Wednesday, November 15, 2017

Schreiber on Bonn Climate Talks

Socialist Action's Michael Schreiber reports on the COP23 UN-sponsored climate talks held in Bonn, Germany. The topic has not made the news on any other medium I pay attention to (and I'm a news junkie), so I was unaware that the talks were even happening. That's how far climate change has fallen off the radar in the United States--you have to read papers from Trotskyist grouplets to find out what's going on.

Whatever the status of the scientific debate, the climateers have lost the political battle. People are not willing to take a catastrophic hit to their standard of living now in order to prevent some hypothetical (and improbable) disaster one hundred years from now.

My own posts on climate change are among the least read of any, which is par for the course--nobody is interested in the topic anymore. But Mr. Schreiber's article is such a hodge-podge of silly ideas that I can't resist trying to set him straight (a lost cause, I know). I will make clear at the outset that I don't believe Mr. Schreiber speaks for actual "climate scientists." They are a more sober group of people who are less willing to throw factoids around as propaganda points. For in the long run such hyperbole diminishes their credibility and hurts their cause.

Here are a few of the factoids:
  • "As the conference opened, the World Meteorological Organization released data showing that 2017 is apparently the hottest non-NiƱo year on record, and is expected to join the two previous years as the three hottest in modern history." What is left unsaid is that the record is only since the beginning of the satellite era, i.e., about 40 years ago. This is not a long enough timeframe from which to draw major inferences about the climate.
  • "The amount of CO2 in the atmosphere (over 400 ppm) is at a concentration unsurpassed in the last three million years, when global temperatures and sea level were significantly higher than today—and the concentration is still rising."  The 400 ppm is true. The "three million years" is irrelevant. 
  • "The report predicted heat waves becoming common, an increase in forest fires in the American West, and drastically reduced water resources with possible chronic drought in the United States by the end of the 21st century. Worldwide sea levels could continue to rise for centuries to come, as the ice sheets and glaciers melt." Rising temperatures will mean more water vapor in the atmosphere, which is inconsistent with a prediction of more droughts. And rising sea levels are not caused by melting glaciers, but rather by the thermal expansion of the world's oceans.
  • "The report presented a grim prognosis for the future, in which the Atlantic coast of the United States could be swamped by rising seas and regularly battered by heavy storms."  'Heavy storms' is inconsistent with extreme drought. And it's not clear climate science suggests there will be more storms, which depend not on the absolute temperature, but rather the temperature difference between the poles and the equator. So far that difference seems to be diminishing rather than increasing.
The conference chose an odd spokesman: the Prime Minister of Fiji, Mr. Frank Bainimarama. He claims to represent “ 'one of the most climate-vulnerable regions on earth' and called on the delegates to 'make the Paris Accord work.' ” If you're trying to convince American workers to make huge sacrifices to prevent climate change, then touting him as the principal beneficiary hardly seems like a winning strategy.

Mr. Bainimarama doubles down on the disaster by claiming “ 'The need for urgency is obvious,' he said, referring to the tremendous hurricanes, floods, droughts, and forest fires of the last year and more. 'Our world is in distress from the extreme weather events caused by climate change.' ” A prediction that predicts everything is a forecast that can't be taken very seriously.

More surprising to me is that Mr. Schreiber, a Trotskyist in good standing, even takes the Paris accords seriously. He echoes the complaints of poor countries that the developed countries are not keeping their word to contribute the promised $100 billion in climate aid.
The Bonn conference is entrusted with creating a mechanism to achieve the objectives of the Paris Accord, while leaving space for those goals to be raised higher. But success, even on limited terms, is not assured. On the first day of the conference, less developed countries, led by India, questioned whether the wealthier countries could be trusted, since they had failed to meet many of their pledges to reduce carbon emissions made at earlier COPs.
India's prime minister, Narendra Modi, has been very forthright in stating that his country is not going to take an economic hit because of hypothetical climate predictions. He has adamantly refused to scale back fossil fuel use. So the hypocrisy is stunning: India still wants money from American taxpayers (among others) to fund its nonexistent efforts in fighting climate change.

Mr. Schreiber seems to believe (though he does not say explicitly) that the Paris accords are a good first step, i.e., a reformist position. Though I will ask: if the Accords were implemented in full, how much cooler would the planet be 100 years from now? How is the implementation (or lack thereof) of the Paris accords reflected in the computer models that supposedly predict the climate?

In the extraordinarily unlikely possibility that Mr. Schreiber gets his way, this is what it would mean for American workers:

  • They will pay much higher electric bills, by multiples of 10, or even 100 times more.
  • Transport will become vastly more expensive, and much less convenient. Travel in the US will be as difficult as it is in today's Cuba.
  • Solar power, when scaled up, will have enormous environmental impacts, from the large heavy-metal waste from their manufacture, to the large amounts of land required for their use, to the toxic and expensive materials used in batteries to store the generated power.
  • Electric cars will put even larger demands on the power network, leading to much higher prices and lower reliability.
It is no wonder that the climate issue has disappeared from American politics. Trump's withdrawal from Paris was very popular, and not even progressive Democrats are advocating that we reenlist. The Accords were never meaningful, regardless of whether the US is a signatory or not.

Further Reading:

Sunday, November 12, 2017

Tradable vs. Non-Tradable Goods

This post has nothing to do with Trotskyism, for which I apologize in advance. But I watched a really interesting talk last night by Mervyn King (h/t Timothy Taylor). The thesis is new to me and so totally congenial to my priors that I'm inspired to write about it--Trotskyism be damned.

Mr. King's larger topic is the "failure" of macroeconomics since the Great Recession. He has a lot of interesting things to say about that, but he also addresses why the current recovery has been relatively slow and weak.

There are a number of theories:

  • Larry Summers' Secular Stagnation model, by which interest rates can't go below zero.
  • Robert Gordon's low-productivity model, which maintains the "miracle century" is over and done with and won't come again anytime soon.
  • It's all the Fed's fault, which for malign and inexplicable reasons has kept interest rates very low for far too long.
These are not really mutually exclusive, but the long-term decline in global interest rates since 1990 requires an explanation. And Mr. King offers a good one.

One of the shortcomings of modern macro (in his view) is that the computer models all assume a single sector. This is best explained using the cartoon version: The economy consists of a GDP factory that manufactures GDP. Consumers buy the GDP, and if they buy all of it then we have full employment and a thriving economy. If, on the other hand, consumers only purchase some of the GDP, then there will be layoffs, declining production, deflation, and all the other ills that afflict a recessionary economy. The disease is generally described as "low aggregate demand", which just means consumers don't want to buy all the GDP. The cure is to increase aggregate demand, typically by the government buying up the excess GDP through deficit spending, and thereby putting folks back to work again.

A common criticism is that the economy is much more complicated than that--it's not just a GDP factory. Instead you have technology, and retail, and automobiles, etc. Some of these sectors may be healthy and others not so much. There's no such thing as "aggregate demand", but rather demand for the products of these individual sectors.

The computer guys are aware of this shortcoming, and so they inserted multiple sectors into their models and ran the programs that way. What they discovered is that it didn't make much difference--for all intents and purposes you got the same answer whether or not you use a multi-sector model or a single-sector model, i.e., a GDP factory. (I'm assuming that the sectors they tried are things like Industrials, Transports, Retail, etc., but I don't know that for sure.)

So now Mr. King comes along and suggests that the single-sector model is fundamentally wrong, and that at least two sectors are required. But rather than divvying up the economy as market indicators do, he instead makes the fundamental distinction between tradable goods and non-tradable goods.

The difference is that foreigners can buy tradable goods, whereas they can't easily buy non-tradable goods. So airplanes, movies, software, and computer chips can be exported abroad, and those are examples of tradable goods. Conversely, haircuts, taxi rides, restaurant meals, and doctors' visit are not readily tradable. (At the margin everything becomes fuzzy: foreign tourists can eat in our restaurants and foreign students can study at our universities, but for the most part restaurants and colleges are in the non-tradable sector.)

If the economy is split between tradable and non-tradable sectors, then there is some optimal distribution of capital and labor investment that optimizes total GDP. That is, the optimal proportion of capital is invested in tradable industries with the remainder in non-tradable industries. And similarly for labor.

This idea can be represented graphically (see below). The blue arrow (labelled a von Neumann ray) represents economic growth--the longer the arrow the faster the economy is growing. The direction of the arrow tells you the optimal proportions of investment in tradable (T) and non-tradable (NT) industries. Choose any different direction and the arrow will be shorter (i.e., suboptimal). Taken literally (which is not the intention) the diagram indicates that the bulk of the investment is in tradable industries since the arrow is closer to the T axis. (Put mathematically, the blue arrow is a vector in a 2-dimensional vector-space, with the coefficients representing the fraction of investment in either T or NT.)
Diagram taken from King, Mervyn: NBER Reporter (2017: 3, pp. 1-10)
Of course there is no guarantee that the economy is optimal--if resources are misallocated between the two sectors then it won't be. A tell that there is misallocation is if there is a permanent trade imbalance such as what exists today. In today's world, China and (especially) Germany have been running huge trade surpluses, while the US and the UK have been running substantial trade deficits. These imbalances have persisted for decades (though in the case of China things are beginning to change).

This means that the US is producing too few tradable goods, and conversely producing too many non-tradable goods. Schematically, it implies that we've gone off the rails somewhere around point A on the graph and have been following the suboptimal, dashed-line curve to point B. This, in Mr. King's opinion, is the reason for the sub-par growth of the economy since the Great Recession.

It also explains low interest rates. A big trade surplus (such as for Germany) results in a comparably large capital surplus for the United States. This typically shows up in German and Chinese purchases of US government debt, i.e., treasury bills, resulting in very low interest rates.

Before the Great Recession we were able to muddle through. Since the Recession, however, the situation has become unsustainable and we (along with the rest of the world) are taking a hit to growth. The solution is to rebalance investment between the two sectors and follow the red line from B back to point C, on the optimal von Neumann ray.

For Germany the situation is opposite. Their economy also deviates from optimum, but to the left of the blue arrow rather than to the right. They are producing too many tradable goods and as a result required to export capital around the world. US government debt is the least of their problems; more troublesome are the large loans made to countries such as Greece.

My thoughts:

1) If Mr. King is correct, then huge investments in new infrastructure are precisely the wrong thing to do. After all, there is nothing less tradable than a new highway, and since we're already over-invested in NT, this just doubles down on a bad idea. I've never been a fan of infrastructure spending, which I regard mostly as wasteful pork. Mr. King simply confirms my opinion.

2) Among the things I most appreciate about the Republican tax plan is that it disses higher education. Of course that's mostly political--higher ed is certainly no friend of conservative politics, and for that reason alone they deserve to be defunded. But more, I think this country invests waaay too much in education generally, and higher ed specifically. And given that education is mostly an NT industry, Mr. King's thesis reinforces the point. Disinvesting from higher ed at the margin is a very good idea, and an excellent reason to support the Republican tax plan.

3) Mr. Trump's fixation on the trade deficit may not be quite as cockamamie as it sounds (though it's still pretty cockamamie). Most economists think that the trade deficit doesn't matter, and that's certainly what I used to think. To be sure, year to year fluctuations don't matter, but when the deficits are long term and endemic, there clearly is a problem. In his own inarticulate way Mr. Trump is addressing an important issue. Though I do wish he'd phrase it in less zero-sum terms.

In short, I learned something from Mr. King. If anybody thinks I misunderstand or have misstated his views, please let me know.

Further Reading:

Saturday, November 4, 2017

100 Years After October Revolution

Three articles have recently appeared celebrating the centennial of the 1917 Russian Revolution. Socialist Viewpoint publishes a piece by Chris Kinder, The North Star highlights an article by Roger Silverman, and finally, Socialist Action posts a feature written by their national leader, Jeff Mackler. Mr. Mackler promises a second installment which I fear may not appear for several more weeks.

All three articles cover pretty much the same territory, which we can summarize with three questions:
  1. What was the significance of the Russian Revolution in 1917?
  2. How can the success or failure of the Revolution be assessed?
  3. What is the relevance of 1917 to our present day?

All three authors hold the Russian Revolution in very high regard. Chris Kinder, in his opening paragraph, phrases it in utopian terms.
Long disparaged and denounced as it is, the Russian Revolution of 1917 still demands our attention today. No event in history was quite like the Russian Revolution, because no other event before or since has attempted to change the motive force of history in the fundamental way that this event did. By forming the world’s first and only lasting (if only for a few years) workers’ state, this revolution alone offered the promise of a world without the endless class conflict that defined all previous history: a world based on genuine human cooperation; free of exploitation, war, racism, sexism and national, ethnic and religious oppression. The promise of the Russian Revolution embodied the true goals of the vast majority of humanity then, and yes, of humanity today. The fact that this revolution soon was unraveled, betrayed and eventually destroyed only makes the lessons it holds for us today more important to understand.
Mr. Silverman perceives the Revolution as a specter that still haunts the globe.
November 7th, 2017 marks the centenary of an event whose impact still today reverberates throughout the world. The Russian revolution remains a constant spectre at the feast of the rich, its shadow falling across all subsequent history. Since its lessons lie buried in a century of sludge by all those determined to malign its meaning, it is the duty of socialists to unearth them and bring them back to light.
Mr. Mackler credits the Bolshevik Party.
To this day, 100 years after Lenin’s Bolshevik Party led the world’s first socialist revolution, no party has matched its record of social, political, theoretical, organizational, military, cultural, and moral contributions to the advancement of the interests of the working-class masses.
He sees Socialist Action as following in the Bolshevik's footsteps (though he's too modest to suggest that he is himself the reincarnation of Lenin).


Trotskyists have a problem. Unlike Communist parties, they are not willing to sweep the Stalinist crimes under the rug. They freely admit to the purges and mass murders of the 1930s, though those events are not explicitly mentioned in any of the articles. And contrary to Conservative critics (like me) they are even more adamantly insistent that the Revolution was ultimately a success. After all, why celebrate it otherwise. It is a high wire act to rescue something of enduring value from an event that otherwise appears disastrous.

Mr. Silverman is the most explicit in tabulating accomplishments, citing economic data.
It is worth remembering that in earlier days, for all its devastating burdens, the planned economy had boasted miracles of economic transformation. To take a measure of what was then achieved, in the fifty years starting from 1913 (the highest point of the Russian pre-revolutionary economy), Russia’s share of total world industrial output had soared from 3% to 20%, and total industrial output had risen more than 52 times over. (The corresponding figure for the USA was less than six times.) In the same period, industrial productivity of labour had risen by 1,310%, compared to 332% in the USA, and steel production from 4.3 million tons in 1928 (at the start of the first Five Year Plan) to 100 million tons. Life expectancy had more than doubled and child mortality dropped nine times. Soviet Russia in its heyday produced more scientists, technicians and engineers every year than the rest of the world put together.
This paragraph illustrates a fundamental problem with Marxist economics, which renders their comparisons irrelevant. That's because they weigh measures of what workers produce much higher than what consumers buy. Producing something (e.g., refrigerators that don't work or cars that break down within 5000 miles or warehouses full of rotting produce) is not important if people don't want or need to buy it. Increasing industrial output by 52 times, or even by a million times, has no value if it serves no need for consumers, i.e., people. That's why sales data is more important than production data.

Mr. Kinder recounts some (in his view) admirable Bolshevik policies without commenting on how successful they were. The most radical was the Decree on Land, which forbade landlords from collecting rent or evicting tenants. He tells in loving detail of the political intrigue this dramatic move caused, though nowhere does he say anything about the economic outcome, which we know was awful.

Mr. Mackler also comments on land reform, writing,
Aside from revolutionary Cuba, no nation since then has implemented a land reform-distribution of that scope. Indeed, today in Latin America every so-called revolutionary or “popular” regime, from Venezuela to Bolivia, Ecuador and Uruguay to Nicaragua and Argentina, has failed to accomplish even a modest land reform. To do so would entail a break with the capitalist system of private property that none of the above dared to contemplate.
Beyond Cuba, he fails to consider Zimbabwe, which implemented a land reform at least as catastrophic as the Soviets. And then also China, unless he is revisiting the existence of the Chinese Revolution. Beyond which it beggars imagination to think that Cuba has an effective agricultural industry.

The problem with transferring all property rights to the poorest citizens is that they, almost by definition, lack the capital (both human & financial) and the access to markets to be meaningful producers. If the goal is to improve agricultural output, this strategy will inevitably fail, as it always has.

Then Mr. Kinder talks about Soviet housing policy. The paragraph is long and hard to excerpt, but here goes.
However, to judge by the numerous critiques of Soviet housing that emerged in modern times, one would think that problems such as these were the whole story, as they repeat endless horror stories about inadequate housing in the USSR. Yet, how many homeless people were there in the Soviet Union?....Russians find it odd that Americans call themselves ‘homeowners’ from the day they close on a mortgage loan. For Russians, ownership only begins after all debts are paid off.” How true that was for millions of so-called “homeowners” in the U.S. who lost their homes in the mortgage fraud-induced crash of 2008!
There was no homelessness in the Soviet Union because it was illegal to be homeless. The alternative was internment in a mental hospital (or worse). And surely Mr. Kinder will acknowledge that almost all Americans had housing far better than all but the Soviet's nomenklatura.


None of our correspondents are very specific about the relevance of Russia's revolution on today's world, beyond claiming that it's earthshaking and exemplary.

We've quoted Mr. Kinder at the top of this post. Presumably Mr. Mackler will have something to say in his next installment. That leaves Mr. Silverman, who simply asserts that it continues to be important.
And now more than ever, another world is necessary. In every continent today, a new generation is waking up to the reality that the only future it faces under capitalism is one of poverty, homelessness, hopelessness, discrimination, environmental destruction and war. Millions of people are in revolt, casting around for alternatives, sometimes seduced by false demagogues, but increasingly determined to find a road to change. Those commentators who used to scoff at the idea of revolution are today falling silent. In a recent Greek opinion poll, 33% called for “revolution”. And last year in the USA, 54% of respondents voted yes to the idea of a “political revolution to redistribute money from the wealthiest Americans”. That included 68% of Afro-Americans, 65% of Hispanics, and 68% of 18-29 year-olds.
It is time to rescue the Russian revolution from the history books and return it to its rightful place as a guide to action.
I think if you'd asked those poll respondents "Would you like to live in country like the Soviet Union?" I suspect the answers would have been far different.

My view is that the Russian Revolution has faded into history and has nearly no relevance for the modern world outside of Russia. Within Russia, the Revolution was a cataclysmic event that destroyed their country, culture, and peoples, and from which they will never recover.

Further Reading:

Sunday, October 29, 2017

The Eisenhower Coalition

Thomas Friedman has expressed his desire for a radical centrist to save us from our partisan bickering. He thinks our two-party system is broken (written in 2010).
My definition of broken is simple. It is a system in which Republicans will be voted out for doing the right thing (raising taxes when needed) and Democrats will be voted out for doing the right thing (cutting services when needed). When your political system punishes lawmakers for the doing the right things, it is broken. That is why we need political innovation that takes America’s disempowered radical center and enables it to act in proportion to its true size, unconstrained by the two parties, interest groups and orthodoxies that have tied our politics in knots.
Be careful what you wish for, Mr. Friedman. Because you have precisely your savior right in front of you: Donald J. Trump.

The last time we had a centrist, non-partisan president in office was Dwight D. Eisenhower. He was courted by both parties to serve as their nominee, but chose the Republicans. He believed in big infrastructure (e.g., the Interstate Highway System), balanced budgets, and American patriotism. Those were the days of beneficent paternalism (Father Knows Best) and he-man heroics (John Wayne movies). His modern critics accuse him of sexism and racism, conveniently forgetting that Ike sent in the 101st Airborne to help desegregate schools in Little Rock, Arkansas.

So in Ike's image along comes Donald, nominally a Republican, though those most loyal to the Republican ideology hived off as NeverTrumpers. Likewise, a lot of Democrats have claimed to hate him, and some of them really do. But it's difficult to find much animosity between Trump and Chuck Schumer, for example. A lot of Democrats actually voted for Trump!

Trump has muddied the waters more by throwing some bones to the Democrats. Most embarrassingly for Congressional Republicans, he forced them to cave on the debt limit extension. The Dems got everything they wanted with no return favor granted or requested.

There are, I think, some not-so-subtle signs that the President is looking for bipartisan, centrist solutions. He knows he is not going to get there by simply hectoring--telling the Democrats that they're obstructionists. Instead he's put some carrots on the table and made it clear that if they bite he'll reciprocate. His debt ceiling surrender was an invitation to negotiate.

I see four general areas where the President would be happy to work with a coalition of centrist Democrats and Republicans, throwing both the Tea Party and the Progressives overboard in the process.

1) Health care. Trump relentlessly challenged the Republicans to make good on their Repeal & Replace promise. They couldn't do it--and perhaps Trump even predicted that. He's gone out of his way to embarrass the Congressional leadership, saying he'll be happy to work with Democrats.

And that's true--Trump would love to strike a deal with Chuck Schumer to craft a version of Obamacare that is both financially and politically stable. It will have to be less intrusive and less comprehensive than the original, but unlike ideological Republicans, Trump definitely believes that health care is a legitimate responsibility of the federal government. In his view Obamacare was a step in the right direction, only it went too far to be practicable.

Trump's strategy is to pressure the Democrats by gradually dismantling Obamacare until they are willing to deal. Eventually (he and Mr. Friedman hope) they will. Obamacare will be saved to be renamed Trumpcare.

2) Immigration. Mr. Trump was never against immigration (see my post from early 2016 here). But he is also right when he says that a country without borders ceases to be a country. Americans will never agree to any legalization not accompanied by much stronger border security. Trump's goal, which he presented in very visceral language illustrating that trade-off, is precisely to craft a comprehensive immigration deal (such as what Chuck Schumer, Marco Rubio and Mr. Friedman also want).

For that he needs Democratic support. The carrot is already there--he's offered to sign a DACA bill. But that bill also has to include a "wall", which really just means more border enforcement. Trump has indicated a willingness to legalize most undocumented people already here, but not an automatic path to citizenship.

Under Trump an immigration bill becomes politically possible--his base trusts him and the Dems can work with him. In the meantime he is going to make life as uncomfortable for the Democrats as possible by deporting dreamers and defunding their sanctuary cities. Eventually they'll come to the table.

3) Infrastructure. Personally I think this country needs more infrastructure like it needs a hole in the head, though I know Mr. Friedman disagrees with me. But then I'm not a congressman with people in my district looking for candy. Trump--a born builder--is looking for any shiny, new thing that he can attach his name to, along with the name of the local congress-critter. So it's a done deal--yet another tool he can use to bribe the Democrats.

4) The Trump Doctrine. This will replace the Cold War/containment strategy conceived and executed under the Eisenhower administration. Of course that model is now obsolete, and Mr. Trump--in his own colorful and non-intellectual way--understands that. He realizes that the United States has no real use for NATO anymore. He understands that the word "ally" only makes sense if there is also a global enemy (which there isn't). He intuits that countries as disparate as South Korea, Canada, and Saudi Arabia are no longer as strategically important to the United States as they once were. Indeed, they're all about to get thrown under the bus.

But there is one global issue that will keep the US involved on the global stage indefinitely, and that is nuclear proliferation.

In a policy that I predict will eventually be known as the Trump Doctrine, the United States will prohibit any additional country from acquiring deliverable nuclear weapons. The first test case is North Korea--there are only two options. Either the Norks gradually dismantle their nuclear and missile capabilities, or the United States will use military means to take them out. The Trump administration has made that abundantly clear--to North Korea, to China, to South Korea and Japan. While we hope those latter three are allies in this fight, neither their opinion nor their fate will determine our action. If necessary we will attack North Korea to destroy their bombs and missiles regardless of consequences elsewhere.

Once North Korea is disarmed we will pull our troops off the Korean peninsula. There is no strategic reason for us to be there.

Terminating the treaty with Iran is of the same piece. It doesn't matter if Iran was in compliance or not--their nuclear program is non-negotiable. The fact is that a nuclear Iran will experience the very same fire and fury that may be visited on North Korea. I think the Iranians understand that--their nuclear program is over.

So while I supported Trump in 2016 (and compared to Hillary it was no contest--also no regrets), I'm not really a Trump centrist. Count me more sympathetic to neverTrumpers ideology (though frankly they're not a very inspiring group of people).

I'm skeptical of more federal involvement in healthcare, and as stated, I generally oppose big infrastructure projects. I am pro-immigration, and I would strongly support the immigration plan I attribute to Trump above. I support the Trump Doctrine, if that's what it turns out to be.

Still, it's a strange world out there. I won't make any predictions, but if in 2020 I vote against Trump, and if Thomas Friedman votes for him I will not be all that surprised.

Further Reading:

Sunday, October 22, 2017

Book Review: The Absent Superpower

So I'm on a Peter Zeihan tear this month--this is the third post in a row about that author. But now is the end of it, for as much as I agree with his premises and some of his conclusions, his recent (2016) book goes off the rails.

The first section, entitled Shale New World, is worth the read no matter what you think of Mr. Zeihan's opinions. It is a concise and clear description of the US and global shale industry, including relevant facts about technology, geology, chemistry and finance, all very clearly explained. In particular, my Trotskyist friends would do well to read this--not that it will change their minds, but at least they could argue their environmental extremist positions knowledgeably.

American frackers have worked hard to ameliorate the environmental problems of their trade, also making it cheaper in the process. For example, there has been much talk about the amount of water used in fracking. That was never as big problem as it was cracked up to be--the US industry uses less water American golf courses. Still, especially in arid areas, water had to be trucked to the site, and the resulting waste water was no longer usable by humans or agriculture.

What frackers have since discovered is that accompanying shale oil is also a layer of water far below the shallow ground water that makes up important aquifers. This deep groundwater is brackish, meaning it can't be used as fresh water, which is an advantage to frackers since they need to add salt to frack-water anyway. Further, organic material--algae, etc.--is a problem and aquifer water needs to be filtered to remove that. The deep groundwater contains little or no life, which saves money. Finally, they drill through the layer on their way to the oil, so water can be extracted on site, eliminating trucking costs.

While shale producers recycle as much wastewater as possible, eventually there is a disposal problem, which remains the largest environmental issue associated with fracking. Accordingly frackers have worked hard to make their solutions as non-toxic as possible. Today they restrict themselves to using non-toxic, consumer products as additives. Apparently there are YouTube videos showing frack executives drinking frack water!

The result is that the American frack industry is profitable at $35/barrel, competitive even with Saudi Arabia.

A second important point is that fracking is overwhelmingly an American industry, and Mr. Zeihan explains why that will remain true even two or three decades into the future, despite the fact that there are massive shale reserves elsewhere on the planet.

And that leads to the remainder of the book, which reads very much like a war thriller. It's as compelling as fiction largely because it mostly is fiction--at least in my opinion.

I accept Mr. Zeihan's two premises: 1) North America is already energy independent, and does not depend on global trade for oil; and 2) the United States no longer has any compelling reason to remain engaged in world affairs outside the Western Hemisphere, and therefore will no longer police global sea lanes or enforce international borders. 

The result will be the Great Disorder as the rest of the world fails on short notice to establish their own order. Mr. Zeihan predicts three wars, all occurring roughly simultaneously. The Twilight War, centered around the Baltic Sea, will pit Russia against Scandinavia, Poland, England, and probably Germany. Related to the Twilight War will be Russia's effort to secure its southeastern flank against Turkey by occupying land to the banks of the Danube in Romania.

The second war is the (Next) Gulf War which will pit Iran against Saudi Arabia, precipitated by the withdrawal of American forces from the Persian Gulf. This will lead, in extremis, to the complete de-civilization of the entire Middle East, including the destruction of the electricity network from Oman to Lebanon. It will result in 60 million deaths and/or refugees.

And finally is the Tanker War, caused by the closure of the Persian Gulf, along with most Russian oil exports. The Tanker War will be a struggle between China, Japan, Korea, and Taiwan to secure whatever little oil is left on the open market, and to protect their ships from the depredations of enemies, pirates, and third-party countries such as India that will engage in privateering.

Of course all of this could happen--anything could happen--but it's not likely. When I mentioned these scenarios to a friend of mine, he immediately asked Don't any of the countries have any diplomats? It's a good question--Mr. Zeihan's scenario assumes they don't and they all go for absolutely the worst possible outcome.

Let's take the Twilight War as an example--so named because Russia is in terminal demographic decline and has only a few more years to wage war of any sort. It will spend this opportunity attempting to recover the defensible boundaries of the former Soviet Union. Of course they will probably lose, and either way their demography will still decline, so this really doesn't make too much sense.

It's easy to come up with a diplomatic solution to the Twilight War. Germany, far from fighting Russia, has every reason to ally itself. In return for a guaranteed supply of oil and access to the Russian market, Germany will guarantee Russian borders. Indeed, Germany can guarantee all the borders in the Baltic region. As Mr. Zeihan points out, the Russians could invade the Baltic countries on a Sunday afternoon. There's no reason for them to do it preemptively when there is no military threat on the Western frontier. By treaty both Poland and the Baltics could be demilitarized.

Further, the Germans will float a flotilla down the Danube to Romania, and set up camp on the Black Sea. Of course they'll be keeping an eye on Russia, but their primary mission will be to defend against the real rising power in Eurasia--Turkey. On this front, too, the Germans and Russians are allies. Germany has been very quiet about objections to the Russian reconquest of Crimea, and is not all that upset by the Russian invasion of Ukraine precisely because the Turks are a bigger threat.

If the French navy can secure the Eastern Mediterranean, Russia can fortify the northern shores of the Black Sea, and Germany can defend Romania, Bulgaria, and mainland Greece against Turkey, then Europe is as secure as possible against either military or refugee invasions from the Middle East. The Russians can get back to doing what they most urgently need to do--make babies.

Turkey can relieve Iranian pressure on Saudi Arabia simply by attacking, or threatening to attack, Azerbaijan. With this tool the Turks can turn Saudi Arabia into a vassal state, reminiscent of the Ottoman Empire. By building a pipeline from Ghawar (Saudi's oil-producing region) to the Mediterranean, Turkey will have both the Iranians and Arabs by the short hairs.

There is no shortage of oil in the world--the only issue is transport disruption due to war. Get rid of the other wars, then the tanker war becomes unnecessary. Peace will prevail. And we'll all live happily ever after.

Or maybe not. It may not end as cheerily as I suggest. But Mr. Zeihan's predictions I think are almost certainly wrong.

Further Reading:

Saturday, October 14, 2017

Book Review: The Accidental Superpower

The Accidental Superpower, by Peter Zeihan, has a long subtitle: "The Next Generation of American Preeminence and the Coming Global Disorder." The thesis is summarized in a talk Mr. Zeihan recently posted here, and which I reviewed in my previous post, here. Both the book and the talk are a perfect trifecta of things that interest me: geography, politics and economics. Accordingly, my enthusiastic account of the video might be described as "breathless."

I found the book equally fascinating, and I pretty much inhaled it as others might a good novel. Mr. Zeihan is a talented writer and makes an excellent case. But now I will force myself to take a more critical eye and look for weaknesses. There are a few.

Briefly, Mr. Zeihan's thesis is that two things have changed: 1) the Soviet Union is no more, and even Russia itself is in the process of disintegrating; 2) The shale revolution means that the United States is largely energy independent, and therefore no longer relies crucially on foreign trade as it once did.

The result is that the global free trade regime, institutionalized under the Bretton Woods framework, is breaking down. From the US perspective, Bretton Woods provided lots of allies as a bulwark against the Soviets, and also guaranteed American energy supplies, including from the Persian Gulf. In return, the US policed global sea lanes, ensuring safe travel from the Skagerrat and Malaccan Straits, all the way to the Straits of Hormuz and everything in between.

The result is the Soviet Union was defeated, and everybody got rich--from Western Europe to Japan, Korea, and even China, Israel, Chile, and more.

But now, because of shale oil, America has little incentive to patrol the global trade routes. Accordingly we will no longer guarantee shipping through the Persian Gulf or the Indian Ocean, or over much of the rest of the world as well. Absent energy needs, the USA depends less on trade than any other country on earth, and can simply rely on itself. Or so Mr. Zeihan maintains.

The US can get away with this new isolationism because it is blessed in two ways: geography and demographics.

Geographically, America has more navigable, internal waterways than the rest of the world combined, not even counting the intracoastal waterway from Chesapeake to the Rio Grande. Since transport by water--even today-- is more than a factor of ten cheaper than by truck, and still a factor of three cheaper than rail, the US has a huge advantage. Further, our water network overlaps the largest bit of agricultural land in the world. Put bluntly, a homesteader in Iowa had, via the Mississippi, cheap access to global markets, even from Day One in the early 19th Century. By comparison, today's small farmer in Mexico's Chiapas state still has no cheap access to any market, not even Mexico City.

The Iowan will get rich. The Chiapas peasant will remain poor no matter how much some stupid Commandante rails against the injustice.

Second, while birth rates have declined in most of the world, the US still has relatively bright demographic prospects (though perhaps not as bright as Mr. Zeihan imagines). By contrast, countries like Canada, Japan, Greece, and especially China and Russia, are facing a crisis.

Using these two factors as a guide, Mr. Zeihan offers predictions for the next 15 years, beginning in 2015. The book was written in 2014--a very long time ago. Back then oil cost $100/bbl, the Canadian dollar fetched US$1.05, and the word "trump" doesn't even appear in the index. Further, he never mentions robotics (a subject in the more recent video), which certainly changes the situation considerably.

Still, for all that, his predictions hold up reasonably well:

  • Russia is at the point of demographic collapse and will cease to be a viable nation within the next decade.
  • The Chinese economy will collapse, and China as a unitary state will disintegrate. He points out that China throughout its history has only briefly existed as a single state.
  • Japan, no longer able to source oil from the Persian Gulf, will need to conquer neighboring, oil-bearing territories to meet its needs. He predicts that Manchuria and Sakhalin Island will fall to the Japanese.
  • The fastest growing economy over the next fifteen years will be Mexico (though the spread of robotics might change this).

So I think all of this makes sense, and I am now making sure that my retirement funds don't include any investments in China--that part of his argument is completely convincing. Still, there are some flaws, and it is now my duty to point them out.

1) Geography and demographics are certainly important, but hardly determining. That America has a near-perfect geography is as much historical accident as anything. Andrew Jackson could have lost the Battle of New Orleans, or worse yet, not fought it at all. A president not named Lincoln might have agreed to Southern succession on the condition of peace. A talented Canadian negotiator could have settled on the 42nd parallel rather than the 49th. Any of these would have changed American history dramatically, negating our geographical advantage.

History is contingent. Or put another way, history is just one damn thing after the other. Geography is the stage on which it all takes place, but it really doesn't tell us very much about the ultimate outcome. None of Mr. Zeihan's predictions will come true if the US descends into civil war, or if California really secedes from the union, geography notwithstanding.

Demography isn't all that it's cracked up to be, either. For example, Greece and Japan both have similar geographies (mountainous, seafaring nations), and similar demographics (old). Yet the prognoses are very different: Greece is predicted to be a failed state, while Japan will muddle through mostly as is. Culture matters a lot. Mr. Zeihan gives it too short shrift.

2)  I don't think Mr. Zeihan understands very much about economics. Some of this is just semantic--he refers to geographically-rich countries such as the US as "capital-rich." I think "resource-rich" would be more precise. Capital is investment in plant and equipment, which can be bought and sold and where depreciation is a problem. None of that applies to the Mississippi River, at least not in any meaningful sense.

Despite having no navigable waterways, Japan is a capital-rich country because of its beautiful cities, high-tech factories, elaborate rail system, and skilled labor force.

3) Mr. Zeihan claims that because of the retirement of the baby-boomers, total capital will decline. This is partly because we're not saving anymore (I stopped saving last month), and also because we're living off our accumulated wealth.

And this is true as far as it goes, but Mr. Zeihan leaves out the other half of the picture. Beyond withdrawing our savings, we are also withdrawing our labor. Capital is often usefully expressed as capital density: capital per worker. If total capital declines and the total number of workers declines, there is no obvious change in the capital density. So I think Mr. Zeihan exaggerates the scale of this problem.

The more important problem is the decline in the labor force. If Mr. Zeihan had phrased his argument from that point of view I think he'd make a stronger case.

4) Despite the crystal clarity in most of the book, there are a few sections that just didn't make any sense. For example, he claims that the Mexican drug war will lower the cost of labor--and for the life of me I don't understand his argument. It doubt it's true. First, a drug business, and much more a war, requires labor and therefore competes with other industries, raising wages. And second, civil discord makes labor less flexible and less productive, increasing the total cost. Again, I don't believe he thinks like an economist.

5) Mr. Zeihan apparently has never heard of comparative advantage. While the geopolitics he describes will undoubtedly change the comparisons by which the advantage is calculated, the principle will still hold.

Mr. Zeihan lumps all 1.2 billion Chinese together as "low-cost labor." But surely among that mass of humanity there exists particular skills and infrastructure that are comparatively advantageous--be it porcelain or shoelaces or rice or whatever. The US will still trade with China.

So I am skeptical that there will be the collapse in world trade that he predicts. Yes, the Americans will withdraw from the Persian Gulf and the Indian Ocean. And maybe even from the Mediterranean. But likely not from other important trade routes.

So he's left out culture and economic complexity. That let's him tell a simple, engaging, largely convincing story. It's fun to read. I think it's mostly true. But it is far from inevitably true. And indeed, there are enough differences between the book (2014) and the video (2017) to indicate that it won't be true.

Further Reading:

Wednesday, October 4, 2017

New World Disorder

My Trotskyist friends celebrate the supposed decline of American empire. They see this as the beginning of the end; the start of the breakdown that will climax in World Revolution. US imperialism is playing a losing game of whack-a-mole trying to smash rebellions in remote corners of the world: Syria, Afghanistan, Venezuela, Iran, etc. The Socialist Workers Party takes this furthest, going so far as to claim the US lost the Cold War in 1991.

So last night I listened to an amazing talk by Peter Zeihan, entitled The New President & World Challenges (h/t Arnold Kling). It's a bit over an hour long, but Mr. Zeihan is an entertaining speaker, and his ideas are very provocative. Highly recommended! Indeed, I'm sufficiently inspired to write about it now, despite the fact that I've just ordered his book and should probably wait until after I've read it.

Mr. Zeihan does say that we're at an inflection point in world history, symbolized not by the end of the Cold War, but rather by the end of Bretton Woods (BW). BW was an agreement between the United States and the Free World that the US would control the world financial system, while in return we would 1) guarantee global security, specifically the flow of trade routes and oil supplies, and 2) allow free entry into the US marketplace. To keep its end of the bargain, the US built by far the strongest military in the world.

That agreement worked spectacularly well. After Nixon visited China, that country also became part of the "free world", and the system brought 400,000,000 people out of poverty. Japan and South Korea took maximum advantage of BW, to spectacular effect. And of course the Marshall Plan (which depended crucially on open US markets) was a smash hit. Organizations such as NATO prevented global war for 70 years, and the European Union was founded on the assumption that global peace was durable.

So what went wrong? Nothing, really, but something very dramatic went right. Fracking. Within a period of about 10 years the US went from being dependent on oil imports to being a net oil and gas exporter. Today we buy next to nothing from the Persian Gulf. Our need for the Venezuelan resource has dwindled to nearly zero, and even Mexico can't sell oil to it's northern neighbor.

For years this was euphemistically proclaimed as North American energy independence, as if we were dependent on Canada. And perhaps at one point we were, but no longer today. The much maligned Keystone Pipeline would have found a ready market as recently as 2008, but today it becomes irrelevant. American shale gas and oil are more than sufficient to supply the entire economy.

Further, they are now competitive on price with everybody but the Persian Gulf states, and on present trends US frackers will be the world's low-cost producers by 2022 or so.

Good news! Right?

For the United States, yes, but not for the rest of the world. The US now has no economic interest in the Persian Gulf, and therefore no incentive to maintain security there. Mr. Zeihan points out that historically the US maintained an aircraft carrier group in the Persian Gulf at all times. Today our ships are there only half the time. He predicts that soon enough there will be no American naval presence in the Persian Gulf at all.

Of course protecting the Persian Gulf means defending the sea lanes approaching the Gulf, especially from northeast Asia, which countries depend crucially on that energy source. But America's enthusiasm for defending their trade routes has also diminished. Japan and China are in a panic--they do not have the ability to protect those trade routes themselves, much less preserve peace in the Middle East.

A knock-off effect is the US no longer needs bases in Western Europe, which were used as a forward base for the Middle East. Indeed, Mr. Zeihan claims that the US now has fewer troops posted abroad than any time in postwar history. And our footprint is about to shrink further.

Of course Europe also depends on Persian Gulf oil, and will be equally unable to secure it for itself. The result is that Germany becomes dependent on Russia (and vice versa). The geopolitical calculus that led to the Hitler-Stalin pact reasserts itself. NATO is dead. So is the EU.

So doesn't the US care about the fate of its allies? A whole lot less than you might think, and that leads to the second disastrous piece of good news: artificial intelligence (AI).

AI reduces the need for large amounts of low-cost labor. All those women slaving away in the textile mills of China, Vietnam, Bangladesh, etc. are about to be rendered redundant. That manufacture will now be done by machine, with only a small fraction of the employees. Labor costs will not be the determining factor, but instead electricity (cheaper in the US than anyplace else), proximity to markets, and availability of natural resources will clinch the deal.

In a word, manufacturing moves back to the United States. Big time. That's already occurring. Instead of the infernal mills, it will be local, flexible, small-scale, cheap, and very close to the customer. It's all very good news...for the United States.

China, meanwhile, goes bankrupt. Mr. Zeihan points out that China has existed as a unified state only for brief periods in its history. He predicts disintegration, or perhaps only civil war possibly leading to disintegration. China will resume its historical role of not being part of the world economy. Poverty for Everybody Now--my Trotskyist friends should be happy.

Donald Trump has likely never seen Mr. Zeihan's video nor read his book. He's not an intellectual sort. But he clearly has an intuitive sense of the immense bargaining power the United States now has over its so-called "allies." 

President Xi, Angela Merkel, Theresa May, Shinzo Abe, and Justin Trudeau all paid Mr. Trump a visit. (You really need to watch the video to see the humor in that situation.) Trump somehow understands that these people have absolutely no bargaining power whatsoever! Mr. Xi (according to Zeihan) basically conceded everything that Trump asked for in the vain hope that the US will continue to trade with China as it always has.

Theresa May offered a free trade deal with the US, pretty much entirely on American terms and in violation of EU law (Brexit hasn't happened yet).

Angela Merkel had nothing to offer the US, and thus came away with nothing. Germany is no longer a US ally in any meaningful sense of the word.

Justin Trudeau wants to maintain NAFTA, but Trump understands that Trudeau has no choice but to accept American terms of trade no matter what. NAFTA will turn into an American diktat.

All of these world leaders need the US way more than the US needs them. They came to Washington not to negotiate or bargain, but rather in abject supplication.

Welcome to the New World Order. And be very grateful that you live in the United States of America.

Further Reading: