Did Jonathan Portes Cause Brexit?

I should like to show that Jonathan Portes most probably did not cause Brexit. To do so, however, I first must examine the plausibility of the case that his actions and words did indeed provoke a decisive margin for the Leave vote in the EU referendum last June.

Portes is Principal Research Fellow, formerly Director, at the National Institute for Social and Economic Research in London. From 2002 to 2008, he was chief economist at the U.K. Department of Works and Pensions and, following that, chief economist at the Cabinet Office. David Goodhart has described Portes as "one of the architects of Labour's immigration policy" during that period. He is a regular contributor to the Guardian, frequently on migration issues.

In a 2012 blog post, Portes fondly reminisced that explaining the lump-of-labour fallacy "to six successive Secretaries of State for Work and Pensions, usually in the context of immigration… was probably the most useful thing I did, from a public policy perspective, in my six years as Chief Economist at Department for Work and Pensions."  The lump-of-labour fallacy is the spurious claim that supporters of some policy or other are motivated by a false belief that there is only ever a "certain amount" of work to be done.

The alleged belief is indeed false, as is the claim that support for the policy in question is motivated by it. The bogus fallacy claim was a staple of 19th century anti-trades union propaganda. Portes thus prided himself on his acumen in persuading Labour cabinet secretaries "to go out and defend policies that were consistent with" an archaic, reactionary view of the labour market.

That is not to say that the policies defended by cabinet secretaries coached by Portes were reactionary. The phrase "were consistent with" is notoriously ambiguous. Wearing an amulet is "consistent with" being a Satanist. It is also consistent with not being a Satanist. One must always be wary of "affirming the consequent."

Not wearing an amulet is consistent
with Portes not being a Satanist.

The Friendly Irish Skies for Transfer Pricing Games

My discussion of the Apple Structure promised to elaborate on a gem from Aidan Regan:

Wow! Exports are up 34%; Investment is up 27%; imports are up 22%. Wham, bam, the economy grew by 26%. Sensational. Per capita income per person in employment has increased from a whopping 88k in 2010 to 130k in 2015. I’m sure you can feel the booming economy in your pocket? Of course you can’t, the national accounts are a sham. So what’s really going on? The increase in investment, although you can’t see it in the national accounts, is being driven by airline leasing. My hunch is that this has increased by about 110%. Airline companies of the world are effectively transferring their financial activities (as new aircraft machinery) into Ireland for tax purposes….imagine all those massive Boeing planes flying around the world, then imagine them in Ireland, and hundreds of people working on them. Where are they? In truth. We couldn’t even fit these planes in Ireland. It’s just around 20 people managing a financial fund for tax avoidance purposes. Then using the generated money for profit redistribution. That’s what’s really go on.

Let me preface our discussion by noting this game is played by hotels in the U.S. who establish Real Estate Investment Trusts as well as oil drilling rig multinationals. After all those rigs in the North Sea off the coast of Norway and Scotland are formally owned by tax haven affiliates in Switzerland and the Cayman Islands. So how much income is being diverted to these tax havens? Let’s start with a discussion from Tom Bergin of Reuters:

The change, announced by Finance Minister George Osborne in March, caps the amount a UK company can deduct from profit for leasing drilling rigs from an overseas unit in the same group. The rig-leasing units are typically based in countries where their income is taxed lightly or not at all…Companies that have benefited from the current rules include Ensco Plc, Rowan Companies Plc and Transocean Ltd, which collectively accounted for over 60 percent of the UK market in 2012…"Currently, some companies making significant operating profits in the UK are able to move up to 90 percent of these profits overseas and out of the UK tax net," a spokeswoman for the UK Treasury said."In 2012, more than 1.75 billion pounds ($2.95 billion) was paid by oil and gas operators in the UK to contractors who lease drilling rigs and accommodation vessels. Almost no corporation tax was received on this," the finance ministry added. GENEROUS DEDUCTIONS Osborne's change, which will limit the amount companies can deduct from profit for such lease payments to 7.5 percent of the historical cost of the rig, will replace generous deductions calculated on the market value of rigs, which has been soaring.

While Osborne was right that a lease to value ratio near 15% is overly generous, his 7.5% might be a tad skinny. Let’s imagine an Irish affiliate that “owned” $30 billion in planes (see the financials for AerCap) that incurred operating and depreciation costs equal to 5% of assets ($150 million). I would argue for a 10% lease to value ration so the intercompany payment is $3 billion and profits of $150 million. This 15% lease to value ratio doubles those profits and leave the operating entities (the ones in high tax jurisdictions) with very little profit. So which approach is right? The OECD’s Action Plan 9 notes in its paragraph 63:

Risks should be analyzed with specificity, and it is not the case that risks and opportunities associated with the exploitation of an asset, for example, derive from asset ownership alone. Ownership brings specific investment risk that the value of the asset can increase or may be impaired, and there exists risk that the asset could be damaged, destroyed or lost (and such consequences can be insured against). However, the risk associated with the commercial opportunities potentially generated through the asset is not exploited by mere ownership.

The 15% lease to value ratio inappropriately assigns the expected return for bearing commercial risk to the Irish owner of the assets whereas the approach suggested here is to grant it only the return for bearing ownership risk or obsolescence risk as Miller and Upton noted. Their model would suggest that the appropriate profits for the Irish affiliate represent only a 5% return to assets with the remaining system profits accruing the operating entity. What the OECD has noted here is simply good finance and yet we often see the representatives of multinationals arguing for the overly generous 15% lease to value ratio. This is how transfer pricing abuse is done – these representatives basically lie to tax authorities under the assumption that the tax authorities are too stupid to realize they are being lied to.

Two Thirds Of The Way Through The Teens Decade

Yes, give or take a day or two and accepting that 2010 really was part of the teens decade of the 21st century*, as of August 31, 2016, we are two thirds of the way through that decade.  With what is left only half as long as what has passed, the form and nature of that decade should be becoming established.  What is it?  Above all, it has been a decade of stagnation from a deep economic recession, a depressing event rivaling only that of the 1930s decade of the Great Depression, even if technically in the US the entire decade has been one of positive economic growth since the bottom was reached in 2009, the last year of the previous decade.  But that decade was more the decade of terrorism, thanks to 9/11/01, with only its end marked by the crash and recession the slow recovery from which has dominated this decade, even if we still have terrorism and a political atmosphere overhung by it as well.  The combination has soured the political atmosphere both here and in Europe.

From where I  sit as a front end baby boomer who is still teaching economics at the university level, I am looking at this in terms of who my students are and in terms of generations and generational shifts.  This decade has so far been heavily dominated by the so-called millennials, although they were emerging as important during the previous decade.  Indeed, many would say the event that defines their consciousness is 9/11, the defining event of last decade, just as the Challenger crackup defines the Gen-X generation, and the civil rights movement and the Vietnam War defined the boomer generation, although as one gets to the outer edges of these generations these things get fuzzy, and the boundaries between them are not entirely clear.

One thing that is clear is that the influence of a generation has much to do with its numbers, with these effectively alternating with successive generations.  The Greatest generation, who lived through the Great Depression, won World War II, and basically ran the show in the US for  most of the Cold War, were a populous and dominating generation.  Their successor, the Silent generation, with their low numbers reflecting the low birth rates in the Great Depression 30s and WW II, made much less of an impression.  Then we had the noisy and self-important boomers, the children of the Greatest, who would rebel against their supposedly virtuous parents (who, despite their achievements, were also marked by being heavily racist, sexist, anti-Semitic, and homophobic).  They were  followed by the ironic and low key and less numerous Gen-Xers, the children of the silent Silents, with the also self-important and numerous millennnials somewhat resembling their  boomer parents. These  periods of dominance are in some sense illustrated by how there were no US presidents from the Silent generation, with us going from G.W.H. Bush of the Greatest to Bill Clinton of  the boomers.  Between Trump and Hillary, we see a last gasp of boomers, although do not be surprised that the successor to either of them jumps over the self-effacing Gen-Xers to represent the noisy millennials.

Of course there are arguments about exactly where those generational boundaries are.  So it is conventional to give the boomers two  decades, being born from 1946 to the mid-60s somewhere, about 1965, give or take a year.  That means they are currently in the 50s and 60s, just starting to move into their 70s with none left in their 40s, and with 1957 the peak year of  births for them, their center of gravity, just about to hit 60.  While the beginning point of the Gen-Xers clearly start in the mid-60s, it is more debated where their endpoint is, with this ranging from around 1976 to possibly as late as 1980, making people in their late 30s sort of a boundary case, up in the air.  Many of these people think of themselves as millennials, but this may be a matter of  wanting to be in the supposedly cooler millennials rather than the sort of pathetic Gen-Xers.  I mean, lots of popular media may say they are, but are people 39 years old really millennials? Well, maybe, but of course this matter of giving the Gen-Xers a shorter time period while both the boomers and millennials get longer periods just emphasizes the dominated and outnumbered nature of the Gen-Xers, with the birth rate bottoming out in 1975 while it reached a new peak in 1990, clearly a core year for the millennials.

Which brings us to what I think may be an important emerging story for the rest of  this decade, the social appearance of the post-millennials or Gen-Z, with indeed them now dominating the current set of undergrad students, with I think many people  not realizing yet that another generation is in the works about to make their presence felt socially as they start graduating from college.  Obviously this depends on when that endpoint of the millennials is, but some put it as early as people being born around 1996, especially if  their beginning point was those born in 1977.  So they are people basically in their 20s and 30s, although, again, those in their upper 30s may be hanger on Gen-Xers.  Thus the endpoint of the millennials might be a year or two  later, maybe those born in 1998, but if 9/11 is the defining event of their generation, well, those in 1998 do not remember anything from 2001 at all.  They are getting to be something else.

Now it must be recognized that there are important sub-groups within some of these generations. Thus I know that there are substantial differences between my front-end baby boomer group and those born nearer the end after 1957 or so and especially in the early 1960s.  Likewise, among the millennials there is a sharp break between those who came out of college after 2007 when economic conditions became much worse than those who got out before.  There is an especially damaged group who will probably suffer their entire lives for their bad luck in timing, those who graduated in roughly 2009-2013, the worst years of the Great Recession job markets.  These are the people with high student debts and lousy starting jobs, if any starting jobs, with many spending time in their parents' basements playing video  games, who will probably never catch up economically, even if they have gotten out into  the job market finally.  Those graduating in the last year or two are experiencing a different situation, one more like those who graduated prior to 2009.  This past spring for the first time since 2008 I heard some graduating seniors rather self-satisfiededly talking about which of competing job offers they would take.  Wages may have remained stagnant with inequality and student debt loads worse than ever, but there are now many more jobs with the Great Recession really over, even if for many it does not really quite feel like it.  But it is, and the post-millennials will be the beneficiaries of that, even if the current stagnation really does turn into something more permanent or longer lasting than those more optimistic think.  Thinking that it will has certainly become quite an intellectual fad, with some serious arguments behind it, even if we do get a pickup in growth rates sometime in the next few years.

So the question that is on my mind is what is the nature of this newly emerging post-millennial (or maybe Gen-Z) group that is now clearly to me at least dominant among current undergrads?  I somehow feel that last year's seniors were the last of the clear millennials.  Current seniors and juniors may be a transition group, but by the time one gets to current sophomores (born in 1997) and freshman, one is getting to post-millennials, closer to my oldest grandson, who at age 11 just entered middle school yesterday, than they are to my youngest daughter, who just turned 27 yesterday, part of the core millennial group, even as her older sisters at 41 and nearly 45 are definitely Gen-Xers.  I  can see and feel the difference with the current undergrads, even if  I am not sure I can fully articulate it.

Besides not being so down about future job prospects, even as they continue to be plenty worried about high college costs and future indebtedness,with this latter problem only worsening as college tuitions continue to outpace inflation in their rise (with this perhaps having stopped after decades for medical care costs) for no good reason (they are not rising due to faculty salary or numbers increases).  Of course part of it is indeed that they do not remember 9/11 at all.  It is strictly history, so all this terrorism stuff is more strictly background noise, if annoying.  However, probably a stronger aspect is a qualitatively greater involvement in a natural and engrossed way in social media and that world of technology.  It is totally second nature in a way that it has not been even for  the deeply embodied millennials.  I am not sure I can pinpoint it or describe it, but I suspect that they have been an even stronger driving force in the new Pokemon Go fad than their millennial predecessors.  They live more  fully in this "augmented reality" that adds this odd social media-generated component to itself than their older peers in the earlier generations.  Is this good or bad?  I do not know, but I think it is a serious reality, this new augmented reality that will more truly be with the post-millennials than earlier generations, with middle schoolers reportedly playing by sitting in their homes on skype whle they play with games and other things, even when they live on the same street.

In any case, I think this generation will play an important role in defining the rest of this decade, even as it will probably be mostly one dominated by the millennials, as the boomers really move into retiring and the millennials finally begin to really move into decent paying jobs and forming families and all that.

*The technicality regarding 2010 is  that properly speaking it was the last year of the first decade of the 21st century, for which we still do not have a universally accepted name, the "noughties" being not all that widely used.  That is because, technically speaking 2000 was not  the first year of the 21st century and third millennium, but the last of the 20th century and second millennium.  Why?  Because there was no year Zero.  Of course at the time nobody was remotely aware of this question, it being some centuries later that the Roman Church established when Year One succeeded Year Minus One (or in those days, B.C., Before Christ) using the Julian calendar and Roman numerals, which had no zero or negative numbers.  The Church would come to view those numbers as demonic or satanic, not really real, with the double-entry accounting-inventing Tuscans of the late middle ages finally having to convince the Church, especially the wealthy and powerful Medici bankers of Florence who loaned the Church lots of money, that indeed that negative net wealth is a real thing, and that adopting those Indo-Arabic numerals with their zero really made it easier to do that accounting.  Or, as my late mathematician father, a gentleman of the old Deep South, once said in reply to a young woman during a public lecture who asked him if zero was a real number, "One of the finest, my dear, one of the finest."

Barkley Rosser (Jr.)

The Apple Structure to Parking Profits in Bermuda

British economist Andrew Watt tells us how he really feels about the European Commission’s slam of Apple’s transfer pricing:

Without delving too deeply into the specifics of the case, a number of crucial issues are raised by this controversy, not just in the narrow area of taxation but for the European integeration process more generally...The ability of internationally active and thus “mobile” companies to play off national tax jurisdictions against one another and to use transfer pricing and other tricks to concentrate book profits in low-tax jurisdictions is one of the most pernicious effects of globalisation as it has been implemented over the past three or four decades. Whole armies of corporate (tax) lawyers optimise financial flows so as to minimise tax liabilities. The largest companies reach tailor-made deals, primarily with smaller economies, The resultant “race to the bottom” is an important reason why capital (and higher-skilled , also mobile wage-earners) have reaped most if not all the gains, while most workers have been left out or seen declines in living standards. The tax burden is shifted onto “immobile” factors, especially labour and the ability of national governments to finance compensatory measures (welfare benefits, active labour market policies) to offset the losses caused to some by globalisation has been constrained. The fact (according to the FT) that Apple, one of the world’s wealthiest companies, pays a (sic) 2% rate of corporation tax thanks to its deal with Ireland is a particularly egregious

Of course other hi-tech and life science multinationals are playing the same game which is often dubbed the “Apple Structure”. How this works is actually quite simple. Imagine Apple Ireland sells $100 billion in either smart phones or personal computers (a conservative estimate given the US share of sales is only 40%) with total operating costs being $70 billion - $30 billion in profits to be divided among the tax authorities. Ireland’s share of Californian based R&D costs represent $10 billion when one includes the cost of employee stock options. Given how the game is played, the US tax base would include no profit and might not even include those cost of employee stock options. Selling costs represent another $10 billion, which are incurred by the foreign distribution affiliates, which likely pick up only $1 billion in profits. The remaining $29 billion are either taxed in Ireland at 12.5% or sourced in Bermuda where they are not taxed at all. Back in 2007, Apple’s 10-K noted that their products were assembled in Cork, Ireland:

Most of the Company's components and products are manufactured in whole or in part by third-party manufacturers, most of which are located outside of the U.S...Final assembly of the Company's products is currently performed in the Company's manufacturing facility in Cork, Ireland, and by external vendors in California, Korea, China and the Czech Republic.

Let’s assume that total production costs are $50 billion with $45 billion being components supplied by third parties. Cork incurs $5 billion in labor costs and the tax deal gave Ireland a 20% markup or $1 billion in profits. So $28 billion ended up in Bermuda. Today, Apple’s products are assembled by Foxconn so Ireland gets even less in profits. Aggressive tax planning indeed but Tim Cook says it is “all perfectly legal”. Andrew also linked to Aidan Regan:

Wow! Exports are up 34%; Investment is up 27%; imports are up 22%. Wham, bam, the economy grew by 26%. Sensational. Per capita income per person in employment has increased from a whopping 88k in 2010 to 130k in 2015. I’m sure you can feel the booming economy in your pocket? Of course you can’t, the national accounts are a sham. So what’s really going on? The increase in investment, although you can’t see it in the national accounts, is being driven by airline leasing. My hunch is that this has increased by about 110%. Airline companies of the world are effectively transferring their financial activities (as new aircraft machinery) into Ireland for tax purposes...imagine all those massive Boeing planes flying around the world, then imagine them in Ireland, and hundreds of people working on them. Where are they? In truth. We couldn’t even fit these planes in Ireland. It’s just around 20 people managing a financial fund for tax avoidance purposes. Then using the generated money for profit redistribution. That’s what’s really go on.

Enough transfer pricing for one day so I will elaborate on this scam tomorrow.

Question for Labor Day, 2016

"...it is often said that to regulate the hours of labour, or to introduce differential import duties, is to break economic law." -- Palgrave's Dictionary of Political Economy, 1894

Do you agree that regulating the hours of labor is a violation of economic law?

Trigger Warnings and Academic Freedom

The top brass at the University of Chicago are so, so wrong about trigger warnings.  I don’t know how other instructors use them, but for me they provide the opportunity to bring disturbing material to my students.  I have used them for graphic films about child soldiers and prostitutes, for instance, hoping to provide a missing dimension to the social science readings I assign on these topics.  I would never be able to do this unless I allowed the most vulnerable students to excuse themselves.  In the absence of trigger warnings, and out of respect for the needs of these students, I would not be able to use this material at all.

The core intellectual error in the UC statement is that it implicitly assumes that the extent to which academic content is challenging is fixed.  It’s not.  It’s a product of the flexibility we have in the classroom to introduce it.

The Infrastructure Investment Debate

While Noah Smith makes the standard case for public infrastructure spending, he only lightly touches on the right wing critiques:

Some question the need for road and bridge repair. Others deny the need for federal infrastructure spending in the first place. Still others claim that while spending is good in theory, the U.S.’s high infrastructure costs mean we should hold off until those costs can be brought down.

This last line left me speechless as real borrowing costs are incredibly low right now and with a continuing weak economy, one would think this is a great time to hire construction workers. We will turn to material costs later. Noah links to Adam Millsap of George Mason:

In inflation adjusted dollars (the top panel) infrastructure spending has exhibited a positive trend and was higher on average post 1992 after the completion of the interstate highway system...The bottom panel shows that spending as a % of GDP has declined since the early 80s, but it has never been very high, topping out at approximately 6% in 1965. Since the top panel shows an increase in the level of spending, the decline relative to GDP is due to the government increasing spending in other areas over this time period, not cutting spending on infrastructure... Another interesting thing that jumps out is that state and local governments provide the bulk of infrastructure spending.

Adam’s source is the 2015 CBO analysis, which confirms this last claim:

Public spending—spending by federal, state, and local governments—on transportation and water infrastructure totaled $416 billion in 2014. Most of that spending came from state and local governments: They provided $320 billion, and the federal government accounted for $96 billion.

Alas Adam choose to omit the rest of the summary which also notes:

In 2003, the average price of materials (asphalt, concrete, and cement, for example) and other inputs used to build, operate, and maintain transportation and water infrastructure began to rise rapidly. Nominal public spending on that infrastructure increased by 44 percent between 2003 and 2014, but because prices of materials and other inputs rose more quickly than nominal spending, real (inflation-adjusted) public purchases decreased, falling by 9 percent from their peak in 2003 to their level in 2014 (see the figure on page 2)...The decline in real public spending (adjusted using infrastructure-specific price indexes) on transportation and water infrastructure between 2003 and 2014 occurred almost exclusively within the category of capital purchases, which fell by 23 percent during those years. The construction and rehabilitation of highways, in particular, declined over the period. By contrast, real public spending for the operation and maintenance of infrastructure continued its historical tendency to grow, rising by about 6 percent over that period, primarily because of increases at the state and local level.

The debate is over the lack of capital spending – not the cost of ongoing operations. I have a hard time believing that Adam missed this point even as he choose not to note it to his readers. Incidentally, if material costs are way up do we have any reason to believe that they will dramatically fall? I’ll provide links to the FRED series on two price indices - asphalt and cement. Both nominal price indices rose from 2003 to 2009 as China was undergoing its own construction boom. While the Great Recession moderated these increases for now – I seriously doubt either commodity will ever see the relative prices observed before the commodity boom. Now is the right time for infrastructure investment.

James Galbraith Resigns As Chair Of Economists For Peace And Security

After serving for 20 years, James K. Galbraith is stepping down as Director of Economists for Peace and Security (EPS), an important group in my view that he has built up during his time as its leader.  I know that is a long time, so I understand that perhaps the time has come.  However, his shoes will  be hard to  fill.  He originally succeeded Kenneth Arrow (who just turned 95) and the late Lawrence Klein, who co-founded the organization and served as co-chairs.  Other Nobelists who are Fellows or Board members include Amartya Sen, Daniel McFadden, George Akerlof, Joseph Stiglitz, Eric Maskin, Roger Myerson, and Thomas Schelling.  I hope that a suitable successor for Galbraith will be found.

Barkley Rosser

Amnesia, Automation and Job Loss

I would say that when technology is contributing to greater inequality of incomes, as it  seems to be doing in recent decades, then address the inequality directly. -- Timothy Taylor

Having lived through "recent decades" (along with a couple of less recent decades) I can't imagine how Timothy Taylor can blame greater inequality of incomes on technology and then go on to talk about addressing inequality directly through public policy.

Whether or not it was the intention of public policies, greater income inequality has been a direct outcome of  those policies. As a matter of fact, increasing income inequality wasn't a stated objective of the policies. The stated objectives were promoting economic growth and controlling inflation. That was supposed to make everybody better off. Technology is just an alibi for what went wrong.

Is Timothy Taylor against economic growth? Does he favor accelerating inflation? If not, how does he propose to design public policies to somehow counteract the presumably unintended inequality effects of the policies that inadvertently brought about those outcomes, while simultaneously continuing those policies and pretending that some vague "technology" was the culprit for the undesired effects? I think he's got himself a bit of a dilemma there.

Might I suggest that his narrative doesn't jibe with itself? We already have "corporatist public policy" in a form that insulates elite decision making from democratic oversight or input. How we transition from that to something better is a mystery to me but I'm pretty sure that the solution is not to pretend that individuals' insatiable desires are what ultimately determine the mixture of leisure and income. Especially after three decades of stagnant incomes for wage earners. I remember the promises made in the 1950s, 60s and 70s. Those promises were broken. Nobody believes them any more.

What people do believe is not necessarily true, either. But it conforms to their experience. Given a choice between abstractions that have been discredited by experience and illusions that validate that experience, most people will choose the illusions. Hello, Rough Beast, slouching toward Bethlehem.

The "reduction of the average work week in manufacturing from 67 hours in 1870 to somewhat less than 42 hours" that Leontief cited, quoted by Taylor, was not just something that "happened" as a result of individuals choosing to take more of the fruits of their increased productivity in leisure. It was the outcome of political struggle that was viciously opposed at every step along the way. At. Every. Step. The compromising and subsequent defeat of the labor movement that fought for shorter hours is not unrelated to the subsequent increase of income inequality over recent decades.

In the view of some economists, such as Milton Friedman, labor unions were a parasitic impediment on the smooth functioning of free markets. Free to choose entailed a "right-to-work," in the Taft-Hartley sense. Hooray! The debilitating leisure is all gone; we can bask obesely in our insatiable glut of shoddy goods and huckster services. Climate change? What... [glug, glug, glug]

Economists are all too modest when they act surprised at the ill effects resulting from policies that they had insisted would make everyone better off. "If only they had listened to us," they moan.

Oh, but the leaders did listen. And they did what their economists told them to.

By the way, the analysis and arguments put forward by advocates during that long struggle for shorter working time are very relevant to some of the most seemingly intractable policy dilemmas that we face today. And no, they weren't based on a false belief in a fixed amount of work. Unfortunately, the actual views have been so slandered and sidetracked by the propaganda that economists would rather contemplate the lint in their own belly button than marginalize themselves by engaging with these "fringe" ideas in an ethical debate.

It Is Monday And The Washington Post Wants To Cut Social Security Benefits (Again)

To  be more specific, Robert J. Samuelson on the editorial page, and I am posting this because for some reason Dean Baker did not post about this, perhaps bored with yet another round of WaPo and its columnists doing the same old same old over and over again, especially on Mondays.  This one draws on a new study of the impact of aging on economic growth, specifically per capita growth, using US states as the data sources by Nicole Maestas, Kathleen Mullen, and David Powell, the first in the Harvard Medical School and the latter two at the RAND Corporation.  A main finding is that a 10% increase in the percent of a state population that is over 60 implies a 5.5% decline in real per  capital income growth.  They find a third of this due to fewer workers, but the other  two thirds due to  unexplained productivity changes, with RJS recognizing that the paper does not provide completely convincing explanations for this, although there are some, such as that the retirement of older workers with their experience reduces  the productivity of those left behind still working.

Of course, when it comes to the end of the column Samuelson does that old Monday WaPo thing, dragging out Social Security as a big problem. Now indeed, it is certainly the case that anything that damages future economic growth damages the future status of Social Security, although apparently this paper has nothing to say about this, and Samuelson does not provide any specific estimates.  But this does not hold him back from the following: "As a society, we need a better  balanceof  obligation between the older and younger generations.  Until now, policy has favored the elderly.  The remedies to shift the balance are well-known: higher eligibility ages for government benefits; less generous benefits and tax breaks for wealthier retirees. None is politically easy." 

Yes,  that was it, the complete list of possible ways of  dealing with this problem. Should we increase aid to  students going to college or making moves to reduce college tuitions that might help the younger generation?  Nope, not a word.  How about increased aid for poor children?  Nope, not a word.  Medicare was not mentioned,which Dean Baker has regularly pointed out has much more rapidly rising costs than Social Security and helps the old, but as he has regularly also noted, most of that is due to  the continuance of medical care costs rising more rapidly than inflation, just as college tuitions have been.  No suggestion from Samuelson that any effort to try to  restrain these increases might help with this problem.  No, it was all about messing with Social  Security, although for once he did mention tax changes, not a general tax increase, but one maybe just directed at the wealthy, not recognizing that this could undermine future support for the program.

I have not read the paper, only its abstract, but at least one issue appears to me as possibly contributing to the large effects that the authors of this study find that RJS does not note  This is that it might be that they have not accounted for the fact that migration of the young is very responsive to job availability.   So, if a state has more rapid per capita growth than another one, and thus more rapid job growth, it will see younger people moving into it and out of the other one, at least relative to each other.  So, a more rapidly growing state will tend to end up with a lower percentage of elderly than a slower one, without any of this needing to be due to the rise in the percentage of elderly themselves.  This is certainly what is going on in say West Virginia, which has one of the highest percentages of elderly in the country.  Now it may be that they do not want to pay for schools, which may be damaging long run growth, but it is obvious that the main thing going on there is that with the collapse of the coal mining industry, younger people have moved out of the state leaving the old behind, not that some rise in the numbers of  old people drove the coal mining industry out of the state.  However, I must grant that it is possible that they have somehow accounted for this sort of endogeneity effect.

In any case, even if the study has completely covered for all of these sorts of issues, it is completely unsurprising that Samuelson on a Monday somehow sees the only thing that should be done in the face of this supposedly negative effect of the elderly on growth is to cut Social Security benefits.

Barkley Rosser

He Said, She Said on Charter Schools and the Black Community in the New York Times

Today we get another sad example of “objective” journalism, where advocates from opposing sides of an issue are given a platform to face off—without any independent investigation of the underlying merits.  In particular, the possibility that one point of view may just be the public face of a wad of cash is not considered.

So we have a “controversy” piece in the New York Times about black attitudes toward charter schools, the NAACP and the Movement for Black Lives (whose platform really deserves your attention) against and the Black Alliance for Educational Options for.  The Times hands the pro-charter mike over to Howard Fuller of BAEO, naming his organization and identifying him only as a professor at Marquette University.

Anyone who knows anything about the education “reform” “movement” anticipates there will be more to the story, and there is.  See this revealing piece on Fuller and BAEO by Julian Vasquez Heilig of CSU, Sacramento.  (Hat tip: Diane Ravitch.)  Sure enough, there’s seed money from right wing foundations (Bradley, Milton and Rose Friedman) and continuing sugar from Walton and Gates.  In fact, Fuller started out pushing vouchers and only gravitated to charters as the movement (and money) against public education shifted from far right to near right.  Heilig gives a nice example of a BAEO “survey” that is actually a thinly disguised propaganda effort.

Here’s the thing: I, who am just a casual follower of K-12 education politics, found all this in about five minutes.  Maybe a Times reporter could do the same.

Women New School Econ PhDs Hit The Big Time

Dr. Stephanie Bell Kelton served as the top economic adviser of Bernie Sanders.  She has apparently recently returned to her old position in the economics department at the University of Missouri-Kansas City.

It has now been announced that Dr. Heather Boushey will serve as Chief Economist for the Hillary Clinton transition team, assuming that she wins the forthcoming presidential election.  She has been the Director of the Center for Equitable Growth in Washington.

I note that both of them received their economics PhDs from the New School for Social Research economics department in New York City.  Looks like women coming out of that department have been hitting the poliltical big time recently.  Congratulations to both of them as well as the New School economics department.

Barkley Rosser

Hillary Clinton’s “Outrun You” Strategy

There’s an old joke among hikers; maybe some of you couch potatoes have heard it too.  Two guys are out on the trail when they suddenly cross paths with a grizzly.  The bear rears up and prepares to charge.  Hiker A turns to Hiker B and says, “Quick!  My running shoes are in your pack.  I need them!”  Says B: “Don’t be stupid.  You can’t outrun a bear!”  Replies A: “I don’t need to outrun the bear—I just need to outrun you.”

Which is entirely doable if your fellow hiker is Donald Trump.

Obama, Schelling, And No First Use Of Nuclear Weapons

Funny thing. Here I have been blogging here recently, econospeak.blogspot.com/2016/08/cheap-talk-and-nuclear-war.html , about how Thomas Schelling's idea of  focal points fit in to discussions about No First Use (NFU) of nuclear weapons policies.  Then today in both the New York Times ("End the First-Use Policy for  Nuclear Weapons" by James E. Cartwright and Bruce G. Blair) and the Washington Post ("Allies unite to block an Obama 'legacy'" by Josh Rogin) columns appeared about an ongoing debate within the Obama administration over precisely this issue, a debate I did not know was going on.  Apparently President Obama is seriously contemplating changing the official US policy that allows for a possible first use of nuclear weapons under several possible conditions to one of No First Use, with an announcement of this to coincide with his last visit to the UN General Assembly in late September. Interestingly, the two columns took opposite positions, the Cartwright-Blair one supporting the initiative while the Rogin ends up opposing it.

Cartwright and Blair, who both have past  experience nuclear weapons military policy, argue that this would be a move towards world peace, would save $100 billion over a decade, and that the US has sufficient conventional strength that nukes are not needed for such sensitive places as Korea. The policy would involve eliminating the tactical nukes in Europe, which should relax Russia somewhat, as well as the land-based ICBMs in the US, with both of these the least secure and the ones that are most likely to be launched suddenly by lower level officials.  The number of US warheads would go to 1000 from its current 1550, with bomber and submarine based launchpads still in place.  As it is, both China and India (and curiously, North Korea, although Kim Jong Un has recently talked of thermonuclearly wiping out New York City) have such NFU policies, while the remaining nuclear powers do not.

Rogin dismisses this effort as merely something Obama wants for his "legacy," suggesting it might make war more likely. Apparently several US allies oppose this initiative, including both UK and France who  do  not have NFU policies and think it would undermine their policies and their positions on the UN Security Council.  Offhand, I do not see the basis for this argument by them.  The other two nations not so keen on this are Japan and South Korea, with Abe of Japan supposedly the most vociferous about needing a nuclear defense against North Korea, even though a nuclear attack there would send nuclear fallout to Japan.Rogin, who has no past expertise in this area, accepts these arguments and effectively sees all this as just some dangerous grandstanding by Obama.  Also, according to him, the objections by these allies are getting traction and may carry the day in the end. I think that would be too bad.

I would like to bring out a bit more  from the arguments by Schelling regarding this, highlighting his Nobel Prize address, which appeared in the AER in 2006, "An Astonishing 60 Years: The Legacy of Hiroshima." (I have tried to link to this, but unsuccessfully, but googling the title will give you access).  I  have spoken of Schelling's modesty, and in the lecture he says nothing about his own role or the idea of focal points.  Rather he noted that while official policy among the leading nuclear powers never involved No First Use, from a very early time the norm emerged due to the moral  revulsion against nuclear weapons, as early even as 1953.  He recounts that some in the Eisenhower administration wanted to use nuclear weapons in various places, most especially Secretary of State, John Foster Dulles, but Dulles and his allies were frustrated at the resistance they encountered.  It is not  in his talk, but in 1961 when Schelling oversaw war games for Europe at Camp David, those playing on each side simply refused to use nuclear weapons, even though official  policy of  both the US and USSR was that a European war would be a nuclear war.

Schelling argues (and obviously he was a force for  this)  that during the Kennedy-Johnson years, Defense Secretary MacNamara argued that the US should build up its conventional  forces in Europe precisely so  that there would be a non-nuclear option.  Schelling argues that this was understood implicitly and tacitly by the Soviets, and that they did likewise.  In short, both sides engaged in lots of expenditure of resources in order to develop  the non-nuclear alternative, and he notes that in both Vietnam and Afghanistan, where these great nuclear powers lost, neither used  nuclear weapons against a non-nuclear adversary, although the late Curtis E. LeMay urged it in the US.

Schelling emphasized how important it was that these understandings were tacit, implicit, but nonetheless very real.  Part of enforcing the norm, even as it was not part of official policy, was simply not to talk about it.  This is a main reason why the cheap talk by first some around Putin and now US presidential candidate Trump are so disturbing.  They really do undermine the norm, as I have noted in my earlier posts.  And it may be because of this undermining by these irresponsible parties that we so seriously now need an explicit No First Use pledge by the US, to make explicit what  has been implicit, and to shut these irresponsible nuclear warmongers up.

BTW, I doubt that Schelling has been personally involved in these current debates within the administration or that he will make any public statement about this matter (although I hope he will say something about it when he speaks at James Madison University on Sept. 14).  But I have no doubt that his work in his Nobel Prize address as well as his earlier Strategy of Conflict that sat on JFK's bedside table during the Cuban missile crisis have played an important part in the thinking of  those advocating this change of  US policy.

Barkley Rosser

Cheap Talk And Nuclear War

This is a followup of my recent post here, econospeak.blogspot.com/2016//08/the-man-who-saved-world-from-nuclear.html .  That discussed Thomas Schelling's role in developing the "no first use of nuclear weapons" policy over several decades in the late 20th century related to his Nobel-Prize winning idea of focal points.  Now I shall be more precise about who and what and how this norm he played such an important role in establishing is breaking down.

Staying within the game theory framework that Schelling operated within, the problem we face now is "cheap talk."  This term entered formal game theory discussions in a paper in 1982 in Econometrica by Vince Crawford and P. Sobel, "Strategic Information Transmission."  They characterized this as involving 1) being costless,2) non-binding, and 3) unverifiable. The large literature on this since their paper  has made it clear that details matter, and that there are many special cases and variations regarding cheap talk and how it can affect real outcomes, which, it is certainly clear it can.  Cheap talk can undermine an established game theoretic equilibrium in a world where there are multiple such equilibria, and an agreement such as Schelling's old "meet under the clock at Grand Central Station" focal point can be undermined by cheap  talk about, "well, maybe we should meet under the clock at Penn Station instead."  Yeah, maybe instead of the norm of no first use of nuclear weapons, we should entertain the possibility of doing so almost randomly if  other nations annoy the heck out of us.

So indeed, as I noted in the earlier post, the origin of cheap talk undermining Schelling's hard to establish norm of no first use of nuclear  weapons came from Russians surrounding Vladimir Putin in March 2014 at the time of the imposition of economic sanctions by the US and EU over his annexation of Krim in violation of  Russia's signing on to the 1994 Budapest Accords that guaranteed the territorial integrity of Ukraine in response to Urkaine giving Russia its pretty numerous nuclear weapons, with the US and UK signing on also, neither of which did anything military when Russia under Putin violated this accord by its annexation of  Krim (Crimea).

The first to  engage in such cheap  talk was Dmitry Kiselev, appointed by Putin to run Russia Today (now  RT) and some other media.  In March 2014 during the annexation fuss, he reminded the world that Russia could turn the US into "radioactive ash."  Not too long after a young military leader, Aleksey Gudovshnikov on Govorit Moskva made fun or worrying about nuclear war, "Why are we so afraid of nuclear war?" noting that both Hiroshima and Nagasaki involved fewer deaths than the fire bombing of Dresden, which is true, but all this was before the invention of the to-this-day-never- deployed and far more destructive H-bomb.  This sort of talk has become quite common on various Russian media outlets in the last two years, very cheap talk indeed. ("Russian media learn to love the bomb" 2/23/15, www.bbc.com/news/world-europe-31557254 ).  Putin has never uttered a single word suggesting that these individuals, all of them his appointees, have overdone their public remarks.

So here we are now, with many on both the right and left in the US saying that Putin is a good guy who must be taken very very seriously, not to mention his pal in the US  adding to the cheap talk in various ways, both questioning repeatedly why we cannot just use those nukes we have whenever we feel like it, as well as approving nuclear proliferation to such nations as Japan and South Korea (Um would either China or Russia  be too keen on either of those proliferations?  But, oh, this was probaby just  "sarcasm," not recognized as such by the evil MSM).

I note another point some have raised in this debate:which nations have actually publicly supported the Schelling focal point of no first use  of  nuclear weapons.  The list is short, including India and North Korea, whose leader was recently talking about nuking New York City.

What is clear is that on the official list the big nuclear powers: US, Russia, China; list themselves as possibly using nukes for defensive purposes, no public adherence to the Schelling no-first-use norm.  But this has been for decades a discrete matter, with the signal given that nobody talks about it, no talk cheap or expensive to enforce the norm.  It has been a good 40 years since anybody serious in the US (Air Force General Curtis E.LeMay the last) has spoken in such terms.  But if one returns to the 1950s one finds very serious people using the Prisoner's Dilemma model of game theory to argue for a first strike, most famously the late John von Neumann, who declared "If it is wise to strike tomorrow [the former Soviet Union], then why not today at 5 o'clock, and if not at 5, then why not at 1 PM?"  As it was, von Neumann's great rival in those debates, Tom Schelling, won the day then.

 Barkley Rosser

Barkley Rosser

The Man Who Saved The World From Nuclear Holocaust During The Cold War

That would be Thomas C. Schelling, now age 95, whom the late Paul Samuelson once stated that Tom was the most intelligent person he ever met, presumably beating out John von Neumann, whom Samuelson argued with about cigars and general equilibrium theory, and his relative by marriage, Kenneth Arrow, a few months younger than Schelling, who is generally viewed as by far the most respected living economist, and who was a coauthor of the most famous and influential paper on the conditions for the existence of general equilibrium.  But Samuelson thought Schelling was ultimately smarter than either of them. After all, he got his Nobel in game theory in 2005 with Robert Aumann for his 1960 book, The Strategy of Conflict, which was by all accounts on the bedside table of JFK during the Cuban missile crisis, and Schelling, a technical adviser on the 1964 film, "Dr. Strangelove," was reportedly the main driving force behind establishing a secure "hot line" between the US president and the Soviet leader. 

But indeed there is more to this, including exactly why Schelling was given the Nobel Prize, which does come from arguments made in his 1960 book. So not long after Nash provided his game theoretic equilibrium, arguably more general than the strictly competitive Arrow-Debreu-McKenzie solution, and providing the Kakutani fixed point trick beyond Brouwer's that Arrow-Debreu used after him, it became known that for many games there are many Nash equilibria, probably more often than there are for ADM equilibria, for which one can find conditions that guarantee both uniqueness and stability, even if there is good reason to believe that these do not hold in economic reality.

So what Schelling was given the Nobel Prize for, and the idea he pushed that contributed to the ending of the threat of nuclear war that most now take for granted when many experts now say we are in more danger of a global thermonuclear war than we were in at least the later years of the Cold War, was that of focal  points.  His original example was a group of friends living near NYC who want to meet for dinner but do  not agree on where to meet. So, they look for a focal point they can all agree on, and back in 1960 he said that might be under the clock in Grand Central Station.

The focal point that Schelling pushed tirelessly in numerous channels, most of them private but highly placed, was that there should be an internationally agreed upon focal point that there should be no first use of nuclear weapons by any nuclear weapons holder, which, if all agree to it guarantees no nuclear war aside from accidents.  There was resistance to this, within the US most notably in the air force, especially from the late Gen. Curtis E. LeMay, who not only advocated the use of nukes in the Cuban missile crisis (when we came much closer to nuclear war than most realize), but also during the Vietnam War.  His retirement certainly ended the last serious public opposition to Schelling's focal point, which somewhere during the 1970s quietly came into force without anybody publicly saying so.  And as a result "many [very well informed] people" say he was more responsible than anybody else for why there was no nuclear war during the Cold War.

Unfortunately it would seem that a lot of recent loose talk has begun to undermine Schelling's long accepted and established focal point that has restrained a possible global nuclear holocaust for decades.  It started  with associates of Vladimir Putin during when Russia was annexing Crimea loosely noting that Russia could still nuke New York City.  Spacibo, guys. Since then people friendly with Putin in other nations have been making even looser remarks as the nuclear cat is out of the bag.  I mean, according to some of them, just why cannot we use nuclear weapons anyway whenever and wherever we want?

For those interested, Tom is scheduled to speak at James Madison University at 4 PM on Wednesday, September 14 in Zane Showker 105, but if you are interested you should check with us about details. I certainly hope that he will be able to give this important lecture.h

Barkley Rosser

Nobody Knows

Actually, Everybody knows.

A Marxist Moment

The best thing about Marxism is that it provides a language for talking about comprehensive, fundamental aspects of society.  The worst is that it also imposes a template for this discussion that often doesn’t fit very well.

I just read Daniel Zamora’s When Exclusion Replaces Exploitation: The Condition of the Surplus-Population under Neoliberalism in nonsite.  The first half is really excellent.  His insight is that the shift from the old left to the new and the rise of modern neoliberalism are in some sense reflections of one another, and both are rooted in the emergence of a relatively distinct “surplus” stratum of the population in developed capitalist countries.  (I also associate this view with Loïc Wacquant, whose notion that racial division in the US has shifted from being a means of exploitation to one of exclusion was a basis for Michelle Alexander’s New Jim Crow.)  According to this argument, in the bad old days the visible line drawn through society was between the wealthy and the rest of society whose work made this wealth possible.  Now, in the bad new days the line has been redrawn between those who have steady work and a modicum of economic security on the one side, and the poor, the unemployed, and the victims of discrimination on the other.  Left and right agree on this, and only disagree about which side they valorize.  Interesting.

The second half of the essay, alas, is a big letdown.  It retreats into pure dogmatism: we read that Marx showed the exploitation of the working class is the motor that powers the whole system and only a united working class movement can end exploitation and usher in a society without all the invidious distinctions.  Zamora actually describes his intellectual retreat precisely, juxtaposing the concrete and contingent analysis of current social conditions that foregrounds various group oppressions and the abstract (his word, used over and over) revelation of Marxism that is true without any need for empirical validation.  If, like me, you’re not a believer, nothing he says about this will turn you around.  What I was hoping for was an analysis of the structures of inequality that exist today, with a grounded explanation for why the identitarian movements don’t add up to a systemic force (which I suspect but may be wrong about), and instead all I got was the same old, same old.

Diamond Transfer Pricing and the Tax Rate in Dubai

A follow-up to my previous post courtesy of Amnesty International:

Within the diamond supply chain, however, smuggling is not the only means by which actors such as traders and companies can unjustly enrich themselves at the expense of diamond-producing countries. A central issue is the way diamonds are valued and the phenomenon of transfer pricing. This is particularly evident in diamond trading centres operating in low tax or no tax jurisdictions….Dubai has come in for particular criticism because of the significant difference in the value of its rough diamond imports and exports (as shown in the table on page 59) and the fact that it does not tax diamond traders.243 Diamond traders in Dubai benefit from various free trade zones, including the DMCC and the Dubai Airport Free Zone Area (or DAFZA). As such, a company could export a diamond at a low value from a developing country; the diamond could then enter Dubai where the importing company marks-up the price and exports it to a related company in another trading or cutting / polishing centre. No tax is payable in the free trade zones in Dubai, so the company in Dubai makes a substantial non-taxable profit.

I sort of stumbled onto this when trying to understand the last from the European Union on their State Aid inquiries:

Under the new Diamond Regime, a trader's gross profit margin is fixed at 2.1% of its turnover.

The Belgian trader affiliate likely incurs operating expenses near 1.5% of sales (turnover) so its operating profits are a mere 0.6% of sales. The intercompany flows are likely as follows. A gold mine in Africa sells its rough diamonds to an affiliate in the UAE which converts these into polished diamonds. The UAE affiliate then sells the polished diamonds to the Belgian trader affiliate. Amnesty International is suggesting very little profit stays in Africa with most of the profits accruing to the UAE affiliate. Now if the UAE affiliate had a 55% tax rate – this would be awful tax planning. But the reality is that the UAE is a tax haven for the diamond sector.

The Man Who Refused To Drink Champagne At Alamoagordo On July 16, 1945

That would be Robert Wilson at the first successful  explosion of a nuclear bomb, a plutonium one, at the Trinity test on the date in the title, about 120 miles south of Albuquerque, quite far from the Los Alamos site that Wilson oversaw the construction of, reportedly riding around on a horse to see that the sewer and electrical lines were properly installed, he being a native of Wyoming, unlike the majority of the Manhattan Project crowd, many of them Jewish refugees from large cities in Europe totally unable to deal with the American Southwest.

No, this is not the co-composer of the minimalist opera, "Einstein on the Beach," or the microeconomic theorist that some think should receive a Nobel Prize (forecast, no).  This one built the Fermilab near Chicago as well as Los Alamos, and after the war attracted the largest group of Manhattan Project physicists to be with him at Cornell University, including Nobelist Hans Bethe as well as Richard Feynman, and many others.  They respected him that much.

So indeed, he was the man who when the bomb went off did not join in with the others to drink champagne and celebrate their great achievement.  It is true that his boss Oppenheimer expressed a complicated view, suggesting that what they had done was in honor of Shiva, the Hindu god of destruction and creation (how Schumpeterian), but he drank the champagne, even as he would later be deposed by McCarthyites for his leftist connections when it came to the matter of the H-bomb.

So,  his oldest son and wife has been a serious conservative, voting GOP and quite critical of the political views of his left/progressive parents. However, last night I spoke with him and his wife, and this person acutely aware of nuclear weapons issues, the oldest son of the man who said that "We have done an evil  thing" when the others were celebrating and drinking champagne, has, like many other serious Republicans, decided that Trump is completely unacceptable and irresponsible on the grounds of his completely ignorant and ridiculous remarks regarding nuclear weapons policy, which  themselves have already degraded the peace of the world.

Barkley Rosser

Trump Claims US Has the Highest Corporate Tax Rate

Katherine Krueger covered the Trump economic address noting his lack of honesty. I should say nice job but there was one item that troubled me:

According to Trump, the U.S. has the highest business tax rate among the major industrialized nations of the world at 35 percent, which under his plan would be slashed to no more than 15 percent. Although the country has the third-highest top marginal corporate income tax rate in the world (and the highest among the industrialized nations), the reality is that the money collected is cut significantly by things like tax credits and offshore tax havens. In 2010, the average effective federal tax rate paid by large, profitable corporations was just 12.6 percent, according to the Government Accountability Office.

She is right about how the statutory tax rate in the US overstates the effective rate for many US based multinationals but let’s check her source that alleges two other nations have higher tax rates:

The United States has the third highest general top marginal corporate income tax rate in the world at 39 percent, which is the same as Puerto Rico and is exceeded only by Chad and the United Arab Emirates…the U.S.’s corporate tax rate of 39 percent is the third highest in the world, tied with Puerto Rico and lower only than the United Arab Emirates and Chad, which have rates of 55 and 40 percent, respectively.

The alleged 39 percent rate for U.S. companies again is a statutory rate that many companies do not really face as she has noted. The tax rate in the United Arab Emirates is often zero for companies that are not in the business of extracting oil out of the ground. This 55% rate is actually a surcharge on oil profits. Other nations with lower tax rates than we have also have high surcharges on oil profits. So OK – the statutory rate for profits in Chad is higher than this alleged 39%. Of course the effective tax rate for US based multinationals is often nowhere near 40%. Trump could advocate enforcing transfer pricing if he were serious about raising taxes from the rich but I guess his small government economic advisers have convinced him of the “wisdom” of that Laugher Curve.

How Much Did We Own Iran?

The Wall Street Journal got the right wing all excited with some phony suggestion that we sent $400 million in hostage money to Iran. Of course the real story is clear:

Ryan, Trump, and other critics have the facts wrong. The Wall Street Journal story is actually describing a payment that President Obama announced back in January. What’s more, the payment was the result of a 35-year case in international court — and had nothing to do with any "hostage" payments.

Iran was actually seeking $10 billion to settle this matter. Let’s do a little mini-analysis. Suppose you borrowed $400 million in 1979 and did not settle matters until 37 years later. Over the course of this period of time, the general price index has increased by a factor of 3.5. So $400 million back in 1979 would be $1.4 billion today. And of course this calculation assumes you pay zero real interest. While that may be near the real interest rate today – real interest rates back in the early 1980’s were very high. So what should we assume is the appropriate real interest rate for our exercise? If we assume 2 percent, then in real terms the principle should be about 2.1 times higher. So we likely should be paying Iran $2.9 billion. Of course the Republicans likely have a different view as they don’t mind cutting those Social Security benefits we were promised during the 1983 Reagan reforms in order to give tax cuts for rich people. So why not default on our international obligations. Call this Trump Financing.

Washington Post Leaves Out a Detail

The Washington Post story on the Melania Trump visa mystery presents the following narrative:

Q: But the nude photographs were taken in New York City in 1995? 

A: Correct. The photographs originally appeared in the French magazine Max and were published again in the New York Post last weekend. Marc Dolisi, chief editor of Max at the time, told The Washington Post that the pictures appeared in the February 1996 edition of the magazine and had been shot in November or December of 1995. Jarl Ale de Basseville, the photographer, said the shoot was conducted in New York. 

Q: How can the discrepancy be explained? 

A: Only Melania Trump can explain the discrepancy, which was first reported by Politico. The campaign has not responded to questions asking how those photos could be shot in 1995 if Melania Trump arrived in 1996. 

Q: So does that mean Melania Trump was in the United States illegally in 1995? 

A: It’s not clear. Dolisi and de Basseville both told The Washington Post that Melania Trump was not compensated for the Max magazine photo shoot. She was a relatively unknown model at the time. Taking part in magazine photo spreads for free is common for models at that level because the exposure can help them secure commercial work. 

Q: Why is it important that Trump was not paid? 

A: Without pay, she could have been here legally on a visitor’s visa. Foreigners coming to the United States for brief stays can obtain B1 or B2 visitor’s visas allowing them to stay in the United States as either a tourist or a business visitor attending a meeting or other work event. It is, however, illegal to work in the United States on a visitor’s visa; that kind of illegal work has tripped up many other people who wish to legally immigrate to the United States. People applying for or holding a visitor’s visa are asked both at an embassy or consulate abroad and at the port of entry upon arrival whether they intend to work. If they come to the United States planning to work and claim otherwise, that’s immigration fraud. 

It is unclear, however, if she got any other kind of compensation during her 1995 stay, such as airfare and lodging.

This seems to be a fairly comprehensive account except for one detail.  Count Jarl Ale de Basseville or Alexandre de Basseville pleaded guilty in 2007 to conspiracy to commit money laundering and conspiracy to distribute MDMA ("Ecstasy") and was sentenced to 240 months in prison and ordered to forfeit $528,500. Not exactly what one would consider a credible reference regarding the legitimacy of one's visa status.

"Taking part in magazine photo spreads for free is common for models at that level because the exposure can help them secure commercial work." Can we get a second opinion on that?

Coincidentally, one of the prosecutors for the drug and money laundering case was named Trump -- James L. Trump:

DEA to Drug Ring with Hollywood Ties: "That's a Wrap"

Swiss and L.A.-based companies involved in drug and weapons trafficking 

(WASHINGTON, D.C.) - The Drug Enforcement Administration (DEA) today announced the successful results of Operation Director's Cut, a two-year investigation involving an international ecstasy and weapons trafficking organization with Hollywood connections.

Seven arrests took place in the case, including those of Limelight Films, Inc. Chief Executive Officer Bruno D'Esclavelles of Los Angeles, Chief Financial Officer David Liberman, and three other associates. Also arrested was Alexandre De Basseville of Switzerland and Los Angeles. De Basseville is an executive board member of ADB Swiss S.A., a Swiss-based financial, business, and consulting service that owns the L.A.- based Limelight Films, Inc. Various media outlets have reported that De Basseville is engaged to Kiera Chaplin, granddaughter of the legendary film actor Charlie Chaplin. According to the Limelight Films, Inc. website Kiera Chaplin serves as an executive. De Basseville and D'Esclavelles were arrested in Arlington, Virginia and charged with conspiracy to distribute MDMA (ecstasy). Liberman was charged with conspiring to launder money. 

"The men we arrested have laundered hundreds of thousands of dollars -- money used to further their drug and weapons trade to endanger our neighborhoods and bleed our communities," said DEA Administrator Karen P. Tandy. "This operation demonstrates once again the poisoning influence of drug money, and the greed that causes some people to hurt the lives of the many." 

According to criminal complaints filed in federal court, Alexandre De Basseville met repeatedly with undercover agents over the past two years, posing as international drug traffickers. De Basseville offered to launder drug proceeds, supply weapons and broker ecstacy deals for the undercover agents. The agents met with De Basseville and several of his associates, including the other six individuals charged, in various locations, including Arlington, Virginia; Miami, Florida; Los Angeles, California; Amsterdam; the Netherlands; and Geneva, Switzerland. On two occasions, De Basseville and D'Esclavelles took cash, totaling $300,000, which they believed to be drug proceeds, and laundered it for the undercover agents using their Los Angeles business, Limelight Films, Inc. 

In February 2006, de Basseville and d'Esclavelles arranged for the sale of ecstasy from the Netherlands by Thomas Frischknecht to an undercover agent. Frischknecht sent the agent a package containing 10,000 pills, which the agent received in Arlington, Virginia. Thereafter, de Basseville, d'Esclavelles and Frischknecht agreed to sell the agent 500,000  pills in the Netherlands. Frischknecht was arrested in the Netherlands as the undercover agent negotiated for the delivery of 500,000 ecstasy pills. 

Thomas Frischknecht, age 26, of Switzerland, was arrested in Amsterdam, the Netherlands, and charged with conspiracy to import ecstasy. Authorities also arrested Fabian Pruvot, age 37, Andre Prikazhikov, age 31, and Brian Delansky, age 33, all of Los Angeles, California. Pruvot and Liberman were charged with conspiracy to launder money. Prikazhikov and Delansky were charged with conspiracy to possess firearms in furtherance of drug trafficking. 

This case was investigated by the Drug Enforcement Administration; the Federal Bureau of Investigation; the Internal Revenue Service; the Bureau of Alcohol, Tobacco, Firearms and Explosives; Immigration and Customs Enforcement; Customs Border Patrol; Arlington County Police Department, Metropolitan (D.C.) Police Department. The United States Attorney's Office also received considerable assistance from law enforcement authorities in the Netherlands and Switzerland. The case is an OCDETF (Organized Crime Drug Enforcement Task Force) investigation. The prosecution of the case is being handled by Assistant United States Attorneys James L. Trump and Steven D. Mellin and Special Assistant United States Attorney Daniel Grooms.

"This struggle about the legal restriction of the hours of labor...

...raged the more fiercely since, apart from frightened avarice, it told indeed upon the great contest between the blind rule of the supply and demand laws which form the political economy of the middle class, and social production controlled by social foresight, which forms the political economy of the working class." --Karl Marx, Inaugural Address of the International Working Men’s Association

Wealth And Power: Does One Necessarily Lead To The Other?: The Curious Case Of Flanders

While wealth and power are usually highly correlated, with each feeding into the other positively most of the time, it is not always the case.  Curious are cases where there has been substantial economic wealth, but no  great power.  One example of this is Flanders, the northwestern part of Belgium, currently the most densely populated part of Europe, as it has been for many centuries, although the data becomes weak and unreliable as one goes further back in time.  Furthermore, it has often been an economic leader in Europe, and when not  an outright leader such as in the High Middle Ages, it has always been near the top in per capita real income, not a Malthusian disaster.  Yet it has never been the center of a great political power, essentially always ultimately ruled by outsiders, even though nearly always those outsiders were poorer than the Flemish.

The historian Fernand Braudel was a great student of Johan Heinrich von Thunen, author in 1826 of The 1State, in which land use patterns appeared as rings around a central place, the main market location for all that is produced on the homogeneous plane of his estate and his broader speculations.  Braudel ties these economic rings to population density, and saw Flanders at the center for centuries of the Europe-wide pattern of such rings, with income falling with population density as one moved out from that central place in Flanders.

Much economic theory says that if an area can avoid a Malthusian disaster or drag, density of population can be a positive for economic growth for multiple reasons, including such things as endogenous technological change and reduced transportation costs leading to agglomeration economies.  Flanders may have been one of the first parts of the Roman Empire to replace slavery with serfdom, and then it was one of the first places to move beyond serfdom.  The first industrial strike in the world happened in a textile mill in Douai in 1245.  Canals were being built as early as a thousand years ago around Bruges/Brugge, with the flat and wet land seeing many built since then. Bruges was one of  the largest cities in Europe in the 1200s, limited at its river silted up, with textile  manufacturing Ghent the third largest after Constantinople and Paris in the 1300s.  World-powerful Hapsburg Holy Roman emperor, Charles V, was born in Ghent in the late1400s, but he chose to rule from other cities.   While he spoke Flemish/Dutch to his mother, he is reported to have said, " I speak Spanish to God, French to men, Italian to women, and German to  my horse."  The latter may reflect his battling with the Protestant Reformation among Germans, which started during his reign.

Flanders and Tuscany co-led the mercantile capitalist revolution in the 1300s, and traded intensely with each other, even as they also  saw a major development of art.  However, neither dominated other territories, despite their high real per capita income and cultural activities, with the Renaissance coming out of Tuscany thereafter.

Then Ghent and other parts of Belgium would be the first places on the European continent to follow Britain and introduce the industrial revolutions.  Per capita income in Flanders remains high today, if not at the very highest levels in Europe.

I really do not have an explanation why such a region that was for centuries a leading economic powerhouse in Europe never dominated or ruled others.  One issue, which one can see in some other places such as Lower Egypt, is that its wealth attracted outsiders to conquer it to obtain its income and riches, starting with the Romans and then the Franks, who may have made the best shot at making it a conquering territory, even as they moved their capital to Paris (the Flemish language as spoken in Bruges is probably the closest thing to Old Frankish spoken anywhere  now, and is viewed by linguists as the oldest form of Dutch).  While there was always a Count in Flanders, he was almost always subject to somebody else, the Romans or Holy Romans and later the Burgundians  with more outside Holy Romans, even when the  Holy Roman came from there as in the case of  Charles V.

Later on one can attribute their inability to rule themselves due to Catholic-Protestant religious conflicts and wars, with this split the key to the split between Catholic Belgium and Protestant Holland. In any case, the Spanish and then the Austrians got in to running Flanders.  They have now achieved regional autonomy within modern Belgium, but they are very far from ruling anybody else, even as they remain the most densely populated part of Europe with a very high per capita income.

Barkley Rosser