without the need to export. With that assurance, German industry could plan expansion with confidence. Roosevelt was unable to provide such "confidence" to industry and had to rely on anemic market forces until after the Japanese attack on Pearl Harbor, Hawaii.

The Marshall Plan: A Trojan horse for monetary conquest
The Marshall Plan grew out of the Truman Doctrine, proclaimed in 1947, stressing the moralistic duty of the United States to combat communist regimes worldwide. The Marshall Plan spent US$13 billion (out of a 1947 GDP of $244 billion or 5.4%, or $632 billion in 2004 dollars) to help Europe recover economically from World War II to keep it from communism. The money actually did not all come out of the US government's budget, but out of US sovereign credit. The most significant aspect of the Marshall Plan was the US government guarantee to US investors in Europe to exchange their profits denominated in weak European currencies back into dollars at guaranteed fixed rates, backed by gold at $35 an ounce.

The Marshall Plan helped establish the US dollar as the world's reserved currency at fixed exchange rates established by the IMF, which had been created by the Bretton Woods Conference. The Marshall Plan enabled international trade to resume and laid the foundation for dollar hegemony for more than half a century even after the dollar was taken off gold by president Richard Nixon in 1971. While the Marshall Plan did help the German economy recover, it was not entirely a selfless gift from the victor to the vanquished. It was more a Trojan horse for monetary conquest. It condemned Germany's economy to the status of a dependent satellite of the US economy from which it has yet to free itself fully.

The Marshall Plan lent Europe the equivalent of $632 billion in 2004 dollars. Japan's foreign-exchange reserves alone were $830 billion at the end of September 2004. In other words, Japan was lending more to the United States in 2004 than the Marshall Plan lent to Europe in 1947. And Japan did not get any benefits, because the loan is denominated in dollars that the US can print at will, and dollars are useless in Japan unless reconverted to yen, which because of dollar hegemony Japan is not in a position to do without reducing the yen money supply, causing the Japanese economy to contract and the yen exchange rate to rise, thus hurting Japanese export competitiveness.

West Germany's postwar economy functioned well for several decades, and became one of Europe's strongest. Much of its success was due to the German tradition of strong social welfare that dated back to the days of Otto von Bismarck a century earlier, and the system of co-determination, which gave workers in factories a voice about their management and provided West German industries a long period of labor peace. The economics of the Cold War also gave Germany guaranteed markets in the US. The export-oriented economy received another boost with the creation of the European Economic Community (EEC) by the Treaty of Rome in March 1957. West Germany was one of the EEC's founding members. Since the end of the Cold War, this economic order has been under threat from neo-liberal globalization that first attacked the developing economies in Latin America and then the world over.

Sovereignty, finance capitalism and democracy
Jean Bodin (1530-96), the first thinker in the West to develop the modern theory of sovereignty, held that in every society there must be one power with the legitimate authority to give law to all others. The Edict of Nantes issued by Henry of Navarre, the Huguenot (French Calvinist) chief, who reigned as Henry IV in 1598, was a sovereign edict that laid the foundation of French royal absolutism of the sovereign state. The Edict protected a Huguenot minority, composed mostly of members of the aristocracy, against popular opposition from the Catholic peasants with the support of the papacy. Henry IV was a member of the politiques who believed that no religious doctrine was important enough to justify ever-lasting war. He abjured the Calvinist faith in 1593 and subjected himself to papal absolution, supposedly remarking that Paris was well worth a Mass. He wanted to rebuild France from a war-torn economy caused by religious strife into a prosperous nation, with "a chicken in every pot" for every French family, a phrase borrowed by Roosevelt two and a half centuries later to describe the goal of his New Deal.

The Edict to protect the Protestant aristocrats led to the assassination of the converted Catholic king by a Catholic fanatic in 1610. The widowed queen, Marie de Medici, a devout Catholic and scion of the celebrated banking family of Florence, handed control of France to Cardinal Richelieu, who undertook a secular policy to enhance the economic interest of the state with mercantilist measures, by allowing the aristocracy to engage in maritime trade without loss of noble status, and by making it possible for merchants to become nobles through payments to the royal exchequer. This provided a political union of the aristocracy and the bourgeois elite that held the nation together until the French Revolution of 1789.

In 1627, the Duke of Rohan led a Huguenot rebellion from La Rochelle with English military support. Richelieu suppressed the rebellion ruthlessly and modified the Edict of Nantes with the Peace of Alais in 1629, by allowing the Huguenots to keep their religion but stripping them of their instruments of political power: their fortified cities, their Protestant armies and all their military and territorial autonomy and rights. Calvinism has been identified by social historians as the driving force behind modern capitalism.

The Age of New Monarchy in Europe laid the foundation for the age of sovereign nation-states by placing royal authority to institute a fairer social contract above feudal rights, a development that began in the High Middle Ages. The new monarchs presented the institution of monarchy as a progressive guarantor of law and order and promoted hereditary monarchy as the legitimate means of transferring public power. Monarchism was supported by the urban bourgeoisie, as it had long been victimized by the private wars and marauding excesses of the feudal lords. The bourgeoisie was willing to pay taxes directly to the king in return for peace and royal protection from aristocratic abuse. Its members were willing to let parliament, the stronghold of the aristocracy, be dominated by the king who was expected to be a populist. The direct collection of popular taxes by the king, bypassing the feudal lords, gave the king the necessary resources to maintain a standing army to keep the feudal lords in check. These new monarchs revived Roman law, which favored the state and incorporated the will and welfare of the people in their own persons. Direct payment of taxes to the sovereign also ensured that future wars were fought to protect or enhance national interests, rather than at the personal pleasure of the king. The new monarchs ruled by the mandate of the dictatorship of the bourgeoisie, just as communist governments ruled centuries later with the mandate of the dictatorship of the proletariat. It was by protecting the people against abuses from aristocratic special interests that the king protected himself, a principle that escaped Louise XVI of France to his own sorrow.

Today, as the institution of democracy is supplanted by control by the moneyed class, democracy will lose its popular mandate. What the US needs is not to spread democracy around the world, but to restore economic democracy at home. Similarly, when the Chinese Communist Party permits neo-liberal market fundamentalism to distant itself from its revolutionary mission of protecting the peasant masses from market abuse, it will lose its mandate as the legitimate defender of the dictatorship of the proletariat. What China needs is not political reform to accommodate capitalistic democracy, but a restoration of its revolutionary ideological line in its political institutions and a renewal of populist commitment on the part of its leadership. Political reform driven by flawed ideology is institutional suicide.

The new monarchies in Europe, by breaking down feudal tariff barriers within the kingdom, contributed to the rise of the commercial revolution and the development of extended cross-border markets. In the rise of capitalism, the needs of a new military not dependent on the aristocracy had been of critical importance. The standing national armies of the new monarchs required sudden expenditures in times of war that the traditional feudal dues and normal flow of tax revenue could not meet. Private bankers emerged to finance wars by lending money to the kings secured by the right to collect taxes in the future from conquered lands. The medieval prohibition of interest as usury, denounced as the sin of avarice and forbidden by canon laws, faded in practice even as it continued to be upheld by all religions. Luther denounced "Fruggerism" in reference to the bankers of the Holy Roman Empire. Even Calvinism only gradually made allowances on the issue of interest.

The new monarchies, caught between fixed income and mounting expenses, were forced to devalue their money by diluting its gold content. They began to borrow from private banks to deal with recurring monetary crises. These monetary crises led to constitutional crises that produced absolute monarchies in Europe and the triumph of bourgeois parliamentarianism in England. The need to find new conquered lands to repay sovereign indebtedness gave birth to imperialism and colonialism, which the Atlantic Charter centuries later categorically rejected in the third of its eight points of "common principles in the national policies of their respective countries on which they base their hopes for a better future for the world". The third point stated that "they [the US and Britain, and later the United Nations members] respect the right of all peoples to choose the form of government under which they will live; and they wish to see sovereign rights and self-government restored to those who have been forcibly deprived of them".

German rearmament to defend neo-imperialism
Notwithstanding the high-sounding rhetoric of the Atlantic Charter, the outbreak of the Korean War in 1950 provided a propaganda opening for the US to impress on its submissive Western allies in the United Nations that international communism was a clear and present danger to residual Western imperialism and colonialism in the Third World. Under president Harry Truman, the US began to abandon its wartime anti-colonialist posture and to solicit the help of European imperialists, particularly the British and French, to support its global war on communism.

Colonel Harry G Summers Jr, US Army (retired), in an article in Military History magazine titled "The Korean War: A fresh perspective", pointed out that during a post-Cold War Pentagon briefing in 1974, General Vernon Walters, then deputy director of the Central Intelligence Agency (CIA), revealed what amounted to the unpredictability of US policy intentions on Korea: "If a Soviet KGB spy had broken into the Pentagon or the State Department on June 25, 1950, and gained access to our most secret files, he would have found the US had no interest at all in Korea. But the one place he couldn't break into was the mind of Harry Truman, and two days later America went to war over Korea."

Truman, unprepared for global leadership, insecure and paranoid, fell under the spell of Winston Churchill, who, borrowing from Lenin, equated anti-imperialism with anti-capitalism. Churchill aimed at using the Cold War as a device to save European imperialism by offering the fruits of neo-imperialism to the US in the name of democracy. In taking the United States to war in Korea, Truman, in addition to placing the US firmly on the side of imperialists, made two critical decisions that would shape future US military actions.

First, he decided to fight the war under the auspices of the United Nations, a pattern followed by president Lyndon B Johnson in the Vietnam War in 1964, president George H W Bush in the Gulf War in 1991, by president Bill Clinton in Bosnia-Herzegovina in 1999, and by President George W Bush in Afghanistan in 2001 and in Iraq in 2003. Second, for the first time in US military history, Truman decided to take the nation to war without first asking Congress for a declaration of war. Using the UN Security Council resolution as his authority, he said the conflict in Korea was not a war but a "police action". With the Soviet Union then boycotting the Security Council, the United States was able to gain approval of UN resolutions labeling the North Korean invasion a "breach of the peace" and urging all members to aid South Korea, notwithstanding that both North and South Korea had been aiming for unification by force for several years.

Another consequence of the Korean War was damage to the image of the UN as a neutral world body. Secretary general Trygve Lie was forced to resign over Soviet complaints of the way he manipulated Security Council procedures to comply with US dictates.

Colonel Summers pointed out that, in reality, UN involvement was a facade for unilateral US action to protect its vital interests in northeast Asia. The UN Command was just another name for General Douglas MacArthur's US Far East Command in Tokyo. At its peak strength in July 1953, the UN Command stood at 932,539 ground troops. Republic of Korea (ROK) army and marine forces accounted for 590,911 of that force, and US Army and Marine Corps forces for another 302,483. By comparison, other UN ground forces totaled 39,145 men, 24,085 of whom were provided by British Commonwealth Forces (Britain, Canada, Australia and New Zealand) and 5,455 of whom came from Turkey. The troop composition was similar to that of the "coalition of the willing" in the 2003 Iraq war. While the UN facade was detrimental to the prestige of the UN, Truman's decision not to seek a declaration of war set a dangerous precedent in the erosion of the constitutional power of the US Congress.

Claiming that their war-making authority rested in their power as commanders-in-chief, both Johnson and Nixon refused to ask Congress for approval to wage war in Vietnam, a major factor in undermining popular support for that conflict. In the entire history of the United States, only seven wars had been declared by Congress, with World War II the last declared war. Ten other wars were not declared: the Florida Seminole Wars, 1817-58; the Civil War, 1861-65; the Korean War, 1950-53; the Vietnam War, 1964-72; the first Gulf War, 1991; the war on drugs, 1980s to the present; the Kosovo war, 1999; the "war on terror", 2001 to the present; Operation Enduring Freedom (Afghanistan), 2001; and the second Gulf war (Iraq), 2003. Instead of formal war declarations, the US Congress has issued authorizations of force. Such authorizations have included the Gulf of Tonkin Resolution of 1964 that officially initiated US participation in the Vietnam War, and the "use-of-force" resolution that started the 2003 Iraq war. Questions remain as to the legality of these authorizations of force.

Ironically, the Federal Republic of Germany, whose own empire had been partitioned out of existence since the end of World War I, was pushed to contribute financially to its own defense against Soviet threat so that its less prosperous but victorious imperialist allies, Britain and France, could spend their hard-pressed resources to defend their crumbling empires outside of Europe in the name of democracy.

For West Germany, five years after having lost the most devastating of all wars, this meant forming a new army, a step unthinkable for many Germans who had just gone through de-Nazification and demilitarization indoctrination during Allied occupation. But the worldwide "Korean War boom" of 1950 came at exactly the right moment for an export-addicted Germany eager to capture new overseas markets. As West Germany prospered from profits garnered from new wars to defend imperialism in Asia, the US was in a position to push Germany into rearmament, despite the fact that German rearmament was anathema not only to German citizens, but also to all their apprehensive neighbors, especially France. As the Korean War continued, however, opposition to rearmament lessened within West Germany, and China's entry into the war caused Gaullist France, which was apprehensive of the liberating impact of Asian communism on its crumbling empire in Southeast Asia, to revise its negative posture toward German rearmament, as long as the new German war machine was oriented toward the east. Instead of the tradition Franco-Russian alliance against a powerful Germany, the French began to see benefits in using the Germans to deter Soviet intentions to march toward Paris. It was a classic balance-of-power move. Germany, deprived of sovereign authority, was at the mercy of superpower global conflict.

To contain a newly armed Germany, French officials proposed the creation of the European Defense Community (EDC) under the aegis of North Atlantic Treaty Organization (NATO), but with strengthened European control, with a European Army to run in parallel with the European Steel and Coal Community that France and Germany had formed earlier. Within the EDC context was the need to rearm West Germany to counter the Soviet Union's overwhelming superiority in military manpower. Adenauer quickly agreed to join the EDC because he saw membership as likely to enhance the eventual full restoration of German sovereignty. The treaties establishing the EDC were signed in May 1952 in Bonn by the Western Allies and West Germany. Britain refused to be part of it, seeing its armed forces as being more important to NATO, the Commonwealth and the special relationship with the US than to Europe.

Arguments arose over who would have ultimate control over the army - would it be the EDC or would it be the national governments? The whole idea eventually fell apart, although West Germany was welcomed into NATO and the West European Union (WEU) was created. Although the German Bundestag ratified the treaties, the EDC was ultimately blocked by the French National Assembly, because it opposed putting French troops under foreign command. The French veto meant that Adenauer's attempt to regain German sovereignty through disguised militarism had failed and a new formula was needed to allay French fears of a strong Germany.

The failed negotiations surrounding the planned rearmament of West Germany through the creation of the EDC nevertheless provoked a Soviet countermeasure. After a second East German proposal for talks on a possible unification of the two German states failed because of West Germany's demands for free elections in the German Democratic Republic (GDR), the Soviet Union put forth a new proposal to its wartime Western Allies in March 1952. The Soviet Union would agree to German unification if the Oder-Neisse border were recognized as final and if a unified Germany were to remain neutral. If the proposal were accepted, Allied troops would leave Germany within one year, and a united neutral Germany would obtain its full sovereignty.

The offer, directed to the Western Allies rather than Germany, which, deprived of sovereignty, had no authority to negotiate its own fate, nevertheless aroused lively public discussion in West Germany about the country's political future. Adenauer was afraid that neutrality would mean Germany's exclusion from US-dominated Western Europe and that without US support, he and his conservative Christian Democrats might not stay in power, in view of the traditional strength of the Social Democrats or, worse, the communists. Encouraged by the United States, Adenauer demanded free elections in all of Germany as a precondition for negotiations, a demand he knew was unacceptable to both the Soviets and East Germany, as Western-style elections would be financed by money from the US to ensure the defeat of communist and socialist candidates, repeating the postwar political sham in both West Germany and Japan. The Soviet Union declined and abandoned its proposal. Adenauer was harshly criticized by the opposition for not having seized this opportunity for unification. By allying itself with the US, West Germany sacrificed its unification with East Germany for half a century. A divided Germany provided a balance-of-power arrangement between the two superpowers all through the Cold War.

Adenauer's decision to turn down the Soviet proposal left Germany divided for the then foreseeable future. West Germany was then expected to remain firmly anchored in the Western defense community. Yet doubt remained in Washington on whether Germans would kill other Germans to protect US interests in Europe.

After plans for the EDC failed because of the French veto, negotiations were successfully concluded on the Treaties of Paris in May 1954, which ended the Occupation Statute and made West Germany a member of the Western European Union and of NATO. NATO was the vehicle to camouflage US geopolitical interests in Europe with a common goal among the Western Allies against Soviet communism. On May 5, 1955, the Federal Republic of Germany declared its sovereignty as a state and, as a new member of NATO, undertook to contribute to the organization's defense effort by building up its own armed forces, the Bundeswehr. German rearmament was to be camouflaged under the NATO umbrella. West German soldiers could now be counted on to fight East German soldiers to protect Western Europe against communism. Militarism was the price the United States extracted for granting Germany a facade of independent sovereignty, but not yet full independence of foreign or security policy, as NATO continued to be dominated by the US, with its mission framed by US geopolitical interests.

The buildup of the Bundeswehr met considerable popular opposition within West Germany. To avoid isolating the army from the country's civilian and political life, as was the case historically up to the fall of the Weimar Republic, laws were passed that guaranteed civilian control over the armed forces and gave the individual soldier a new social status. Members of the conscription army were to be "citizens in uniform" and were encouraged to take an active part in democratic politics, in contrast to the Junker tradition of a warrior class. This was done to inject a measure of consideration of German domestic politics into US-dominated NATO decision-making.

By 1955, the Soviet Union had abandoned efforts to secure a neutralized united Germany. After the Four Power Conference in Geneva in July that year, Adenauer accepted an invitation to visit Moscow, seeking to open new lines of communication with the East without compromising West German commitments to the West. On the other side, Moscow wanted to exploit German apprehension of being in the front line of hostility to create a voice of caution within NATO. In Moscow in September, Adenauer arranged for the release of 10,000 German war prisoners in the Soviet Union. In addition, without having recognized the division of Germany or the Oder-Neisse line as permanent, West German negotiators also established diplomatic relations with the Soviet Union.

The Soviet Union recognized the German Democratic Republic as a sovereign state in 1954, and the two communist countries established diplomatic relations. The Federal Republic of Germany (FRG) had not, however, recognized the GDR. And to dissuade other countries from recognizing East Germany, Adenauer's foreign policy adviser, Walter Hallstein, proposed that the FRG break diplomatic relations with any country that recognized the GDR. Anti-communism was the convenient decoy from targeting the rise of neo-fascism in a society that had won a permissive reprieve from its US conqueror's de-Nazification program. As the brilliant German filmmaker Rainer Werner Fassbinder showed in many of his films, postwar Germany turned out to be very much what it would have been like if the Nazis had won the war.

The Hallstein proposal was based on the West German claim that as a democratic state, it should be accepted as the only legitimate representative of the German people. By contrast, East Germany claimed to be the legitimate state of the German people because it was a dictatorship of the proletariat. Democracy was used as a justification for legitimacy in the West. Israel would learn from the former persecutor of its people to use democracy to bargain for US acceptance of its legitimacy in an Arab region, using anti-communism as currency to secure US support, by purging the left totally from Israeli domestic politics. The Hallstein Doctrine was adopted as a principle of West German foreign policy in September 1955 and remained in effect until the late 1960s when the idea of two German states became a reality, and Germany remained divided until the dissolution of the USSR in 1991.

Unfortunately, whereas militarism under market capitalism stimulated economic expansion by providing profit to private enterprise, it operated to drain prosperity under communism, which could not find a vehicle to recycle financial energy consumed by the arms race. Militarism then was co-opted by finance capitalism as an effective weapon against communism, which was an economic system that could only be operative in peace. The reason war has not ended even after the global war on communism has ended with the dissolution of the USSR is because militarism and capitalism have a mutual dependency. The end of the Cold War, while marking the failure of peaceful communism, marked the triumph of capitalistic militarism.

Traditionally, European integration and trans-Atlantic relations have been the two key components of postwar German foreign policy. German trans-Atlantic relations are a euphemism for German acceptance of US dominance. Both components were strategic necessities for the Federal Republic of Germany after World War II, and at the same time paved the way for West Germany to rejoin the European community of nations. Since then, the US had been Germany's protector ally both in and outside Europe. This relationship remained after German unification.

Today, while the US and Germany continue to share similar views on a range of global issues such as terrorism, WMD (weapons of mass destruction) proliferation and regional conflicts, there is increasing divergence on what constitute proper policy responses to these new threats and challenges. Germany subscribes to multilateralism as a fundamental component of its foreign policy in a multipolar world. Differences on issues such as Iraq, Iran, the International Criminal Court, the Kyoto Protocol and the Ottawa Convention have surfaced between the US and Germany as the latter regains more of its full sovereignty and as its domestic politics turns centrist as opposed to US unilateralism. Strategically, German relations with China and Russia are evolving along lines more independent from US policies.

During the Cold War, trans-Atlantic relations in the West were dominated by the need to defend the US and Western Europe jointly against the Soviet threat. This was also the reason for US forces to remain in Europe via NATO. With the end of the Cold War in 1989, the threat posed by the Warsaw Pact and the Soviet Union disappeared overnight. Since then, trans-Atlantic relations have faced new challenges devoid of a common thread.

Having contained domestic terrorism on its own soil, Germany, like many other nations, is being pressured by the United States to join in the "global war on terrorism" as a replacement of the threat from global communism. International terrorism, which also put a new dimension on the problem of WMD proliferation, created a demand from the US for German military projection beyond German borders, along with regional conflicts that allegedly had supra-regional destabilizing effects, eg the Balkans, the Middle East, Congo, Afghanistan, India-Pakistan. This definition of supra-regional stability can involve Germany in distant conflicts around the globe, since no regional conflict can remain isolated in an interconnected global security network. The process of greater European integration has spilled beyond historical European borders into the Crimea and the Balkans, the Middle East, Africa and Asia. Yet domestic threats from international terrorism can be intensified by a country's military involvement beyond its borders, as demonstrated by the terrorist bombing of trains in Spain in response to deployment of Spanish troops in Iraq.

As early as 1990, the European Union and the United States agreed in the Transatlantic Declaration to establish a closely meshed network of twice-yearly summit consultations. The terrorist attacks of September 11, 2001, showed that security policy and trans-Atlantic cooperation have not been removed with the end of East-West conflict. Yet the nature of the cooperation has undergone a fundamental change: comprehensive security implies that internal and external security threats are interconnected. There is also a historical legacy that set German relations with Islamic nations apart from the Anglo-US legacy. Competition for the hearts and minds of Islamic peoples had been a focus of the contest between Germany and the Western Allies in the two World Wars.

With the US drifting toward a policy of relying on its super-power to impose a global geopolitical, economic and financial architecture to its liking, a critical divergence has emerged between the US and its NATO allies over the need for conflict prevention and the most effective paths of conflict resolution. US responses to terrorism threats, as manifested in its invasion and occupation of Iraq, if not Afghanistan, have created policy rifts between the EU and the US.

With the end of the Soviet threat to Western Europe, US planners began to ask whether the United States would always have to deploy troops and equipment to sort out Europe's problems. Consequently, the US was looking to Western Europe to take more responsibility for its own defense and security. It has also become harder for US policymakers to justify spending considerable amounts of money on overseas deployments. Equally, the US remains hesitant over overseas deployments because of experiences and lessons from the Vietnam War. Despite being the main contributor to Operation Desert Storm in the Persian Gulf during 1991, the later debacle of Operation Restore Hope in Somalia only reinforced US objections to its their ground forces in international hotspots.

For the United States, modern warfare or military operations have to be conducted with minimum risk to US lives. When the US refused to deploy peacekeepers to UN operations in Croatia and Bosnia-Herzegovina during 1992-95, or make the ground-force option available during Operation Allied Force in Kosovo in 1999, many Western European governments wondered whether the United States could always be counted on if military intervention were needed in an international crisis. Many were now asking the same questions as the French had asked years before: Why should an economically and politically powerful Western Europe not take more responsibility for its own security, especially as there was no longer the threat from the USSR and the Warsaw Pact?

As a result, Western Europe had begun to develop a European Security and Defense Identity (ESDI) since the early 1990s. In 1993, the EU decided to embody parts of the Petersberg Tasks into the Treaty on the European Union. This gave the WEU, Western Europe's own security apparatus within NATO, a clear defined role in humanitarian and conventional operations. The WEU was strengthened. Among other changes, this included the appointment of a secretary general and a planning cell that were responsible for assessing and planning for operations as they arose. The number of troops available to it was also increased. If necessary, the WEU could call on other NATO units such as the UK/Netherlands Landing Force. It also had its own rapid-response unit, EUROFOR, which was made up of troops from France, Italy, Spain and Portugal. It was envisaged that the WEU would act independently or as part of a UN force in humanitarian operations in which the US would not want to become involved. In other operations, it would act as part of NATO. Both the US and Western Europe believed that the proposals would strengthen NATO by providing better cooperation and coordination, a problem NATO had suffered from in multinational operations.

In 1999, however, the EU decided to revise the WEU plans. It decided to adopt the crisis-management and conflict-prevention elements itself. The WEU would remain as an organization but would mostly concentrate on being a contribution to NATO during a conventional war. At the European Council's Cologne Summit in June 1999, the EU launched the Common European Security and Defense Policy (CESDP). A later summit at Helsinki built on Cologne and defined new EU structures to undertake the crisis-management role. Both summits also proposed an EU Rapid Reaction Force that would draw mostly on the member states' commitments that had already been made to the WEU after the Petersberg Tasks - the force levels being agreed at the Military Capabilities Conference in November 2000.

The EU force is not a European Army in the sense of a standing army. It follows a similar character to NATO's Allied Command Europe (ACE) Rapid Reaction Corps (ARRC) in which certain elements of member states' armed forces are earmarked for rapid deployment if the need arises. Only one part of the force could be considered a standing army. In 1987, France and Germany decided to create a Security and Defense Council (SDC) that would allow for better coordination on joint Franco-German operations as part of the WEU and later NATO. In 1991, both countries decided to back up the SDC with a joint Franco-German brigade directly responsible to the EU and the WEU (and NATO from 1993) - this became known as the Eurocorps. Spain, Belgium and Luxembourg then went on to join, allowing the WEU to call on a sizable force for immediate deployment. With its headquarters in Strasbourg, the Eurocorps has since deployed to Bosnia and Kosovo and is likely to feature in the new EU force.

Germany goes its own way
The EU created the European Security and Defense Policy (ESDP) to ensure independent control of its security policy. The United States views the ESDP as an attempt to replace NATO by creating a security and defense system free of US dominance if not involvement. Changing its Cold War role of an economic giant and a geopolitical pigmy, drawing on the lesson of Iraq, Germany, the dominant component in the EU, has taken on the task of trying to prevent a military confrontation between the US and Iran. The European initiative, led by Germany, France and an ambiguously European Britain, proposes to give Iran substantial economic benefits in exchange for Iranian commitment to cease efforts to become a nuclear power. This initiative has received little support either from Iranian domestic politics or from the US. Washington views the European initiative with skeptical contempt. US hawks want "regime change" and/or a "surgical strike" against Iranian nuclear facilities. The EU views both options as ineffective, based on what has transpired in Iraq, since Iranian nuclear facilities are both dispersed and hardened, and since the US faces a severe shortage of troops because of its aggressive foreign policy, a problem that NATO is not at all keen to help resolve with its own troops.

German officials point out that their country's Iran initiative is a breakthrough, since for the first time in recent memory the leading European powers are united and proactive, as well as independent from Washington, on a major issue that threatens peace. There is sober concern about Iran playing off the US against Europe. German officials see their role as demonstrating that there are diplomatic alternatives to a repeat of US Iraq policy in Iran. If the EU approach to Iran should break down, the EU, being still economically dependent on the US, would have no choice but to join the United States in economic sanctions against Iran. Diplomatically, the EU would still be in a position to dissuade the Bush administration from pursuing a military option or seeking Security Council action that Russia and China could be expected to oppose.

Since the end of World War II, nothing major has happened on the world stage, good or bad, unless the United States has orchestrated it. The only two notable exceptions are chancellor Willy Brandt's efforts more than two decades ago to engage the Soviet Union and East Germany, and British and French diplomatic efforts that helped produce the deal to trade an end of Libyan terrorism for an end to economic and diplomatic sanctions.

Washington at first reacted negatively to both of these initiatives. European involvement in world affairs beyond continental borders has been welcomed by Washington only when Europe served as a docile junior partner to US geopolitical designs. On Iraq, most of Europe refused to accept this subservient role. The Iraq war is immensely unpopular in Europe, similarly to other regions around the globe, even in Britain, which has happily accepted the role of geopolitical water boy for US foreign policy since the end of World War II. German domestic politics does not give Chancellor Gerhard Schroeder an option to support the Bush administration's Iraq policy. The blatant ineptitude of recent US foreign policy, particularly in the Persian Gulf and the Middle East, has provided a window of opportunity for European independent activism in world affairs.

The re-election of Schroeder as chancellor of Germany with the help of the Green Party in September 2002 symbolized the end of an era in close, albeit unequal, postwar relations between the US and Germany. Schroeder held on to power after his SPD (Sozial-demokratische Partei Deutschlands, or Social Democrat Party), ran an intensely anti-US campaign based upon opposition to US policy on Iraq. The SPD was tied with the conservative, pro-US CDU-CSU (Christian Democrats), each getting 38.5% of the votes in an election in which 80% of eligible voters took part. But with the support of the Green Party's 8.6% vote, Schroeder defeated Edmond Stoiber, the CDU candidate, by fewer than 9,000 votes over the conservative coalition, giving the SPD-Green coalition 306 seats in the 603-seat parliament. The generally conservative German press referred to the winning coalition derogatorily as the Red-Green Coalition. The German Greens are a party of ecology and used to be a pacifist party until their chairman, Joschka Fischer, won a battle between the realists and the fundamentalists and got the party to back German troops going into Kosovo.

The re-election of Schroeder has been tremendously damaging to the carefully nurtured five-decade-old US-German alliance. After Schroeder's victory, a curt statement from the White House did not congratulate him, or even mention him by name. It was a marked contrast to a statement congratulating French President Jacques Chirac, with whom Washington also has serious diplomatic problems, on his May re-election. The White House also declined to arrange a personal telephone call between Schroeder and Bush. In the view of the US, Schroeder and key members of his cabinet played to anti-US sentiment in Germany over foreign-policy issues during the final weeks of the campaign beyond election politics to the point of personal attacks on the US president.

Politically, the Bush administration at the time leading up to the Iraq invasion wanted Germany to join its international coalition to support its disastrous policy on Iraq, with diplomatic backing at the UN, and to grant the "coalition of the willing" complete access to German airspace and allow the US and Britain full use of their bases on German soil for offensive operations against Iraq. The White House also wanted Germany to support more fully Washington's "war on terrorism", especially with regard to the extradition of terrorist suspects on German soil, even those with German citizenship, and the release of crucial evidence that could be used to help convict them in US courts. It also wanted Germany to increase defense spending, which had fallen to just 1.5% of its GDP, and to pay for costs associated with increased terrorism security at US bases in Germany. The US has warned that if the German government continues to hinder US policy toward Iraq and elsewhere, such as Iran and in the UN, Washington may conclude that Berlin is reneging on its defense-treaty obligations, which would have serious political consequences, beyond being labeled the "old Europe". US support for German membership in the UN Security Council hangs in the balance.

With the creation of NATO in April 1949, the US and Germany formally became military allies. It was a turning point for both. For the first time in its history, the United States had signed on to a permanent alliance that linked it to Europe's defense; and for Germany, as for Italy, membership in NATO signaled a new acceptance internationally, an important political legitimacy for a nation with an embarrassing past. It was an alliance relationship that remained solidly operative throughout the decades of the Cold War, as a succession of German leaders, from Konrad Adenauer to Helmut Kohl, remained determinedly pro-US in their policies. The US views Schroeder as having placed in jeopardy this historically close relationship for shortsighted political gain.

Germany, on the other hand, merely sees itself as finally acting as an independent nation with full sovereignty responsive to its social-democratic heritage. The new independent Germany will support US policies that converge with German national interests and values and opposed those that diverge from them. From this point on, no German politician can afford to play the role of collaborator to US occupation on the Adenauer rationalization that it would buy better treatment from the occupier. The Germans have been occupiers and they know from first-hand experience that collaborators enjoy no respect from anyone, least of all from the occupiers.

Schroeder has stated unequivocally that Germany would not participate in US-led military action in Iraq. In his first successful election campaign in September 1998, he declared that "this country under my leadership is not available for adventure". In reference to Germany's $9 billion contribution to funding the first Gulf War, Schroeder warned that "the time of checkbook diplomacy is over once and for all". During the Cold War, checkbook diplomacy for West Germany meant to give money in place of sending German troops. It remains unclear if the end of checkbook diplomacy according to Schroeder means acceptance of a revival of German militarism or merely refusal to pay the bill for US militarism, something Saudi Arabia has never dared to do. To buy their precarious security, the Saudis have been forced to pay all sides in complex Mid-East politics.

The first months of Schroeder's chancellorship were marked by policy disputes with his more strongly socialist finance minister (and Social Democratic party chairman) Oskar Lafontaine, who was SPD regional chairman in 1977 and premier of the Saar in 1985. A leader of his party's "peace faction" in the early 1980s, Lafontaine denounced chancellor Helmut Schmidt's nuclear policy, calling for German withdrawal from NATO. He was seen as the party's "conceptual pioneer", who would redefine its policies on unemployment and the environment. He opposed the German reunification agreement negotiated by chancellor Helmut Kohl, but lost support within the SPD. Lafontaine was defeated in the December 1990 election, having survived an assassination attempt in April. In 1995, he became national chairman of the SPD. Returned to parliament, Lafontaine became finance minister in the Schroeder government in 1998, but clashes over policy caused him to resign the ministry, his SPD leadership, and his parliamentary seat in March 1999.

Schroeder succeeded Lafontaine as party chairman. However, after the Social Democrats' subsequent series of electoral defeats on the state level, Schroeder moved to shore up his standing with the left. But economic problems forced him in 2000 to reduce individual and corporate income taxes and positioned the Social Democrats as a "modernizing force" in German politics. Internationally, Schroeder's pursued a less EU-centered and NATO-dependent foreign policy than his predecessor, establishing good relations with Russia and China. He also supported the US in its "war on terrorism" in Afghanistan, which strained relations with the Green Party, his main coalition partner.

The Social Democrats' electoral setbacks in the 2002 elections initially led Schroeder to move forward more modestly with reforms in his second term, despite Germany's weak economy, and late in 2003 he secured passage of supply-side tax cuts and anti-labor laws intended to revive the economy. Rank-and-file unhappiness with his reform program forced Schroeder to resign as party chairman in 2004.

Schroeder is a firm believer of a more independent German foreign policy. For the first time since World War II, Germany's leaders are advocating a course based on German national interests. The general secretary of the Social Democratic Party, Franz Muentefering, summarized this position clearly: "Independently of what the UN decides, there must be a German way, that we must decide for ourselves what is to be done. That decision for us means no involvement in any ... conflict or war in Iraq."

Reflective of rising anti-US sentiments in Germany, campaign polemic invoked harsh criticism of US policy on Iraq. The chancellor himself mocked the US president in election rallies, telling crowds that he would not "click his heels" and say "ja" automatically to US foreign-policy demands or commands. Ludwig Stiegler, the Social Democrat parliamentary leader during the election, accused Bush of acting like a Roman dictator, "as if he were Caesar Augustus and Germany were his province Germania". Stiegler also compared the US ambassador to Berlin to Pyotr Abrassimow, the unpopular Soviet ambassador to East Germany prior to the fall of the Berlin Wall.

Schroeder's justice minister, Herta Daeubler-Gmelin, compared the Bush administration's policy towards Iraq to that of Hitler's strategy before World War II. She was quoted by the German regional newspaper Schwabisches Tagblatt as stating: "Bush wants to divert attention from his domestic problems. It's a classic tactic. It's one that Hitler also used." Daeubler-Gmelin also remarked that the United States "has a lousy legal system" and that "Bush would be sitting in prison today" if new insider-trading laws had applied when the president had worked as an oil executive. Condoleezza Rice, then the US national security adviser, condemned the remarks as "way beyond the pale", and according to the White House, the president was "very angered" by the comments. Schroeder sent a letter of apology to Bush. Daeubler-Gmelin denied making the comments, but Schroeder announced that she would resign. Then defense minister Rudolf Scharping, a leading figure in the SPD, accused Bush of wishing to remove Saddam Hussein in order to placate "a powerful - perhaps overly powerful - Jewish lobby". Predictably, this raised vocal accusations of anti-Semitism in Washington.

Unfortunately for the United States, German opposition to US foreign policy tends to be validated by the march of events. Accordingly, there is little prospect that Berlin is willing to compromise over the Iraq question. Immediately after his re-election, Schroeder declared that "we have nothing to change in what we said before the election and we will change nothing", a view backed by Green Party secretary general Reinhard Buetikofer. Opposition to the Iraq war formed part of a wider German foreign-policy strategy - actively pursued by Foreign Minister Joschka Fischer - of opposing key elements of the Bush administration agenda and thinking. Like Schroeder, Fischer's roots lie in radical left-wing politics. A self-professed Marxist activist in the late 1960s and early 1970s with a record of violent street protest, Fischer leads a party that stands on the extreme left of the political spectrum and that is shunned as a respectable political force even in much of Europe until recent successes at the polls. The Green Party is fundamentally opposed to the US missile defense system and highly critical of US unilateralism on the Kyoto Protocol. With just 11 seats in the 601-seat German parliament, the Green Party holds the balance of power and with it a great deal of influence in the governing Red-Green coalition.

Fischer was also outspoken in his criticism of Bush's 2002 State of the Union address, which called for action to be taken against the emerging threat posed by rogue states that were relabeled an "axis of evil". Fischer warned the White House that the fight against terrorism was not "a blank check in and of itself to invade some country - especially not single-handedly". In an interview with Die Welt, he criticized what he perceived to be US unilateralism over a possible war with Iraq: "Without compelling evidence, it will not be a good idea to launch something that will mean going it alone. The international coalition against terror does not provide a basis for doing just anything against anybody - and certainly not by going it alone. This is the view of every European foreign minister. For this reason, talk of the 'axis of evil' does not get us any further. Lumping Iran, North Korea and Iraq all together, what is the point of this? ... For all the differences in size and weight, alliance partnerships between free democracies cannot be reduced to obedience; alliance partners are not satellites."

Fischer is fiercely critical of America's policy of using military power to deal with the threat of global terrorism. The solution, according to his view, lies in the reduction of global inequalities between rich and poor: "Chaos, poverty and social instability form the breeding ground on which fundamentalism, hatred and terror thrive. To tackle the new challenges, we need more than police and military missions. We need a long-term political and economic strategy which deals especially with the forgotten conflicts, the failed states, the black holes of lawlessness on our planet."

Fischer has opposed most of the foreign-policy initiatives under the Bush administration, with the notable exception of the war against the Taliban in Afghanistan. In defiance of Bush's "axis of evil" speech, Fischer openly courted close ties with Iran and North Korea, and has been a keen supporter of the EU's policy of "constructive engagement" with what the US identifies as rogue regimes. At the same time, he is a staunch defender of the International Criminal Court and has fiercely opposed the concept of individual EU member states signing bilateral immunity agreements with the US. Environmental concerns have also been elevated by Fischer to the top of the Schroeder government's international agenda, and the foreign minister declared that Bush was making a "fatal error" by refusing to sign the Kyoto Protocol on global warming.

Germany is urging the US to remove its 150 or so land-based nuclear weapons still deployed on German soil. "The nuclear weapons still housed in Germany are a relic from the Cold War," said Green Party leader Claudia Roth in the Berliner Zeitung newspaper. "There is no need for them to be there. They should be removed and destroyed."

Engaging China
The EU is actively expanding beyond trans-Atlantic relations. The annual EU-China summits highlight not only the burgeoning economic ties between the major European powers and China but also moves toward closer political relations. Germany, backed by France, pushed for and achieved an in-principle agreement for the EU to work toward lifting the arms embargo imposed on China after the Tiananmen Square incident in 1989. The arms embargo has been an obstacle to stronger strategic ties. In the lead-up to the most recent summit last December, China branded the ban "political discrimination" and "the result of the Cold War". During his recent visit to China, Schroeder expressed the hope that the summit would "give an important signal" for the removal of the ban. Chirac also declared the French government in favor of rescinding the embargo during a visit to China last October.

Washington has strongly objected to any lifting of the arms embargo. Behind the US opposition lie broader concerns that a stronger China military, along with closer strategic relations between the EU and China, would undermine the present US hegemony in Northeast Asia. The Bush administration lobbied EU members to oppose the move by France and Germany to get the embargo lifted. The EU members that vocally resisted the change are those most closely aligned to the US, notably the government in British Prime Minister Tony Blair. Japan, a major US ally in East Asia, also urged the EU to retain the ban, with France and Germany asserting a more independent European stance toward China. While yielding to US pressure, the EU has declared that it "confirms its political will to continue to work towards lifting the embargo". For its part, Beijing "welcomed the positive signal, and considered it beneficial to the sound development of the comprehensive strategic partnership between China and the EU". The best the US can do is to slow EU-China convergence, but it cannot stop it.

Political and strategic considerations are closely tied to trade opportunities for European corporations in China. In 1980, China ranked 25th among the EU's trading partners. Today, it is the second-largest after the US and growing at a faster pace. Bilateral trade between the EU and China has doubled since 1999 to 142.3 billion euros ($180.1 billion), making the EU China's largest trade partner. A number of bilateral agreements were signed at the seventh EU-China summit at The Hague last December 8 to accelerate economic relations. EU Trade Commissioner Peter Mandelson summed up the mood in European capitals when he called on the EU to "place China firmly and centrally on our radar. We must review and lift our relations with China to a new and higher, more intense level ... Europeans have to sit up and take notice because in absolute and relative terms, China is a huge phenomenon to be reckoned with."

Germany's central role in pushing for an end to the arms embargo is related to the fact that German corporations have been major beneficiaries of developing EU-China ties. Germany is by far the largest EU exporter to China, accounting for 44% of the total. Bilateral trade between China and Germany reached $43.6 billion last year - a 31% annual increase - and is expected to double by 2010. Some 2,000 German companies, including major banks, operate in China. China is heavily reliant on imported machinery and technology, especially from Germany and Japan, the world's two largest exporters of machine tools. Nearly two-thirds of EU exports to China are in the category of "machinery and vehicles".

According to a research paper issued by Deutsche Bank, 80% of German investors in China are major corporations in the automotive, steel, mechanical and chemical industries. BASF and Bayer, for instance, are the largest chemical firms in China. Volkswagen controls about 30% of the Chinese car market, where sales surged to five million units this year. In 2003, Volkswagen produced more cars in China than in Germany and Chinese sales accounted for one-third of the company's global net profit. The company has unveiled plans to invest another $6.5 billion in China to increase its annual production there to 1.6 million vehicles by 2008. German investment in China since 1995 increased tenfold, from just 800 million euros to 7.9 billion euros, by 2003, making Germany China's seventh-largest foreign investor.

German hopes in China were clearly displayed during Schroeder's three-day visit there on the eve of the Hague summit in December. Accompanied by 44 business leaders from major corporations such as DaimlerChrysler, Siemens and Deutsche Bank, the German chancellor signed 22 agreements with the Chinese government. These included the sale of Airbus commercial jets worth $1.3 billion, as well as $480 million in railway locomotives and $280 million in power-generation equipment. Schroeder declared that China's fast-growing car industry - now dominated by German companies - could be the "engine" of China's economic growth. He laid the cornerstone for a new DaimlerChrysler plant in Beijing and attended the opening ceremony of the second joint-venture factory between Volkswagen and First Auto Works, China's largest vehicle producer, in Changchun, in northeastern China. He told Chinese officials that German corporations were very interested helping to "restructure" China's northeastern heavy industries. The northeastern provinces, or Manchuria, are a key focus of German attention. The region has been the center of China's state-owned heavy industry.

Anti-Americanism has prove to be a useful ideology for the definition of a new European identity. It was the attempt to defend European colonialism in the Third World, particularly in Asia and the Middle East, that had forced Europe to accept US dominance. A new definition of European identity will seek strength from anti-Americanism in the form of anti-neo-imperialism in Asia and the Middle East. European anti-Americanism is not just a friendly disagreement with its former senior ally, it is a widening chasm to buttress an independent Europe. Although in the formerly communist states of Eastern Europe, the US anti-communist policies during the Cold War can translate into pro-US sympathies today, a comparable post-Cold War bonus does not appear to apply in the new state of a unified Germany. The social democracies in Europe seem more in tune with the neo-communism in China than the neo-liberal supply-side market fundamentalism promoted by the United States.

Next: The revival of militarism in Japan

Henry C K Liu is chairman of the New York-based Liu Investment Group.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)

The complete Henry C K Liu

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