Washington Blizzards A Libertarian Paradise?

The editorial page cartoon in today's Washington Post by Toles shows a TV newsperson reporting from piles of snow that "Washington is a frozen block of ice, and nothing is happening, moving forward, or advancing." A balloon from the Capitol building says, "Now we have an excuse!" and down in the lower corner it says, "Every day is a snow day in Washington." In any case, I often see or hear libertarians declaring the virtues of "Washington doing nothing," although presumably they might prefer that Washington acted to shut itself down permanently.

Global Trade Imbalances as a Statistical Artifact

Today, the latest spin that purports to describe the still unfolding global economic crisis is that of 'global trade imbalance', with particular attention being focussed on the US and China.

The US, we are told, has a huge trade deficit and China is conveniently blamed for this. "They say China's currency manipulation hurts the U.S. economy" [1] making China's goods much too cheap relative to those produced in America.

This tale does not reflect the contemporary reality and it is all the stranger because, on the other hand, it's never been a secret about the manner in which the large global corporation has evolved its operations over the last 4 decades. These huge networked businesses now have production systems that most often span a large number of countries at the one time. That means, in effect, that world trade is now mostly defined by the nature and extent of the global corporation and its networks. The nation is no longer the core economic entity.

In 2006 Samuel J. Palmisano, Chair of the Board, President, and Chief
Executive Officer of IBM described the evolution that has occurred in the nature and function of the international corporation.[2]Since the early 1970s economic nationalism has abated, Palmisano says. Trade and investment barriers consequently receded. A revolution in information technology also occurred and this development improved the quality and cut the cost of global communications and business operations "by several orders of magnitude". The large transnational corporation was then much more able to standardise technologies as well as its business operations all over the world. This, in turn, led to the interlinking and facilitation of work both within and among companies.

"New perceptions emerged as to what was possible and permissible.... The focus shifted from products to production." State borders defined less and less "the boundaries in corporate thinking and practice…."

More ominously, as we now see with the global fad for deregulation, Palmisano eulogises

"the growth of horizontal, intergovernmental networks among the world’s regulators and legislators [that are] built on shared professional standards and relationships among cross-national communities of experts."

Almost anyone with more than a fleeting interest in economics understands this new reality. The most dominant global enterprises have embedded themselves in one nation after another and most of those businesses are US and European in origin. The economic reasons for these entities doing so appear quite obvious. Labour is cheaper in Asia. Corporations find it much easier to avoid tax and engage in transfer pricing to maximise profits, and so forth.

So, it's not surprising, and somewhat belated, to find a 2007 paper published by the Asian Shadow Financial Regulatory Committee that finally raises the very serious issue of false accounting in international trade by governments around the globe. Quote:

"MNC affiliate sales within their host countries are not included in trade balances, but are counted in host country GDP. MNC affiliate sales from the host country to other countries are counted as exports of the host country. This accounting practice overstates the current account surplus of a country like China with heavy inward foreign direct investment (FDI). This surplus would be reduced if sales outside China by affiliates of foreign-owned MNCs were excluded from its exports and sales within China by affiliates of foreign-owned MNCs were included in its imports. The trade accounting system overstates the current account deficit of a country like the US, with heavy outward FDI. This deficit would be greatly reduced if sales outside the US of overseas affiliates of US MNCs were included in US exports and sales back to the US of overseas affiliates of US MNCs were excluded from US imports." [3]

For all the huge trade surplus that China is purportedly 'enjoying' it turns out that little benefit is being derived from it. Over 50% of China's exports are produced by foreign corporations. Walmart, for instance, has 700 factories in China. And 'China' (whatever accounting entity this word constitutes) has 'trade deficits' with "the rest of Asia".

"In effect, China aggregates the trade surplus of East Asia with the U.S. and Western Europe, takes the political heat, but captures relatively little of the value that it adds to final products."

We need to know more than just the fragments of data that government bureaucracies, mainstream professions and the media serve out. A true understanding of the nature of the crises now confronting us is absolutely essential, and yet deliberate obfuscation is occuring as to the cause and nature of our collective dilemma.

"Were it part of our everyday education and comment that the corporation is an instrument for the exercise of power, that it belongs to the process by which we are governed, there would then be debate on how that power is used and how it might be made subordinate to the public will and need. This debate is avoided by propagating the myth that the power does not exist."

John Kenneth Galbraith, The Age of Uncertainty, 1977

[1] Q&A: How China's Currency Policy Affects You
by Adam Davidson
text sizeAAA
April 20, 2006
http://www.npr.org/templates/story/story.php?storyId=5353313

[2] "The Globally integrated Enterprise" Samuel Palmisano, ceo and chair of the board of ibm, Foreign Affairs
http://www.ibm.com/ibm/governmentalprograms/samforeignaffairs.pdf

[3] Asian Shadow Financial Regulatory Committee
A New Perspective on Global Imbalances: the Role of MNCs
Statement No. 8
Hong Kong, July 5, 2007
www2.hawaii.edu/~fima/ASFRC/HK_Statement.pdf

What Was Wrong With The Clinton Tax Code?

Arguably that it was insufficiently progressive. Of course, that is not what one heard during the Bush presidency when that tax code was made both more regressive as well as less able to collect revenues, playing a non-trivial role in turning a US budget surplus into a massive deficit, now being used by Republicans in the US Senate to push for cuts in all kinds of social safety net programs. Because of their firm opposition there will be no going back to it, and when Clinton got it put in place in the early 90s, they totally opposed it, forecasting it would lead to a massive recession. It did not, but they took control of the Congress on such claims.

I note for anybody who thinks that the Clinton code was some sort of "anti-rich" pile of socialistic redistributionism that the top marginal income tax rate in it was still well below what was in place after the first round of Reagan tax cuts in the early 1980s, when that rate was still at 50%. The really sharp cut in the top rate only came in 1986 with the tax simplification.

Remembering the 1970s' Energy Crisis

This week I discovered an interesting International Monetary Fund webpage that provided a brief history of the oil crisis of the early 1970s. I quote from one of their pages:

"The fourth Arab-Israeli conflict broke out in October 1973. Over the next three months, the price of crude oil shot up 300%! Global energy and financial crises ensued." [1]

It was all very simple, according to the IMF. Anger towards the Netherlands and the Unites States because of their judged undue level of sympathy for Israel and also (as mentioned later) because the price of oil had not risen in line with other world commodities at the time.

This version is somewhat at odds with actual events, however. I was aware in the '70s that Western governments (in particular) justified the then huge spikes in the price of oil by repeatedly making the claim that world oil shortages existed and we'd all better get used to it.

Decades of wasteful energy consumption follwed. There was almost a complete lack of effort by government and industry to limit the public's consumption of oil. I was left a permanent skeptic.

Many other people were suspicious of events even at the time.

Richard J Barnett and Ronald E Muller, writing in 1974 said:

“Between 1970 and 1973, even before the Arab boycott and the official proclamation of the Energy Crisis, the price for crude rose 72%. In some cases the price of natural gas has risen 200% since 1970….Although consumption in the United States has been cut back by government programs, blackouts, brownouts, service-station shutdowns, winter school closings, and rationing, demand, both US and worldwide, far outpaces available supply. This situation is a direct consequence of some of the structural changes in the world economy to which we have alluded. The decisions about production, pricing, research and development, and distribution in the energy field have been substantially in the hands of the global energy companies, the “seven sisters” – British Petroleum, Gulf, Mobil, Shell, Texaco, Exxon, and Chevron (Standard Oil of California). (Purely domestic energy companies account for approximately one-third of annual US energy consumption.) For many years Exxon and other global energy companies have been earning substantially higher profits abroad than in the United States. Because 300 billion barrels of the proved 500-billion barrel world oil reserves are in the Arab countries of the Middle East, the companies have been concentrating their development activities there. Because of their oligopolistic control over the world energy market, they have held the commanding power to decide how much oil is produced, where it shall go, the price to be charged, and where, through transfer pricing techniques, to declare their profits. The power of the global energy companies in the US economy is based on a combination of special privileges, uniquely favourable oil concessions in foreign countries backed by the power of the US government in the name of “national security.”….[The major oil companies – the “seven sisters” have] near monopoly control of oil reserves, transportation, refining and marketing facilities…..Despite recent nationalizations and the rise of a few European and Japanese companies, 8 global companies, 5 of them US-based, still control 48 percent of world production and a degree of vertical integration and market sharing permitted no other industry. Immunity from antitrust prosecution has been justified on “national security” grounds….Because the petroleum companies have had near-monopoly power over production and distribution, they have, for much of the last generation, been able to set world prices at will. This explains, in part, their extraordinary profits….the annual rate of return on fixed assets invested in the Middle East rose from 61 percent in the 1948-1949 period to 72 percent a decade later….costs are much lower in the Middle East…..Because the information about oil reserves, real costs of drilling and distribution, and their own long-range strategies is in the exclusive hands of the companies, it is impossible to know the extent to which the celebrated Energy Crisis that began in 1973 is real or manipulated. There is considerable evidence, as committees of Congress began to discover in 1974, that available supplies are far more ample than the long lines at gas stations and “crisis messages” from the White House would suggest. Indeed, fuel stocks in the US were at an all-time high in 1974….Some knowledgeable students of the petroleum industry such as former Occidental executive Christopher Rand and MIT professor Morris Adelman offer impressive evidence that there is no shortage of fossil fuels in the ground and that indeed, in Rand’s words, “the inventories of the world’s available fuel have been increasing rather than diminishing, even when measured against the annual rise in the rate of the world’s consumption.” The suddenness with which lines at gas stations appeared and disappeared, the puzzling display of sudden anger and sudden friendship from the Arab boycotters, and the quick jump in gas prices and oil-company profits all within a few short winter months in 1974 aroused widespread public suspicion that the Energy Crisis was stage-managed….The extent to which the crisis was the result of conspiracy may not be known until historians are given access to the oil companies’ equivalent of the Pentagon Papers….The worldwide energy crisis is not a problem of absolute shortages of energy sources. It is a political crisis over who shall control these resources; who shall decide where, when, and how they are to be distributed; and who shall share in the enormous revenues….as Professor Adelman and other petroleum experts [argue] that there is no worldwide shortage of recoverable oil in the ground, but it is an academic point if those who control the reserves will not permit them to be exploited fast enough to meet rising demand. While the US-based oil companies now issue standard warnings about the Energy Crisis, they are engaged…”in a massive exercise in picking the pocket of the American consumer to the tune of billions a year.”[2]

In somewhat of an understatement Barnet and Muller observe that these extreme hikes in the price of oil had created a dollar glut. They say that this, "no less than the [so-called] scarcity of oil threatens the stability of the international structures for the creation and maintenance of wealth." [3] Poor and oil-dependent countries - the first 'subprimers' were pushed into extraordinary levels of unsustainable debt in order to recycle this artificial liquidity glut of petrodollars. They defaulted in quick succession, more dollars were lent back to them and the global Ponzi game continued to our current financial and ecological breaking point.

Governments around the world became dependent upon another global cartel to be able to continue to pay for expensive oil. The bankers of Wall Street were the second powerful oligopoly exacerbating global imbalance. As Grazia Ietto-Gillies once stated, these “Multinationals are [and were] everywhere except in economic theories and economics departments.”

[1] Reinventing the System (1972-1981)
https://www.imf.org/external/np/exr/center/mm/eng/mm_rs_01.htm
OPEC Takes Center Stage

[2] Richard J Barnet and Ronald E Muller, ‘Global Reach – the Power of the Multinational Corporations’ Simon and Schuster, 1974. Pages 218 – 224.

[3] Richard J Barnet and Ronald E Muller, ‘Global Reach – the Power of the Multinational Corporations’ Simon and Schuster, 1974. Page 226.

Howard Zinn: RIP

The historian Howard Zinn died this week at 87. His _The Peoples' History_ of 1980 altered how many viewed US history, bringing to attention the stories of those who were not the winners of the American dream, the many who suffered, from slaves through Indians, and on and on to many groups. He performed a real service and will be missed.

Banning Foreign Companies' Campaign Contributions

Many companies have tried to reduce taxes by incorporating abroad -- the so-called Bermuda Inversion. Wouldn't the banning of foreign campaign contributions apply to them?.

Finance vs. Independence at the Fed

Richard Smith is a historian who is doing a biography about my mother's cousin.
Here is his timely piece about the corrupting influence of finance on the Fed -- in particular about A. P. Giannini got Truman to remove Marriner Eccles from his position as chairman of the Fed. So much for independence.

Smith, Richard H. 2010. "Breaking News (From 1948): Banking Mogul Ousts Fed Chairman." Huffington Post (28 January).

http://www.huffingtonpost.com/richard-h-smith/breaking-news-from-1948-b_b_439398.html

Climate Disclosure: More than a Carbon Inventory

The SEC has voted to require something that firms should already be doing proactively, assessing their vulnerability to climate change and legislative remedies for it. What everyone should recognize, however, is that first generation measures are not enough.

First generation analysis was first-round: a business or agency would inventory its own carbon emissions and the impact that climate change would have on their own operations. This is a good start, and much has been learned.

To go to the next generation, the guiding principle is to evaluate not only your own direct exposure, but also that of important customers, partners and suppliers. You can say it’s their problem, and it is, but it’s also yours. For example, my institutional home, Evergreen State College, has to consider what the consequences will be for student enrollment if fossil fuel prices are increased dramatically. How many commute from distant locations, and how many of these will move to our neighborhood in order to continue their education? If there are likely to be significant shifts in residential patterns that will affect student demand, can we predict them? Are there actions we can take in advance that can minimize the downside of these adjustments or possibly take advantage of the upside?

You could say that what is needed is for organizations to stop looking at themselves as if there were thick lines around their borders and see themselves ecologically.

The Ideological Use of Cost Benefit Analysis

This short section from my forthcoming Invisible Handcuffs discusses the ideological use of cost-benefit analysis.

http://michaelperelman.files.wordpress.com/2010/01/cost-benefit.pdf

Profound Journalistic Ignorance of Climate Change Legislation

It’s not like this is a new issue. By now, you’d think that journalists would have figured out what’s what in the realm of forestalling climate change, but you’d be wrong. Just take a look at today’s long writeup in the New York Times.

After a quote from Lindsay Graham, a senator from South Carolina, pronouncing the death of cap-and-trade, the coauthors write

Mr. Graham’s opinion matters because he has been the only Republican willing to work with Democratic senators on some form of climate change legislation.

But towards the end of the piece we read that

Two senators, Maria Cantwell of Washington, a Democrat, and Susan Collins of Maine, a Republican, have proposed a system known as “cap and dividend” under which power plants, steel mills, refineries and other major carbon emitters would have to pay for permits to pollute, with all of the money being rebated to consumers to cover the higher costs of energy and manufactured goods.

So: Graham is the only Republican willing to collaborate, but Collins has also sponsored a carbon-capping bill (one that would allow trading too).

Even worse—in fact, much worse—the article completely mischaracterizes Cantwell-Collins. It does not, unlike Kerry-Boxer, require industry-by-industry emission permits. Instead, it requires permits for introducing fossil fuels into the economy, whether by extraction or importation. It goes after carbon from the top of the food chain, making its cap comprehensive, unlike approaches that try to determine which uses of fuels will be regulated and by how much. This also neatly sidesteps the political morass that results from inviting each industry to lobby for its own dispensations. Auctioning fossil fuel permits and rebating the proceeds to the public, as Cantwell-Collins proposes, is not an evasion of environmental responsibility, but a rational attempt to make the inevitable energy price increases economically and politically palatable.

The real story is not the death of climate change policy, but the collapse of one particular initiative that was largely smoke and mirrors, fatally compromised by payoffs to any business alliance that stuck out its hand. The bad news is good news, unless all we know is what we read in the papers, feel discouraged and give up.

A Woody Allen Moment

You may remember the scene from “Take the Money and Run” (if you’re as old as I am). Over and over, as he was growing up, bullies would pull Woody’s glasses from his face, throw them on the ground and smash them. Now, as an adult, he is cornered by the police after a failed heist. In a panic, he pulls his glasses off, throws them on the ground and smashes them. “See,” he says, “I did it myself.”

Fast forward to Obama post-Massachusetts, offering to shrink the beast all on his own.

Time to switch role models.

The Other Shoe

In broad outlines, the story is very simple. In bailing out the financial system without taking possession of more than a small equity position, and then in engineering a stimulus that was deliberately inefficient—devoting a third of its cost to tax cuts at a time of massive deleveraging—the Bush and Obama administrations squandered hundreds of billions of dollars in public resources. Now, to prove his fiscal responsibility, Obama wants to cut spending on core functions of government, like public health, the environment and national infrastructure.

You can blame him for leaving the bloated Pentagon budget off the table, or for prematurely panicking over fiscal deficits. Both criticisms are entirely justified. But in a larger sense, we condemned ourselves to a generation of torturous public finance in that spasm of terrible policy. We will be paying for it, one way or another, for years to come.

Obama is not a Wimp

Barack Obama gave the appearance of meekly appealing for bipartisanship, only to get kicked in his private parts. Yet, look how courageously he is willing to take on the liberals and his party. Along with Larry Summers and Rahm Emanuel, he can really kick butt. Locale he has taken on the teachers union by ramping up Bush's No Child Left Behind. Watch him cut back entitlements for those people without enough initiative to run their own hedge funds.

He may down to the Israelis, but look how decisive he is in Afghanistan, willing to fight an unwinnable war. Not even Joe Lieberman can top him.

And what about his decisive actions against the fat cats? He didn't kick them when they were down. A would not real hero to behave that way. No, he gave them billions of dollars, but now he's decided to take them on, by creating regulations so tough that the fat cats will have to spend thousands of dollars to figure out how to circumvent them.

Barack Obama, change you can believe in.

This Ford’s in Reverse

How should the Democrats respond to their collapse in Massachusetts? Harold Ford, who wants the Democratic nomination for Senate in New York, says swing to the right: cut taxes, lower our sites on health care, fast-track more foreign workers in high-tech fields (which companies want in order to undercut wages they see as “too high”), and cut government spending.

In other words, be like Republicans, only more civilized.

If voters voted on ideology this would make sense. With the Republicans racing to the right, the median voters ought to be there for the taking. Unfortunately, few people actually vote on ideology. Political preferences are based primarily on identity (who we think are “us” as against “them”), secondarily on narrative. If Democrats reposition themselves as responsible conservatives, it just means that, when they are in power, their policies will be more conservative.

Obama’s Gesture on Student Loans

According to this morning’s New York Times, in his state of the union address Obama will call for a cap on student loan repayments. The formula will set a maximum of 10% of post-graduation income above a living allowance. Money not collected due to the cap will be replaced from the general budget.

Is this better than nothing? Yes. It removes a bit of the pressure on grads who face a harsh job market or who want to explore less pecuniary pathways in life. It also encourages students to borrow more for their education, which is a good idea if it allows them to cut back on the number of hours they try to work as they go to school, study, raise kids and cope with life’s other challenges. The cost of tuition has gone up relentlessly, and students have responded by trying to earn more, at the expense of their ability to graduate in a reasonable amount of time and remain sane in the process.

But why is this proposal so much less than it should be? For decades education policy analysts have been calling for putting student loan repayment on an ability to pay basis. Repayment should be set as a fixed percentage of income, with a proportionality between the amount of the loan taken out and the number of years of repayment. Some, who make a bundle, would end up paying more, others less. The system would be progressive and predictable. It would also pay for itself, which in principle frees up more public money for reducing tuition in the first place. (Obama would have lower-income students paying a little less, but no one paying more.)

There is a larger debate that ought to be held around using tuition to pay for the costs of public education. Outside the US this is much less common. One reason is that societies want to encourage more students to continue to a higher level, and studying is already challenging without adding financial pressure to the pot. Another is that they want to separate curricular decision-making in higher education from student preference, at least to some extent. If a college depends primarily on tuition to make ends meet, it has to give greater weight to student demand when deciding what courses to offer, which programs to expand or eliminate, what kind of teaching to reward, and so on. Obviously there are arguments on both sides of this debate, but the US has swung very far in the direction of demand-driven revenues. My college, which is nominally public, now gets the majority of its funding from students, not the state legislature.

The Obama proposal is small, small, small. I guess we are entering Phase II of his presidency, where he shifts to Clintonoid minimalism, a fine mist of minute policy droplets that bathes the public with good PR even if no one actually gets wet.