Sanctions Impossible

Speaker 2

And Bill Magnus, the economist. Maybe the data centers or something they plug in into AI and said, give us a a cool name for that should Yeah, yeah. So ⁓ Trump ⁓ has involved himself in a war with Iran, and the war is not going as intended. It's ⁓ been dragging on and it's gotten very expensive. And he is trying to rebrand what he's doing there, ⁓ because see

Speaker 1

So ⁓ what's happening?

Speaker 2

Various rounds of peace negotiations, as well as military strikes, don't seem to be delivering an end game in sight. So he said we're going to pivot to the economic approach. And this comes from prior to the war breaking out, Iran's economy shocker was a basket case. ⁓ they were faced with hyperinflation as well as a very authoritarian government ⁓ that seemed to be delving into the things that authoritarians do, like price controls and restrictions on ⁓ what you can do with your wealth and your money if you live at Iran. So ⁓ this escalated over the course of several years into a high inflation economy with also very high unemployment that broke out into protests on the street that the regime cracked down on. Right. This is all before the US got involved in the war. Things were not going all that well there. ⁓ well now we've had several months of war and the Trump administration has not attained its military objectives and they've decided to pivot and say, All right, well, Iran's economy was structurally unsound even before we entered into this game. ⁓ let's make it even more unsound by putting economic pressure on them. And that's the game.

Speaker 1

questions for one, you know, what are the military objectives? Is it toppling the regime, the at the Ayatollah?

Speaker 2

And that's been one of the ambiguities about this war is ⁓ we've heard different stories at different times. Some say regime change, which again harkens back to like the Iraq war, it's very politically unpopular. Others have said, well, this is to set them back technologically so they don't obtain a nuclear bomb. And that was the point of the precision strikes. Now, whether they attain that objective or not, there's a lot of debate around it. ⁓ but sometimes that's been the argument. And the third. is to end the disruption to oil flow through the Strait of Hormuz, which ironically was created by the outbreak of the war itself, because that's the one thing Iran could do after the United States started striking it, was that they could ⁓ put mines and ships and attack commerce going through the Strait of Hormuz.

Speaker 1

We are now currently undergoing Operation Economic Outcast, Economic D Day. How are these sanctions different from the previous sanctions? Can you sanction harder? Can you just you know sanction on steroids?

Speaker 2

That's what it seems to be. Yeah. And you know, that this gets into the the academic literature on economic sanctions is really interesting because by and large, at the macro level, they really don't work all that much. ⁓ they're a thing that politicians gravitate toward because it's relatively low cost to impose them, especially if you're a superpower, an economic superpower included. It's also generally popular, like ⁓ in other words. Everyday Americans don't feel the pain at home that we put sanctions on Iran or on Iraq a couple of decades ago or on Russia over Ukraine or on Cuba. ⁓ it's probably the mo the most famous example of a sanctioned regime. ⁓ so it's like very, very low cost on the American people, the fact that we're sanctioning something on the other side of the world. It doesn't come with the political baggage of an unpopular war. Which is one, very expensive to maintain on the budget side. And two, it starts having casualties coming home. And no one likes ⁓ coffins being carried off an airplane because we're in the middle of a a deadly and brutal war. So ⁓ war is politically unpopular to maintain for a long period of time. Sanctions are are not. Sanctions ⁓ people generally look the other way and ⁓ don't really care one way or another. that ⁓ this regime we generally dislike on the other side of the world is being economically targeted and having assets frozen, having their trade disrupted, because it doesn't affect me at home. And yet the politician can go back to the constituents and say, look, we're doing something to stop Iran from doing this bad thing of getting the bomb or being a brutal regime, all of which are legitimate concerns. And yet the sanctions are like the window dressing to pretend that you're doing something significant, although it doesn't really make much of an effect.

Speaker 1

I figure, you know, sanctions would be better if the country imposing them wasn't also being impacted by them. Yeah. If you were sanctioning, you know, another country and you just happen not to like trade or whatever with them, there would be something there. But if it's actually hurting you, yeah, then how's that shaking out?

Speaker 2

Yeah, yeah. You know, I think there's some concern here that driving up oil prices in particular. Yeah. Iran is a major oil producing country and the United States, you know, we haven't had relations with them since ⁓ the late seventies when that all fell to pieces and they had their revolution. But they're still traders on a world market. So if their oil flow to other countries gets disrupted, that means those other countries still need and use and consume oil. Well, they have to get it from somewhere else. So it puts a strain On the US domestic market and on other world suppliers of oil, you know, they become the replacement for Iran if Iran is cut off. You were to go like in a full embargo or something like that. So it does have disruptive effects on the world economy. The other component of sanctions, and this comes very clear in the economic literature on sanctions, when you impose them on a country. Well, if that country's an authoritarian dictatorship, Saddam Hussein was the classic example. We imposed all these sanctions on Iraq. Did that mean Saddam Hussein no longer had access to his palaces? No, he was actually quite comfortable. What it meant is the fewer resour fewer resources are coming into Iraq, but the predatory regime at the top seizes them all and continues to build its palaces, meanwhile the people are bearing the consequences of not having food at the grocery store. Saddam always made sure he was fed. And this is true of almost every regime that ⁓ we've put sanctions on, you know, for ostensibly good reasons, because the head of the regime's a terrible person. It usually gets passed on to the general population, at least the pain from it, because that dictator will ensure that he and his immediate family are always taken care of, no matter what the peasants are doing in the streets. And this is this becomes a problem politically, and Cuba's the classic example of this. So we have put sanctions on the communist regime in Cuba since basically the 1960s. And they're politically popular among the exiled Cuban community in the United States. But the question is, well, are they achieving what we intended them to achieve? And I think the first off, there's an obvious answer of no, because they've been in place since the 1960s and Cuba's still there. They still have the same communist regime. So it's a very ineffective tool at best to toppling it. But here's the second component of it. It's bred all sorts of animosity and it's given that Cuban regime an excuse to blame for the failures of its own basket case Marxist economic policies internally. ⁓ they are basically saying, and you you hear this in the rhetoric, Cuba is running out of food and oil and resources, and its power grids falling offline and everything's falling to pieces. Yes, that's true. It's true because their dysfunctional Marxist economic system. But they get to point the finger at the United States and say, No, the real reason we're poor is because America won't do capitalism with us.

Speaker 1

An interesting detail was only like a few years ago, I think like four or five years ago, that the Cuban regime even opened up its local markets and allowed private businesses. Right. You know, somehow the CIA or the United States was responsible for not allowing Cubans to like have a fruit stand or a fruit shop.

Speaker 2

Gave them an opportunity, a scapegoat to blame. And there's there's some good analytical work on this. So ⁓ a couple of my friends, ⁓ Vincent Jeloso, Jamie Pavlek, JP Bostos, they just published a really interesting paper that does the counterfactual calculation. It's like what would the Cuban economy look like if there was no sanction regime put in place by the United States? And they find pretty robust empirical data using this counterfactual analysis that's only a tiny little effect. Of a drag on their economy, something like three to five percent caused by the US sanctions. So they're barely making any dent whatsoever. Meanwhile, the Cuban economy is a basket case because of the Marxism. But the Cuban government gets to say it's not our Marxism that's not working, it's those American sanctions. Even though the evidence is overwhelming, the sanctions are barely doing anything at all. So I asked the question, well, what are we gaining from this? A tiny little dent in the Cuban economy while giving them the excuse to point their finger at and blame for all of their own mistakes and failures and thereby prolong a socialist regime.

Speaker 1

Yeah, I'm just wondering what things would look like. you know, for Cuba, if if it were opened up and say just for example, more Americans were allowed to travel back and forth without, you know, all the different restrictions that you have. I mean, recently there was a a convoy of American socialists that went there. And, you know, some of those American socialists had on really expensive jewelry. I'm sure many of them brought US dollars with them and were paying for stuff in cash. Yeah. If the local Cubans can see like, ⁓ my God, even the the socialists in the United States live like kings, that might be able to change something. on the ground if more and more people were able were able to see that.

Speaker 2

And that was the big strategy of how we got ⁓ ended communism in Eastern Europe is they started getting access to Western rock music. And then ⁓ then they discovered there was this thing called McDonald's that existed in the West, and it was much better than ⁓ any of the food options that existed under the Iron Curtain. ⁓ so you get you get all these cultural pressures that are put on those governments. Well, why can't we have that too? My cousin that lives in West Germany. has all this wonderful stuff and I here I am behind the wall in East Germany and life is miserable. Why can't I have that too? Capitalism becomes its own ambassador to the unfree parts of the world and eventually contributes to their fall.

Speaker 1

Well one of the things that I'm really interested in learning more about or the arts used as a weapon. Right. The CIA funding basically like Jackson Pollock. Right. It's like, ⁓ that makes sense. Like why why in the world would Jackson Pollock's stuff be considered so groundbreaking and and all that? But there is also my ⁓ my wife is ⁓ is a trained dancer and ⁓ She introduced me to ⁓ Martha Graham, who was like a very important dancer choreographer, and she would go on like all of these kind of State Department funded trips to the Soviet Union and stuff and bringing this new interesting way of of doing dance, but then also exposing the American dancers to what life was like. in the Soviet Union, how horrible it was. And the lefties in the art world were not happy to hear that Martha Graham was so connected with the US ⁓ government when it came to things like that. But you know, obviously that stuff puts a smile on my face versus finding out that tankers are being, you know, shot at in the Strait of Hormuz and Right. ⁓ Something that I heard about the Strait of Hormuz and and Iran is that they're kind of finding ways of getting around these sanctions. Things called like the shadow fleet, where Iranian oil exports are they're using like kind of ghost or shadow tankers and front companies and you know, relabeling things and you know, that's obviously taking an economic toll, but it also shows like Yeah, yeah. And it is very difficult to police something like that.

Speaker 2

And we saw this same tactics playing out with the Venezuela regime under Nicolas Maduro. ⁓ they had all these ambiguously flagged takers that like they were sailing out into the middle of the Atlantic and then the crew jumps on the back and paints a new name on the ship. I mean that that may be stretch exaggerating a little bit, but it was pretty close to that sort of thing. It's like, ⁓ this is now a Russian flagship. Well, what what it goes to show is sanctions are very difficult and costly to enforce. ⁓ there are all sorts of gray areas to get around them. And if you have another regime that's willing to bend the rules and not enforce it, well, there's the porousness of the sanction. And meanwhile, the country that's being sanctioned now has a scapegoat to point to for all of its problems. It's not our terrible Maduro Chavez socialist, ⁓ Bolivarian socialist state that's the problem here. It's those evil Americans that are trying to imperialize us. Now there's one area of sanctions where I I think some of the academic literature says they actually do kind of have an effect, but it's so narrow and so so targeted you can only like use the tool once. And that is if you seize the yacht and the Mediterranean of the cousin of the dictator to like their direct personal luxury assets, ⁓ yeah, that's pretty hard to get back and it puts pressure. ⁓ or you have some really highly targeted ⁓ diplomatic sanctions. That basically say, yeah, the president, his vice president, and the members of all of their immediate family are now on a list that they cannot go to the vacation in Disneyland. ⁓ that's exacting a toll on them, but that's a very narrow type of sanction. And it's it's like a very limited tool that you could do without spreading the harm onto all of that society. ⁓ yeah, the dictator says, Well, my cousin Jot was seized. ⁓ blame the Americans for our problem because it's a very different story than ⁓ there's no food at the grocery store. Blame the Americans for the problem.

Speaker 1

When they seized the yacht, they also seized all the groceries on the yacht, so We talked a little bit earlier about you know what impact the sanctions are having on Iran's economy. And you know, the question I would have is, you know, can Iran hold out? It seems like like they can. And probably one of the problems is that there seems to be very little information getting out of Iran. I mean, it's the reality of of living under that kind of authoritarian dictatorship. They stomp out people who are protesting and s and speaking out. Whereas in the United States, Everybody's complaining about the price of gasoline. You cannot stop ⁓ people from complaining about ⁓ all this stuff. So I even wonder from what we know about Iran, do we know like how hard the sanctions are are hitting them?

Speaker 2

Right, right. I don't think life in Iran is very good right now. I don't think it's been good for a while. but again, the government controlling information, that's the perfect weapon to use on blaming somebody else externally. ⁓ so all the regime has to do is say, Well, see, ⁓ we told you those Americans were ⁓ trying to ruin us, and now they're bombing us too, and they're laying all these sanctions on us. It's not our fault. We're the victims here. So it's made the dictatorial regime put them into a position where they can claim victimhood. And meanwhile, they're controlling information that's going into and out of Iran. And it's kind of like, all right, well, people are operating in a vacuum. That's the perfect scenario for propaganda to work.

Speaker 1

You know, obviously Iran's ⁓ allies, ⁓ China and Russia, you know, I guess it opens up like the same question. How how are they holding up? How are you guys holding up in China and Russia without things being normal in in Iran?

Speaker 2

Well, one thing that China and Russia both have to their advantage is they're both very, very large countries. The United States is in this similar position. ⁓ you know, we have the largest economy in the world, China the second largest. Russia lags economically, but it's geographically very large and it has a lot of ⁓ historical advantages and military strength, all that to it. ⁓ what what it means is big regimes are much ⁓ more capable of weathering and absorbing sanctions than a little island in the Caribbean like Cuba. So y y you know, y if someone puts sanctions on Russia, yeah, it's not good. It's ⁓ probably harming them on the margin economically, but it also goes unnoticed. You put sanctions on Cuba, it's also not good. It's a small piece of the basket case economy in the grander scheme of things, but it becomes easier to pinpoint and target. Well, what happens if you put sanctions on China that disrupt, say, their trade? Well that they engage in import substitution. Instead of ⁓ getting the sanctioned item from abroad, they just figure a way to make it domestically and and there can be. If someone tried to put sanctions on the United States, we'd do the same thing.

Speaker 1

I was gonna ask, like, are there any sanctions on the United States? ⁓ I I would expect at least some from Iran. I mean I don't know what you know

Speaker 2

I mean the countries that would do that or be in the position to do that. It's like Saddam Hussein saying, ⁓ yeah, well, you sanction me, I'm going to sanction you in return. ⁓ the United States, well, we do barely any business with you to begin with. So it goes unnoticed. ⁓ I'm sure there are historical examples, but barring a major contest with other superpowers, ⁓ we haven't really had that since the Cold War. ⁓ we really haven't had that in a military way since World War Two. ⁓ then no, there's not really pronounced effective sanctions on the US. We do have retaliatory trade measures against us for some of the tariffs we put in place. That's probably the closest example. So for example, we're in a trade war with Canada right now, you know, thanks to some bad policy decisions by the United States government. But It's been met with retaliatory tariffs on US goods and it's basically made like US beer and alcohol is no longer sold at the state liquor stores in Ontario.

Speaker 1

I remember seeing ⁓ some empty shelves of there was like no whiskey or you know, or bourbon or something like that. Yeah.

Speaker 2

Yeah. So what when what does that do? Well it hurts the US bourbon industry and vice versa. If we retaliate against Canadian rye whiskey or something like that, ⁓ well it hurts the consumers of those products and it hurts the ⁓ the industry. It but ⁓ it doesn't seem to have dislodged or changed the policies of either government.

Speaker 1

Well the downside is that you have fewer choices to choose from to drink in celebration when sanctions finally get lifted. And given all your choices out there, all the things that you could be listening to right now, we are so grateful that you're listening to Happy Hour Econ. You have not been sanctioned yet. We have not been sanctioned yet. Until then, catch us next week. See you then.