That’s pretty bad. But it gets worse. The country used to make money off fossil fuel exports. Now, though, it exports crude oil but imports even more refined products, measured by value:

Economically, that’s not a problem. But politically, it is. The Conservation Act of 1975 authorizes the U.S. president to ban hydrocarbon exports. If the U.S. does that, it would take some time for alternative suppliers to Mexico to materialize. In the interim, shortages would idle trucks, clog supply chains, and strand goods — including food. Manufacturing would contract sharply. Farm tractors grind to a halt. Flights would be grounded. Fuel prices would spike, along with the price of food and transport, and inflation would accelerate.

And worst of all, gas-fired power plants would shut down for lack of fuel. Mexico used to be self-sufficient in natural gas. Self-sufficiency ended in 1999, and imports from the United States ballooned after 2011:

So the Sheinbaum administration has multiple reasons to want to resuscitate the hydrocarbon industry. And that’s besides the obvious one, which is, to paraphrase Gordon Gekko, that growth is good.

And the solution? Fracking! Fracking turned the United States into an oil and gas powerhouse. It’s the greatest thing since sliced bread. The Eagle Ford formation slops right over the border and Mexico possesses other potentially productive shale gas and tight oil plays. Solution!

Probably not.

Hold up, wait a minute

There are reasons why the United States dominates fracking worldwide, with only Argentina, Canada, and China providing any serious competition. And most of those reasons aren’t things that the Sheinbaum administration can change with the stroke of a Congressional pen.

Read more

Being a country of Europeans is a deep part of Argentina’s national identity. The census stopped recording race in 1869. A bit more than 80 years later, when Josephine Baker visited, she was surprised at the absence of black people. So she asked Ramón Carilio, the dark-skinned minister of public health, where the black population lived. Carilio felt free to joke, “There are only two — you and I.”

When Era Bell Thompson visited Argentina in 1973 to report on the black population there, she recorded one Argentine’s ironic complaint about the United States: “Argentines are lumped in with all the rest of the Spanish-speaking peoples, even though we are white.” Thompson had no problem finding black people, but she described them as “Not a viable, but a vanishing black people: relatively few in numbers, relatively free of racial discrimination and relatively content.”

Even now, some Argentines still joke — with somewhat less accuracy than in the past — that an Argentine is an Italian who speaks Spanish and wants to be British. The self-image dies hard: when María Lamadrid tried to board a flight from Buenos Aires to Panama in 2001, the Argentine border officials refused to believe that a black woman could actually be Argentine and accused her of using a fake passport.1

It’s true that there are relatively few Argentines who appear phenotypically African.

The problem is that we know that colonial Argentina was heavily African! And this is not some obscure recently-discovered fact; this has been well known, since, well, since Argentina was still a Spanish colony. Ebony magazine sent Thompson to Buenos Aires in 1973 because the past existence of a now-vanished African population was common knowledge. James Scobie wrote in his classic work, Argentina: A City and a Nation, “The disappearance of the Negro from the Argentine scene has puzzled demographers far more than the vanishing Indian.”

We know that colonial Argentina was heavily African! A census of Buenos Aires held in 1778 revealed an African population of 35%. (See Luis Wainer, La Ciudad de Buenos Aires en los Censos de 1778 y 1810.) As late as 1855, local B.A. surveys recorded race. George Andrews (page 41) estimated the total African population of Argentina in 1800 to be 69,000, roughly 22% of a total population around 310,000.

So what happened? One common story is that two somewhat deliberate events decimated the community. First, blacks were supposedly recruited in greater numbers to fight Paraguay in the War of the Triple Alliance, which killed large numbers of the male population. Second, yellow fever epidemics (particularly in Buenos Aires) did what conscription could not and further reduced the black population.

The genetic ancestry data cited in the last post, however, shows only about a 4% presence of African genetic markers. That is a lot less than 22%! Does that provide evidence of some great genocide or expulsion in 19th-century Argentina?

Probably not.

First, the starting population denominator of 310,000 is wrong. It doesn’t include the indigenous population nor a chunk of the far north. It’s not even consistent with a Spanish census undertaken in 1778. Fortunately, the Argentine government has made efforts to estimate the actual population in 1800, producing a figure of 552,000. That would reduce the African population share of the country to 12½ percent in that year.

Second, given the massive immigration to Argentina over the next 150 years, you’d expect the Afro-Argentine share to fall even if they had the same birth and death rates as the general population.

The population of Argentina grew by about 1.8% per year between 1800 and the first national census in 1869. (The link goes to the census; the data on the Argentine population is on page 686.) Now, there was some immigration to Argentina before 1869: by that year, 12% of the population was foreign-born, which implies a maximum rate of natural increase for the native-born population around 1.6%.

Let’s assume that the Afro-Argentine population increased at the same 1.6% rate as the overall population in 1800-69. That is a fairly high rate of natural increase for the time: it’s only slightly lower than the 2.2% rate of natural increase in the United States between 1800 and 1870, as estimated by Michael Haines. (See Table 1.) But we know that the rate of natural increase in Argentina was 1.3% per year in 1869-95 and 1.6% per year in 1895-1947, so 1.6% for 1800-69 is plausible.2

If you assume that the Afro-Argentine population continued to grow at the same rate of natural increase as the overall population after 1869 — a reasonable upper bound since Afro-Argentines were disproportionately located in Buenos Aires province and disproportionately urban — then you would have expected about 920,000 Afro-Argentines by 1947, roughly 4.5% of the total population of 15.9 million. By 2022, that number would have increased marginally, to about 4.6%.

And 4.6% is in the ballpark of what we see in the genetic data:

There still is room for some impact from differential mortality, particularly on the male side. But the observed admixture levels are within the range you would expect even if there had been no differential mortality at all, especially given the uncertainty around these estimates.

In addition, the evidence indicates a very large rate of exogamy: African y-chromosomes are overwhelmingly paired with Native American mitochondria and African mitochondria are overwhelmingly paired with European y-chromosomes. That implies that the African population was simply absorbed into the overall population. No need for genocidal wars or horrible plagues — just an open society.

You might think that there is an interesting class story here. But you would be wrong. Yes, it looks like African men married Native American women, whereas African women married European men. But that pattern was already built into the pre-1869 population! That population consisted largely of people with Native American mitochondria and European y-chromosomes. So the figure doesn’t tell you much about the social position of Afro-Argentines or how they were absorbed into the general population.

At most, the pattern suggests that the descendants of European immigrants were somewhat more likely to marry other descendants of European immigrants, which should surprise precisely nobody. Go listen to some Billy Joel songs. Or rewatch The Sopranos. And that’s just about Jews and Italians. Even if endogamy among the descendants of European immigrants had completely disappeared by 2022 you would still expect to see a pattern like the one in the figure.

So while there is a lot that we don’t know about the historical evolution of Afro-Argentine society and the terms of their integration into Argentine life — the Ebony article from 1973 is very worth reading! — there really isn’t much mystery about what happened to them. They melted into the Argentine melting pot.

I’m not sure that I agree with that, but it is true that Argentines tend to compare themselves with Europe, not with Latin Americans. They think of themselves as a nation of European immigrants.

But the genetic evidence complicates the country’s self-image. In fact, the genetic evidence shows a remarkable similarity to Puerto Rico!

Early DNA studies of Puerto Rico, from back when such things were new and neat, showed something a bit disturbing. Mitochondrial DNA, which is passed down through the female line, skewed Native American. But Y-chromosomes were entirely European and African. The implication is that something awful happened to the entire male Taíno population; they were either killed or denied the possibility of procreation. Likely both. Later studies upheld the results. Here is one from 2014, which sampled 326 people and found mitochondrial DNA that was 60% indigenous, 25% African, and 15% European, whereas male Y-chromosomes were 85% European and 15% African.

Argentine DNA samples also show a strong sex asymmetry, more like Puerto Rico that most people would expect. A 2010 study found that 54% of Argentine mtDNA came from indigenous sources while 94% of Y-chromosomes traced to Europe. These results are strikingly close to Puerto Rico (minus the large African admixture on the island) ... shockingly so for a country which received mass immigration from Europe in relatively recent times. More recent studies have confirmed this. A 2012 study from the Buenos Aires metropolitan area found that maternal lineages were 55% European and 44% Amerindian, whereas paternal lineages were 93% European and 6% Amerindian. A 2022 study of the entire country found that maternal lineages were 27% European, 69% Amerindian, and 4% African, compared to 92%, 4%, and 3% for the paternal lines.

More interestingly, while it was not uncommon for Argentines in the 2022 study to have Native American mitochondria and a European Y-chromosomes, it was vanishingly rare for someone to have an Amerindian Y-chromosome and European mitochondria, as you can see below:

Argentina shows a sex asymmetry that looks surprisingly like Puerto Rico! The African proportion is lower, as you might expect, but otherwise there is not that much difference. Male lineages are overwhelmingly European and female ones majority Amerindian.

Now, one warning.1 The “Eurasian other than Spain and Italy” data are suspect. They use the R1b haplogroup to identify origin, even though R1b is as common in Portugal, France, Belgium, and the Netherlands as it is in Spain and Italy. Worse yet, even in Western Europe, only 57% of the population has it, as opposed to other Eurasian haplogroups. For example, Leticia Abad’s research shows that most of the early Spanish settlers came from Andalucía, where half of the population has haplogroup J. (If you know any Spanish history, you won’t be shocked to learn that haplogroup J is most common in Arabia.) Similarly, later Italian migrants came from northern Italy, where 10% of the population shows haplogroup I. So “other Eurasian” doesn’t rule out Spanish or Italian origins and “Spain and Italy” doesn’t guarantee it.

How can this be?

Argentina is typically thought of as a European settler offshoot, and with good reason. In 1895, 25% of the population was foreign-born, overwhelmingly from Europe and the Levant. By 1914, that figure was up to 30%. Gross immigration between 1857 and 1914 came to 4.6 million people; net immigration ran about 3.0 million. (Pages 201-02 of the 1914 census.) All this with a population of only 7.9 million in 1914! Add in the Argentine-born children of those 3.0 million post-1869 immigrants, and you have a veritable transformation of the population. You might reasonably expect Argentina to have a similar genetic makeup to, say, New Jersey.2

How can Argentine DNA resemble Puerto Rico, given the sheer size of the migratory wave? Well, that wave was not evenly distributed. Rather, as “” points out, it was concentrated in the Pampas and left the north almost entirely untouched.

Differential birthrates diluted the wave’s impact over time by increasing the national weight of the lower-immigration north. Since 1914, the fastest population growth has been in the north. A back-of-the-envelope calculation produces the conclusion that only 24% of the current Argentine population can be traced to the foreign-born population in 1914. Note that this number is an average, because it assumes no intermarriage between the immigrants and the native-born. That’s a ridiculous assumption — the number of Argentines with at least one post-1895 migrant ancestor is going to be much much higher, well above half and probably above ¾ths.)

Now, the 24% number is uncertain. Pushing it down is the fact that almost half of Argentine immigrants in this epoch ultimately returned home. Pushing it up is the fact that there were already a lot of second-generation immigrants by 1914.3

Below is a (very rough!!) estimate of the Argentine population in a no-immigration counterfactual, assuming (probably correctly) that the northern population is almost entirely native-born and that the descendants of immigrants urbanize much faster than the entire population (quite possibly incorrectly).4 If those assumptions are accurate, then the share of Argentina’s cumulative population growth due to post-1869 immigration peaks at 52% in 1947 and declines until 2010, when it starts to rise again as South American immigration picks up steam and Argentine birthrates fall.

Please don’t forget that far more than 29% of the Argentine population has at least one immigrant grandparent or great-grandparent (let alone great-great grandparent)! These estimates only means that only 29% of Argentina’s cumulative population growth since 1869 was due to immigration.

These estimates help explain why mass European immigration did not erase the older genetic pattern. At some point well before 1860, a mestizo population emerged from Spanish men and indigenous women. (I shudder to think about what probably happened to the indigenous men.) That population was then diluted by the great immigrant wave, but the impact of that wave shrank over time due to differential birthrates between the low-immigration north and the high-immigration central pampas. The same story also better fits the heavy male skew of the 1869-1914 influx and the fact that roughly one-half of all immigrants to Argentina ultimately returned home.

What would a country reshaped by immigration look like?

It would look like the United States.

Much more of U.S. population growth seems to be due to post-1860 immigration than is the case in Argentina. Here’s a back-of-the-envelope exercise from Charles Lehman, using a method not-unlike Javiero’s (or mine), and applying it to the non-black population of the United States:

If the above is correct, then Elvis Country really did shrink in North America! Fully 69% of U.S. post-1860 population growth is due to immigration. Now, these estimates leave out the African-American population (they were created to ask a different question than the one posed here) and therefore leave out substantial immigration waves from the West Indies. But including them would only strengthen the conclusion.

To be fully comparable to Argentina, we’d probably want to look at two other numbers. The first is 1970, close to when the foreign-born share of the population bottomed out: immigration’s cumulative contribution to American growth was 59% in that year, against 40% in Argentina. Similarly, if you just look at the non-Hispanic white population, where immigration followed a rise-and-fall pattern similar to Argentina, immigration’s contribution to the growth of the white population peaked at 57% in 1980 and was still 55% in 2020. That is much more than our estimated 29% for Argentina.

A brief demographic history of Argentina

At the level of maternal and paternal lineages, the colonial period appears to have looked a lot like Puerto Rico. Something (probably bad) happened to the indigenous men, resulting in a mestizo population. After 1869, a massive wave of European immigration landed on top of these mestizos, but it was regionally concentrated. Later northern population growth increased the national weight of mestizo Argentines, and male-skewed immigration and return migration further limited the long-run impact of the European wave.

Argentina is not simply a South American version of the classic nation-of-immigrants model. Nor is it a simple extrapolation of the colonial society. It’s a country where an old mestizo substrate that looks a lot like Puerto Rico survived beneath a later immigrant overlay and re-emerged over the 20th Century, more strongly than the national myth admits.

Or, if you’re more willing to risk cancellation, you could just paraphrase Argentina’s former president: “A lot of Argentines arrived on boats, but a lot of them went back home, and a lot of our grandmothers came from the Indians. The boats, though, they really did come from Europe.”

And in comments, (who should have 10,000 subscribers, at least) wrote: “I guess the obvious argument is: look at Puerto Rico.”1 So let’s look at Puerto Rico!

What is Puerto Rico?

It’s an island in the Caribbean, duh. And a place that produced one of my favorite musical acts ever, Calle 13, and another one that’s, like, okay. (He played the Superbowl. I’m told the kids like him.)

But that’s obviously not what I mean. What I mean is, what is Puerto Rico? It’s not a state, but it’s not independent, so what is it? You’ll hear the phrase “colony” from politically-minded types who like to wave that stupid flag with the light-blue canton and “organized unincorporated territory of the United States” from most (but not all!) lawyers.

I’m here to tell you that both the politically-minded and (some!) lawyers are wrong. Puerto Rico is just an old-fashioned American territory, the way God and the U.S. Constitution intended, like Ohio before 1803 or Colorado before 1876 or Hawaii before 1959.

Bit by bit, in scattered pieces of legislation, Congress fully extended the Constitution to Puerto Rico. Sure, Congress could pass an “organic act” and declare the Commonwealth to be “incorporated,” but that would change nothing. It is now just an old-fashioned territory, like Arizona used to be.2

Foreign in a domestic sense

Some history: the United States annexed Puerto Rico along with the Philippines in 1898. For purely racial reasons, there was zero support for taking over the Philippines as an ordinary territory, thereby bringing 7 million “Malays” into the American polity. Congress therefore created a special colonial status for the Philippines, under which the U.S. government would exercise sovereignty but within which the U.S. Constitution would not apply. That status was extended to Puerto Rico (essentially by default) and the Supreme Court ratified it in the infamous insular cases, which ruled that Puerto Rico was “foreign in a domestic sense.”

First, it meant that Puerto Ricans were not automatically American citizens. They could keep Spanish citizenship (one of my grandfathers did) or adopt a separate Puerto Rican citizenship. Now, this didn’t mean that Puerto Ricans were foreigners, either. In 1902, the fiancé of one Isabel González traveled to Staten Island in order to take a job at a factory where Isabel’s older brother Luis already worked. The plan was for Isabel to join him later. But when Isabel got off the boat in 1902, she was declared an alien, and therefore subject to the immigration laws that prevented entry to anyone likely to become a public charge.

As you might imagine, an unaccompanied unmarried pregnant woman qualified as “likely to become a public charge.” Fortunately for Isabel, her brother and uncle made it to Ellis Island from their home in Staten Island the next day. Unfortunately for her, her fiancé wasn’t allowed off work to testify. So the authorities dug in and upheld her exclusion.

Unfortunately for the authorities, González was a very stubborn woman. She also had access to top-notch lawyers through her uncle, Domingo Collazo, who’d lived in the United States as an exile for decades and who had actually gone back to Puerto Rico as part of the American expeditionary force that took the island. He got a prominent lawyer, Charles LeBarbier, into the act, as did Puerto Rico’s nonvoting Congressional delegate, Federico Degetau.

That legal firepower meant that González could take her case all the way to the Supreme Court, which ruled 9-0 in González v. Williams that Puerto Ricans were not aliens and therefore could not be excluded from the mainland under the immigration laws. But it also didn’t say that they were American citizens.3

Second, Congress could regulate commerce with the island. This was an obvious problem for an island dependent on coffee exports and hoping to develop a sugar industry. Now, Congress didn’t tariff the island very heavily or for very long: the Foraker Act of 1900 declared that Puerto Rico would come fully under the U.S. tariff wall by March 1st, 1902. But it could, whenever it wanted to.

Finally, Constitutional protections did not extend to the island. The Bill of Rights simply did not apply. Congress could pretty much do anything it wanted to do.

Domestic in a domestic sense

None of this is true anymore.

Congress and the Supreme Court slowly extended the Constitution to Puerto Rico. In 1902, the island became part of the American customs area, equal to any other part of the United States. In 1917, Puerto Ricans became American citizens. In 1947, Congress extended Article IV, Section 3 of the Constitution to the island. In 1952, it went further, declaring that anyone born in Puerto Rico (regardless of parental citizenship) would be a citizen. The Supreme Court then extended the 1st, 4th, 5th, 11th and 14th amendments to the territory; extending the 14th brought along the 6th and 8th amendments with it.

In 1922, SCOTUS decided that the 7th Amendment, which guarantees a jury trial in civil cases, does not apply to Puerto Rican courts. But it does not apply to state courts, either: in 1877, in Pearson v. Yewdall, the Supreme Court held that the 14th Amendment does not does not require state laws to follow the 7th Amendment. In federal courts in Puerto Rico, the 7th Amendment has applied since 1922.

What about criminal law? Didn’t the Supreme Court recently rule that someone could not be tried separately in federal and Puerto Rican courts? Well, yes it did, but the logic of 2016’s Puerto Rico v. Sanchez Valle stated only that Puerto Rico was not a state, sovereign under the 11th Amendment. Rather, it was a creation of Congress. But all that did was give Puerto Rico the same status as any pre-1959 territorial government; territorial courts are a subset of the federal judicial system rather than the creation of an independent sovereignty.

Puerto Rico is indeed treated differently in terms of federal funding — a big part of the Puerto Rican debt crisis came from the fact that Congress decided to fund Medicaid at a far lower rate on the island. Was it able to do that because Puerto Rico was “unincorporated”? No. In United States v. Vaello Madero (2021), the Supreme Court said that Congress may treat territories differently under the Territorial Clause of the Constitution, with no need to rely on the incorporated-unincorporated distinction. Alaska was similarly shortchanged for federal highway money before statehood.

That leaves the income tax exemption. (Alaskans paid income taxes before statehood.) Puerto Ricans don’t pay because of 48 U.S. Code § 734. In other words, Congress exempted the island in 1917. Could it have done that with an incorporated territory? Yes. After all, nobody doubts the constitutionality of the Empowerment Zones, which provide tax exemptions for investors and businesses that set up shop inside them. We can also turn once again to United States v. Vaello Madero, which made no mention of any special doctrines about “unincorporated” territories to justify different treatment. In fact, Justice Gorsuch wrote a beautiful and blistering concurrence in which he blasted the Court for not taking the opportunity to overturn the entire distinction while it was at it.4

In other words, Congress can exempt territories from various taxes as it pleases. Incorporation or its absence has nothing to do with it.

Finally, the courts have defined Puerto Ricans as natural-born American citizens. It is extremely hard to strip a natural-born American of their citizenship. Taking out a foreign nationality will not do it. Hell, not even serving in the armed forces of another state will do it.5 (My uncle Eddie served in the IDF; he kept his U.S. citizenship.) The law states “A person who is a national of the United States whether by birth or naturalization, shall lose his nationality by voluntarily performing any of the following acts with the intention of relinquishing United States nationality.”

That is, of course, only a law. It could be changed, but the change would only apply to naturalized citizens (maybe), and perhaps not even that: Afroyim v. Rusk (1967) held that Congress cannot strip Americans of their citizenship against their will. Interestingly, the Court used originalist language to justify that decision:

The Constitution, of course, grants Congress no express power to strip people of their citizenship, whether, in the exercise of the implied power to regulate foreign affairs or in the exercise of any specifically granted power.

So let’s recap:

1. Congress and the courts have extended all the major constitutional protections that applied to old-fashioned “organized incorporated territories” as existed before 1959.

2. Puerto Ricans are natural-born citizens and not aliens or American nationals, like Samoans.

3. Congress legislates for Puerto Rico under the same constitutional clauses that it used for old-fashioned territories.

4. The incorporated/unincorporated distinction is not doing visible work in Puerto Rico’s differential treatment regarding federal taxes and benefits.

5. Puerto Rico’s remaining differences from states look like differences of territorial status, not evidence of “foreignness” or deriving from “unincorporated” status.

In other words, Puerto Rico isn’t a state, but it’s far from a colony. It’s an old-fashioned territory, enough to make any constitutional conservative happy. And in fact, there is one (so far solo) federal court decision affirming that argument. In the words of Judge Gustavo Gelpi, writing in Consejo de Salud Playa de Ponce v. Rullan:

Actions speak louder than words. Although Congress has never enacted any affirmative language such as ‘Puerto Rico is hereby an incorporated territory,’ its sequence of legislative actions from 1900 to present has in fact incorporated the territory.

So how has Puerto Rico done?

Great.

In the postwar decades, Puerto Rico grew astonishingly fast. By the time the model petered out around 2004, the island’s per capita income was within striking distance of Mississippi and catching up to North Carolina. That is a simply phenomenal rate of growth. Now, some may say that growth was caused by two factors: (a) free emigration to the United States, and (b) large subsidies from the United States — but both of those are benefits of being part of the United States!

From the point of view of Cuba or Costa Rica, Puerto Rico entered a whole ‘nother economic universe. Its per capita income currently rivals Italy. (A country which, like Puerto Rico, has faced a lost two decades in terms of economic growth.) And all you need to do is travel around Puerto Rico to see this. It’s not as picturesque as Italy and the transport network isn’t as good, but it’s obvious that Puerto Rico is a developed country.

Less known is that Puerto Rico also did pretty well before World War 2. It caught up to Cuba and Costa Rica and avoided the worst vicissitudes of the Great Depression. Its GDP per capita more than doubled in the four decades after it became an American territory, for an annual growth rate of 2.6%. That’s not extraordinarily fast by modern standards, but it’s pretty good for the early 20th century. And it happened at a time when few Puerto Ricans emigrated to the mainland and the federal government was very stingy with its subsidies.

Moreover, this growth was a revolutionary change in the island’s lived experience. In 1900, its income was on a par with places like Burundi or the D.R. Congo in 2024 — well above subsistence, yes, but still desperately impoverished. In 1940, Puerto Rico remained a poor country, but now on a par with Latin American norms. Living standards were not good — only 14% of housing units had a private indoor flush toilet in 1940, for example (page 21) and only 29% were wired for electricity (page 24) — but even those miserable conditions were a massive improvement over the island’s destitution around the turn of the 20th century. After all, in 1899 only 1% of the island’s dwellings had “toilets” (pages 110-11) — and few of those were real flush toilets, instead mostly cisterns relying on lime or dry clay to soak up the “foul odors.”

Other indicators improved as dramatically. Life expectancy went from around 30 to 46.4. Literacy increased from 22 percent of the population above age 10 in 1899 to 60 percent by 1940. Surfaced roads went from 275 kilometers in 1899 to 2,394 kilometers by 1940. As a result, transportation costs fell between 50 and 70 percent in the first decade of American rule. The result was an export boom, even before you add in the benefit of being inside the American customs area.

By 1940, Puerto Rico no longer lived on the edge of famine, even if malnutrition remained widespread. According to Brian Marein, male heights increased by 4.2 centimeters between 1890 and 1940, and Puerto Ricans became the tallest Latin Americans outside Argentina and Uruguay. In 1930 — yes, under the Hoover Administration — the federal government began paying to provide milk to infants and school-age children at stations established around the island. The New Deal expanded those programs and added investments in housing, sewers, and electricity. By mainland standards, Puerto Rico was still desperately poor — even Mississippi outdistanced it in 1940. But by southern European standards, the island fit right in: richer than Romania, on par with Portugal, slightly less than Spain. And in Latin America, only the Southern Cone was significantly better off.

Three things underpinned the island’s prewar growth. First, agriculture. Unlike Cuba, Puerto Rico was firmly inside the American tariff wall. So sugar and tobacco production grew rapidly after annexation. Not only that, protection made Puerto Rican sugar resilient to downturns (unlike Cuba): as the Great Depression gathered force in 1928-34, mainland agricultural output fell 12% whereas Puerto Rican output rose by 26%.

Second, cheap wages fueled a textile boom. The Depression sent New England mill owners in search of cheaper labor and prompted a production exodus to the island. Mainland textile output collapsed by 30% in 1928-34, but Puerto Rican production surged by an astonishing 128%.6

Finally, the New Deal cushioned the Great Depression. Federal spending rose from basically nothing in 1930 to around a fifth of economic output in 1945. That powered a lot of construction jobs and built a lot of very useful infrastructure.

The exhaustion of the Puerto Rican growth model in the early 21st century has been a tragedy. The travails of the island’s power sector are unworthy of a rich nation. Hurricane María was a disaster. Its second population exodus — making Central Florida great again — is terrible for the island. But at the end of the day, we’re talking stagnation rather than collapse … and stagnation at an extraordinarily high income level. The economic miracle was a real one — few today would prefer the dynamism of Panama or the D.R. over Puerto Rico’s wealthy torpor.

And who’s to say that good times can’t come again?

Applications to a Cuban counterfactual

So what does this history say about the prospects of a genuine American Cuba, where it became part of the United States in 1898?

Easy: they’d be phenomenal.

The first channel would be via the American customs area. With no trade barriers, sugar production would have exploded, nipping the mainland beet sugar industry in the bud. In addition, textile, tobacco, and tropical fruit production would have surged. The size of those surges would depend upon how low Cuban costs could go, but they would certainly happen.

The second would be fiscal. Railroads and paved roads would have expanded much further and much faster — even when not directly financed by the local government, investors would be far more willing to risk their capital in a U.S. territory than they were in an independent republic, even one under explicit American protection. Then, during the Depression, the place would have been flooded with federal money. As a share of GDP, that support would likely be smaller than Puerto Rico, but only because Cuba would be richer. In absolute terms, its impossible to imagine Cuba receiving less than its fellow Caribbean island.

Finally, Cuban politics would be much better. The problem with actual Cuba after 1934 was not simply that Machado had wrecked the state. It was that the successor regime settled into a durable political economy of quotas, protection, and restraints on trade. Government policy deliberately stifled innovation and the adoption of new technology. The resulting inefficient apparatus had to be protected from foreign competition with a high tariff wall.

An American Cuba could not do that. Even if a hypothetical Cuban territorial (or state) government tried to implement such a web of controls, the federal courts would not let them. Lots of American states tried and failed. In Baldwin v. Seelig the Court struck down New York’s attempt to keep out lower-priced Vermont milk. In Hood v. Du Mond it struck down New York’s denial of a business license where the point was to limit interstate shipments and protect local economic interests. In Dean Milk v. City of Madison it invalidated a local-processing rule that reserved a city market for nearby producers. In Polar Ice Cream v. Florida Milk Commission it invalidated Florida rules that forced a distributor to buy from designated local producers at fixed prices. In West Lynn Creamery v. Healy it invalidated a Massachusetts scheme that assessed all milk sold in the state but rebated the proceeds only to Massachusetts farmers.7 If these didn’t survive court scrutiny, it’s unlikely that Cuba’s baroque web of rules would have.

That is not to say that every post-1934 Cuban rule would have been laughed out of federal court. (See footnote six.) It is to say that the core devices of Cuban “risk-free capitalism,” as outlined in the last post, would have been both illegal and self-defeating in an American Cuba. Illegal, because federal law empowered American courts to block attempts to reserve markets, restrain interstate commerce, legalize collusion, or favor local producers. Self-defeating, because if Cuba were inside the American customs area, then the island’s businesses would have no separate tariff wall behind which to hide. Cuban firms would face mainland competitors free of Cuban restrictions. Under those circumstances, business and labor support for the regulations would rapidly slip away.

To speculate a bit, Cuba probably would not have remained a territory for very long. Territorial status has been unstable enough in Puerto Rico. In Cuba, with a larger and more sophisticated political class and a far stronger sense of national identity, long-term relegation to the territorial league would likely have been impossible. If that’s correct, and Cuba became a state, then the relevant counterfactual to American Cuba wouldn’t be Puerto Rico; it would be Florida, with the island receiving even more federal spending and steady stream of gringo migrants coming to work, establish businesses, or retire.

There are few other places on Earth besides Cuba where the gap between what is and what realistically could have been is so large.

If only it could have failed like Puerto Rico. Most countries should aspire to fail like Puerto Rico.

That really happened. President Gerardo Machado was prepared to pay any price, bear any burden, rather than miss Cuba’s debt payments. Even when that price included confiscatory taxes, wage arrears, the complete shutdown of public education, and an unstoppable downward GDP spiral, Machado refused to default. The end result was the extraordinary spectacle of the Roosevelt administration (Franklin, not Theodore) orchestrating the overthrow of a Cuban president because he refused to default on debts to American investors.

Machado had the bad luck to be elected president in 1924, right before the sugar market collapsed. Elected in November, he didn’t take office until May, as the market went into free fall. A record Cuban sugar harvest combined with London’s decision to exempt imperial sugar from U.K. duties caused prices to collapse. Prices sort of stabilized after that, but the good times were over.

The Machado administration reacted with a kind of proto-Keynesianism. In 1926, it borrowed $10 million (2% of GDP) from Chase to accelerate a public works program. The next year, it ran a fiscal deficit of 3% of GDP. In 1928, it negotiated a $50 million credit line as nominal GDP shrank from $648 million to $584 million.

After securing a constitutional amendment, Machado (a Liberal) won re-election in 1928 as the nominee of all three Cuban political parties — the U.S. embassy believed, perhaps unsurprisingly, that he had used government funds to bribe members of the Conservatives and the Cuban People’s Party in order to secure both the amendment and his uncontested re-election. When Carlos Mendieta tried to challenge Machado under the rubric of the Nationalist Union, the new party was kept off the ballot and harassed by police.

In February ‘29, after the election, the government issued an additional $38 million (7% of GDP) in long-term bonds and negotiated an additional $20 million credit line (4% of GDP) … which it exhausted by August. By the end of the year it had run an eye-watering deficit of 15% of GDP. Under the prevailing interpretation of Cuba’s constitution, the U.S. State Department had to sign off on all of these loans, which it dutifully did, terrified that a failure to do so would cause the Cuban economy to deteriorate faster.

Machado failed to ignite a recovery, as the Great Depression ravaged the country’s export markets.1 The fundamental problem was that Cuba used the U.S. dollar as its currency, which meant that it could not devalue. It therefore had to adjust through deflation. Prices and wages declined, the debt-to-GDP ratio rose, and the gigantic budget deficits made matters worse by making everyone fear higher future taxes.2 The government tried minting silver pesos in 1932, which helped it cover its growing deficits, but not in sufficient quantities to drive the dollar out of circulation.3

Instead of reactivating the economy, growing public debt dragged it down further. Prices were falling. Nominal tax receipts followed. But the burden of public debt rose and the willingness of lenders to finance new debt fell. The government therefore had to raise taxes, lay off workers, and cut salaries to make its debt payments. But that cut the demand for goods and services, which in turn caused prices to fall further, depressing tax revenues even more …

And so a de facto dictatorship entered an economic spiral. Violence rose. In 1930, before the midterm elections, gunfire broke up a student demonstration, killing one and wounding two. The President then “temporarily” suspended constitutional guarantees, and armed his supporters to violently break up Nationalist Union rallies, which in a heavily-armed country managed to kill both police officers and civilians. Massive student demonstrations followed the November “elections.” Machado shut the university and all high schools in December (fiscal exigencies would keep them from reopening). In January he arrested the entire university student directorate and rammed a bill through Congress indefinitely suspending civil liberties.

The Machadato, Part I: The Full Ceaușescu

Machado dismantled the Cuban state and wrecked the economy in order to keep paying its debts. The result was exactly as chaotic as you would expect. Debt service rose from 9% of public spending in 1928 to 13% in ‘30 and 14% in ‘31 before spiking upwards to 20% in 1932.

In January 1930 the government decreed the first wage cut; by September 1931, overall nominal public sector salary levels had declined by half. Even then, the government couldn’t pay its bills. In December 1931, the Machado administration postponed government paychecks for several weeks. Six months later, in June 1932, it again suspended wage payments, save the judiciary, high officials, and the military. The judiciary came under the axe in September ‘32.

And even that didn’t stop the bleeding. In January 1933 cabinet members joined the long list of public servants expected to work for worthless paper IOUs. The New York Times reported that salary arrears reached $14 million that month and the government began paying salaries in scrip. By May 1933, wage arrears alone surpassed $19 million, fully half the central government’s annual budget. The rest of the public schools and all of the courts shut down, agricultural extension programs ceased, and public services were suspended.

Tax hikes were almost as destructive. In 1933, Cuba imposed a 1¢ per pound excise tax on refined sugar at a time when sugar (net of U.S. tariffs) traded at 0.9¢ in New York. Machado essentially confiscated the lion’s share of Cuba’s export earnings. The tax ignited a furious response from sugar growers. The government backed off (informally) on the sugar levy but imposed a dizzying array of domestic taxes, only to see collection collapse even faster than the economy because tax collectors, having been unpaid for months, grabbed the receipts for themselves.

The state’s collapse didn’t go unresisted. Open revolt broke out in August 1931, as Cuban troops fought rebels in Havana, Matanzas, Pinar del Río, and Santa Clara. The organized revolt collapsed within a week, but organized warfare morphed into widespread terrorism. 1931 and 1932 saw a regular litany of bombings and assassinations — including two massive car bombs fortunately discovered by police before they could detonate.4 Machado gave as good as he could take: in addition to the police, Machado pardoned 489 supporters in 1931, 400 for violent offenses. The U.S. ambassador warned Machado that “nearly everyone was opposed to the government except those being paid by it.”

So why did Machado insist on repaying the bankers? Well, part of it was a (misplaced) fear of American intervention, part was pride, and part was fear of losing access to foreign credit, but the strongest motive appears to have been self-interest. From The Empire Trap, page 228:

Cuba’s lenders provided Machado and his supporters with personal incentives to continue the government’s debt payments. Chase Bank granted Machado personal loans worth $130,000 ($2.15 million in 2011 dollars), “with little prospect of immediate payment” in the words of a later Senate investigatory committee. Chase also made loans to enterprises owned by the Cuban president: it gave $45,000 ($745,000 in 2011 dollars) to a construction company and $89,000 ($1.48 million in 2011 dollars) to a shoe factory.

In addition, Chase hired Machado’s son-in-law, José Emilio Obregón, even though, as Chase officials themselves wrote, “As we know, from any business standpoint he is perfectly useless.” Although Obregón was perfectly useless to Chase’s business, he nevertheless received a starting salary of $12,000 (which rapidly rose to $19,000, for a rise from $202,000 to $319,000 in 2011 dollars) and an additional $500,000 commission ($8.5 million in 2011 dollars) for his role in securing the 1928 public works loan.

Cuban families close to Machado were invested in the Cuban public debt. The State Department reported that at least $1.5 million of the Cuban public works bonds ($26.3 million in 2011 dollars) was held by “individuals close to the President,” with an additional $5.5 million ($96.8 million in 2011 dollars) belonging to the Compañía Cubana de Contratistas, “in which those chiefly interested are Augustus Alvárez and Rodolfo Arrelano, both of them intimately connected with the President.”

Machado’s system meant that Machado and his cronies had a vested interest in continuing to pay the debt. That was great for American bankers, at least as long as Machado could keep himself in power. For the Cuban people, under Depression conditions, not so much.

The Machadato, Part II: The American coup

There’s a long history of paranoid people seeing an American hand in all sorts of foreign events. Sometimes they’re even true. In the 1960s, American oil companies really did try to overthrow Sukarno. In the 1970s, ITT really did try to overthrow Allende. (There is something very strange in having the phone company try to overthrow a government, but when you think about it, it has a certain perverse sense.)

In Cuba, however, the U.S. got rid of Machado because he refused to default on the debt. Back in Washington, the Great Depression destroyed whatever political influence the bankers possessed. Abroad, meanwhile, American officials were urging client states to stop servicing unsustainable debts — nobody wanted to see countries fall into chaos under the burden of interest. Nor did they want to see taxes on American enterprises raised to confiscatory levels in order to repay debts to American banks. And Machado, in Cuba, was simultaneously dismantling the state he ruled and taxing away the foreign earnings of American enterprises, even as his country slid into civil war.

But Machado was stubborn. Or greedy. Or crazy. Or all three — American officials who met with him during this period reported strong whiffs of “crazy” from the man. He studiously ignored every hint emanating from the American embassy in Havana.

The problem for Washington was that it couldn’t openly order Machado to stop making payments. It couldn’t even simply pressure U.S. banks to unilaterally offer a debt restructuring. President Hoover’s last ambassador, Harry Guggenheim, succinctly summed up the dilemma: “Any effort by our government to induce the bankers to relieve the financial strain on the Machado administration will be generally condemned as United States support of the unpopular Machado administration.” In other words, the Hoover Administration wanted to get Machado to stop wrecking his country, but they didn’t want to be seen saving him from himself.

Guggenheim’s FDR-appointed successor, Sumner Welles, was less risk-averse and tried more directly to get Machado to default. The problem, Welles reported, was that Machado was delusional. “He feels that the strongest support which he has in his present position is the support given him by the American banking groups and he has further the conviction, which nothing will shake, that any default of obligations by his administration will make more likely the possibility of American intervention.”

The thing is that failing to default made American intervention inevitable. Machado could have forestalled that by defaulting, but didn’t, even when FDR’s own ambassador told him to.

And so the U.S. got rid of Machado. We didn’t have to invade. A wave of strikes provided the pretext. On July 25th, Havana’s bus drivers went on strike to protest a municipal tax hike. Cab drivers followed on August 1st. Their strike wasn’t just a walkout: the strikers littered Havana’s boulevards with broken glass and nails to make them impassable. Long-distance truck drivers and bus drivers in other cities walked out on August 2nd; the longshoremen followed on August 3rd.5 The next day the strike went national: government employees walked out, stores closed, and Welles worried that “there will be a state of near starvation within the next 24 hours.” Three days later, on August 7th, the general strike turned violent when the police fired on demonstrators.

Welles immediately went to President Machado, and bluntly told him Cuba would fall into anarchy that unless he appointed somebody else to run the government and resigned. Machado told Welles that he would “prefer armed intervention to the acceptance of any such proposal.” In Welles’s words, Machado “was in a state of mental disturbance bordering on hysteria.”

FDR quietly called the Cuban foreign minister in Washington down to the Oval Office on August 9th. He gently told the ambassador that Machado should step down “to prove to the world his high purpose in this crisis” and perform “a noble act” suitable for “a great man, a great leader, and a great patriot.” FDR even offered to provide unspecified political cover so that Machado would not lose “face.” He also somewhat ominously added that he felt a “duty to do what we could so that there should be no starvation and chaos among the Cuban people.”

When Machado refused FDR’s direct order, the gig was up. With disorder and food shortages spreading, Ambassador Welles held meetings with the leaders of Cuba’s three major parties and the military to organize a new government. Welles was less than impressed with most of the opposition’s leaders, with one exception: Hortensia Lamar, the leader of the campaign for women’s suffrage.6 Welles told her on August 12th that Machado would be resigning soon and Lamar announced it to an enthusiastic crowd from the balcony of the U.S. embassy.

The next day, Machado stepped down. Carlos Manuel de Céspedes took over as provisional president. Machado left by plane for the Bahamas with “five revolvers, seven bags of gold, and five friends in pyjamas.”7

He would die in 1939 in … where else? … Miami.

The U.S. proceeded to implement a plan for orchestrating a Cuban default. Bureaucratic conflicts between State and Treasury led to a rather less smooth rollout than Ambassador Welles hoped, but it nonetheless worked. With his typical creativity, FDR even found a clever way to aid the new government without the need to go to Congress: have the Reconstruction Finance Corporation make a $4 million loan to a mining company, which it would pay in silver that the Treasury would immediately mint into coins with a face value of $14 million that would then be shipped to Cuba — that’s the equivalent of $7.7 billion in 2024 as a share of the federal budget, and almost 4% of Cuba’s GDP.

After the Machadato: Not quite over

As the Americans were hammering out their plan to start repaying salaries, one Sergeant Fulgencio Batista led a mutiny of non-commis­sioned officers. The proximate cause of the mutiny was a [false] rumor that the government intended to cut enlisted pay from $22 a month to $13. Radical student leaders quickly converged on the mutineers’ headquarters. The mutineers agreed to support the students, and declared a new government on September 4th under a five-man executive commission headed by one Ramón Grau. Five days later, Grau assumed the Presidency. Recalcitrant Cuban officers held out in the National Hotel in Havana, when Grau’s soldiers stormed the building and captured or killed the holdouts.

Ambassador Welles wasn’t thrilled by the new regime, and not only because he was between leases and living in the National Hotel when the Cubans stormed it. No, the problem was that Grau was a terrible combination of left-wing and ineffective. Bombings and terrorism surged, assassinations proliferated, and anti-Grau troops from Camp Columbia “flying stolen fighter planes, swooped low over the city of Havana, spraying 50-caliber machine gun bullets into the streets, across the roof tops, and into the streets again.”

More importantly, the disorder threatened American investments. Workers occupied American-owned sugar plantations, including two sugar mills, and the Grau government directly interfered in the management of the American-owned Cuban electric and phone companies. Other plantations went up in flames. Police protection had already evaporated under Machado; Grau made it worse. Welles reported that the Grau government was under “ultra-radical control,” and “Communistic elements are having an unfortunate influence.” Standard Oil asked for U.S. Marines to protect its operations. Bethlehem Steel and United Fruit quickly followed.

FDR heard their requests: he ordered 29 naval vessels to Cuba and Key West. He also ordered the Marine Corps to put its air squadrons on alert, with pilots at Quantico, Virginia, ordered to be packed and ready to fly to Cuba “on a moment’s notice.” The Marines also activated five battalions in Quantico and Port Everglades in Fort Lauderdale, Florida, and prepared for deployment.

American covert action managed to head off the need to invade. Jefferson Caffery, acting as FDR’s personal representative, brokered a deal between the aforementioned Carlos Mendieta and Fulgencio Batista to organize a coup against Grau. On January 15th, 1934, the Cuban army swung into action and quickly ousted the chaos-prone left-wing government. Mendieta assumed the presidency, ceased debt payments, got American money, and started paying back salaries.

A New Deal for Cuba?

The … uh … new deal between the U.S. and Cuba was a strange one. As Alan Dye and Richard Sicotte have argued, it relieved the immediate crisis at the cost of long-term growth.

The U.S. gave up its legal right to intervene, but nobody thought that meant anything. The Olney declaration was still alive and well: “Today the United States is practically sovereign on this continent and its fiat is law upon the subjects to which it confines its interposition.” The U.S. hadn’t needed legal justification to create Panama, occupy Hispaniola and Nicaragua, or install its officials inside the governments of places as far afield as Peru and Bolivia. It was a nice gesture, but purely symbolic, as Messrs. Noriega and Maduro would discover many decades later.

The substantive change was that FDR renegotiated Cuba’s trade status with Congress to channel more benefits to the island while protecting mainland sugar producers. FDR convinced Congress to cut the sugar duty in half, from 2¢ to 0.9¢ — but with a quid pro quo that capped Cuba’s share of the American market to its 1931-33 average. (See figure below.) Moreover, access had to be renewed every three years, which discouraged investment.

So Cuba would enjoy high sugar prices, but American producers could rest secure that no matter how efficient the Cuban industry became — and there was ample scope for innovative productivity gains — it would never cut into their existing market.

The resulting arrangement stabilized Cuba and generated rents, but it also capped the island’s main source of growth. With its share of the U.S. market quota-limited and foreign markets increasingly inaccessible or unattractive, sugar production stagnated. In an alternate universe, that stagnation might have produced dynamic new industries (or a precocious mass migration to the United States) but we don’t live in that universe. In this one, the combination of American subsidies and hard output caps seems instead to have generated enough rents to keep Cuban elites attached to protecting their existing lines of business.

In the words of Mary Speck:

Reorganization of the [sugar] industry would have been economically painful, and, for a country still reeling from Machado’s overthrow, politically disastrous. Cuban producers demanded internal quotas to protect themselves from internal competition. Decree 522, promulgated in 1936, followed a year later by the Law of Sugar Coordination, set up an elaborate regulatory system designed to guarantee the survival of the island’s smaller mills, along with independent sugar planters or colonos. Small mills were guaranteed minimum basic quotas, while larger mills were limited to their average production in 1934 and 1935. Sugar planters or colonos in turn won quotas to preserve their share of the cane sold to mills, and also secured restrictions on the amount of “administration cane” large mill owners could grow on their own property. Colonos also won the so-called “right of permanent occupancy,” which meant that as long they met their cane quota and paid their rent, they could never be evicted. And just to be sure no mill owner or cane grower ever went into bankruptcy, the act extended a moratorium on agricultural loans.

But it did not end with sugar.

Risk-free capitalism in Cuba after ‘34

After 1934, Cuban governments increasingly extended the sugar sector’s logic of protection to the rest of the economy. Back to Mary Speck:

U.S. trade policies not only limited the growth of Cuban sugar exports, they discouraged the growth of other export industries, as well. High tariffs on finished tobacco products … encouraged U.S. cigar makers in Havana to shut down their factories and re-open them in New Jersey. 30 Would-be exporters of winter vegetables and citrus fruits also faced tariff barriers supported by strong domestic lobbies. It did not matter that many of these small farmers were U.S. citizens, lured to the island shortly after independence by land developers … Well-organized fruit growers in Florida and California made sure that tariffs were high enough to discourage foreign imports, including those raised by their compatriots in Cuba.

The economic polices that emerged beginning in the 1930s were geared, not toward growth, but toward protecting Cuban jobs and Cuban businesses. In the words of the World Bank, Cuban economic policies focused on “preserving the status quo and on regulating the division of a fixed national production, rather than on innovation to enlarge the total product.”

Mills were discouraged from economizing by reducing the length of the harvest or improving the productivity of labor. Labor legislation made it difficult to dismiss workers for any reason, including “tecnificación.” Sugar unions also protested against rising “intensivismo” in sugar factories. … Growers had little incentive to improve the quality of their cane because their payments were based, not on the yield of their individual crops, but on the average yield of the entire cane crop processed at their local mill. In order to equalize payments to colonos with poor land, the percentage payment declined as yield increased. There was little reward for raising yield by planting better varieties of cane, cutting cane only when mature, or delivering it promptly to the mill.

The attempt to create risk-free capitalism was not limited to the sugar sector. Quotas were extended to two other important products, tobacco and coffee. Nor were imports allowed to bring unbridled competition to the island’s domestic market. Most industries were organized in manufacturers’ associations that secured tax advantages, subsidies, and protective tariff barriers against finished products while lobbying for low tariffs on imported inputs. The result was a complex system of taxes and tariffs, riddled with exemptions.

Manufacturers did not hesitate to join forces with labor when threatened with technologies that might raise productivity and thus displace workers by putting inefficient enterprises out of business. Attempts to mechanize cigar production beginning as early as the 1920s were repeatedly thwarted by a powerful alliance of small manufacturers and skilled workers. Candy manufacturers who invested in modern machines during the 1940s had to run them at the lowest possible speed so as not to put their rivals out of business and displace workers. Textile factories faced potent opposition from their competitors and their workers as they tried to raise productivity in the 1940s and 50s.

In short, other sectors demanded the same security that the U.S. quota system gave to sugar, which soon enveloped Cuba in an ever-tightening web of regulations. Cuba remained a relatively prosperous country, but growth never returned to its pre-Machado trend. Hell, it didn’t fully recover from the Depression until 1950:

Needless to say, none of this would have happened had Cuba become an American territory in 1898, let alone a state.8

The irony is hard to miss. Washington helped remove a government because it would not stop paying American creditors. It then imposed a settlement that channeled rents to Cuba and avoided a painful restructuring of the economy. The settlement spared the island a complete implosion, but locked Cuba into a political economy in which too many interests lived off rent-seeking and too few were able to gamble on creative destruction. The opposite of dollar diplomacy, it turns out, was not economic freedom. It was a system where American dollars prevented collapse but froze the economy.

At least until 1959.

But there is a third episode in Cuban history: Cuba under American domination, between 1898 and 1934. The United States takes control of Cuba, declines to annex it, reserves the right to intervene, and finally overthrows the government on its way out because said government insists on repaying its debts to American creditors.

It’s a weird story. This is part I.

The annexation that wasn’t

So why didn’t the United States annex Cuba in 1898?

Well, there are three general hypotheses:

1. Anti-imperial ideology. In some readings, this is actually a form of racism; we weren’t anti-imperial so much as we didn’t want more non-white people in the polity.1

2. Cuban resistance.

3. Sugar.

The correct answer is sugar. There is something to the other two arguments. But neither was decisive in the face of opposition from sugar interests. Nonetheless, let me briefly take the other two in turn.

Yes, Congress got into the Spanish-American War in order to guarantee Cuban independence. And yes, the Senate declined to ratify the 1869 treaty to bring the Dominican Republic into the Union for racial reasons.2

But let’s be serious. The U.S. annexed the Philippines and Puerto Rico as a result of that same the Spanish-American war with no compunctions. Even though the Congress declared that the U.S. had gone to war to preserve Cuban independence, the McKinley Administration was very careful to leave the island’s status vague in the peace treaty. As for the D.R., the project was Ulysses Grant’s brainchild and came out of nowhere for most Americans; annexing Cuba, conversely, went back a long way. Moreover, domestic and international conditions in 1898 were very different than they had been in 1869.

As for Cuban opposition, well, there was no serious violence under U.S. occupation. (This may have been related to the fact that the U.S. paid former Cuban rebel fighters the equivalent of $3,034 in 2024 dollars if they turned over their equipment — about 25% more than the country’s per capita GDP at the time.) Many Cuban elites were opposed to American annexation, but that’s not the same thing as stating that they would pledge their lives, fortunes, and sacred honor to prevent it.

That said, as with the debate over Castro’s intentions, it doesn’t matter. Congress was not going to accept a Cuban territory. Why not? Simply put: the domestic sugar industry. (Shrinking cane in Florida and Louisiana, booming beet in California, Michigan, Colorado, Utah, and Nebraska.) The industry’s output was trivial — a near invisible 0.3% of GDP in 1900 — but its influence in Congress was anything but.

The power of the sugar lobby is obscured in the debates over American intervention and the Treaty of Paris, but you can see it clearly when the new Cuban government and Teddy Roosevelt tried to get a free trade treaty with the United States.3 The Cubans opened with a fairly simple proposition: “The proper solution for both countries is virtually free trade.” (Page 94.) Luis de Abad eloquently put it this way before the U.S. Congress (page 142):

The Cuban workingman remarks with surprise, without being able to explain it, that while the Stars and Stripes float on the Morro there is less bread and butter in his home and he is worse off than under the Spanish domination.

Free trade didn’t happen. All the Cubans got was a 20% reduction in the tariff faced by other foreign producers. (That’s one-fifth off the base rate for any product, not a 20-point benefit.) In return, all the Cubans had to do was add an “appendix” to their constitution — and, just to be sure, sign a treaty with the same language — giving Washington the legal right to “intervene”:

The Government of Cuba consents that the United States may exercise the right to intervene for the preservation of Cuban independence, the maintenance of a government adequate for the protection of life, property, and individual liberty, and for discharging the obligations with respect to Cuba imposed by the Treaty of Paris on the United States, now to be assumed and undertaken by the Government of Cuba.

And even then, Congress balked. In 1902, the proposed agreement came under widespread condemnation in the House of Representatives. The Department of Agriculture came out against the President’s own initiative. The New York Times reported colorfully on the scene before the Ways and Means Committee:

It was impossible to determine even approximately the attitude of the committee. It seemed to be beyond question, however, that Mr. Tawney (Rep.) of Minnesota, Mr. Lu (Rep.) of Kansas, Mr. Metcalf (Rep.) of California, and Mr. Robertson (Dem.) of Louisiana were strongly against the Cubans. The questions they asked indicated this, and it also was indicated by the intimate association maintained all through the day between these gentlemen and Mr. Oxnard and his friends of the beet sugar persuasion.

The one thing made absolutely clear was that a great pressure was being brought upon the committee to prevent it, if possible, from yielding anything to Cuba. Mr. Oxnard and his friends completely filled the space in the committee room to the left of the committee table, and every man in the party was alert and active in furnishing information and in offering suggestions to the members of the committee who had espoused their cause.

The Cubans apparently lacked earnest advocates of their proposition.

So it died in Congress. Died dead. Opposition by the sugar interests meant that you couldn’t get a 20% cut in tariff rates through the House, let alone bring Cuba under the American tariff wall.

Now, T.R. was not a man to give up that easy. So in 1903 he resubmitted the agreement, this time as a treaty, allowing him to bypass the House of Representatives. In order to get it through he had to agree to higher tariffs on Cuban refined sugar, because the Havemeyer sugar trust feared that new refineries on the island might undercut it.

If that’s how hard Congressional interests fought the possibility of a tariff cut, how do you think they would react to bringing Cuba fully under the American tariff wall? Badly, that’s right. The Philippines and Puerto Rico got in because they didn’t yet possess extensive sugar industries — and in 1898, the latter wasn’t expected to in the future either. Hawaii only got in because of the combination of a planter elite that enjoyed direct family ties to New England elite Republican families, the presence of a rapidly growing community of American settlers, and some very astute politicking.

In other words, neither domestic anti-imperial sentiment nor Cuban nationalism mattered. ‘Twas old-fashioned industry lobbyists what kept Cuba a country. At least on paper. End result was an “independent” Cuba linked to the American market and subsidized by American sugar consumers, but with a constitutional clause allowing Washington to intervene.

The colony that was

Preferential access to the American market brought Cuba real economic advantages.

The above figure measures the size of the American subsidy by the difference between the revenue received by Cuban sales to the U.S. minus the revenue they would have received from sales to the U.K. market. It doesn’t hold a candle to later Soviet or Venezuelan subsidies, but it’s nonetheless relatively large. (After 1916, World War 1 sent British sugar prices soaring, making a simple measurement of the implicit subsidy impossible.)

The American protectorate had a second benefit for Cuba: investors regarded Cuban bonds nearly as secure as obligations of the United States. And nothing dissuaded them from this belief. Cuba could face armed revolts, foreign occupation, sugar price gyrations, and changes in American tariff policy without the sharp repricing seen in other Latin American countries. In fact, during the “dance of millions” speculative boom following WW1, yields on Cuban bonds fell below the United States, when the yields for other Latin American countries spiked.

Nonetheless, American tutelage didn’t transform Cuba. The export sector remained dominated by sugar. Manufacturing remained desultory, at best. Tourism was slow to expand. Cuba could borrow money at lower rates than other Latin American nations, but the U.S. State Department had the power to restrict all borrowing, and so Cuba did not invest as much in public infrastructure as it might have had it been fully independent. (Of course, it also possibly avoided worse debt crises — but as you’ll see in Part IIIb, it ran into a pretty awful one anyway.)

The Second Occupation

American control didn’t remain a distant threat. In 1906, the fraudulent re-election of President Tómas Estrada triggered riots, which grew into armed revolt. When the U.S. consul cabled Roosevelt, “Government forces are unable to quell rebellion,” Roosevelt’s personal reaction was to say to a friend, “I am so angry with that infernal little Cuban republic that I would like to wipe its people off the face of the earth.” Roosevelt, however, used more temperate language in a cable to the consul: “Perhaps you do not yourself appreciate the reluctance with which this country would intervene.”

Upon hearing of Roosevelt’s reluctance to step in, President Estrada threatened to resign, “and therefore the prevailing state of anarchy will continue.” Unwilling to invade, but also unwilling to sit idly by, Roosevelt dispatched Secretary of War Taft to Havana, with orders to take all necessary measures. (To be fair, he also dispatched nine warships carrying 6,000 soldiers to Cuban harbors.) Taft landed in Havana on September 19, 1906.

Taft rapidly realized that the government had essentially lost control of everything save a few scattered urban centers. On September 29, ten days after arrival, he commandeered an office in Havana, printed up on his own accord letterhead reading, “Office of the Governor, Republic of Cuba, Under the Provisional Administration of the United States” and declared himself the governor. He then ordered the Marines to land.4 The Americans remained in control of the island until 1909.5

Armed resistance to the occupation was minimal. Marine letters home talk about how good the shopping was in Pinar del Río.6 When insurgents returned from the field on a passenger train, the crowd went into the following call-and-response:

• Crowd: “Viva los Liberales!”

• Rebels: “Viva Cuba!”

• Crowd: “Viva los libertadores!”

• Rebels “Viva la Constitución!”

• Both: “Viva los americanos! Viva la paz! Viva Taft y Bacon! Viva-a-a-a Mister Roosevelt!”7

The 6,000-man Army of Cuban Pacification saw little action during the occupation.

Taft’s biggest headache came from annexationists among the Cuban elite and American expats. First, they spread rumors of revolt in an attempt “to show the Americans that they must remain in Cuba.” Second, they invited in a junket of Republican congressmen and tried to convince them of the wisdom of permanent association. Third, Juan Masó Parra.

The Masó Parra Conspiracy

Ah, Juan Masó. This guy was the son of a Spanish immigrant. He was also the cousin of Bartolomé Masó Márquez, President of the Cuban “Republic in Arms” during the independence war.

Masó joined the fight against Spain, but on January 19, 1898, he took his entire battalion of 107 men and defected to Madrid’s side. For obvious reasons, this made him rather disliked in Cuba, and he returned the favor by writing an entire book called Masó Parra contra Cuba. His own father reported that nothing would make Juan happier than a chance to fight Cubans again. The guy became a political extortionist, collecting commissions from both the Colombian and Venezuelan governments to not raise hell within their borders. He apparently did very well out of unrest in the Dominican Republic.

On June 22, 1907, Masó crosses the border into Haiti and walks into the Cuban consulate in Port-of-Prince, where he declares that he will return to Cuba. For reasons known to nobody, he gets a visa, even though he was on a Cuban no-entry list. In Cuba, Masó starts meeting with anyone who might even vaguely be interested in violence. And who would that turn out to be? Well, as Masó himself unwittingly told an American intelligence agent, his financiers were Cuban elites trying to bring on annexation. According to U.S. intelligence reports, a group of Cuban elites, Spanish expats, and German investors wanted to finance a “Negro revolt” which would end “the chance of Negro control” because it would terrify the Americans into making Cuba a U.S. territory.8 So the plan seemed to be to get a revolutionary army to attack American interests in order to make Washington think that they’d have to stay permanently? I’m not sure that it made sense, but that was the idea.

Anyway, the U.S. governor who replaced Taft, Charles Magoon, sent the Havana police to arrest the plot’s leaders on September 26, 1907.9

And that was sort of the end of that, although I have to point out two ridiculous ironies about the plot. First, the Military Intelligence Division — America’s proto-CIA — reported that the Spanish conspirators wanted the U.S. to take over Cuba because they, uh, wanted to prevent “[a government] like the United States which plays to the common people and makes [business] interests secondary to politics.”10 Second, the Cubans who’d helped reveal the plot were reviled by Cuban nationalists.11 So some of the conspirators wanted to annex Cuba to the United States in order to prevent Cuba from getting a government like the United States, whereas nationalists opposed to any American interference on the island yelled “traitor!” at the Cubans who helped expose a plot intended to annex Cuba to the United States.

OK, history is full of dumber things.

Although maybe the dumbest is that Masó received a pardon from the Americans only to try to overthrow the government again in May 1909, a mere three months after the Americans turned the keys back over to the Cubans.

Intimations of the end

During the occupation many people (American and Cuban) proposed that the U.S. and Cuba should form a customs and postal union. (The Platt Amendment was widely considered to commit Washington to defending the island from external threats.) Even when the proposals included a sugar carveout they floundered on Congressional opposition — sugar interests wanted to retain the option to raise rates in the future, which a formal customs union would rule out.

In part, American support for a customs union reflected the attraction of the Cuban market. Cuba was not a poor country per se — agricultural wages on the island were higher than in much of the United States; some kinds of semi-skilled labor could earn as much in Havana as they could in Brooklyn. Overall GDP per capita was higher than in the South (except Texas).

The problem was the concentration on sugar. Governor Magoon put it well in his annual report from 1908:

The industrial situation in Cuba is the same as it would be in a manufacturing community in the United States, where, each year, the mills were run to their full capacity, night and day, for six months and then closed down for six months.

The seasonality introduced all sorts of terrible uncertainty into the Cuban economy. And that was in addition to the general problem of an export-oriented economy centered on a single product, which is that it lived and died on gyrations in the sugar price. But even when sugar demand was high, the country never quite figured out what to do during the months outside the harvest. In another world, Cuba would have become a U.S. territory. Other industries would have flourished, and Cuban workers would have moved to the mainland, replaced by Spanish, Haitian, and Jamaican migrant workers who could go home when the harvest ended. (The latter part happened anyway, I should add, as the planters searched for cheaper labor.)

But none of that happened. Cuba remained dependent on sugar. And then, in 1934, Congress cut the growth opportunities of the sugar economy off at the knees. But that’s the subject for the next post.

This post has three sections. The first describes how Cuba and the United States descended into deep hostility. The second explains Cuba’s attempts to impose central planning and how it became dependent upon Soviet subsidies. The third describes how Castro somehow managed to wag the Soviet dog (at least in foreign policy) despite its dependence.

(1) Jump or pushed?

There’s an active debate over whether Castro was always a Soviet sympathizer or whether the United States drove him into their arms. There is little doubt that he was a leftist. But there is a lot of doubt as to whether he would have settled for a position like Indonesia or Yugoslavia; that is, a one-party state running a highly socialist economy, but opposed (more or less) to Moscow.

For what it’s worth, both the CIA and Richard Nixon thought a neutral Cuba under Castro was possible. At a meeting of the National Security Council on December 23, 1958, with the Batista government in full collapse, CIA director Allen Dulles gave his agency’s appraisal of Castro: “The Communists appear to have penetrated the Castro movement, despite some effort by Fidel to keep them out.” [Italics mine.] Immediately upon taking power, the rebels replaced the Constitution of 1940 with a “Fundamental Law” that prohibited confiscation. Four months later, in April ‘59, a victorious Castro went to Washington. He personally met with Vice-President Nixon, who wrote:

My own appraisal of him as a man is somewhat mixed. The one fact we can be sure of is that he has those indefinable qualities which make him a leader of men. ... He is either incredibly naive about Communism or under Communist discipline — my guess is the former. ... because he has the power to lead to which I have referred, we have no choice but at least to try to orient him in the right direction.

Many historians, myself included, have seized on these and other statements to conclude that Castro’s Cuba was not fated to become part of the Soviet Empire.1

But the debate is moot. Why? The reason wasn’t the implacable anti-Communism of the Eisenhower administration. Nor was it some inevitable affinity between Havana’s new rulers and Nikita Khrushchev. No, the reason the debate is moot is that American investors were never going to sit back and watch Mr. Castro seize their properties. They were going to scream bloody murder, and in a country like the United States, no administration would be able to sit idly by and ignore them, no matter how much doing so might be in the national interest. A tit-for-tat series of provocations was inevitable, and in the context of the Cold War, that would have driven any leftist government, no matter how moderate, into Moscow’s arms.

(I wrote a book about this problem called The Empire Trap; its main thesis is that U.S. foreign policy has been just as subject to interest-group capture as its domestic policy. All uncited claims below are from my book.)

Washington tries hard to do nothing

The Cubans declared land reform on May 17, 1959. The Agrarian Reform Act limited individual landholdings to roughly 1½ square miles but allowed sugar and cattle holdings as large as five square miles. No non-Cubans (or foreign corporations) would be allowed to purchase rural property in the future. Current shareholders in corporations that grew sugarcane would have to divest any shares in a corporation that processed sugarcane. As a result, sugar processors lost about 2 million acres.

Cuba lacked sufficient dollars to pay cash compensation, so it offered nontransferable 20-year bonds with an interest rate capped at 4.5%, a mere 12 basis points above the rate on 10-year U.S. government securities. Moreover, the law valued the properties at their 1958 appraisals.2

The U.S. government reacted moderately. This was Dwight Eisenhower. It accepted the use of appraised value and merely requested that Cuba pay in “long-term bonds that would be marketable and would be payable in dollars.”

U.S. investors? Not so much. Robert Kleberg, a Texan with extensive Cuban holdings, complained to the Senate majority leader — one Lyndon Baines Johnson. They went way back: LBJ’s first job in Washington had been as a staffer to one Richard Kleberg, the “cowboy congressman.” As importantly, Assistant Secretary of State for Inter-American Affairs Roy Rubottom and Assistant Secretary of State for Economic Affairs Thomas Mann were both from Texas. These Texan connections mattered — if Kleberg wanted a meeting with Eisenhower administration officials, Kleberg was gonna get a meeting with Eisenhower administration officials.

And it was in a meeting with Secretary of State Christian Herter on June 24, 1959, that we have our first record of a proposal to cut off Cuba’s ability to sell sugar to the United States. Soon enough, Kleberg got the chance to repeat his proposal to President Eisenhower in the Oval Office.

American sugar interests were split. The refiners backed Mr. Kleberg. But the rest of the American plantation owners disagreed with the Texan: they wanted Washington to ask Cuba for a sugarcane exception to the Agrarian Reform Act. They went so far as to tell the Administration in writing: “Other lands present no real problem — they are not a serious matter.”

Eisenhower did nothing. He wanted to do nothing. Unlike Guatemala in 1954, there were no counter-revolutionaries waiting in the wings to replace Mr. Castro.3 The State Department resolutely recommended that the President do nothing. One 1959 memo stated, “I think our point of departure must be that keeping Cuba out of the Sino-Soviet orbit, and returning it to the Inter-American system, is more important than the salvaging of the U.S. investment in Cuba to the complete satisfaction of the U.S. business community. This is a bitter pill to swallow.” Another read, “Cutting the sugar quota is the ultimate weapon in relations with Cuba,” and recommended doing so only after the Soviet Union took an action “supporting Castro which we consider intolerable.” A third outlined:

The political effects of a quota cut would be: (a) to create hatred of the United States in Cuba and elsewhere in the hemisphere; (b) to increase sympathy for Castro, thereby probably prolonging the tenure of his regime; (c) to give what would be, with perhaps some justification, clear evidence of a policy of economic coercion of a country 90 miles from our shores; and (d) to create for ourselves the eventual problem of trying to pull up Cuba’s weakened economy after Castro has gone.

Even the CIA got into the “don’t do anything!” act. A National Intelligence Estimate dated March 22, 1960, bluntly stated, “We believe that Fidel Castro and his government are not now demonstrably under the domination or control of the international Communist movement.” The estimate went on to state, equally bluntly, that the CIA did not believe that Castro’s regime was vulnerable to falling under such domination. According to the report, damage to America’s strategic interests was being caused by the U.S. reaction to Castro’s policies, not Castro’s actions themselves.

Washington fails to do nothing

And what was the U.S. reaction to which the CIA referred? It wasn’t the Eisenhower administration. Nope. It was Florida. (More accurately, Florida being Florida.) And to a lesser extent, Congress’s, back at a time when Congress acted the way the Founders intended.

1. In October 1959, Cuban counterrevolutionaries start flying private planes from Florida airstrips carrying white phosphorus bombs and machine guns to strafe Cuban positions, including one in the Havana suburbs. President Eisenhower wants them stopped but fears domestic blowback. So the administration convinces itself that the raids were an unimportant sideshow, which has the advantage of being true, militarily and economically.

2. But not politically. No Cuban government can ignore attacks from a private air force operating 90 miles away. Castro’s foreign minister writes to the U.S.: “The Cuban people know, from bitter experience, that if the government of the United States sets in motion its formidable system of vigilance and defense it is almost impossible to conspire in its territory, traffic in arms, leave its ports illegally, or take off in airplanes without proper papers.” The U.S. briefly cracks down on the flights after one of them shoots up a passenger train on October 22nd, but then loosens up again, against presidential wishes.

3. Negotiations over American properties in Cuba go nowhere during the rest of the year, although Fidel kindly (or maybe ominously) tells the U.S. ambassador that he “admires Americans, especially tourists, for whom he is planning great things.”

4. Nonetheless, in January 1960, President Eisenhower requests that the CIA start preparing contingency plans to overthrow the Cuban government. The bombings step up throughout the month.

5. On February 14, 1960, the Russians send First Deputy Anastas Mikoyan to Havana, where he negotiates a deal to buy 425,000 tons of sugar in 1960 and one million tons per year through 1964 for 3¢ per pound. This isn’t a Soviet subsidy: Cuban sugar trades at 5.4¢ in the U.S. Cooler heads seem to be getting the upper hand in Washington: on March 22, a National Intelligence Estimate bluntly declares, “We believe that Fidel Castro and his government are not now demonstrably under the domination or control of the international Communist movement.” In fact, the CIA goes on to warn that the danger to U.S. strategic interests comes from U.S. policy towards Castro, not Castro himself.

6. And then, on March 4th, the Le Coubre explodes in Havana harbor. For those of you who don’t remember Le Coubre — most people don’t — it’s a Belgian freighter filled with munitions for Cuba. These were bought by the Cuban government with Cuban money; they did not come from the Soviet Bloc. Che Guevara rushes down to the scene to help, producing the iconic photo that now graces poseur T-shirts the world over, although I myself much prefer this one:

   

   The Cubans blame the Americans for the explosion — the poetic justice given the USS Maine is hard to ignore.4

7. On March 17, President Eisenhower gives the go-ahead to activate the contingency plans and start actively trying to overthrow Castro. Eisenhower tells everybody to keep this secret, but that proves not possible, what with training camps in Guatemala being hard to hide. On April 23rd, Cuba’s Foreign Minister, Raúl Roa, says as much in a public speech.

8. On May 31st, Castro asks American-owned refineries to process Soviet crude oil. The companies say no.5 On June 28th, Castro takes over the refineries.

9. The next day a sanctions bill hits Congress. It passes 396-0 in the House and 84-0 in the Senate. The bill cuts Cuba’s sugar quota from 3.1 million tons to 2.4 million, effectively kiboshing Cuban exports for the rest of the calendar year.

10. Castro retaliates by expropriating all American-owned property on the island — with compensation to be paid from sugar revenues earned on sales to the United States above the pre-existing quota and price. (Take that, Yankees!)

11. Finally, on July 9, 1960, Nikita Khrushchev speaks on the Cuban situation before the unlikely forum of the Russian Federative Soviet Republic’s Teacher’s Congress. He thunders to the audience — which includes, symbolically, his own childhood teacher — that as a result of the American “economic blockade,” Cuba would now be under the umbrella of Soviet rocketry:

    Soviet artillerymen can support the Cuban people with their rocket fire, should the aggressive forces in the Pentagon dare to start intervention against Cuba. And the Pentagon would be well advised not to forget that, as has been shown by the latest tests, we have rockets which land accurately in a predetermined square target 13,000 kilometers away. This, if you wish, is a warning to those who might like to solve international problems by force and not by reason.6

    In case the point wasn’t clear, Che Guevara clarifies the next day before a crowd of 100,000 in Havana:

    Cuba is now, in addition, a proud Caribbean island defended by the missiles of the greatest military power in history.

You can imagine how all this goes down in the United States during a presidential election year.

In short, you had two givens in this situation. First, Castro was going to redistribute land. Second, the United States was going to be incapable of containing its political response to the first point. Put those together, and you can see why it doesn’t matter whether Fidel marched into Havana intending to create a socialist state or whether he only decided to become a Communist under American pressure; either way, Cuba was going to join the Soviet Bloc unless the Americans somehow managed to overthrow him first. Which they emphatically did not manage to do.

The rest is, as the podcast title goes, history.

(2) Joining the Soviet

Cuba soon became more Catholic than the Pope, much to the chagrin of the men in Moscow. Fidel also proclaimed revolution throughout the Third World, announcing that any revolutionary movement could count on Havana. Eventually, in 1972, he had his country join the Soviet. Which is not a typo; read on.

The Cubans first tried crash industrialization. In 1961, Che Guevara drew up a list of targeted industries. Shopping list in hand, he traveled around the Eastern bloc for the needed credits. The biggest investment turned out to be a pencil factory.

Now, there were some impressive commitments: expansions of the existing steel and cement plants, a diesel motor plant, a gigantic textile mill, a ball bearing plant. (Don’t knock the latter!) But these hadn’t been finished by the time the big push runs out of steam in late 1963.

Pretty much everything went wrong.

The problem wasn’t the capital goods, those could be had from the Soviets, the problem was that all these plants required intermediate goods that were in scarce supply in the Eastern bloc … and Cuba’s existing industrial plant required Western spare parts. So Cuba still had to export to the West, except that it had already blown giant holes in its ability to do so: with workers being transferred to industrial projects, sugar production crashed from 6.8 million tons in 1961 to 4.8 million in 1962.

A CIA assessment identified three major problems:

1. The level of managerial ability. As in, Cuba had almost none. “The evidence indicates that inexperienced management probably has been the principal cause of the decline in industrial production apparent during the last 2 years.”

2. “Apathy and disaffection within the labor force.” Which isn’t surprising, considering the precocious attempt to create the New Cuban Man. Workers got no raises or bonuses, just exhortations to engage in “socialist emulation.”

3. Finally, spare parts shortages. It concluded that they were not yet binding, but would become more serious over time, since the Soviets could not easily provide them but Cuba faced hard currency shortages in its trade with the West.

The Cubans recognized pretty early that the plan was off the rails. In September 1961, Fidel started complaining about lazy workers. By March 1962, Guevara himself called it, “An absurd plan, disconnected from reality, with absurd goals and imaginary resources.”7 About the best thing that could be said for the industrialization push was that the Cubans stopped it before it led to mass starvation, unlike the Soviets, Chinese, and (later) Ethiopians.

Unfortunately, what came next wasn’t much better. Against Soviet advice, Cuba pushed to break its need for Eastern Bloc support by increasing exports at all costs. They nationalized all food marketing, so the remaining private farmers had to sell to the state at controlled prices. The Cubans then squeezed wages, in order to generate higher savings … which brilliantly included depriving the best workers of their higher salaries.8 It’s probably less than shocking that a 1968 study found that “one-quarter to one-half the workday was wasted due to overstaffing and poor discipline.”9

The government then drafted the entire male labor force and set everyone who wasn’t needed elsewhere to the sugar fields. Again, as Communist policies go, this was pretty vegetarian — there were no mass casualties, no starvation. But it turned out to be a terrible policy: the Cubans failed to meet their 10 million ton target, but they came close — only to see world sugar prices fall to 2¢ in 1966-69. As a result, Cuba failed to generate hard currency exchange and wound up selling its entire crop to the Eastern Bloc at heavily subsidized prices.10

In short, Cuba became locked into subsidized sugar exports to the Soviet Bloc. Communist countries became Havana’s sole suppliers of oil, coal, iron, cotton, timber, pig, grain, fertilizers, trucks, cars, and most machinery. Cuba increasingly failed to cover the cost of those imports from its Soviet Bloc exports, so it needed more and more balance-of-payments support, which could not be paid back.

Socialists to the rescue

After a lot of lobbying, in 1972, Cuba became a full member of the Council for Mutual Economic Assistance, commonly called Comecon. In Russian, the organization’s acronym was SEV (СЭВ), short for Sovet Ekonomicheskoy Vzaimopomoshchi — literally, the Soviet of Mutual Economic Assistance. Cuba had joined the Soviet. I told you the opening line wasn’t a typo!

Cuba had already received much help from Eastern Europe, but the SEV put it on a formal basis. Cuba (along with Mongolia and North Vietnam) automatically received special status as a developing economy, which which entitled it to balance-of-payments support — e.g., cheap credits whenever imports exceeded exports.

Everyone knew that these arrangements were bad for everyone: an official Polish report declared that Cuba’s SEV dependence was “destabilizing.” In 1974, the Russians tried to pressure Fidel to improve relations with the United States and attract American tourists. With Cuba’s economy still in need of Western inputs, this would also have the salubrious effect of stopping the inexorable growth of the Communist state’s debt to Western banks and taken pressure off the SEV.

You won’t be surprised to know that El Comandante’s response was:

We are in no hurry. We can wait ten or twenty years. Condemnation of the blockade of Cuba is growing, and the North Americans are increasingly isolated. The blockade is harming us, but we can wait. Argentina’s U.S. companies are willing to sell us automobiles. The United States, as well as U.S. businesses, are facing a dilemma. They have to choose between U.S. and Argentine law.11

Well, friendly Argentine governments (under President Juan Perón, and then his successor — and wife — President Isabel Perón) were not going to last. The 1976 coup dropped Cuba further into dependence on the Soviet.

How dependent?

John Devereaux of CUNY did the work. For comparison, he added U.S. aid flows between 1941 (the start of the war) and 1959. In his words, “The results are startling.”

That is simply incredible. Almost the point where I want to check the calculations (and ask what happened in 1974) but Devereux is an excellent economic historian.12 It’s more than farm states get in the U.S., it’s more than the European Union transfers to its poorer states, it’s more than northern Italy gives to the South.

(3) Wagging the Dog

And yet, this poor mendicant state not only managed to institutionalize its subsidy flows — and collect them from all of Eastern Europe, not just the USSR proper — it wound up driving Soviet foreign policy in the 1970s. Angola is where you can see it most clearly, although there are echoes across Africa and (to a lesser extent) Latin America. For space, however, I’ll stick to Angola here.

In the 1960s, Havana and Moscow were often frosty, because Cuba was all-in on Third World revolution, whereas the Soviets thought that would just be a mess.

In 1974, there’s a military coup in Portugal and the new government abruptly declares that is going to quit Angola. Note here that the Portuguese had practically won the war of independence: none of the three main rebel factions were particularly organized or well-armed by this point. In fact, two of them — the openly Marxist Popular Movement for the Liberation of Angola (MPLA) and the American-supported National Front for the Liberation of Angola (FNLA) spent more time fighting each other than the Portuguese.

Anyway, with Portugal out the door at maximum speed, the country looked to fall into the hands of the Marxist-Leninist Movimento Popular de Libertação de Angola (MPLA). The prospect of a Communist Angola right on what was then their northern border did not please the South African government. So it swept across the border on October 14th, before the Portuguese had fully withdrawn.

The MPLA folded up in the face of Operation Savannah, which advanced an astonishing 3,159 kilometers in 33 days at a cost of 5 dead and 41 wounded. Gabriel García Márquez (yes, that García Márquez) described it such: “It was like a Sunday drive: the South Africans played festive music on cassette-decks fitted to their tanks.” So things looked pretty bad for the MPLA. There were already a few Cuban trainers in-country, but nothing that could withstand the South African advance.

Now, one thing to keep in mind is just how small this South African force actually was. At its peak, it numbered about 3,000 soldiers, backed by an unknown number of badly-trained members of the non-Communist FNLA independence forces. It was this force that looked set to bring down the MPLA.

And so, on November 4th, 1975, Fidel Castro decided to help out his old African allies. As far as we know, he made this decision without consulting Moscow. So no modern airlift here. Nope. Instead, starting on November 7th, the Cubans cobbled together some ancient Bristol Britannia 318 turbo-props. These planes normally had no way to make it across the Atlantic without refueling but the Americans were not about to let them refuel in the Azores. So the Cubans bolted extra tanks to the Bristol Britannia, flew them out of the easternmost point on the island, and somehow managed to get them all the way to Cape Verde without losing a single plane. The Cubans kept coming; by January over 1,000 soldiers were arriving every week, in five round trip flights.

Cuba was not acting at Moscow’s behest. In fact, Moscow was perfectly willing to cut its losses and write off Angola. After all, it wasn’t like the MPLA had actually taken power; letting it fall would not reverse the Marxist arrow of history. Antoly Dobrynin wrote in his memoirs that Cuba acted “on their own initiative and without consulting us.”13 I could review the evidence that Moscow had no intention to intervene, but it seems sufficient to quote Henry Kissinger in 1999:

We could not imagine that he would act so provocatively so far from home unless he was pressured by Moscow to repay the Soviet Union for its military and economic support. Evidence now available suggests that the opposite was the case.

Once Moscow realized that the Cubans intended to commit more than one 5,000-man division, the Soviet ambassador in Havana asked the Cubans to tone down their support. Which they refused to do.

And that forced Moscow’s hand. It couldn’t stand by in the face of such fraternal socialist bravery! So, finally, in January, it gave the Cubans the use of more modern IL-62 transports. It also agreed to replace all of the equipment the Cubans had brought with them and started to supply the in-country Cubans from Moscow.

The South Africans weren’t prepared for this sort of opposition, so they withdrew. Of course, the war went on and the Cuban presence grew. It’s not clear that the Soviets wanted to get involved at all. And when they did, the Cubans often got in the way — for example, in 1977 the Cubans blocked a Soviet attempt to engineer a coup in Luanda and get rid of the MPLA. The Cubans then proceeded to send thousands of non-combatants to shore up the MPLA’s administration and secret police, not entirely unlike what they’d do in Venezuela a few decades later.14

Ultimately, 337,033 Cuban soldiers and a bit more than 50,000 civilians would serve in Africa — about one-in-seven of all Cuban men who turned 18 between 1975 and 1991.15

Demetropolitanization? It’s a mouthful, but accurate

Cuba wasn’t decolonized so much as the de-metropolitanized: its metropole simply fell apart in 1989-91. The Russian Federation that emerged from the wreckage had little ability and less desire to continue its expensive relationship with Cuba. Neither Communism and the October Revolution was a source of legitimacy for the new Russia, so why should the romantic Caribbean revolution and the old bearded guy with the green fatigues enjoy any special privileges?

But Cuba survived the loss of the subsidies. The Russians had saved the Cubans from the worst consequences of their own model, thereby giving the time for central planning and the Communist Party to entrench itself. When Soviet support went away, Cubans got a lot poorer — but reform never went beyond the bare minimum before the country found a new source of support in the Bolivarian Republic.

Of course, this wasn’t the first time that a foreign-backed Cuban regime had collapsed when subsidies went away. It was the second. And while the collapse of that first regime did involve some spectacular changes of government, it did not lead to anything resembling real reform of the system. That will be the subject of our next installment, when we tackle the American withdrawal from its Cuban colony in 1934.

After the Revolution, Cuba became an integral part of the Soviet system. The Revolution was a domestic affair, but Soviet support made it much easier to stamp out markets and capitalism and build something more Catholic than the Pope. In other words, in a world where the Movimiento 26 de Julio takes power but receives no Soviet support, Cuba might have still swung hard to the left, but it would have been simply impossible to dismantle the private sector as thoroughly as it did.

When the Soviet Union collapsed, so did Cuba. But it managed to reform enough to buy time to find a second sponsor: this time the Bolivarian Republic of Venezuela (BRV). Venezuelan aid was never as large as Soviet aid, so Cuba had to continue to develop its tourist sector, but it was enough to forestall more thorough reform. Most shockingly, Venezuelan aid allowed the socialist Republic of Cuba to ignore the collapse of its agricultural sector.

Now, with the last vestiges of Venezuelan support disappearing, and the Americans going after the viability of the tourist sector, Cuba is facing collapse again.

This wouldn’t be the second time the perennial colony of Cuba collapsed because a foreign patron unilaterally decolonized it withdrew its support. It would actually be the third. In the 1930s, the United States wrapped up its semiformal empire on the island and what do you know? The economy collapsed, and hadn’t really recovered by the 1950s.1

In all three cases, the collapse provided an opportunity for reform that was not taken. In Cuba’s case, “decolonization” usually means its foreign patron yanks away the subsidy that has been covering the system’s internal contradictions, and the resulting crash is the moment when reform is possible but repeatedly rejected.

Two threads run through all three cases, more thoroughly each time. First, in all three cases the Cuban tail tried to wag the imperial dog: with slight success in Washington, much more in Moscow, and downright domination in Caracas. Second, in all three cases the Cubans would have preferred a much more formal relationship than the one they actually got, in order to protect themselves from the political winds in the metropole, but in all three cases they ultimately failed.

This series of three posts will move backwards through three empires that dared not speak their name: Venezuela, the Soviet Union, and the United States. Here we’ll briefly review the current crisis and then dive into the Venezuelan connection.

The current crisis

Cuba is on the brink of collapse under an American quasi-blockade. I am choosing my words carefully. The long-standing U.S. embargo was most emphatically not a blockade: Cuba could trade with anyone they wanted, as long as the counterparty was willing to pick a fight with Washington about the Helms-Burton Act. And trade they did! Europeans bought vacations and the Chinese bought cigars and all was … not precisely well, but well enough.

But this time is different.

1. The United States is putting the screws on all petroleum imports. And even though the U.S. Navy hasn’t (yet) stopped any tankers, everyone knows that the United States has turned into the honey badger of the Western Hemisphere. We don’t need to stop tankers because everyone increasingly believes that we would. Even poor President Sheinbaum of Mexico is going along. Cuba has some domestic oil production, but at some point what’s left of the transportation network is going to seize up.

2. The Trump administration has declared that any Europeans traveling to Cuba will be denied visa-free access to the United States … and good luck getting a visa.

To be frank, it’s hard to imagine regime collapse. There is no opposition in Cuba and state control remains strong. But power supplies are collapsing and transportation will soon freeze up. With no serious sources of foreign exchange, the country will become dependent on foreign food aid. The thing is, the governments of North Korea and Venezuela both survived science-fictional economic collapses. Moreover, neither of the previous two collapses led to rapid regime change. Unless the U.S. decides to step up its actions, it’s not clear why this time should be different.

Venecuba, a single nation

From the Economist, in 2010:

When he was visiting Cuba in 2005 Fidel Castro said publicly to him that their two countries were “a single nation.” “With one flag,” added Mr Chávez, to which Mr Castro replied, “We are Venecubans.”

Analysts disagree as to whether Mr Chávez or Mr Castro intended to formally unite the countries. We do know that Chávez floated the idea of a “Bolivarian Confederation” between the two at various times and in 2007 he went to the voters and asked them to change this (very boring and legalistic) article of the Constitution:

Article 153: The Republic shall promote and encourage Latin American and Caribbean integration … the Republic may transfer to supranational organizations, through treaties, the exercise of the necessary authorities … Provisions adopted within the framework of integration agreements shall be regarded as an integral part of the legal order in force, and shall be applicable directly and with priority over internal legislation.

to this turgid but nonetheless much less boring paragraph:

Article 153: The Republic shall promote the integration, Confederation, and union of Latin America and the Caribbean with the aim of configuring a great regional political, economic, and social power bloc. In order to obtain this objective, the State will favor the construction of new models of integration and union across our continent, to permit the creation of a geopolitical space within which the peoples and governments of our America shall construct a single Greater National project, which Simón Bolívar called “A Nation of Republics.”2

The prose is terrible, but terrible in a recognizably leftist manner. Substantively, the change in wording would have altered little …but approval of the new version would show popular support! A Nation of Republics! He might as well have run up a flag reading: us and Cuba, man, how about it?

Well, the public said “no.” Three years later, in 2010, a poll showed that 85% of Venezuelans didn’t want their country to become “more like Cuba.”

So that didn’t happen.3

But what did happen was a massive informal integra … no, it was more like a Cuban takeover. The island of Cuba got oil. Mainland Venezuela got good doctors, very good secret policemen, and plenty of Cuban bureaucrats. Those bureaucrats wound up effectively running the security services, the presidential guard, the economic planning bureaucracy, and much of the military.

Formally, the core of the system was a trade. Cuba sent over advisors and medical personnel. The Venezuelans paid not the individual Cuban expats, but the Cuban government, mostly in the form of crude oil. The Cuban refinery at Cienfuegos refined that oil … and sent much of it back to Venezuela for foreign exchange. Of course, Havana overcharged for its part of the trade, and Caracas happily went along.

Cuba did very well out of Venecuba, even if it failed to fully formalize the relationship, which might have offered some protection against Venezuelan political winds (if not necessarily the 160th Special Operations Aviation Regiment). Venezuela overpaid for the doctors; Cuba underpaid for its oil. There is a way to come up with a rough idea of the subsidy. On the doctors’ side, we can subtract the amount taken by the Cuban government from the salaries and support received by the doctors. On the oil side, Cuba paid for its oil on credit, which it never paid back. So add those two numbers, and you’ll have a very rough idea of the size of the Venecubano transfer.

Aritmética venecubana

To the numbers! How big was the subsidy?

Cuban GDP

First we need to know Cuban GDP. That’s not easy! For reasons that maybe made sense before the Trump administration, the World Bank and IMF all value Cuba’s GDP at the official exchange rate of one peso per dollar. Except that’s silly — the parallel market rate for the peso averaged 24 per dollar after 2005. That implies that we should just divide Cuba’s official GDP by 24, but that’s silly too: the one-to-one exchange rate really did apply to huge chunks of the economy, like the tourist sector! In 2020, Pavel Vidal did the work and calculated an average exchange rate of 2.38 per dollar. That cut the figures for Cuba’s nominal dollar GDP in half.

Still, 2.38 per dollar seems high: the calculation assumes that the official rate applies to the entire public sector: the “state business system and mixed capital, public institutions, fiscal budget, rationed consumption markets, public services to the population, banks.”4 That seems wrong. Lots of what state companies did involved purely domestic transactions — say, confiscating agricultural production from Cuban farms and transferring it to rationed markets, or paying for investment using workers paid in CUP rather than CUC. In 2021, the Cuban government unified the exchange rates and the resulting average rate crashed from 2.4 per dollar to 26 per dollar.

Did the country’s dollar GDP really fall tenfold that year, or was that just when the Cuban government recognized reality? I mean, sure, you state expenditures and investment spending at the 1:1 exchange rate, but would any foreigner have been willing to pay for the resulting services and equipment at the 1:1 price?

Well, no. Prices soared by a factor of five while the exchange rate collapsed by a factor of ten so maybe nominal GDP dropped “only” by half. That’s well within the experience of other countries experiencing crises on the level of the one that shellacked Cuba in 2020-21, so let’s accept the Vidal numbers and move on.

Venecuban transfers

Now we need to know the scale of the transfers from Venezuela to Cuba.

This is a blog substack, so I’ll keep it quick and dirty. Werlau (2013) estimated that Venezuela paid about $5,000 per month for each Cuban doctor — an extravagant number; you could hire an entry-level family doctor from Spain — but the doctors themselves received only $900 to $1,740 per year for their services. If that’s true, then you could reasonably conclude that the whole program is pure subsidy.5

But that’s probably not correct. First, the Cuban doctors really did provide value. Second, many of those Cuban doctors were basically drafted into the program, so Havana could pay them wages far below market. Some of the rents, therefore, were extracted from them, not from the BRV. We don’t want to include that in the calculation of Venezuela’s transfers to Cuba. So let’s value the doctors at their replacement cost, using the $940 average monthly salary for Venezuelan doctors. If Venezuela was paying roughly $5,000 a month per Cuban doctor, but the replacement cost of a public-sector doctor was only $940, then the gap is a crude lower-bound resource transfer to the Cuban state. Multiply that $4,060/month gap by the total doctor-months Venezuela brought in in 2007-17 and you get a total transfer to the Cuban state of $53 billion in 2007-17 …

… unless you believe that Cuba’s organizational services were worth an 80% margin. Maybe. I could be biased, but I have trouble believing that.

Then let’s get a low estimate for the underpayment for crude oil. I’m going to do something … uh … crude: treat the unpaid oil credit as a transfer. The actual terms are opaque, but there is a 2019 estimate that Cuba owed the Venezuelan government $11.4 billion, which most observers agree the BRV never intended to collect. We can allocate that unpaid-debt stock across 2007-17 in proportion to annual physical oil shipments. This ignores aid flows, price discounts, refinery investments, and refined-products pricing, so it is a lower bound.

In a bit more detail: First, it ignores Venezuelan aid projects, such as the expansion of the Cienfuegos refinery. Second, it ignores the fact that Cuba refined a lot of Venezuelan oil and sent it back to Venezuela, in essence capturing the crack spread for itself. I am not adding pricing/refining margins here, only unpaid credit. Third, it leaves out the fact that half of all Venezuelan petroleum exports consisted of refined products, which were sold at less than market prices (or Cuban refining costs). Finally, who knows if that $11.4 billion debt figure is comprehensive? I know many U.S. Army finance officers who would love to poke around inside the BRV’s accounting — MOS 36A, it’s a good career — but sadly those records are still in Delcy Rodríguez’s hands.

That said, it does give us a rough lower-bound estimate of the size of the transfers:

These numbers are enormous. They’re on the order of the net subsidy that Alabama receives from the rest of the United States (roughly 15% of Alabama’s GDP), only the rest of the U.S. receives considerable benefits from its spending in Alabama: the 20th Special Forces Group, Army aviation at Fort Rucker, the rocket research in Huntsville, keeping the interstates open across the state, the emotional benefit from helping fellow Americans, etcetera. It is unclear at best what the average Venezuelan got from their government’s massive support for Cuba.

Venecuba is (was?) a thing

The BRV government, on the other hand, got a lot of value out of its support for Cuba. It tamed its own military, created a police state, took control of the economy (albeit incompetently), and developed new surveillance systems. In addition, the BRV benefitted from the mystique surrounding Fidel Castro and his Revolution. Consider:

• During the 2002 coup, Chávez was suicidal, but Fidel Castro talked him down and convinced him to neither kill himself nor resign. The Chavista defense minister at the time later stated that the call with Castro was “the determining factor. His advice allowed us to see better through the darkness. It helped us a great deal.”

• Venezuela renamed its armed forces the Bolivarian National Armed Forces (FANB) and redesigned the uniforms along Cuban lines. Cuban ideology permeated the whole organization:

  

  If you don’t know the origins of “Homeland, Socialism, or Death … we will win!” well, now you do. It comes directly from the slightly shorter Cuban version from 1960: “Homeland or Death, we will win!” It says something that it was the Venezuelans what added the “socialism.”

• Thousands of Cuban trainers arrived, who were “housed in military installations and given lodging, food, and transportation.” But it didn’t stop there …

• In 2008, Venezuela allowed foreigners to serve in the military. This was clearly aimed at Cuba. At first, Cuba limited its involvement to placing officers in the FANB planning apparatus, but according to Venezuelan military sources who talked to a pair of American academics, Cuban personnel eventually took direct command of logistics, support, and transportation. Only the President stood above the Cubans in the chain of command. (Honestly, given the Venezuelan military’s disastrous attempt to mobilize against Colombia in 2008, this was certainly helpful.)

• Cuban officers monitored and reported on military morale, both for officers and the enlisted ranks. Cubans (reportedly wearing either civilian clothes or distinctive black uniforms) in Military Counterintelligence Directorate (DGCIM), were stationed inside FANB facilities where they would “compile dossiers on perceived troublemakers and report any signs of disloyalty, according to more than 20 former Venezuelan military and intelligence officials.”

• Cuba developed Venezuela’s “Homeland Card” system, which has proven to be an incredibly useful instrument of machine politics and political repression.

• “Cuban officers control Venezuela’s public notaries and civil registries. Cubans oversee the computer systems of the presidency, ministries, social programmes, police and security services as well as the national oil company,” reported Moisés Naím in the Financial Times.

• Finally, the two governments signed agreements which, in the words of the U.S. embassy in Caracas, allowed “cooperation in investigating political crimes and offenses which are considered illegal in only one of the two countries.” It also allowed Cuban officials to “act directly in Venezuela, without judicial supervision, to investigate people and property for trials in Cuba.” Later agreements in 2010 and 2018 extended the ability of Cuban police to “to carry out intelligence and police tasks in Venezuela.”

And, as mentioned before, it was Cuban soldiers around the Venezuelan president whom U.S. soldiers killed during the Maduro raid.

Now Vene and Cuba have separated

Venecuba was falling apart well before the U.S. Army invaded Venezuelan airspace. The mainland’s economic mismanagement meant that it could provide less and less economic support for the island. The “Greater National” projects mostly came to naught, the Cienfuego refinery expansion aside. Cuba was forced into wrenching economic adjustments after 2018, with particularly painful adjustments in 2021 and 2024. And now the last of the Venezuelan links is cut off.

The future is precarious. I admit, I am skeptical that the Cuban regime will fall unless the U.S. does something more than blockade the oil. Please note the italics if you want to mark me to market: I will be wrong if the U.S. leaves policy where it is right now in February 2026 and the Cuban socialist state falls nonetheless. If the U.S. intensifies its actions and then the regime in Havana collapses, well, that’s entirely consistent with my prediction. (It’s also what I kind of suspect will happen, but my crystal ball is cracked where the Trump administration is concerned.) “Stepping things up” could mean anything from generalizing the current blockade into an actual naval interdiction of commerce, actively aiding (or even creating) opposition organizations on the island, or sending in the Marines. But as it stands now, I think that the socialist Republic of Cuba will survive.

Why do I think that the regime can weather the loss of Venezuela, even in the context of an American blockade?

Well, Cuba has been here twice before. Both times the regime survived, to the surprise of many. The next two posts in this series will explore those episodes.

Can Europe end that dependence? Mark Rutte, NATO’s civilian head and former Dutch prime minister, says “no.” Speaking to the European parliament:

If anyone thinks here . . . that the European Union or Europe as a whole can defend itself without the U.S., keep on dreaming. You can’t. … If you really want to go it alone, forget that you can ever get there with 5 percent [of GDP spent on defense]. It will be 10 percent.

Is Rutte right? Is strategic autonomy for Europe a chimera, something politically impossible to muster and economically impossible to afford?

I am loath to contradict a former Prime Minister, who also has access to a hell of a lot more information than I do. I’m just a guy, a former E-5, a nobody.

Modesty and disclaimers out there … the evidence is that Rutte is wrong. (Ed West is my witness that I started work on this before the FT ran its article today.) As a citizen of both continents, the possibility of a rupture pains me — never did I imagine that American and Dutch interests wouldn’t align! But here we are, and it matters that Rutte is wrong.

A common European defense will save money

NATO has a common military command and strives for “interoperability”: that is, NATO forces use the same ammunition and power standards and the like. But they are not equipped with a common kit. For example, Europe uses 55 different land combat systems and 39 air systems, as opposed to 5 and 10 for the United States.1 Worse yet, there is a huge variance across countries in the share of their active-duty soldiers who are actually deployable in case of war. This number doesn’t matter much for places like Finland and Poland, which border the Russian Federation, but it makes a big difference for, say, Belgium. (The Royal Netherlands Army, of course, scores very high —although this number may have declined since all Dutch land forces are now effectively integrated into the Bundeswehr.)

Europe could save quite a bit of money by eliminating all the duplication and taking advantage of economies of scale. In 2020, the European parliament commissioned a study that aimed to estimate the potential savings from creating a common military. As shares of GDP and military spending, here are the estimates:

Carlo Cottarelli and Leoluca Virgadamo at Bocconi University doubted this estimate — it’s really big! So the European Parliamentary Research Service later used a more direct methodology and came up with a number that was about half the size, but still large:

To be fair, the second methodology envisioned a less-comprehensive military unification than the first one and limited itself to areas where the authors felt comfortable with the data. R&D, for example, included only “emerging disruptive technologies” in the second estimate, whereas in the first it included things like creating tastier ration packs and redesigning camouflage patterns.

In short, creating a European military would allow Europe to get the same bang for somewhere between four-fifths and three-fifths of its current spending.

Creating new capabilities isn’t that expensive

But Europe also has to create new capabilities if it’s going to free itself from dependence on the Americans. How much would that cost?

Two estimates are floating about, both from 2025. The International Institute for Strategic Studies (IISS) estimated the capital cost of replacing U.S. combat capabilities, which came to somewhere between €200 and €305 billion. It’s a little hard to convert these numbers into an annual flow, since they don’t include the full life-cycle costs nor personnel costs (they do include munitions), and presumably the flow of expenditures will be lumpy. They end by saying it will cost a cool $1 trillion over a quarter-century, which comes to €35 billion per year.

That seems kinda small, actually. No? It’s 0.2% of the E.U.’s GDP, which is almost a rounding error in light of the massive increases in spending that we’re currently seeing. Spending hit 1.9% of GDP in 2024 and is scheduled to head up to 5% in most countries, which by the IISS’s lights should be much more than enough to replicate America’s current military presence in Europe.

European and American military spending, share of GDP

In short, the IISS’s high estimate of the cost to replicate American capabilities is about the same as the low estimate of what the Europeans could save by getting their act together and creating a common military.

But there’s a problem. This spending is going to be lumpy. There will be short-term spending to rapidly expand land forces and build electric flying robots (the IISS estimate doesn’t reckon with the ongoing revolution in military affairs), but also much longer term projects to figure out how to do things like build nuclear submarines.

Alexandr Burilkov and Guntram Wolff at Bruegel produced a much more back-of-envelopey estimate that it would require roughly €250 billion per year to match American capabilities. That’s a lot more than the IISS! But it nonetheless implies that European annual spending will “only” rise to 3.5% of GDP per year — which if you take the 20% cost savings seriously means that a common European military would require 2.8% of the Union’s GDP per year.

The problem lies in several vital capabilities … but most of them would probably not be needed to fight off the Russians, or even a Russo-Chinese alliance. The E.U. could certainly use an expanded nuclear deterrent, but the French one is pretty robust, barring some revolutionary increases in the effectiveness of antimissile technology. (Which could happen, of course.) Airlift capabilities will take a long time to rival the U.S., but that’s less than vital in a war against Russia. Space is dicier — as are American intelligence capabilities and our amazeballs “suppression of enemy air defenses-slash-destruction of enemy air defenses” that everyone saw in Venezuela. But you can fight and win a territorial war without fully replicating them.

Plus American training training training training. Which is not as easy to reproduce as people who haven’t experienced it might think.

The bottom line is that building an independent European defense is far from insurmountable, and looks quite affordable, even if it can’t be done quickly.

Political will could change quickly

Right now Europe is increasing defense spending, but there’s not a whole lot of political will to create a European armed force. Oh, the Spanish foreign minister might say that the continent needs a “European army,” but it’s a freaking word salad:

We must go to a European army. I am very much aware that you don’t do that from one day to the other, but if we are doing a coalition of the willing when it comes to security for external threats to Europe, we can very well do it for us, for our deterrence.

Right. We need an army but you know, we can do a coalition of the willing. Huh? At least the French have been direct: European defense would rest upon the sovereign choices of each nation.

Except the French statement is not clear at all either. After all, a nation can make a sovereign choice to merge its military with another nation’s. The Nordic countries have operationally merged their air forces, integrating the chain of command, creating a joint logistics system, combining training, and using similar equipment.2 In December, the Finnish defense minister went so far as to say (assuming you trust the automated translation), “The Nordic air forces will form a unified air force in the future.” They’ve also centralized ammunition production and purchases and created a common field uniform, albeit with separate camouflage patterns.3

And without anybody noticing, the Kingdom of the Netherlands has done just that, quietly merging all of its land forces into the army of the Bondsrepubliek next door, despite, uh, checkered historical relations.

Still, those are isolated examples. Why might general European sentiment change?

Well, Janan Ganesh recently wrote a column entitled, “The right will want a United States of Europe.” He said:

The right, above all the hard right, should favour a United States of Europe. And over time, I think it will, at least on the continent, if not in Britain. A unified Europe, a cause that has long been associated with liberals, will start to appeal to traditionalists as the only hope against brash, technologically ascendant superpowers to the west (America) and east (China). It will be framed as a matter of cultural survival.

Ed West agrees, writing:

Right-wing Europeanism is certainly growing, and is based on a real identity, stronger than the post-national ethos that currently defines the E.U. It’s real because, like all strong nationalism, it’s based on a sense of the “other” — Russia and Trump’s America, yes, but more so immigration from the Islamic world.

If they’re right, then the European pendulum might swing quickly in favor of a European military once the older generation of rightists is out of the way, especially if there was a way to build one separately from the current European Union.

One weird trick to create a real European army

Back in the 1950s, western Europe hammered out an entity called the European Defence Community (EDC). The idea was to allow Germany to rearm without creating a German military. Essentially, the treaty would have combined the armed forces of the Netherlands, Belgium, France, Italy, and Luxembourg into the European Defence Forces (EDF), with a common uniform, and then allowed German units to be created under its auspices.

The innovation at the heart of the EDC was the Commissariat. It consisted of nine people appointed by governments but serving fixed six-year terms. The Commissariat would have been charged with signing defense contracts and executing budgets — national governments set budgets and policy, but it was this independent group what would ensure that contracts went to the lowest bidder unless security concerns meant that a single company should get it … which the Commissariat would decide. In fact, the treaty gave the Commissariat authority over all war-related production.

This is heady stuff, more so than the mere fact that national units would be lumped together into multinational divisions. (NATO already does that, just without a common uniform.) And while a common uniform would be pretty cool, it doesn’t mean that much in practice.4 The EDC’s real innovation was the way the treaty made sure that there wouldn’t be any national favoritism in war production and ensured that everything would be standardized and fixed capabilities would be shared in pursuit of a single strategic vision.5

But the French parliament killed it in 1954 — by the expedient of indefinitely postponing discussion rather than voting “no” outright — so in order to resuscitate it, you’d need to go through the whole arduous process of reinventing the wheel by getting all twenty-seven E.U. states to agree. Right?

Maybe not! Here comes the weird trick.

And an Italian legal scholar, Federico Fabbrini, has argued that the treaty is still alive and the ratifications of the four countries that agreed to the treaty are still valid. So all you would need to do to bring it back is get France and Italy to ratify.

Moreover, a resuscitated EDC will have no direct ties to the E.U., which will please many right-wingers who increasingly support European unity but consider the E.U. to be irredeemable. The EDC Treaty makes reference to an Assembly, but those clauses do not refer to the European Parliament.6 The Treaty is also full of references to NATO, which might be a problem if the worry is a bolshy American government. But the references are all conditional — lots of “may” and “recommend” and “with the agreement of.” So that shouldn’t pose a problem.7

It is true that if the revived EDC were to assume by itself the entire burden of recreating America’s European presence, the burden would be a little higher — but still only 2.0% of the combined GDP of the six EDC states, even using the high cost estimate of $250 billion per year. In other words, their defense spending would have to rise from 1.7% of GDP in 2024 to 3.7% of GDP.

Obviously neither France nor Italy is going to bring the EDC back to life today. And as a practical matter, they would need buy-in from Germany, Belgium, and the Netherlands, even if their parliaments don’t need to take a formal vote.8

But if the political winds shift the way Ganesh (and maybe West?) think that they will, then building a European force will be easier than expected. Once conservatives start to think of themselves as European — driven by the contrast with all the not-European threats out there — then a united Europe as a bulwark against those threats becomes thinkable.

But

I don’t think this will happen. But I think it should. I think it should even if there is a rapprochement between Europe and a future American administration. The math adds up, the threats are real, and the management problems were sorted out in 1954. Just do it!

I love soccer! It’s a great game. I like watching it, I like playing it.1 I root for Ajax in the Champions League (when they’re in) and sometimes Barça (when they’re not). I love the international game even more. Argentina and the Netherlands and God save me if they ever play each other. I’ve even occasionally watched the NYCFC.

But the truth is (sorry) I like playing baseball orders of magnitude more than soccer. And I generally like watching both baseball and “American soccer” — what my daughter charmingly calls football of the NFL variety — a little bit more than soccer, at least outside the fervor of the World Cup.

Why is that?

Well, the truth is that soccer really is different from American sports in some fundamental ways. That makes it a taste that is actually kind of hard to acquire, despite the sport’s near universal appeal across the globe.

Professional fouls

What’s a professional foul? Well, I discussed it here in the context of European politics, so let me quote myself:

A professional foul in soccer is where a player decides that taking the penalty for a foul is better than letting the opposing play succeed.

An iconic case of a professional foul was in 2010 when Luis Suárez saved Uruguay’s bacon by slapping a ball away with both hands that was otherwise going to hit the net. Sure, he was sent off and Ghana got another penalty kick, but if he hadn’t done that the match would have been over and with it Uruguay’s World Cup hopes.

I was watching the match in Cambridge, Massachusetts, and the Americans around me were outraged. Even the Uruguay fans looked a little weirded out. But Matias Mori, the Chilean guy I was drinking with, well, he was plussed. (Is that a word?) Unphased. Unbothered. So was Luis Suárez. His teammate, Diego Forlan, had this to say when the two countries were about to meet again in 2022:

It’s not a revenge match for us. If Ghana see it that way, that’s on them. They’ll use it for motivation so that they can say, “This is our chance for revenge against Uruguay.” That’s valid. [But] the rules say that if you use your hand to handle the ball inside the box it’s a penalty. And what happened? It was a penalty and [Suárez] was sent off. What was the result? A penalty for Ghana and they missed it. Done. End of story.

Here’s the problem for Americans: our big three sports are all set up so the concept of the professional foul just doesn’t make sense. (I’m skipping the fourth one, hockey, until the very end of this post.) It’s literally not possible in two of them and feels very different in the third. So when you see a player deliberately breaking the rules, it comes across as, well, cheating.

Take American football. The rules kill the whole logic of the professional foul at the root. First, plays stop discretely, so there is rarely a need to commit an infraction to halt a developing threat. Second, penalties are compensatory, completely undoing the benefit of the foul and adding a little more pain on top. Soccer doesn’t have that — the penalties go up with severity, but they aren’t designed to neatly undo the tactical advantage. (How would you even do that in a continuous game like soccer?) Finally, when both of the above break down, the team that was fouled can choose whether to accept the penalty or accept the play’s result. You just can’t say “this is worth it” in advance, because the other side decides whether your foul helped them or not.

Baseball goes even further. I was talking this over with a bunch of people at a bar (where else?) and I suggested that maybe some plays at the plate would qualify as a sort of professional foul? A “play at the plate” is when a runner is sliding towards home and the catcher tries to tag him out. But sometimes, you know, maybe the catcher will body check the runner, even though body-checking is against the rules.

Only baseball short-circuits the logic. If a player without the ball obstructs the runner, then the run will be awarded anyway. If the catcher has the ball and roughs up the runner (without tagging the runner with the ball), same thing, and the catcher would be tossed from the game. (Not to mention that the benches would clear and somebody would get punched in the face. Although I guess a catcher would have protection in a bench-clearing program situation.) There isn’t even a pithy phrase for roughing the runner (like, uh, “roughing the runner”) because it just doesn’t happen on purpose. The same is true for near-miss cases like catcher’s interference or obstruction: the foul gives the other guy a base and why the hell would you do that on purpose?

Now, you might think that basketball is similar to soccer. After all, there is the intentional foul. Here a defender deliberately fouls somebody to stop the clock and force free throws instead of allowing a three-pointer or losing possession. That’s the same thing, right?

Yes, yes it is … but it doesn’t feel like it. There are three reasons for this. First, there is a LOT of scoring in basketball. So an intentional foul feels less portentous than a professional foul. Second, there is a LOT of scoring in basketball. People who love basketball generally find soccer interminable. The reverse also holds: basketball isn’t boring, not at all, but I have had a lot trouble really getting into it because there’s too much scoring. You don’t get the kind of drawn-out drama that characterizes American football, baseball, and soccer.2 Third, basketball has a much more stop-and-go quality than soccer. So penalties can be well calibrated to the crime: free throws, bonus rules, clear-path fouls, and take-foul penalties are much more exact than yellow cards, red cards, advantage rules, and stoppage time.

Time-wasting as a tactic

Time-wasting works in soccer for the same structural reason as the professional foul: time itself is a scarce defensive resource. A team with a lead can convert possession into minutes burned. Shielding the ball in the corner, slow restarts, goalkeeper delay, well-timed mysterious cramps — they all cut into the opponent’s remaining attacking opportunities while keeping the ball notionally in play. Stoppage time only weakly compensates, so the trade is predictable and repeatable. So wasting time remains central to match management.

American football looks similar on the surface but that collapses under inspection. Yes, teams manage the clock, but they do so through explicitly legal mechanisms: kneel-downs, runs up the middle, forcing the opponent to burn timeouts. There is no analogue to soccer’s grey-zone delay, because the rules precisely specify how time can be consumed and when the clock stops. You can’t just hang out with the ball or stall indefinitely inside a play. “Clock management” is part of American football strategy. But soccer’s time-wasting, well, that comes across to an American football fan as just more cheating.

Now, baseball doesn’t have a clock but something a lot like soccer’s time-wasting once almost killed the sport. Before 2000 or so, there was an unwritten rule against pitchers and hitters deliberately slowing the game. But as that taboo broke down — in part because computers showed that delay did in fact reduce risk — delay turned into a science. The hitter would dawdle to try to break up a pitcher’s rhythm, the pitcher would stand around or make endless pickoff attempts to cool a hitter’s hot bat. The whole game slooooooooooooooowwwwwwwwed down.

But once the league recognized that what had once been an idiosyncrasy had turned into a systematic tactic, they banned it. Poof, give the pitcher 20 seconds to throw the ball, limit pickoff attempts, make the batter get into the box quickly, and make the penalties severe enough that no sane person would run out the clock. And that was the end of that.

And basketball? Well it’s nothing like soccer, superficial resemblances to the contrary. There’s a shot clock. Once a team gets the ball, it has 24 seconds to make a shot. You can’t just exist with the ball. Moreover, when there is a timeout the clock stops one-for-one. No vague stoppage time.3 So teams manage the clock but within very tight constraints. Soccer has no equivalent. If the ball is in play, the main clock is running. That’s why go-slow tactics work.

But Americans have to get used to the deliberate delays. If you grew up with the sport, or learned to love it like I have, then you think of soccer as mostly continuous action; aren’t the American sports the ones with all the breaks? But it doesn’t seem that way if you’re new to the game. Soccer really is an acquired taste, like good beer or fine wine. Alla yous out there in the wider world think it’s just fun natchully. Nopety nope nope.

Screwing up as an offensive strategy

Okay, I really mean “setting up set pieces,” not “screwing up.” But to an American unversed in the ways of the beautiful game, deliberately screwing up is what it looks like.

In soccer, teams sometimes don’t try to score right away. Instead, they try to win corners or free kicks, which are special restarts near the opponent’s goal. These situations matter because everyone stops, lines up, and the attacking team gets to run a rehearsed play. In a corner kick, the offensive team gets to kick a dead ball right into a crowded penalty area where chaos favors the attackers. Fans recognize this immediately. When a player shoots into a defender and knocks the ball out of play and sets up a corner, it usually isn’t a mistake.

This only works because soccer allows restarts to be unequal by design. A foul near the goal or a forced clearance creates a moment where the attacking side has an advantage it didn’t have seconds earlier. Teams try to create these moments deliberately and repeatedly. It helps weaker teams to score and makes a tied late game start to look like everybody’s losing both their minds and their ability to play. They’re not! It’s part of the drama!

But it doesn’t read that way to an American sports fan.

The whole thing mostly doesn’t compute in baseball. What, you gonna deliberately hit a foul ball in order to … what? I mean, players sometimes do hit a whole bunch of foul tips instead of striking out, but that’s the opposite of a frantic mess and they certainly don’t look incompetent, even to somebody with little idea what’s happening. The hitter would genuinely prefer to get on base!

There is one situation where stuff like this would have made sense in baseball: the infield fly. That’s where a batter accidentally pops the ball up and it comes down in the infield, near the bases. A player should just catch the ball, one out, end of story. But if there is more than one opposing runner on base, well, then you might wanna deliberately let the ball hit the ground, pick it up, and then try to get both (or all three) of ‘em out. So baseball simply declared that if a pop-up is gonna hit the infield, it’s just an automatic out. No reason to incentivize a player to deliberately screw up.

American football once had a faint version of this in the onside kick. Normally, after a score, the ball is handed to the other team. The onside kick let a team gamble instead: kick the ball a short distance and try to recover it themselves. It was risky, but it created a special, high-stakes situation. Over time, the league decided this was too disruptive and changed the rules to make it almost impossible. That’s why set pieces remain key to soccer strategy — and why nothing quite like them survives elsewhere: the football and baseball created rules to kill similar tactics.

And basketball? Well, I know a young American lady who likes likes to watch soccer but plays baseball and loves everything about basketball. She told me that she dislikes soccer set pieces. They just seem “wrong.” So I asked her why and she said, “In basketball, a bad shot is just, like, a bad shot.”

The reason, once again, is the shot clock. In basketball, once a team has the ball, it’s got a fixed amount of time to do something with it. If you don’t shoot in time, the ball is automatically handed to the other team. That forces every possession to resolve itself. You just can’t deliberately fail in order to get a better kind of possession next. “A bad shot is just, like, a bad shot.”

From a basketball perspective, deliberately shooting into a defender to win a corner looks like intentionally missing in order to get rewarded with a better chance. In basketball, if you throw the ball off a defender on purpose and it goes out of bounds, you usually lose the ball. You do not get to reset the play with an advantage. So the idea that “screwing up” can be productive runs directly against how basketball fans understand offense.

My old friend Scott just reminded me that there is one circumstance in basketball where bouncing the ball off a defender is accepted. Imagine the ball has just gone out of bounds, and your team has a player looking to pass it in. He has five seconds, but because the other team has five people covering his four teammates, he can’t find a decent passing opportunity. So he might deliberately try to bounce the ball off the lower body of the nearest defensive player hard enough to have it go out-of-bounds again. His team keeps possession and gets to try again. But it doesn’t necessarily lead to a better advantage and, in Scott’s words, “It’s a clever, athletic play: smart and fast.” To a basketball fan (hypocritically or not) that doesn’t seem like a screw up.

Set-piece hunting still feels perverse to basketball eyes … even ones that have already been seduced by the beautiful game.

The offsides trap

I have to mention soccer’s infamous offsides rule, right? If you’ve heard it all, then go ahead, skip down, just subscribe first, okay?

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The offsides trap sounds like a trick but it’s really a powerful collective weapon that more resembles a dance than anything else. Properly executed, it really is beautiful, but it depends upon a rule that kinda sounds random if you don’t understand it.

Very briefly: the offsides rule means attackers are not allowed to receive the ball if they are closer to the enemy goal than the last defender at the moment the pass is played, not counting the goalkeeper. (The reason is that otherwise players would have an incentive to just hang around the goal waiting to kick something in and that would be boring. It’s kinda the equivalent of baseball’s pitch clock and infield fly rule.) Defenders exploit this by stepping forward in unison just before the pass, leaving the attacker suddenly — and illegally — ahead of play. The result is that an attack that looked alive is erased by timing and coordination alone, even though the ball was kicked into the goal.

If it works, the offensive play is invalidated even before it starts. It’s brilliant, sporting time travel, totally magical to watch. But if you don’t understand why the offsides rule exists, it just comes across as a random WTF thing, where a bunch of players make a strange forwards move and then that awesome-sauce goal you just watched is overturned by that weird dude at the end waving a flag.

Baseball once flirted with something that looked, from a distance, like an offsides trap: the defensive shift. Teams would stack fielders on one side of the field based on where a hitter was likely to hit the ball. Nothing illegal was happening. The pitcher threw, the batter hit, the ball was live. But the defense had moved in advance to where the danger was expected to appear. For Europeans, think of it as the back line sliding ten meters early, not to catch anyone offsides, but to smother the pass before it arrived.

But the shift differed from the trap because no time travel was involved. The offsides trap lets the defense say, “this move never existed.” The defensive shift only let them say, “this move is less likely to work.”

Hitters, see, could beat the shift. Wee Willie Keeler, a short professional baseball player from Brooklyn, explained how: “Hit it where they ain’t.”4 If the batter beat the shift, then he beat the shift. The shift changed probabilities and turned singles into outs more often than before, at the cost of making other hits more damaging. That is a fundamentally different mechanism from the offside trap, which erases the attack altogether.

Moreover, Major League Baseball (MLB) reacted once the shift became too common. It got to be that it was turning the game into one of outs and home runs with none of the exciting stuff in-between those two extremes, squashing the offense and confusing casual fans. So the league changed the rule to say that infielders hadda stay on their side of the infield until the pitch is thrown. Baseball saw anticipatory collective defense and put the kibosh on it. Soccer saw the same thing and made it a central feature of the game. (Not that I’d know how you’d get rid of it even if you wanted to — and I wouldn’t want to!) But it’s off-putting to Americans not raised on soccer.

Bottom of the ninth

I guess I should draw some deep conclusions here about the American character or the European spirit or whatever. Or do talk about a bunch about hockey. (Why don’t hockey fans automatically like soccer? Hockey players do the opposite of diving, man, and the game is like soccer on 50 milligrams of speed. Goddamned game has a position called the “enforcer.” I don’t need to say more.)

But no, I’m just gonna hope I’ve made my point, which is that soccer is a great great game, but there are real genuine structural differences that mean that an American just isn’t gonna automatically turn it on and like it.

I will conclude, however, with one deep point about a country that is neither the United States, nor in South America, nor Europe. Mexico, los Estados Unidos Mexicanos, is obviously the perfect country, sports-wise. They love basketball in Chiapas and Chihuahua, baseball is played from Cancún to Tijuana, the NFL is popular enough to consider giving the capital an expansion team, and I don’t have to talk about soccer. I’ve even seen people watch hockey and like it. Como México, no hay dos.

They just gotta start winning at something and not just playing it.

So which one is right?

Well, let’s see.

Rystad Energy tried to cost out what it would require to get Venezuela’s output back up to 3 million barrels per day (bpd) by 2040. They estimated that it would require $183 billion in capital expenditures to accomplish that, broken out as follows:

Explained: the field will need $53 billion over 14 years to maintain current production ($36 billion + $17 billion). Additional amounts will need to be invested to get production back up to historic levels.

While it is possible that this could happen more quickly than Rystad estimates, it is nonetheless a pretty rapid rate of growth in historic perspective:

We can back Rystad’s capex estimates into a rough annual flow over the period. We’ll only consider the expansion: that is, the $148 billion that needs to be invested in order to increase production beyond 1.1 million bpd, rather than keep existing fields running. Assuming an operating cost of roughly $17 per barrel (this is optimistic, but I’ll discuss below in another post) then you get a flow of expenditures and output that looks like this:

The last line gives the net present value in 2041 of all subsequent expenditures, assuming a certain level of continuing capex to keep production going. You can then use the above data to back out the minimum price per barrel at which the project makes sense for any given discount rate. Let’s run with 12%. That is a relatively low hurdle rate for an oil project in a country like Venezuela. Still, it isn’t unreasonable given how much pressure companies will come under from Washington to expand production. In order to get the equilibrium price, you divide the net present value (NPV) of expenditures by the NPV of the number of barrels that you expect to produce.

That equilibrium price turns out to be $39 per barrel. This $39 figure reflects project economics without any taxes or royalties. Consider it a counterfactual benchmark. Currently, Venezuelan crude is trading at roughly $22 below Brent, which is (coincidentally) around $39 per barrel. And that price is almost certain to rise in the absence of sanctions and legal uncertainty: the historical discount on Venezuela’s Merey blend has been around $7 per barrel, not $22. Even with Rystad’s high capex estimates and a long payoff period — the expansion as a whole won’t generate a positive cash flow until 2038 — investing in the Orinoco appears to make sense on project economics.

To be clear for readers unversed in accounting: this does not mean that the project will fail to earn a return for investors. They still earn a 12% return on their capital. It just means that the payoff is back-loaded.

But to repeat, this all assumes that the Venezuelan government charges no royalties, taxes, or fees. Nothing. Zip. Nada. Which is obviously not the case.

Moreover …

The Bolivarian Republic’s fiscal system is crazy

On paper, Venezuela’s fiscal regime doesn’t look insane. There is a 63.4% combined royalty, production tax, and export charge — that’s 63.4% percent right off the top, not of income. In practice, however, the government generally cuts the combined levy to 40.1%. Then once that is paid, the government applies a 50% income tax rate. Now, that’s a pretty high tax rate — 40.1% off of gross revenues and then half of the remaining profits — but isn’t completely out-of-line for traditional oil projects.

Except that the places that have punitive fiscal regimes like the BRV also have low lifting costs and require low capital expenditures. That does not characterize Venezuela.

So what’s the breakeven price under Venezuela’s system? We can do this quick-and-dirty or we can do it right. Quick and dirty: gross taxes of 40% plus income taxes of 50% means a marginal government share of revenues in the in the 70% range.1 That means that the post-tax breakeven price per barrel (at a 12% hurdle rate) becomes:

Whoa.

Doing it right produces an even higher number: breakeven comes to an astronomical $157 per barrel, assuming that capital expenditures can be recovered through 10-year straight-line depreciation. The gap arises because straight-line depreciation means that capital costs are recouped slowly rather than expensed up-front. That means investors need more cash more quickly to hit the same hurdle rate.

Below are the results of the calculations: the project’s total NPV (including the 12% return) doesn’t go positive below that astronomical oil price.2

In other words, ExxonMobil’s CEO is correct. Venezuela needs a saner fiscal system before anyone will invest. The current Venezuelan fiscal regime is punishing and the risk of expropriation is high, in addition to the already-significant project risk given the terrible state of the fields and facilities.

It is possible to calculate the maximum government share of gross revenues that at any given oil price that will still let the investors hit their hurdle rate. At $56 per barrel, that number comes to about 30%. It will also yield the Venezuelan government about $12 billion per year once production hits 3 million bpd. A royalty of 30% off the top is not unreasonable — in Texas, private landowners generally charge around 25%.3 And, of course, Venezuela could add in income taxes or a sliding royalty scale or accelerated depreciation or all sorts of other things to that would preserve their average share of revenues while making things more attractive for private investors.

But the government is going to have to revamp its fiscal system and the United States is going to have to guarantee that it won’t change in the future. President Trump may not have wanted to hear that news, but it is nonetheless true. I presume that somebody in the State Department is explaining this to Delcy Rodríguez as you read this.

Right?

Venezuelan nationalizations came in two waves. The first was in the 1970s, under President Carlos Andrés Pérez. They were generally negotiated and the American companies did pretty well. In fact, given that the original concessions were slated to expire in 1983, it isn’t even clear that we should call them nationalizations at all.

The second wave was under Hugo Chávez in the 2000s. Those nationalizations were neither negotiated nor fully compensated and they remain a huge mess. Love it or hate it, President Trump has a point when he says, “They took our oil rights,” if not quite our land.

Venezuelan commentators have mostly jumped to the conclusion that President Trump was referring to 1976 rather than the more recent depredations of the Chavistas. I’m honestly not sure why; it isn’t like any of them are shills for the Bolivarian government.

1976 and all that

In general, foreign nationalizations of American property have been contentious, to say the least. I wrote an entire book about how the U.S. government has proven itself generally unable to resist pressure to protect its investors, so when countries nationalize American assets they risk unleashing the panoply of pressures that Washington can bring to bear.

Venezuela’s nationalization of American oil assets in 1976 was not like that. The United States barely noticed. And the reason for that, quite simply, is that there was little expropriable value at stake because the concessions were due to expire in 1983. In fact, Venezuela had always given out time-limited oil concessions. The Hydrocarbon Act of 1943 created standard 40-year concessions (Article 26) after which both the lands and fixed investments would revert to the state (Article 80). Importantly, the Hydrocarbon Act did not overturn previous concessions — the oil companies could choose whether to keep their old concessions or switch to the new 40-year contracts (Article 95).1

The upshot is that the 1976 bargaining was just over the remaining seven years on the contracts. The companies managed to get compensated for that. In addition to a payment of $1.02 billion ($4.4 billion in 2024 dollars), they received a combination of operating fees and licensing payments that maintained their income streams into the 1980s:

You’ll have to take my word for it that the nationalization of the iron industry was equally fair to American shareholders. (Read my book!)

Unlike Brooklyn, not a whole lot of robbery was going on in the Venezuelan oil sector in the 1970s.

The Bolivarian Revolution

Well, that’s a different story again. Hugo Chávez broke contracts, forced sales, imposed illegal payments, and just plain expropriated businesses right and left. Venezuela never quite toppled over into Cuban-style communism simply because the country’s private sector was too entrenched (and old-fashioned communism too discredited) but it came pretty close.

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This poses a bit of a problem, considering that President Trump declared that we are now running Venezuela. He also declared that one of our principal aims is to get our expropriated oil investments back. I find that refreshing, to be honest, but it is a departure from the rhetoric around American interventions over the past 120 years. And it is not clear how we’re going to do that with the Bolivarian regime still alive on the ground.

So what happens now?

Well, let me first lay out what seems to have happened, and then lay out three possibilities. I would love to call them good, bad, and ugly, but the analogy to the movie just doesn’t hold.

What happened

The U.S. intervention came as no surprise. (I called it on December 14th.) But the rapid success in suppressing Venezuelan air defenses and the apparent lack of serious Venezuelan resistence to the raid comes as a huge surprise. Vladimir Putin can only wish that the Russians could have done something remotely close in Kyiv in 2022. Electronic countermeasures and F-35s took out the Bolivarian air defense systems, allowing the helicopters to come in at low altitudes from the USS Iwo Jima. That said, it seems that the country’s air defenses had already fallen apart years ago.

I am more surprised that there wasn’t more resistence on the ground, but I’m not quite willing to say that there was cooperation with Venezuelan military elements. Modern American helicopters have good defenses against shoulder-fired missiles. It is also true that the effectiveness of RPGs against helicopters is a bit overrated. Modern U.S. helicopters change heading and altitude constantly in flight — in the one second that it takes an RPG to get to where the shooter thinks the helicopter is going to be, the vehicle can move more than 60 meters. 50-cal machine guns are more effective, but not that much more effective.

What might happen

The President also stated that we’re now running Venezuela. This poses a bit of problem, since we don’t have any soldiers or diplomats on the ground. We may have decapitated the Venezuelan government, but the Venezuela state remains intact. (For Venezuelan levels of “intact,” that is — this is not a country with a lot of state capacity.) So, scenarios.

(1) Collaborators emerge from inside the Venezuelan regime

President Trump threw Corina Machado under the bus in yesterday’s press conference — leaving the door open to someone else.

President Trump intimated that Delcy Rodríguez, Maduro’s constitutional successor, is willing to work with Washington. If it’s her, then she is going to have a problem threading the needle between giving the United States what it wants and upholding the Bolivarian Revolution. And so far, she is giving no sign of backing the United States. But you don’t know until you know.

Interior Minister Diosdado Cabello is preaching war — he has always been a Socialist Party hard-liner with deep ties to the military. Gustavo González still heads the Bolivarian National Intelligence Service (Sebin).1 González does not seem to have an independent power base — Lavrenty Beria he is not — but when there is a power vacuum it helps to head the secret police. Finally, General Vladimir Padrino has run the Bolivarian armed forces since 2014. The Bolivarian armed forces are de facto autonomous: when Acting President Rodríguez says “jump,” they will say, “Tell me why and we’ll think about it.”2

So while the ease of the raid supports the hypothesis that there are U.S. collaborators inside the regime, there is little direct evidence for that. And anyone who wants to collaborate is going to face internal resistance. To be honest, I think that could be faced down, but it won’t be easy.

(2) We “take the oil”

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As many of you may know, the Nobel Prize in Economics was won by a short Dutch Jew whose last name starts with “M” and first name ends in “oel.” I’d like to thank the committee on its very wise choice of Joel Mokyr.

Coincidentally, I also happen to be a short Dutch Jew with a similar first and last name.1 Which means that I voted in the recent Netherlands general election.

The lower house of the legislature is elected using an extreme form of proportional representation; the minimum threshold to get a seat is only 0.67% of the total vote.2 Which is to say that a party can get in with just a hair over 71,000 votes. Combine that with very easy ballot access — you can get on with a refundable deposit of only €11,250 — and you have a fragmented system that generally leads to very boring coalition governments.

For that reason, Dutch elections typically pass by without anyone noticing or caring outside the country. That is a good thing — elections are most exciting when big things are at stake. No one should want their well-being to hinge upon an election outcome. Elections can also be exciting when they’re dysfunctional or ridiculous, but given how important governing is, no one should want that either.

Recently, however, that has not been the case. Dutch politics has been unpleasantly exciting. The reason is Geert Wilders.

The 2023 election

In the last election, the Freedom Party (PVV) came in first place with 23% of the vote. The Freedom Party is not boring. It’s the opposite of boring.

The Freedom Party is headed up by Geert Wilders, the kind of person that my mom would have called a “character.”3 Wilders’ father, like my mother, survived the Nazi occupation and was left with a deep-seated revulsion at all things German. (Also like my mother.) Wilders’ mother was a multiracial refugee who fled Indonesia at independence for a mother country that she’d never seen. He split with the more moderate squishy-libertarian People’s Party for Freedom and Democracy (VVD) over the possibility that Turkey might be let into the European Union. He then became increasingly anti-immigration and anti-Islam as time went on; by the last election, his party wanted to ban the Koran.

Nobody else wanted Wilders to become Prime Minister — Wilders didn’t seem to want Wilders to be Prime Minister — so after nine months of negotiations you got a weird coalition with the Freedom Party in it but not in it and a guy named Dick Schoof appointed Prime Minister. Here are the parties that made it up:

• The Freedom Party. ‘Nuff said.

• The People’s Party. Long form: “People’s Party for Freedom and Democracy,” and who could disagree with that? (Nobody in the Netherlands calls it just the “People’s Party,” but I will because it sounds good in English.) This is a boring center-right outfit that managed to put up the same guy as Prime Minister from 2010 to 2024. I think it has principles. At least that’s what its website tells me.

• The New Social Contract (NSC), which was, as its name implies, new. Its leader, Pieter Omtzigt, walked out of the party I usually vote for in a huff over something or other. The NSC’s ideology could have been produced by a random number generator, which may be a good thing. Since I’m also an American, I can’t get behind its demand to create a Constitutional Court.

• The Farmer-Citizen Movement (BBB). In order to explain these guys, I’m going to have to explain the Only-in-Nederland nitrogen controversy, which I’m gonna punt to the bottom of this post.

This rickety thing was destined for collapse, which it finally did between June and August of this year. The collapse started when the Freedom Party insisted that the Netherlands deny all future asylum requests and send all resident Syrians home since the war was officially over. The People’s Party found some principles and said “no,” so the Freedom Party left the coalition. A new election was called for October 29th, 2025.4

The 2025 election

The election result caused celebration across the center-left in Europe; it even managed to penetrate American insularity. The Freedom Party lost its plurality, passed by the center-left D66. D66 was fairly radical when it was formed in 1966 — that’s where its name comes from — but now it’s boringly liberal.5 If the United States had a multiparty system it’s the kind of thing you’d expect to emerge from Marin County or Bethesda. On the center-right, the “We don’t need no stinking beliefs” People’s Party got 14% and the truly boring party, the Christian Democrats (CDA), revived to win 12% of the vote after a near-death experience in 2023.6

A return to normalcy! A chicken in every pot! A good €1.68 cigar!7

Uh, no.

Hoe meer dingen veranderen, hoe meer ze hetzelfde blijven

It sounds better in French, I have to admit. (And even worse in my broken Dutch with the New York accent.) Nonetheless, it is true — everything seemed to change in the election, but in reality not much changed.

In the above chart, I tried to order the parties with left parties at the top and right parties at the bottom. I used American conventions to color-code center-left parties in blue, centrist parties in purple, center-right parties in orange, and populist right parties in red. (The ratings are subjective.)

You can see that the Freedom Party lost ground to even more right-wing outfits.8 Overall, the populist right gained a seat. (I put a fundamentalist Christian party called the SGP in lighter red. It isn’t really like the populists, but it did not lose seats either.)

D66 didn’t take votes away from the populists; neither did the Christian Democrats. Rather, two shifts determined the election. The first was the collapse of the NSC. Its voters gravitated to two established parties: D66 and the back-from-the-dead Christian Democrats. D66 also grabbed votes from the Green-Labor coalition. The second was a contraction in support for the Farmers Party (BBB), which occupied a strange issue-space in the Netherlands’ fractured political system.

In short, the center-left prospered at the expense of the center because the NSC collapsed. Voters defected from the Freedom Party, but because they didn’t think it was radical enough, not because they saw the progressive light.

Which brings us to the BBB.

The only-in-Nederland nitrogen crisis

The BBB arose in reaction to the Dutch government’s decision to limit “nitrogen” emissions. Urea-based fertilizer and manure on farms release ammonia and nitrous oxide, which can harm natural habitats. Farms in the Netherlands use a lot of fertilizer.

In 1992, the European Council passed the “Habitats Directive,” which required national governments to declare particular areas as “special areas of conservation.”9 The directive sat around unnoticed by most Dutch voters people until 2019, when the Netherlands’ highest court (not the European Court, this is a domestic story) ruled that the government had failed to protect a bunch of special areas from nitrogen runoff. So the government looked around, realized that dairy farms produced 80% of the nitrogen compounds but only employed 15,000 workers and generated just 1.2% of GDP. Deputy prime minister Johan Remkes (of the People’s Party) duly declared that “drastic measures” would be taken to reduce the emission of nitrogen compounds by buying out and shutting down dairy farms.

Uh oh.

Farmers were outraged. Giant tractors drove right into the Hague and broke into a park near Parliament. In Groningen, a town I’ve been to quite a bit, angry farmers invaded the provincial hall. The anger and demonstrations went on and on; the farmers blocked roads with piles of manure; in July 2022, police officers resorted to firing shots in the air in order to get angry farmers to disperse.

In 2022, Donald Trump got into the act:

“Farmers in the Netherlands of all places are courageously opposing the climate tyranny of the Dutch government. Can you believe that? Which wants to dramatically cut Dutch farm production despite growing food shortages. We stand with the peaceful Dutch farmers who are bravely fighting for their freedom.”

The result was the Farmer-Citizen Movement (BBB), and to a lesser extent the NSC. In the Schoof government, the BBB managed to get the buyout program declared “voluntary” and push back the target date for emission cuts from 2030 to 2035.

The controversy might result from a European directive, but at the end of the day the policy decision lies with the Hague, not Brussels. Most European countries, Germany included, have set rather more lenient standards than the Netherlands. And while some appear to be in violation of the directive, European enforcement has been deliberately slow. As of April 2024 the Commission had pursued twenty actions against states for letting too many nitrates get into water. But as far as I could find in the E.U. databases, only one of those, Case C-298/19 against Greece resulted in a fine.10 And that fine amounted to a less-than-overwhelming €3.5 million.

In other words, the Netherlands could have taken a professional foul! A professional foul in soccer is where a player decides that taking the penalty for a foul is better than letting the opposing play succeed. I’m a federalist and I don’t think that the European Union should work this way, but it does work that way, and given that there’s no reason the Netherlands shouldn’t play by the rules as they are.

The farmers are right to blame the Hague rather than Brussels for the imbroglio. And their voters were entirely rational to defect from the BBB given the BBB’s failure to adequately address their concerns.

The election has consequences but …

… they are not what most of the foreign commentariat thinks they are. D66 and the Christian Democrats are currently deep into coalition talks, but I will be surprised they choose to loosen immigration laws.

The Schoof cabinet didn’t collapse because the other parties rejected Wilders’ demands for stricter asylum rules. It collapsed because Wilders demanded that the government immediately sign off on them instead of submitting them to Parliamentary debate. In other words, he lost votes because he didn’t take governing seriously.

It didn’t help that Wilders chickened out from a debate during the campaign because he putatively received death threats from Belgian jihadis. This didn’t go over well, especially since the head of the People’s Party, Dilan Yeşilgöz, has faced death threats almost permanently because of her last name, and she didn’t suspend campaigning.. Given his failure to get his objectives signed into law, it is no surprise that Wilders’ supporters defected to further right parties.

In the medium term, this is good for progressives. The Freedom Party discredited itself as a credible governing partner. It also discredited Wilders personally.

In the longer term, however, the Dutch government will need to identify and address the root concerns of far right voters or risk a worse reaction in the future. Support for the far right is not diminishing.

The center-left may have won, but they face the electorate they have, not the electorate that they wish they had.

You’re back? Great! He divides the possibilities into three verticals: the economy crashes, things muddle along, or the economy booms. He then asks himself, what needs to be true under each of these verticals for Milei to win re-election or for Milei to hand over the Casa Rosada to somebody else. It’s quite well done.

Here, I want to discuss the probabilities of the three scenarios. TLDR:

1. Argentina is starting a resource boom and its trade surplus will rise sharply. Good!

2. Chinese and American swap lines (plus other less obvious forms of American assistance) provide insurance. Also good.

3. Therefore Argentina can probably meet its rather large obligations …

4. But reserve accumulation is not guaranteed and mismanaging the exchange rate raises the risk. That’s bad.

5. Milei seems to really want to avoid letting the peso float, which is pretty egregious mismanagement of the exchange rate. Heck, devaluation is needed if he still wants to dollarize. And a devaluation could let the central bank ease up on interest rates. The only way defending the peso makes economic sense is fear of inflation, but that’s probably overdone. That’s also pretty bad.

6. Unfortunately, mismanaging the exchange rate makes political sense.

7. That’s ugly.

Since I am a huge fan of Clint Eastwood, let me use an often misinterpreted metaphor and call the following sections the Good, the Bad, and the Ugly.1

The Good

Argentina really is the lucky country. If you were in a spaceship and you found the uninhabited Earth, it’s where you would want to plant your colony. That plot of land has everything, in a geography that makes it all relatively easy to get.

And so Argentina’s geography looks set to bail it out. Mining exports rose 33% over the course of 2025 and output is scheduled to rise a further 20% in 2026. Hydrocarbon output rose as well. This year, oil production is expected to rise by 9.7% and natural gas by 5.3% — oil production is already outpacing that and gas is only a little below expectations. The government projects that gas production will stagnate and oil production grow by 25% between now and 2029 — but both projections are only from existing fields. Argentina is bringing new ones into play every year.

Even taking account that the hydrocarbon projections are unreasonably low, the Argentine central bank (BCRA) expects hydrocarbon exports to increase from $10 billion in 2024 to $37 billion by 2030 and mining exports from $6 billion to $16 billion. That alone would increase GDP growth in 2025-30 by five percentage points. The IMF’s projections are similar, expecting net energy exports to grow from about $3 billion last year to more than $25 billion by 2030.

The IMF also projects that mining exports will almost quintuple in the same period, from around $8 billion to $38 billion — that would add another four points of growth between now and 2030. The BCRA is more conservative, expecting growth around $12½ billion, which would add “only” another two points to growth.

In 2016, KPMG calculated that mining had a multiplier effect around 1.7 — that is to say, a dollar of mining exports induced about 70¢ in additional economic activity. Estimates for hydrocarbons, however, are all over the map (ranging from 0.5 to 3.0) so let’s assume that the mining multiplier is 1.7 but there is no hydrocarbon multiplier (i.e., its value is one). That would translate into annual growth rate over the next five years of somewhere between 1.7% and 2.5% more than it otherwise would have been.

That’s a lot! I’ll smile for you, Argentina.

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I am here to say no tea leaf readings are necessary. Venezuela is hard to invade, so you’ll know it if an invasion is in the works. But to my surprise, there was no easy place to find an estimate of what it would take to invade or why it would be obvious!

So I decided to fill the gap. I’m not a military analyst. In the Army, I was just a lowly enlisted guy in the S-2 of what was then called a corps support battalion. But I read a lot in the course of putting together all the paperwork for a Navy commission that I never pulled the trigger on, and I read even more when bored in New Jersey and Afghanistan. I even wrote “A Historical Guide to Invading Panama,” based on a bunch of research I did while writing The Empire Trap. So if not me, who?

I’ll start with the requirements for “forced entry” and discuss what observers would see if that were in the works. Then I’ll mention “kinetic” actions that would likely precede the forcible entry.1 Finally, I’ll show how anyone who cares will see the preparations coming a mile away. Think of it as three phases: lodgment, air supremacy, and sustainment.

The U.S. could suddenly airstrike Venezuela or land some sort of small team, of course. We could even try a raid using the Marines currently offshore. But that’s another way of saying that the U.S. could do something completely stupid, and you can’t predict stupid. (When I do stupid things, I’m usually surprised at myself.)

But if invading Venezuela is going to be less than 100% stupid, it will look like what I’m laying out below. And you will see it coming well before the fact.

Pier review (lodgment)

Venezuela has two airfields conveniently located on the coast: Simón Bolívar, in Maiquetía, right over a rather intimidating set of low mountains from Caracas, and Jose Antonio Anzoategui International Airport in Barcelona, located a hair less than 200 miles from Caracas. Both also happen to be bases for the “Bolivarian Military Aviation of Venezuela.”2

Now, the U.S. wouldn’t need to seize the airfields, as helpful as that might be. The mellifluously-named “Joint Concept for Entry Operations” points out that sea-basing is a reasonable substitute for land basing. Right after entry forces secure a lodgment, follow-up reinforcing entry forces will be tasked with creating expeditionary airfields and securing temporary docks to allow offloading.

That said, the fiasco of the U.S. floating dock — in Army-speak the “joint logistics over-the-shore” (JLOTS) infrastructure — in Gaza last year should give a little pause as to the military’s ability to pull off this sort of thing seamlessly, let alone without giving notice something was up.3 And while the military could get an airfield up-and-running in 96 hours if it had to, they probably would prefer not to.

Either way, the U.S. needs to get a secure lodgment before it starts worrying about JLOTS and managing captured airfields. That means a force package of at least one Marine Expeditionary Brigade (MEB) and an airborne brigade from the Army. That’s about 14,500 marines and about 4,000 soldiers. The rationale here is that Venezuela has a pretty big military, if a flabby one of uncertain capability and morale.4 Without the MEB, airborne operations will fail if Venezuelan counterattacks exceed the brigade’s defensive capacity. (That went kind of badly for the Russians in 2022.)

Landing a MEB requires about 15 specialized amphibious warfare vessels. (Page 6.)5 As of right now, we have only three amphibious warfare ships in the Caribbean: Iwo Jima, San Antonio, and Fort Lauderdale. (The latter name makes me smile, I can’t help it.) The remaining ships are scattered from Japan to Virginia. It would take about 20 days for the vessels based in Sasebo and Okinawa to get to the Caribbean, so that’s the first thing to watch for.

I suspect that U.S. planners would prefer to go larger, but we can’t. In theory, we have the capability to land two MEBs. In practice, it’s only one, because only 41% of our amphibious fleet is fully operational at any given time. (That is doubleplusungood.) On the other hand, we can get airborne units into the mix, so it is likely that the 82nd Airborne would stage simultaneously with the MEB. The Army and Air Force can deploy one brigade of approximately 3,000 to 4,000 reinforcements somewhere between 18 and 37 hours after notification (page 25 and 27). It takes about five hours to fly from North Carolina, but the operation would likely stage through Puerto Rico.

Bomb Voyage (air supremacy)

None of this will work without air superiority, and preferably air supremacy. So the U.S. will want to dismantle Venezuela’s air force and air defenses as well as degrade the of the Bolivarian Armed Forces to call up and move around their forces. So the United States will open with a massive focused bombardment that won’t stop until there are no more SAMs and all Bolivarian Military Aviation is stopped. Israel’s success in destroying Iran’s air defense system implies that this won’t be that hard, but it will be dramatic.

It is hard to imagine the United States carrying out such a campaign without an aircraft carrier. In theory it could — Venezuela isn’t that far away. But in practice it probably won’t. Air operations are split into offensive counter air (OCA), suppression of enemy air defenses (SEAD), and defensive counter air (DCA), all of which are easier to manage with the flexibility you get from having a carrier right offshore.

So the first thing to look for is a carrier group in the Caribbean. Again, to be clear, the U.S. might try to launch an air campaign without one — it’s just not the way I’d bet. The main reason to avoid moving a carrier to the Caribbean is to preserve the element of surprise but you need to move the amphibious fleet anyway. In addition, there isn’t a whole lot that the Venezuelans can do with advance knowledge, except maybe crater their own air bases’ runways. Which won’t work even if they tried: the USAF plans on getting a 10,000-foot runway back up and running in 6½ hours.

Even without a carrier, you would see a lot of Air Force tankers start flying in predictable patterns off the Venezuelan coast. Tanker aircraft don’t randomly float around or wait on the ground until they’re needed; they fly along set routes (called “tracks” or “anchors”) so that planes needing fuel can rendezvous with them safely and efficiently. (See page 18.) In the run-up to a big strike you will see multiple tankers on overlapping flight paths making frequent trips in and out of the same zones.

Hurry up and wait (sustainment)

Before we finish, let’s circle back to what happens after the U.S. takes control of an airfield or establishes a lodgment to bring in forces by sea. What happens is that somewhere between 50,000 and 100,000 uniformed personnel from every service save the Space Force (plus the associated equipment and supply) pour into Venezuela.6 These units will start arriving en masse within two or three days of the initial forced entry (page 46). I have no idea how many divisions the U.S. will move or how it will plan the invasion after the initial forced entry — I am trying to resist the temptation to start drawing MSRs on a map of Venezuela and play-acting what I used to help officers do for real — but it will be a lot.

The preparations for the above are gonna be very very obvious to everyone. First all these units will get “prepare to deploy orders” (PTDO). Within a week, units will start moving towards “ports of embarkation.” Soon thereafter you’ll see heavy equipment loaded onto civilian trucks and trains; unless things have changed dramatically, you’ll see convoys on the roads. By the second week, various East Coast ports will fill up with military vehicles. (See Chapter 4.) You’ll also see increased chartered aircraft traffic as the Civil Reserve Air Fleet ramps up. By the third week, anyone looking at American ports will see ro-ros moving in and out constantly.

“Hurry up and wait” is not just an old Army cliché— although oh my Lord is it an accurate description — but it describes the reality even with modern logistical miracles. Units get PTDOs quickly, but then spend days doing the unglamorous things I spent a lot of my doing in 2002: pulling vehicles out of garages and storage lots, draining fluids for transport, signing hand receipts, filling out spreadsheets, checking off lists, and loading gear onto trucks and railcars. When you start seeing ports and airfields backed up with equipment, you’re already two weeks into a mobilization, and you know the big move is coming.

Ports and railheads have finite berths and sidings, which means units end up parked in improvised motor pools on the edges of cities, waiting their turn to load. Traffic jams happen, with civilian containers backed up waiting to hand off military cargo. During Desert Storm, nearly 48,000 containers backed up despite months of preparation. (Page 2.) That was with Cold War capacity still at hand. Today’s smaller merchant fleet and leaner port system would make backups more obvious, not less.

TLDR

The presence of electric flying robots on the battlefield will change things, of course. My intuition is that drones will continue to favor the defense, as they have in Ukraine, but that is speculative. The battlefields of 2035 may be filled with microwave rayguns that fry autonomous flying robots but allow lightly shielded grunts (or heavily shielded vehicles) to pass unmolested. Who knows? In the case of Venezuela in 2025, however, I will be very surprised if the National Bolivarian Armed Forces has either enough drones on hand or the tactical knowledge to use them effectively.

Venezuela in 2025 is not Panama in 1989 or the Dominican Republic in 1965. In Panama, the build-up in the Canal Zone was obvious if you looked — the invasion was a surprise more because too many observers lulled themselves into thinking that George H.W. Bush would never pull the trigger, not because the signs were hard to see. Meanwhile, in 1965 the D.R.’s small 18,000-person military was busy fighting itself (and the U.S. had far greater air and sea lift capacity than today) so it could take only 48 hours between giving the order and helicoptering the first Marines to the Embajador Hotel.

Venezuela won’t work like that, at least not if regime change is the point. It will require preparation. The invasion will be televised and you will all see it coming. So please ignore breathless speculation or silly news reports. In fact, please ignore reasoned measured speculation, unless the speculator has actually looked at these indicators or can muster a reasoned argument about why this time is different.

3

The inspector-general’s report on the mess is a gold mine. In case of link rot: “Evaluation of the DoD’s Capabilities to Effectively Carry out Joint Logistics Over-the-Shore Operations and Exercises,” Office of the Inspector General Project No. D2024-DEV0PC-0163.000 (2 May 2025).

In 2023, the Navy decommissioned its only East Coast JLOTS unit, leaving only one other unit in California. But the Army had the 7th Transportation Brigade in Virginia and the 3rd Transportation Brigade in the USAR, so all was not lost. Sadly, in an organizational SNAFU that brings up memories of my time in the 369th Corps Support Battalion, the 3rd Transportation Brigade lacked the subordinate units that would actually build the modular causeways. (Head, desk.) Luckily, now the Navy Reserve rescued the Army — the Navy Reserve had seven battalions trained to load and off-load bulk cargo. But then we ran into the problem that the Army and Navy use different docking standards. Navy docks sit higher in the water, so you have to bend things to get them to hook up, whereas Army watercraft aren’t designed to get close to Navy docks without banging them up.

Hey, that’s the Defense War Department for you.

Wowza. Given that Argentina has to make about $23.5 billion in debt payments between now and the end of 2026, that’s a lot of money!

But was it necessary? Well, yes. Argentina was facing a run on the peso, which started around September 7th.

What happened on September 7th? President Milei’s Liberty party got unexpectedly creamed in the Buenos Aires provincial legislative elections. The incumbent Peronists squashed Liberty, 47% to 34%. At first glance, that doesn’t look so bad: the margin was 45% to 25% in 2023. But at second glance it’s terrible. In ‘23 there were two conservative parties in the mix which collectively got 51% of the vote. So the right lost half its vote share to smaller leftish parties.1

Since the Peronist governor of Buenos Aires — Axel “Kichi” Kiciloff — is the leading candidate for the presidential nomination in ‘27, it’s doubly bad for Milei. Triply so because the election result emboldened Congress to start overturning presidential vetoes. He can’t ignore it with the national midterm election approaching on October 26th.

That said, we still have to peel the balloon further back, because the above recap begs two questions. First, why did Milei’s party do so badly? Second, why did investors react so strongly to the result? Let’s take them in turn.

Milei agonistes

Well, we’re not really sure that President Milei has much of an inner struggle about anything, but we don’t know the man, and he certainly is engaged in an outer struggle with the Argentine economy. We’ll stick with “agonistes” for now.

One part of the explanation for the loss is that the economic recovery has been halting. Inflation ran last month at an annualized rate of 25%. That’s better than when Milei took office, but it isn’t good by any standard. Unemployment is down slightly, but only slightly. Poverty has fallen from it’s peak, but it still around the same elevated level as it was in 2020.. Real wages have managed to touch the level they had when Milei took office in June of this year … but they are still much lower than in the recent past. And as we all know, inflation angers voters even when their real wages rise, because they view their nominal raises raised as deserved which inflation then unfairly steals away from them.2

But the economy is only one part of the wipeout at the polls, and we suspect it is actually a very small part.

The election saw an August surprise: Diego Spagnuolo, who ran the country's National Disability Agency, was caught on tape claiming that Milei’s sister, Karina, helped create a kickback scheme from pharmaceutical companies. We’ll recount what Spagnolo said because it’s juicy:

Karina is owed three or four [percent]. I calculate three because they will surely tell her that out of the five, one percent is for the operation, another one percent for me and the remaining three percent for Karina. It’s surely like that and they’re making an Olympic grab. They’re going to ask for cash from the providers. They’re embezzling the agency … behind my back. I have nothing to do with it.

I went and told him [President Milei]: “Javier, I’m denouncing all this filching and below me I have people who are going to ask for cash. What do I do?”

This is about as simple as a corruption scheme gets. Which means it lands hard. No one needs to sit down with a 20-minute explainer to understand the wrongdoing.

The President canned Spagnolo, but won’t distance himself from his sister. They have a very strange and very close relationship; he is not about to throw her under the bus. But even in the absence of direct evidence, the scandal looks terrible.

In short, there is a decent explanation of why the Libertarians lost: a corruption scandal hit amidst an incomplete recovery. But if the explanation is so decent, why did investors react so strongly to the result? Were they really that surprised?

No. They had two reasons to be scared by a bad outcome for Milei. One is economic and the other is political.

The economic catch-22 that is the Argentine peso

Milei’s anti-inflation plan has two anchors. The first is a balanced budget. The second is what’s called a crawling peg. Instead of being subject to market forces, the central bank lets the currency fluctuate inside an ever-widening band against the dollar. That takes into account the fact that Argentine inflation is higher than in the United States, but insures that the peso won’t fall in an abrupt or drastic fashion.

Empirically, most successful disinflationary programs in Latin America have involved a crawling peg.

The problem is that prices have risen by rather more than the exchange rate has fallen. We were worried about that back in October ‘24. It has since gotten worse. In other words, Argentina has become a rather expensive place to do business. To lift our explanation from October:

The “real exchange rate” tries to capture whether the exchange rate is keeping up with relative changes in inflation. For example, if inflation in Argentina is lower than in the USA, but the peso doesn’t fall at the same rate, then things will get more expensive in Argentina measured in dollars and the real exchange rate will rise. Similarly, the peso falls faster than relative prices rise, then things will get cheaper in Argentina and the real exchange rate will fall.

The blue line in the below graph captures the change in the real exchange rate (RER) against the U.S. dollar. President Milei took office at the vertical line. The higher the RER, the more expensive things are in Argentina relative to other countries.

As of July, the country was on average twice as expensive as it had been in November 2023. Yikes.

And that is the root of the problem. The Argentine central bank has to keep the peso within a band. That means it cannot freely buy and sell dollars. If it sells dollars, it will drive up the value of the peso … but then the central bank will use up its supply of dollars, which it needs to make debt service payments. If it buys dollars, it will build up its reserves, but the central bank pays for those dollars by printing up pesos and exchanging them in the market. It it does that, then the value of the pesos will fall against the dollar, and the effect on inflation from running the printing press is left as an exercise for the reader.

So the BCRA can’t accumulate dollars by going out on the market and buying them unless it wants to blow up the exchange rate band. Doing that, however, risks igniting inflation or crushing interest rate hikes.

If the Argentine economy were regularly selling more to the rest of the world than it was buying from it, then that would not be a problem. Dollars would flow in, and a lot of those dollars would end up in the coffers of the central bank. The analogy is with a person: when you sell more to the rest of the world than you buy from it, you’ll use some of that surplus to invest in shares or bitcoin or lend to your sister or whatever, but a lot of it will end up in your bank account, which you can then use to pay interest on your debts.

Except, well, Argentina lost its surplus at of the start of this year. In the first quarter of 2025, Argentina’s current account surplus plunged from US$176 billion in the first quarter of 2024 to negative $5.2 billion.3 The cause was not a fall in exports — in fact, exports rose by $1.2 billion.

Nope, two things killed the surplus: a $4.2 billion dollar rise in goods imports and a staggering $2.8 billion deterioration in net tourism revenues. In other words, as the peso’s real exchange rate went off exploring Mars, Argentines took advantage of cheap relative prices elsewhere to buy stuff from overseas or go vacation in Brazil. And that blew open a hole in the current account deficit. Which meant that Argentina had to either run down its holdings of foreign assets or borrow from abroad to pay for those cheap imports and bargain vacations.

But even that wouldn’t necessarily be a problem but for the fact that …

No hay plata

The Argentine central bank doesn’t have any cash.

Really, it doesn’t have any cash. If you just look at the gross headline figures, it’s sitting on almost $40 billion in foreign exchange. But most of that is tied to either bank reserve requirements (which the BCRA technically owes to the banks in dollars) or Chinese swap lines. Netting that out leaves you with only $6 billion.

Except about half of that is needed to cover three-year dollar bonds that BCRA issued to help importers pay their foreign suppliers. (The importer bought the bonds with and received a promise to get paid back in dollars at 3% interest.4) That leaves you with only $3 billion.

Only … the IMF thinks the situation is even worse than that. It thinks that when all is said and done, the BCRA’s liquid reserves are negative:

And this is a problem, because as we indicated earlier, Argentina has bills to pay: $6 billion left this year and $17 billion next year. Foreign creditors want dollars, and if Argentine businesses aren’t earning them then somebody else is gonna have to cough them up.

But Argentina doesn’t have dollars! It could get them by letting the peso fall. Exports would rise and imports would fall. So dollars would flow in. But that would smack the country in the face in three other ways:

1. The government collects taxes in pesos, which it then exchanges for dollars. If the peso falls, then it gets fewer dollars for the same amount of pesos. So wonderful as it would be for there to be more dollars around, Argentine taxpayers would have to shell out a bigger share of their income to buy those dollars, only to hand them back over to foreigners as debt repayments. Voters won’t like that.

2. If the peso falls, import prices rise. And that feeds right into inflation. Voters won’t like that either.

3. Sometimes it is very hard to just let a currency fall “a bit” before panic and speculation take over and move things a lot further than the authorities had expected. If the central bank announced, for example, that it was widening the band even further, then history suggests it would run a big risk of provoking the very crisis that it hoped to prevent.

In the words of Nic Saldías, speaking right before the U.S. stepped in with its $30 billion, “If they lose control of the peso, they lose the [October midterm] election.”

Losing my religion

And who would they lose that election to? Well, none other than Governor Axel Rose Kiciloff. (We really wrote “Rose” but decided it was too funny to erase.) Noel met the man back in 2012, when he had the unassuming title of Secretary of Economic Policy and Development Planning, subordinate to the Minister of Economy, and a seat on the board of the newly-nationalized YPF oil company.

They should have gotten along. They were both in their mid-forties, Jewish, professors, fathers, short (around 5’7”), and held leftish economic opinions relative to the prevailing orthodoxy at the time. They did not. The secretary clearly didn’t trust this Yankee academic in the pinstriped suit.5

Kiciloff called himself a Keynesian but it wasn’t a Keynes that either of us would recognize. Rather, he seemed more like a Marxist, in the sense that he didn’t seem to believe that the price system was a good way to allocate resources. But he eloquently and cogently defended the decision to nationalize the YPF oil company. He accused YPF’s Spanish owners of tunneling, and provided evidence consistent with that story. (A Shell executive admiringly called him “Excel” Kiciloff. He knew his numbers.) Kiciloff’s claims shaped the case study of the nationalization that Noel was there to write.

The problem is Kiciloff does not seem to have learned anything from the country’s subsequent economic travails. Watch this interview. He denies that the previous administration’s fiscal irresponsibility caused the recent inflationary blowout. He couldn’t bring himself to say that a balanced budget over the business cycle might be sensible. Nor did he admit that faking economic data was a mistake. As for current problems, he just kept repeating the equivalent of “no hay dólares,” without any plan as to how to get the dólares or make do with fewer.

Kiciloff even mangled his own analysis of the 2012 oil nationalization. It’s true that the Spanish owners were hollowing out their own enterprise instead of reinvesting. But in the interview he said that’s why the government then had to control prices and subsidize energy, when in fact the causality went the other way: controlled prices —> energy shortages —> big subsidies.

In short, he just won’t admit the presence of painful tradeoffs. Milei might well be making the wrong tradeoffs, but the guy certainly isn’t trying to avoid tradeoffs. Kiciloff might.

We understand why the prospect of President Kiciloff fills investors with fear. The Peronists really did create a disaster and he gave no reassurance that it wouldn’t happen again. And if they do get a hold on Congress on October 26th, then they have every incentive to do everything they can to wreck the economy in order to help their candidate in the 2027 presidential election.

Light at the end of the tunnel?

Without the $30 billion, Argentina really had no good options. Let the peso slide, great for exporters, bad for taxpayers. You get more dollars by in effect paying more for them. Hold the line, and you risk running out of reserves and becoming unable to make upcoming debt payments. You also further crush what’s left of Argentine manufacturing.

The Argentine economy was facing a Catch-22. But if the $30 billion from Daddy Yankee materializes, then a way out becomes very clear. Milei will have to let the peso sink more than he seems to want. But if he does that, with cash in hand, then maybe the administration can take a breather and wait for the crisis to go away on its own.

The balance of payments situation already looks to be easing. Exports spiked in June and July, more than doubling to $10.2 billion. Argentines have contined to take those cheap foreign vacations, and we would not want to work in an Argentine factory right now, but if this keeps up then the dollar shortages just might eventually solve themselves. (Although keep things in perspective: those red columns on the bottom represent largely net interest payments, and those aren’t going away.)

Second, despite some headlines, as far as we can tell the budget is still in generally good shape. It’s true that spending has recently moved into deficit, but that happened in the same month last year and we suspect it’s seasonal. (The relevant columns are helpfully put in dashed boxes below.) The accumulated surplus through August is still there . At some point the Milei administration is going to have to increase spending — particularly on infrastructure — but it still has breathing room.

Add a $30 billion lifeline to the above and things should — should! — work out. If Milei can make it out of the midterms without too much disaster and assuming that the commodity boom holds, then Argentina should be able to get out of the woods. The peso has to go down and inflation will temporarily go up, but them’s the breaks. That much ammunition from Uncle Sam will make a difference.

But it’s Argentina. So you never really know! Nobody’s lost money betting on an Argentine crisis.

Rather, the theory states that the President has complete control over the executive branch. So Congress cannot create executive agencies outside presidential control or limit the President’s ability to remove executive branch officials.

The rationale behind that interpretation lies in the first line of Article 2 of the Constitution: “The executive power shall be vested in a President of the United States of America.”

There is also an ideological defense of the idea that is neither liberal nor conservative in the current American sense. The President is directly elected; the officials and panels appointed to head independent agencies are not. So a unitary executive increases democratic accountability.

That seems pretty clear?

The unitary executive in American history

Well, no. There is little evidence that the Constitutional Convention intended to make the President the sole authority in the executive branch. For example, here are the first two lines of Federalist #77, by Alexander Hamilton:

IT HAS been mentioned as one of the advantages to be expected from the co-operation of the Senate, in the business of appointments, that it would contribute to the stability of the administration. The consent of that body would be necessary to displace as well as to appoint. [Italics mine.]1

In this view, the first line of Article 2 is just saying the obvious: the President has executive power, but Congress can obviously limit it or assign new ones to new agencies. You can certainly read the text of the Constitution that way. Article 1 starts by saying, “All legislative powers herein granted shall be vested in a Congress of the United States.” Article 2, conversely, does not start by saying “All the executive power herein granted shall be vested in a President of the United States.”

Why, runs this line of reasoning, would the Founding Fathers have put an “all” and “herein granted” in Article 1 and left it out of Article 2 if they didn’t think it had meaning?2 Article 1 unambiguously hands every single legislative power to Congress and only Congress. Article 2 just says that the President has executive authority, with nothing there about its scope.

And as with unitary executive theory, there is a good nonpartisan ideological defense of independent agencies. The U.S. is all about limited government. What’s more limiting than a limit on the power of the President? Independent agencies limit the authority of an overweening executive that could otherwise use the powerful federation to profit friends and punish foes.

But there is indirect evidence pointing the other way. James Madison (after the Constitutional Convention) argued that he thought the document implied that the president could fire cabinet members. Congress agreed in the Decision of 1789, when it created the Department of Foreign Affairs with a Madison-inspired proviso that outlined what would happen after a Secretary “shall be removed from office by the President of the United States,” but it did not bother to give the President that explicit power.3 Rather, the law just assumed that he had it. And that Congressional decision gave us the view that the Decision of 1789 implied that there was a consensus that Article 2 gave the President control over executive officials, making him the decider.

Thus far, the U.S. has played it both ways. The President has been given the power to fire officials except when Congress says otherwise.4 In general, then, we have assumed that our executive isn’t unitary — a win for the Alexander Hamilton who wrote Federalist #77.

Until recently.

The Lisa Cook case

The current Supreme Court leans pretty strongly towards the unitary executive. All six conservative justices have signed onto decisions that uphold it in one way or another.

President Trump’s attempt to fire Fed Governor Lisa Cook will likely drag the structure of the Federal Reserve into this debate. 12 U.S.C. § 242 gives Fed governors 14-year terms and says they can be removed only for cause. Governor Cook is accused of listing two homes as her primary residence on two mortgage applications.

President Trump says that the allegation (backed by some evidence) is egregious enough to count as cause. But Governor Cook has indicated that she will not step down. Her case, then, will have two parts to it. Is her offense grave enough to activate the “for cause” clause? If not, is effective prohibition on removing Fed governors consistent with Article 2 of the Constitution?

If SCOTUS accepts an appeal it could decide “yes” to the first question. I am very hesitant to opine on that, although to be frank, the alleged offense is crazily minor. I searched and found at least two cases: one in 1981 and one in 2004 where federal agencies fired civil servants for mortgage fraud. The employee in 1981 had lied about her income and job title and the one in 2004 gave a friend nonpublic information about a HUD-owned property in Philadelphia.5

But those were civil servants. And both infractions were much more serious than the allegations against Governor Cook. If I had to bet, SCOTUS will rule on the constitutional issue.6

And it may want to, anyway!

The declaration of Federal Reserve independence

As many observers have pointed out, a ruling that President Trump could fire Fed governors at-will could cause serious problems.7 Politicians have an interest in re-election. Sometimes keeping interest rates low will serve that second interest at the expense of the first. Which means that monetary policy might not prioritize low inflation or financial stability. Hand the central bank over to elected officials and they will set interest rates too low in election years. Eventually, goes the logic, inflation will spiral upwards until voters get angry enough to punish governments.

But the logic here is the opposite of ironclad. Why should decisions made by politicians be worse than decisions made by technocrats? After all, politicians have an interest in financial stability! When there’s inflation, the voters toss them out. That’s a pretty big incentive to avoid playing games with interest rates. I stand unconvinced by the correlation between lower inflation and the spread of independent central banks since the 1970s. What elected government wants to risk the fate of Jimmy Carter or James Callaghan or, heck, Kamala Harris?

Well, since you ask …

President Trump has made it clear that he wants lower interest rates, regardless of what that might do to the economy. Whatever you might think about the proposition that central bank independence in general is a great and wonderful thing that has brought us puppies and rainbows, there is a case to be made that right now it would be a bad thing for America to abandon.8

Central bank independence is not a new idea: Congress began insulating the Federal Reserve from presidential politics as early as 1935. But those restrictions depend on the executive of the United States not being unitary! Either the Court will have to back off the unitary executive theory or it will have to put the American central bank under democratic Presidential control.

But maybe there is a way for the six unitarian judges on SCOTUS to have their unitary executive and eat it too, at least as far as the central bank is concerned. It would even have precedent. It would involve an unprecedented stripping the Fed of some of its Congressionally-delegated powers—while SCOTUS has stripped the office of the President of powers, it hasn’t before ripped away part of an agency’s authority.

Still, maybe the idea has legs. So let me make it public. But first, let’s ask …

Is the Federal Reserve an executive agency?

Congress can create Article I agencies to carry out its constitutional power as long as they are not executive agencies: thus we have the Congressional Budget Office and the Government Accountability Office, but also Article I courts, like the U.S. Tax Court and the U.S. Court of Federal Claims. But separation of powers must be maintained. In the words of a 1995 U.S. Court of Appeals decision: “The Supreme Court has indicated that delegations of rulemaking authority to Article I agencies may implicate separation of powers concerns.”

So let’s look at the Federal Reserve system. It consists of three elements:

1. The twelve regional Federal Reserve Banks;

2. The Federal Open Market Committee;

3. The Board of Governors.

The Federal Reserve Banks are chartered by Congress, but they are not executive agencies. They are owned by their member banks. They cannot force anybody to do anything. No fines, no guns. They have privileges that regular banks do not, but Congress is constitutionally allowed to establish monopolies if it wants to.

So their legal status is kosher even under the unitary executive theory.

The Federal Open Market Committee (FOMC) sets interest rates. That’s not an executive function, since the FOMC does this by buying and selling bonds in the market or by altering the interest rate it pays on the deposit accounts that banks hold at the Federal Reserve. Anyone can still make a loan at any interest rate that they want to charge, no one is at risk of having someone with a badge point a gun at them. So it’s also not an executive agency.

So far so good! We have no problems. SCOTUS can stop President Trump from firing Lisa Cook while still upholding — or at least not jeopardizing — the principle that he is the unconstrained head of the executive branch. That could get a seven vote SCOTUS majority, maybe more. It would not, however, be a borough majority.

The Board of Governors is a unitary problem

Which brings us to the Board of Governors. If it carries out executive functions then we have a problem, not least because its seven members make up a majority of the FOMC. (The other five consisting of the president of the New York Fed and a rotating group of four of the heads of the regional Federal Reserve Banks.)

So under unitary executive theory, if the Board is an executive agency, then the President can fire at will a member of the Board of Governors, which also means the President can also fire at will seven of the twelve members of the FOMC. Poof, no more independent Fed!

So what does the Board do? Well it can:

1. Set reserve requirements and discount rates.9

2. Regulate national banks chartered under federal law.10 State-chartered banks may choose to become members.

3. Set rules for financial institutions that maintain accounts at a Federal Reserve Bank or use Fedwire, the Fed’s payment system.

4. Regulate banks owned by a holding company.11

5. Regulate other creditors and depository institutions under various Congressional acts, including “systemically important financial institutions” (SIFIs) that are so big that their collapse could bring down the national economy under the Wall Street Reform Act of 2010.12

Having your central bank and eating it too: justifying Fed independence under a unitary executive

Which of these are problems under the unitary executive theory?

(1) Setting reserve requirements and discount rates:

These are core functions related to the issuance of money, which Article 1 gives to Congress. These are not executive functions, unless the Supreme Court wants to overturn McCulloch v. Maryland. Justice Kavanaugh, in particular, has already averred that he will accept this argument.

(2) Regulating national banks chartered under federal law:

National charters are a federal franchise under Article 1. Congress attached mandatory Federal Reserve membership to federal banking charters. But banking is not like flying, where you just cannot send something into the sky without FAA approval. Rather, banks can operate under state charters and simply not join the Federal Reserve System.13 Not only can state banks engage in the same kind of financial operations as national banks, but since the Interstate Banking Act of 1994 (aka “Riegle-Neal”) there have been no federal restrictions on their ability to branch across state lines.

Since banks voluntarily choose to subject themselves to regulation by the Board of Governors, then the Board is not an executive agency. After all, if you could choose to operate an airplane under state law instead of federal law — and fly that airplane over the state line as long as the other states approved — then it would be hard to argue that the FAA had executive authority over you.14

But we will return to this point about voluntary association, because it’s more complicated.

(3) Setting rules for institutions that use Fed services

This is a trickier, since it is pretty hard to be a bank and avoid the Federal Reserve’s payments system entirely. But it can be done! For example, there is the Clearing House Interbank Payments System (CHIPS) and it is pretty widely used by large banks instead of Fedwire. Smaller state banks could in theory band together and set up a CHIPS for the little guy, although this would be costly. A skeptical SCOTUS justice could reasonably decide that this meant that Board of Governors’ regulation was basically inescapable and therefore the Fed is an executive agency.

But SCOTUS could also decide that it wasn’t the Fed’s fault that no private agency had replicated its functions. The fact that a private agency could legally do so — or that a bank could, I dunno, use Bitcoin or schlep bills across the country or something — means that banks voluntarily subject themselves to Fed oversight and that does not make the Board of Governors into an executive agency.

The Fed itself says “operating circulars are contracts between a Reserve Bank and a financial institution that govern the provision of Reserve Bank services. Consistent with longstanding practice for all other operating circulars issued by the Reserve Banks, the Board does not believe those contractual documents need to be issued for public comment.” In 1983, the courts ratified this interpretation. Later courts cited Continental Illinois National Bank & Trust Co. v. Sterling National Bank & Trust Company as concluding “that operating circulars do not create any substantive rights.”

But remember that I told you we would return to the point about voluntary association? We’re there.

(4 & 5) The rub, there’s always a rub

And here we have the problem! The Federal Reserve does issue “system-wide” regulations that apply to all financial institutions, not just banks affiliated with the system. A comprehensive list (in legalese, I’m sorry) is here. Here’re the four biggies:

Regulation B: operationalizes the requirements of the Equal Credit Opportunity Act of 1974. It applies to all creditors. I guess I should have filed more paperwork when I lent my sister that money back in the day? Anyway, this is pretty clearly an exercise of executive authority.

Regulation D: under the Federal Reserve Act and the International Banking Act of 1978, this puts reserve requirements on any deposit-taking financial institution that does business with the public. Now, I guess you could say that since deposit-taking by definition creates money, then it could be an Article 1 function. It is a reach, but I can imagine Kavanaugh making the stretch and Roberts and the three liberals writing concurrent decisions.

Regulation E: governs electronic fund transfers. But all transfers, not just ones using the Fed’s infrastructure: “Any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer's account.” Yeah, that looks pretty executive.

Regulation J: in 1987, Congress handed the Fed the authority to govern check clearing for all depository institutions. The Check Clearing Act of 2004 expanded this authority. Now, the regulation is enforced via operating circulars and applies mostly to transactions that go through the Federal Reserve Banks at some point, so maybe it could be called an Article 1 function?

So the first and third of these are clearly executive functions and the other two require some creative interpretation to be kosher. Now add Fed regulation of bank holding companies and “systemically important financial institutions,” i.e., any big financial institution.

Yeah, the Board of Governors looks like an executive agency. I guess you either have to admit that the unitary executive theory is horseshit or hand keys to the Federal Reserve over to President Trump.

But maybe not!

Severance, without the chip in the head

The Court could save the Fed by declaring it sui generis, but that would be too tidy, like calling Staten Island part of “the city.” The Court used to lack only a justice from Staten Island. But we no longer have representation for Brooklyn and Queens.

There are problems with just declaring that the Fed is a special federal snowflake. It would invite future Congresses to create more “Article 1” agencies disguised as voluntary associations while they actually exercise executive power. It also makes the unitary executive look like a made-up doctrine, the Calvinball of constitutional theory. Both consequences kind of bely the purpose if you believe in unitary executive theory.

A cleaner option is to follow the spirit of Panama Refining Co. v. Ryan, decided in 1935. The National Industrial Recovery Act of 1933 (NIRA) handed President Roosevelt the power to prohibit the interstate transportation of oil produced in violation of state quotas. Congress can set such limits, the Court noted, but also stated that “nowhere in the statute has Congress declared or indicated any policy or standard to guide or limit the President when acting under such delegation.” Giving total discretion to the President violated the separation of powers. So it severed that grant of power from the Presidency but left the rest of NIRA intact.

SCOTUS could solve its Fed dilemma similarly. The Fed’s monetary and franchise powers are fine under Article 1 but its consumer credit and electronic transfer rules are not. The Court could strike those delegations and leave the Fed with its monetary core, forcing Congress to reassign the rest. (Or maybe Congress just leaves the banking system unregulated. I don’t know. It’s 2025, we might annex Panama or build Skynet or let federal agents run around in masks without badges. Who knows?)

The immediate objection is that this would be unprecedented. The Roberts Court has severed structures while leaving agency powers intact, as in 2010, when Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB) removed the PCAOB’s complex governing structure but left its authority unchanged. It did it again in Seila Law LLC v. CFPB.15 But it has never stripped substantive regulatory powers while leaving an agency’s governance structure intact. Critics would argue that only Congress can decide where those powers go.

The deeper objection would be that the unitary executive theory itself is wrong. When George Mason warned at the Convention that Article 2 grants the executive too much power — “We are not forming a Government by which the few are to govern the many,” he thundered — nobody countered by claiming, “Well, no, we just want to make sure that Congress will place no limits on the President’s control over executive officers!” After all, both in 2025 and in 1787, American states divide up executive authority, as do most other presidential republics.16

But the evidence is that this Court believes in the unitary executive theory. And it’s not crazy, just something with which I happen to disagree. Pretending that Court will change its mind when the arguments are not clear cut is not a useful exercise.

I do have to give one warning, however. The regulation is a powerful thing. There are legal remedies against capricious and unfair regulation, but they are often slow and expensive. The Trump administration has shown that it is willing to use its power against institutions that it does not like, so politicizing bank regulation could have its own deleterious consequences. But if you believe in unitary executive theory, as a SCOTUS majority seems to believe, then that is the potential price you will pay.

Here’s to eating that unitary, unsliced, delicious cake

The Roberts Court has shown an appetite for severance. If it wants to preserve the Fed while keeping faith with unitary executive theory, a Panama Refining solution presents a path. I personally think that a unitary executive is a terrible idea, regardless of the legal merits. But if you’re going to have a unitary executive, better it keeps monetary policy outside direct presidential control.

Of course, Congress will need to put the banking authority somewhere, which would open up the chance to completely rewrite banking law, which would probably result in a mess. But that’s the way our system works. Filibusters, the Senate, dysfunctional parties, paralyzed lawmaking, only two boroughs instead of four represented on the Supreme Court.

But given a unitary executive, you only have three options. The first is a political Federal Reserve under presidential control. The second is a specious carve out for the Fed that further delegitimizes the Supreme Court and makes unitary executive theory seem confused and ad hoc. (Although how legitimate can the Court be, if it has never once seated a justice from Staten Island?) The third is the above interpretation, that keeps the monetary policy part of the Fed’s mission outside politics, at least directly.

Unless, of course, a real expert tells me where I’m completely off base in comments!

What could go wrong?

Oh boy. Well, monetary policy would remain outside the President’s purview. But financial regulation would not. Financial institutions under Fed supervision controlled $32.4 trillion in assets. That’s a lot of cash. An unscrupulous government could, well, do a lot with that authority. In the words of my old friend Ross Levine from Flatbush:

Let’s say you want certain constituencies to have access to low-cost credit. You could easily make that happen. In fact, financial institutions themselves would be guessing that's what you want. You may not even have to be explicit. Let’s say I'm the president and you’re the head of JP Morgan. You know what my interests are. You know I have the power to influence your wellbeing.

I could probably get the supervisors to fire you, so I wouldn’t even have to say anything to you. You would simply act in a way that you think would please me. Let’s say there are people that are my enemies, and let's say I wanted to exact retribution. This could all be done in reverse. Maybe they don’t get credit. Maybe their businesses fail.

Let’s say there are certain stock prices that I think I would rather have go up or that I would rather have go down. There are a whole set of financial institutions making those decisions that could make that happen. The implications are simply not being appreciated by the public and I don’t think by politicians. So all of this stuff about tariffs and all of this stuff about the Fed to me is way less important.

Now, I’m not that pessimistic. Financial institutions have access to a lot of lawyers, and so far the legal system has kept the Administration’s worst instinct in check. But it means that the legal solution proposed here won’t by itself replace the ability of independent agencies to prevent the potential for political pressure.

A republic, if you can keep it, said Benjamin Franklin. But institutional decay, not democratic collapse, is the more serious worry. Although with the Court down from representing four boroughs to only two, we’ve already slid quite a way.

In a parallel universe, however, you could have gotten an American rebellion that really was about pres…

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Probably not. Let’s go through the evidence in turn.

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Northern Slavery without the Revolution

Without the American Revolution, slavery spreads into the Midwest and declines more slowly in the Northeast.

It’s impossible to state for certain how quickly the Northeastern states would have abolished slavery in the absence of the American Revolution. We do know that precocious abolition in Massachusetts and Vermont was directly related to the events of 1776. In Massachusetts, abolition was an unintended consequence of the state’s new revolutionary constitution; in Vermont, there would be no state government at all without the Revolution. So at the very least Abolition is delayed there.

The rest of the Northeast was a lot more begrudging. None of them freed existing slaves. They did free the children of slaves born after a certain date, but only after extraordinarily long transition periods. New Jersey was the most “liberal,” freeing the children of female slaves on their 21st birthday.

As you might imagine, that left plenty of opportunities for unscrupulous slaveowners to sell their slaves South before freedom arrived. New Jersey, at least, prohibited the forcible transportation of a free-born person out of state without their permission, but enforcement was spotty. In both New York and New Jersey, the growth of the Black population fell well below natural increase after the passage of the free-born laws and the enslaved population plummeted … even though nobody was yet legally freed.

In the words of Fogel and Engerman, “The entries in Table 4 strongly suggest that slaveholders in New Jersey were selling their slaves to the South.” It is hard to see why this sad story would be better in a world without the American Revolution.

But there are reasons to think that it would be worse. Remember, we’re in a universe where London puts imperial unity above all other interests. (If we’re not in that world, then the Revolution happens on schedule!) Well, in that world the British authorities have incentives to veto local attempts to abolish slavery. As historian David Brion Davis wrote in 1983:

If the states south of Maryland had remained within the empire, it seems highly probable that the British government would have vetoed all such emancipation acts in the interest of imperial unity and security. Restraints might even have been applied on the judges who actually succeeded in undermining slavery, without benefit of positive law, in Massachusetts, New Hampshire, and the eastern provinces of Canada. Certainly British courts gave no encouragement to the idea of extending to the colonies the common-law principles of the famous Somerset case of 1772, which denied legal support for slavery in England. As late as 1827 …Somerset could not even prevent the reestablishment of slave status for a black who had voluntarily returned to the colonies from England.

Second, we have to think about the territories known in our history as “Northwest.” In 1774, the Quebec Act handed “Ohio Country” and part of “Illinois Country” over to the Province of Quebec. Slavery was legal in Quebec. Partly as a result, English-speaking settlers brought enslaved people with them. In a no-Revolution timeline either there is no Quebec Act and Virginia extends its claim, or there is one but London soon detaches the territory to accommodate English-speakers once their number rise sufficiently, just as it did in Upper Canada.

What won’t happen is a precocious ban on slavery. Abolitionism wins no victories in London before 1806. (That is when Parliament banned trafficking enslaved people across the imperial border.) Across the Atlantic, Congress banned slavery from the Northwest Territories in 1787, but even then it was a struggle to bring Indiana and Illinois into the Union as free states. Parliament would have no incentive to abolish the institution against the wishes of Quebeckers (who did not abolish it our world) or English settlers pouring into a new colony. It isn’t necessary to ask what would happen under the third option of Virginia keeping the territory.

Under continued British rule, slavery will remain legal in the territories currently occupied by the states of Indiana, Ohio, Illinois, and Wisconsin, even if only Indiana and Illinois are likely to see a large enslaved population.

So while it is possible that abolition is delayed in the Northeast, it is probable that slavery extends into the Midwest.1

Would things be any better in a world where the Revolution happens but the British defeat it by force of arms? Not likely. Both sides promised freedom to enslaved people who fought for them but neither campaigned against slavery as an institution. Sir Henry Clinton’s Philipsburg proclamation was a worthy thing, but it was no Emancipation Proclamation. In fact, it deliberately did not promise freedom to enslaved refugees, but rather vaguely stated:

But I do most strictly forbid any person to sell or claim right over any NEGROE, the property of a rebel, who may take refuge with any part of this Army: And I do promise to every NEGROE who shall desert the rebel standard, full security to follow within these lines, any occupation which he shall think proper.

Since he hadn’t promised freedom, but rather security, Clinton saw nothing wrong with returning refugees to their enslavers when too many began escaping across British lines. Even more tragically, neither Clinton nor the British authorities saw anything wrong with re-enslaving many of the refugees themselves and transporting them to the West Indies after the war.2

The British rejected all serious proposals to attack the slave system. They summarily rejected a proposal by Lord Dunmore, the royal governor of Virginia, to subdue Southern resistance with an army of 10,000 free Black soldiers. Lieutenant Colonel Archibald Campbell later proposed to free, enlist, arm, and transport at least 1400 West Indian slaves to the mainland, where they would encourage America’s enslaved population to desert and wreck the rebel economy. London rejected that as well.3 In fact, the British made open appeals to slaveholding Loyalists on the basis of their economic interests.

By the time of Yorktown, the vast majority of enslaved people were still in captivity, and the British showed no interest in freeing them.

None of this is consistent with the hypothesis that the victorious British would have precociously weakened slavery on the mainland. It is unlikely in the extreme that an exhausted British Crown, having recently subdued the rebellious colonies, is going to have an appetite for a similar struggle.

The Economics of Emancipation

The problem is that North American slavery is on an entirely different scale from the West Indies. The “value” of the 655,000 enslaved people in the West Indies came to roughly £37 million in 1833, when Parliament passed the Abolition Act. If you add in the 2.1 million enslaved people in British North America, then you get a total value of £210 million, which is an entirely different order of magnitude. That value came to roughly 40% of the United Kingdom’s GDP. Even if you assume that Parliament could have gotten away with subsidizing the North American slaveowners to the tune of only 44% of the “market” value of their enslaved people, the cost is still 19% of the country’s GDP — and almost five times what it actually paid.

Gabriel Mathy, in his paper regretting the American Revolution, makes the point that a united empire would have a larger tax base to draw upon. That gets into two problems. One is economic and the other is political. Let’s take the economics first.

A “United Empire” isn’t that much richer than the United Kingdom

Simply put, the United Kingdom was still a lot richer than the USA in 1833, at least in aggregate terms. The nominal GDP of the U.K. was £494 million, as against £245 million for the entire United States. Adding them together reduces the scale of the problem facing any program for compensated abolition, but by rather less than you might think:

It is true that these numbers do not include Canada, but Canada was small. Moreover, these estimates assume that British North America will grow as fast as the United States did in our history. There are many reasons to doubt that. First, the colonies might not be united into a common market. Second, they might have a far less efficient financial system, in a world without Alexander Hamilton. Third, in our history there was an explosion of joint stock companies after the Revolution, as states competed with each other to charter this new form of private enterprise. Whether the reforms enabling this new form of entrepreneurialism would spread as fast without the Revolution — they didn’t in Canada or the U.K. itself — is anyone’s guess.

How is the United Empire governed?

The political problem is fairly straightforward. Could London have taxed the colonies to pay for Abolition? Mathy’s scenario is a world where Parliament never tried to tax North America — or if it did, soon admitted that it should not. That is a strong precedent. I can imagine situations where London would ignore it — some sort of world war, for example — but I am not sure that the expense of North American Abolition in 1833 would have had sufficient support to risk taxing the colonies.

Alternatively, we might be in a world where the colonists accepted some sort of plan for imperial unity. Elsewhere, I have argued that this is exceedingly unlikely, but it is not outside the realm of possibility. The problem, however, is obvious: Parliament now has to deal with the representatives of Southern slaveholding elites.

Under the Galloway Plan — offered as a 1774 compromise to head off the war — the American legislature would have had a veto over British legislation for America. The 1778 offer from the Carlisle Peace Commission was far vaguer, but at the very least it would have put colonial representatives into Parliament … and it certainly appeared to preclude the possibility of imperial taxation with the words:

In short, to establish the power of the respective legislatures in each particular state, to settle its revenue, its civil and military establishment, and to exercise a perfect freedom of legislation and internal government, so that the British states throughout North America, acting with us in peace and war, under our common sovereign, may have the irrevocable enjoyment of every privilege that is short of a total separation of interest.

What would have happened had the rebellion collapsed after 1778? Maybe Britain would have been in a position to simply legislate for the colonies. But that just brings us back to the economic problem: the subsidized emancipation of slaves on the American mainland would have cost five times as much as freeing the ones in the West Indies. And no, neither Mauritius nor the Cape Colony had enough slaves to alter that conclusion.

So even if British politicians are willing to tax the colonies (risking a revolt) they would have to tax the United Kingdom quite a bit more to finance abolition.4

Cotton was a strategic crop and growing in importance

But now we get to the bigger economic problem. Slave prices in the West Indies were sinking in the 1820s along with the price of sugar, which dropped (net of shipping costs) from 2.3p per pound in 1818 to 0.8p per pound in 1829.5 There were exceptions, of course: slavery was booming in Trinidad and British Guiana. But in general slave prices were declining across the West Indies and British policy prevented slaves in declining areas (like Jamaica) from being sold on to booming places. Barbadian slave prices, for example, fell by half between 1823 and 1831.

That is not to say that the British planters supported abolition; slavery was obviously more profitable to them than free labor would be. (J. R. Ward looked into that back in 1978.) It is to say that they were willing to accept compensation at 44% of the average market price because market prices were falling fast.

Contrast that with the southern United States, where the cotton boom was just getting started. By 1833, the South was starting a prolonged cotton boom driven by exploding British demand for cotton textiles. In addition, American slave populations were growing fast.

It doesn’t take a political scientist to realize that the politics of abolition are going to look very different in the above world. West Indian interests reluctantly capitulated to subsidized abolition; North American slaveowners are going to fight a lot harder. Any compromise is going to result in a much higher compensation per slave than the West Indian slaveowners received.

We then add the third problem: in the 1830s, cotton was a strategic crop. Sugar is nice; cotton drives the U.K. economy. It is the oil of the day. Politicians could contemplate a disruption of sugar production in the West Indies with equanimity. After all, the product is available from elsewhere and who cares if it comes from within the Empire or outside? Those same politicians could not easily contemplate a reform that might disrupt the flow of cotton to British textile mills.

In the words of David Brion Davis:

It is impossible to imagine Parliament passing the celebrated Emancipation Act of 1833 if the United States had remained part of the empire. Cotton was by then far more vital for British industry and trade than sugar had ever been. [Italics mine.]

Moreover, both contemporary British observers and later historians agree that no emancipation plan was politically feasible unless it included monetary compensation from the British government to West Indian proprietors. Parliament finally assented to the staggering figure of £20 million because of the pressing need to win the cooperation of slaveholders, to affirm the sanctity of private property, and to guard against other and more threatening forms of expropriation. But this twenty million-pound grant, which the so-called black apprentices were to supplement for a period of six years with forty-five hours of unpaid labor for their masters out of a sixty-hour working week, was clearly an upper limit for British taxpayers.

It is true that the addition of the United States would have increased the number of taxpayers, but if British leaders had managed to preserve the empire for fifty-seven additional years, they presumably would have been sensitive to American feelings about taxes. As Thomas Jefferson put it in 1824, after making somewhat similar calculations of the costs of African colonization, “it is . . . impossible to look at the enterprise a second time.”

Moral pressure mattered, but it was never sufficient on its own. Religious abolitionists like Wilberforce succeeded only by aligning with economic and political interests already in motion.

An abolitionist U.K. government will face a Hobson’s choice. They can abolish with insufficient compensation. But even if it could get such a bill through Parliament — which is unlikely — they would risk triggering a revolt by Southern planters. The British Empire could probably win such a revolt (strangling Southern commerce and trying to mobilize Northern armies), but no government would take such a threat lightly. Remember, uncompensated emancipation was never seriously contemplated in Britain; even the abolition of the slave trade in 1807 required substantial compromise and freeing slaves without compensation was seen as a radical threat to property rights.

Moreover, unless this world saw some sort of parallel to the Napoleonic Wars, Northern armies won’t necessarily be loyal to London without the national and ideological sentiment forged by the Revolution.

They can abolish with sufficient compensation — which would be extremely expensive and would still risk triggering a planters’ revolt regardless of how the resulting debt burden is apportioned. Or they can ignore public opinion (10% of the British population signed an anti-slavery petition) and hope the problem goes away.

The problem is that the longer Parliament waits, the less tractable the problem becomes. I would like to believe that a unified British Empire could solve it without having to fight against a “Treasonous Slave-Owner’s Rebellion.” But the only solution on offer parallels the kind of abolition offered in our world by the State of New York or the Province of Upper Canada: slow intergenerational abolition with ridiculously long lead-times. That is better than a rebellion, I suppose — I am genuinely not sure that is true — but it does not lead to much earlier freedom than arrived in our universe.