Russian Spies: OK But Keystone Cops?

Contemporary Russia is a KGB state, as the cover of The Economist informed its readers a while back. Vladimir Putin cut his teeth as a KGB operative in Berlin. Much of the Russian state, finance, and industry is run by former KGB agents. The official website of the KGB’s successor organization, the FSB, trumpets the bravery and bravado of agents who thwarted and continue to foil the West’s evil plans. Why should we be surprised that Russian agents are spying in the United States, some apparently under deep cover? In fact, the story makes eminent sense. Putin and the KGB resurgence dates back to the 2000, the year the arrested agents began their deep cover in the United States. Only back then, Russia had less cash than it has today.

What is unexpected is what the new Russian spies appear to be doing. Infiltration of Think Tanks would not seem to yield secret information of value. Our Think Tanks compete among themselves for the attention of policy makers with their prolific working papers and publications. Any respectable foreigner can walk in the front door and ask for such information without much of a fuss. Not knowing about our nuclear secrets, I cannot comment on what Russian spies can learn by learning them. The accounts in today’s press remind one of Graham Greene’s Our Man in Havana, which describes the machinations of a “spy” who fabricates elaborate plots, secret drops, and the like to justify the money he receives. Russia’s spies seem to face a similar problem in convincing their superiors in Moscow to buy them houses and reimburse their vacation travel.

When more comes out, I may stand corrected, but my first impression is that of a Keystone Cops movie.

Medvedev in Silicon Valley: Do Not Fall For It

The Russian President visited Silicon Valley last Wednesday (June 23). His aim: To establish a Russian silicon valley outside of Moscow. He wanted the assistance and capital of Silicon valley. As usual, Medvedev emphasized that a rule of law would be established in Russia to safeguard foreign investment. Our experience to date in Russia is that promises of a rule of law are cheap. Delivering on that promise is expensive. As I write this piece, Khodorkovsky is still in jail in Siberia, now accused of stealing virtually all the revenue ever generated by Yukos Oil company. BP, ExxonMobil and other energy concerns are rewarded for their billions of dollars investment with de facto expropriation by environmental or tax authorities. Since Russian independence, there are few, if any, western companies, that have earned returns on investment commensurate with the risk. Under Putin, the largest and potentially most-profitable companies are now run by the state either directly or indirectly. The Russian mindset has always been to reserve the real profits for ourselves. If a western venture is about to earn a substantial profit, we must find a way to take it away.

I assume that these lessons are not lost on Silicon Valley. My advice is for them to stay away until that goal on the distant horizon is reached -- a true rule of law.

Why the Worst Rise to the Top: Hayek, Stalin and Bukharin

Hayek in his renowned Road to Serfdom argued that administered economies tend toward dictatorship and that the dictator is unlikely to be benevolent. Indeed, benevolent dictators are a rarity, which does not prevent some development economists from pitching benevolent dictatorship as the quickest path to growth.

My “Politics, Murder, and Love in Stalin’s Kremlin: The Story of Nikolai Bukharin and Anna Larina” (Hoover Press, 2010) is one of the first case studies of why the “worst gets to the top.” It uses archival evidence of verbatim party debates, transcripts of interrogations, and correspondence to describe the uneven struggle for power between Stalin and Bukharin, the proponent of a form of market socialism. This case study shows that the “soft” Bukharin was no match whatsoever for Stalin who was prepared to use any and all means for as long as needed to win. Whereas Bukharin used theoretical arguments, Stalin used intimidation, appointments, and the distribution of spoils.

My account shows that until July 1928 Bukharin had a considerable following in his fight against Stalin’s application of force to the countryside. Bukharin fought Stalin to a standstill in the July 1928 plenum, but was tricked into signing a “unity statement” to show the party that the Politburo was united. Bukharin knowing that Stalin would renege on the compromises he made at the plenum was tricked into meeting with a disgraced ally of Trotsky in which he revealed the deep fissures within the Politburo to an outsider. Stalin’s agents knew of the meeting, and Stalin now had the evidence he needed. Bukharin was charged with “fighting against the will of the party.” With such a charge pinned on him, the disgraced Bukharin’s political career was over. Thereafter, he public comments in party forums were meet with jeers and disdain.

After his decisive political defeat in 1929, Bukharin attempted to withdraw from public life. He refused to see his former allies. It was his hope that “good behavior” would save his life. This hope was dashed with his death sentence in March of 1938 at the final Moscow Show Trial.

When Will China Join the Also Rans?

We better foresee small than big changes. Transitory fads and group think divert us from recognizing obvious signs. In the 1930s, we -- mired in the Great Depression -- were taken in by “heroic” successes of Stalin’s five year plans. In the 1950s, we were alarmed by Sputnik and Nikita Khrushchev’s “We will bury you” boasts. In the 1960s, we dispatched congressional delegations to learn from Germany’s consensus economy and France’s Planification. The 1980s saw the glorification of Japan’s unerring industrial policy and its lifetime labor contracts. In each case, the model which we worried would bury us or admired returned to earth. The Soviet Union is gone after an extended “period of stagnation.” Congress had to form special committees to explain why so few saw this coming. Germany and France are plagued by stagnant growth and high unemployment. Japan has experienced economic stagnation for more than two decades and sees no end in sight.
We now admire the Chinese model. We are told that its technocratic monopoly party makes rational decisions that guide it unscathed through storms of financial crisis and recession. Unlike the clumsy west, it knows how to build roads, whole new cities and stage Olympics – no dithering around with messy democratic decision making. We are now recycling calculations of when our rival will overtake us – only this time round it is China and not Russia.
In all these cases, we actually had the basic insights to foresee the future. Already in the 1920s, Ludwig von Mises and Friederick Hayek explained in painstaking detail why Soviet planning could not work. The postwar German and Japanese Wirtschaftswunders resulted from the technology chasm that had opened vis-a-vis the United States and from the reopening of world trade. Japan’s vaunted industrial policies floundered as it bet on the wrong technologies in an increasingly complex industrial economy.
Nobel laureate W. Arthur Lewis’s 1954 article “Economic Development with Unlimited Supplies of Labor” is the crystal ball we need to assess China’s future: A country with virtually unlimited supplies of labor locked in unproductive traditional pursuits can grow rapidly by transferring it to a “modern” sector, that is UNTIL the transfer is complete. Thereafter, it must grow, like other countries, on the basis of technological progress, which is an entirely different ball game.
China was twenty percent urbanized at the start of its reforms. Now it is officially one half, but in addition millions of rural residents work as migrant workers in construction and industry outside of agriculture. China is therefore nearing the end of its “easy growth” era. This end will likely occur at a relatively low standard of living.
But, could it not be argued that China’s rapid growth will continue after its labor surpluses are exhausted? Will not China’s party technocrats convert China’s high savings rates into spectacular technological achievements? Will they not make the right investment decisions? The answer is no! China’s legal and economic institutions are those of a third world country, with rampant corruption, a weak rule of law, poor protection of property rights, and the allocation of loans by state banks and political officials. Just as Japan’s maligned government-operated postal savings bank system wastes capital; so do China’s local and regional officials and the financial institutions they control. The high rates of capital accumulation simply make such waste less visible. There is a lot of capital to misuse.
There have been no historical exceptions to the requirements to join the top ranks of countries in living standards: limited government interference in economic decision-making, equal application of the rule of law, a small government to avoid waste and rent seeking, low rates of taxation and other burdens on achievement and free international trade with other countries. China is unlikely to improve its performance in these areas. The Chinese communist party is no historical aberration. China has a long, long history of statism, and no intellectual challenge to this tradition. The communist party cannot introduce a real rule of law without a serious loss of its political power. When confronted with the impending end of its growth miracle, China will not change its stripes.

$3 to $7 trillion CBO Underestimate of the deficit

I am no expert on the budget, but my pundit record is a documented 100% accurate. When I was revising my introductory economics text in 2000, I spent about one hour examining the CBO’s budget projection of a $4 trillion surplus by 2010. I concluded that there would be no surplus to speak of (Paul Gregory, Essentials of Economics, 5th edition, p.166). This conclusion was easy. The surplus disappeared if we dismissed the improbable assumption that nominal government spending would increase 2.3 percent a year (versus the historical rate of 7.6%) and recognized that the peace dividend of 1998-2000 was a one time event. The CBO projection also assumed that there would be no recession between 2000 and 2010.

I just repeated the same hour-long exercise with the CBO’s August 2009 projections, which estimate that the cumulated deficit will grow by $7 trillion between 2008 and 2019. Without even looking at the revenue side of the equation (which looks too optimistic to me), I conclude that the CBO projection underestimates the cumulated deficit by $3 to $7 trillion. The deficit grows by $3 trillion if we use the growth rate of government spending over the previous eleven years. It grows by $7 trillion, if we use the historical rate of growth of government spending since 1970. The CBO projection also assumes there will be no recession over the next eleven years. A recurrence of recession would raise the cumulated deficit by a considerable amount depending on its severity.

Even if we accept the CBO’s optimistic revenue projections, I doubt that the growth of spending can be reduced below rates of the last decade or the longer term rates. If I am correct, gross federal debt will be between 110 to 130 percent of GDP in 2019. Federal debt held by the public will be between 80 to 100 percent. These figures do not include the potential impact of an expensive federal government health care reform. These national debt ratios will make the United States look like Italy and Spain.

I therefore have to join the chorus that such deficits are not sustainable and conclude that the alarming deficit projections we have seen are underestimates of the true situation unfolding.

Did Stalin Poison Lenin?

In the Hoover Institution Archives’s Volkogonov microfilm collection, there is a remarkable document dated March 23, 1923 from Joseph Stalin to the Politburo.[i] The document is two pages long and written in Stalin’s hand on his official letterhead as secretary of the central committee. In this “strictly secret” memo, Stalin states that “On Sunday March 17, Comrade Ulianova (N. K.) (Lenin’s wife) confidentially communicated to me ‘the request of Vladimir Ilich (Lenin) to Stalin’ that I, Stalin, take upon myself the responsibility to acquire and administer cyanide poison to Vladimir Ilich. In her conversation with me, she said that ‘Vladimir Ilich is “experiencing unbearable suffering’ and that ‘it makes no sense to keep on living’ and stubbornly insisted that I ‘not deny Ilich his request.” In view of the special insistence of Ulianova and that Ilich demanded my approval (Ilich twice called his wife to his office during our conversation and agitatedly demanded the ‘agreement of Stalin which meant that we had to interrupt our conversation twice), I did not consider it possible to say no, declaring ‘I request that Vladimir Ilich keep calm and he must believe that when it is necessary, I will without hesitation fulfill his request.’ Vladimir Ilich did indeed calm down. I must , however, declare, that I do not have the strength to fulfill the request of Vladimir Ilich and I must refuse this mission, no matter how humane and necessary and which I relate for the information of the members of the Politburo.
All Politburo members, including Lev Trotsky, signed that they had read the memo. One, Mikhail Tomsky, wrote by hand that “I presume that the ‘indecisiveness’ of Stalin is correct. It follows that the members of the Politburo should exchange their views in a strict order of secrecy. Without a secretary present.”
Vladimir Ilich Lenin, the uncontested leader of the Bolshevik state, suffered his first stroke in May of 1922, leaving him partially paralyzed. A second stroke followed in December, and a third stroke in March of 1923 required him to withdraw from public life. Lenin died on January 21, 1924, ten months after his request to Stalin. Throughout his lengthy illness, Lenin experienced periods of improvement, leading his doctors to maintain hope that his situation was not hopeless.
As Lenin faded from the leadership, Stalin allied himself with two of Lenin’s allies, Grigory Zinoviev and Lev Kamenev, to block the charismatic Trotsky. They reached agreements among themselves before Politburo meetings, thereby effectively excluding Trotsky from decision making. In fact, Stalin informed his allies about his meeting with Lenin first. In this undated “strictly secret” memo, he adds that Lenin’s wife could not bring herself to poison her husband and was therefore asking for his assistance. The emphatic joint reply of Zinoviev and Kamenev was “We cannot do this! Ferster (Lenin’s doctor) holds out hope. If only this were not happening. No, No, No!”
Years after his exile from Russia in 1929, Trotsky expressed the view that Stalin did indeed poison Lenin and that he did so, not for the “humane and necessary” reasons mentioned in his memo, but to protect himself. There are no accounts other than Trotsky’s of the Politburo discussion that followed Stalin’s March 23 memo. According to Trotsky, he and other Politburo members argued against assisting Lenin’s death, while Stalin took no position other than to emphasize Lenin’s desire to end his suffering. The Politburo did not vote, but everyone was left with the impression that there could be no further talk of administering Lenin poison.
If Stalin intended to poison Lenin, as Trotsky claimed, why would he inform the Politburo of Lenin’s request? A possible answer is that this would give Stalin the ideal alibi. If poison were detected in Lenin’s body, a reasonable conclusion would be that Lenin’s wife finally got the nerve to do it herself. Also, what would Stalin have to gain from poisoning the incapacitated Lenin? On December 25, 1922, Lenin dictated his final political testament in which he recommended that Stalin be removed from his position as general secretary of the central committee. Stalin was rude and was accumulating too much power. Especially troubling to Lenin was that Stalin had shouted at his wife in the foulest language in December of 1922. Lenin learned of this on March 5, 1923 and immediately wrote to him demanding that he apologize or else all relations between them would end. On the next day, the agitated Lenin suffered his third and final stroke. If Lenin’s condition were unexpectedly to improve enough to attend a politburo or central committee meeting, a proposal from him to remove Stalin would have surely been approved. A third issue with Trotsky’s charge is why Lenin would call for Stalin, with whom he had quarreled, to put him out of his misery? An inebriated Stalin himself recounted the incident in a meeting with writers in 1932: “Ilich understood that he was dying and he actually said to me, I do not know in jest or in earnest, but I will relate to you as a serious request, that I should I should obtain poison for him because he cannot ask his wife or sister. You are the most brutal member of the party.” According to one witness, Stalin spoke these words with a hint of pride.[ii]
We will never know the answer to the mystery: Did Stalin poison Lenin? What we do know is that no one should underestimate Stalin’s criminal instincts. On the evening of February 26, 1939, Lenin’s widow invited her friends to attend her seventieth birthday party. Stalin did not attend but he sent a cake. Later that evening, she was stricken with severe food poisoning and died the following morning. It was the grieving Stalin who carried her ashes at the funeral.[iii] It should also be remembered that by 1939, Stalin had executed almost half of the party leadership and almost one million ordinary citizens. Poisoning Lenin would have been consistent with his later actions.
[i] Dimitrii Antonovich Volkogonov Papers, Hoover Institution Archives, microfilm, collection.
[ii] V. Rogovin, The End Means the Beginning http://trst.narod.ru/rogovin/t7

[iii] Larissa Vasilieva, Kremlin Wives (New York: Arcade Publishing, 1992), p.32.