Discuss.

But that doesn’t mean it’s going to be popular. Indeed, Joseph Schumpeter himself predicted that innovative market capitalism would perish at the hands of jealous intellectuals who hated it and the passive bourgeoisie who failed to defend it.

Which brings us to Mitt Romney, Bain Capital, and a very good essay by Guy Sorman in the Manhattan Institute’s City Journal:

Yes, free-market advocates can point out that when a state steps in to help a dying sector of the economy, it is actually harming economic growth by sinking financial capital—a limited resource—into inefficient activities and diverting funds from more innovative enterprises. A job saved in an obsolete economic sector, they will say correctly, is a job—often many jobs—forgone elsewhere in the economy. But that’s a very hard argument for a politician to make. As the great free-market economist Milton Friedman frequently observed, a business closing gets on the television news, while the new businesses that get created from the reallocated capital go unnoticed because they are so widely dispersed.

Mitt Romney has run smack into this problem during his campaign for the Republican nomination. Bain Capital, the firm he led, was a pure engine of creative destruction: a private investment fund that bought troubled businesses, restructured them (often by firing people), and sold them for a profit. Even some of Romney’s Republican opponents, who know better, couldn’t resist attacking him for his entrepreneurial work; Newt Gingrich went so far as to run ads featuring workers who had lost their jobs because of Bain’s restructuring. Romney contended that Bain had helped create 100,000 new jobs, which may be true, but—underscoring Friedman’s point—no one knows exactly where they are. …

Can a Schumpeterian candidate make it to the White House in 2012? Yes, but in the current climate of economic uncertainty, he will need to be a talented rhetorician. Otherwise, America in a second Obama term will probably continue to move in a European direction, with the government playing an increasingly activist role in the economy, protecting out-of-date ways of doing business. And without the liberating fire of creative destruction, America will follow Europe down the path of slow growth, high unemployment, and decline.

One suggestion Sorman offers is for Romney to emphasize his support for a modernized social safety net: unemployment benefits, retraining, and various welfare services (as long they have pro-work incentives). But I also think that Romney needs to point out again and again that stopping or penalizing creative destruction means stopping innovation, resulting in a stagnation of American living standards and a worsening of our debt situation. The opposite of innovative capitalism is crony/state capitalism. And as even China may finally be realizing, the latter only works for so long.

And that’s why, he says, “the whole project of deepening Europe into a fiscal union seems to me like such a fairy tale. Outside pressure will never succeed in bringing about change by itself unless it can be allied to internal forces that themselves want reform. In Italy, these forces at least potentially exist, but in Greece they seem altogether absent.”

See, in clientelistic systems, political parties reward supporters with individual benefits, such as jobs, when they get in office. It is Chicago-style democracy.

In my view, clientelism should be distinguished from corruption proper because of the relationship of reciprocity that exists between politicians and voters. There is a real degree of accountability in a clientelistic system: the politician has to give something back to supporters if he or she is to stay in power, even if that is a purely private benefit. Clientelism is not the product of a cultural proclivity or a failure of politicians to understand how a modern democratic political system is supposed to operate. Rather, it is often the most efficient way to mobilize relatively poor and uneducated voters and get them into the polling place. Such voters often care less about programmatic policies than an immediate personal benefit like a job or the equivalent of a Thanksgiving turkey.

Here is how it works in Greece. And change in Greece will take a lot more time than the bankers will offer.

Solving the issue of clientelism would address one of the long-term sources of the current crisis. But any fix would have an effect only over a prolonged period, and is therefore not terribly relevant to the short-term future of either Greece or the EU. If the Greek public wants to reject the austerity agreement, which seems pretty clear, the country will be heading for outright default and exit from the euro. I always believed that exiting the euro was Greece’s only realistic option, and one that could have been done in a reasonably orderly way had it been undertaken some months ago. Now, it is being pushed as the preference of the extremist parties, and if it happens, will probably occur in a very messy way with bad consequences for the stability of Europe as a whole. So neither the long- or short-term futures look terribly bright.

I am certainly convinced that the euro cannot survive in its current form without some sort of fiscal union involving common euro bonds and fiscal transfers. But the north sees the clientelistic states for what they are, even if they cannot articulate their views quite as lucidly as Fukuyama, and seems unwilling to go that route.

David Brooks:

Why is Obama even close? If you look at the fundamentals, the president should be getting crushed right now. The economic mood of the country is terrible. Roughly 75 percent of Americans believe the economy is still in recession. According to a Quinnipiac survey, only 35 percent of Americans say they are better off than they were four years ago. Barely a third believe the country is heading in the right direction. The economic climate is as bad as or worse than it was in 1968, 1976, 1992 and 2000, years when incumbent parties lost re-election.

Brooks’s answer is a) Dems have a growing demographic advantage (single women, secular types) and b) voters like Obama’s cool and confident style.

Or … maybe voters are still cutting Obama considerable slack since he’s a first termer who inherited an economic mess. (And incumbents win about 70% of the time anyway.) “Blame Bush” still carries a bit of punch.

Let’s compare the economies in those election years Brooks mentions. The current misery index — inflation + unemployment — is 10.85. In May of those various election years, it was 7.42 (1968), 13.60 (1976), 10.62 (1992) and 7.19 in 2000. And in October of those years, it was 8.15 (1968), 13.16 (1976) 10.50 (1992) and 7.35 (2000).

So by the misery index measure, the economy is indeed worse today than it was in 1968, 1992 (barely), and 2000, but better than 1976. But keep in mind that in all those other years, the incumbent presidential party was finishing at least its second-straight term in office. So you had both a fatigue factor at play and the reality that the losing presidential candidates (Humphrey, Ford, Bush, and Gore) couldn’t blame the other party so easily since theirs already controlled the White House for some time.

(Now, let me also add that the real unemployment rate and the exceptionally slow recovery, to me, make the economy this year much, much worse than in any of those other elections years.)

Then there is the Carter Exception. Jimmy Carter was a first-term president who got bounced mostly due to the economy. But it was a really, really bad economy. The misery index in October 1980 was 20.27, and the economy suffered a recession earlier in the year.

Things aren’t that bad, and probably won’t be come November no matter what happens in Europe. The econ forecasting models make Obama a slight underdog. Sounds about right to me with a “more of the same” economy.

Over at nature magazine, Daniel Sarewitz points out very troubling trends in the world of science:

Alarming cracks are starting to penetrate deep into the scientific edifice. They threaten the status of science and its value to society. And they cannot be blamed on the usual suspects — inadequate funding, misconduct, political interference, an illiterate public. Their cause is bias, and the threat they pose goes to the heart of research.

What Sarewitz is pointing to here isn’t political bias (though the overwhelming liberalness of scientists is well documented), but rather, to systematic biases that favor the constant production of “positive” findings with redeeming social value:

The belief is that progress in science means the continual production of positive findings. All involved benefit from positive results, and from the appearance of progress. Scientists are rewarded both intellectually and professionally, science administrators are empowered and the public desire for a better world is answered. The lack of incentives to report negative results, replicate experiments or recognize inconsistencies, ambiguities and uncertainties is widely appreciated — but the necessary cultural change is incredibly difficult to achieve.

And while most of the examples he gives are from biomedical research (where, ironically, it’s easiest to test hypotheses), Sarewitz suggests we view most scientific research with caution these days:

It would therefore be naive to believe that systematic error is a problem for biomedicine alone. It is likely to be prevalent in any field that seeks to predict the behaviour of complex systems — economics, ecology, environmental science, epidemiology and so on. The cracks will be there, they are just harder to spot because it is harder to test research results through direct technological applications (such as drugs) and straightforward indicators of desired outcomes (such as reduced morbidity and mortality).

As someone who routinely has to dispute crazy claims about climate science being “settled,” and about predictions of the climate 100 years from now as being “sound science,” I find it refreshing to see such a discussion in nature magazine. But as someone trained in the sciences, who believes that science is still our pre-eminent route to understanding the world around us, and that robust scientific institutions are necessary to human progress, I find the entire thing somewhat depressing.

From The Road to Freedom: How to Win the Fight for Free Enterprise by AEI President Arthur Brooks, which was published earlier this month:

It’s going to take a lot more than one election to get us off what Nobel laureate Friedrich Hayek called the ‘road to serfdom.’ Americans today are experiencing a low-grade, virtual servitude to an ever-expanding, unaccountable government that, starved for tax revenues, has appropriated for itself funds that entrepreneurs could have used to grow the economy, has created a protected class of government workers and crony corporations that play by a different set of rules than the rest of America, and has consequently left the nation in hock for generations to come.

This is what the U.S. economy is facing (courtesy of a great chart from Strategas) come 2013 because of legislated tax increases and spending cuts. And here is the breakdown on those:

Fiscal cliff = recession—or an even worse recession if the EU debt crisis already has the economy shrinking by then.

From economists Emin M. Dinlersoz and Jeremy Greenwood, The Rise and Fall of Unions in the U.S.:

When the productivity of unskilled labor is (relatively) high it pays for the union to organize a lot of firms and demand generous wages. The shift from an artisan economy to an assembly line economy during the beginning of the 20th century was associated with an increase in the (relative) productivity of unskilled labor that led to an increase in unionization and a decrease in income inequality.

The decline of the assembly line economy and the rise of the information age during the second half of the century reversed this. This led to the ∩-shaped pattern of unionization and the ∪-shaped one for income inequality. … Statistical analysis suggests that skill-biased technological change is an important factor in de-unionization.

In 1900 seven percent of the American workforce were union members. The number of union members rose until the middle of the century, as shown in Figure 1, hitting its apex at 32%. It then began a slow decline. At the end of century 14% of American workers belonged to a union. At the beginning of the 20th century, the top 10% of workers earned 41% of income. This figure declined hitting a low of 31% around mid-century. It then steadily increased to 41% around 2000.1 What could have caused the ∩-shaped pattern of union membership and the ∪-shaped one for the distribution of income? Are they related? The hypothesis here is that skill-biased technological change underlies the rise and fall in union membership, along with the up and down in income inequality. The beginning of the 20th century witnessed a shift away from an artisan economy toward an assembly line one. This favored unskilled labor. The premium for skill declined.

Unskilled labor is homogenous, almost by definition. This makes it easier to unionize than skilled labor. When the demand for unskilled labor rises there is a larger payoff to unionizing it. Things changed at the midpoint of the century. The second industrial revolution was petering out and the information age was dawning. Transistors and silicon chips meant that automatons could replace the hoards of unskilled workers laboring on factory and office floors. This represented a reversal of the earlier trend.

Sorry, my left-liberal friends, there’s no going back to the 1950s and 1960s when unions were strong. And just as technology undercut unions, it has contributed to the rise of income inequality. That is what we call a trade-off, though as long as median incomes are rising and mobility remains high, I don’t much care about inequality driven by technology and globalization, as opposed to crony capitalism.

As Iran starts a critical round of talks over its nuclear program, its negotiating team may be less interested in reaching a comprehensive settlement than in buying time and establishing the legitimacy of its enrichment program, Iranian officials and analysts said…

In continually pushing forward the nuclear activities — increasing enrichment and building a bunker mountain enrichment facility — Iran has in effect forced the West to accept a program it insists is for peaceful purposes. Iranians say their carefully crafted policy has helped move the goal posts in their favor by making enrichment a reality that the West has been unable to stop — and may now be willing, however grudgingly, to accept.

“Without violating any international laws or the nonproliferation treaty, we have managed to bypass the red lines the West created for us,” said Hamidreza Taraghi, an adviser to Iran’s supreme leader, Ayatollah Ali Khamenei, who is close to the negotiating team.

It gets even better:

Mr. Taraghi ticked off Iran’s successes. First, he said, Western countries did not want Iran to have a nuclear power plant, but its Bushehr reactor was now connected to the national grid. Second, the West had opposed Iran having heavy-water facilities, he said, but it now has one in Arak.

Third, the West had said no to any enrichment.

“But here we are, enriching as much as we need for our nuclear energy program,” Mr. Taraghi said with a smile, referring to the thousands of cascades of centrifuges spinning for years in the half-underground facility in Natanz. Since January, dozens more centrifuges have been online in the Fordo mountain bunker complex, near Qum, built to withstand a heavy attack.

Mr. Taraghi and other officials say their policy has forced the United States to accept enrichment, though five resolutions by the United Nations Security Council have called for it to suspend it. …

“We view the nuclear episode as a heavy retreat for the Western powers,” he said. “But acceptance of our nuclear program takes time, we understand that.”

This does not sound like a regime that is living in fear of a military strike on its nuclear program. To the contrary, the Iranians are basically rubbing their success in Obama’s face before the negotiations resume. This is because, as I pointed out in the Washington Post last week, the Iranians recognize that the Obama administration’s objective in these negotiations is not to stop them from obtaining a nuclear weapon—it is to stop Israel from striking their nuclear program before the November elections. If the Iranians were worried that failure in Baghdad could lead to devastating military consequences, would they really be gloating in the New York Times about how shrewdly they are playing America?