Posts tagged ‘china’

Currency Manipulation

One of the critiques of any trade deal of late is that there should be penalties for countries guilty of "currency manipulation."  The concern is that countries will devalue their currency in an effort to make their own exports cheaper to other nations while making it harder for other countries to export back to them.  As an example, if the Chinese were to do something that cuts the value of the Yuan in half vs. the dollar, their products look very cheap to American consumers while American-produced goods suddenly look a lot more expensive to Chinese consumers.

I have two brief responses to this:

  1. I find it hilarious that anyone in the United States government, which has a Federal Reserve that has added nearly $2 trillion to its balance sheet in the service of cramming down the value of the dollar, can with a straight face accuse other nations of currency manipulation.  In practice in today's QEconomy, currency manipulation means another country is doing exactly what we are doing, but just doing it faster.
  2. As an American consumer, to such currency manipulation by other countries I say, Bring it On!  If China wants to hammer its own citizens with higher prices and lower purchasing power just to subsidize lower prices for me, I am happy to let them do it.  Yes, a few specific politically-connected export businesses lose revenues, but trying to prop them up is pure cronyism.  Which is one reason I think Elizabeth Warren is a total hypocrite.  The constituency of the poor and lower middle class she presumes to speak for are the exact folks who shop at Walmart and need very price break on everyday goods they can get.  Senator Warren's preferences for protectionist trade policies and a weak dollar will hurt these folks the most.

Celebrate the Strong Dollar

We are already seeing articles bemoaning the strong dollar as somehow a threat to the American economy.  Don't believe it.  Maintaining a weak dollar is yet another crony government program that benefits a tiny minority of admittedly vocal and politically connected Americans.

First, a bit of an aside.  It is amazing to me that the US dollar can be strong at all right now, given the actions of the Fed.  With its near infinite QE and zero-interest rate programs, one would expect the dollar to be weak (Oversimplifying, driving down the returns on financial assets reduces the overseas demand for them, thus reducing the demand for dollars, driving down the price of dollars).  But it turns out that the rest of the world (esp. Japan and the EU) are actually working twice as hard to trash their own currencies (they are actually heading into negative interest rate territory, not just zero) and thus on a relative basis, the dollar is stronger.

Companies that export or compete a lot with manufacturers in other countries hate the strong dollar.  It makes their domestically produced products more expensive vis a vis products manufactured in other countries.  Many of these companies have powerful political voices, and some have large unions with even more powerful political voices.  They lobby for a weaker dollar.  Part of that lobbying is often to portray other countries as nefariously "manipulating" their currencies to hurt the US.

What these countries that are weakening their own currencies are actually doing is trashing the prosperity of the vast majority of their citizens to protect the earnings of a few politically powerful producers.  Japan is a great example.  Japan is a country in which consumers have been stomped on from decades in order to reduce the price of the country's exports.  Japanese consumers pay far more for everything than we do, all so their exporters can lower their prices in the US.

This is the same in China.  We frequently host visiting Chinese students.  You know what every one of these kids do on their trip to the US?  They bring an empty suitcase that they fill up with electronic and fashion goods they buy here, many of which were actually manufactured in China  (I have never, ever have hosted a Chinese student that did not buy at least one Chinese-manufactured iPhone here).

So, we must oppose this currency "manipulation" that impoverishes Japanese, Chinese, and European citizens in favor of giving much lower prices to Americans -- Why?

We should celebrate the strong dollar.  It makes every one of us richer.  Not just when we buy Chinese electronics, but even when we buy American-made products that now must be less expensive to compete with foreign products and which benefit from cheaper inputs in their own manufacturing.

Years and years ago I wrote a hypothetical post about Chinese interventions to maintain a trade surplus form a Chinese consumer's perspective in a post from our sister publication Panda Blog.  I think it holds up really well.  It said in part:

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

Consensus Science

The invaluable Carpe Diem blog has a compendium of 18 forecasts of doom that were made on or around the first Earth Day in 1970 -- all of which turned out wrong.   Here is an example:

8. Peter Gunter, a North Texas State University professor, wrote in 1970, “Demographers agree almost unanimously on the following grim timetable: by 1975 widespread famines will begin in India; these will spread by 1990 to include all of India, Pakistan, China and the Near East, Africa. By the year 2000, or conceivably sooner, South and Central America will exist under famine conditions….By the year 2000, thirty years from now, the entire world, with the exception of Western Europe, North America, and Australia, will be in famine.”

9. In January 1970, Life reported, “Scientists have solid experimental and theoretical evidence to support…the following predictions: In a decade, urban dwellers will have to wear gas masks to survive air pollution…by 1985 air pollution will have reduced the amount of sunlight reaching earth by one half….”

Participants in the global warming debate today will surely recognize the formulation of these statements as representing a consensus scientific opinion.

For those of you too young to actively follow the news in the 1970s, Mark Perry is not cherry-picking cranks.  These fearful quotations are representative of what was ubiquitous in the media of that time.

My school (Kinkaid in Houston) took speech and debate very seriously and had a robust debate program even in middle school.  In 1975-1976 the national debate topic was this:

Resolved:  That the development and allocation of scarce world resources should be controlled by an international organization

The short answer to this proposition should realistically have been:  "you have got to be f*cking kidding me."  But such were the times that this was considered a serious proposal worth debating for the entire year.  In fact, in doing research, it was dead-easy to build up suitcases of quotations of doom to support the affirmative;  it was far, far harder finding anyone who would argue that a) the world was not going to run out of everything in a few decades and b) that markets were an appropriate vehicle for managing resources.   I could fill up an hour reading different sources predicting that oil would have run out by 1990 or 2000 at the latest.

In China, It's 1928

I know I have been warning about a Chinese recession/depression for a while, but it takes a while (and still will take some time) for this disaster to play out.  But the warning signs are all there.  This article today in the WSJ is a great example.  

A little over a year ago, a Chinese credit agency downgraded a government-owned financing company in this dusty industrial city. Default—nearly unheard-of in China on government bonds—was a possibility, it said.

But during discussions with lenders, city officials made sure Wuhan Urban Construction Investment & Development Corp. could keep borrowing, officials with knowledge of the matter say. The city during those discussions said it backed the finance firm, essentially guaranteeing the debt, and helped the company restructure its assets to entice investors to lend more.

Borrowing by firms like Wuhan Urban is a big reason China’s debt load is expanding. The International Monetary Fund says China’s debt is growing more rapidly than debt in Japan, South Korea and the U.S. did before they tumbled into deep recessions. Local-government borrowing is responsible for one-fourth of the buildup in China’s overall domestic debt since 2008....

Even before its latest step, Beijing had put forward plans to slow local-borrowing growth. But China’s local governments have a surprising ability to resist policies. Another central-government priority—reducing excess production in steel, cement and other industries—has foundered due to local opposition.

“The guys running local government financing operations won’t roll over and die,” says Fraser Howie, co-author of “Red Capitalism,” a study of China’s financial system. “These companies take on a life of their own.”

Perhaps we should call this the looming Thomas Friedman recession, as China goes bankrupt doing exactly what Friedman admires - building more and more infrastructure and then taking out debt and building even more.

There is absolutely no reason to believe, as folks like Friedman do, that this investment in infrastructure automatically has a positive return, and in fact there are a lot of reasons to think it does not (ie gluts of housing and basic materials).  As I have written before, like light rail spending in the US, these infrastructure investments pay their benefits mostly in prestige to local government officials and rents for politically connected contractors and government workers and not in real returns to future economic growth.

I tend to accept the Austrian theory of recessions, which I would simplify (perhaps inaccurately) as mis-allocation of capital and labor investments leading to economic downturns as the economy restructures.  The longer the reckoning is put off, the worse the recession.   These mis-allocations can sometimes be due to private causes (e.g. over-euphoric investments in early Internet companies in the late 1990's) but they often have public causes (e.g. artificially low interest rates or government programs to promote investment in a single industry like, say, housing).

I am convinced this is what brought down Japan -- after years of admiration for Japan, inc. and MITI economic management, it turns out the government had directed all capital into a few export manufacturing industries, while continuing to protect retail and agriculture locally from any real change or competition.  Which is why 25 years of government directed deficit spending has not fixed the recession -- it just doubles down on the original cause.  For those of you too young to remember, the Friedman-types of the world were all praising Japan to the hilt in the late 80's as the model we should all be following.  People like this don't admit error, they simply shut up about Japan and started praising the same behaviors in China.

The same reckoning is coming to China.  Probably not this year or the next, but within the next 5 years almost for sure.  It is 1928 in China.

Postscript:  By 1928, I mean a year of apparent prosperity before the Great Depression in 1929.  I am not referring to the nominal reunification of China or start of the "republic" under Chiang Kai-shek.

Why Its Madness To Spend So Much Effort Pressuring China to Reduce CO2 output

...because CO2 is the least of its pollution problems.  See here.   As the West has proven over the last century, it is entirely possible to have economic growth and modern technology while maintaining clean water and soot-free air.  So why don't we let China focus on that?  It is entirely unproven whether modern technology will allow economic growth without CO2 production, yet that is what we spend all of our time pestering China to do.

This is a GOOD Sign for the United States

Thomas Friedman, and many others, think it is a sign of America's decline and some sort of failure of government will that other countries are building super-massive showcase infrastructure projects while we are not.  They would take this chart as a sign of decline:

20150114_sky

I disagree.  This is a sign of growing maturity on the part of the United States.  Many of these super-tall building projects make little economic sense, but are completed to validate the prestige of emerging nations, like teenage boys comparing penis sizes.  Grown men are beyond that behavior, just as are grown-up nations.  I discussed this in the context of rail a while back at Forbes.  In that case, it seems everyone thinks the US is behind in rail, because it does not have sexy bullet trains.  But in fact we have a far more developed freight network than any other country, and shift of transport to rail makes a much larger positive economic and environmental impact for cargo than for rail.  It comes down to what you care about -- prestige or actual performance.   Again choosing performance over prestige is a sign of maturity.**

The US had a phase just like China's, when we were emerging as a world economic and political power, and had a first generation of successful business pioneers who were unsure how to put their stamp on the world.  So they competed at building tall buildings.   Many of the tallest were not even private efforts.  The Empire State Building was a crony enterprise from start to finish, and ended up sitting empty for years.  The World Trade Center project (WTC) was a complete government boondoggle, built by a public agency at the behest of the Rockefeller family, who wanted to protect its investments in lower Manhattan.  That building also sat nearly empty for years.   By the way, the Ken Burns New York documentary series added a special extra episode at the end after 9/11 on the history of the WTC and really digs in to the awful crony and bureaucratic history of that project.  Though Burns likely did not think of it that way, it could as easily be a documentary of public choice theory.  His coverage earlier in that series of Robert Moses (featuring a lot of Robert Caro) is also excellent.

** I have always wondered if you could take this model further, and predict that once-great nations in decline (at least in decline relative to their earlier position) might not re-engage with such prestige projects, much like an aging male seeking out the young second wife and buying a Porche.

Update:  Here is part of what I wrote on US vs. European and Japanese railroading, which I think is an absolutely awesome example of where the triumphalists like Friedman go wrong:

In particular, both Friedman and Epstein think we need to build more high speed passenger trains.  This is exactly the kind of gauzy non-fact-based wishful thinking that makes me extremely pleased that these folks do not have the dictatorial powers they long for.   High speed rail is a terrible investment, a black hole for pouring away money, that has little net impact on efficiency or pollution.   But rail is a powerful example because it demonstrates exactly how this bias for high-profile triumphal projects causes people to miss the obvious.

Which is this:  The US rail system, unlike nearly every other system in the world, was built (mostly) by private individuals with private capital.  It is operated privately, and runs without taxpayer subsidies.    And, it is by farthe greatest rail system in the world.  It has by far the cheapest rates in the world (1/2 of China’s, 1/8 of Germany’s).  But here is the real key:  it is almost all freight.

As a percentage, far more freight moves in the US by rail (vs. truck) than almost any other country in the world.  Europe and Japan are not even close.  Specifically, about 40% of US freight moves by rail, vs. just 10% or so in Europe and less than 5% in Japan.   As a result, far more of European and Japanese freight jams up the highways in trucks than in the United States.  For example, the percentage of freight that hits the roads in Japan is nearly double that of the US.

You see, passenger rail is sexy and pretty and visible.  You can build grand stations and entertain visiting dignitaries on your high-speed trains.  This is why statist governments have invested so much in passenger rail — not to be more efficient, but to awe their citizens and foreign observers.

But there is little efficiency improvement in moving passengers by rail vs. other modes.   Most of the energy consumed goes into hauling not the passengers themselves, but the weight of increasingly plush rail cars.  Trains have to be really, really full all the time to make for a net energy savings for high-speed rail vs. cars or even planes, and they seldom are full.  I had a lovely trip on the high speed rail last summer between London and Paris and back through the Chunnel — especially nice because my son and I had the rail car entirely to ourselves both ways.

The real rail efficiency comes from moving freight.  As compared to passenger rail, more of the total energy budget is used moving the actual freight rather than the cars themselves.  Freight is far more efficient to move by rail than by road, but only the US moves a substantial amount of its freight by rail.    One reason for this is that freight and high-speed passenger traffic have a variety of problems sharing the same rails, so systems that are optimized for one tend to struggle serving the other.

Freight is boring and un-sexy.  Its not a government function in the US.  So intellectuals tend to ignore it, even though it is the far more important, from and energy and environmental standpoint, portion of transport to put on the rails.  In fact, the US would actually probably have even a higher rail modal percentage if the US government had not enforced a regulatory regime (until the Staggers Act) that favored trucks over rail.   If the government really had been asleep the last century, we would be further along.

A Small Silver Lining in the Very Black Torture Cloud

Well, the Senate torture report is out and it is every bit as bad, perhaps worse, than expected.   There are summaries all over but this one seems as good as any.  And here. Essentially the CIA:

  • Tortured and detained more people than they ever admitted
  • Were more brutal than they ever admitted
  • Were more haphazard and incompetent than can be believed (losing suspects, outsourcing torture to a couple of outside psychologists with no interrogation experience or credentials)
  • Achieved far less than they bragged from the torture, with results that now appear to approximate zero
  • Lied about everything to everyone, up to and including Congress and the President

The CIA needs a forced enema of its own, though I am skeptical they will get it.

I will say that there is nothing really particularly surprising here to a libertarian.  This sort of lawlessness often occurs in fairly transparent government agencies (think VA) so it should be no surprise that it occurs in an agency like this that has zero accountability (because it can yell "classified" as the drop of a hat).  An agency empowered to hide stuff and keep secrets is going to hide stuff and keep secrets.  I am not even sure that if we really could turn the CIA upside down that this would be the worst thing we would find.

At the risk of diluting the totally appropriate horror with which this report should be received, I will observe a couple of positives:

  1. Three cheers for partisanship and divided government.  They get a bad rap because gridlock, but without confrontational, competitive, even polarized rivals for power, this sort of thing would never have come out.  You can see pretty clearly from the minority comments that Republicans would have buried this had they controlled the Senate.
  2. One cheer for American exceptionalism.  Yes, the hubris and arrogance that often accompanies American exceptionalism went a long way to contributing to these errors.   But there are not many countries in the world that would publish this report.  Forget for a minute Russia or China or Mali.  Even among western democracies there are not many countries that would voluntarily call for penalty strokes on themselves.  I can't imagine, for example, France ever making such an admission (and not, I think, because the DGSE's hands are particularly clean).

It is Historically Unusual for China NOT to be the Largest Economy on Earth

A couple of quick thoughts on this map from this Vox article edited by Matt Yglesias

click to enlarge

  1. I hate to diss my old cohorts at McKinsey, but isn't this entirely arbitrary to how you draw the map?  If you made the map break in, say, the Atlantic Ocean with the Ivory Coast on the far left of the map and Newfoundland on the far right, won't this look different?
  2. People seem to want to get freaked out about China passing the US in terms of the size of its economy.  But in the history of Civilization there have probably been barely 200 years in the last 4000 that China hasn't been the largest economy in the world.  It probably only lost that title in the early 19th century and is just now getting it back.  We are in some senses ending an unusual period, not starting one.

Is Bing Censoring US Searches on Chinese Topics?

The other day I had a little fun with Bing's search results on Windows 8 problems.  But this seems much more serious.  From a reader:

No comment.

That’s Microsoft’s response to new revelations that the search engine is censoring Chinese searches in the United States — not just in China. Searches on Chinese topics in the U.S. now produce markedly different search results than Google, results that mimic those  in China. China broadly censors the Internet, blocking topics like the Dalai Lama and Tiananmen Square.

The censorship blog Greatfire.org was the first to point out  that Bing’s search results display information propagated by Chinese authorities. A Chinese language search in Bing for the Dalai Lama (达赖喇嘛 in Chinese) produces two results from China’s Wikipedia (Baidu Baike) and one from the state-owned television station CCTV. In Google, the same search returns two Wikipedia entries and the Dalai Lama’s official site.

Click here to see the results in Bing, versus the results in Google.

Even more shocking, a search for the anti-censorship software FreeGate produces the result: “Due to restrictions on Chinese laws and regulations, we removed the results of these search terms. For more information, see here.”

Microsoft responded to a request from Charlie Smith’s Greatfire to explain the discrepancy. At first, the  software juggernaut replied: “We’ve conducted an investigation of the claims raised by Greatfire.org. First, Bing does not apply China’s legal requirements to searches conducted outside of China. Due to an error in our system, we triggered an incorrect results removal notification for some searches noted in the report but the results themselves are and were unaltered outside of China.”

But after finding the “due to Chinese laws and regulations” search result, Microsoft replied: “Thanks for your inquiry. We have no comment on this topic.”

Much more detail at the link, with examples and screenshots

Arnold Kling Provides An Interesting Framework for Economic Growth

I thought this was a useful simple picture from Arnold Kling, vis a vis countries and their economies:

Low Creation High Creation
Low Destruction Corporatist Stagnation Schumpeterian Boom
High Destruction Minsky Recession Rising Dynamism

He suggests the US may currently be in the lower-left quadrant.  Europe and Japan in the upper left.   My sense is that China is in the upper right, not the lower right (too much of the economy is controlled by the politicians in power for any real destruction to occur).

Once a government gains powerful tools for economic intervention, it becomes politically almost impossible to allow destruction to occur, no matter how long-term beneficial it can be.  The US is one of the few countries in the world that has ever allowed such destruction to occur over an extended period.  The reason it is hard is that successful incumbents are able to wield political power to prevent upstart competition that might threaten their position and business model (see here for example).

It takes a lot of discipline to have government not intervene in favor of such incumbents.  Since politicians lack this discipline, the only way to prevent such intervention is by castrating the government, by eliminating its power to intervene in the first place.  Feckless politicians cannot wield power that does not exist (though don't tell Obama that because he seems to be wielding a lot of power to modify legislation that is not written into my copy of the Constitution.).

Wealth and China Through History

The media tends to talk about the growth of the Chinese economy as if it is something new and different.   In fact, there probably have been only about 200 years in the history of civilization when China was not the largest economy on Earth.  China still held this title into the early 18th century, and will get it back early in this century.

This map from the Economist (via Mark Perry) illustrates the point.

economic map

 

Of course there is a problem with this map.  It is easy to do a center of gravity for a country, but for the whole Earth?  The center in this case (unless one rightly puts it somewhere in the depths of the planet itself) depends on arbitrary decisions about where one puts the edges of the map. I presume this is from a map with North America on the far left side and Japan on the far right.  If one redid the map, say, with North America in the center, Asia on the left and Europe on the right, the center of gravity would roam around North America through history.

Want to Save The Ice in the Arctic?

I wrote below about Chinese pollution, but here is one other thought.  Shifting Chinese focus from reducing CO2 with unproven 21st century technology to reducing particulates with 1970s technology would be a great boon for its citizens.  But it could well have one other effect:

It might reverse the warming in the Arctic.

The reduction of Arctic ice sheet size in the summer, and the warming of the Arctic over the last several decades, is generally attributed to greenhouse warming.  But there are reasons to doubt that Co2 is the whole story.   One is that the sea ice extent in Antarctica has actually been growing at the same time the Arctic sea ice cover has been shrinking.  Maybe there is another explanation, one that affects only the northern hemisphere and not the southern?

I don't know if you have snow right now or even ever get snow.  If you do, find some black dust, like coal dust or dark dirt, and sprinkle it on a patch of snow.  Then come back tomorrow.  What will you find?  The patch of snow you sprinkled in dark dust melted a lot in comparison to the rest of the snow.  This is an albedo effect.  Snow takes a while to melt because it reflects rather than absorbs solar radiation.  Putting black dust on it changes that equation, and suddenly solar radiation is adsorbed as heat, and the now melts.  Fast.  I know this because I run a sledding hill in the wintertime, where snow falls on a black cinder hill.  The snow will last until even the smallest patch of black cinders is exposed.  Once exposed, that small hole will grow like a cancer, as it absorbs solar energy and pumps it into the surrounding ground.

By the way, if you have not snow, Accuweather.com did the experiment for you.  See here.  Very nice pictures that make the story really clear.

So consider this mess:

china_pollution_ap971430398958_620x350

Eventually that mess blows away.  Where does it end up?  Well, a lot of it ends up deposited in the Arctic, on top of the sea ice and Greenland ice sheet.

There is a growing hypothesis that this black carbon deposited on the ice from China is causing much of the sea ice to melt faster.  And as the ice sheet melts faster, this lowers the albedo of the arctic, and creates warming.  In this hypothesis, warming follows from ice melting, rather than vice versa.

How do we test this?  Well, the best way would be to go out and actually measure the deposits and calculate the albedo changes from this.  My sense is that this work is starting to be done (example), but it has been slow, because everyone who is interested in Arctic ice of late are strong global warming proponents who have incentives not to find an alternative explanation for melting ice.

But here are two quick mental experiments we can do:

  1. We already mentioned one proof.  Wind patterns cause most pollution to remain within the hemisphere (northern or southern) where it was generated.  So we would expect black carbon ice melting to be limited to the Arctic and not be seen in the Antarctic.  This fits observations
  2. In the winter, as the sea ice is growing, we would expect new ice would be free of particulate deposits and that any new deposits would be quickly covered in snow.  This would mean that we should see ice extents in the winter to be about the same as they were historically, and we would see most of the ice extent reduction in the summer.  Again, this is exactly what we see.

This is by no means a proof -- there are other explanations for the same data.  But I am convinced we would see at least a partial sea ice recovery in the Arctic if China could get their particulate emissions under control.

Update:  Melt ponds in Greenland are black with coal dust

 

Global Warming Folly

I have not written much about climate of late because my interest, err, runs hot and cold.  As most readers know, I am in the lukewarmer camp, meaning that I accept that Co2 is a greenhouse gas but believe that catastrophic warming forecasts are greatly exaggerated (in large part by scientifically unsupportable assumptions of strong net positive feedback in the climate system).  If what I just said is in any way news to you, read this and this for background.

Anyway, one thing I have been saying for about 8 years is that when the history of the environmental movement is written, the global warming obsession will be considered a great folly.  This is because global warming has sucked all the air out of almost anything else in the environmental movement.  For God sakes, the other day the Obama Administration OK'd the wind industry killing more protected birds in a month than the oil industry has killed in its entire history.  Every day the rain forest in the Amazon is cleared away a bit further to make room for ethanol-making crops.

This picture demonstrates a great example of what I mean.   Here is a recent photo from China:

20131211_china1

 

You might reasonably say, well that pollution is from the burning of fossil fuels, and the global warming folks want to reduce fossil fuel use, so aren't they trying to fight this?  And the answer is yes, tangentially.   But here is the problem:  It is an order of magnitude or more cheaper to eliminate polluting byproducts of fossil fuel combustion than it is to eliminate fossil fuel combustion altogether.

What do I mean?  China gets a lot of pressure to reduce its carbon emissions, since it is the largest emitter in the world.  So it might build a wind project, or some solar, or some expensive high speed rail to reduce fossil fuel use.  Let's say any one of these actions reduces smog and sulfur dioxide and particulate pollution (as seen in this photo) by X through reduction in fossil fuel use.  Now, let's take whatever money we spent in, say, a wind project to get X improvement and instead invest it in emissions control technologies that the US has used for decades (coal plant scrubbers, gasoline blending changes, etc) -- invest in making fossil fuel use cleaner, not in eliminating it altogether.  This same money invested in this way would get 10X, maybe even up to 100X improvement in these emissions.

By pressuring China on carbon, we have unwittingly helped enable their pollution problem.  We are trying to get them to do 21st century things that the US can't even figure out how to do economically when in actuality what they really need to be doing is 1970's things that would be relatively easy to do and would have a much bigger impact on their citizen's well-being.

Obama's "Nixon Goes to China" Moment

Barack Obama is the worst possible thing that could have happened for civil liberties in this country.  Not necessarily because he promotes the worst possible policies -- As bad as he has been (drone strikes, domestic spying, aggressive prosecuting of whistle blowers, indefinite detentions, executive orders, arbitrarily ignoring legislation, cutting myriad special favors, and overturning the rule of law in the auto bankruptcies), I could imagine others being worse  (Lindsey Graham -- eek!).

But Obama is the worst because he is beloved almost unconditionally by the very factions who are the natural defenders on the Left of civil liberties and opponents of creeping (non-economic) state control.  With all this insane cr*p coming from Obama, the opposition one would expect to these policies has been slow and muted.  The anti-war movement, for example, effectively dissolved once George Bush was in office -- the ACLU and a few others continue to public reports on civilian drone deaths but the stories don't make the front page now that Obama is President.  Only recently, with the press itself under attack, has anyone woken up, but even with recent revelations about the NSA and harassing leakers, the last press conference was still dominated by softballs everyone in the room would have been embarrassed to have asked George Bush.

The Left seems to believe that this is all OK as long as their guy wields the power, but that cannot last forever.  And you can be damn sure that neither President Hillary or the next Republican in the White House is going to eschew or reverse the precedents established by Obama.  We have to end them right now, or we are stuck with them forever.  It may be too late already.

 

** The title refers to the idea that only Nixon, an anti-communist Republican, could have opened up relations with Communist China in the early 1970's and defused opposition to the move by the Right, the natural opponents of such a move at the time.  A President McGovern would have been skewered.  In the same way, Republican President Bush was rightly attacked whole-heartedly by the Left for intrusions on civil liberties and military activities.  On the other hand, having these same type of actions taken -- really much worse actions -- taken by a Liberal President has mostly diffused the opposition.

National Adolescence

I have been toying with a concept I am calling national adolescence.  My emerging theory is that civilizations go through phases much like that of a human male, and the most dangerous to all around it is adolescence.  Adolescent males can do crazy, unproductive things to show off, to count coup, to bolster their ego and perceived status.  They are more prone to being violent and dangerous, to pick stupid fights to prove their alpha-maleness rather than to achieve rational goals.

Nations often go through an adolescent phase.  Sometimes it can last for decades or centuries.  Two symptoms of this phase are 1) Imperialism and over-readiness to fight and 2) monument-building and other such show-offery.

I have written a number of times about monument building, for example here.  We see it in countries trying to build record-tall buildings -- note who is doing it, they are always the nouveau riche (e.g. Dubai).  We see it in cities wanting to have light rail systems in order to be considered a real city (ie as a status project).  We see it in every Thomas Friedman column about China doing big things while we are not.  And we see it now in the fear that somehow having China sending men into space 50 years after the US and USSR did so somehow is a marker in the decline and fall of the US.

I don't buy it.  What you are seeing, what Thomas Friedman is seeing, is adolescence.  We may regret lacking as much youthful vitality, but we should not aspire to the adolescent's poor judgement.  Our sixties space program went exactly nowhere, except to let us count coup on the rest of the world and cement our status.  The Chines space program as currently configured will achieve nothing more.

PS-  The Egyptians may be a good example.  All the great Pyramids were built when the Egyptian civilization was really young.  There are a variety of reasons why pyramid building ended, but surely a maturing confidence in their civilization's greatness must be one.

KFC and China

Apparently YUM Brands stock is falling because investors are worried about KFC's prospects in China.  I am not a YUM supporter particularly, nor am I a patron of KFC, but from some exposure to China I can say that KFC in China is like Taco Bell in the movie Demolition Man.  They own the market.

War and Stimulus

I had an argument about the (economic) stimulative effect of war the other night.  As usual, I was not entirely happy with how I argued my point in real time (which is why I blog).  Here is an attempt at an improved, brief answer:

One of the reasons that people often believe that war "improves" the economy is that they are looking at the wrong metrics.  They look at unemployment and observe that it falls.  They look at capacity utilization and observe that it rises.  They look at GDP and see that it rises.

But these are the wrong metrics.  What we care about is if people are better off: Can they buy the things they want?  Are they wealthier?

These outcomes are hard to measure, so we use unemployment and GDP and capacity utilization as proxies for people's economic well-being.  And in most times, these metrics are reasonably correlated with well-being.  That is because in a free economy individuals and their choices guide the flow of resources, which are dedicated to improving what people consider to be their own well-being.  More resources, more well-being.

But in war time, all this gets changed.  Government intervenes with a very heavy hand to shift a vast amount of the resources from satisfying people's well-being to blowing other people up.  Now, I need to take an aside on well-being in this context.  Certainly it is possible that I am better off poor in a world with no Nazis than rich in one dominated by Nazis.  But I am going to leave war aims out of the concept of well-being.  This is appropriate, because when people argue that war stimulates the economy, they are talking purely about economic activity and benefits, and so will I.

What we find is that in war time, unemployment is down, but in part because young people have been drafted (a form of servitude) to fight and die.  Are they better off so employed?  Those who are left find themselves with jobs in factories with admittedly high capacity utilization, but building things that make no one better off (and many people worse off).  GDP skyrockets as government goes deeply in debt to pay for bombs and rockets and tanks.  This debt builds nothing for the future -- future generations are left with debt and no wealth to show for it, like taking out a mortgage to buy a house and then having the house burn down uninsured.  This is no more economically useful than borrowing money and then burning it.  In fact, burning it would have been better, economically, as each dollar we borrowed in WWII had a "multiplier" effect in that it destroyed another dollar of European or Asian civilian infrastructure.

Sure, during WWII, everyone in the US had a job, but with war-time restrictions and rationing, these employed people couldn't buy anything.  Forget the metrics - in their daily lives Americans lived poorer, giving up driving and even basic staples.  This was the same condition Soviet citizens found themselves facing in the 1970s -- they all had jobs, but they could not find anything to buy.  Do we consider them to have been well off?

There is one way to prosper from war, but it is a terrible zero-sum game -- making money from other people's wars.  The US prospered in 1915 and later 1941 as Britain and France sunk into bankruptcy and despair, sending us the last of their wealth in exchange for material that might help them hang on to their existence.  Ditto in 1946, when having bombed Japanese and German infrastructure into the stone age. we provided many of the goods to help rebuild them.  But is this really the way we want to prosper?  And is this sort of vulture-like prosperity even possible with our inter-woven global supply chains?  For example, I can't see a China-Japan war being particularly stimulative for anybody nowadays.

Non-Precautionary Principle: Debt Denialists

Kevin Drum begins this post by making a point I have made forever -- that selling debt to Chinese investors does not somehow put the US in China's power.  In fact, one can argue just the opposite, that Chinese policy options vis a vis the US are circumscribed to some extent by the desire to get paid back on all this lending some day.

However, he goes on to make this incredible statement:

Rising U.S. debt hasn't caused inflation. It hasn't sent interest rates skyrocketing. It hasn't reduced Chinese demand for American bonds. It hasn't reduced demand for long-dated bonds. Really, it hasn't done any of the things that conservatives have been predicting with apocalyptic fervor for the past four years.

I am left agog at the incredible blindness of this position, and find it intriguing how it contrasts with Drum's position on rising atmospheric CO2 levels.  In the latter case, he constantly argues that lack of warming today is not an excuse for inaction, that CO2 is dangerous and its production must be greatly curtailed.  He takes this position despite any real historic evidence of harm from CO2 levels -- ie future harm is hypothetical and without precedent.  But still he wants action now.

On the other side, there is plenty of historical evidence for what rising deficit spending and government debt will do to a country and an economy.  Heck, you don't even have to look at history -- it is being pushed in our face every day by Greece and Spain and Italy.  And yet he councils full steam ahead.

Even most climate skeptics (including myself) would not make a statement about CO2 as denialist as Kevin Drum makes about debt.  We acknowledge CO2 is rising, believe it has some impact on rising temperatures, but differ from the most alarmist in the amount of future temperature increases expected.  We expect more modest anthropogenic temperature increases that make more sense to deal with by adaption -- but we don't generally deny its effect altogether (crazy talk show host and a few prominent bloggers notwithstanding).

 Postscript:  The Weimar Republic went from relative normalcy to hyperinflation in less than three months, the time between two quarterly meetings of the Fed.  In Europe, one day there was no problem in Greece and Spain and Italy and a day or a week later, boom, the crisis is upon them.

Demand at Price = $0

These two articles were back to back in my feed reader this morning.  First, Joe Biden argues that medical procedures should be free if you feel you need one

“Everyone knows, everyone in this room knows that President Obama has increased the benefits available to people on Medicare by the action he took,” Biden said. “You are now able to go get a wellness exam, and guys, if you conclude you need a colonoscopy because of the feeling you had or you need a breast health examination, you don’t have to pay a co-pay for that.”

And then I got this from China

As part of its 8 day Golden Week celebration, China's central planners decided to do a good thing for the people and remove all tolls from expressways. That was the populist explanation. The fundamental one was that this act would somehow spur the economy. Alas, while the same people may have saved some transit money in the process, what they did not save was on transit times. As South China Morning Post reports, millions were promptly stuck in traffic jams as a result of the politburo's generosity. From SCMP: "A bid by authorities tostimulate the economy by suspending road tolls for the "golden week" holiday brought huge tailbacks across the mainland yesterday as almost 86 million travelers took to the roads. That's 13.3 per cent more than on the first day of the National Day holiday last year." And then the fun began.

"One traveller blogged that he could only move 200 metres in an hour on the Zhengzhou to Shijiazhuang expressway in Henan province. Others said the queue of cars on the Guangzhou to Shenzhen expressway was 40 kilometres long. All roads leading out of Guangdong were jammed, with cars moving at about a kilometre an hour in front of some toll gates. Provincial traffic-management authorities estimated traffic on expressways would increase by 40 to 80 per cent compared with the same period last year, the Shenzhen Special Zone Daily reported. The People's Daily reported dozens of accidents on 24 highways across the mainland, further aggravating the congestion."

Since the government still keeps hammering down doctor supply, through enforcement of tough licensing procedures and through price caps (that keep getting cut) on doctor visits, we should soon be seeing the equivalent of this highway traffic jam in medicine.  Which is why every socialized medicine country in the world has queues and why their citizens keep flying to the US for treatment.

Moral Hazard in the Drone War

I missed Tom Junod's original article on targeted killing, but his response to Andrew Sullivan's defense of the Obama Administration is terrific:

I did not -- and do not -- condone the use of torture any more than Sullivan does. But the moral risk of torture is not so different from the moral risk of targeted killing. Indeed, the moral risk of torture provides a template for the moral risk of targeted killing. What was introduced as an option of last resort becomes the option of first resort, then the only option. Sullivan always understood that torture was a temptation, and that the day would come when it was applied not in emergency, "ticking-clock" situations, but as a matter of routine. Well, that day has come, only now with targeted killing, where the option of first resort meets the court of no appeal.

Yes, killing is a part of war, and torture isn't. But what if the the kind of militant who was captured and tortured under Bush is the kind of militant who is simply being killed under President Obama? The Obama Administration vigorously denies this, just as it vigorously denies that it is combating terrorism by practicing a policy of extermination against terrorists. But the numbers -- the thousands killed by drone and raid against the single high-value asset captured and interrogated outside the theater of war in Afghanistan -- tell a story that can't simply be shrugged off. Interrogation has been replaced by assassination.

Moreover, I talked to a source familiar with the targeting process who told me that the people involved in the life-or-death decisions of the Obama administration often do not know the credibility of intelligence sources. This was a highly informed and involved source who, when asked the most essential question -- "how good is the intelligence?" -- paused and finally couldn't answer. In fact, when I raised the question of whether those who were once captured are now being killed, the source suggested that it was the wrong question:

"It's not at all clear that we'd be sending our people into Yemen to capture the people we're targeting. But it's not at all clear that we'd be targeting them if the technology wasn't so advanced. What's happening is that we're using the technology to target people we never would have bothered to capture."

Unfortunately, I think targeting killing is here to stay, by the "only Nixon could go to China" logic.  By having a Democrat start this policy, it has avoided a lot of critique from the usual defenders of humanity against arbitrary power, for the simple reason that many of these folks consider Obama to be "on their team."  Just look at Andrew Sullivan, for God sakes, defending the practice.   The Left spent more time criticizing Bush over looting at the Bagdad museum than it has over Obama's targeted killing (Glen Greenwald being a notable exception).  Having set the precedent under Obama, there will be no going back under either party in the future.

Danger of the Mono-Culture

The problem with the media is not outright bias, but an intellectual mono-culture that fails to exercise the most basic skepticism when stories fit their narrative.

By the way, I find it likely that there are factories in China making products with household names for western markets that have practices from wildly unsafe to outright slavery that deserve shaming and boycotts, as a minimum, when discovered.

But I often find the discourse around "sweatshops" to be colored by weterners' middle class notions of what our own personal alternatives are.  "I would never work for a $1 a day..."  Sure, but your alternative is not 15 hours a day in a rice paddy with the constant threat of outright death and starvation for your entire family if one years' crops fail.

Just When You Thought China Might Be Joining the Modern World

from the HuffPo via Q&O

In one of history's more absurd acts of totalitarianism, China has banned Buddhist monks in Tibet from reincarnating without government permission. According to a statement issued by the State Administration for Religious Affairs, the law, which goes into effect next month and strictly stipulates the procedures by which one is to reincarnate, is "an important move to institutionalize management of reincarnation." But beyond the irony lies China's true motive: to cut off the influence of the Dalai Lama, Tibet's exiled spiritual and political leader, and to quell the region's Buddhist religious establishment more than 50 years after China invaded the small Himalayan country. By barring any Buddhist monk living outside China from seeking reincarnation, the law effectively gives Chinese authorities the power to choose the next Dalai Lama, whose soul, by tradition, is reborn as a new human to continue the work of relieving suffering.

Update:  Maybe he will be reincarnated in Avignon:

At 72, the Dalai Lama, who  has lived in India since 1959, is beginning to plan his succession, saying that he refuses to be reborn in Tibet so long as it’s under Chinese control. Assuming he’s able to master the feat of controlling his rebirth, as Dalai Lamas supposedly have for the last 600 years, the situation is shaping up in which there could be two Dalai Lamas: one picked by the Chinese government, the other by Buddhist monks.

Trade is Cooperation, Not War

First, I will admit that this was probably a throwaway line, but it does represent the worldview of a lot of Americans.  In an article showing a funny story about poor preparation of college students, Kevin Drum ended with this:

This does not bode well for our coming economic war with China, does it?

Trade is not war.  Trade is cooperation, exactly the opposite of war.   By definition, it benefits both parties or it would not occur, though of course it can benefit one more than the other.

Treating trade like war is a very dangerous game engaged in by some politicians.  At best, it leads to protectionism that makes the country poorer.  At worst, it can lead to real war.

Consider two examples of a country treating trade like war, both from Japan.  In the 1930's, Japan developed an imperial desire to directly control all the key resources it needed, rather than to trade for them.  The wealthy ports of China and iron-rich Manchuria were early targets.   This desire was compounded when the US used trade embargoes as a policy tool to protest Japanese invasions and occupation of China.  This eventually led to war, with Japan's goal mainly to capture oil and rubber supplies of southeast Asia.  Obviously, this effort led to Japan essentially being left a smoking hole in the ground by late 1945.

The second example was in the 1980's, as Japan, via MITI, actively managed its economy to promote trade.  The "trade as war" vision was common among Japanese leaders of the time.  The results was a gross, government-forced misallocation of resources and bubble in the real estate and stock markets that led to a couple of lost decades.

 

Final Indicator, if You Needed One, of a Looming China Crash

Here is what I remember from the late 1980's - just about every technocratic pundit of the leftish bent, and a number on the right, all hailed Japan as the government economic planning model the US should follow.  One fawning essay after another lauded Japan's MITI and its top-down approach to economic investment.

Practically within hours of when these editorials peaked, the Japanese economy began to crumble.  We know now that MITI and other Japanese officials were creating gross distortions and misallocations in the economy, and inflating an economic bubble with gobs of cheap credit.  These distortions have still not been entirely cleared from the Japanese economy 20 years later, and the country experienced what was called "the lost decade" which may become the lost two decades.

For over a year, it has appeared to me (and many other observers more knowledgeable than I) that China was headed for a crash for many of the same reasons as Japan.  I am now sure this is true, as today Andy Stern (formerly of the SEIU) writes an essay lauding the Chinese top-down state-planned economic model.

The current debates about China's currency, the trade imbalance, our debt and China's excessive use of pirated American intellectual property are evidence that the Global Revolution—coupled with Deng Xiaoping's government-led, growth-oriented reforms—has created the planet's second-largest economy. It's on a clear trajectory to knock America off its perch by 2025....

There is no doubt that China will pass the US in total economic size -- it has three times more people than we do.  But their success is clearly due to the small dollops of free enterprise that are allowed in a statist society, and advances are made in spite of, not because of, the meddling state.

Exactly how much economic progress had China made before its leaders brought in the very free market ideas Stern says are dead?  None, of course.  To read China as a triumph of statism and as the death nell of capitalism, when in fact it is one of the greatest examples in history of the power of capitalist ideas and how fast they can turn around a starving and poverty-stricken country, is just willful blindness.

I will include just one other excerpt

While we debate, Team China rolls on. Our delegation witnessed China's people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.

Meanwhile, the Chinese government can boast that it has established in Western China an economic zone for cloud computing and automotive and aerospace production resulting in 12.5% annual growth and 49% growth in annual tax revenue, with wages rising more than 10% a year.

My first thought on reading this was that Houston used to look exactly like this, with cranes all over the place building things, until we had an Administration that actively opposed expansion of domestic oil production.  My second thought is that this reads so much like the enthusiast essays written by leftists when they used to visit the Soviet Union and came back telling us Russia was so much superior to the US -- just look at the Moscow subway!

The emergence of hundreds of millions of people in China and India from poverty is exciting as hell, and at some level I don't blame Stern for his excitement.  But I fear that what he is seeing is the US housing bubble on steroids, a gross misallocation of capital and resources driven by a few technocrats who think they can manage a billion person economy from their office in Beijing.

Disclosure:  I seldom do anything but invest in generic bond funds and US stock funds, but right now I am out of US equities and I have a number of shorts on Chinese manufacturing and real estate.

Dispatches From the Corporate State: Apparently, Taxpayers Don't Give Enough Money to Solar Companies

Well, it appears that Solyndra has not scared solar companies off from feeding at the state trough

More subsidies for the solar industry in Arizona are crucial to avoid being left behind by other states and China, a Phoenix business leader said today at a solar-power conference.

Tax incentives and loan guarantees "make a lot of sense" right now in Arizona, which is already a leader in the industry, said Barry Broome, president and CEO of theGreater Phoenix Economic Council at the Solarpraxisconvention.

Despite the high-profile financial failure of the Solyndrasolar plant this year in California, Broome told a packed conference room that solar power is destined to be a major force in Arizona and elsewhere. The only question, as he sees it, is whether sunny-skied Arizona will take full advantage....

Behind Broome on an overhead screen, a chart showed that Texas, Oregon, Nevada and other states provide more "aggressive economic development tools," (a.k.a. public money), for solar power than Arizona, and the state can't compete without doing the same thing.

What is this, a football game?  This strikes me as turn-of-the-century small town boosterism updated to the 21st century, with a dollop of tribal rivalry thrown in. He's talking mainly about manufacturing of solar components.  I am left with a couple of questions

  • Why should the fact that Arizona has sunny skies have any bearing on whether or not it is an appropriate spot to manufacture solar panels.   Should Seattle subsidize umbrella manufacture because it is rainy there?   My sense is that transportation costs are a small part of the price to end users.  Arizona clearly will be a great spot for solar panels to be installed -- why does that mean we need to manufacture them?
  • If other states like Oregon or China are subsidizing solar products that we might buy, shouldn't we celebrate that?  Thanks, taxpayers of Oregon, for forking over your tax money so we can buy solar panels cheaper in Arizona.  Why in the hell should be try to out-do them at this?  Now we can go invest our capital in a business that actually makes money.
  • I am obviously not a fan of government-led economic/industrial policy, but if I were, why in the hell would I want to direct my state's capital and manpower towards a business that requires subsidies, ie can't make a profit  on its own in the marketplace?

Its just too easy to snipe at about everything in this article, but this caught my eye in particular

To help move the industry's message, Broome said, solar advocates must stop infighting over their competing technologies and present a unified and positive position.

Normally, I think an economist would argue that in an immature (both market-wise and technologically) product, competition and creative destruction between various competitors is critical to ultimate success.  So in fact this advice is totally senseless, unless you see the industry as a taxpayer-money-magnet rather than a real business, and then it makes perfect sense.  Politics, after all, demands simple sound bytes and a unified front.

Update:  In the first week of Harvard Business School, I learned a lesson from strategy class, in a series of two cases, that still may be the most important thing I learned there.  The cases were a hot, sexy electronics company, and a boring, dull as dirt water meter company.  To cut to the chase, the electronics company sucked as an investment, and the water meter company was a gold mine.  The moral, among several takeaways, is don't get fooled into thinking the hot, sexy business of the moment is necessarily a good investment.  Our development agencies in AZ are making this mistake in spades.  In fact, the entire history of government economic development efforts in Phoenix has been to chase sexy businesses at the top of the market, spend taxpayer money to get some plant relocations, and then see the businesses struggle.  We certainly did this with semiconductor fabs a couple of decades ago.