Wednesday, December 13, 2017

China & the United States

There are two extreme but commonly held opinions about China. The China Bulls, typified by NYT columnist Thomas Friedman (e.g., here), believe that China will leap from strength to strength, eventually far surpassing the United States in both wealth and power.

The China Bears, meanwhile (represented ably by Peter Zeihan, whose work I have reviewed here, here and here), think China is approaching a precipice beyond which lies disastrous decline. Mr. Zeihan, for example, thinks the country is unstable as a unitary state.

Lynn Henderson (who often writes for Socialist Viewpoint) sent an Open Letter to Dave Gilbert, kindly including me on the copy list. The full text of the letter is posted at Louis Proyect's site, here. Despite its length, it is cogent, well-written, and very much worth the read.

Mr. Henderson did not title his piece. Mr. Proyect headlines it as Trump, Russia vs China and China Industrialization. Fair enough, but I'd prefer another: China's Threat to American Capitalist Hegemony. That reveals him as a China Bull, and further, he subscribes to the common corollary: that the United States is in secular decline (a view shared by Mr. Friedman).

Mr. Henderson tells a history of Chinese-American relations that doesn't make much sense to me. The 1949 revolution threw the imperialists out of China, but then in 1980 Deng Xiaoping invited them back in as foreign direct investment*. My take is that China wasted 30 years murdering tens of millions of its own people before they finally got their economic act together. Somehow Mr. Henderson sees the "revolution" as an advantage.

He attributes too much credit to Nixon and Kissinger--figures who were bit players in the whole drama. The real stars were people like Malcom McLean and Sam Walton. The former "invented" the shipping container, reducing the cost of freight transport by 90%--a technology that came to full fruition by 1970. The latter (who in 1970 owned a few stores in NW Arkansas) took advantage of that savings, along with cheap labor availability in China, to build the world's largest retail chain.

Mr. Henderson gets that last point. A key paragraph is this.
Handed down from the pre-revolutionary past, the new China possessed a gigantic peasantry numbering in the hundreds of millions accustomed to a very low standard of living and hard manual labor. This peasantry served as the source for an industrial proletariat willing to put up with a much higher rate of surplus value than the workers of North—and even Latin—America, Western Europe or modern Japan. Huge amounts of foreign investment, especially U.S. investment flowed into China. What the United States—or rather the United States capitalists—wanted most of all from China was the lion’s share of the surplus value produced by the Chinese working class. Russian workers produce very little surplus value compared to what the U.S. capitalists could appropriate from Chinese workers in the form of profit, interest and dividends.
Let's ignore the unnecessary term "surplus value" and acknowledge that trade with China was hugely profitable--for both Americans and Chinese. We got everything from toys to hand tools to smartphones at sharply reduced prices. Indeed, though Mr. Henderson credits Paul Volcker with ending inflation, it's just as likely that cheap imports from China did the trick. China, initially through Walmart, dramatically raised the standard of living of every American, especially poorer ones.

In return 400 million Chinese were pulled out of poverty and became part of the global middle class. They used the proceeds of their labor to buy grain (there's no more starvation in China), airplanes (jumbo jets fly hourly schedules between Shanghai and Beijing), and the construction of superhighways and bullet trains (Tom Friedman's favorite toys), among many other things.

Though somehow Mr. Henderson thinks this is a problem.
The problem from the viewpoint of the U.S. capitalist class and its political representatives—the Party of Order of both Democrats and Republicans and the emerging Trump America First gang—is that the U.S. capitalists in squeezing huge amounts of surplus value out of the Chinese have been forced to develop China’s productive forces at the same time.
Mysteriously, he thinks we'd be better off if China remained poor. Just how are those poor, starving Chinese supposed to buy grain, airplanes, and everything else from the USA? They have to sell something to us first--as I said in a previous post, it's all about trade. The USA can't trade with countries that have nothing to sell. Fortunately for all of us, Sam Walton enabled China to sell lots of stuff to Americans.

Mr. Henderson buttresses his argument with one big factual error. He claims that because production increased in China, US industrial production has been declining.
In order to make the empire last for even 70 years—a very short period historically—the U.S. had to give up much of its domestic industrial production.
But this is manifestly not true--US industrial production has more than doubled since 1980! Don't believe me? Then listen to that Marxist economist of (deserved) renown, Kim Moody (my review here):
The problem with trade-based explanations [for the decline in manufacturing employment--ed] is that manufacturing output hadn’t shown a decline, but had grown in real terms by 131% from 1982 to 2007 just before the Great Recession reduced output. At an annual average of 5% this is only slightly less than the 6% annual growth of the 1960s.
So both China and the USA were successful from 1980 through 2010. But the world moves on; this is how Mr. Henderson sees the future.
China on the other hand, as the world’s most rapidly expanding manufacturing power, is now its strongest proponent for globalization, “free trade”, open markets and multinational trade agreements. Under China’s “One Belt, One Road” initiative, which is aimed at creating a modern version of the Silk Road, a network of trading routes from China to Africa and Europe, it has launched a massive economic outreach dwarfing even the Marshall Plan of U.S. imperialism following WWII.
Let's take this apart.
  • China is not "the world's most rapidly expanding manufacturing power." The United States is, by far. Robots and AI have reduced the value of low-wage labor, and sharply increased the advantage of cheap electricity. Thanks to fracking, the US has by a good margin among the cheapest electricity prices of any country in the world.
  • OBOR ain't gonna work--see my previous post. The only advantage is it gives China a back door to Persian Gulf oil. Though shipping oil over the top of the world won't be cheap.
  • Yes--China is a strong proponent of globalization and free trade, for obvious reasons. But see my reviews of Peter Zeihan's books for more about that.
I tend to be a China Bear, though not as pessimistic as Mr. Zeihan. Here are some of the important problems China faces.
  • Chinese population growth is slowing, and the size of its labor force is actually shrinking. Since labor force growth is the biggest component in overall economic growth, this will severely limit the Chinese economy going forward.
  • The economy is too big to be primarily export-oriented. Global markets simply can't absorb all that stuff. Exports will have to decline as a fraction of GDP.
  • China is dependent on foreign oil, which will put it at a significant disadvantage to the US.
  • Increasing personal consumption--and therefore income--is absolutely crucial to sustain the economy. That means Chinese citizens have to get a lot richer, which means productivity has to increase--dramatically. I'm not sure they can do that.
  • China has a huge debt burden, which is a drag on future growth.
So I think the best case scenario for China is growth at global rates, i.e., around 2%. Personally, I'm skeptical if they can sustain that. Then it becomes an issue of whether or not the country remains politically stable.


*Not sure I buy the "foreign investment" argument. I don't believe the US ever ran a trade surplus with China, which means net foreign investment must have flowed toward the US, not toward China.

Further Reading:


Tuesday, December 12, 2017

Sex and the Alpha Male

What the mainstream media has to say about the slew of sexual harassment scandals is silly. In their telling women have finally had the "courage" to call out "unacceptable" behavior on the part of "men." We are now at a turning point, they claim, where the male psyche has been sufficiently tamed such that we stand on the precipice of a different world.

Hogwash! "Courage" is not a new attribute among women, but rather a function of new media. It's easy to be courageous in an era of Facebook, Twitter, and cell phone cameras. In an earlier day the best you could do is go to the New York Times and plead for coverage (which mostly didn't happen). Nor has the male psyche changed--it's just that any expectation of privacy is now non-existent. Whatever they do is likely to become public, much to the embarrassment of Alphas who preferred their failed efforts at conquest remained secret.

The world will adjust, and not by a decrease in sexual hijinks. Instead the constant scandals will wear on the public, they'll tire of them, and soon enough tune them out. This, too, shall pass.

The most perceptive post on the kerfuffle that I have read so far surprisingly comes from a music professor. Kristi Brown-Montesano (B-M) is on the faculty at Colburn Conservatory of Music, has authored a book entitled The Women of Mozart's Operas, and pens a piece entitled Holding Don Giovanni Accountable.* (h/t Tyler Cowen)

The opera revolves around three women, two aristocrats and a peasant girl. Donna Elvira is in love with Don Giovanni and feels betrayed by his infidelity. Donna Anna was either raped or seduced by him. Her father came to defend her honor and was murdered by Don Giovanni. Finally, Zerlina was also raped or seduced by the Don.

Professor B-M is convinced that rape is the appropriate descriptor in the latter two cases. Maybe. Though if I were Mr. Giovanni's defense attorney I could at least raise reasonable doubt.

For starters, rape isn't really an operatic subject, while seduction certainly is. If my client were intent on simply forcing himself on Zerlina, why did he sing her such a beautiful aria beforehand (Là ci darem la mano)? To which her reply was roughly I want to, but I shouldn't.

She eventually succumbs, after which she is deeply ashamed. She goes to her fiance begging forgiveness with what I think is the most beautiful aria in the whole opera (Batti, batti, o bel Masetto). Forgiveness is soon granted.

The professor has a stronger argument in the other case. According to Donna Anna (echoed by Lepporello), Giovanni sneaked into her bedroom and raped her, after which he murdered her father. We don't know for certain what happened--the events occurred off-stage before the opera even begins.

Donna Anna loudly proclaims her victimhood, and feels not ashamed but rather humiliated. Instead of seeking forgiveness, she goes to her hopelessly feckless boyfriend--Don Ottavio, a Beta male if there ever was one--and demands that he avenge the crime. He comically touts his pathetically unsuccessful efforts to redeem her honor.

And maybe a crime it was. But why? Giovanni is obviously very successful with the ladies and doesn't really need to force himself on anybody. She, meanwhile, has every reason to lie about it. That's my lawyerly response, and maybe it's true.

Were I producing Don Giovanni, I'd cast Anita Hill as Donna Elvira. She always struck me as the woman scorned, and had she become the Mrs. Clarence Thomas we'd never have heard another word from her.

Monica Lewinsky will get Zerlina's role, an innocent seduced by a charming man. She never claimed otherwise, and I don't recall her ever saying a bad word about Bill Clinton. Like Zerlina, all she sought from the public was forgiveness, which she never received. We were too mean-spirited.

Finally, I'd assign Juanita Broaddrick the role of Donna Anna. She claims she was raped by Bill Clinton, and perhaps that's true. Again, though, why? Rape is usually the last resort of low-status males who can't get it any other way. Bill certainly doesn't fall into that category--why would he force himself on somebody when there were any number of others eager for the privilege? So I don't believe her, just as I don't believe Donna Anna.

Mozart's opera is about a male predator and not a female manipulator (for that, listen to Bizet's Carmen). Women have a career option not open to most men--they can spread their legs in return for promotion. When men offer that bargain it is considered a fireable offense. But surely as often as not the offer comes from the woman. In the current environment the man is damned if he accepts her offer and damned if he doesn't. It's always his fault, no matter what the circumstances. That's what makes it an unfair witch-hunt.

So we need some rules about sex in the workplace. It's just that I don't know what they should be. Perhaps we should go by the Mike Pence standard: no man should ever be alone with a woman not his wife? That would end sexual harassment, albeit at the cost of putting the kibosh on most women's careers. Though we're headed toward a rule like that on college campuses.

Or perhaps it's a prohibition against sex in the workplace? My former campus recently instituted something very similar to that. I'm not opposed to it, but it has to be enforced against both genders--not just men.

I can tell you what the solution is not: the females in Congress want all men to behave like Don Ottavio--cowardly, weak, ineffectual. Alpha males are supposed to sacrifice their Alpha-ness and become wallpaper. It won't happen, and surely we don't want it to happen. What a boring world!

So I think (based only on what I know, which may not be enough) that Al Franken has done nothing to deserve losing his Senate seat. The Democratic women are stupid. John Conyers is on the bubble, but he's so old he should probably retire anyway. Donald Trump behaved in precisely the way you'd expect Donald to behave, and as far as I can tell has done nothing worse than Al Franken. He should not be impeached for sexual misconduct (or for any other reason).

Roy Moore's transgressions are much worse and if true are literally criminal. Though they happened a very long time ago. I surely wish that Luther Strange had won the primary. The fact that the allegations were made public only after the primary speaks to the dishonesty of Alabama Democrats, and also is a reason to doubt the whole story.

Still, I wish the guy would just disappear. Having said that (were I an Alabaman) I'd vote for him. He's a bastard, but he's our bastard.

The final scene in Don Giovanni is like the ending to a cheap, dance-hall rom-com. It's a we all lived happily ever after epilogue. The Human Comedy is indeed just that: a comedy. Complicated humans will rarely interact in straightforward, good/evil ways, especially when it comes to sex.

Shit happens. Get over it. Get a life. Enjoy the passing scene.


* Don Giovanni is an opera by Mozart about an aristocratic playboy (also known as Don Juan) whose mission in life is to f**k as many women as possible. A short synopsis of the plot is here.

Further Reading:

Thursday, December 7, 2017

What Marxists Don't Understand About Economics

This post is inspired by, but not directly in response to, an Open Letter by Lynn Henderson and Cindy Burke (H&B), posted on Louis Proyect's website. Their misconceptions are so common on my Beat that I think a post pointing them out is useful.

Growth

In 1956 Robert Solow and Trevor Swan published a model for economic growth that is both simple and fits real world data fairly well. Economic growth is the sum of three terms: 1) growth in the skills-adjusted labor supply; 2) growth in capital invested; and 3) growth in productivity due to technological advancement.

In today's world (unlike the future world of robots), the availability of skilled labor is the most important factor. A proxy for that is population growth, especially of the working-age population. In the US our population growth is less than 1%. During the first 60 years of the last century it was closer to 2 or 3%. Obviously fewer workers will result in a lower GDP, so it should be no surprise that our growth rates have declined from 3-4% historically to about 2% today. Absent a new baby boom or a sharp increase in immigration, our economy will not grow as fast as it did before.

Japan's workforce has been in absolute decline for several decades. So it should be no shock that their economy is barely growing at all. This has nothing to do with a "crisis" of capitalism or malfeasance by Mr. Abe, but is a matter of simple demographics.

Note that we Trumpkins will be disappointed with our president's stated immigration policy. Economically we are much better off with more immigrants rather than fewer.

Capital behaves differently, obeying the law of diminishing returns. When a company with 1000 employees buys their first computer, there is a huge jump in productivity. But after they buy the 1000th computer, productivity will barely budge. That is, initial investment in a new technology is highly profitable, but as more and more money is invested the returns diminish. Eventually the maintenance and upkeep on all those computers costs more than any profit, at which point the firm is fully capitalized. There is no point in investing more money in more computers.

It's roughly the same for national economies. In my opinion the United States is fully capitalized--there are relatively few places where investing new money makes sense. That means we have a savings glut, which implies that interest rates are low and will remain low for a very long time. This is why asset prices are being bid up--houses, art, antique cars, bitcoin, stocks & bonds, etc.--as there are no other good places to put money.

Note that we Trumpkins will be disappointed with tax reform. The stated goal is to repatriate trillions of offshore dollars and thus recapitalize and dramatically grow our economy. Sorry--it won't work. We've already got too much capital sloshing around. But it will secure very low interest rates for even longer, and people who own real estate or bitcoin will do very well. (I am generally in favor of the tax reform proposals, but not for that reason.)

Finally, productivity growth is the implementation of new technology, e.g., replacing the horse with the internal combustion engine, or the abacus with a computer. For whatever reason (there's no agreement on why) productivity growth has declined since about 1970. Robert Gordon wrote a whole book on that subject, which I reviewed here.

That our economy is growing faster than demographics is likely due entirely to productivity growth.

Trade

Money is earned only by trade and in no other way. I can buy something from you only if I have money. And the only way I can get money is by selling something to you or somebody else. Or put another way, only people with something to sell are able to buy the things I sell. A homeless, unemployed bum has no marketable skill or product to sell, and therefore has no money to buy anything from me or anybody else.

It's the same with countries. We buy toys from China, paying them in dollars. That only works if China can buy airplanes from us, also paid for in dollars. If we didn't manufacture airplanes then China would not sell us their toys since we'd have no money. (A trade deficit just means China doesn't need an airplane today, but will buy one in the future. Meanwhile it keeps its dollars invested in US Treasury bills.)

China is America's largest trading partner. That means China manufactures things that we want to buy, which perforce means that we manufacture things that they want to buy (today or in the future). So Marxists are wrong (and specifically H&B are wrong): we do not benefit from manufacturing all products in the United States. We should only manufacture those items for which we have a comparative advantage. Everything else we should buy from other countries.

This explains why our biggest trading partners are mostly rich countries. Rich countries produce things we want to buy, which means they have money to buy the things we have to sell. A country with nothing to sell also can't buy anything, and therefore is not a market for our products. Our trade with Haiti is next to zero--they've got nothing to sell to us. So Marxists have it precisely wrong: we do not want to impoverish the world. Quite the opposite--we only trade with countries that can produce valuable goods and so can afford our products.

The Marshall Plan and OBOR

The Marshall Plan was a program of loans to war-ravaged Europe after World War II. The purpose was to rebuild the European economy so that Europeans could sell into the US market, enabling them to buy things from the United States. That trade was hugely profitable to both sides of the Atlantic, generating way more than enough to pay back all the loans.

Had the Plan been a failure then US taxpayers would have been on the hook for all the loan defaults, and Europe would never have become a major trading partner to the US. As it is our total trade to European Union countries combined is larger than our trade with China.

OBOR (One Belt, One Road) is--according to H&B--a Chinese version of the Marshall Plan. That means China is lending to other countries in the hopes that they can produce something that China wants to buy, which will enable those countries to pay back the loans. So compare and contrast: during the Marshall Plan we lent money to Germany, Holland, the UK, France, etc. China is lending money to Kyrgyzstan, Uzbekistan, Azerbaijan, Greece, and Venezuela. Let me know how promising you think Chinese investments are likely to be. Hint: they've already written off Venezuela.

There are certainly geopolitical calculations in China's OBOR project, but as an economic effort it's doomed to fail. H&B, for example, point to the Greek port of Piraeus, which they claim is now the largest port in the Eastern Mediterranean. But it's a lost cause--Piraeus has no industrial or agricultural hinterland, and transport to/from the more productive parts of Europe is hopelessly difficult and expensive.

China

Henderson & Burke's letter is mostly about China. I will have more to say about that in a future post.

Further Reading:


Thursday, November 30, 2017

Book Review: Eleven Nations of North America

This post's heading is often how Colin Woodard's book is referred to, but the real title is American Nations: A History of the Eleven Rival Regional Cultures of North America, published in 2011. As someone interested in geography and politics I found it a fascinating and engaging read. I had originally resisted reading it thinking it was a rehash of Joel Garreau's 1982 book The Nine Nations of North America. It's not, and indeed it is much better--more scholarly, much more historical, and a lot more than Mr. Garreau's entertaining, anecdotal journalism.

For all that, I think Mr. Woodard's thesis is at least incomplete, if not outright wrong.

It begins promisingly enough, expanding on David Hackett Fisher's magisterial Albion's Seed, which describes four of the nations. For example, Yankeedom was founded by Puritan immigrants from East Anglia. They were the victors in England's Civil War, and came not as refugees, but rather as pilgrims. Their goal was to build "a city on a hill," i.e., a place closer to God, and where His chosen people can lead a more saintly life. The Yankees had no use for aristocrats or royalty, nor did they believe in freedom of religion. They despised the Anglican church, "popery", and the heretical Quakers. They passionately supported the American Revolution, providing the largest number of soldiers for that effort.

Yankeedom, according to Woodard, started in New England, but has since expanded to include the Canadian Maritimes, Upstate New York, and west to encompass Michigan, Wisconsin and Minnesota (along with bits of Ohio, Indiana and Illinois). Yankees believed in good government guided by religious truth.

They also colonized the Left Coast, that skinny stretch along our Pacific rim to the west of the Sierra/Cascade mountains, including San Francisco, Portland, Seattle and Vancouver. (Los Angeles is part of El Norte.)

By contrast, the Midlands was settled originally by Quakers, a heretical Christian sect who emigrated from the West Midlands--places like Lancashire and Cheshire. Unique among American colonists, they championed religious liberty and tolerance generally. Accordingly, they welcomed immigration from "friendly" people, e.g. German pietists such as the Amish, Mennonites, Anabaptists, etc. Because their ancestral home in England was strongly affected by Viking invasions, the Quakers share much with Scandinavians, both in heritage and culture, including gender equality, and indeed equality generally. Northern Delaware was settled by Swedes, who arrived upon Quaker invitation.

The Quakers themselves are not important today, but the immigrants they attracted still thrive and preserve most of their values. Among those are pacifism, which led them to tend Loyalist during the American Revolution, and not eager to join the Union cause during the Civil War. (The New Netherlanders, who lived in New York City and immediate environs, were stauncher Loyalists and Confederate sympathizers, albeit for different reasons.)

From Mr. Woodard's map, the Midlands today looks like a ridiculously gerrymandered congressional district, including most of Pennsylvania and South Jersey, central portions of Ohio, Indiana and Illinois, much of Missouri and Iowa, and the eastern parts of Kansas, Nebraska and the Dakotas. Their Loyalist sympathies caused them to emigrate to Southern Ontario and Manitoba, where they still dominate the culture. Toronto, Pittsburgh, Cincinnati and St. Louis are Midlander cities.

Greater Appalachia was settled by people from the Scottish Borders, who Woodard dubs Borderlanders, but are more commonly known as Scots-Irish. They are the only colonists who truly supported democracy and individual rights, along with the ideal of rugged individualism. Tidewater (Chesapeake Bay) was settled by the aristocratic losers in the English civil war, who sought to recreate their lost British homeland. They produced men of great character and erudition, notably George Washington and Thomas Jefferson, without whom the Revolution should never have succeeded. The Deep South began in Charleston, SC, by immigrants from Barbados who wanted to expand their profitable slaveocracy beyond that small island. Unlike in Tidewater, for these people slavery was precisely the point of their existence.

And so on. Mr. Woodard recounts American history as a struggle between these and other nations for dominance in the federal government. While Virginia was the most populous state, Yankeedom was the most populous nation. They both hated the Quakers. The Borderlanders hated everybody, fighting against Southern aristocrats and Yankee "good government" meddlers alike. In the end it became a battle to prevent the Deep South from expanding too far, and then dominating the federal government. That, along with the Yankee's strong moral objections to slavery, led eventually to the Civil War.

And indeed, through the Civil War I find Mr. Woodard's story convincing. After that it becomes much less credible. I'll highlight three reasons why.

1.  African-Americans. Through most of the book Black people are slaves and have no further influence. Then they briefly become equally neutered sharecroppers. Only near the end do they acquire any agency at all in the form of the Civil Rights movement. During which Malcolm X is described as a "Yankee," in comparison to Martin Luther King, who is a "Deep Southerner." Really?

Within Mr. Woodard's framework African-Americans are probably deserving of their own nation, overlayed on top of the others such as what they do with area codes. Certainly their influence on American politics and culture grants them at least that importance. For example, American music is substantially of African-American heritage, and owes nothing to the Barbadian immigrants who founded the Deep South.

Indeed, I will go further and argue that most residual influence of the antebellum South is due to African-Americans.

2.  Technology. In 1840 it may have been reasonable for Southern plantation owners to think their slaveocracy might survive (though Tidewater's Thomas Jefferson doubted that even before the Revolution). But by 1860 surely the handwriting was on the wall--technology in the form of railroads and mechanization would eventually render slavery economically impossible.

The problems with slavery are twofold: it is a fundamentally unproductive use of labor, and it depends crucially on export markets for income, as slaves cannot become consumers. Both of those conditions made slavery uncompetitive on the world market.

After the war it turned into sharecropping, which at least incentivized the workforce a little better. By 1900 mechanization was in full force, the Southern farms became much more productive, and their former slaves migrated north to factories where their skills could be better used.

Exceptions notwithstanding, today's Southern Blacks--who populate shopping malls and live in middle class suburbs--are not desperately poor people under the thumb of some hopelessly cruel oligarchy. Yet oligarchy is precisely how Mr. Woodard describes the South, as if  Barbadian descendants still ran the show. Please, Mr. Woodard, name ten such oligarchs that control the South. You can't because they don't exist anymore. The South has an economy as modern as any other part of the country. And the proof is that Blacks have gone from being slaves to being consumers, just like the rest of us.

This process would have happened anyway, Civil War or no. So I disagree with Mr. Woodard's statement that the war was primarily about slavery. It was much more about culture, which included slavery but which didn't depend on it, especially in Virginia.

3. Morality Tale. The last two chapters of the book are the least satisfying, for that is where Mr. Woodard reveals his Yankee roots and moralizing tendencies. The Borderlanders are no longer just different, but they've morphed into something evil. Either that or they're stupid victims of some (non-existent) oligarchy. He claims, for example, that lessening regulations on clean air standards is a sop to corporations, apparently unaware that the United Mine Workers are as much against those regulations as their bosses. Of course, because their jobs and livelihoods are on the line.

Borderlanders have spent the last three centuries fighting against aristocracy and Yankee government  in defense of democracy and individual freedom. Why should they now surrender to the regulatory state? What is it about Yankee technocrats that makes them so fit to rule?

Some regulation is necessary. Too much regulation is bad. One can argue the distinction. But Mr. Woodard seems to think that every squiggle from a government bureaucrat is divinely inspired, and that Borderlanders should just suck it up and obey their Yankee superiors.

Bullshit.

Though I enjoyed and recommend Mr. Woodard's book. Just don't believe all of it.

Further Reading:

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-Niño 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?
Significance

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).

Assessment

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.

Relevance

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: