Gideon's Blog

In direct contravention of my wife's explicit instructions, herewith I inaugurate my first blog. Long may it prosper.

For some reason, I think I have something to say to you. You think you have something to say to me? Email me at: gideonsblogger -at- yahoo -dot- com

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Wednesday, July 31, 2002
Apologies for nothing very interesting today: I'm not feeling well, work is busy, I've got to research a drash for two weeks from now (parshat ki tetzeh, lots of options, but I'll probably talk about the laws of war), and I'm drained from reading about the latest massacre even as I'm preparing for a brief visit to Israel next week. And the daughter of a close friend will be studying at Hebrew U. as of September. Nobody's going to be getting much sleep for the next 50 years. (Last night I dreamt that I was back from the trip, on a bus heading back to NY from the airport, when September 11 happened all over again. What what THAT means.)

So I'll stick to reporting an upbeat piece in the WSJ that I think has some merit: Michael Gonzales thinks US-EU ties are improving. Maybe he's right. After all, how do you spell US in French? EU.

Tuesday, July 30, 2002
Actually, the next stop isn't Social Security reform. It's sin industries, a philosophic, economic and legal challenge for our time.

What are sin industries? They are industries whose product results in (or risks resulting in) a net reduction of overall well-being for the society. Their business model may depend upon addictive behavior on the part of their clientele. Their product may cause the erosion of social capital and a rise in criminal behavior. Their product may be, in some sense, evil in itself, though not necessarily obviously the cause of harm in other people.

I'm not going out on a limb with the sorts of things I'm calling "sin industries." I'm not arguing that, for example, burning fossil fuels cause a net reduction in overall well-being for society by melting the polar ice caps and creating suburban cultural wastelands, nor am I arguing that fast food is giving us all type-II diabetes and arterial sclerosis. When the etiology of a social, economic or environmental problem is sufficiently complex, I think we're talking about something different. I'm talking about industries you would recognize as "sin" industries:

Other mind-altering recreational drugs

That sort of thing. The common thread among these industries is that many people would argue that there is something fundamentally dirty about them, but they don't harm anyone directly (except for the last, if you view even early-stage pregnancies as involving two rights-bearing entities). None of these are "crime industries" like assassination or extortion. A strict libertarian would probably view all of these as unproblematic: if people want these products, they can have them, and if they get hurt that's their problem. But most of us think the question is a bit more complicated than that.

Let's take tobacco. Tobacco is not like corn syrup or deep-fried clams. It's a substance whose link to serious disease has been amply demonstrated. It's highly addictive. And the economics of the industry require the acquisition of new customers at an age when they are, shall we say, unsophisticated about taking mortal risks to health. At this stage of things, it is hard to argue that anyone is uninformed about the harm tobacco does, including teenagers. And you can argue that people who smoke are making a rational trade-off between current pleasure and future pain or loss of lifespan. But we don't behave as if we believe that. When our daughters start smoking, we don't say, well, that's a reasonable and rational choice to make. We think they made a terrible choice, and try to get them to stop. That's not how we react when, say, they take up skydiving, or photojournalism.

Let's take alcohol. Alcohol is similarly highly addictive and associated with terrible health consequences. Moreover, it is a mind-altering substance under whose influence many serious crimes are committed, from murderous crimes of passion to inadvertent vehicular homicide. Alcohol has a long history with humans, is involved in many social and religious rituals, and may be beneficial in moderation. But the costs of abuse of alcohol are enormous, more so than for illegal drugs, and they are not borne exclusively or even primarily by individual addicts.

Let's take gambling. In the last decade or so, gambling has become a national addiction. Gaming companies would not survive economically were it not for gambling addicts, people who are hooked on the high of risk and throw away all their worldly possessions and then some in pursuit of it. And the most profitable form of gambling is the least-defensible in "entertainment" terms and the most addictive: slot machines. Slots gambling is properly understood as a form of narcotic, and indulgence can be viewed as a harmless vice or a serious problem or a crippling addiction depending on its severity, but is hard to view as value-neutral.

Let's take pornography. As with gambling, the last decade or so has seen an explosion of pornography, which is now widely available to all age groups and in as graphic or bizarre a form as could be desired. We don't really know what the consequences will be for the revolution in mores that the pornography explosion has inaugurated. It is not obvious that indulgence in pornography is addictive, nor is it obvious that the industry is necessarily exploitative of its employees (which would arguably make it a "crime" rather than a "sin" industry). But there are good arguments to be made that the ubiquity of pornography has real and negative consequences for relations between the sexes, and of course there is the traditional argument that it is wrong in and of itself. Prostitution is a similar case: while highly exploitative in practice, it is possible to imagine a world where prostitutes manage themselves and are free of the gravest risks to life and health that characterize the profession in America today. But it is difficult to imagine being pleased at one's sister making a good living turning tricks or at one's brother-in-law for frequenting a brothel every weekend. Clean as we can make it, it will always be an unavoidably dirty business.

I've thrown abortion on the list mostly to cause a stir, but similar arguments obtain. Let's put aside arguments about late-stage abortions and let's put aside arguments that an early-stage abortion ends a human life. Either argument is an argument that abortion is a "crime" industry not a "sin" industry, and so off-topic. Even for those who believe that early-stage abortions are not homicide, having an abortion is a sad thing, not a happy thing. The asserted right to an abortion is not like the right to speak or assemble or practice religion, positive goods, nor is it even like the right against self-incrimination or to a trial by jury, protections against governmental tyranny. It is rather a right to an escape-hatch from what are generally one's own decisions. And reducing the cost of those decisions, when they are bad, will necessarily encourage risk-taking; this is true in every other sphere of life, and I don't see why it wouldn't be true here. Abortion, then, is an industry that encourages sexual irresponsibility. This is, by the way, why the public is generally receptive to restrictions on abortion but strongly in favor of exceptions in the cases of rape or incest. The public is not "pro-life" in the sense of seeing even an early-stage fetus as a rights-bearing human. But there is nonetheless a general sense that abortion is wrong, that it shouldn't be encouraged, and that if it is too "easy" it will encourage promiscuity. In other words, the public in general - excepting the 10% or so who are strongly pro-life and the probably larger minority who view abortion as morally completely neutral - relates to abortion as a "sin" industry rather than a "crime" industry. That's why I put it on the list.

Okay, so we've got a rough-and-ready definition of sin industries and some examples of same. The problem is: what's to do about them?

This topic is usually discussed as if the alternatives were really polar: you either believe in the Tehran solution or the Amsterdam solution, and anything in-between is a futile attempt to stop the slide down the slippery slope from one to the other. But it's a bit more complicated than that. Prohibition of any sin industry will lead to a black market. We're familiar with this from arguments about drugs, alcohol and tobacco. But what about gambling? A black market in slot machines is unlikely to develop. Rather, with gambling, the issue is the economic drain from regions that prohibit slots to regions that allow them - this is a live issue, for example, in upstate New York, where Buffalo plans to build a casino downtown (by giving a chunk of downtown to an Indian tribe, making downtown Buffalo quasi-foreign territory!) in order to compete with the casinos on the Canadian side of nearby Niagara Falls. It's a tough call; with a casino so close, Ontario can reap all of the economic benefits of gambling (jobs and taxes) and export virtually all of the social costs (addiction, poverty, family breakdown). Gambling is one area where prohibition is a valid strategy but only works well if everyone in a large region plays along. Cheating causes the system to rapidly unravel - as has been the case in the United States over the past decade.

Another complication of a legalization strategy for dealing with sin industries is government entanglement with such industries. Let's take prostitution. It's well and good (and true) to say that prostitutes would be better off with a legalized, regulated industry than they are today taking their chances on the streets. However, once the government starts regulating (and taxing) the industry, it gets pretty heavily involved in its operations. If you are going to have legalized prostitution, you need official red-light districts. You need regular inspections, a government health presence on site, and so forth. Pretty soon you have a legitimate interest group. For something like prostitution, that's a non-negligible cost that is almost impossible to recoup; by going down the path of legalization, you also go down the path of legitimization and cultural change for the society as a whole. Something like this has happened with pornography already. The life of a sexual "entertainment" worker is undoubtedly much better nowadays because of the higher profile of the industry and the higher standards such a profile brings. But that same high profile has resulted in the ubiquity of pornography to the point where the national culture has changed substantially. These externalities could be avoided through a stategy of prohibition without draconian enforcement, such as usually has existed in Western countries; the cost of such a strategy is overwhelmingly born by the individuals working in the industry.

Drugs, alcohol and tobacco are more familiar territory, but even here the complications of virtually any strategy are significant. Legalization of drugs would reduce the incidence of fatal error and contamination, would bring addicts more completely into the health-care system, would dry up a source of organized crime, and would reduce a huge burden on our overtaxed police and penal system. But, it would also almost certainly increase the incidence of addiction. Back in the days before Prohibition, alcohol abuse was a much more serious problem in America than it is today. That's one of the reasons why the temperance movement had such moral and political force. While Prohibition did result in the creation of modern organized crime in America, it also significantly reduced alcohol consumption levels. Tobacco represents another interesting case. Prohibition would be circumvented by the black market, though it would be unlikely to be associated with the degree of criminality that drugs and alcohol have brought in train because tobacco is not a judgement-impairing substance. But short of prohibition, most of the strategies of control have perverse side effects. The ban on tobacco ads has the primary effect of cementing the market power of existing brands (since new ones can't advertise to gain market share). And the strategy of punitive taxation has the perverse result of making the government a tobacco addict, making it only less likely that the government will pursue intelligent strategies to reduce consumption. (There's a similar effect on gambling resultant from state lotteries: the government is in the business, so it now has a stake in the promotion of gambling and, inevitably, gambling addiction.)

Sin industries are tough problems, and increasing ones in contemporary society. They operate at the edge of rational-choice-modelable behavior. By their nature, they are designed to remove reason progressively from decisionmaking, whether because their products are addictive or because they are culturally coarsening or both. A strategy of strict prohibition raises the specter of first disorganized subversion through the black market, then organized crime, and finally the corruption of the state that is supposed to be enforcing prohibition. (This is a huge issue in Iran, for instance, where the government is heavily implicated in drug trafficking and prostitution, a major reason for the regime's loss of legitimacy in the eyes of the people.) But this kind of corruption can take place under a regime of legalization as well. Many U.S. states are now addicted to gambling revenues and tobacco money. They are now in the business of sin industries. In other cases - such as pornography - they are heavily influenced by the increased prominence and economic importance of the sin industry. In some cases, enforced prohibition may be the best strategy; in others, legalization. But in many cases, a strategy of prohibition with lax enforcement may do a better job of reducing the cultural damage from a sin industry than legalization but without the enormous costs of an actively enforced prohibition strategy.

Monday, July 29, 2002
Okay, I promised I'd give my thoughts on our tax system and how to reform it, and I've got a few spare moments now, so I'll give it a go.

Let's start with the basics. If you want to have government, you need to have taxes. You could probably run a very low-service frontier town on the basis of user fees alone, but even there you'd have all kinds of implicit taxes in the form of "volunteered" labor to handle things like forming posses to catch bandits, moving the community when there's a flash flood, etc. Anything bigger than that, and you need taxes.

All taxes distort economic decisionmaking to some extent, precisely because they are not user fees or voluntary contributions. So the key questions about tax policy are:

* How can we raise the required revenue most efficiently (i.e. least waste in the collection process)?
* How can we do so with the least economic cost (i.e. creation of the smallest incentive for mal-investment)?
* How can we do so with the least likelihood of political mischief?
* How can we do so with the least social cost or greatest social benefit?

The first question we have to answer is: what do we want to tax? We have, broadly speaking, three choices:

* We can tax income
* We can tax wealth
* We can tax economic transactions

That's really about it. Some folks make a big deal about philosophical differences between these choices - Nozick, for example, argued that income taxation is equivalent to slavery because you are, effectively, being coerced into working for the government - but I don't see it. Everyone wants - nay, needs - to earn income, accumulate wealth, and conduct economic transactions. Government is a communal good (or necessary evil) and so the cost should be born by the whole community, and should not be comprehensively avoidable. So I can't get too excited about the argument that income taxes are absolutely evil while transaction taxes are absolutely fine (philosophically, at least).

In any event, within each category, we can tax at various rates and with varied degrees of discrimination. We have three main taxes on income in the United States, one regressive (the Social Security tax), one relatively flat (the Medicare tax) and one progressive (the Income Tax), all of them highly discriminatory based on the source of income (SSI and Medicare are taxes on wage income only, and the income tax is levied at different rates for wages and capital gains, and has an astonishing maze of exemptions, credits and deductions). Two major wealth taxes we have in the United States are the tax on real property (levied at the state and/or local level), which discriminates based on the kind of property owned (buildings are taxed, gold ingots aren't) and the estate tax, which is levied only once (upon inheritance). There are too many transaction taxes to count, from sales taxes to tariffs to gasoline and cigarette taxes; what is notable is that the United States does not have the most common kind of transaction tax, the value-added tax, which is a major revenue-raiser across Europe.

What's the most efficient way to raise revenue? In general, the more complex the tax system, the greater the transaction costs in terms of accountants, lawyers and lobbyists whose sole function is to game the system to minimize taxes or to distort the system by winning new loopholes. Some degree of complexity is inevitable in a modern economy, but our current system is truly byzantine, and one of the strongest arguments for the flat income tax is that it would realize huge efficiencies by eliminating much of this complexity. Certain taxes stand out for their inefficiency, however, and the estate tax is high on the list. As an economy, we probably spend as much money trying to avoid the estate tax as we pay in estate taxes. That's pretty inefficient. The corporate income tax is similarly a waste; not only is it expensive to collect but it results in double-taxation of income, as corporate income is taxed first by at the corporate level and second at the level of the investor who collects dividends.

What's the tax with the least economic cost? Supply-siders have argued that high marginal rates on income are the biggest disincentive to wealth creation; they therefore argue for low and flat rates of tax on income, if income is to be taxed at all. There's some question whether these disincentives are particularly powerful once you get below truly punitive rates. However, there's not much disagreement that a value-added tax is particularly efficient, both in terms of transaction costs and economic cost. Why? Because it falls equally on all transactions, the VAT causes little in the way of economic distortion. Because it is collected by business, it creates little in the way of new bureaucracy. And because it is passed on to consumers, it creates little incentive for business to invest money or energy in trying to avoid the tax, as they do with the corporate income tax.

The downside of the VAT is political: it is very easy to raise without immediate political impact, and it does impose a drag on the economy by discouraging economic transactions of all kinds. Because it is relatively "cheap" to raise, the VAT imposes less fiscal discipline than the income tax, and this makes it a dangerous tax from a "political mischief" perspective. In addition, the VAT is very regressive; the poor spend a greater percentage of their income, and thus, as a percentage of income, pay a greater amount of VAT than the wealthy. This is undesireable from a social-policy perspective. In addition, at very high VAT levels (as with high sales-taxes), you encourage smuggling.

Wealth taxes are also theoretically "cheap" to impose. They create incentives to put capital to work, since "dead" money is still taxed even if it has no return. A modest wealth tax should therefore be a spur to productive investment. However, wealth taxes have two significant political downsides. First, there's the privacy issue of letting the government know your net worth. Lots of people object to that on principle, and with good reason. Second, there's the consequence of such concerns: people will hide wealth, both legally and illegally. Finally, there is the problem of defining wealth. Real property is relatively easy to tax, as are securities. What about a private business? What about art? What about intangibles like intellectual property? These things all can be valued - they are, when an estate is inherited or in a divorce proceeding. But the burden of making these valuations on an annual basis is significant. In the end, the cheapest wealth tax is a mildly inflationary monetary policy, as inflation is effectively a tax on wealth. This is what we've had in much of the Western world since the 1980s, and what we had in the 1950s as well: a policy of low, stable inflation that correlates better with steady economic growth and rising overall incomes than either the very inflationary policies of the 1970s or the sharp booms and busts of the 19th century gold standard.

Ignoring our entitlement programs that dominate both taxes and spending in absolute dollar terms (but are not part of general revenues), our Federal tax system is dominated by income taxes as our state and local systems are dominated by real property and sales taxes. I believe that the cheapest, most efficient transition we could make from our current Federal tax system would be from a tax on income to a tax on consumed income. We should eliminate the corporate income tax entirely and treat capital gains as regular income, and we should also eliminate the estate tax. (I would eliminate the estate tax and corporate income tax because these are extraordinarily inefficient taxes. I would tax capital gains as ordinary income because the lower rate for capital gains creates economic distortions and one main justification for the lower rate is that capital is already taxed at the corporate level; if we get rid of the corporate income tax, that's no longer a rationale.)

Why do I argue for a consumed-income tax? I believe that it would be superior to our current income tax system in several ways and would be politically and socially more palatable than eliminating the income tax and moving to a VAT. Moreover, it would best leverage the existing infrastructure for tax collection, reducing transition costs.

A consumed-income tax would be a tax on income with an unlimited deduction for investment or charitable giving. Our current income tax, with deductions for various kinds of debt and with rising marginal rates with income, distorts economic decisionmaking to favor consumption and debt over investment and savings. A consumed-income tax would remove these distortions; income would be taxed when it was spent, not when it was earned and reinvested. One reason some people tout a VAT over the income tax is that under a VAT a taxpayer can give herself a tax break simply by cutting back on spending; this would also be true under a consumed-income tax regime.

So why not simply move to a VAT? Four reasons. First, we already have an infrastructure for collecting income taxes, and we don't have one for VAT. The transition costs for moving to a consumed-income tax system would therefore be less than for moving to a VAT. Second, a VAT is a pretty regressive tax, as people with lower incomes tend to spend more of their income, and thus pay a greater percentage burden of tax. Under a consumed-income system of tax, the wealthy could still be taxed at higher rates than the poor, but without the usual negative supply-side consequences because a wealthy person would not pay high taxes simply for earning income, only for earning income and then spending it. Third, as long as we remain within an income-tax framework, we can make charitable giving deductible, which is good social policy. We can't do that under a VAT system. Finally, an income tax would be far more transparent to the citizenry than a VAT, because it would come out of people's paychecks. Therefore, it would be politically more difficult to hike the basic rate to very high levels, unlike the VAT which can be raised stealthily to quite high levels before it encourages either political resistance or smuggling.

I would add a fifth, most tentative reason: a consumed-income tax will promote greater social solidarity. This will happen in three ways. First, because consumed income would be heavily taxed (I would expect a fairly steep rate structure, and higher nominal rates than currently) there will be a strong economic disincentive to conspicuous consumption, and conspicuous consumption by the wealthy is a major cause of social inequality. Second, our current income tax system is rigged to overwhelmingly tax the wealthy, and to exempt an ever-greater percentage of the citizenry from income taxes. Since those who pay the bills make the rules, this has effectively given the wealthy ever greater influence over our government. A consumed-income tax would have a broader base even while it penalized the wealthy with higher nominal rates, and would thus make the government less dependent on the wealthy for its revenue. Third, a consumed-income tax would provide a very strong economic incentive to the lower-middle class to save their excess income, and consistent savings is very highly correlated with migration up the socio-economic scale. Our current system is tilted to make debt-financing as cheap as possible for this group of people. A consumed-income tax would make savings as cheap as possible, and the shift from debt to equity will ultimately be very good for social mobility.

The main risk with a consumed-income tax would be the definition of an investment. Real property and securities would clearly qualify, but what about art? What about perks received from an employer or from one's own business - would these be consumed income, and therefore taxed? They should be, or else these perks will multiply enormously as an untaxed form of consumption. In the end, we'll probably still have a lot of work for tax lawyers and accountants under a consumed-income system. But I still think it would be preferable to the current system for all the reasons outlined above.

Next stop: Social Security reform.

Sunday, July 28, 2002
Every time I start to get frustrated with the Bush Administration, Al Gore says something that makes it clear why he would have been a disaster as President.

A quick correction of one point in his little talk: Gore did indeed vote to support the Gulf War (unlike the vast majority of Democrats in the Senate), but he agonized about it publicly, spent most of the speech attacking the Bush (41) Administration, and generally bent over backwards to cover his rear end in case the war didn't go well. Sharp contrast to Sen. Lieberman, who lobbied his fellow Democrats actively to win support for the war.

(Clinton, by the way, said he would have personally preferred to let sanctions work rather than launch a counter-attack to remove Saddam from Kuwait, but that he would probably have voted for war for political reasons. Vintage.)

Friday, July 26, 2002
Apologies to my few readers out there, but it has been a very hectic week and I am nursing a bad cold.

That said, a couple of words about John Judis's latest declaration that the Democrats are headed toward being a majority party. He says pretty much the same thing every year for the past 5 years or so.

His point is: Democrats do well among singles (particularly single women), working women (particularly single working women, most particularly single working women with children), non-church-goers, American blacks and Caribbean immigrants, Hispanics, East Asians, and the professional classes, and all these demographic groups are growing. Hence, ultimate victory for the Democrats. This is an excellent analysis of why Pete Wilson was the last governor of California, and why even Gray Davis is the odd-on favorite for re-election. But is it true?

No, for three reasons.

First, accepting the thesis amounts to accepting that liberals are right on the ideology, particularly on the culture war. Non-church-goers are growing as a percentage of the population. So is the percentage of the population that adheres to "hard-line" religious views: Mormons, Pentecostals, evangelical Christians, Orthodox Jews, etc. Similarly, the numbers of single white women with children continues to grow; so do the numbers of home-schoolers. Who's going to win the demographic battle? Depends on which trend you think is going to dominate in the long term. If you agree with Democrats, you'll think that their trend will dominate; if you agree with the Republicans, you'll think that their's will. There's no strong argument here in the end. It does seem to me, though, that the regular church-goers have rather more children than the non-church-goers.

Second, the longer immigrants remain in America, the more likely they are to vote Republican. Blacks (both native and immigrants) and East Asians seem to be something of an exception; East Asians arrived more likely to vote Republican because of anti-Communism, but their children have rapidly assimilated to the professional-class that is indeed trending strongly Democratic, while African-Americans have a unique antipathy to voting Republican that will not change without some major event to precipitate a shift. Among Hispanic-Americans specifically, there is a clear trend towards voting Republican with rises in income and generations since immigration. So the short-term and long-term trends for the most important immigrant group may cut opposite ways: short-term, high immigration may help the Democrats (as it has in California), but longer-term these may be fertile fields for the GOP to harvest. (It's also worth noting that Hispanics are well-represented in the "faith-oriented" groups that most strongly affiliate with the GOP.) In any event, it's quite clear that the Republican Party is trying very hard to figure out how to appeal to Hispanic voters; it seems rather complacent of Judis and Teixeira to assume they will fail on the basis of the California experience, when Pete Wilson's GOP there did so much to actively alienate this group.

Third, and most trickily, while Judis and Teixeira are right that on a national-political level the professional class tends strongly to vote Democratic, on a local level this is far from the case. The reason is that these voters are concentrated in urban areas that are frequently captive to lunatic or corrupt Democratic machines. The Giuliani and Riordan victories were not accidents; they show the potential for reformist Republicans to capture power in areas that are overwhelmingly Democratic by registration but where the Democratic Party is totally disfunctional. It is not impossible to see the GOP taking advantage of this trend longer-term, its reformist, progressive wing reborn on a regional basis. The biggest barrier is the GOP label, which is now associated with a regional, Southern-oriented national party that has little to say to urban America. But the Northeast is not naturally a one-party region, and the revitalization of its urban metropolises has happened frequently under GOP auspices, which gives the party a real opportunity to make long-term converts, if it seizes it.

What I think is most notable about the argument is that Judis and Teixeira have changed the demography without changing their position. They have long argued that there is a natural Democratic majority because Democratic economics appeals to working people. They are not arguing this anymore; indeed, they praise the Clinton Administration's "fiscal moderation" - i.e. Eisenhower Republicanism. The GOP has moved the discussion on economics so far to the right that even Judis and Teixeira have taken notice, and accepted that the DLC vision of the Democratic Party is the only plausible way to victory. They are now counting on what amounts to a coalition of cultural liberals because their economic story didn't pan out: white males voted overwhelmingly for Bush in the last election.

The reason the GOP is on the defensive now is simple: they have been the aggressive party, pushing their ideas and their bases' interests, for 20 years, and they are over-extended. Clinton changed people's perceptions: they now think of the Democrats as the party of stability and the GOP as the party of change, and voters will always cycle between these poles. (In that light, the change in women's voting preferences make perfect sense: when the Democrats were the party of change, women voted Republican; now that they are the party of stability, women vote Democratic and men vote Republican.) But the party of change controls the conversation. The national Democratic party has only three concrete proposals for change: national health insurance, gay marriage, and gun control, and Judis and Teixeira know that the last two are very risky electorally. Everything else on the Democratic agenda consists of stopping the GOP agenda: stopping school choice, stopping Social Security privatization, protecting established abortion rights, preventing changes in environmental regulations or tort law, preserving affirmative action, trimming back tax cuts, watering-down welfare reform, preventing new trade liberalization rounds, protecting the privileges of public-sector unions - that's the agenda, one dictated by GOP attempts to change the way things are done. Which means the GOP controls the conversation and the Democrats win when the GOP over-reaches in its efforts to produce change. The Democrats may score some significant victories - and they should, if only to keep the GOP honest. But we will not be in an era of Democratic majority until Democratic ideas dominate the national conversation.

Thursday, July 25, 2002
A very good article on the opinion pages of the Wall Street Journal: Stocks Are Still an Oasis. Part of the article is devoted to the proposition that stocks are a buy. I suspect the bottom is a bit lower, but we're getting close in price and time terms. But that's not what I think is interesting about the article.

The author makes the point that this bear market is partly about mal-investment (specifically in telecom) but in its recent down phase is about the honesty of corporate earnings. And one reason why we had the potential for a scandal about corporate earnings is that stocks don't pay dividends anymore. It used to be that the way you found out whether a company had stable earnings was from the dividend yield: if the stock had a reliable record of raising dividends regularly, and dividends were a substantial portion of corporate earnings, then you could be pretty confident in the reality of corporate earnings and their probable continuance into the future.

Nowadays, stocks don't pay dividends. During the bull market, companies retained earnings or spent them on buying back stock to create capital gains. Why did they do this? The major reason is the structure of our tax system. Dividends received are taxed as income whereas capital gains are taxed at a lower rate. Dividends paid are not deductible whereas interest paid is. So if a company pays dividends, it increases its own tax bill and that of its investors; if instead it borrows money to buy back stock, it pays less in taxes and so do its investors. So corporations behaved rationally: they stopped raising dividends, and new companies never started paying them (even when they became huge and had a very stable earnings record, as, for example, Microsoft).

The result is that investors are deprived of a valuable signal and a valuable discipline on management. Management can finesse a bad quarter's earnings with little negative impact if business recovers thereafter, but dividends send cash out the door, and management with be loathe to spend actual money they don't have. And as managers increasingly compensated themselves with stock options, they had a new powerful incentive both to prefer capital gains to dividends (options don't pay dividends) and to manipulate earnings to generate capital gains.

We badly need to restore a dividend-paying culture to corporate America. The preference for capital-gains is tax-driven and does not accord with good corporate governance. Investors bought into the current system as a philosophy because of the outsized capital gains during the bubble years. Now that the bubble has burst, we can sit down and try to fix this aspect of the system that is broken. But how?

One part of the solution is to properly account for stock options; if we did that (as I have argued before), corporations would increasingly compensate executives not with options but with stock grants, which would pay dividends. That would eliminate the perverse incentives that options create. But to really change things, we need to tackle the perverse incentives of the tax system.

Tax changes that would eliminate the perverse incentives against paying dividends would include making dividend payments deductible (putting them on a level playing field with interest payments), and raising the capital-gains tax rate (bringing capital gains taxes into line with taxes on dividends) or, alternatively, taxing dividends as capital gains.

Personally, I'd prefer to see a more widespread overhaul of our tax system, which would solve the problem of low dividends as a small side-effect. I will outline my preferred tax system in another post. But even within our current system, minor changes in corporate and individual income tax policy could make a big difference in improving corporate governance by restoring substantial dividend payouts and the discipline they bring.

Tuesday, July 23, 2002
STRATFOR also has a good (and depressing) piece on the state of China-Taiwan relations. The only bright spot: China doesn't need to invade any time soon, because time is on its side. Here's the key section:

Beijing can afford to sit back and wait for economic integration to reach a point where Taiwan has little choice but to accede to Beijing's demands for reunification under the "one country, two systems" scheme. Chinese officials have carefully assessed the balance of power across the strait and know that, should the United States intervene, China would have little chance of conquering Taiwan through military action. Further, were Beijing to attempt such a move, it surely would lose all of the incoming investment and global goodwill the regime has worked so hard over the past decade to attract.

Beijing sees little need to act militarily against Taipei any time before the 2008 Summer Olympics, and probably not for several years after that. In the meantime, the People's Liberation Army can improve its technological assets and operational capabilities, just in case Taiwan finds some way out of the economic web Beijing is weaving. If Taiwan has not come to a peaceful solution on cohabitation with mainland China a decade or two down the road, or if Taipei takes the drastic step of declaring independence, leaders in Beijing will feel little choice but to respond with force.

Taipei does not feel the same luxury of time as Beijing. Investment into Taiwan keeps falling, dropping nearly 47 percent year-on-year for the first half of 2002 to just $1.5 billion. Over the same period, foreign investment into China grew 18.7 percent, and officials expect a record $50 billion in incoming investment for the year. Taiwanese businesses, meanwhile, are looking to relocate some of their operations to China to take advantage of cheap labor costs and to remain competitive in the global race for a stake in China's huge market and labor pool.

As a result, Taiwanese leaders face a conundrum. To remain economically competitive and vibrant, Taipei needs to approve Taiwanese business investments in China, and in fact has approved 611 such requests amounting to $1.5 billion in the first six months of this year, according to the Taiwan Investment Commission. Yet the more tightly Taiwan's economy becomes tied to that of mainland China, the more exposed Taipei is to the whims of Beijing.

Sounds like a good argument for a Free Trade Area of the Pacific, hmmm?

Good piece on Iran from Daniel Pipes. He doesn't think the regime is on its last legs; he correctly notes that those in power are ready to kill to stay there (but will the soldiers pull the trigger for them? That's the question.) but does think that regime change is only a matter of time. But here's the key section:

By virtue of getting more or less what they wanted in 1979 (i.e., no shah), the Iranian population realized that it had control over and responsibility over its destiny.

This development, unknown among Arabic-speaking populations, has led to something quite profound and wondrous: a maturation of the Iranian body politic. It has looked at its choices and thumpingly comes down in favor of democracy and a cautious foreign policy.

The contrast between the maturity of Iranian politics and the puerile quality of Arab politics could hardly be greater. Yes, both are dominated by tyrannical regimes, but Iranians can see their way out of the darkness. It is conceivable that before too long, the apparently disastrous Iranian revolution of 1978-79 will be looked back on as the inadvertent start of something wholesome and necessary.

This is a very important point. I am less than optimistic about the prospects for any kind of healthy democracy in Iraq after an American conquest, because there is nothing there to build on, politically. Ditto Afghanistan. Liberated by outsiders, with no authentic nationalism, no patriotic elite, no domestic civil society to build on, Iraq will only be held together by occupation. It'll be better than things are now, but that's the best that can be said - and even that will only be true so long as the Americans stay.

By contrast, I remain more optimistic about Egypt than most precisely because Nasserism and the Sadat-Begin peace accords consecutively established Egyptian independence on Egyptian terms: the former from the West, the latter from the chimera of pan-Arab "nationalism." Egypt has enormous problems as a society, but at least it is to some degree a nation. It is easier for me to imagine a Carlos Salinas type coming to power in Egypt and putting the country firmly on the road to reform (even as he lined his own pockets and played bloody politics to stay in power), paving the way for a Vicente Fox type a couple of decades later, than I can in any other major Arab country. I'm not saying it's gonna happen, or even that it's likely to happen, only that it could happen, and it will never happen in Syria or Iraq or Saudi Arabia.

This is really good (and much blogged elsewhere, but who cares): Bruce Hill has a conversation with himself circa 1997. He doesn't like what he hears.

As someone who started turning rightward around 1994 (you know, I grew up under Reagan, so didn't really have any idea what a Democratic President would be like . . . then I found out), and who thought Oslo was a mistake from day 1 (the horror of the Rabin assassination shook me badly, and I despised Netanyahu, but I never changed my view of Arafat), I can't play the same game.

One part of the conversation Bruce left out, though:

1997 ME: So, where's the Dow trading?

2002 ME: Oh, a bit under 8000.

1997 ME: Wow, right about where it is now. Just treading water for five years, huh? Must have been boring.

2002 ME: Not exactly . . . wonders whether the Israeli traitors - the ones who sold weapons and ammunition to Arafat's Tanzim - were deranged or whether they were part of a settler plot to foment Palestinian violence, and thereby trigger an explosion that would terminate the Oslo accords.

I ultimately agree with Stratfor that no explanation is entirely satisfactory. The amounts of money involved are too small to tempt someone to treason. But the idea of selling weapons in order to provoke a conflict is just too baroque.

In any event, this is a very distressing case.

Good stuff at DEBKAfile today: on the new U.S. airbase being built in western Afghanistan, near Herat (mullahs of Iran none too pleased about that) and the ongoing Jordanian takeover (under American auspices, and with Israeli acquiescence) of the Palestinian areas of the West Bank (Arafat & Co. none too pleased about that).

Winds of Change, Joe Katzman's site, continues to be a major source of news for me. This post is mostly an ad for him, but I wanted to comment on two items in his round-up:

* I3 Axis: I know it spoils the symmetry, but you need to add Turkey to the axis - and can we call it something other than an axis? The good guys are always the allies; the bad guys are the axis. In any event, Iran is a natural ally of Israel's for several reasons. First, the Persians hate the Arabs, and always have. Second, the Iranian people hate their government, and are eager to ally with the West, which would make friendship and even alliance with Israel much easier. Moreover, after a generation under the mullahs, the Iranian people will have no interest in shunning Israel in deference to Muslim sensibilities.

Thid, with rare historical exceptions (such as under the current regime), Persians have been good to the Jews. Indeed, Judaism as we know it developed largely under Persian influence, in two periods. First, under Cyrus of Persia, the Jews who had been deported from Israel by the Babylonians were permitted - even encouraged - to return and rebuild their homeland and to fix their law in a standard form. (Since the Persian Empire largely allowed its subject peoples to govern themselves, so long as they paid taxes and didn't treat with foreign powers, it had an interest in making sure that these subject peoples had regular systems of law and administration.) It is thanks to the Persians, then, that the canon of Jewish scripture was fixed, that Jewish sovereignty in Israel was restored, and that the Temple was rebuilt. Nearly 1000 years later, the Talmud was written in Babylonia when that land was part of the Parthian/Sassanid Empire, a tolerant Zoroastrian realm, and the religion of the magi left an important imprint on this seminal document of Jewish religious civilization.

Once the mullahs fall, Iran will join Israel, Turkey and India in a natural pro-Western and anti-Arab alliance. It will then be left to the Arab states (and Pakistan) to choose whether to line up together to fight a losing battle against this American-backed cohort or whether to recognize the correlation of forces against them and ally with the West. I expect Egypt, Tunisia, Morocco and Jordan to choose wisely, Syria, Saudi Arabia and the Palestinians to choose unwisely, Algeria, Pakistan, Yemen and Sudan to try to play both sides or focus on trying to keep their countries from imploding, and Iraq to be an American- Turkish- and Iranian-dominated state without power to choose.

* I've been following the story of the Bnei Menashe with great interest. I hope that these brave souls will be successful in their quest to rejoin the body of their people. But I also hope that for once Israel doesn't make the kinds of mistakes it made in the past. The Bnei Menashe need to be religiously reconnected to the rest of Judaism; in most cases, this will mean conducting "conversions in the case of a doubt." But the powers-that-be in Israel will, if past is precedent, do much more to bruise the spirit of these people. The Lithuanian theocrats will try to divest them of their religious traditions and teach them to wear black hats and eat herring. The Housing Ministry will build dwellings for them in the most dangerous or depressed areas of the country. Everywhere but in the army, they will be isolated from the mainstream of Israeli life. I'm being pessimistic, but this is what happened to the Teimani (Yemenite) Jews and the Ethiopians. A generation later, things will have ameliorated quite a bit, but there's no reason for the damage to be done in the first place.

Monday, July 22, 2002
A really moving piece from my old high-school debate nemesis Hanna Rosin, a profile of two seminarians - one straight, one gay - who dropped out of seminary because of the gay "tension" they found there. Their common message is: seminaries are not healthy environments, for straights or gays, because they are dominated by gay men in one degree or another of denial about their own sexuality. It's a pretty sad piece. Both of these men were clearly called in some way, and both felt that the institution they were called to failed them. Anyhow, worth reading.

Damn. And I used to like Steve Earle.

Stanley Kurtz has been fighting the good fight against the Middle East Studies departments of our universities for a while now. He's very eloquent on the subject. Read his piece.

Good piece from veteran China hawk John Derbyshire on the Chinese military threat. Short synopsis: it's bad, and getting worse. They are nationalistic, united and building furiously to challenge the American presence in the western Pacific, particularly but not exclusively over Taiwan. They will be a much more formidable adversary than the Taliban, and America will stand entirely alone against them; no European nor Asian power will have an interest in fighting China for other than their direct self-defense. The only good news Derb can come up with is: their economy is being crushed by debt and they are not producing enough children. But economic collapse has often been a spur to military adventure, and the demographic collapse of China has been accompanied by a burgeoning surplus of males. According to the CIA factbook, China has 15 million more males than females aged 0 to 14 years. That's a big army when it comes of age. Not such happy demographic news after all.

Just in case you were wondering, that disparity is an anomaly. Here's a rundown of other major countries, the percentage of children aged 0 to 14 that are "surplus" males - meaning, if these males didn't exist, the sex ratio in that age group would be 1:1 - and the absolute number of "surplus" males. Only South Korea has more percentagewise and only India comes close numerically. I do think this has significant implications for present and future Chinese belligerency.

These are listed in descending order of percentage of surplus males:

South Korea - 5.90% surplus - 0.61 million surplus
China - 4.76% surplus - 15.16 million surplus
Vietnam - 3.32% surplus - 0.85 million surplus
Pakistan - 2.97% surplus - 1.74 million surplus
India - 2.96% surplus - 10.09 million surplus
Germany - 2.67% surplus - 0.35 million surplus
United Kingdom - 2.59% surplus - 0.29 million surplus
Japan - 2.52% surplus - 0.47 million surplus
North Korea - 2.50% surplus - 0.14 million surplus
Poland - 2.48% surplus - 0.18 million surplus
France - 2.44% surplus - 0.27 million surplus
Egypt - 2.39% surplus - 0.58 million surplus
USA - 2.31% surplus - 1.35 million surplus
Iran - 2.27% surplus - 0.50 million surplus
Russia - 2.01% surplus - 0.51 million surplus
Mexico - 1.99% surplus - 0.68 million surplus
Saudi Arabia - 1.94% surplus - 0.19 million surplus
Turkey - 1.82% surplus - 0.34 million surplus
Philippines - 1.80% surplus - 0.55 million surplus
Indonesia - 1.69% surplus - 1.17 million surplus
Iraq - 1.57% surplus - 0.15 million surplus
South Africa - 0.68% surplus - 0.10 million surplus
Nigeria - 0.59% surplus - 0.33 million surplus

The normal excess of males in this age bracket appears to be in the 2.5% area, so China has twice as many surplus males as it should. Obviously, over time this surplus declines and eventually flips to become a surplus of females, owing to greater female longevity. But in the meantime, there will be a lot of unattached men of army age looking for something to occupy their time.

A. B. Yehoshua has a well-argued piece in the Jerusalem Post: For a Jewish border. Yehoshua is one of the smartest Israeli lefties on the scene, and very worth engaging. A synopsis of his argument: Zionism sought to end anti-Semitism by changing Judaism and Jews, from a people without a country to one sovereign in its own land. The acquisition of the territories in 1967 corrupted this change because it put Israel in the position of ruling another people, of asserting a demi-sovereignty that could never be realized. His cure for this new malady: unilateral separation, the creation of a border that can be defended and that does not include the vast bulk, if not all of Judea, Samaria and Gaza.

Yehoshua doesn't say whether he favors a unilateral withdrawal from the Old City of Jerusalem. I think I can confidently predict that he does not. He is not so foolish as to suggest that a unilateral withdrawal will usher in an immediate era of peace and good feeling between Israel and the Palestinians, nor that security measures will be unnecessary post-withdrawal. In practice, then, his withdrawal is a continuation of the Oslo process, in that Israel withdraws to new boundaries and the Palestinians attack across those boundaries. Rather than impose closure on the Palestinian population centers, closure would be imposed on most or all of the territories as a single unit. Rather than fighting to liberate all of the territories, the Palestinians will be fighting particularly for Jerusalem. It is manifestly unclear how his proposal will change anything. And I don't think I need to detail all of the dangers it poses, which should be obvious.

And Yehoshua himself knows why a withdrawal will solve nothing, as is clear from this key section from his piece:

In trying to understand the sudden collapse of Palestinian inclinations towards rapprochement and peace, which took more than a few Arab-world experts and scholars by surprise, we must study Palestinian historical and cultural codes, addressing the "problematicness" of a national identity swinging between affiliation with a big rich Arab family, on the one hand, and the existence of a small people that never experienced a single moment's independence in its land, on the other.

Palestinian identity was forged by struggle and conflict with the Jews; prolonging the conflict may possibly be a sine qua non for the continued emergence of that identity.

That is the key to understanding the conflict, and to understanding why Arafat could walk away from the only deal that would give his people a state, and be supported wholeheartedly by his people for his intransigence. Palestinian identity is the negation of Jewish claims to the Land of Israel, and the affirmation of the suffering of the Palestinian people on account of those claims. That is the entire substance of that identity. Palestinian nationalism, therefore, can never be satisfied until the Jewish state is destroyed, whether violently or peaceably.

I don't say that Palestinians will never be satisfied; Palestinians come in all sizes, shapes, colors, etc. But Palestinian nationalism cannot be satisfied. Oslo was premised on the notion that this nationalism had changed its character, that the Palestinians accepted Jewish sovereignty in Israel, and demanded only their own self-determination alongside, ultimately in the form of an independent state, however small and defenseless. It is simply very difficult to maintain that that is the case, after all that has happened. If Yehoshua agrees that the PLO is the embodiment of a Palestinian nationalism that can only be satisfied with Israel's destruction, then Israel can only survive not by fleeing from a new PLO state but by destroying it.

Of course, the Palestinians will still be there. And Israel's options for dealing with them will be the same as they always have been. Either they must join Israel as equal citizens, which would turn Israel into a bi-national state. Or they and their lands must be traded away to Jordan, the only state in the region to have accepted the Palestinian people and the only logical locus for their national aspirations. Or some kind of autonomy arrangement must be worked out for Palestinian self-government. Whether this last involves formal Palestinian statehood is somewhat secondary; the state cannot possibly be viable, and so will be a practical dependency of its neighbors - and, to the extent that Israel wants to have access to the Palestinian areas for its military for security reasons, this probably would mean accepting a similar role for the Jordanians.

So I agree with Yehoshua. The choices are what they always were: share the state or share the land. I simply disagree with him that running away from an enemy ideologically committed to your demise is in any way constructive. And I think his own arguments support my position more than they do his.

Friday, July 19, 2002
I haven't blogged on this topic in a while, but the lattest missive from anti-bilingual activist UnzColumn got me thinking about it again. I'll be brief 'cause it's Friday afternoon.

I never cease to wonder at the fact that the conservative movement doesn't make ending bi-lingual education more of an issue. This has got to be one of the easiest ways to improve American education, and one of the easiest fights to win in the culture war. It is a lot cleaner - and more important - fight than vouchers, because bi-lingualism is an affront to common citizenship and equality of opportunity perpetrated by the state, the closest thing we have today to legally mandated segregation, and with the same awful consequences. But conservatives are routinely terrified to take on the issue; in fact, the most vocal supporters have been Republican liberals like Richard Riordan and Mitt Romney. Why is that? Why has the conservative movement spent more energy trying to prevent any state from adopting some form of marriage for gay couples (to take an example from the title of Unz's piece) and so little trying to end bi-lingual education? Somebody's priorities aren't in order, and I don't think it's Ron Unz's.

Like Charles said, sometimes there's not much to say except ... wow.

Per the discussion that follows his original post, Shamir is definitely a real person; I've read things by him before in Ha'aretz. My suspicion is that he is a Russian of mixed Jewish-Russian heritage, profoundly anti-Semitic, and a disgrace to Ha'aretz. By analogy to American politics, having Ha'aretz publish Shamir is roughly equivalent to having the New York Times give a regular column to Bill Ayers. (Which, now that you mention it . . .)

Okay, back to the market. There's been a bunch of bloviating about stock options and whether they can be expensed. I'd like to offer the insights of someone who actually structured hedges for these programs, and elaborate on why I think it is important that they indeed be expensed.

We all understand why companies issue stock options to their employees. It boils down to two rationales: (1) it's a cheap way to give potentially outsized compensation because it costs the company nothing in up-front cash, and therefore helps risky ventures with high upside potential lure top managerial talent; (2) it's a way to align management interests with those of shareholders generally, in that it rewards management for a rising stock price, which is what investors want.

The former is unproblematic. Were it not for stock options, startups would have a very hard time luring experienced managers who usually have many offers for their services to choose from (including the option of starting their own firm). In spite of everything that has happened since the bubble burst, I think we can all agree that entrepreneurial activity is a good thing, that technology startups in particular have done a great deal to add value to the American economy, and will continue to do so in the future. We don't want to jeopardize this activity, and if expensing stock-options would do so, then this would be an argument against such expensing.

Fortunately, an accounting change will have no impact on these young, fast-growing companies. These companies are not measured on a quarter-by-quarter earnings yardstick but according to metrics more appropriate for their youth. Their investors tend to be extremely knowledgeable and will not be put off by a change in accounting. And they are frequently expected to post losses for some time before achieving profitability. A change in accounting for stock options will have no impact on this sector.

The second reason why companies issue stock options is far more problematic. First of all, options are not the same as stock in terms of the incentives they put on management. Stock has both upside and downside; the asset can gain or lose value. A stockholder, therefore, has an incentive not only to take risks to increase value but to weigh risks carefully because, if they don't work out, they can cause a loss in value. Moreover, a stockholder has theoretically an infinite amount of time to achieve her goals; while future earnings must be appropriately discounted, all the earnings, into infinity, go into the value of the stock. By contrast, an option holder has unlimited potential upside but limited downside. An option is worth only a fraction of the value of a share, but the potential gains on an option are equal to the potential gains on a share. Moreover, all options have expiration dates, so that improvements in share value need to be recognized by the market within that time limit for the option to pay off for the holder. Both of these factors - limited downside and time-constraints on returns - encourage an option holder to seek risk. An increase in riskiness of the underlying shares, even if it subtracts value from shareholders, increases the value for option holders, because it increases the odds of a spectacular payout.

This problem - that options encourage excessive risk-taking - is not acute for startups because startups are already extraordinarily risky. But at mature corporations, large option grants encourage management to behave as if they were running a start-up - as if time were acutely short and both upside and downside potential were enormous. They encourage management to increase leverage and to take actions that erode shareholder value in the interests of increasing volatility, and thereby potential upside. This is, contrary to bubble-era logic that treated risk is meaningless and focused only on potential reward, extremely bad management.

It would be far more sensible for large corporations to align their managers' interests with those of shareholders by compensating them in part in restricted stock. But such stock grants, unlike options grants, have an immediate and negative impact on the company's bottom-line through dilution. Moreover, a company will have to pay a manager more in stock than in cash because stock is riskier than cash. Options, however - because of their current accounting - are free. They are valuable securities - long-dated options on typical stocks can cost over 25% of the value of the stock, even with strike prices significantly above the current market price - and this value is directly transferred from investors to managers. But this value transfer is never recorded on the balance sheet of the company.

If you doubt that companies are over-generous with stock options because of the accounting, just look at how hostile they are to the idea of changing that accounting. It never ceases to amaze me that commentators can say on the one hand that the accounting for options doesn't matter because investors "see through" the accounting to the underlying value, and on the other hand that changing that accounting would have a real and negative impact on business. You can't have it both ways. If accounting doesn't matter to shareholders, then let's make the change and not worry about it. If it does matter, then let's have a substantive debate about the various ways to account for options and decide what is best.

Options, as I have said, do give management a strong incentive to increase the company's stock price, but they also give management a perverse incentive to seek risk even where it marginally erodes shareholder value. Accounting for options as if they were free gives corporate boards a perverse incentive to over-issue options, since they are perceived to be the cheapest way to attract talent. This over-issuance, then, distorts the entire compensation market, encouraging executives to chase the hottest option-grant opportunities - to go work for the company with the greatest perceived likelihood for a rapidly rising stock price - rather than try to add the most value at a firm where they have established expertise and strong working relationships. The stock-options game, by giving such outsized compensation to some executives during the bubble market, put all corporations in the position of an arms race: in order to retain executives, older, stabler corporations had to vastly increase their options grants; companies with declining stock prices had to re-price options - a truly perverse action, given that the point of options compensation is that the executives are supposed to be paid less when the stock goes down; etc.

Accounting for stock options as an expense is the simplest way to dramatically reduce these perverse incentives in the future. There are several arguments against such a change, however, and I'd like to address them all here.

OBJECTION: You can't actually value stock options because you don't know what they are ultimately going to be worth.

RESPONSE: This is silly. I work in a derivatives business. We value stock options all day long. There is a huge market in options of all kinds, not just the standard listed options but all kinds of exotic over-the-counter structures. If a company can't do the valuation itself, it can hire an auditor or an investment bank to do the valuation. In fact, the simplest way to get a valuation would be to purchase hedges. Most companies do not do this, leaving themselves exposed to what are effectively large losses (though they are never accounted for that way) if the stock price rises. Why don't they buy hedges? Because that would cause them to book an expense up-front, while if they don't hedge, the options they have granted are costless.

OBJECTION: But that isn't really fair. If the company doesn't hedge, it won't face any kind of a loss unless the stock goes up and the options are exercised. Why penalize the company if it never faces this cost?

RESPONSE: Okay, then, we'll give companies a choice. They can either book the cost of the options as an expense up-front, when the options are granted. Then, when the options are exercised, they won't have to book any additional expense. Otherwise, they can book no expense up-front, but when the options are exercised they will have to book an expense equal to the difference between the market price and the exercise price of the options. The latter is what is done today for tax purposes. I suspect that most early-stage companies will similarly use the latter method because their earnings are already highly volatile, and therefore they will prefer to dampen that volatility by taking losses in good years when the stock is up rather than face a drag on earnings every year from option grants; moreover, they will be unlikely to buy hedges because this would involve a cash outlay. By contrast, I would expect mature companies to expense the options up-front, because such companies place a premium on earnings predictability, and up-front expensing would provide this; moreover, once they expensed the options, they would have an incentive to purchase hedges so that their cashflow tracked their earnings more closely and was similarly predictable. Does that sound fair?

OBJECTION: It sounds fair, but it is really punitive, because currently the cost of stock options is accounted for upon exercise through dilution. The market knows more shares have been issued, and discounts them appropriately.

RESPONSE: It may look punitive in comparison with the current system, but that is because the current system is biased in favor of options grants. You're right that the market responds to the dilution. But you can't tell by looking at an accounting statement how much value was transferred from shareholders to managers via options grants. That is important information, and it is very hard to determine because of current accounting. If you accounted for stock options as an expense on the back end, upon exercise, you would show the same cash flow as is currently the case, but you'd have a bigger number representing the value of the stock issued (based on the current value of the stock) and then a big negative number representing the difference between that number and the actual proceeds, reflecting the fact that the stock option caused the company to sell stock below market. Because the issuance of securities is not income, while the cost of the options exercise would be expense, it would affect the company's reported earnings. And that's appropriate: the options grant was a transfer of value, and is part of the cost of doing business, and this should be recorded somewhere. Now it isn't, and that's wrong. Dilution is correctly accounted for today, and tells you the denominator for EPS. Cashflow is accounted for properly as well. But the numerator of EPS is incorrect because part of the cost of doing business is the cost of stock options, and that cost is nowhere on the accounting statements.

OBJECTION: Well, we can agree to disagree on what is the most correct accounting, but surely you must agree that a sudden change in accounting standards will be very confusing to shareholders. More important, businesses whose plans depend on the regular issuance of options will suddenly be thrown into disarray, as they will be unable to economically offer the same kind of package and retain their top employees.

RESPONSE: I think this objections answers itself. We cannot agree to disagree on what counts as proper accounting and then agree that changing accounting would be a bad idea. If businesses depend on a certain accounting, then it matters a great deal whether that accounting is correct; we can't agree to disagree about it. If changing accounting standards are confusing, then presumably incorrect accounting standards are more confusing. If businesses' plans depend on wrong accounting, there is something wrong with those plans. If entire industries depend on overcompensation of executives abetted by bad accounting, then perhaps too much capital is being devoted to those industries; indeed, such a mis-allocation of capital could be a contributing cause of a stock-market bubble.

It comes down to this: it is possible to hedge the risks associated with issuing stock options. Virtually no major companies lay out this expense because, under current accounting, the issuance of stock options is free. A change in accounting would encourage these companies to hedge or, alternatively, to accept that their earnings will be dampened in years when their stock does well, in either case revealing the true cost of stock-options issuance. If banks were apparently making money, and compensating their employees on that basis, because they did not have to fully acknowledge the interest-rate risks or credit risks they were taking, everyone would agree that an accounting change was in order. The only difference here is that, because of continued prestige of the high-tech industry, and because of that industry's ecumenical policy with respect to campaign contributions, their objections - and they have objected vociferously to any change in the accounting for options - carry a weight in excess of the merits of their arguments.

Final point: I do not think that stock-options accounting was in any way directly to blame for the fraud that occurred at Enron, Worldcom, etc. However, I do think it was indirectly to blame in two ways: it helped fuel the bubble that made everyone lose their bearings, ethically and otherwise, and it created perverse incentives to pump-up stock prices that may have tipped some companies over the edge from aggressive accounting into outright fraud in an effort to avoid a stock collapse. The existence of perverse incentives in no way mitigates the criminality of those who committed accounting fraud. But we should nonetheless pay at least as much attention to those incentives as we do to criminal penalties as a solution to our current crisis of credibility.

God, I hope this is true:Ha'aretz: French sources say U.S. to attack Iraq in next 3 months. Not only that, the French government supports it!

I'm scanning the sky for flying pork.

The inimitable Ruth Wisse has an excellent op-ed in The Jerusalem Post on what is properly called the Oslo War. Most important in her analysis is the acknowledgement, so infrequently heard on the left, that by propping up Arafat Israel bears the responsibility for his crimes, against both the Palestinian people and the Israeli people. Israel can atone for the latter by winning the war. It will be more expensive to atone for the former.

The great error of Oslo was architected by Shimon Peres and his proteges, but it could never have happened without Yitzchak Rabin. Rabin will always remain for me the great tragic figure of Israel's history, Israel's King Lear. Like Lear, anyone decent loved him, and those who hated him were despicable. Like Lear, he was a larger-than-life figure, the first Sabra (native) leader of the nation, a leader in all of the nation's wars; he was, in many ways, the epitome of the Ashkenazi elite who dominated Israel's politics and culture for most of the nation's first 50 years. Like Lear, he loved his children - biological and metaphoric - too much, was too fearful for their fate in 1967 and again in 1993. And like Lear, as a consequence of that too-great love, he catastrophically decided to divide the kingdom, a decision that cost him his life along with the lives of so many of his nation's children. I will always love Rabin, even though I, like Ruth Wisse, was appalled by the decision Israel made to rehabilitate Yasser Arafat at Oslo, because I know all his fateful decisions, good and ill, were made from love - not self-love, but love of the nation.

Thursday, July 18, 2002
Today is the ninth of Av, the saddest day on the Jewish calendar. Today both the first and second Temple in Jerusalem were destroyed, the first by the Babylonians, over 2500 years ago, the second by the Romans, nearly 2000 years ago. The first of these destructions was said to have been punishment for the sin of infidelity, the worship of foreign Gods. After a 70-year exile, the people returned and the Temple was rebuilt. The second Temple was destroyed as punishment for causeless hatred between the people. This time, the return from exile took nearly 2000 years, and the Temple will not be rebuilt until the coming of the Messiah.

In Jeremiah, we read of the people, beseiged by Nebucadnezzar's troops, declaring their faith that Jerusalem would never fall - God would defend his Temple, as he did in the days of Isaiah when Jerusalem was beseiged by the Assyrians. But as Jeremiah foresaw, God did not defend, and Jerusalem was made a waste, and Lamentations records the only advice left to give a lost people: accept defeat, obey the conqueror, and wait for God's signal that the time had come to return to Zion, a signal that came in the reign of Cyrus of Persia, the conqueror of Babylon.

In the festival musaf liturgy, we say, "mi-p'nei hata'einu galinu me-artzeinu" - in the face of our sins we were exiled from our land. This is usually interpreted as causative: we sinned, therefore we have been exiled. But it is also proper to read it as descriptive: as we were exiled, our sins were in our face. This is the meaning of the line in Lamentations: it is good for man to be chastened in his youth. Suffering naturally and properly prompts us to repentance, and far better to repent while we are still young, with many years of good to do, then when we are old, with only a brief moment to reconcile ourselves to God. The Jewish people was chastened in its youth. Do we yet recall this chastening in our age?

In the Hallel, recited on festivals, we sing, "zeh ha-yom asah hashem, negilah v-nismecha vo" - this is the day the Lord made, let us rejoice and be glad in it. This day, the ninth of Av, is also a day the Lord made, and made, until the Messianic Age, for our sorrow. We must always remember that the God of Isaiah and the God of Jeremiah are the same God. The same God gave us Jerusalem and the same God destroyed it. The same God is the reason why there is life in the universe and the same God decrees the death of every living thing. We do not divide the Godhead, and if we have the temerity to approach Him, we must remember before whom we stand. On a day like today, it is best not to have the temerity. We have sixty days yet to prepare for our scheduled audience.

On the ninth of Av, it is traditional to study the following text, from the Talmud, tractate Gittin (I've cut the text off before its end; it goes on for quite a ways). I find the text endlessly fascinating. It reminds me on the one hand of the post-apocalyptic folk tales from Russell Hoban's Riddley Walker. The description of the behavior of the Biryonim, the most radical of the zealot party that favored war with Rome, remind me of nothing so much as our enemies in the current war: convinced that God would fight for them, they were happy to kill their own people in order to provoke the war they thought they were destined to win. There is a great deal to say about this text, but I am a little light-headed now, so I suggest you read it yourselves. Anything is square brackets are explanatory expansions of the text written by a modern editor; anything is curly brackets and italics is a footnote by a modern editor.


R. Yochanan said: Let me give you an example of what is meant by the verse, "Praiseworthy is the man who always fears, but he who is stubborn of heart will fall into misfortune" (Proverbs 28:14). [The following story shows that a person must be extremely cautious and realize that stubbornness brings in its wake the greatest disaster.] Through Kamtza and Bar Kamtza Jerusalem was destroyed. Because of a rooster and a hen Tur Malka was devastated. Because of a rod of a carriage Betar was ruined. [The Gemara now explains:] "Through Kamtza and Bar Kamtza Jerusalem was destroyed." [This is what happened.] There was a person who had a friend named Kamtza and an enemy named Bar Kamtza. He once made a banquet and said to his servant, "Go and bring me Kamtza." [By mistake] the servant went and brought Bar Kamtza. When the host entered and found Bar Kamtza sitting at his banquet, he said, "The person sitting here is an enemy of mine. What is he doing at my banquet? Get out of here!" So Bar Kamtza said to him, "Since I am here, let me stay. I will pay for whatever I eat and drink."

He replied, "No, I won't let you stay." "I will pay for half the banquet," Bar Kamtza pleaded. "No," was the answer. "I will pay for the whole banquet, just let me stay." He still said no, grabbed him by the arm, and threw him out.

Bar Kamtza now said to himself, "Since the Rabbis were there and did not protest, that shows that they approved of what he did. I will go and denounce them to the Roman authorities." He went and said to the Emperor, "The Jews have rebelled against you." "How do you know that?" the Emperor asked. He replied, "Send an offering to their Temple, and see if they will sacrifice it for you on the Altar." {If a gentile brings an offering we are allowed to accept it and bring it on the Altar (Chullin 13b).} So the Emperor sent with him a beautiful calf. On the way to the Bet Hamikdash Bar Kamtza made a blemish on its upper lip, or as some say, in the white of the eye; in a place that we consider a blemish but the Romans do not. The Rabbis thought that they should bring this sacrifice [in spite of the blemish] in order to preserve the good relations with the government [and prevent the bloodshed that might result from their refusal]. Said R. Zechariah b. Avkulas, "People will say that you can bring a blemished animal on the Altar." So they considered killing Bar Kamtza [so that he should not report that they refused to offer the sacrifice]. {The rule is: If someone tries to kill you, be quick and kill him first. And Bar Kamtza through his denunciation was a mortal threat to the community.}

R. Zechariah now again said, "People will say that you killed him because he made a blemish on a sacrifice." R. Yochanan said: Through the timidity of R. Zechariah b. Avkulas [in allowing Bar Kamtza to go back and report that the sacrifice was not offered] the Bet Hamikdash was destroyed, our Sanctuary was burned, and we were exiled from our land.

The Emperor then sent Nero the Caesar to destroy Jerusalem. When he arrived, he shot an arrow toward the east, and it landed in Jerusalem. He shot another toward the west; it too landed in Jerusalem. He shot in the four directions, and every time it landed in Jerusalem [which to him was an auspicious omen that he would conquer Jerusalem]. He found a Jewish child and said to him, "Please repeat to me the verse you have learned today" [as an indication of what was in store for him]. The boy said, "I will take My vengeance on Edom [i.e., Rome] through My people Israel" (Ezekiel 25:14). Nero concluded: The Holy One, blessed be He, wants to destroy His House, and He wants to blame me for it. {Literally: He wants to wipe His hand.} He got up, ran away, and converted to Judaism, and R. Meir was one of his descendants.

He then sent Vespasian the Caesar to destroy Jerusalem. He besieged Jerusalem for three years. There were three wealthy people [in Jerusalem]: Nakdimon b. Gurion, Ben Kalba Savua, and Ben Tzitzit Hakeset. Nakdimon b. Gurion got his name because the sun continued shining [nakedah] for his sake. {See Taanit 19b.} Ben Kalba Savua got his name because whoever entered his house hungry like a dog [kelev] came out satiated [savua]. Ben Tzitzit Hakeset got his name because [he was so rich that] his tzitzit never touched the floor since he was always sitting on cushions [keset]. Others say that he owed his name to the fact that his seat [kisei] was among the prominent people of Rome.

One of these three men said to the Rabbis: I will provide the city with wheat and barley. The second said: I will provide it with wine, salt, and oil. The third said: I will supply it with firewood. [They had stored these provisions in anticipation of the Roman siege.] The Sages praised especially the one who had the foresight to put away wood, since R. Chisda would give all his keys to his servant except the key to the woodshed, for R. Chisda said: One storehouse of wheat requires sixty storehouses of wood [to process it into bread]. The three men had stored enough supplies to sustain Jerusalem for twenty-one years.

[At that time there was a civil war raging in Jerusalem among three Jewish factions: moderates who were followers of the Rabbis; the corrupt and assimilated Sadducees who were Roman sympathizers and opponents of the Rabbis and halachah; and the Zealots [Kana'im], extreme nationalists who advocated open warfare to overthrow Roman domination. The violent and militant members of the Zealot party were called Biryonim.]

The Biryonim were then [in control of] the city, [and did not allow anyone to leave the city]. The Rabbis said to the Biryonim, "Let us go out and make a truce with the Romans." They did not let them, but, on the contrary, said, "Let's go out and fight the Romans." The Rabbis said, "You will not succeed." The Biryonim then went and burned down the storehouses of wheat and barley [in order to force the people into an immediate armed confrontation with the Romans]. As a result there was a famine in Jerusalem.


Martha the daughter of Baitus was one of the richest women in Jerusalem. She sent her servant to buy fine flour. By the time he got to the market it was all sold out. He told her, "There is no fine flour, but there is white flour." "Go and get me some," she said. By the time he got there, it was all sold out. He came back and said, "There is no white flour, but there still is dark flour." "Go and get me some," she said. By the time he got there, it was all sold out. He came back and said, "There is no dark flour, but there is barley flour." She said, "Go and get me some." By the time he got there, this too was sold out. She had already taken off her shoes, but she said, "Let me go myself and see if I can find anything to eat." [She was going barefoot,] so a piece of manure stuck to her foot, and she died from the shock.

R. Yochanan b. Zakkai applied to her the verse, "The most pampered, delicate woman, who is so refined that she does not let her foot touch the ground" (Deuteronomy 28:56). Some say that she ate one of the figs R. Tzadok had thrown away, and because of her squeamishness she died. For R. Tzadok fasted for forty years that Jerusalem should not be destroyed. [He was so skinny that] when he ate something, you could see it go down his throat. When he decided to try and eat they would bring him figs, and he would only suck the juice and throw away the rest [because he could not digest solid food]. When Martha was dying she took all her gold and silver and threw it out into the street and said, "What do I need this for?" She thereby fulfilled the prophecy, "They will throw their silver in the streets" (Ezekiel 7:19).


Abba Sikra, the head of the Biryonim [the militant branch of the Zealot party] of Jerusalem was the nephew of Rabban Yochanan b. Zakkai. Rabban Yochanan b. Zakkai sent him a message, saying, "Come to me secretly." [Risking his life,] Abba Sikra came. R. Yochanan said, "How long are you going to keep this up, [thwarting the efforts to make peace, thereby causing people to die of starvation]?" He replied, "What can I do? If I say anything [to the Biryonim about making a truce with the Romans], they'll kill me." R. Yochanan b. Zakkai said, "Find some way for me to get out of the city, [so that I can negotiate with the Romans]. Maybe something can still be saved." Abba Sikra replied, "Pretend that you are sick, and let everyone come and visit you. Then bring something that has a foul odor and put it in your bed, so that they will think that you have died. [He had to use a ruse because the Biryonim permitted no one except the dead to leave the city.] Let only your students carry your coffin, and don't allow anyone else to carry you, so that they should not notice that you are still light-for everybody knows that a live person weighs less than a corpse."

R. Yochanan b. Zakkai followed Abba Sikra's strategy. R. Eliezer carried the coffin on one side, and R. Yehoshua on the other. When they came to the gate, [the Biryonim guards who were suspicious] wanted to pierce the coffin with a spear. Abba Sikra said to them, " [Do you want the Romans] to say about you, 'They even pierce their own rabbi!'" The guards then wanted to push the coffin, but Abba Sikra said to them, " [Do you want the Romans] to say about you, 'They push their own rabbi!'" The Biryonim guards then opened the gate, and [R. Yochanan b. Zakkai] got out.

When he reached the Roman headquarters he said to Vespasian, "Peace to you, Emperor! Peace to you, Emperor!" Replied Vespasian, "You forfeit your life for two reasons: first, I am not an emperor, and you call me emperor; [you ridiculed me]; and second, if I am an emperor, why did you not come to pay your respects until now?" R. Yochanan replied, "Concerning your statement that you are not an emperor, (56b) the truth is that you will become an emperor, since if you were not a ruler, Jerusalem would not be given over into your hands. For it says, 'Lebanon will fall by a mighty one [adir]' (Isaiah 10:34). And we know that adir refers specifically to a king, as it says, ' [Israel's] king [adiro] will be from their midst' (Jeremiah 30:21). And furthermore, we know that Lebanon refers to the Bet Hamikdash, {Levanon is derived from lavan, "white." The Bet Hamikdash purifies and cleanses Israel from their wrongdoings, rendering them "white." } for it says, [Moses pleaded for permission to see] 'This goodly mountain and Lebanon' (Deuteronomy 3:25).

Now, regarding your question that if you are an emperor, why I did not come until now? The answer is that the Biryonim among us did not allow it." Vespasian said, "If you had a barrel of honey, and there was a snake coiled around it, wouldn't you break the barrel in order to rid yourself of the snake?" [Although you would lose much of the honey, you would at least salvage some of it. Similarly, you should have burned down Jerusalem to get rid of the Biryonim and save the people from starvation.] R. Yochanan b. Zakkai was silent and did not know what to answer. R. Yosef, some say R. Akiva, said: We can apply to R. Yochanan b. Zakkai the verse, "Who makes wise men retreat, and makes their knowledge foolish" (Isaiah 44:25). He should have said to him: We take a pair of pliers and grab the snake and kill it, and leave the barrel undamaged. [I would rather get rid of the Biryonim and leave Jerusalem intact.]

Just then, a messenger arrived from Rome saying: Arise, for Caesar is dead, and the senators in Rome have decided to appoint you as the Head of State. Vespasian had just put on one shoe and wanted to put on the other, but it did not fit anymore. He tried to take off the other one, but it did not come off. [Thinking that his feet were swollen, he exclaimed:] What is the meaning of this? R. Yochanan b. Zakkai calmed him: Don't worry. You just received good tidings, and it says, "Good news will fatten a bone" (Proverbs 15:30). What should you do to remedy the condition? Let someone whom you dislike pass before you, as it says, "A broken spirit will dry up the bone" (ibid. 17:22). Vespasian did so, and he was able to put on the other shoe. He then said to R. Yochanan b. Zakkai: Since you are so wise, why didn't you come to me until now? He replied: Didn't I tell you, [because of the problem with the Biryonim]? Vespasian shot back: I also answered you [that you should have burned down Jerusalem].

Vespasian then said: I am going back to Rome, and I will send someone else to take my place. However, go ahead and ask me a favor, and I will grant it. [Seeing that Jerusalem was lost, R. Yochanan wanted to preserve the spiritual heritage of the Jewish people,] so he said: Give me the city of Yavneh and its Torah scholars [at least the Torah will survive and continue to flourish], {R. Yochanan b. Zakkai's request to set up a yeshivah in Yavneh was of crucial importance. It was the instrument through which God ensured the continued existence of the Jewish people during the long exile.} and the family of Rabban Gamliel [who are the leaders of the Jewish people and descendants of David], and give us some of your physicians to heal R. Tzadok. R. Yosef, some say, R. Akiva, applied to him this verse, "Who makes wise men retreat and makes their knowledge foolish" (Isaiah 44:25). He should have said to him: Let the Jews go this time altogether [and lift the siege of Jerusalem]. However, R. Yochanan b. Zakkai thought that he would not grant him that much, and so he would not be able to save even a little.

How did the doctors heal R. Tzadok? The first day they gave him water in which bran had been soaked; the next day water that had bran and a little flour mixed into it; the next day water mixed with flour, so that his stomach gradually expanded.


Vespasian went back to Rome and sent the wicked Titus [to destroy Jerusalem]. Titus said, "Where is their God, the Rock in whom they trusted?" (Deuteronomy 32:37). This is the same wicked Titus who blasphemed and cursed God. What did he do? He grabbed a prostitute by the hand and entered into the Holy of Holies and spread out a Torah scroll and sinned with her on it. He then took a sword and slashed the curtain. Miraculously, blood gushed forth from the curtain, and he thought that he had killed God, as it says, "Your enemies have roared inside Your meeting place [i.e., the Bet Hamikdash], they take their signs for true signs" (Psalms 74:4). [They construed their success as a sign that their cause was just.] Abba Chanan said: "Who is like You, O Strong One, God?" (ibid. 89:9). Who is like You, mighty in self-restraint, that You heard the blaspheming and cursing of that wicked man and keep silent? In the yeshivah of R. Yishmael they expounded: "Who is like You among the powers, [eilim] God?" (Exodus 15:11). Who is like You among the silent ones [illemim]. [God has the strength to remain silent in the face of Titus's provocation.]

What did Titus do? He took the curtain, shaped it like a basket, and took all the vessels of the Bet Hamikdash and put them in it. He then put them aboard a ship to sail to his city to glorify himself with them, as it says, "And then I saw the wicked buried and newly come while those who had done right were gone from the holy place and were forgotten in the city" (Ecclesiastes 8:10). [The Gemara expounds the verse as refrring to Titus:] Don't read kevurim, "buried," but kevutzim, "gathered"; don't read veyishtakechu, "were forgotten," but veyishtabbechu, "and glorified." [The verse now takes on a new meaning: The wicked Titus gathered all the vessels; he came from the Bet Hamikdash, and glorified himself with them in their city.]

Some say that kevurim means "buried" because even things that were buried were revealed to Titus [so that he was able to loot the Bet Hamikdash completely]. A storm blew up that threatened to sink the ship. Titus said: Evidently the God of the Jews has power only over water. When Pharaoh came He drowned him in the sea. Sisera was overcome by water, 25 and now He wants to drown me also in water. If He is a great warrior, let Him come up on dry land and wage war against me. A voice came forth from Heaven and said: Wicked one, son of a wicked one, descendant of the wicked Esau, I have an inferior creature in My world called a gnat.-Why is it called inferior? Because it only eats but does not excrete.-Go up on the dry land and wage war against it! When Titus landed a gnat came and entered his nose, and kept knocking against his brain for seven years. One day, as he was passing a blacksmith's shop, the gnat heard the noise of the hammer and stopped knocking.

Titus said: I see, there is a remedy. So every day he brought a blacksmith to hammer for him. If he was a non-Jew he would pay him four zuz for doing this; if he was a Jew, he would say: It should be enough of a reward for you to see your enemy [suffer so much]. He did this for thirty days; then the gnat got used to the noise and resumed the knocking. We learned in a Baraita: R. Pinchas b. Aruva said: I was together with the public figures of Rome, [and from them I found out that] when Titus died they opened his skull and they found something the size of a swallow weighing two sela. Alternately, it has been taught: the size of a year-old dove 26 weighing two pounds. Abaye said: We learned: It had a copper beak and iron claws. When he was dying he said: Burn me, and scatter my ashes over the seven seas, so that the God of the Jews should not be able to find me and bring me to trial.

Onkelos son of Kalonikos who was Titus's nephew wanted to convert to Judaism. He went and, through sorcery, raised Titus from the dead. He asked him: Who is most highly respected in the World to Come? Titus replied: Israel. He further asked him: What about me joining them? Titus replied: They have many commandments, and you will not be able to fulfill them. Go and fight them, and you will gain prominence, for it says, "Her tormentors become her master" (Lamentations 1:5); whoever makes the Jews suffer gains prestige. He asked him:

How are you being punished [in the hereafter]? Titus replied: With the punishment I decreed on myself. Every day my ashes are collected, and sentence is passed on me, and I am burned, and my ashes are scattered over the seven seas. Then Onkelos went and raised Balaam from the dead through sorcery. He asked him: Who is most highly respected in the World to Come? He replied: Israel. What about me joining them? He replied, "You must never seek peace or good relations with them, as long as you exist" (Deuteronomy 23:7). Onkelos then asked: How are you being punished?

He replied: I am being cooked in boiling semen [in retaliation for giving the advice that led Israel to behave immorally with the Moabite girls]. 27 He then went and raised other sinners of Israel from the dead through sorcery. He asked them: Who is most highly respected in the World to Come? They replied: Israel. What about me joining them? They replied: Seek their welfare, and don't seek to harm them. Whoever touches them touches the apple of God's eye. He asked: How are you being punished? They replied: We are being cooked in boiling manure, for a Rabbi has said: Whoever ridicules the words of the Sages is punished in Gehinnom with boiling manure. [The Gemara observes:] Go and look at the difference between Jewish sinners and the prophets of the nations that worship idols. [The Jewish sinners told Onkelos to convert; whereas the prophets of the heathen nations, although they knew the truth, still told him not to associate with Jews.] We learned in a Baraita: Look how serious are the consequences of putting a person to shame. God stood up for Bar Kamtza [who had been humiliated] and made him the instrument with which He destroyed the Bet Hamikdash.