Clear and Candid

By Vincent J. Truglia

In 1956, Richard Lipsky and Kelvin Lancaster introduced the Theory of the Second Best. What they were aiming for was to explore what would happen if all the required conditions for economic models were not met. They concluded that if even only one of the so-called necessary conditions were not met, then a policy of moving closer to the required theoretical conditions is not necessarily the best approach. The policy implications are profound.

Free trade has been the model espoused by most economists since the days of Adam Smith and David Ricardo. However, today many economists do not like to discuss the theory of the second best because when doing so it becomes clear the argument for unfettered free trade is a hollow one. Once we are in the world of the second best all bets are off as to what the best policy approach is.

We are in the midst of a significant policy debate about the re-introduction of tariffs in the US. It seems most commentators continue to base their analysis of the imposition of tariffs on trade models based on a world of pure competition, perfect information, markets that will always clear themselves, etc. It is obvious we do not live in such a world. Therefore, believing that moving ever closer to free trade is always the best policy falls flat.  Deciding the impact of tariffs or other trade restrictions requires a robust exploration.

By Vincent J. Truglia

April 13, 2013

I fear we are slowly seeing a slide into civil war in the/Ukraine.  I see little room for compromise on either side, especially since both the present “interim” government and Russian speaking Ukrainians view their country so differently.  The geopolitics is such that without both sides giving in to the other in a way acceptable to both, the likely outcome is an escalation of violence.  I cannot see such a rapprochement happening.

As violence escalates in the Eastern Ukraine, it will grow increasingly likely that the Russian Federation will be forced by circumstances to move into the Eastern Ukraine to avoid a Syria-like situation there. 

My own personal view, as I have said/written on numerous occasions is that it is highly likely that the Russian Federation would move not only into the eastern and southern parts of the Ukraine, but go beyond Odessa and fixing another problem, that of Russian-speaking Trans-Dniester, which could then join the Russian Federation, or at least become a member state of the Eurasian Economic Community.

There is little the US, the EU or NATO can do to prevent this.  If sanctions are hardened against Russia, given its history of strong resistance to outside pressure, the likely outcome of more sanctions will be a toughening of the Russian position.  In addition, besides the fact that NATO and the EU did the exact same thing when they invaded Serbia, and separated Kosovo, Serbia’s traditional heartland into, an Albanian state, without the acquienscence of Serbia, it is the height of hypocrisy for the West to argue that Russia is breaking international law.  Using the West’s present logic, then Kosovo should immediately be given back to Serbia.

We must remember, President Putin warned NATO and the EU that by creating a separate state in Kosovo, the West was changing international law.  He is even quoted as stating that such an action “would come back and slap them in the face.”  That’s what’s happening now.

If events in the Ukraine grow worse, and I expect they will, then I expect that the next provocative move the Russians may make is to put nuclear weapons in Kaliningrad, a perfectly legitimate action for them to take. They threatened this in 2008.  After all, Kaliningrad, despite being between Poland and Lithuania is an integral part of the Russian Federation.  Russia is free to move its nuclear weapons wherever it wants within its own territory.

Also, claims of the high ground by the so-called interim government in Kiev are laughable.  The government came to power as a result of an overthrow of the legally elected President of the Ukraine.  It was a coup, simple as that. They had perfectly legal means of removing him, and yet still follow the Ukrainian constitution.  They could have impeached him.

Ukraine is scheduled for national elections in May.  Under present conditions, it will be impossible for the Ukrainian government to guarantee free and fair elections, especially since it is not viewed as legitimate by a large swathe of the country.

The US is powerless to resolve this problem. More sanctions will make matters worse.  The reality is that a modern version of the Soviet Union is practically complete.  Since there are no real policy differences between the West and the Eurasian Economic Community, as there was when the Soviet Union tried to overthrow capitalism, the risk and national interests are quite different.  Today, if anything, the Russian Federation suffers from an extreme form of capitalism.

Let’s hope that the Ukrainians either make peace – not likely – or separate into two separate countries.  Then the last thing NATO should do is to move into the Eastern Ukraine.  That would make tensions throughout the region, especially in the Baltics, which are now not center-stage, much worse.

As always, Clear and Candid.