Category: News and politics

Fairness or Envy?

After many decades of impressive and relatively steady increases in the standard of living (increases in real per capital income) of all quintiles of the American income distribution, since 2000 all quintiles have lost ground. In the run up to 2000 incomes in the top quintile increased more rapidly than those in the lower quintiles resulting in a less equal distribution income.

Mean income

The mean real incomes of each quintile are lower now (2014) than they were in 2000. However, the percentage decline has been larger for the middle and lower income quintiles (see table below) leaving the more unequal income distribution in place. Some of the relative gains of the top quintile are attributed to the growing premium for higher education, but as claimed by the Occupy Wall Street demonstrators, some have not been earned by providing higher valued products.

Income table

Most of us do not resent and in fact are grateful for those whose wealth resulted from inventing and giving us products we greatly enjoy. However, we are rightly angry at both political parties for increasingly supporting crony capitalists—those who benefit from their connection with and influence on the government—who benefit at the expense of the rest of us. They are capturing economic rents at the expense of the rest of us rather than enjoying the fruits of greater productivity.

The broad political consensus in the United States that we are each entitled to the wealth we each create, but must fairly share in the cost of providing our national defense, public goods and a satisfactory safety net for the poor, seems to be falling apart. In the economic sphere, the left increasingly favors one group, the working class represented by labor unions, against the professional and entrepreneurial classes. Classical liberals (i.e., economic conservatives) champion fairness – a level playing field – and the freedom to get rich if you work harder, or create a better product, or a more efficient way of producing what people want. They champion measures that facilitate entrepreneurship and economic growth without much regard for its impact on income distribution. Trade – globalization – is an essential part of promoting economic efficiency and thus growth, allowing, if not forcing, firms to shift resources into goods for export in which they are relatively more efficient in order to pay for the cheaper imports enjoyed by the average middle class consumer.

The Republican Party more so than the Democratic Party, though not by much, has increasingly been failing to preserve a level playing field in various areas (Wall Street, defense industry etc.). But the embrace of protectionism offered by Donald Trump reflects either class warfare or ignorance of globalization’s enormous contribution to our standard of living. The big trade and industrial unions of old—think of the United Auto Workers in Detroit—followed a different drummer. They were not interested in fairness but rather fought to bring economic rents (monopoly returns) to themselves at the expense of other workers via a deal with their employers to create, defend, and share monopoly returns. This worked with the auto industry, where auto workers earned at least double the prevailing wages for nonunion workers with comparable skills as long as GM, Ford and Chrysler could hold off competition from German and Japanese (plus a growing list) auto producers via a combination of tariffs and safety standards. Globalization gradually destroyed this monopoly arrangement and almost killed the American automobile industry until U.S. automakers relocated to southern, non-union states.

While good working conditions are win win for workers and employers, pushing up wages above their competitive level either drives firms to other locations (non union states or abroad) or kills them all together. Voters supporting protectionist policies either don’t understand that they lower the standard of living for most people (here and abroad) by lowering the overall productivity of workers or they seek to exploit monopoly rents for themselves at the expense of other workers.

Such thinking was dramatically illustrated by the recent strike of workers at Tesla Motor’s giga battery factory project in Nevada. As reported in the Washington Post on March 2: “On Monday, hundreds of workers walked off their jobs at the giant battery factory that Tesla Motors is building in the desert outside Reno, Nevada. It wasn’t your typical picket: They weren’t protesting bad working conditions, or making a show of force around contract negotiations. Rather, they were protesting other workers — specifically, the fact that they were from somewhere else.” Their complaint was that workers from out side Nevada were willing to work for less than the $35 per hour that members of the local union were making. These were not “foreign” workers from South of the border. These were workers from Arizona and New Mexico. The out of state workers obviously found their “low” wages with Tesla in Nevada better than the wages they would receive staying at home so they were better off coming to Reno.

The Post further reported: “That dispute explains an important debate underway right now in all sorts of skilled trades: Builders say there’s a labor supply problem, which needs to be fixed by bringing more people into the field from across the country and across the border. Worker groups say there isn’t a supply problem — it’s just that builders aren’t paying enough to make the jobs worth someone’s while.”

Trump’s pledge to protect America workers from cheap Chinese and other imports so they can produce them in the U.S. at a higher cost, is bad economics and bad policy. He is pledging to benefit one group of workers at the expense of other workers and at the expense of the standard of living more generally. This is not what the Republican Party has stood for in the past and not what it should stand for now. It should stand for fairness and equal opportunity for workers and entrepreneurs to benefit from doing things better and thereby raising their incomes and the income of the nation. The principle of fairness is widely held in the United States but has always had to battle for dominance against the temptation of the zero sum claims of special interests for government to serve their interests at the expense of others and at the expense of fairness. Donald Trump and Bernie Sanders are appealing to special rather than general interests at the expense of fairness.

The Asian Infrastructure Investment Bank and the SDR

By Warren Coats and Dongsheng Di

Jin Liqun, President of the new Asian Infrastructure Investment Bank (AIIB) announced on January 17, 2016 that all of its loans would be in U.S. dollars, “signaling that Beijing will not use the development bank as a platform to promote renminbi internationalization.”[1] In this note we argue that the AIIB should make all of its loans in SDRs. Doing so would make a major contribution to promoting the replacement/supplementation of the U.S. dollar for international payments that was called for by People’s Bank of China’s Governor, Zhou Xiaochuan in 2009.[2] As the SDR valuation basket will include the Chinese renminbi after October 1, 2016[3] it will also contribute, but more modestly, to the international use of the renmimbi.[4]

As the AIIB is a Chinese initiative and is headquartered in China, it was initially thought by some that its operations would be denominated in RMB. However, denominating its loans in RMB and actually disbursing RMB would suffer several disadvantages for the AIIB and for its loan recipients. There was concern by some that the use of the RMB might further strain the already complicated US-China bilateral relationship. In might also force the pace of China’s financial and capital account liberalization faster than other conditions warrant. Moreover, with greater exchange rate volatility of late, loan recipients would be exposed to greater exchange rate risk. The AIIB’s choice of the U.S. dollar avoids these risks but continues to subject its borrows to exchange risks associate with the dollar, which has varied considerably over the years. For these reasons the IMF, for example, denominates its loans and other financial operations in its Special Drawing Right (SDR), whose value is based on the market value of specific amounts of the five freely useable currencies in its valuation basket.[5] Thus for most countries, the international value of the SDR is more stabile than is the value of the dollar or another of the other currencies in its valuation basket. This logic applies fully to the operations of the AIIB and other development banks. The case for creating “private” SDRs to disburse to AIIB loan recipients rests on the contribution it would make toward developing the SDR issued by the IMF into a global reserve asset to supplement or replace the U.S. dollar, Euro and other national currencies in countries foreign exchange reserves.

The development and use of private SDRs, SDR denominated bank liabilities, is described in detail in an article one of us wrote over thirty four years ago in the IMF Staff Papers.[6] The AIIB would establish SDR denominated deposits with its bank (e.g., the BIS) and instruct its loan recipients to establish SDR accounts with their banks. AIIB loans would be disbursed by transferring the appropriate amounts of its SDR balances at the BIS to the recipients’ account at its banks. The dollar value of these SDRs would be determined in the same way as is the IMF’s official SDR. Following the procedures used by the IMF when disbursing its SDR denominated loans, recipients could request to receive their loans in the equivalent value of a freely usable currency of their choice (or in any or all of the five currencies in the valuation basket). In the first instance, AIIB loan recipients are likely to be governments with accounts in their central banks. Thus these central banks would need, in addition to their SDR accounts with the IMF, to establish (private) SDR accounts for their governments and commercial banks. If the loan recipient is able to spend these SDRs (pay its contractors and suppliers) directly it would do so, but most often it would need to exchange them for the currency wanted the ultimate recipients. This exchange would most likely be executed by its bank providing the SDR deposit.

Cross border private SDRs payments would be cleared and settled in the same general way as are U.S. dollar payments. Net outflows of SDRs from the banks of one country via their central bank to another country via its central bank, would be settled by the transfer of official SDRs on the books of the SDR Department of the IMF. Alternative clearinghouse arrangements are also possible has suggested by Peter Kennan in his comments on the 1982 IMF Staff Papers article. When such loans are repaid, if the repaying government (or other loan recipient) doesn’t have sufficient balances in its private SDR account with its central bank to transfer to the AIIB’s account with the BIS it would use other currencies to buy additional private SDRs. It might also use its official IMF allocated SDRs to either buy private ones or to transfer directly to the AIIB (assuming that like most other development banks and the BIS it has become an “other holder” of official SDRs). Private and official SDRs would have essentially the same relationship with each other as do base money and bank money in national currencies.

China and the AIIB are in a strong position, working through the IMF or bilateral discussions, to urge central banks to open private SDR accounts for their governments and their commercial banks toward the fulfillment of their obligation under the IMF’s Articles of Agreement to make the SDR “the principal reserve asset in the international monetary system” (IMF Article XXII). Through their representatives at the World Bank, Asian Development Bank, and their New BRICS Development Bank they could press these institutions to disburse in SDRs (private and/or official) as well. As an important purchaser of oil and other globally traded commodities they could encourage their pricing in SDRs. In the first instance, many loan recipients would choose to convert their SDRs into one or more of its basket currencies. But as private SDRs and supporting clearing and settlement arrangements proliferated, holding and using SDRs for international transactions would become more convenient and would potentially grow rapidly. This is an opportunity that should not be missed.

References

Coats, Warren, 1982   “The SDR as a Means of Payment,” IMF Staff Papers, Vol. 29, No. 3 (September 1982) (reprinted in Spanish in Centro de Estudios Monetarios Latinoamericanos Boletin, Vol. XXIX, Numero 4, Julio–Agosto de 1983).

1983, “The SDR as a Means of Payment, Response to Colin, van den Boogaerde, and Kennen,” IMF Staff Papers, Vol. 30, No. 3 (September 1983).

2009, “Time for a New Global Currency?” New Global Studies: Vol. 3: Issue.1, Article 5. (2009).

2011, “Real SDR Currency Board”, Central Banking Journal XXII.2 (2011), also available at http://works.bepress.com/warren_coats/25

2014, “Implementing a Real SDR Currency Board”

_____. Dongsheng Di, and Yuxaun Zhao, 2016, Why the World needs a Reserve Asset with a Hard Anchor, http://works.bepress.com/warren_coats/34/

Footnotes

Dr. Warren Coats retired from the International Monetary Fund in 2003 where he led technical assistance missions to more than twenty countries (including Afghanistan, Bosnia, Egypt, Iraq, Kenya, Serbia, Turkey, and Zimbabwe). He was Chief of the SDR Division of the Finance Department from 1982-88. His PhD from the University of Chicago was supervised by Milton Friedman. He was part of the IMF’s program team for Afghanistan from 2010-2013 and is a U.S. citizen. Wcoats@aol.com

Dr. Dongsheng DI is an associate professor of International Political Economy with School of International Studies, Renmin University of China and also a Research fellow with International Monetary Institute of RUC. In 2015 he is a visiting researcher at Edmund A. Walsh School of Foreign Service of Georgetown University. His research interests include the political economy of global monetary affairs, RMB internationalization, and Chinese Domestic Reforms. He is also a policy advisor to NDRC and China Development Bank and is a citizen of the People’s Republic of China. didongsheng@vip.sina.com

[1] China’s New Asia Development Bank will lend in US dollars, Financial Times Jan 17, 2016 http://www.ft.com/intl/cms/s/0/762ce968-bcee-11e5-a8c6-deeeb63d6d4b.html#axzz3xWiTvQZD

[2] Zhou Xiaochuan, “Reform the International Monetary System”, Website of the People’s Bank of China, March 23, 2009;

[3] The amount of the China currency in the SDR valuation basket will be determined on September 30, 2016 such that its weight in the basket on that day is 10.92% of the total value of one SDR.

[4] Banks offering SDR denominated deposits will generally balance them with SDR denominated assets or assets in the five currencies in the SDR’s valuation basket similarly weighted.

[5] The RMB will be added to the existing basket of four currencies—USD, Euro, GBP, JPY—from October 1, 2016.

[6] Warren Coats, “The SDR as a Means of Payment,” IMF Staff Papers, Vol. 29, No. 3 (September 1982); “The SDR as a Means of Payment, Response to Colin, van den Boogaerde, and Kennen,” IMF Staff Papers, Vol. 30, No. 3 (September 1983).

Fighting Terrorists

A front-page article in the Washington Post announced that: “Saudi Arabia launches alliance to fight terrorism.”[1] This news truly gave me pause. If the irony of this does not hit you in the face, and even if it does, please read on.

Before exploring approaches to fighting terrorism, we need to define who or what our terrorist enemy is. The failure to do so clearly has badly undermined our efforts to defeat this enemy. Clearly the thousands of young men and women from around the world fighting in Iraq and Syria under the self designated Islamic State are terrorist enemies, as are Syed Farook and Tashfeen Malik, who killed 15 of Farook’s co workers in San Bernardino, California recently, and so are the French and Belgian Jihadists who killed 130 people in Paris on November 13th. Dropping bombs on San Bernardino or Paris or carpet bombing the Levant will not stop this enemy and the collateral damage, both human and physical,… well, you get the point.

If we understood why they were doing what they are doing, either at home or in far off places, we might be better able to deter them. What is their goal? Several steps are needed to reach such an understanding, but they all claim to be fulfilling what they understand to be their obligation to Allah to kill non-believers who refuse to convert to Islam:

I have been ordered by Allah to fight and kill all people (non-Muslims) until they say “No God except Allah.”

The above statement is a hadith collected and recorded by Sahih al-Bukhari and Sahih Muslim, the two most important compilers of the oral history of the words and deeds of Muhammad.

So our enemies are young Muslims who accept martyrdom and the prospect of early entry to paradise by fulfilling the commands of their religion as it has been taught to them. Those of us who live beyond this period of desperate searching for the meaning and purpose of our lives and make it to a more mature adulthood generally find less demanding objectives and meanings for our lives. Do most Muslims accept this version of their religion? This is a complicated subject but obviously we see the vast, vast majority of Muslims living in compliance with the laws and customs of whatever country they live in. Have they embraced a more peaceful understanding of Islam or have they managed to ignore those aspects of their religious beliefs that are clearly unacceptable in the modern civilized world?

Following 9/11, once I was able to return to the U.S., I asked a Pakistani colleague why he and his fellow Muslims did not speak out to condemn this barbaric act made in the name of Islam. He replied that it was very difficult for a Muslim to publically criticize a fellow Muslim. I only now think I understand what he meant. For a Muslim to criticize or renounce his religion is called apostasy. According to Dr. Tawfik Hamid in his very illuminating book Inside Jihad: “The portion of Sharia concerned with apostates is known as Redda law, and according to the literal implementation of Redda in Saudi Arabia, the punishment for apostasy is death.”[2]  Thus condemning Muslim’s who kill non-believers can be dangerous.

The proponents of this strict, fundamentalist form of Islam are called Salafists. According to Dr. Hamid: “Salafists desire a return to the Islamic Caliphate. They do not respect secular states or weak Islamic regimes. They believe Sharia law should constitute, ideally, the only legal system in any society, because it is the divine law…. For Salafists, the perfect world is one in which apostates are slain, adulterous women are stoned to death, enslavement of war captives is permitted, polygamy is admired and wives can be beaten when the husband deems it appropriate.”[3] Such views are not compatible with our Constitution or culture nor with any other modern culture and should be condemned as unacceptable.

According to Dr. Hamid, Salafist interpretations of Islam promulgated around the world by the Wahhabi sect of Sunni Islam financed by the Saudi Arabian government has come to dominate the understanding of the teachings of Muhammad by most Muslims. In exchange for the commitment of the Wahhabi leadership to respect and not politically challenge the Saudi royal family, the Saudi rulers financed the Wahhabi movement and its expansion. So the irony of Saudi Arabia launching an alliance to combat terrorism is that it is Saudi Arabia that continues to finance its primary cause, the Salafist version of Islam. For starters the Saudi government should cut off the funds it now provided to the promotion and spread of such teachings.

If the United States or any other military were able to kill every ISIS fighter in the Levant (Iraq and Syria), even if it could do so without destroying the cities and communities and kill their citizens that ISIS now occupies and controls, and even if it could leave behind or install a creditable, peaceful, and broadly accepted government that could prevent a new ISIS from arising, this would not end the threat of Islamic terrorism. As long as young men and women around the world continue to believe that their ticket to paradise entails fulfilling their religious duty to kill infidels, innocent people will continue to die at their hands and we will remain at risk.

Saudi Foreign Minister Adel al-Jubeir has the right idea, if he means it, that “we” must “stop the flow of funds to terrorists and confront the ideology of extremism that promotes killing of the innocent.”[4] But according to Dr. Hamid, this is not enough. “Islamic terror is not likely to decrease until Muslims cease being passive terrorist and become active defenders of hard truth, true peace and real tolerance.”[5] “For every jihadist in the world there is a much larger number of individuals who quietly approve of his conduct. Islamic terror often makes passive terrorist secretly proud.”[6] This is because the passive terrorist believes on the basis of Salafist teachings that the active terrorist is fulfilling the requirements of Islam. “In the case of passive terrorists the schism is one between the cultural mind and the religious mind.”[7]

Islam needs a reformation. While peaceful forms of Islam already exist (e.g., Sufism), Dr. Hamid argues that a more rigorous and scholarly reinterpretation can emerge from a refocusing on the Koran (the word of Allah), which does not contain many of the offending texts in the hadiths and Sunnah (the words and deeds of Muhammad), and placing certain commands and acts in the historical context in which they originally occurred as is generally done when interpreting the Bible.

The United States and other secular societies need the help of peaceful Muslims, those who have accepted the secular laws of their country (e.g. the U.S. Constitution) and thus rejected those Salafist teachings that contradict them. We need their help in attracting Muslims to its acceptable and peaceful versions and we need their help in isolating and exposing the few Islamic terrorists among them. These peaceful Muslims, in turn, need our condemnation of the intolerant and violent elements of Salafism, to help support their campaign for reformation. To ignore that Islamic terrorists are acting on their understanding of their religion, i.e. that they are Islamic, undercuts any effort and hope for the reformation that Islam needs in order to peacefully take its place in the modern world.

In his farewell speech to the Nation in 1988 Reagan spoke of America as a shinning city on the hill: “In my mind it was a tall, proud city built on rocks stronger than oceans, windswept, God-blessed, and teeming with people of all kinds living in harmony and peace; a city with free ports that hummed with commerce and creativity. And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here.” Implicit in Reagan’s vision was that anyone “with the will and heart to get here,” had already embraced the laws and customs of their new land. Those who have and who satisfy our other requirements for immigration should be welcomed.

[1] https://www.washingtonpost.com/world/national-security/saudi-arabia-launches-islamic-military-alliance-to-combat-terrorism/2015/12/15/ad568a1c-a361-11e5-9c4e-be37f66848bb_story.html

[2] Tawfik Hamid Inside Jihad: How Radical Islam Works, Why it Should Terrify Us, How to Defeat it, Mountain Lake Press, 2015 page 83. http://www.tawfikhamid.com/

[3] Ibid.

[4] Washington Post Op. Cit.

[5] Hamid, Op. cit. page 98

[6] Ibid. page 87

[7] Ibid. page 102

What to do about Syrian refugees?

When frightened most people take or support steps to reduce risks to their security even at the expense of their liberties or other normally valued principles. Failure to do so might even be considered foolish if such steps might actually increase their safety. On the other hand, we regularly accept small risks in exchange for more interesting lives. The fact that 92 people died every day on average in the U.S. in traffic accidents in 2012 (about the same number who died from falling) has not kept most of us home, where we would have faced the risk that an average of 7 people per day died from home fires.

I am prompted to return to this subject (for an earlier blog see: https://wcoats.wordpress.com/2013/08/06/are-we-becoming-a-nation-of-cowards/) by a recent Bloomberg poll in which the majority of adult American’s surveyed (53%) following the recent terrorist attacks in Paris that killed 129 people said that “the nation should not continue a program to resettle up to 10,000 Syrian refugees.” Leaving aside that this is an almost unnoticeable share of the more than 3 million Syrians who have fled their country and the 6.5 million displaced within Syria, and leaving aside the causes of the horrors from which they are fleeing, are we justified in refusing to accept refugees if it makes us safer? But before taking that on, we should have a clear understanding of whether it is likely to make us safer.

The concern, of course is that among these poor desperate souls, terrorist might pose as refugees in order to gain entry to the U.S. (or Europe) in order to wreak havoc. Despite best efforts this possibility cannot be ruled out any more that we can rule out dying by fire if we lock ourselves in our homes. But the recent Paris attacks were carried out by French and Belgian citizens, not refugees. “Then there was the curious case of the Syrian passport found near the body of a suicide bomber. Who takes a passport to a terrorist operation? Someone who wants it to be found.” (Frida Ghitis, CNN, November 18, 2015: http://www.cnn.com/2015/11/18/opinions/ghitis-isis-self-destructive/index.html)

Gaining entry to the U.S. as a political refugee is a time consuming and difficult process. I have written a number of letters in support of applications by Iraqis and Afghans I have worked with and that is a very small part of what is required. Ms. Ghitis’ very interesting article continues: “The Paris operation had multiple objectives. The passport was a way of provoking the West to turn against refugees. The attack sought to provoke France, NATO and Europe to fight ISIS and the public to turn against the Muslim population and against refugees. ISIS wants a war between Islam and the rest of the world, with Muslims on its side, as a way of creating and expanding its so-called ‘caliphate.’ ISIS wants the world’s Muslims to feel they are at war with the modern world. It also wants to stop the flow of Syrians to the West, because it’s more than a little embarrassing that Muslims are fleeing its utopian Islamic ‘state.’”

In short, the risks of terrorist attacks (or attacks by deranged students at schools, etc.) in the U.S. come almost totally from our own citizens, just as do virtually all other crimes, violent or otherwise, in the U.S.  We call their perpetrators criminals and have vast and expensive programs to minimize such acts and to protect us to the extent compatible with our values from the crimes that nonetheless still take place. Aspects of these programs are the promotion of respect for the rights of others and for law and order and addressing and minimizing injustices toward individuals or groups that might provide the basis for grievances and hostility. For the rest we rely on the police to maintain order and arrest those who persist in crime (violent or otherwise). Crime and its perpetuators have always been and always will be with us. Some approaches to containing them have worked better than others and we should continuously strive to find the most effective balance between our freedom and our security.

So will ending the already negligible immigration of Syrians or Muslims improve our safety? If anything at all, it will worsen it by alienating and angering some of the almost 3 million Muslim’s already living here. The cry by some Governors and Presidential candidates and others to close the door to Muslims is much more likely to turn an American Muslim into a terrorist than to prevent one from entering the country from abroad. Thus these ugly cries by understandably frightened people fail on all counts (the promotion of American values and the promotion of security).

We need champions of the “Land of the free, home of the brave.” We have been the “Home of the free because of the brave;” not the brave young men and women sent off as cannon fodder to fight wars all over the place by deranged neocons but those brave enough to stand tall for the values of human respect and freedom that have (and hopefully still will) define America.

 

What is wrong with PC?

Almost five years ago I wrote about political correctness (PC, politeness and caondor): https://wcoats.wordpress.com/2011/01/11/pc-politeness-and-candor/. In short, I said that what would normally be considered “good manners,” — values and behavior of free individuals– was becoming a stifling imposition of expected behavior by various authorities, another manifestation of the nanny state. Given our laudable propensity to generally rebalance excesses in one direction or another, I assumed that PC would be fading by now.

In 1964 at the University of California at Berkeley, I participated with other students from the far left to the right (University Conservatives and Young Republicans– we didn’t have far right students at Berkeley) in demonstrations AGAINST the University administration’s efforts to limit our freedom of speech. This was the famous Free Speech Movement. Thus I am shocked to read that today’s students are demanding restrictions on speech by the authorities. What is going on here?

On November 9 the WSJ reported that: “On Oct. 28 Yale Dean Burgwell Howard and Yale’s Intercultural Affairs Committee blasted out an email advising students against ‘culturally unaware’ Halloween costumes, with self-help questions such as: ‘If this costume is meant to be historical, does it further misinformation or historical and cultural inaccuracies?’ Watch out for insensitivity toward ‘religious beliefs, Native American/Indigenous people, Socio-economic strata, Asians, Hispanic/Latino, Women, Muslims, etc.’ In short, everyone.

“Who knew Yale still employed anyone willing to doubt the costume wardens? But in response to the dean’s email, lecturer in early childhood education Erika Christakis mused to the student residential community she oversees with her husband, Nicholas, a Yale sociologist and physician: ‘I don’t wish to trivialize genuine concerns,’ but she wondered if colleges had morphed into ‘places of censure and prohibition.’

“And: Nicholas says, ‘if you don’t like a costume someone is wearing, look away, or tell them you are offended. Talk to each other. Free speech and the ability to tolerate offence are the hallmarks of a free and open society.’

“Some 750 Yale students, faculty, alumni and others signed a letter saying Ms. Christakis’s ‘jarring’ email served to ‘further degrade marginalized people,’ as though someone with a Yale degree could be marginalized in America” Read the whole sickening story: http://www.wsj.com/articles/yales-little-robespierres-1447115476

It is hard for me to grasp that some Universities now carve out limited spaces within which students may freely express their opinions on controversial issues. Charles Murray’s reaction resonates with me: “Safe space. That’s the POINT of a university. To be a safe space for intellectual freedom in a world largely hostile to that concept.” FACEBOOK, Nov 10, 2015.

It is a good thing that today’s students are more sensitive to bad behavior among their peers and hopefully better behaved themselves. However, the swing from students demonstrating to defend free speech to students demonstrating to restrict it represents, in my view (as correctly noted by the brave Mr. Christakis in the above article) a swing from each or our personal responsibilities to exhibit, defend and promote good manners to a wide ranging state—big brother—to oversee and enforce all that in its wisdom we should believe and do. We will be a weaker and more subservient country as a result.

Keystone XL pipeline madness

By his own admission President Obama’s rejection of the Keystone XL pipeline project is political rather than scientific.

Two environmental concerns have been raised. The first is that the emissions of greenhouse gases are about 17% higher for oil from oil sands compared to conventional sources. However, the rejection of the pipeline proposal will not materially change the production and consumption of Canada’s oil shale crude, which will now be transported to market by more expensive means. “Rail transport has expanded to carry oil sands to the United States, soaring from just 16,000 barrels in 2010 to 51.2 million barrels in 2014 before dropping somewhat this year. But rail transport is more expensive than pipeline transport…. Royal Dutch Shell’s chief executive, Ben van Beurden, said last year that the company had bid for space on another pipeline to move its oil-sands crude to Canada’s east coast and from there to world markets, including Gulf Coast refiners. ‘We’re covered. I’m good,’ he said in an interview. He said that ‘the argument that Keystone is a bad idea because it will somehow enable development of resources in Canada is to some extent flawed,’ adding that other alternatives would emerge.” (This and other quotes are from today’s Washington Post in the article linked below)

The second environmental concern arises from the possibility of oil spills from breaks in the pipeline. This possibility needs to be compared with the possibility of spills from rail accidents or breaks in alternative pipelines.

Because the pipeline would cross international boundaries it must be approved by the State Department. As the application was being reviewed, then Secretary of State Hillary Clinton stated on October 15, 2010 that the department was “inclined” to approve project. “We’re either going to be dependent on dirty oil from the Gulf or dirty oil from Canada,” she said. On August 26, 2011 the State Department issued its final environmental impact statement determining “there would be no significant impacts to most resources along the proposed project corridor.” And again on March 1, 2013 the State Department issued another environmental review that raised no major objections to the Keystone XL oil pipeline saying that other options to get the oil from Canada to Gulf Coast refineries were worse for climate change.

Canada’s new liberal Prime Minister, Justin Trudeau, supported the project. “TransCanada’s president and chief executive, Russ Girling, issued a statement saying his company was ‘disappointed. Today, misplaced symbolism was chosen over merit and science — rhetoric won out over reason,’ Girling said…. Terry O’Sullivan, general president of the Laborers’ International Union of North America, said Friday that ‘Obama has also solidified a legacy as a pompous, pandering job killer.’” (same Post article).

“As Obama rode from the White House to the campus [Georgetown on June 25, 2013, he], said he would approve Keystone XL only ‘if it does not significantly exacerbate the climate problem.’” But his own State Department found that it does not. So what is going on?

“By late 2013, Obama and Kerry had concluded that the pipeline failed their climate test — not because blocking it would guarantee that Canada’s fossil fuels would remain in the ground, but because denying the permit would strengthen America’s position in international climate negotiations…. ‘The reality is that this decision could not be made solely on the numbers — jobs that would be created, dirty fuel that would be transported here, or carbon pollution that would ultimately be unleashed,’ Kerry said in a statement. ‘The United States cannot ask other nations to make tough choices to address climate change if we are unwilling to make them ourselves.’”

In short the President lied (not an uncommon practice among politicians, but we might hope for a higher standard from American Presidents). But apparently not. The Obama administration has authorized the selling of coal owned by the U.S. government that would not meet our C02 emission standards to third world countries, which helps our emission record but not the world’s. https://www.washingtonpost.com/world/us-exports-its-greenhouse-gas-emissions–as-coal-profitable-coal/2015/10/08/05711c92-65fc-11e5-bdb6-6861f4521205_story.html

“The Washington Post’s editorial on the pipeline today began: “President Obama rejected the Keystone XL oil pipeline on Friday, ending an unseemly political dispute marked by activist hysteria, GOP hyperbole, presidential weakness and a general incapability of various sides to see the policy question for what it was: a mundane infrastructure approval that didn’t pose a high threat to the environment but also didn’t promise much economic development. The politicization of this regulatory decision, and the consequent warping of the issue to the point that it was described in existential terms, was a national embarrassment, reflecting poorly on the United States’ capability to treat parties equitably under law and regulation.”

https://www.washingtonpost.com/blogs/post-partisan/wp/2015/11/06/obama-ditches-evidence-to-capitulate-on-keystone-xl/

https://www.washingtonpost.com/news/post-politics/wp/2015/11/06/obama-set-to-reject-keystone-xl-project-citing-climate-concerns/

Cayman Financial Review, Q3 2015

Dear Friends,

The Third Quarter issue of the Cayman Financial Review is now available on the web: http://www.compasscayman.com/cfr/. I am on the Editorial Board and have two articles in this issue that might interest you. The first discusses the continued decline of U.S. world leadership exemplified in the case of the new Asian Infrastructure Investment Bank located in China: http://www.compasscayman.com/cfr/2015/08/19/US-leadership-and-the-Asian-Infrastructure-Investment-Bank/

The second is the final installment of my series on the Kabul Bank scandal. The failure of Kabul Bank in Afghanistan was probably the biggest bank failure and fraud in history on a per capital basis.  As this final article looks at some of the legal issues and developments in recovering stolen assets held abroad and Afghanistan’s uneven struggle to strengthen its criminal justice system, Gary Gegenheimer, a lawyer who also worked in Afghanistan, joined me to write this third installment: http://www.compasscayman.com/cfr/2015/08/19/The-Kabulbank-scandal–Part-III/

I hope that you enjoy them.

Best wishes,

Warren

Greece: What should its creditors do now?

Following Sunday’s NO vote in Greece, what ever that might have meant, it is tempting to tell Greece to get lost and be done with them. Aside from the unseemly lack of compassion for our suffering fellow man, the further collapse of the Greek economy and society that would likely follow Grexit (the Greek exit from the Euro and introduction of its own currency) would open unknown and potentially very dangerous risks to the rest of Europe from its southern periphery. However, any new deal between Greece and its creditors should be mutually beneficial for Greece and the EU in the long run and achievable and practical in the short run. What are the key elements needed for such an agreement?

Greece’s second bailout program with its creditors (the EU, ECB, and IMF) expired June 30 after a four-month extension without disbursing the final installment of around $8 billion dollars. It cannot be resurrected. Thus any further discussions between Greece and its creditors will concern a third bailout program.

Greece’s recently replaced and unmissed Finance Minister, Yanis Varoufakis’, stock speech said basically that Greece does not need or want more loans because it is bankrupt rather than illiquid. In short, it wants debt forgiveness. In fact, many European officials have acknowledged the possible need to write off (reduce the present value one way or another of) existing Greek debt but insisted that any such consideration be put off for a new program. Discussion of a new program has now arrived.

The foundation of any financial assistance program with the IMF is its assessment that the borrowing country can repay the loan. This assessment is contained in the IMF’s “Debt Sustainability Analysis.” This analysis imbeds the agreed (or assumed) level of government spending and estimated tax and other government revenue and of the level of economic activity (GDP growth) upon which it depends in a forecasting model of the deficit and debt/GDP ratios expected from implementation of the agreed policies. The IMF was badly embarrassed by its acceptance of overly optimistic assumptions about income growth government revenue in its first bailout program in 2010 with the EU and ECB. Under political pressure from the EU and ECB, these assumptions allowed the IMF to conclude that Greece’s debt would be sustainable thus avoiding the need for some debt write off favored by the IMF but opposed by Germany and France, whose banks held large amounts of that debt. The second bailout program included a write off of about 70% of the privately held Greek debt. However, this came too late and the adjustment in the Greek government’s annual deficits required by the first program proved too severe causing a much larger and longer lasting contraction in the Greek economy than expected and assumed in the IMF Debt Sustainability Analysis at that time.

On June 26, 2015 (i.e. prior to Greece’s default on its $1.7 billion payment to the IMF and to the July 5 referendum) the IMF released a draft Debt Sustainability Analysis based on the information available at that time. It concluded that “If the program had been implemented as assumed, no further debt relief would have been needed under the agreed November 2012 framework…. At the last review in May 2014, Greece’s public debt was assessed to be getting back on a path toward sustainability, though it remained highly vulnerable to shocks. By late summer 2014, with interest rates having declined further, it appeared that no further debt relief would have been needed under the November 2012 framework, if the program were to have been implemented as agreed. But significant changes in policies since then—not least, lower primary surpluses and a weak reform effort that will weigh on growth and privatization—are leading to substantial new financing needs. Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable…. But if the package of reforms under consideration is weakened further—in particular, through a further lowering of primary surplus targets and even weaker structural reforms—haircuts on debt will become necessary.”

In short, the Greek economy was finally beginning to recover by the end of 2014 but the reversals by the new Syriza government of some of the policies contributing to that gain and the loss of market confidence in the muddled and amateurish behavior of the new government reversed the recovery and further increased Greek deficits. In addition, increasing capital flight has been financed by short-term emergency liquidity loans from the ECB, thus adding to Greece’s over all indebtedness. Capital flight per se should not reduce banks’ capital, as they lose the same amount of assets and liabilities, as long as they are able to liquidate sufficient assets by selling them or by using them as collateral for loans from the ECB or other banks. These loans and the process of transferring Euros abroad are described in the paper I presented in Athens May 19 at the Emergency Economic Summit for Greece: http://works.bepress.com/warren_coats/32/.

Under these circumstances it would be desirable (i.e. consistent with and/or required by a European desire to keep Greece in the Euro Zone while returning it to fiscal balance and sustainability over a reasonable, if somewhat longer, period of time) for Greece’s creditors to forgive some of the debt held by the ECB and IMF and to lower the structural fiscal surpluses initially required in a follow on program for the next few years (this latter element had already been offered by the creditors before the referendum). In short, by reducing Greece’s debt service payments and lowering its primary fiscal surplus, it would endure less “austerity.” Former Finance Minister Varoufakis actually proposed a sensible risk sharing form of refinanced Greek debt indexed to the economy’s economic performance. Creditors would do better than expected on their concessional loans if the economy performed better than forecast and would suffer losses if it did worse. This would give both sides a financial incentive to get the pace and balance of fiscal adjustment right (growth maximizing). While Europe’s political leaders sort out the details, the ECB should continue to provide liquidity credit to the extent that, and as long as, Greek banks can provide realistically valued collateral.

The purpose of these adjustments by the creditors should not and must not be to throw more good money after bad allowing a continuation of decades of corruption, rent seeking and government inefficiency. Long before it joined the Euro Zone, Greece suffered poor government services by a bureaucracy overstaffed by friends and supporters of the government in power at the time. Not receiving expected government services, many Greeks have decided not to pay for what they are not getting. Hence tax evasion and a large underground economy added to Greece’s deficits. Quoting from Bret Stephens’ July 6 column: “Greeks retire earlier and live longer than most of their eurozone peers, which means they spend close to 18% of GDP on public pensions, compared with about 7% in Ireland and 5% in the U.S…. As of 2010, Greek labor costs were 25% higher than in Germany. [As a result of internal devaluation since then, this is no longer true.] A liter of milk in Greece costs 30% more than elsewhere in Europe, thanks to regulations that allow it to remain on the shelf for no more than a week. Pharmaceuticals are also more expensive, thanks to the cartelization of the economy…. Greece wanted to be prosperous without being competitive. It wanted to run a five-star welfare state with a two-star economy. It wanted modernity without efficiency or transparency, and wealth without work. It wanted control over its own destiny—while someone else picked up the check.”

Changing this behavior by Greek governments and the Greek public will not be easy if it is possible at all. The still very strong support by the Greek public for keeping the Euro suggests a strong awareness of the need for some restraints and discipline of its government’s spending. But is the desire for a truly better deal (from their own government) strong enough to overcome the resistance of the entrenched and favored interests, who would lose from liberalizing the economy and cleaning up the patronage mess and tax non compliance, etc.? The best hope is the formation of a unity government that strongly endorses a well balance program of gradual further fiscal adjustment and the continuation of the structural reforms so badly needed. Close monitoring by the creditors of Greek compliance with its promises and the phasing of financial assistance tied to such performance benchmarks, is the IMF’s standard approach to enforcing compliance with the measures the government agrees to. There are risks in agreeing to a third program and risks in not doing so and thus Grexit.

Grexit, even with total default on all external debt, will surely force more austerity on Greece than would any program now contemplated, even before taking account of the almost certain collapse of all of Greece’s already “temporarily” closed banks. The Greek government will hardly be in a position to bailout its banks suffering a surge of non-performing loans. Depositor bail-ins will need to cut all the way into “insured” deposits. The pain will be largely felt only in Greece, and unfortunately mostly by the ordinary Greek citizen.

Baltimore—Saving a City

Few serious problems have a single explanation or cure. The decay of large parts of Baltimore is no exception. An interesting article in the Washington Post explores the diligent efforts of its former mayor, later the governor of Maryland, Martin O’Malley to fix it. http://www.washingtonpost.com/local/baltimores-blight-puts-omalley-on-defensive-in-bid-for-presidency/2015/05/29/9dffe1d0-0541-11e5-8bda-c7b4e9a8f7ac_story.html. The Baltimore mayor depicted in the TV series The Wire, Tommy Carcetti, was inspired by O’Malley. (I was surprised after watching five seasons of the Game of Thrones to learn that the actor who played Carcetti in The Wire, Aidan Gillen, is Littlefinger in the Game of Thrones. His O’Malley character in The Wire was much more interesting.)

O’Malley went after the usual suspects, improving transportation and other infrastructure, improving education, etc. – all of the things we look to government to provide in the name of equal opportunity for all. He also instituted tough policing inspired by the “Broken Windows” theory first expounded by James Q. Wilson and George L. Kelling in 1982. This introduced the intensive use of “stop, question, and frisk” of recent controversy in NYC. In retrospect, the approach alienated the police from the communities they were supposed to protect, and was much in the news when 25 year old African-American Freddie Gray died in April from injuries received while in police custody. His funeral in Baltimore was followed by riots that did much damage to the already impoverished neighborhood in which he lived.

What was almost totally missing from the Post article was the need for jobs. While the over all unemployment rate for metropolitan Baltimore is only slightly above the U.S. average (5.7% compared to 5.6%), black unemployment is dramatically higher. “For young black men between the ages of 20 and 24, the unemployment rate was an astounding 37% in 2013, according to the most recent data available from the U.S. Census Bureau. That’s compared with 10% for white men of the same age.” (CNN Money) Much of the city’s heavy industry and the jobs they provided (steel processing, shipping, auto manufacturing, and transportation) left Baltimore decades ago. Many workers moved with those jobs but some stayed. The increase in service economy jobs of recent years employs workers with different and generally higher level skills than did the lost manufacturing jobs. Johns Hopkins University and Johns Hopkins Hospital are now Baltimore’s largest employers. Baltimore’s population peaked at around 950,000 in 1950 and dropped to 622,000 in 2013. Improving Baltimore’s infrastructure for those who have stayed is pointless if they can’t find jobs.

It is not that infrastructure and education are not important. They are important both for the quality of life and for attracting enterprises that provide jobs. But they are only part of the package companies consider when deciding where to locate. The cost of providing and maintaining them relative to their quality is important as well, and education needs to be relevant for the jobs potentially attracted. Taxes, both state and local are an important port of the cost of doing business. When companies evaluate where to locate new facilities they will want the best bang for their buck. Maryland is an expensive state (35th from the top in CNBC’s list of the best states for doing business). During his term as governor of Maryland O’Malley:
• Raised the top personal income tax rate from 4.75 to 5.75 percent. With local taxes on top, Maryland’s top rate is 8.95 percent.
• Raised the corporate tax rate from 7.0 to 8.25 percent.
• Raised the sales tax rate from 5 to 6 percent and expanded the sales tax base.
• Raised the sales tax rate on beer, wine, and spirits by 50 percent.
• Raised the gas tax by 20 cents over four years, almost doubling the rate from 23.5 cents.
• Doubled the cigarette tax from $1 to $2 per pack.
• Imposed higher taxes on vehicle registration.
• Imposed a storm water mitigation fee on property owners, or a “rain tax.”
(Chris Edwards: Cato)

The quality of government services in Maryland, however, is also fairly high. Last year I incorporated my consulting business in Maryland as an LLC. It took me 30 minutes on line sitting in my office from start to finish, including the email delivery of the signed and sealed document of incorporation. In addition, the cost of property and labor in Baltimore is low. This is a natural market reaction to the loss of industry and residence. The city’s efforts to revive its poorer neighborhoods also need to focus on improving its competitive advantage as a place for businesses to locate.

Crony capitalism and the Export Import Bank

An important and fundamental principle of the rule of law is that laws should have wide or universal applicability to everyone. This principle is generally violated when governments subsidize specific activities. These subsidize might take the form of tax breaks, loans at preferential interest rates or even grants to favored enterprises or activities. The Export Import Bank is a government program for granting such favors in the name of promoting exports.

If the EX-IM Bank only provided information to American firms that helped them satisfy foreign requirements for selling their products abroad or to connect with services available for marketing such produces—following the model of the Small Business Administration or the Agricultural Extension Services provided by many states—their continued existence might be defensible. However, like so many government intrusions into the private sector, it provides huge subsidize to a limited number of customers (about 30% of the total to Boeing to subsidize the sale of its planes to foreign carriers) at the expense of others. American carriers like Delta complain that EX-IM Bank subsidies to Boeing benefit their foreign competitors, who are able to buy Boeing planes more cheaply than they are. “The Airline Pilots Association of America estimates that the bank’s subsidizing of Boeing airline purchases abroad has forced our domestic airlines to cut about 7,500 jobs – decreasing the airline workforce by almost 2 percent.” (The Blaze, May 29, 2015)

While the cost of the EX-IM Bank to U.S. taxpayers is trivial, it is one more drop in the growing pond of crony capitalist connections to the government. Boeing moved its headquarters from Seattle, where most of its production was traditionally located, to Chicago and has diversified its production and suppliers around the country precisely to have more representatives in congress with an interest in its well being. Like many other large companies seeking government favors, it has hired key people from government such as Kevin Varney, former chief of staff at the Ex-Im during Obama’s first term. The stakes for Boeing are large so you can be sure it is spending a lot of money one way or another to protect its interests. This is the nature of crony capitalism, which gradually diminishes real market competition and chokes productivity.

Creating programs that grant favors also creates strong incentives for less subtle and more overt, traditional style corruption. “For example, Johnny Gutierrez, an Ex-Im Loan Specialist, pled guilty on April 22, 2015 of accepting up to $78,000 in bribes in return for recommending the approval of unqualified loan applications to the bank, among other misconduct. During this period, Ex-Im gave Gutierrez nearly a 20 percent pay hike and paid-out thousands in performance bonuses. “ (Adam Andrzejewski, Forbes, http://www.forbes.com/sites/adamandrzejewski/2015/05/31/the-export-import-bank-and-the-art-of-picking-losers/ )

The Ex-Im Bank and dozens of programs like it are economically unsound and wasteful and politically corrupting. It and others like it should be killed when ever possible. Here is a rare case where congress can do good by doing nothing (i.e. by not renewing the Bank at the end of this month).