All right folks, as promised, here's part IV. I'm going to try to keep this one short, because I'm also writing a paper on organized begging and human trafficking in Vienna, which you'll soon be able to view online by clicking the link to "grad school papers" on the sidebar.
This section is supposed to cover a lot: budget and current account deficits, debt, and America's labyrinthine tax system. Luckily, all of these issues are related (isn't it funny how they all ended up on my part IV?). Once again, I will suggest some unpopular changes that probably would not be implemented, but hey, my job's to point out realistic solutions (in the sense that they are completely doable) to problems, it's the politicians' job to get it done.
So here we go: introduce a federal value-added tax system (VAT) like the ones seen in almost every other developed country in the world. Much of deficit-reduction will be tackled by measures mentioned in previous installments (individual private health accounts, later retirement age, paying social security benefits only to those who actually need them, etc.). A VAT is a tax that is applied to goods and services every step of the way. Sounds like it would accumulate, but it doesn't. Look at it like a chain: Producer A sells raw materials to producer B. Producer B pays a 10% VAT to producer A, who is obligated to deliver that amount to the IRS. HOWEVER, it will probably end up getting to keep much or most of the money. Everything producer A spends money on, from machinery, to contractors, to services, requires producer A to pay a VAT. Producer A simply writes down all that it has paid in VAT for business purposes and gets to keep that amount from the VAT it has collected from sales. It sounds complicated, but it's actually much easier to manage than a system of tax-exemptions, which all have to be approved, revised, etc. What a headache!
Producer B then sells its finished goods to the retailer. The retailer pays VAT to producer B, who gets to keep whatever VAT from those sales that it has also spent doing business. The same applies to goods sold by the retailer. In this way, only additional value added at any given stage is taxed, so the effect is not cumulative.
OK, fine, by why is this good? It's good for two reasons. The main one is that studies show that taxes on consumption slow growth less than taxes on income because taxes on income reduce your incentive to work and earn more. The second reason is that a company has to pay VAT to keep VAT, it has an incentive to pay VAT and report this, which makes fraud a bit more difficult.
There are always a few problems, and the main one here is this: consumption taxes are regressive, meaning they tax the poor at a higher rate (as a percentage of their total incomes) than the rich. This, by the way, is another way America is more "liberal" than much of Europe: America's tax system is actually more progressive! In any case, addressing this problem is fairly simple: exempt certain necessities from the VAT, like necessary food items (not potato chips, soft drinks, and TV dinners), clothing items under $50 apiece, prescription medications, etc.
This would allow America's income tax rate to be cut and/or exceptions to it to be removed, making the system simpler (it's one of the most complex and frustrating in the world at the moment, costing individuals and businesses a lot in tax consulting services and wasted time). At the same time, this would help encourage growth and wouldn't be overly regressive.
The other issue to be addressed is also addressed with this tax: America's current account deficit. A current account is made up largely of a country's trade balance. America imports quite a bit more than it exports. This could be due partly to the fact that America taxes income too much and consumption too little when compared to other countries. True, America is likely on the road to rebalancing as we speak, since consumers have no scope to boost consumption in the near future, but this might be a pleasant side-effect of a tax that would otherwise be beneficial anyway.
Nancy Pelosi had indicated last year that a VAT was "on the table." Since then, the discussion has been dropped. It's unpopular because it contains the word "tax," particularly hated by conservatives, and because it's regressive, which makes it unpopular with the left. If combined with income tax cuts, tax simplification, and exceptions to protect those who would be most adversely affected, I think the tax could appeal to a broad base of legislators... if they could explain it to the public. Maybe we can give it some ridiculously long name that excludes the word tax? Those plans are usually stupid, but Congress seems to like them anyway...
Monday, February 22, 2010
Wednesday, February 17, 2010
Who knows Ronald Reagan?
I am starting to become frustrated with the Right's persistent attempts to drag Ronald Reagan's policies back onto the main political stage. The McCain/Palin ticket resurrected the idea of Ronald Reagan to energize their base during an election year, and now the Republicans and Tea Party Movement continue to carry the torch, insisting that we need to return to the Reagan years. President Reagan had a lot of fascinating accomplishments during his Presidency. His foreign policy was a remarkable step forward. His economic policy, however, was much more controversial, and if we are just looking at some hard numbers, it baffles me why we are even bringing up the Reagan name if we are debating the Country's most crucial issue: fiscal deficits. I think we are at the point where no one really remembers what Ronald Reagan actually did during his presidency, which is the perfect storm for meaningless political rhetoric.
Most people remember Reagan's top-down approach to the economy with steep tax cuts, but he also oversaw one of the first real expansions of the deficit, which should cause us to shun his policies in light of today's issues. The Reagan legacy brought such phrases as "supply side economics" and "trickle down" to the national political conversation. This approach is centered on cutting taxes and government spending so individuals can reinvest in the economy. Similar to George H.W. Bush, Reagan was successful in cutting taxes dramatically, especially for the most wealthy Americans, but his true failure was the hard part: cutting spending. We often talk about the unprecedented growth in the national deficit from the Bush Jr. years, but rarely do Republican spinsters mention Reagan's inability to control federal spending. The deficit more than tripled under Reagan's watch, an unintended reality, but still a result of his leadership. Choosing a President that served more than TWENTY years ago may allow Republicans to augment reality, but it cannot escape a simple fact check. At the very least, they should shy away from a politician that made many of the same mistakes that led us to where we are today.
Sure Pamela Geller is making a total idiot of herself, and, sadly enough, this interview sparked an embellished controversy about this non-issue, but there is a bigger point here. I think this exchange really drives home how difficult it is to put words in the mouth of a deceased President. It doesn't matter where you land on the political spectrum, if you thought Reagan was a great President or single handedly destroyed our economy, his policies from days ago are really no longer relevant. We shouldn't be asking what would Reagan do, or care about what he would think. We have today's problems, today's leaders, and today's America. We should start coming up with solutions that are tailored to the present instead of trying to turn back the hands of time... Or at the very least, if we are going to look back, can we at least pick a President who actually DID cut the deficit?!?
Sunday, February 7, 2010
Blue Dogs and Tea Parties, Will New Forces Be For Good?
President Obama made a promise to the American people: a new era of political compromise. With the rise of splintered factions of Democrats and Republicans, I bet the President is now wishing for an old era of bipartisanship. The Blue Dog Democrats and the Tea Party Movement have accumulated massive power to taker control of progress (or lack there of) in Washington. As we look at the potential of these two movements, we can begin to see if they will they be a positive influence of compromise, or a paralyzing force of roadblocks.
President Obama made the following comments during his presidential acceptance speech, his promise to America.
“Let us resist the temptation to fall back on the same partisanship and pettiness and immaturity that has poisoned our politics for so long. Let us remember that it was a man from this state who first carried the banner of the Republican Party to the White House - a party founded on the values of self-reliance, individual liberty, and national unity. Those are values we all share, and while the Democratic Party has won a great victory tonight, we do so with a measure of humility and determination to heal the divides that have held back our progress. As Lincoln said to a nation far more divided than ours, "We are not enemies, but friends...though passion may have strained it must not break our bonds of affection." And to those Americans whose support I have yet to earn - I may not have won your vote, but I hear your voices, I need your help, and I will be your President too[1].” (Emphasis added)
I do not think the new President could have ever expected what would happen during his next 12 months in office. Not only did he experience the entrenched factions within his own volatile party, but triggered the rise of a new, powerful, faction within the GOP.
The President made a few mistakes within his first year that triggered a rapid deterioration in the fragile cohesion within congress. It all comes down to the two emphasized words in his speech, “humility” and “determination,” with not enough of the former and too much of the later. I have been working within local government for a few years now. If nothing else, I have learned to manage my own expectations and set achievable goals. Obama thought he could reverse the course of the Country's hardest issues at breakneck speed. His determination to meet an unrealistic timeline was his own trap. As deadlines slipped, he lost his momentum and became vulnerable to a strong wave of attack from the right (and the left, I might add - IPE pundit). This past summer, he should have shown some humility issuing from this rookie mistake, set a new pace for his agenda, and taken a moment to readjust his priorities. Instead, he isolated the party on healthcare, pushing hard on a Democrat-centric solution, far from the Obama we knew from the campaign.
The State of the Union was a good attempt to reset the agenda, but the tone has already been set; and his speech was far from showing any humility. The President has lost a year without any real progress on his agenda and the political backlash from his first year in office may have changed the political landscape for a long time. Both major parties are now splintered. Blue Dog Democrats gained significant power from the healthcare debate, representing a less liberal, more centrist approach to spending. Representing a more extreme end of the political spectrum, the rise of the Tea Party Movement seems to be a growing force in America, and even has the potential to give birth to a new political party.
The Blue Dogs have the potential to bring balance to legislation as long as they bring reasonable compromise to the debate. If played correctly, the more center-leaning legislation can create a more moderate view of the Democratic Party. This is effective only if the Blue Dogs can be seen as part of a united front supporting certain legislation, instead of eating each other alive for political gain. If this new power is of true compromise, bringing legitimate objections WITH legitimate solutions to the table, they can be a strong force for good, centrist legislation. I have yet to really see this positive influence, but the possibility is there.
Unlike the Blue Dogs, which I think are a short term reaction to Obama's missteps, the Tea Party has some staying power. Now unofficially led by my favorite master of misdirection and rhetoric, Sarah Palin, new polls show the Tea Party brand is more valuable than the GOP. Still loyal to her party, Sarah resisted the idea of a Tea Party separation in her keynote speech at the Tea Party Convention last night, but I think this view can definitely change based on Sarah's future political ambitions. For whatever insane reason, Sarah is able to control her political/celebrity persona so well that she could definitely develop the Tea Party Movement into the Tea Party... Party! If she continues to lose support within the GOP this could be a platform to spring into a larger political career. Given the Movement's current distance from the center, and its choice of spokeswoman, I think this this new party has the potential of being a strongly polarizing force. Is the Rogue Maverick even capable of compromise?
Our Country seems to do best when we head down the center of the road. I see the Blue Dogs as a potential force for good, keeping the extreme liberal side of the Democratic Party in check, as long as they keep their own egos in check along the way. Unfortunately, if the Tea Party Movement is going to step in line behind Sarah Palin, I can only see that as a decisive, destructive force. Without compromise, I cannot see the potential for any real progress in this country, but let's hope I am wrong.
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[1] “Barack Obama's US Election victory speech: full text” http://www.telegraph.co.uk/news/worldnews/northamerica/usa/barackobama/3383629/Barack-Obamas-US-Election-victory-speech-full-text.html
Monday, February 1, 2010
Liberal Europe?
It doesn't matter who you talk to: Europe is considered to be "liberal." Republicans dislike it for that reasons, democrats plan trips there for that reason. But is Europe really so liberal? Before we begin, it's important to note that there is no "Europe" as a single concept. It seems most people seem to be referring to France when they speak of it. There are a lot of countries over there though.
My first example: 2nd and co-parent adoption laws regarding same-sex couples. As far as I know, there is no country in Europe where they are legal. Yet in my home region of the US, legislation passed almost uncontroversially around a decade ago in numerous states allowing gays to adopt children together as a couple. Even in the few countries that have allowed same-sex marriages (like the Netherlands and Spain), adoptions are not part of the deal. "Separate but equal?"
Then let's take religious expression. France has been a bastion of illiberalism in this regard for a while. Recently, a committee recommended banning the burqa in many public spaces in France. Supporters contend that this is merely an assertion of France's long-standing separation of church and state. I like separating church and state and don't feel that any religion should have anything to do with any government decisions. I am disturbed when political candidates talk about their faith (or even go so far as to say they talk to god themselves). But banning freedom of religious expression takes this too far. After all, the result might be that the women are then not permitted to leave the house by their ultra-conservative husbands. The problem is a spread of fundamental Islamic ideas. It makes absolutely no sense to fight illiberalism with illiberalism!
The next point is racism, integration, and acceptance of other people. Here, Europe scores poorly once again. True, this is mostly for historical reasons ("French" and "German" are nationalities, not just citizenships). Europeans claim they are not used to immigration. There is some truth to this, but it is no excuse for the xenophobia immigrants can experience there. Immigrants living in Germany and France take a much longer time to feel at home in their host countries than those in the United States, and many of them never feel at home at all, stuck instead between two worlds. This is largely the source of unrest among immigrant communities in Europe (think of burning cars on the outskirts of Paris or increasing criminal difficulties in Neukölln in Berlin).
Finally, there are inheritance laws. In most, if not all, of continental Europe, you have to bequeath property to all your children. You could not, say, decide to leave all your possessions to your best friend, who had looked after you better than your deadbeat kids. You HAVE to give your property to your kids. This is in the name of "fairness" and was originally intended to break up aristocracies by splitting land into smaller pieces. This may have made sense in the past, but it seems alarmingly un-free now. And yet: there is no desire to change these laws. Continental Europeans are content with them.
Keeping all this in mind, perhaps you ought to be careful next time you talk about Europe being a "liberal" place. Just because there may be bare breasts in some advertisements there does NOT make it "liberal"!
My first example: 2nd and co-parent adoption laws regarding same-sex couples. As far as I know, there is no country in Europe where they are legal. Yet in my home region of the US, legislation passed almost uncontroversially around a decade ago in numerous states allowing gays to adopt children together as a couple. Even in the few countries that have allowed same-sex marriages (like the Netherlands and Spain), adoptions are not part of the deal. "Separate but equal?"
Then let's take religious expression. France has been a bastion of illiberalism in this regard for a while. Recently, a committee recommended banning the burqa in many public spaces in France. Supporters contend that this is merely an assertion of France's long-standing separation of church and state. I like separating church and state and don't feel that any religion should have anything to do with any government decisions. I am disturbed when political candidates talk about their faith (or even go so far as to say they talk to god themselves). But banning freedom of religious expression takes this too far. After all, the result might be that the women are then not permitted to leave the house by their ultra-conservative husbands. The problem is a spread of fundamental Islamic ideas. It makes absolutely no sense to fight illiberalism with illiberalism!
The next point is racism, integration, and acceptance of other people. Here, Europe scores poorly once again. True, this is mostly for historical reasons ("French" and "German" are nationalities, not just citizenships). Europeans claim they are not used to immigration. There is some truth to this, but it is no excuse for the xenophobia immigrants can experience there. Immigrants living in Germany and France take a much longer time to feel at home in their host countries than those in the United States, and many of them never feel at home at all, stuck instead between two worlds. This is largely the source of unrest among immigrant communities in Europe (think of burning cars on the outskirts of Paris or increasing criminal difficulties in Neukölln in Berlin).
Finally, there are inheritance laws. In most, if not all, of continental Europe, you have to bequeath property to all your children. You could not, say, decide to leave all your possessions to your best friend, who had looked after you better than your deadbeat kids. You HAVE to give your property to your kids. This is in the name of "fairness" and was originally intended to break up aristocracies by splitting land into smaller pieces. This may have made sense in the past, but it seems alarmingly un-free now. And yet: there is no desire to change these laws. Continental Europeans are content with them.
Keeping all this in mind, perhaps you ought to be careful next time you talk about Europe being a "liberal" place. Just because there may be bare breasts in some advertisements there does NOT make it "liberal"!
Monday, January 25, 2010
Fixing America, Part III
Point three on our list is energy dependence. This can and must be addressed on multiple levels and from multiple angles. Much of this is related to one particular type of so-called market failure, a situation in which markets do not provide optimal results. Even staunch believers in markets (like the writers of this blog) know these exist. The type in question here are called externalities. These are costs of doing something that are not paid by the person doing it. Pollution is the prime example. It is much cheaper for a factory to dump its waste into a nearby river than to pay to dispose of it properly. This does not mean that dumping waste in the river has no cost. On the contrary, the costs are extreme. The pollution may kill fish and poison water supplies downstream, killing people and making them sick. When the overall cost of dumping waste into a river is seen, one notices that the costs to everyone in total of properly disposing of the waste are actually very small by comparison. If the factory owner had to pay the costs in both situations, he or she would choose to properly dispose of the waste, as it is much cheaper.
In the above situation, the best method is probably regulation. Dumping is forbidden, the river is tested for pollution, anyone caught dumping waste is punished with severe fines or jail time. This works well when there are only a few polluters who are easy to monitor. In the absence of any regulation, non-polluting companies would go out of business because they would have to spend more to dispose of their waste, putting them an a disadvantage. This is the reason regulation in necessary. Calls for "morality" are pointless: without government help (e.g. via regulation or externality charges), the "moral" business owners are put out of business. Competition then selects the "immoral" ones for survival. This, by the way, is the same reason politicians lie: the ones who tell is like it is are never elected. Voters don't want to hear the truth, they vote for liars and then are shocked when lied to. My point is: analyze incentives. Do politicians have an incentive to lie? Do businesses have the incentive to cheat and pollute? If the answer is yes, you can rest assured that all these things are happening. Furthermore, you should think about how to change the incentives. Regulation and enforcement are often the answer for industry, a free press is the best solution for government (and certainly also helps for industry).
But why are we talking about pollution when we should be discussing energy dependence? Well, the two are linked. Much of the imported oil used in the US goes to transportation. Driving a car has a number of negative externalities, among them: pollution, noise, congestion, and increased danger of accidents. All of these things become worse the more people are driving on a given road. Charging for these externalities would increase efficiency (this is also discussed in Harford's book). Charging for congestion in areas where it is a problem would increase the costs to the drivers directly, who might then decide that public transport, biking, carpooling, etc. would be a better option. The money collected could be used to improve roads, rails, and public transit. This would reduce travel times to work for those willing to pay the congestion fees, it would reduce transit times for deliveries, etc. This, along with charges for other externalities like CO2, a fee for SUV drivers, whose large cars endanger other drivers, etc., would also reduce fuel consumption. An increased carbon price (via auctioned cap and trade credits, not given away, as currently planned) would encourage industries to cut carbon in whatever way is sensible for them, or to buy additional credits if that makes no sense for them. This allows each individual to decide what makes the most sense for her, and ensures that those who cause problems also pay for them. This would reduce oil imports and promote energy independence. Not only that, it would reduce waste from cars in traffic jams, cut delivery times, and generally increase efficiency in congested cities. It would also serve to increase the commercial viability of public transit (even if it is not subsidized, which would still make sense).
Why should we subsidize mass transit? Because we already subsidize private transit. Who pays for the roads everyone uses? Taxpayers! Yes, some of this comes from fuel and automobile taxes, meaning the people who use the roads pay for them, but much of it also comes from general taxes. This is a form of subsidy for car drivers.
Who pays for the rails and train cars? In most cases, only those who use them. This is obviously an unfair disadvantage.
All of this would make America a more efficient place, not to mention making driving there less frustrating. However, it would alsp admittedly make driving more expensive in previously congested areas. This sounds unfair for the poor, right? Yet another reason the funds should flow into improving public transit. Don't forget that no one is forced to use the roads as long as there is an alternative. If public transit gets better as a result, people who decide they cannot afford to drive to work will have much better alternative ways to get there.
OK, this is all well and good, but what does it have to do with energy dependency? Obviously this would serve to reduce fuel consumption or at least slow its growth. But we sense intuitively that this cannot be enough. After all, the US imports more than half its oil.
Here's part II: we expect electric cars to start arriving in the coming decades. If this does happen, America will probably need more electrical generation capacity, or a huge increase in the efficiency with which our current supplies are used. Either way, one huge part of this solution is a better power transmission network, capable of transport power around the country from where it is abundant to where it is not with little loss of energy. Could the private sector take care of this? It would be nice, but the answer is no. Here's why: there are 50 states, all with different regulations and processes for building new transmission lines. This bureaucratic red tape insures that federal assistance, oversight, and legislative harmonization are needed to give the project and chance of working. The second reason is that there are a number of regional providers. Who should pay for the network? True, they could form a consortium to build it together, but all of them would have an incentive to cut corners and free ride. Fights would ensue as soon as a project started to cost more than it was supposed to. The project is best managed centrally by an authority that has the power to change laws as necessary to move things forward. That means the federal government. Sorry.
How would this network help? Different parts of the country, across 4 time zones in the Lower 48 alone have different energy needs at different times and seasons. If power plants are not interconnected, each has to have enough capacity to cover an area's maximum energy needs. If they are connected, power can be re-routed to where its needed.
This all would be useful as things are, but it gets really beneficial if more renewables are used. Solar power could be generated very efficiently in the American Southwest. In fact, the majority of the land in Arizona is owned by the state government and could be leased for sold for energy production. With a good direct-current transmission network, this energy could then be shipped around the country. At the same time, the Midwest is a great place for windfarms. This energy, too, could be sent to where it is needed. Chances are, most of the time that it's cloudy in the Southwest or quiet in the Midwest, generation in another place can make up for the loss. Otherwise, natural gas or even coal plants (less polluting because they are only used as backup) could be used to make up the difference. All this is only possible with a transmission network. (See link to Scientific American article on the subject).
All these things combined would reduce our dependency on foreign energy sources, cut CO2 emissions, and even make America a more economically-efficient place. How about off-shore drilling? I'm concerned about the environment, but I'm even more concerned about dependency. Maybe it's time to take a closer look at drilling on US territory...
In the above situation, the best method is probably regulation. Dumping is forbidden, the river is tested for pollution, anyone caught dumping waste is punished with severe fines or jail time. This works well when there are only a few polluters who are easy to monitor. In the absence of any regulation, non-polluting companies would go out of business because they would have to spend more to dispose of their waste, putting them an a disadvantage. This is the reason regulation in necessary. Calls for "morality" are pointless: without government help (e.g. via regulation or externality charges), the "moral" business owners are put out of business. Competition then selects the "immoral" ones for survival. This, by the way, is the same reason politicians lie: the ones who tell is like it is are never elected. Voters don't want to hear the truth, they vote for liars and then are shocked when lied to. My point is: analyze incentives. Do politicians have an incentive to lie? Do businesses have the incentive to cheat and pollute? If the answer is yes, you can rest assured that all these things are happening. Furthermore, you should think about how to change the incentives. Regulation and enforcement are often the answer for industry, a free press is the best solution for government (and certainly also helps for industry).
But why are we talking about pollution when we should be discussing energy dependence? Well, the two are linked. Much of the imported oil used in the US goes to transportation. Driving a car has a number of negative externalities, among them: pollution, noise, congestion, and increased danger of accidents. All of these things become worse the more people are driving on a given road. Charging for these externalities would increase efficiency (this is also discussed in Harford's book). Charging for congestion in areas where it is a problem would increase the costs to the drivers directly, who might then decide that public transport, biking, carpooling, etc. would be a better option. The money collected could be used to improve roads, rails, and public transit. This would reduce travel times to work for those willing to pay the congestion fees, it would reduce transit times for deliveries, etc. This, along with charges for other externalities like CO2, a fee for SUV drivers, whose large cars endanger other drivers, etc., would also reduce fuel consumption. An increased carbon price (via auctioned cap and trade credits, not given away, as currently planned) would encourage industries to cut carbon in whatever way is sensible for them, or to buy additional credits if that makes no sense for them. This allows each individual to decide what makes the most sense for her, and ensures that those who cause problems also pay for them. This would reduce oil imports and promote energy independence. Not only that, it would reduce waste from cars in traffic jams, cut delivery times, and generally increase efficiency in congested cities. It would also serve to increase the commercial viability of public transit (even if it is not subsidized, which would still make sense).
Why should we subsidize mass transit? Because we already subsidize private transit. Who pays for the roads everyone uses? Taxpayers! Yes, some of this comes from fuel and automobile taxes, meaning the people who use the roads pay for them, but much of it also comes from general taxes. This is a form of subsidy for car drivers.
Who pays for the rails and train cars? In most cases, only those who use them. This is obviously an unfair disadvantage.
All of this would make America a more efficient place, not to mention making driving there less frustrating. However, it would alsp admittedly make driving more expensive in previously congested areas. This sounds unfair for the poor, right? Yet another reason the funds should flow into improving public transit. Don't forget that no one is forced to use the roads as long as there is an alternative. If public transit gets better as a result, people who decide they cannot afford to drive to work will have much better alternative ways to get there.
OK, this is all well and good, but what does it have to do with energy dependency? Obviously this would serve to reduce fuel consumption or at least slow its growth. But we sense intuitively that this cannot be enough. After all, the US imports more than half its oil.
Here's part II: we expect electric cars to start arriving in the coming decades. If this does happen, America will probably need more electrical generation capacity, or a huge increase in the efficiency with which our current supplies are used. Either way, one huge part of this solution is a better power transmission network, capable of transport power around the country from where it is abundant to where it is not with little loss of energy. Could the private sector take care of this? It would be nice, but the answer is no. Here's why: there are 50 states, all with different regulations and processes for building new transmission lines. This bureaucratic red tape insures that federal assistance, oversight, and legislative harmonization are needed to give the project and chance of working. The second reason is that there are a number of regional providers. Who should pay for the network? True, they could form a consortium to build it together, but all of them would have an incentive to cut corners and free ride. Fights would ensue as soon as a project started to cost more than it was supposed to. The project is best managed centrally by an authority that has the power to change laws as necessary to move things forward. That means the federal government. Sorry.
How would this network help? Different parts of the country, across 4 time zones in the Lower 48 alone have different energy needs at different times and seasons. If power plants are not interconnected, each has to have enough capacity to cover an area's maximum energy needs. If they are connected, power can be re-routed to where its needed.
This all would be useful as things are, but it gets really beneficial if more renewables are used. Solar power could be generated very efficiently in the American Southwest. In fact, the majority of the land in Arizona is owned by the state government and could be leased for sold for energy production. With a good direct-current transmission network, this energy could then be shipped around the country. At the same time, the Midwest is a great place for windfarms. This energy, too, could be sent to where it is needed. Chances are, most of the time that it's cloudy in the Southwest or quiet in the Midwest, generation in another place can make up for the loss. Otherwise, natural gas or even coal plants (less polluting because they are only used as backup) could be used to make up the difference. All this is only possible with a transmission network. (See link to Scientific American article on the subject).
All these things combined would reduce our dependency on foreign energy sources, cut CO2 emissions, and even make America a more economically-efficient place. How about off-shore drilling? I'm concerned about the environment, but I'm even more concerned about dependency. Maybe it's time to take a closer look at drilling on US territory...
Fixing America, Part II
Now for part two on our list of problems to be fixed in America: inequality. I'm a believer in equality of opportunity, not overall equality. Everyone should get similar chances in life. The outcome, then, is up to each individual. I would consider inequalities that then form to be "fair."
That said, we are far from this in the US. We like to believe that anyone can do anything (and there's certainly truth to that), and complete equality of opportunity is not possible, nor is it really desirable. Nonetheless, some find it much harder to reach their potential than others. Being born in a wealthy family and going to a good school increase your chances of success dramatically.
This is why education reform is so important. Education is strongly correlated with income. The current system is unfair, for obvious reasons, but it's also economically inefficient: talent is wasted. Kids with potential who live in bad neighborhoods are much less likely to reach that potential. More charter schools and federal funding for poor schools are needed, as well as more teacher and school accountability. Some of this is happening, but teachers' unions are standing in the way of more sweeping reforms. This is shameful.
That said, we are far from this in the US. We like to believe that anyone can do anything (and there's certainly truth to that), and complete equality of opportunity is not possible, nor is it really desirable. Nonetheless, some find it much harder to reach their potential than others. Being born in a wealthy family and going to a good school increase your chances of success dramatically.
This is why education reform is so important. Education is strongly correlated with income. The current system is unfair, for obvious reasons, but it's also economically inefficient: talent is wasted. Kids with potential who live in bad neighborhoods are much less likely to reach that potential. More charter schools and federal funding for poor schools are needed, as well as more teacher and school accountability. Some of this is happening, but teachers' unions are standing in the way of more sweeping reforms. This is shameful.
Thursday, January 14, 2010
Fixing America (and the rest, really)
There are four problems in America right now that, if solved, would restore a great deal of America's strength:
Here's how it works:
Instead of buying health insurance, individual health accounts are set up. Every person in the US gets a $1,500 per year tax break (roughly the amount paid in taxes to public healthcare in the US already) that is deposited into an individual health account. The deposit is obligatory, but the use of the money is optional and at the individual's discretion (as long as it's for healthcare). Those who do not earn enough to pay over $1,500 a year in taxes will be given a subsidy in that amount. Two things will happen here: younger people, who often avoid health insurance because they (usually rightly) think they can save money by betting they won't get sick, can leave the money untouched. Deposited in a high-rate bank account, this money will grow over the years and can be used for health problems later in life. The other thing that happens is that each individual can decide what types of care she would like. Homeopathy? Flu shots? Massage therapy? No one would have to worry about whether insurance would cover it: there's no health insurance!
There's a third effect, and this one is huge: currently, government and private health insurance companies spend unbelievable sums of money on administration (risk assessment, lawyers, etc.) to attempt to provide low-cost coverage to healthy people and predict who will need more care. These costs disappear under this system.
Finally, the point of this personal responsibility is that, when people see how much things cost, they will make decisions about whether to get treatment or not. That is currently not the case in America's employer-based insurance system. Rationing currently occurs by who can pay the most (insurance companies and employers decide who gets what). In a government-run system (think Britain), the government decides who gets what. In this system, the individual decides what he would like. I think we can all see why this is attractive.
I know, I know, I can already hear the objections: a single MRI or a round of cancer treatment can cost significantly more than $1,500! You're right, of course. That was only one part of the picture, although this plan would likely bring those costs more in line with treatment costs in other developed countries because people would choose less treatment knowing the real costs. The other two are catastrophe insurance and government aid for the unfortunate, along with changes to liability laws, which currently lead to high legal and insurance fees for doctors and to doctors prescribing every treatment in the book, making all treatments more expensive.
Catastrophe insurance is cheap, as only really serious events are covered. In addition, there would be some co-pay (maybe $500). This would provide some encouragement for people not to put themselves in dangerous situations or to run down their personal accounts with frivolous spending.
The government aid is for people who don't suffer catastrophes, but rather who are born with bad genes and need to spend more on healthcare. Here, to be fair, the government would simply have to help out.
There's another result not mentioned in Harford's book: this would all serve to increase wages and tax revenues, making the system more than pay for itself. Studies have shown that much of the cause of wage stagnation in the US in the past decades has been due to healthcare cost inflation. Workers' wages were rising, they just didn't know it because the money was flowing into healthcare. With that system eliminated, employees would receive more cash. They would also then pay more in taxes.
In this system, the benefits for nearly all are obvious. The only ones who would not benefit are the insurance companies. For this reason, you can expect this plan to never come up and, if it did, to be heavily lobbied against. The other problem: it takes a while to explain - voters don't like policies that seem complicated up front (although this one would be much simpler in reality than the current healthcare bill!).
That said, something will have to happen eventually. Americans will not be able to afford their healthcare system indefinitely, unless they want to trade everything else. Let's hope they make the right choice...
- Exorbitantly priced, patchy healthcare
- Inequality of opportunity resulting in an undesirably high level of income inequality
- Energy dependence
- Budget and current account deficits, debt, and America's labyrinthine tax system.
Here's how it works:
Instead of buying health insurance, individual health accounts are set up. Every person in the US gets a $1,500 per year tax break (roughly the amount paid in taxes to public healthcare in the US already) that is deposited into an individual health account. The deposit is obligatory, but the use of the money is optional and at the individual's discretion (as long as it's for healthcare). Those who do not earn enough to pay over $1,500 a year in taxes will be given a subsidy in that amount. Two things will happen here: younger people, who often avoid health insurance because they (usually rightly) think they can save money by betting they won't get sick, can leave the money untouched. Deposited in a high-rate bank account, this money will grow over the years and can be used for health problems later in life. The other thing that happens is that each individual can decide what types of care she would like. Homeopathy? Flu shots? Massage therapy? No one would have to worry about whether insurance would cover it: there's no health insurance!
There's a third effect, and this one is huge: currently, government and private health insurance companies spend unbelievable sums of money on administration (risk assessment, lawyers, etc.) to attempt to provide low-cost coverage to healthy people and predict who will need more care. These costs disappear under this system.
Finally, the point of this personal responsibility is that, when people see how much things cost, they will make decisions about whether to get treatment or not. That is currently not the case in America's employer-based insurance system. Rationing currently occurs by who can pay the most (insurance companies and employers decide who gets what). In a government-run system (think Britain), the government decides who gets what. In this system, the individual decides what he would like. I think we can all see why this is attractive.
I know, I know, I can already hear the objections: a single MRI or a round of cancer treatment can cost significantly more than $1,500! You're right, of course. That was only one part of the picture, although this plan would likely bring those costs more in line with treatment costs in other developed countries because people would choose less treatment knowing the real costs. The other two are catastrophe insurance and government aid for the unfortunate, along with changes to liability laws, which currently lead to high legal and insurance fees for doctors and to doctors prescribing every treatment in the book, making all treatments more expensive.
Catastrophe insurance is cheap, as only really serious events are covered. In addition, there would be some co-pay (maybe $500). This would provide some encouragement for people not to put themselves in dangerous situations or to run down their personal accounts with frivolous spending.
The government aid is for people who don't suffer catastrophes, but rather who are born with bad genes and need to spend more on healthcare. Here, to be fair, the government would simply have to help out.
There's another result not mentioned in Harford's book: this would all serve to increase wages and tax revenues, making the system more than pay for itself. Studies have shown that much of the cause of wage stagnation in the US in the past decades has been due to healthcare cost inflation. Workers' wages were rising, they just didn't know it because the money was flowing into healthcare. With that system eliminated, employees would receive more cash. They would also then pay more in taxes.
In this system, the benefits for nearly all are obvious. The only ones who would not benefit are the insurance companies. For this reason, you can expect this plan to never come up and, if it did, to be heavily lobbied against. The other problem: it takes a while to explain - voters don't like policies that seem complicated up front (although this one would be much simpler in reality than the current healthcare bill!).
That said, something will have to happen eventually. Americans will not be able to afford their healthcare system indefinitely, unless they want to trade everything else. Let's hope they make the right choice...
- Tim Harford, The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor - and Why You Can Never Buy a Decent Used Car! (New York: Oxford University Press, 2006), 130-135.
Thursday, December 31, 2009
Do Terrorists Get Frequent Flyer Miles?
The news is currently dominated by the "Christmas Day Bomber". Missed signs, missed cues, and missed opportunities on behalf of the U.S.
After watching all the intense coverage of this latest terrorist act, I have to admit the underwear bomb is pretty clever, but I can’t help but wonder why a terrorist would put in the extra effort, risking failure, to attack a relatively difficult target. Having a bomb shaped and positioned in an anatomically sensitive area is a pretty sure way to get through airport security, even with a pat down body search. A passenger would be required to strip completely naked to even have a chance of finding this bomb. I have never seen such enthusiasm for a search in airport security (although it may exist for someone who should have been on a terrorist watch list) so I am not surprised it was successful. Anyone can admit (except for John Stewart) this was a creative method, one which fortunately has not been perfected. I am thankful for the concentration on a single target, but why do foreign terrorists employ these extraordinary efforts to attack an airplane? Living inNew York City
In other countries the car bomb seems to be the weapon of choice for a terrorist plot, but inAmerica Lebanon
I suppose it is possible that the symbol of terrorism is much stronger than the actual act of terrorism, hence the concentrated focus on airlines. This is an attack on our psyche. If the self proclaimed strongest military in the world can't keep its citizens safe from even a repeat target what hope do any of us have from being safe in our daily lives, when we ride the subway, go to school, to work.
Oddly enough, in the face of all the hysteria I have a strange feeling of indifference. I feel like the odds of stopping a determined terrorist are so low that I would be overwhelmed if I was constantly concerned with it, so I choose not to be. Instead I am personally vigilant and hope others are as well. I will take a page out of the book of the guy who apprehended the latest terrorist suspect as he attempted to set off his bomb. I vow that if someone tries to set off a bomb on the next plane I take I am going to throw down! But I am still going to fly without thinking twice. Is that arrogance or the American way?
Sent from my iPod
After watching all the intense coverage of this latest terrorist act, I have to admit the underwear bomb is pretty clever, but I can’t help but wonder why a terrorist would put in the extra effort, risking failure, to attack a relatively difficult target. Having a bomb shaped and positioned in an anatomically sensitive area is a pretty sure way to get through airport security, even with a pat down body search. A passenger would be required to strip completely naked to even have a chance of finding this bomb. I have never seen such enthusiasm for a search in airport security (although it may exist for someone who should have been on a terrorist watch list) so I am not surprised it was successful. Anyone can admit (except for John Stewart) this was a creative method, one which fortunately has not been perfected. I am thankful for the concentration on a single target, but why do foreign terrorists employ these extraordinary efforts to attack an airplane? Living in
In other countries the car bomb seems to be the weapon of choice for a terrorist plot, but in
I suppose it is possible that the symbol of terrorism is much stronger than the actual act of terrorism, hence the concentrated focus on airlines. This is an attack on our psyche. If the self proclaimed strongest military in the world can't keep its citizens safe from even a repeat target what hope do any of us have from being safe in our daily lives, when we ride the subway, go to school, to work.
Oddly enough, in the face of all the hysteria I have a strange feeling of indifference. I feel like the odds of stopping a determined terrorist are so low that I would be overwhelmed if I was constantly concerned with it, so I choose not to be. Instead I am personally vigilant and hope others are as well. I will take a page out of the book of the guy who apprehended the latest terrorist suspect as he attempted to set off his bomb. I vow that if someone tries to set off a bomb on the next plane I take I am going to throw down! But I am still going to fly without thinking twice. Is that arrogance or the American way?
Sent from my iPod
[1] The U.S. Oklahoma City World Trade Center
Friday, December 18, 2009
Add Credit Suisse to the Axis of Evil
I hope everyone has read the articles this week in the Times and WSJ reporting on the half-billion dollar settlement with Credit Suisse for laundering money for
The basic story is that Credit Suisse has settled a case accusing the Bank of purposefully facilitating illegal wire transfers to the
The biggest shocker about this story is the reaction of the U.S. Government. First, without making any assumptions, the Bank clearly violated economic sanctions that have been in effect for the better part of two decades. These sanctions are our only current resource to curb
Secondly, to add insult to injury, it seems likely the Bank facilitated
This plea deal is nothing short of lunacy. The
President Obama, Hilary Clinton, you want more effective sanctions? I can't think of a better gift, use it.
As a final point for this story. Where are the FBI, the Treasury, and Homeland Security in all this? How on earth did the little old NYC District Attorney Robert Morgenthau (literally old: he is in his 90s) nail this case down? Is anyone watching these things? Is it really as simple as disguising a routing number? No wonder this has been completely ineffective foreign policy. Someone better be stepping it up soon because Morgenthau is set to retire January first. Who will watch out for money laundering from the "evil doers" once he is gone?
Sent from my iPod
Thursday, October 22, 2009
Is There Any Value in Education?
I read a disturbing article in the Wall Street Journal today talking about how difficult it has become to obtain a school loan. I could swear I have read this story before, but this article was particularly striking because it also discussed a rise in tuition for both public and private colleges, 6% and 4% respectively. The article simply states that the once-lucrative business of school loans has dried up and students are feeling the pinch, especially in an economy where many parents are out of work. The article made me really think about how the value of education may change in a post recession
The article headline, “Students Rely on Federal Loans to Pay Rising Tuition,” reminded me of a conversation I had with a close friend almost a year ago. We were sitting discussing the state of the world over a cup of coffee. At the time, he was a first-year med student at a state university. The school had just raised his tuition and we were discussing how this fit into the broader economic disaster that seemed to have no end in sight. Last year in
Yesterday’s article flipped my thinking on this whole issue. I am now more honed in on the scary fact that students can no longer leverage future income to meet their rise in tuition. By putting both tuition hikes and loan problems in the same article, a much larger issue seemed to appear (even though the article did not make the link). The value of the college grad in a post recession economy does not look good.
The credit issues our students are facing means our lending institutions do not believe a degree is as economically realistic as it used to be. What if a degree no longer guarantees students will make enough money after graduation to afford their debt service? The answer is what we are seeing in the market: the loans are drying up. A student in 2009 is becoming a bad business deal.
Making the business deal even worse is the rise in tuition. Schools (and governments) are hurting for money. Endowments took a hit but professors still need to be paid. It is making a degree with seemingly depreciating value more risky because of a higher cost. The conclusion one could draw is that we have reached the tipping point of risk/return. It no longer makes sense to lend additional funds to meet the rise in tuition because the long term return just isn't there.
Have we past the time when a college student could simply leverage their future potential to secure a loan?
It seems this market phenomenon is the recognition of a new risk factor related to future wages. I considered, but dismissed, the possibility that the currently high unemployment rate is an influencing these loan decisions. Unemployment trends are relatively quick, short term problems; the loans we are discussing are medium term with a minimum 14 year time horizon from issuance, since a student doesn't begin paying back until they graduate and I believe a typical payback term is 10 years. If we dismiss the short term unemployment factor, the alarming new risk is probably an anticipated drop in lifetime wages of a degree-holding worker, a really important medium- to long-term risk factor. In this case, loans are not made because the investment no longer creates an income (wages) that support the debt service. In short, the college degree is no longer worth its price tag.
How scary is that possibility?!
Tuesday, September 22, 2009
Venezuela: Going Nowhere -- Fast
It has recently become clear that Hugo Chavez, Venezuela's president, is going about setting up a coalition with one goal in mind: bringing about the fall of "The Empire," i.e.: the United States. He plans to do this by forming alliances with every unsavory country in the world, from North Korea and Russia, to Syria and Iran. He recently announced a deal with Iran to cooperate on nuclear work. France reminded him that Iran was prohibited from exporting its nuclear technology. In return for nuclear aid, Chavez has promised Iran shipments of oil, even though Venezuela can hardly refine enough to supply itself.
Is this something the United States needs to worry about? The short answer is yes. All the U.S. needs is for Iran to be additionally strengthened and for an anti-American alliance to form with a powerful country like Russia involved. The long answer first requires answering another question: will this help Venezuela or Hugo Chavez?
It's hard to see how this could help Venezuela or its people. By forging an alliance that includes Iran and North Korea, Venezuela is headed on a path to international isolation. Perhaps Chavez thinks that if he makes deals with Russia (arms) and China (oil), this will prevent isolation. On the latter half of this bet, at least, he may actually be right. China is hungering for natural resources like oil. It is not improbable that China might protect Venezuela with its Security Council veto, but only if things don't get too dicey.
But even so, this would not prevent political isolation and isolation in other economic areas. True, oil is an important export, and Venezuela has a lot of it, but it requires foreign investment in order to develop the oil fields, some of them off shore. This investment could be blocked. Besides, making Venezuela even more reliant on oil exports, and therefore the whims of the global oil price, is not something Chavez should wish for. The current crisis saw a large drop in the oil price, bringing trouble for Venezuela's budget. If Venezuela can no longer receive foreign investment, its current fields will dry up (Venezuela's oil production capacity has steadily dropped since Chavez came to power. One would think that a man who increases his country's dependency on one export would ensure the viability of that export's future).
The country is already fighting inflation, as the government has kept fiscal and monetary policy looser than it ought to. This has caused the black-market trade in bolivares to soar. This market indicates that the bolivar is worth a fraction of what the Venezuelan government maintains it is worth. Strict capital controls are in place to prevent a massive slide and the emptying of the central bank's foreign exchange reserves. Domestic industries are already complaining that the strict limits on conversion to the dollar are making it all but impossible to do business by cutting off imports to the country (which has in turn spurred inflation as imports become much more expensive). Chavez is also consolidating the economy under the control of his clan, which of course receives generous exceptions from the dollar-limit regime and import restrictions. High inflation, blocked imports, and extremely restricted access to industry for everyone not associated with the Chavez clan hardly sounds like a good recipe for economic success. Far from the modern socialist revolution Chavez claims to be bringing about, his revolution sounds like many sad stories we have heard before.
This brings us back to our longer answer to the first question: should the U.S. worry about this? In the long run, these policies will ruin Venezuela, which is certainly nothing to hope for on account of the innocent lives that will be ruined along with it. A nuclear Venezuela, or even just a more heavily armed one, is cause for worry about stability in the region. The real concern is that this could spark a South American arms race. Arms races tend to lead to fear mongering and radicalism. It is therefore much more the future of South America that is at stake than that of the United States's alleged "empire." Venezuela will hardly be able to pose a military threat to the United States, even if it becomes nuclear (see my article on North Korea and compare), and the U.S. relies economically very little on Venezuela, Russia, Iran, and North Korea, et al. The political and economic isolation that will be wrought upon Venezuela if it continues, including in South America (Mr. Chavez is not admired everywhere there, particularly in Colombia) will only serve to weaken Venezuela.
But weak states can become even more radicalized and dangerous. For this reason Venezuela, unlike North Korea, is not something the U.S. should write off. Its approach, however, must be multilateral. Unilateralism would play into Chavez's hands, who claims to be battling the evil that is the United States. Better would be to work to convince Chavez's potential allies that the U.S. is not the bad guy, but that Chavez, indeed, is. This can be done via a higher degree of cooperation and other incentives (free trade agreements, etc.). This would do nothing to convince Russia and China, of course, but I posit that they need little convincing anyway. Venezuela is being used by both. China and Russia (and all other countries) will act in their own interests, and these are unlikely to align with Chavez's that often. The point, then, is for the U.S. to make sure that other countries, who can be more effected by U.S. incentives, are convinced that it is not in their best interests to side with Chavez. Given Chavez's poor policies and overt hotheadedness, this should not even be particularly hard, particularly if the U.S. works to cultivate as broad an international consensus as possible. Venezuela is on a road to nowhere, that doesn't mean we all have to go along for the ride.
Is this something the United States needs to worry about? The short answer is yes. All the U.S. needs is for Iran to be additionally strengthened and for an anti-American alliance to form with a powerful country like Russia involved. The long answer first requires answering another question: will this help Venezuela or Hugo Chavez?
It's hard to see how this could help Venezuela or its people. By forging an alliance that includes Iran and North Korea, Venezuela is headed on a path to international isolation. Perhaps Chavez thinks that if he makes deals with Russia (arms) and China (oil), this will prevent isolation. On the latter half of this bet, at least, he may actually be right. China is hungering for natural resources like oil. It is not improbable that China might protect Venezuela with its Security Council veto, but only if things don't get too dicey.
But even so, this would not prevent political isolation and isolation in other economic areas. True, oil is an important export, and Venezuela has a lot of it, but it requires foreign investment in order to develop the oil fields, some of them off shore. This investment could be blocked. Besides, making Venezuela even more reliant on oil exports, and therefore the whims of the global oil price, is not something Chavez should wish for. The current crisis saw a large drop in the oil price, bringing trouble for Venezuela's budget. If Venezuela can no longer receive foreign investment, its current fields will dry up (Venezuela's oil production capacity has steadily dropped since Chavez came to power. One would think that a man who increases his country's dependency on one export would ensure the viability of that export's future).
The country is already fighting inflation, as the government has kept fiscal and monetary policy looser than it ought to. This has caused the black-market trade in bolivares to soar. This market indicates that the bolivar is worth a fraction of what the Venezuelan government maintains it is worth. Strict capital controls are in place to prevent a massive slide and the emptying of the central bank's foreign exchange reserves. Domestic industries are already complaining that the strict limits on conversion to the dollar are making it all but impossible to do business by cutting off imports to the country (which has in turn spurred inflation as imports become much more expensive). Chavez is also consolidating the economy under the control of his clan, which of course receives generous exceptions from the dollar-limit regime and import restrictions. High inflation, blocked imports, and extremely restricted access to industry for everyone not associated with the Chavez clan hardly sounds like a good recipe for economic success. Far from the modern socialist revolution Chavez claims to be bringing about, his revolution sounds like many sad stories we have heard before.
This brings us back to our longer answer to the first question: should the U.S. worry about this? In the long run, these policies will ruin Venezuela, which is certainly nothing to hope for on account of the innocent lives that will be ruined along with it. A nuclear Venezuela, or even just a more heavily armed one, is cause for worry about stability in the region. The real concern is that this could spark a South American arms race. Arms races tend to lead to fear mongering and radicalism. It is therefore much more the future of South America that is at stake than that of the United States's alleged "empire." Venezuela will hardly be able to pose a military threat to the United States, even if it becomes nuclear (see my article on North Korea and compare), and the U.S. relies economically very little on Venezuela, Russia, Iran, and North Korea, et al. The political and economic isolation that will be wrought upon Venezuela if it continues, including in South America (Mr. Chavez is not admired everywhere there, particularly in Colombia) will only serve to weaken Venezuela.
But weak states can become even more radicalized and dangerous. For this reason Venezuela, unlike North Korea, is not something the U.S. should write off. Its approach, however, must be multilateral. Unilateralism would play into Chavez's hands, who claims to be battling the evil that is the United States. Better would be to work to convince Chavez's potential allies that the U.S. is not the bad guy, but that Chavez, indeed, is. This can be done via a higher degree of cooperation and other incentives (free trade agreements, etc.). This would do nothing to convince Russia and China, of course, but I posit that they need little convincing anyway. Venezuela is being used by both. China and Russia (and all other countries) will act in their own interests, and these are unlikely to align with Chavez's that often. The point, then, is for the U.S. to make sure that other countries, who can be more effected by U.S. incentives, are convinced that it is not in their best interests to side with Chavez. Given Chavez's poor policies and overt hotheadedness, this should not even be particularly hard, particularly if the U.S. works to cultivate as broad an international consensus as possible. Venezuela is on a road to nowhere, that doesn't mean we all have to go along for the ride.
Tuesday, September 8, 2009
A tale of two countries: Brazil must decide if it would like to be Norway or the Netherlands -- or Venezuela
Brazil recently unveiled plans for its government to scoop up a large share of future oil profits from undersea drilling off its coast, where there are alleged to be up to 50 billion barrels of oil (The Economist). Is this good news or bad news for Brazil?
Oil and other valuable and tradeable natural resources have always been a mixed blessing. In well-governed countries that manage the resources properly and invest the resulting profits wisely, they can lead the country to greater prosperity. In poorly run countries or in countries where the resources and their profits, for whatever reason, are invested poorly, they can lead to political corruption and economic ruin.
An example with less of the former and more of the latter is the Netherlands. The discovery of oil proved not to be much of a blessing for the Netherlands. The sudden increase in export values caused a current account surplus, which in turn caused the Dutch currency to revalue to the point where other exporters in the Netherlands had difficulty competing in foreign markets and domestic producers had difficulty competing at home against cheaper, foreign rivals. The result was dubbed the "Dutch disease." This is one possibility for Brazil, but given Brazil's size, this is probably unlikely.
A further possibility is that things will work out in a way similar to Norway. There, the currency was not permitted to rise too far. Instead, money was siphoned off the top and exported, balancing the current account surplus with a capital account deficit. This has allowed Norway's exporters to continue to export (although they must be competitive, as Norway's currency is still quite expensive), and Norway's domestic producers to continue to be able to compete against outsiders. The cost: high taxes and a large sovereign wealth fund. The money in the fund will then later be used to fund Norway's transition from an oil-based economy to something else, and to slow the slide of the currency once the oil dries up. All in all a well-managed, prudent system.
These two cases show the impact oil can have on even wealthy countries with good governance. Either they take action to prevent the Dutch disease, or they succumb to it. But Brazil is vastly larger than either Norway or the Netherlands. Although it is better managed, it may be closer to compare Brazil with Mexico or Venezuela. These are two countries whose governments are heavily involved in the day-to-day procedures of oil drilling. Both governments also rely heavily on the oil for revenues. And in both countries, revenues are dwindling as oil fields dry up due to a lack of investment in, and technology for, new ones. Much of this is the result of taking too much of the profits and failing to reinvest them in discovering or accessing new fields. Another significant factor is a lack of private investment due to heavy restrictions placed on foreign firms, firms that have the necessary capital, expertise, and technology to get the stuff out of the ground in fields that are almost invariably getting more difficult to utilize (requiring a greater investment in capital and technology, as well as higher risk).
What should Brazil do? Taxation is the simplest method. Doesn't it make more sense for private companies to do the work finding and drilling fields? Isn't it better for private money to be invested to get the oil? And wouldn't everyone be more comfortable if private firms' money were being risked on fields that might not be viable, rather than public funds from citizens' taxes? Having the government run these operations, even if only partly, doesn't make a whole lot of sense. Furthermore, beyond economics, having a government-run organization is an invitation to cronyism and corruption, and may become a political liability. The argument that a government organization would be required to ensure equity and provide for social programs doesn't make any sense at all, either. Those aims can be achieved most easily and efficiently with sensible legislation, regulation, and taxes. No matter how you look at it, Brazil is probably going down the wrong track with its plans for big government in big oil. Let's hope they take a closer look at some other oil producers (Russia has similar problems to Mexico and Venezuela) before making their choice.
Oil and other valuable and tradeable natural resources have always been a mixed blessing. In well-governed countries that manage the resources properly and invest the resulting profits wisely, they can lead the country to greater prosperity. In poorly run countries or in countries where the resources and their profits, for whatever reason, are invested poorly, they can lead to political corruption and economic ruin.
An example with less of the former and more of the latter is the Netherlands. The discovery of oil proved not to be much of a blessing for the Netherlands. The sudden increase in export values caused a current account surplus, which in turn caused the Dutch currency to revalue to the point where other exporters in the Netherlands had difficulty competing in foreign markets and domestic producers had difficulty competing at home against cheaper, foreign rivals. The result was dubbed the "Dutch disease." This is one possibility for Brazil, but given Brazil's size, this is probably unlikely.
A further possibility is that things will work out in a way similar to Norway. There, the currency was not permitted to rise too far. Instead, money was siphoned off the top and exported, balancing the current account surplus with a capital account deficit. This has allowed Norway's exporters to continue to export (although they must be competitive, as Norway's currency is still quite expensive), and Norway's domestic producers to continue to be able to compete against outsiders. The cost: high taxes and a large sovereign wealth fund. The money in the fund will then later be used to fund Norway's transition from an oil-based economy to something else, and to slow the slide of the currency once the oil dries up. All in all a well-managed, prudent system.
These two cases show the impact oil can have on even wealthy countries with good governance. Either they take action to prevent the Dutch disease, or they succumb to it. But Brazil is vastly larger than either Norway or the Netherlands. Although it is better managed, it may be closer to compare Brazil with Mexico or Venezuela. These are two countries whose governments are heavily involved in the day-to-day procedures of oil drilling. Both governments also rely heavily on the oil for revenues. And in both countries, revenues are dwindling as oil fields dry up due to a lack of investment in, and technology for, new ones. Much of this is the result of taking too much of the profits and failing to reinvest them in discovering or accessing new fields. Another significant factor is a lack of private investment due to heavy restrictions placed on foreign firms, firms that have the necessary capital, expertise, and technology to get the stuff out of the ground in fields that are almost invariably getting more difficult to utilize (requiring a greater investment in capital and technology, as well as higher risk).
What should Brazil do? Taxation is the simplest method. Doesn't it make more sense for private companies to do the work finding and drilling fields? Isn't it better for private money to be invested to get the oil? And wouldn't everyone be more comfortable if private firms' money were being risked on fields that might not be viable, rather than public funds from citizens' taxes? Having the government run these operations, even if only partly, doesn't make a whole lot of sense. Furthermore, beyond economics, having a government-run organization is an invitation to cronyism and corruption, and may become a political liability. The argument that a government organization would be required to ensure equity and provide for social programs doesn't make any sense at all, either. Those aims can be achieved most easily and efficiently with sensible legislation, regulation, and taxes. No matter how you look at it, Brazil is probably going down the wrong track with its plans for big government in big oil. Let's hope they take a closer look at some other oil producers (Russia has similar problems to Mexico and Venezuela) before making their choice.
Tuesday, July 7, 2009
Gay Parade in Vienna? Don't Bother.
Well, the straight-rainbow flags have been up since sometime in June (official gay pride month, at least in the States, and apparently here, too), and so I knew it was time for the annual Regenbogenparade (Rainbow Parade) gay pride parade here in Vienna. Once again, I was dismayed to see how pathetic the festivities were. Floats? Cheap-looking things stuck on top of trucks (not covering them, like in New York). Stands and activities? Lamer than words can say. The "crowd" at the end of the parade, which this year was at much-too-small-and-devoid-of-grass Schwarzenbergplatz, or at least the part that didn't run for the hills immediately upon seeing the loser-esque display of homoparade-attempt-uality was drunken and throwing trash on the ground everywhere. What a place to hang out. Interested in a gay parade in Europe? Try Cologne (generally considered Europe's gay Mecca), or maybe Zurich (small, but I've heard it's good). I could imagine that London and Paris would be good, but I haven't heard much about them. Berlin should be good if you like bears and leather. But Vienna? Don't bother.
Wednesday, July 1, 2009
North Korea: Don't Worry
It's a totalitarian state with nuclear technology and an ideological slant against the rest of the world that also continually threatens the rest of the world with rockets and other attacks. Sounds scary. And indeed, North Korea shouldn't be underestimated. All of these things are true, and it has been launching ineffective rockets that may very well get more effective in the coming years. Still, I'm not worried.
There are a number of reasons why we should just roll our eyes and carry on with our business while Kim Jong-Il throws yet another tantrum. While it is true that assuming that foreign leaders are rational can be dangerous, it holds true in the overwhelming majority of situations. Although Kim and his forefathers have done many things that could be considered irrational from the point of view of the welfare of the citizens of North Korea, from the standpoint of keeping control of an entire country, they have actually been rather successful. There is little to suggest that Kim Jong-Il or anyone else in North Korea would like to see North Korea wiped out. Thus, I think we can fairly safely assume Kim is rational, if somewhat misguided.
Assuming he is rational, he has very few options. Who would North Korea attack and what could it possibly hope to gain from such an action? The easiest target would be Seoul South Korea, mere miles from the border to North Korea. But again, what would that get North Korea? It would likely result in a UN-sanctioned attack on North Korea, something Obama would not shy away from with widespread international support. Besides, there does seem to be some feeling of brotherhood with their relatives to the south, so killing millions hardly seems likely. How about Japan or the United States, two countries North Korea loathes? Again, wrath, probably much more so than even with an attack against South Korea. This could lead to the re-militarization of Japan and the destabilization of the entire region, something China would desperately seek to hinder. So what about China? China is the closest thing North Korea has to an ally. It would be madness to attack it and that therefore seems highly unlikely. I'm sure anyone can imagine the result if North Korea really succeeded in attacking the United States, especially if Americans were killed. The United States may have shown itself not to be omnipotent, but a country would still be incredibly foolhardy to provoke an attack from it.
Taking all this into account, North Korea is fenced in. It may sometimes seem that China is helping North Korea, but this isn't really true. China pushes other countries to respect North Korean sovereignty for two reasons: it wishes others to do the same with China, and it has no interest in seeing North Korea collapse and then having to deal with a flood of refugees over the border into China. At the same time, China has no desire to have a nuclear competitor as a neighbor. Its siding with North Korea may also stem partly from a desire to snub the West a bit, but at the end of the day, China wants to maintain its predominance (shared with the U.S.) in the region and doesn't want any new dangerous competitors. It may be happy, though, to play North Korea off the West and Japan in the meantime to deflect attention away from itself. This is also all purely rational. Although China's interests are not 100% in line with those of the U.S., they are also not really against them.
A student of mine (Austrian) also let me in on what he was more afraid of: that the U.S. would be hasty and attack North Korea. Here, too, I told him, he could relax. The reason? China, once again. China would be extremely angered by such a move and has too much leverage in the region. No president would endanger relations with such a powerful and important trading partner. Even George Bush realized that. For that reason, an unprovoked (by which I mean that North Korea does not openly attack the U.S. or Americans) U.S. invasion or military engagement against North Korea is extremely unlikely, even before looking at other factors. These factors include the massive debt the U.S. has built and its large deficits, its fighting (or nation-building/peacekeeping, whatever you'd like to call it) on two fronts (Iraq and Afghanistan), and, finally, Barack Obama's presidency, which promises to be a more thoughtful, cautious, and calculating one. All of these factors make it almost inconceivable that the U.S. would do anything militarily against North Korea. Kim Jong-Il knows this, and is pushing his limits and showing his muscle. But that's all it is: show, a demand for more respect.
In the meantime, I propose a sliding scale system of benefits for North Korea, which, once established, would be non-negotiable. This would let North Korea know that it will always be rewarded for doing good things, punished for doing bad, and this always automatically, non-negotiably, instantaneously, and in a predictable and transparent manner. This would prevent North Korea's leaders, current or future, from using tantrums to try to extract more goodies. The only way they could get more would be by improving. Those same benefits would then automatically and immediately be eliminated if things devolved again.
North Korea probably won't stay like this forever, but it is anyone's guess as to how much longer it will remain as it is. Maybe change will come with Kim Jong-Il's passing - maybe not. In the meantime, we should engage North Korea, but not pander to it. By being clear on exactly what consequences which moves will have, we can make it more likely that North Korea will respond positively. If not, it's Kim's loss, not ours. It may be a pity, but that's the way it is. In any case, its threat, though not to be underestimated, especially for its destabilizing effects for the region, should also not be exaggerated.
There are a number of reasons why we should just roll our eyes and carry on with our business while Kim Jong-Il throws yet another tantrum. While it is true that assuming that foreign leaders are rational can be dangerous, it holds true in the overwhelming majority of situations. Although Kim and his forefathers have done many things that could be considered irrational from the point of view of the welfare of the citizens of North Korea, from the standpoint of keeping control of an entire country, they have actually been rather successful. There is little to suggest that Kim Jong-Il or anyone else in North Korea would like to see North Korea wiped out. Thus, I think we can fairly safely assume Kim is rational, if somewhat misguided.
Assuming he is rational, he has very few options. Who would North Korea attack and what could it possibly hope to gain from such an action? The easiest target would be Seoul South Korea, mere miles from the border to North Korea. But again, what would that get North Korea? It would likely result in a UN-sanctioned attack on North Korea, something Obama would not shy away from with widespread international support. Besides, there does seem to be some feeling of brotherhood with their relatives to the south, so killing millions hardly seems likely. How about Japan or the United States, two countries North Korea loathes? Again, wrath, probably much more so than even with an attack against South Korea. This could lead to the re-militarization of Japan and the destabilization of the entire region, something China would desperately seek to hinder. So what about China? China is the closest thing North Korea has to an ally. It would be madness to attack it and that therefore seems highly unlikely. I'm sure anyone can imagine the result if North Korea really succeeded in attacking the United States, especially if Americans were killed. The United States may have shown itself not to be omnipotent, but a country would still be incredibly foolhardy to provoke an attack from it.
Taking all this into account, North Korea is fenced in. It may sometimes seem that China is helping North Korea, but this isn't really true. China pushes other countries to respect North Korean sovereignty for two reasons: it wishes others to do the same with China, and it has no interest in seeing North Korea collapse and then having to deal with a flood of refugees over the border into China. At the same time, China has no desire to have a nuclear competitor as a neighbor. Its siding with North Korea may also stem partly from a desire to snub the West a bit, but at the end of the day, China wants to maintain its predominance (shared with the U.S.) in the region and doesn't want any new dangerous competitors. It may be happy, though, to play North Korea off the West and Japan in the meantime to deflect attention away from itself. This is also all purely rational. Although China's interests are not 100% in line with those of the U.S., they are also not really against them.
A student of mine (Austrian) also let me in on what he was more afraid of: that the U.S. would be hasty and attack North Korea. Here, too, I told him, he could relax. The reason? China, once again. China would be extremely angered by such a move and has too much leverage in the region. No president would endanger relations with such a powerful and important trading partner. Even George Bush realized that. For that reason, an unprovoked (by which I mean that North Korea does not openly attack the U.S. or Americans) U.S. invasion or military engagement against North Korea is extremely unlikely, even before looking at other factors. These factors include the massive debt the U.S. has built and its large deficits, its fighting (or nation-building/peacekeeping, whatever you'd like to call it) on two fronts (Iraq and Afghanistan), and, finally, Barack Obama's presidency, which promises to be a more thoughtful, cautious, and calculating one. All of these factors make it almost inconceivable that the U.S. would do anything militarily against North Korea. Kim Jong-Il knows this, and is pushing his limits and showing his muscle. But that's all it is: show, a demand for more respect.
In the meantime, I propose a sliding scale system of benefits for North Korea, which, once established, would be non-negotiable. This would let North Korea know that it will always be rewarded for doing good things, punished for doing bad, and this always automatically, non-negotiably, instantaneously, and in a predictable and transparent manner. This would prevent North Korea's leaders, current or future, from using tantrums to try to extract more goodies. The only way they could get more would be by improving. Those same benefits would then automatically and immediately be eliminated if things devolved again.
North Korea probably won't stay like this forever, but it is anyone's guess as to how much longer it will remain as it is. Maybe change will come with Kim Jong-Il's passing - maybe not. In the meantime, we should engage North Korea, but not pander to it. By being clear on exactly what consequences which moves will have, we can make it more likely that North Korea will respond positively. If not, it's Kim's loss, not ours. It may be a pity, but that's the way it is. In any case, its threat, though not to be underestimated, especially for its destabilizing effects for the region, should also not be exaggerated.
Saturday, June 27, 2009
No Love for Ben
It was not too long ago that our economy seemed to be at the brink of collapse. Just about a year ago, last March, Bear Stearns was the first to fall. A few short months later, in September, another Wall Street financial titan, Leahman Brothers, crumbled under its own weight. We were at war and we had two Generals, Ben Bernanke and Henry Paulson, and neither disappointed. The U.S. was lucky: with a academic who has an affinity for Depression-era economics (Bernake) and a brilliant Wall Street mind (Paulson), we had a fighting chance. But to my surprise, as soon as things start to calm down, our lawmakers are beginning to seem a bit unappreciative.
Right next to Michael Jackson's picture in the Wall Street Journal this morning was this article (abridged online) detailing Ben Bernanke's contentious hearing in front of Congress Yesterday. The purpose of the hearing was to examine the decisions made during our time of war, with particular attention to the BofA takeover of Merrill. These hearings are missing the big picture, not looking at the cause for instability, but instead trying to answer the thousands of what ifs.
Our economy, at its core, is based on a single concept...confidence. Everything revolves around trust. Trust the dollar I put into a bank today will be there tomorrow, trust that I have the ability to purchase things today because I will have a job tomorrow, trust that if I make a loan to the government they will honor it tomorrow. Even our use of dollars is an inherent trust that our government is supporting our currency as legal tender. Breaking this trust has more dire consequences than any Bernie Madoff, Enron, or a dot-com bubble. Without trust nothing works. As the pillars of the economy started to wobble, and doubt filled the minds of every person around the world, Ben stepped up and reestablished our trust.
It is popular opinion (if not fact) that the major error of fiscal policy during the Great Depression was to allow banks to fail. Possibly the only thing worse than the failure of a financial system is the nationalization of one. The ripple effect that follows the loss of confidence in an economy is an irreversible fear that can bring any country to its knees. One only needs a refresher on any monetary crisis (don't have to go too far into history, just look at Iceland) to see how this break down of trust can destroy an economy. Merrill, and many other banks, were going to fail; the foundation was cracking. Our generals used everything at their disposal to hold it all together. From where I sit today, it looks like the worst is behind us and we should thank Ben for his help.
Instead Democrats feel he was too secretive (must have forgotten to write up enough memos as he was saving the world), Republicans think he has too much power (maybe we should have waited for them to vote on it, that worked really well when the house rejected TARP... 777 drop?). At the end of the day the world was in panic mode, faith in the economy was at one of its lowest levels, and I do not think we made it through by accident.
Ben used his brilliance, and all the leverage he had. He may have used brute force to hold things together, but during a time of war there is a need for action. There were definitely some casualties, but the flag still stands and now the general deserves a medal, or at least a full night's sleep!
Sunday, June 21, 2009
The Justice Department and Gay Marriage
If you know me, you would probably never expect me to speak out defending the federal government when it defends itself for discriminating against gays and lesbians, but that's what I'm about to do.
A recent article in the Advocate, a GLBT news magazine criticizes the Justice Department for defending the "Defense of Marriage Act" (DOMA), which defines marriage on the federal level as between a man and a woman. Gay rights activists see this as betrayal. This is overly dramatic, but may just be a good rhetorical tool for calling attention to inequality. Although I would consider myself to be a gay rights activist, too, and I also vehemently oppose the DOMA for some very personal reasons (it's blocking my boyfriend and myself from being able to move to the States, as he can't get a green card for the States yet), this is not really a betrayal.
Activists point out that Obama claimed to be against the DOMA. But this position is reiterated in the brief from the Justice Department. However, whatever Obama would like, it is up to Congress to change the law by passing a bill, which he would then presumably sign into law, overturning the DOMA. In the meantime, it is only natural that the Justice Department would defend the DOMA: that's its job. It's part of the executive, which means it is charged with enforcing laws, not interpreting them or deciding if they are fair or constitutional (that would be the courts' job) or deciding if they should be replaced by other laws or changed in some way (that's the job of the legislature, in this case Congress). Furthermore, it is right that there is currently no federal legal precedent that would in any way suggest that the DOMA is unconstitutional (unfortunately). It is possible that the Supreme Court would simply decide otherwise, but it is unlikely to even hear the case, choosing to leave the can of worms closed. Again, this is a legislative issue, not an executive or even judicial one.
That said, if this is a rhetorical weapon, it may just work. I think Obama will now know we're watching. More importantly: Congress will know this, too. They are the ones that must make the first move. The move would be very controversial, and tantamount to allowing gay marriage throughout the 50 states. Though they would not all have to allow same-sex marriages to be performed in their own states, federal recognition would mean they would all have to recognize marriages performed elsewhere. There are many constituents in conservative states, even ones who vote democratic, who would not be happy about this. It would be a risky move. It is therefore unsurprising that Congress is taking its time.
In the end, of course, I hope they find the courage to do the right thing and get rid of the DOMA, but it's going to be a BIG deal if they do. In the meantime, neither the Department of Justice nor Obama himself have proved themselves to be traitors. If you want to bark up the right tree, call your state senators and representatives and tell them to get on it!
A recent article in the Advocate, a GLBT news magazine criticizes the Justice Department for defending the "Defense of Marriage Act" (DOMA), which defines marriage on the federal level as between a man and a woman. Gay rights activists see this as betrayal. This is overly dramatic, but may just be a good rhetorical tool for calling attention to inequality. Although I would consider myself to be a gay rights activist, too, and I also vehemently oppose the DOMA for some very personal reasons (it's blocking my boyfriend and myself from being able to move to the States, as he can't get a green card for the States yet), this is not really a betrayal.
Activists point out that Obama claimed to be against the DOMA. But this position is reiterated in the brief from the Justice Department. However, whatever Obama would like, it is up to Congress to change the law by passing a bill, which he would then presumably sign into law, overturning the DOMA. In the meantime, it is only natural that the Justice Department would defend the DOMA: that's its job. It's part of the executive, which means it is charged with enforcing laws, not interpreting them or deciding if they are fair or constitutional (that would be the courts' job) or deciding if they should be replaced by other laws or changed in some way (that's the job of the legislature, in this case Congress). Furthermore, it is right that there is currently no federal legal precedent that would in any way suggest that the DOMA is unconstitutional (unfortunately). It is possible that the Supreme Court would simply decide otherwise, but it is unlikely to even hear the case, choosing to leave the can of worms closed. Again, this is a legislative issue, not an executive or even judicial one.
That said, if this is a rhetorical weapon, it may just work. I think Obama will now know we're watching. More importantly: Congress will know this, too. They are the ones that must make the first move. The move would be very controversial, and tantamount to allowing gay marriage throughout the 50 states. Though they would not all have to allow same-sex marriages to be performed in their own states, federal recognition would mean they would all have to recognize marriages performed elsewhere. There are many constituents in conservative states, even ones who vote democratic, who would not be happy about this. It would be a risky move. It is therefore unsurprising that Congress is taking its time.
In the end, of course, I hope they find the courage to do the right thing and get rid of the DOMA, but it's going to be a BIG deal if they do. In the meantime, neither the Department of Justice nor Obama himself have proved themselves to be traitors. If you want to bark up the right tree, call your state senators and representatives and tell them to get on it!
Friday, June 19, 2009
Obama and Iran: The (U.S.) President Has the Right Idea
Street protests have broken out in Iran, at times becoming violent. They will probably get more so, especially if the government decides to crack down on protesters, which it probably will. This has all happened due to the Iranian presidential election, which is believed to have been rigged so that the incumbent, Mahmoud Ahmadinejad, was declared the winner a suspiciously short time after the polls closed.
Ah, a new Iranian revolution? The moment we've been waiting for? Time for America to rush in? Some seem to think so. That would be asinine.
President Obama's current course (he expressed doubts about the election and that he would support free elections in Iran, but stated that it was up to Iranians to decide who would lead Iran) is the right one. What would those who disagree have him do? Speaking out in favor of the opposition would endanger that very opposition by making it look like it was backed by America, something that would not go over well in a country with a fairly high degree of anti-American sentiment (sentiment left over from when the CIA toppled their democratically elected leader and installed a more West-friendly monarch who ruled over the country for decades and bashed any oppositional voices, though his abuses arguably pale in comparison to the current regime's). What's more, it is unlikely the opposition candidate will come to power, and Barack Obama will have to deal with whomever is in power, probably Ahmadinejad. Acting to back the opposition in any way would make relations with him even more difficult.
Buit even leaving all that aside for a moment: what practical choice does he have? Since no words, whether harsh or soothing, will change the course of events in Iran, the only option would be some sort of intervention. Does anyone really think the U.S. is in a position to intervene in a country several times the size of Iraq that cannot in any way be conceived to wish for this intervention when it is already fighting wars on two fronts and running up a massive bill trying to rescue its own economy from collapse? Not to mention the long-term negative effects yet another Middle East intervention would have on the U.S.'s ability to cooperate with and influence other nations. It would increase anti-Americanism, making any progress in problem areas impossible, and further alienate our allies.
Intervention would be madness, and choosing sides would clearly do more harm than good. Plus, implying support (physically) for a revolution and not being able to back up the promises with actions would endanger the lives of thousands of Iranians if they started a civil war expecting the U.S. to intervene (which is albeit unlikely, since they do not wish to see any U.S. intervention anyway, regardless of what happens).
Given the utter lack of viable alternatives, Obama seems to have chosen the best (or least bad) policy. The greatest thing that Obama has shown since becoming president is not whether he is left or center, but that he is a pragmatist and understands the complexity of the situations that he could so direly influence. For me, at least, this is a relief.
The protests in Iran are heartening because they prove what many have said: Iran is not monolithic, and many of its citizens would like to see bigger reforms and more freedoms. That's a critical first step, but these things have to go inside-out. For now, our focus needs to be on getting Iran to become a better global citizen externally. Easing tensions between Iran, (would-be) Palestine, Israel, and the United States is where we need to focus our attention now. A patient who has no pulse and has broken a leg is best helped by addressing the stopped heart first, we can handle the broken leg later if the patient can be resucitated.
Ah, a new Iranian revolution? The moment we've been waiting for? Time for America to rush in? Some seem to think so. That would be asinine.
President Obama's current course (he expressed doubts about the election and that he would support free elections in Iran, but stated that it was up to Iranians to decide who would lead Iran) is the right one. What would those who disagree have him do? Speaking out in favor of the opposition would endanger that very opposition by making it look like it was backed by America, something that would not go over well in a country with a fairly high degree of anti-American sentiment (sentiment left over from when the CIA toppled their democratically elected leader and installed a more West-friendly monarch who ruled over the country for decades and bashed any oppositional voices, though his abuses arguably pale in comparison to the current regime's). What's more, it is unlikely the opposition candidate will come to power, and Barack Obama will have to deal with whomever is in power, probably Ahmadinejad. Acting to back the opposition in any way would make relations with him even more difficult.
Buit even leaving all that aside for a moment: what practical choice does he have? Since no words, whether harsh or soothing, will change the course of events in Iran, the only option would be some sort of intervention. Does anyone really think the U.S. is in a position to intervene in a country several times the size of Iraq that cannot in any way be conceived to wish for this intervention when it is already fighting wars on two fronts and running up a massive bill trying to rescue its own economy from collapse? Not to mention the long-term negative effects yet another Middle East intervention would have on the U.S.'s ability to cooperate with and influence other nations. It would increase anti-Americanism, making any progress in problem areas impossible, and further alienate our allies.
Intervention would be madness, and choosing sides would clearly do more harm than good. Plus, implying support (physically) for a revolution and not being able to back up the promises with actions would endanger the lives of thousands of Iranians if they started a civil war expecting the U.S. to intervene (which is albeit unlikely, since they do not wish to see any U.S. intervention anyway, regardless of what happens).
Given the utter lack of viable alternatives, Obama seems to have chosen the best (or least bad) policy. The greatest thing that Obama has shown since becoming president is not whether he is left or center, but that he is a pragmatist and understands the complexity of the situations that he could so direly influence. For me, at least, this is a relief.
The protests in Iran are heartening because they prove what many have said: Iran is not monolithic, and many of its citizens would like to see bigger reforms and more freedoms. That's a critical first step, but these things have to go inside-out. For now, our focus needs to be on getting Iran to become a better global citizen externally. Easing tensions between Iran, (would-be) Palestine, Israel, and the United States is where we need to focus our attention now. A patient who has no pulse and has broken a leg is best helped by addressing the stopped heart first, we can handle the broken leg later if the patient can be resucitated.
Monday, June 15, 2009
The IMF: learning from its mistakes, or too soft?
The International Monetary Fund has always been subject to criticism for its hard line on desperate countries. It is a fund that was set up at the end of WWII in order to insure monetary stability in North America and Western Europe. It soon took on that role for the rest of the world as well. At first, it was designed to help countries maintain fixed exchange rates by assisting them in handling balance of payments problems. These occur when a country's current (mostly trade, but also things like aid and interest payments on loans and investments) and capital accounts (mostly loans in or out) do not balance. With floating exchange rates, such a "problem" would simply cause the currency to rise or fall to adjust. In the world of fixed exchange rates from the end of WWII to around 1973, this was not possible. The IMF was meant to lend between countries to help them adjust. It's success was limited.
The IMF has arguably been much more successful in its later role as a lender of last, last resort (the lender of last resort is a country's central bank, the IMF then comes when the country itself needs help). When a country gets into a nasty crisis, generally because of too much debt, so that the country is be unable to pay the interest on debt from foreign creditors, the IMF loans the country money at a discounted rate to help it out of the crisis.
This aid is not without cost, however. There are strings attached: the countries must balance their budgets and pay down debt by cutting spending and raising taxes. They must also fix the imbalances (usually current account deficits, mostly made up of trade deficits) that led to the crisis by lowering wages and prices to make their goods more competitive and to curb demand. The name for this is retrenchment, and it means a lot of suffering for everyone in the economy, but is a necessary move to make the country run better and make it sustainable. It is the only way the IMF could be (fairly) certain it gets its money back.
The other good reason to be tough: it discourages lax behavior in the first place by making sure no one turns to the IMF unless absolutely necessary. Governments do everything else in their power first. Otherwise, governments might run bad policies and then just wait to be bailed out.
Or so the theory.
The Asian debt crisis of 1997-98 changed the perspective for many. The Asian governments generally did not have terribly high debt. Their countries were suffering from a different kind of crisis, much like the one the rich world (and now everyone else) is suffering from now. The answer should have been more government spending to boost flagging demand, not less. The argument is that the austerity measures forced by the IMF actually made the recessions in Asia much more severe than they had to be.
The IMF learned from this. It is now lending almost no-strings-attached to a number of weaker countries hit by the current economic crisis. Is this a rational response to a crisis where boosting demand could help bridge the recession? Or is this niceness coming at the risk of being too soft, causing countries to become too reliant on the IMF in the future?
The new, friendly IMF is probably only a temporary response to the current crisis. But even if it isn't, the old criticisms of the IMF were valid. The prescription of currency devaluation, tax hikes, spending cuts, privatization, and deregulation is not always the best answer. For governments who get themselves into a mess via their own profligacy, though, it really is. I would hope the IMF remains tough on them in the future. Most of the Asian countries, however, were not profligate, but rather suffered from currency speculation and a rather heavy indebtedness of the private sector, not the government (largely due to financial market deregulation at the behest of Washington-based organizations like the IMF!). Had their currencies been free-floating (as they are now), this likely would not have happened (the currency speculation would not have occurred and there probably would have been less borrowing in foreign currencies with the expectation that the fixed exchange rate would hold).
Hopefully, the new IMF is one that differentiates, rather than having a standard set of one-size-fits-all prescriptions that obviously don't fit all. One thing this crisis has shown: the world still needs the IMF, and it still has a critical role to play in world financial stability. Previously, the IMF's nastiness almost did it in, as countries wouldn't turn to the IMF no matter what, and countries like China contemplated making their own pooled funds as an alternative to the IMF's (western/U.S. dominated) meanness. Let's hope it contributes to stability and doesn't encourage profligacy, and that it remains the only lender of last-last resort. A competition among lenders could lead to destabilization as they all get friendlier. It would also be a waste of money, hording cash with IMF-like funds around the world rather than using that cash for something else. As is so often the case, it's all about balance.
The IMF has arguably been much more successful in its later role as a lender of last, last resort (the lender of last resort is a country's central bank, the IMF then comes when the country itself needs help). When a country gets into a nasty crisis, generally because of too much debt, so that the country is be unable to pay the interest on debt from foreign creditors, the IMF loans the country money at a discounted rate to help it out of the crisis.
This aid is not without cost, however. There are strings attached: the countries must balance their budgets and pay down debt by cutting spending and raising taxes. They must also fix the imbalances (usually current account deficits, mostly made up of trade deficits) that led to the crisis by lowering wages and prices to make their goods more competitive and to curb demand. The name for this is retrenchment, and it means a lot of suffering for everyone in the economy, but is a necessary move to make the country run better and make it sustainable. It is the only way the IMF could be (fairly) certain it gets its money back.
The other good reason to be tough: it discourages lax behavior in the first place by making sure no one turns to the IMF unless absolutely necessary. Governments do everything else in their power first. Otherwise, governments might run bad policies and then just wait to be bailed out.
Or so the theory.
The Asian debt crisis of 1997-98 changed the perspective for many. The Asian governments generally did not have terribly high debt. Their countries were suffering from a different kind of crisis, much like the one the rich world (and now everyone else) is suffering from now. The answer should have been more government spending to boost flagging demand, not less. The argument is that the austerity measures forced by the IMF actually made the recessions in Asia much more severe than they had to be.
The IMF learned from this. It is now lending almost no-strings-attached to a number of weaker countries hit by the current economic crisis. Is this a rational response to a crisis where boosting demand could help bridge the recession? Or is this niceness coming at the risk of being too soft, causing countries to become too reliant on the IMF in the future?
The new, friendly IMF is probably only a temporary response to the current crisis. But even if it isn't, the old criticisms of the IMF were valid. The prescription of currency devaluation, tax hikes, spending cuts, privatization, and deregulation is not always the best answer. For governments who get themselves into a mess via their own profligacy, though, it really is. I would hope the IMF remains tough on them in the future. Most of the Asian countries, however, were not profligate, but rather suffered from currency speculation and a rather heavy indebtedness of the private sector, not the government (largely due to financial market deregulation at the behest of Washington-based organizations like the IMF!). Had their currencies been free-floating (as they are now), this likely would not have happened (the currency speculation would not have occurred and there probably would have been less borrowing in foreign currencies with the expectation that the fixed exchange rate would hold).
Hopefully, the new IMF is one that differentiates, rather than having a standard set of one-size-fits-all prescriptions that obviously don't fit all. One thing this crisis has shown: the world still needs the IMF, and it still has a critical role to play in world financial stability. Previously, the IMF's nastiness almost did it in, as countries wouldn't turn to the IMF no matter what, and countries like China contemplated making their own pooled funds as an alternative to the IMF's (western/U.S. dominated) meanness. Let's hope it contributes to stability and doesn't encourage profligacy, and that it remains the only lender of last-last resort. A competition among lenders could lead to destabilization as they all get friendlier. It would also be a waste of money, hording cash with IMF-like funds around the world rather than using that cash for something else. As is so often the case, it's all about balance.
Sunday, June 14, 2009
The Green Economic Revolution: Will it Destroy Our Economy?
By Charles Kirchofer, April 4th, 2009
Barack Obama and other world leaders have been talking a lot about a sort of green industrial revolution. The hope is that this will create new, high tech jobs, reduce the US and other western countries' dependence on foreign oil and energy supplies, and, of course, help the environment by curbing greenhouse gas emissions, along with other environmental benefits. These benefits, it is hoped, will outweigh the costs. Sure, some jobs will be destroyed by higher energy prices and/or taxes, but these will be replaced by a plethora of jobs in green energy and in other areas that benefit from the technology developed in the green energy sector. The reductions in greenhouse gas emissions will benefit the world by saving it money on things like building dikes and levees and transporting water to newly dried out regions, not to mention the benefits received by the world's poorest, who will all too often be unlikely to implement such measures to protect themselves from climate change. The benefits to security and political stability are clear: the US will enjoy greater security and independence, fights over oil will be less likely and will open the door to fair negotiations on peace in the Middle East, or so it is hoped.
But will all that is hoped for really happen? I think this depends more on the way the plans are enacted than on whether they are enacted. There are good ways and bad ways to do just about everything. Unfortunately, from what I've heard so far, Congress is looking to do it the bad way, although there is hope that a more pragmatic Obama may lead them to better decisions.
Cap and trade: Why it's a good idea
An externality is something a company produces that it cannot charge for (or is not charged for). They can be positive or negative. For example, an externality of Coca-Cola advertising for its products is that some people might to be enticed to buy cola in general, but not necessarily Coke. In this way, Coke's advertising provides a service for all cola producers that they don't have to pay for - a positive externality. Pollution is a perfect example of a negative externality. Companies (and people) produce it, and the cost is spread around to everyone. Negative externalities are examples of market failures, areas where the market does not provide the best result for everyone. In these situations, government must step in. No one would argue that the government should let companies dump toxic chemicals into our water supplies, etc. All right, but the way government steps in is perhaps more important than whether it does.
CO2 production is a perfect example. It costs everyone, but the costs are not immediate and are not felt by its producers. There are two ways to make the costs more immediate: a carbon tax and a cap-and-trade system. Though it is more complicated, I prefer a cap-and-trade system because it encourages carbon emitters to either reduce or balance their emissions, both of which can be beneficial. With a carbon tax, this flexibility does not exist. The great thing about the balancing is that companies would then have an incentive, for instance, to buy up plots of rainforest and protect them. This is a double-edged sword of adding value to rainforests and natural lands (which are valuable, but their monetary value is generally underpriced) and increasing the immediate costs of releasing carbon. The flexibility would also allow companies to decide themselves the best way to invest money: buy more carbon credits, reduce carbon emission by increasing efficiency or changing energy supplies, or acquiring more credits through the purchase and maintenance of natural areas, which would allow them to "grow" their own carbon credits. In the future, some companies might exist only on the basis of "producing" carbon credits through conservation. The number of credits in the system would be reduced each year in such a way that the price of carbon rises at a somewhat faster rate than inflation, but not so fast that it kills industry.
Cap and trade: Difficulties
Cap and trade is not without its political difficulties. Aside from cost concerns (which can be continually adjusted, by the way), senators from states that rely heavily on coal and other carbon-intensive industries don't like the idea. Cap and trade would hurt their states more than others. This is where the inefficient politics of earmarks comes in. It might be necessary to divert some of the proceeds from the cap-and-trade system back to the very states that pay most in the form of subsidies. This is perhaps not such a bad idea as long as the subsidies aren't flowing back into the very industries that are paying most. That would obviously be pointless. Instead, the money should be used to help states adapt. Besides, it is still unlikely that the demand for coal is just going to disappear - the carbon credits should not be so extreme. They should encourage a sustainable shift to greener methods. After all, we can't move away from coal if we have nowhere to move to. Coal will be made more expensive, but consumers will still pay for it until other possibilities arise. But those subsidies might help to make the shift for workers in those states affected easier.
This would still be OK. It is my feeling, however, that that should be the end of the subsidies. Once the market failure of negative carbon emission externalities is removed by the cap-and-trade plan, private investment will be able to provide the green solutions we need (after all, "necessity is the mother of invention"). I simply do not believe the government is good at picking the winning technologies. I also think private funds, not public ones, should be risked on the project. Big investments in infrastructure (like direct current transmission wires), due to their massive scope and scale, are an exception, as such a project can only succeed with government assistance. This doesn't mean that the government shouldn't help green technologies in other ways, for example by creating legislation conducive to the types of development needed (making it easier to get permits for windfarms and to use government land for them, for example). This way, the private sector can be steered to produce the technologies we desire, but will be encouraged to find the most efficient and cost effective technologies. This is something that happens less often when politicians, wedded to specific ideas and special interests, get involved. When a politician hears about something and turns it into a pet project, he or she is much less likely to abandon that project when it becomes apparent that it is destined to fail. CEOs are less sentimental.
Although Barack Obama might agree with the above plan (although he also plans to spend a lot more on subsidies than I would like), Congress looks set to mire the entire project in earmarks and subsidies that would drive up the cost of curbing emissions dramatically. In the end, such acts could end up getting repealed as their costs are seen. That would give green ideas in general a bad name, and that would be a real shame.
Oh yeah, and it's also time to divert agricultural subsidies into this project. They are not needed and they are hurting the poorest in developing countries. Agricultural subsidies currently cost more than a solar "Grand Plan" would cost. They are politically popular, but hurt many and are a total waste of money and a misallocation of resources. Get rid of them!
Barack Obama and other world leaders have been talking a lot about a sort of green industrial revolution. The hope is that this will create new, high tech jobs, reduce the US and other western countries' dependence on foreign oil and energy supplies, and, of course, help the environment by curbing greenhouse gas emissions, along with other environmental benefits. These benefits, it is hoped, will outweigh the costs. Sure, some jobs will be destroyed by higher energy prices and/or taxes, but these will be replaced by a plethora of jobs in green energy and in other areas that benefit from the technology developed in the green energy sector. The reductions in greenhouse gas emissions will benefit the world by saving it money on things like building dikes and levees and transporting water to newly dried out regions, not to mention the benefits received by the world's poorest, who will all too often be unlikely to implement such measures to protect themselves from climate change. The benefits to security and political stability are clear: the US will enjoy greater security and independence, fights over oil will be less likely and will open the door to fair negotiations on peace in the Middle East, or so it is hoped.
But will all that is hoped for really happen? I think this depends more on the way the plans are enacted than on whether they are enacted. There are good ways and bad ways to do just about everything. Unfortunately, from what I've heard so far, Congress is looking to do it the bad way, although there is hope that a more pragmatic Obama may lead them to better decisions.
Cap and trade: Why it's a good idea
An externality is something a company produces that it cannot charge for (or is not charged for). They can be positive or negative. For example, an externality of Coca-Cola advertising for its products is that some people might to be enticed to buy cola in general, but not necessarily Coke. In this way, Coke's advertising provides a service for all cola producers that they don't have to pay for - a positive externality. Pollution is a perfect example of a negative externality. Companies (and people) produce it, and the cost is spread around to everyone. Negative externalities are examples of market failures, areas where the market does not provide the best result for everyone. In these situations, government must step in. No one would argue that the government should let companies dump toxic chemicals into our water supplies, etc. All right, but the way government steps in is perhaps more important than whether it does.
CO2 production is a perfect example. It costs everyone, but the costs are not immediate and are not felt by its producers. There are two ways to make the costs more immediate: a carbon tax and a cap-and-trade system. Though it is more complicated, I prefer a cap-and-trade system because it encourages carbon emitters to either reduce or balance their emissions, both of which can be beneficial. With a carbon tax, this flexibility does not exist. The great thing about the balancing is that companies would then have an incentive, for instance, to buy up plots of rainforest and protect them. This is a double-edged sword of adding value to rainforests and natural lands (which are valuable, but their monetary value is generally underpriced) and increasing the immediate costs of releasing carbon. The flexibility would also allow companies to decide themselves the best way to invest money: buy more carbon credits, reduce carbon emission by increasing efficiency or changing energy supplies, or acquiring more credits through the purchase and maintenance of natural areas, which would allow them to "grow" their own carbon credits. In the future, some companies might exist only on the basis of "producing" carbon credits through conservation. The number of credits in the system would be reduced each year in such a way that the price of carbon rises at a somewhat faster rate than inflation, but not so fast that it kills industry.
Cap and trade: Difficulties
Cap and trade is not without its political difficulties. Aside from cost concerns (which can be continually adjusted, by the way), senators from states that rely heavily on coal and other carbon-intensive industries don't like the idea. Cap and trade would hurt their states more than others. This is where the inefficient politics of earmarks comes in. It might be necessary to divert some of the proceeds from the cap-and-trade system back to the very states that pay most in the form of subsidies. This is perhaps not such a bad idea as long as the subsidies aren't flowing back into the very industries that are paying most. That would obviously be pointless. Instead, the money should be used to help states adapt. Besides, it is still unlikely that the demand for coal is just going to disappear - the carbon credits should not be so extreme. They should encourage a sustainable shift to greener methods. After all, we can't move away from coal if we have nowhere to move to. Coal will be made more expensive, but consumers will still pay for it until other possibilities arise. But those subsidies might help to make the shift for workers in those states affected easier.
This would still be OK. It is my feeling, however, that that should be the end of the subsidies. Once the market failure of negative carbon emission externalities is removed by the cap-and-trade plan, private investment will be able to provide the green solutions we need (after all, "necessity is the mother of invention"). I simply do not believe the government is good at picking the winning technologies. I also think private funds, not public ones, should be risked on the project. Big investments in infrastructure (like direct current transmission wires), due to their massive scope and scale, are an exception, as such a project can only succeed with government assistance. This doesn't mean that the government shouldn't help green technologies in other ways, for example by creating legislation conducive to the types of development needed (making it easier to get permits for windfarms and to use government land for them, for example). This way, the private sector can be steered to produce the technologies we desire, but will be encouraged to find the most efficient and cost effective technologies. This is something that happens less often when politicians, wedded to specific ideas and special interests, get involved. When a politician hears about something and turns it into a pet project, he or she is much less likely to abandon that project when it becomes apparent that it is destined to fail. CEOs are less sentimental.
Although Barack Obama might agree with the above plan (although he also plans to spend a lot more on subsidies than I would like), Congress looks set to mire the entire project in earmarks and subsidies that would drive up the cost of curbing emissions dramatically. In the end, such acts could end up getting repealed as their costs are seen. That would give green ideas in general a bad name, and that would be a real shame.
Oh yeah, and it's also time to divert agricultural subsidies into this project. They are not needed and they are hurting the poorest in developing countries. Agricultural subsidies currently cost more than a solar "Grand Plan" would cost. They are politically popular, but hurt many and are a total waste of money and a misallocation of resources. Get rid of them!
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