The Deep State (15 page)

For all of its indignant huffing and puffing about “violent Islamic extremism,” it is our government's fatal dependence on the monarchies in the Arabian Peninsula for their role in keeping our currency system afloat that makes our leaders pull their punches whenever the subject of ISIS or other Sunni Muslim terrorist groups comes up.

War Is Good for Business

French economist Thomas Piketty's
Capital in the Twenty-first Century
posits that over time, individual wealth obtained from the growth of capital will outpace personal wealth gained from labor, except under unusual circumstances that reduce the accumulated capital of the wealthy. One of those circumstances is war. As he notes, none of the belligerent powers could have secured the financial resources necessary to fight World Wars I and II without extremely heavy taxes on the wealthy and on corporate profits. While Piketty concentrates on Europe, and particularly France, his observation that war is a destroyer of accumulated personal capital is largely true of America's experience in World Wars I and II. Income inequality in America dropped sharply during both world wars, not only as a result of income taxes and luxury taxes, but because the conscription of so many men into the armed forces placed a premium on scarce labor.

Piketty's finding holds less true when applied to the kinds of wars the United States has been fighting since 1945. Both the Korean and Vietnam wars saw some surtaxes and scattered labor shortages, but these were minor compared to the world wars, and the two conflicts did not see income distribution change appreciably. The Iraq war of 2003 was a milestone.
From an economic point of view, it was a major war: in inflation-adjusted dollars, it exceeded the costs of both Korea and Vietnam, and even World War I. Yet throughout the conflict, income inequality in the United States increased at an accelerating rate.

There are several reasons why the new American way of war does not conform to the experience of most industrial countries in the twentieth century. First, Iraq was the only large war in modern history fought by a major industrial power that was accompanied not by tax increases, but by a tax cut—not only on incomes, but also on capital. As a result, the war was conducted by deficit financing coupled with a low-interest-rate policy designed to reduce the interest costs of the ballooning debt. These fiscal and monetary policies eventually fed an asset bubble that allowed speculators to make billions on Wall Street even as the second-most-expensive war in American history was being fought. Second, the Pentagon's new wars were fought with a smaller, all-volunteer force that did not draw civilians out of the workforce in large numbers as in previous wars. (Iraq made no change whatever to American labor markets.) Finally, the war was privatized to an unprecedented degree. Almost all of the U.S. military's logistical tasks were undertaken by stock-issuing corporations like Halliburton. War, rather than destroying capital, would beget even more capital, at least for those at the top of the income pyramid. The trajectory for wage earners, meanwhile, has been more uneven.

The succession of major “free trade” deals has been highly favorable for Citigroup's position in Mexico, Goldman Sachs's ability to operate in Europe, and Apple's production platforms in China; but they look far less favorable from the point of view of an assembly-line worker in Detroit or Toledo. The stagnation of middle-class incomes (and thus their ability to pay commensurate taxes), the offshoring of American investments (putting them out of reach of the IRS), and the high cost of maintaining the security apparatus of the Deep State have together ensured an almost unbroken series of large federal deficits for three decades. But Wall Street, however phobic it claims to be about government deficits, rarely, if ever,
calls for trimming military spending.
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Instead, the cry is always for “entitlement reform”: cutting the Social Security and medical benefits that a beleaguered middle class needs in order to maintain its footing at a time of skyrocketing home prices, medical costs, and school tuitions.

From Blockade to Sanctions: A Century of Economic Warfare

If it seems that America is always at war or on the verge of war, there is good reason. Since 1980, the United States has deployed military forces to roughly two dozen “hot” armed conflicts. The Congressional Research Service, using a more expansive definition of operational deployment to include rescues, evacuations of American citizens from war zones, and deterrence missions, counts dozens more instances.
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As for CIA covert and paramilitary operations, they are a closely held secret and will continue to be until most of us are long dead.
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One might be tempted to imagine that the Department of Defense and the intelligence agencies charged with carrying out these overt and covert operations represent the sum total of America's political engagement with the outside world, since old-fashioned state-to-state diplomacy has receded into public relations symbolism. But the Deep State's commitment to international coercion is too ambitious to be limited to military action exclusively. While not as flashy as an F-22 flyby, or as ruthless as a drone kill, economic warfare has in many respects become
Washington's weapon of choice. Just as weapons and logistics contractors are a necessary component of military conflict, America's big banks are an indispensable partner in the U.S. government's economic conflicts around the world.

Economic sanctions go back historically to the naval blockade, in which a fleet would physically seal off the harbors of an opposing state and prevent it from trading with third parties. The blockade was an act of war and was governed by the laws of war at sea. Its most famous instance in the twentieth century was the British blockade of Germany during World War I. It caused real privation among civilians (including starvation and malnourishment of children), but did not prevent the Germans from launching a huge offensive during the last year of the war that almost drove the British army off the Continent. The blockade was continued for seven months after the armistice as a means of diplomatic coercion that would force Germany to sign a peace treaty on the terms demanded by the Allies. This “peacetime” blockade killed about 250,000 people, mostly from diseases caused by malnutrition. Thus was born a preferred instrument for conducting our modern wars.

Four of the most notable cases in the modern era of American sanctions policy are the imposition of economic sanctions on North Korea in 1950, the Cuban embargo in 1960, sanctions against Iran after the takeover of the U.S. embassy in Tehran in 1979, and Iraq beginning in 1990. None of these economic blockades, one of which is in its seventh decade, has had the desired effect of forcing the target state to align its policies with U.S. desires (the collapse of the apartheid regime in South Africa was a special case unlikely to be encountered elsewhere: the vast majority of South Africans were black and strongly supported economic measures against the white-controlled regime that ruled them). Sanctions policy has, however, been successful according to the standard Washington metric of foreign policy achievement: it projects an image that the president is “tough” and “doing something.” In effect, sanctions take another country's civilian population hostage in order to get its leaders to acquiesce. Madeleine Albright perfectly expressed the Washington consensus when
she told
60 Minutes
that, yes, the deaths of half a million Iraqi children were worth it in the complex calculus of sanctions.

With the fall of the Soviet Union and the corresponding decline in Washington's need to offer carrots rather than sticks to nonaligned countries with questionable political systems, economic sanctions became the go-to policy for dealing with countries that chose to flout the will of the Washington-run international community. It is no accident that at about the same time, the theory of rogue states became popular within the Beltway: it allowed us to suggest that some countries do not possess enough legitimacy to give them a legal and moral right to complain about economic coercion or military invasion. There are now twenty-six countries, from Russia and Burma to Zimbabwe, under various forms of U.S. economic sanctions.

After 9/11, sanctions took another turn. Since more and more terrorist groups were nonstate actors, economic sanctions against countries would not directly affect them. The Treasury's Office of Foreign Assets Control began devising new sanctions targeted against individual people and businesses. In addition, the Treasury and intelligence agencies gained more access to financial transactions around the world. The Society for Worldwide Interbank Financial Telecommunication (SWIFT), based in Brussels, is the global messaging service for thousands of banks all over the world: if a bank in the United States wants to send money to Italy or vice versa, SWIFT facilitates it. SWIFT's governing board consists of the world's biggest banks. The Treasury did not previously have access to the huge stream of financial data the system generates, but after the September 11 attacks, SWIFT acceded to U.S. demands and began providing information.
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The loosening of regulations on interstate banking in the United States and the repeal of the act prohibiting institutions from being both commercial and investment banks has had the fortuitous consequence of giving a few American megabanks, Citigroup and JPMorgan Chase among them, membership on the SWIFT board. In their current role, these banks are a critical point of entry for any international flow of
money in violation of sanctions. The American banks do not touch those transactions, and will avoid doing business with foreign banks that do. This has the effect of cutting off those foreign banks from doing business in the United States, or even being able to clear dollar-denominated transactions in the New York market. At the same time, the Treasury has an easier management task in having to deal only with a handful of megabanks with worldwide reach. As journalist Andrew Cockburn, who has written extensively about the American sanctions regime, told me, getting the big American banks to enforce sanctions is “the key to the system.” He believes that in view of the heavy legal penalties for violating sanctions, the banks “do it out of fear.”
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That fear may be softened, however, by a degree of recognition on both parts that the banks are now an essential cog in Washington's economic warfare machinery. While some foreign institutions with banking operations in America like HSBC and BNP Paribas have been hit with billion-dollar fines for money laundering and sanctions evasion, the American-based megabanks have avoided this fate. Moreover, they have evaded criminal prosecution for recent questionable domestic activities like mortgage fraud, robosignings, and selling securities designed to fail, a far different outcome from the aftermath of the savings and loan crisis of the late 1980s, when numerous executives were convicted of crimes.

Economic sanctions are now an integral part of the Deep State's array of tools for coercing adversaries. But do they work? Sixty years of experience suggests that they do not. Sanctions on North Korea since the early 1950s have not prevented the ruling clique in that country from obtaining nuclear weapons and maintaining a huge military. Sanctions on Cuba were a colossal failure and only succeeded in impoverishing ordinary Cubans. Sanctions on Zimbabwe have not resulted in President Robert Mugabe's departure. President Putin seems singularly unimpressed by American-led Western sanctions against his country. Former Treasury official Juan Zarate has written in his book
Treasury's War
that the Iranian sanctions are effective, but more than thirty years of ever-tightening
economic strictures have not made the Iranian government bow to the U.S. will, let alone succeeded in creating a popular Iranian movement to overthrow that government. Did the sanctions bring Iran to the table for nuclear talks? William Miller, a former foreign service officer and onetime diplomat in Iran, doesn't think so: “Sanctions only made them more defiant,” and they have always had ways of evading them.
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Zarate also wrote about the growing effectiveness of using American control of key nodes of the international banking system to cut off financing to terrorist organizations. His book was published in 2013, before the cancerous spread of ISIS, which is an extremely well funded terrorist organization. Apparently, our efforts to prevail upon our “friends” in the Arabian Peninsula to cease funding radical Sunni jihadists have been less than completely successful.

Given the growing list of countries that have had economic sanctions imposed on them—in 2015, when Venezuela was added to the list, White House spokesman Josh Earnest had a hard time keeping a straight face while insisting that the country was a “national security threat” to the United States—it was heartening to see some semblance of common sense in the improvement of our relations with Cuba. But why did it take such a ridiculously long time to lift our sanctions?

Other nations such as Canada long believed America's policy toward Cuba was idiotic as well as cruel, since it only hurt innocent citizens and made little impression on their leadership. Our Cuba policy was a fascinating variation on Gilens and Page's thesis that powerful interest-group goals almost always trump the desires of the broader public when it comes to getting the attention of Congress.

Gilens and Page were referring to moneyed, elite interest groups; the Cuba lobby certainly did not have the financial clout of Wall Street or Silicon Valley, but organized money counts for something, particularly when the opposing view is not nearly so well mobilized. The fact that the lobby was demographically concentrated in a key swing state, and possessed the obsessive single-mindedness of a terrier staring down a rat hole, gave it an outsized role in the formulation of America's policy toward
the Caribbean. Since 1983, the United States broadcast radio and television programming to Cuba to foment discontent with the Castro regime. When the signals were not jammed, fewer than 2 percent of Cubans tuned in, according to a 2010 report by the Senate Foreign Relations Committee. But funding, at $27 million per year, still continued. Why? Because for over fifty years the lobby in favor of that policy could outmuscle those who thought it was a waste of money, and neither party wanted to lose Florida's twenty-nine electoral votes. None of this had anything to do with rational statecraft or advancing America's diplomatic, humanitarian, or commercial interests.