Sen. Harry Reid's Unicorns: Fact Checking A Whopper

Tax policy should be serious business carried out by serious politicians using real facts and figures. This is why we have the Library of Congress and the Congressional Budget Office, among other expert institutions.
How can we take Congress seriously when the Senate Majority Leader, Harry Reid, makes patently inaccurate, outrageous and bizarre claims on an important tax-policy issue without any heads being turned? I guess this is what we have come to expect of Congress. No wonder citizens with favorable opinions of Congress are as rare as unicorns, to borrow a phrase.

go to Forbes.com

I Can’t Believe It: A Great Editorial in USA Today on the Payroll Tax

In its editorial Payroll tax gridlock could actually be a plus USA Today puts important perspective on the payroll tax debate.

The editorial argues that Congressional gridlock could be a good thing in this case. Social-security funding is already rocky, and the social security trust fund is running a deficit this year, thanks in part to the payroll tax cut. Tax cuts (which USA Today appears not to like very much) have a way of becoming permanent – Who can vote to raise someone’s taxes after they have been “temporarily” lowered?

Taking a Keynesian position, the editorial argues that the extension of the payroll tax cut might create some short term stimulus, but the costs of the extension are much too large in terms of threatening  social security revenues.

I can’t believe it. A major news outlet, other than the Wall Street Journal, taking a reasonable position on a major economic and political issue.

The Payroll Tax-Cut Consensus: Another Keynesian Sand Castle

Democrats are pushing hard for an extension of the payroll tax cut, without which, they claim, the economic recovery will falter. They salivate over the hard-hitting campaign ads to come: “Republicans favor tax cuts, but only for millionaires. Republicans sabotage the economy and the middle class to beat Obama.”

The Democrats and their media enablers use their standard refrain to make the case: All reasonable economists believe in the “Keynesian consensus” that tax cuts increase consumer spending and promote economic recovery. How can anyone argue against such “settled science”? We do not have a Ronald Reagan around to remind us: “There they go again.”

Intimidated Republicans do not engage in rebuttal. I guess they fear that voters cannot understand why extending the payroll tax cut is both bad economics and bad politics.

to read the rest

Kim Jong Il: The Passing Of A Tyrant And The Ensuing Power Struggle

Kim Jong Il, who died Saturday at the age of 69, was the last leader of a Stalinist state held together by a Stalin-like cult of personality, brutal repression and disposition of rents to supporters. Like Stalin, Kim Jong Il rid the North Korean leadership of any possible independent-thinking rivals. There are no Gorbachevs or Dengs in the wings. But the grooming of his chosen successor, third son Kim Jong Un, remains incomplete, and this throws something of a monkey wrench in succession plans.

Kim Jong Il leaves behind a failed economy and a starving people. He built a regime that could survive the grossest of economic failures by means of a blustering and threatening foreign policy, an oversized military that sucked up huge resources, strategic payments to key supporters in the party and military from arms and drug sales, and absolute repression of his people.

go to Forbes.com

A Note on U.S. Taxpayers Who Earn a Million Dollars or More

I just completed a blog on a statement by Harry Reid that million-dollar-earners are primarily hedge fund managers and wealthy lawyers. Businesses owned by millionaires that create jobs are as rare as unicorns.

I decided to fact check this bizarre statement (which National Public radio appeared to support) myself. My results will be posted on my Forbes Econworld blog shortly. I use this note to list my data sources:

Data on tax filers earning one million dollars or more is from IRS’s Table 1.4 “Sources of income, adjustments, and tax size of adjusted gross income, 2009.” Table 4 gives the total number of million-dollar tax filers, their sources of income. Income from businesses is over $220 billion. The number of millionaire tax filers is 237,000, and they pay an average tax rate of 30 percent.

Data on employment in investment banking is from the Bureau of Labor Statistics study of investment banking in 2006.

Data on the number of investment bankers earning million-dollar-plus bonuses is from Morgan Stanley. I apply their ratio of employees making million dollar plus bonuses to investment bank employment in general to approximate the total.

Data on the number of general corporate counsels earning a million dollars or more (77) is from Law.Com.

Data on the number of equity partners in law firms earning total compensation of a million or more is from American Lawyer.com. I deliberately overestimate the number of million-dollar lawyers (14,000) by counting all equity partners in firms averaging million dollar compensation as earning a million or more.

My fact check shows how bizarre Harry Reid’s numbers are.

Inconvenient Facts: If Only the State Ran Banks

A demand of the occupy Wall Street crowd is to nationalize banks and have the state rigidly regulate risk. The reason for the world financial crisis is the greed of bankers and financiers throughout the world. We would be safe if we let the state handle such matters, they say. The state would get rid of “risky schemes”  like the infamous credit-default swaps traded by financial institutions and threatening their solvency.

European bank regulators have published the list of the ten  European banks with the greatest exposure to Portugal, Italy, Ireland, Greece and Spain.

Of these ten, only three are privately owned. Three are owned by German state governments and France and Belgium. Four are owned by cooperatives.

These figures suggest that private banks did better than state and cooperative banks in managing risk. I thought state and cooperative ownership were supposed to eliminate excessive risk taking.

Putin Is In a Box: What the Demonstrators Should Demand

Fifty thousand demonstrators are shouting “Russia without Putin!” as I write this post. Symbolically, they are milling in Bolotnaya Square, the site where the Don Cossack Pugachev was beheaded in 1775, after fighting a two-year war against Catherine the Great.  

Madeline Albright used to tell us that “Saddam is in a box.” He was not, but Putin is. His siloviki (power men) can handle a demonstration of one thousand but not fifty thousand. He can no longer claim any kind of legitimacy after the party he founded (and now distances himself from) could not win a majority against ancient communists and bumbling nationalists.

Putin’s “box” offers him no convenient way out. In the old days, he could scold his ministers on his obsequious television networks for not paying pensions on time or for failing this assignment or that. After all, he was looking out for the people. This tactic will not work any more. The demonstrators, at last, understand that Putin is the problem.

Putin cannot cede power. He heads a vast corrupt KGB state of “scoundrels and thieves,” who have been robbing Russia blind for over a decade.  There is no peaceful retirement to his secret palace in Sochi. He can only protect himself and his associates by staying in power. Any successor government would banish him or put him behind bars. I can imagine the panic and confusion in oligarch villas, secret police headquarters, and regional governors’ office. Their resistance will be fierce. They have not only their wealth but also their personal freedom to lose.

.

go to Forbes.com

Remarkable Photo of Moscow Anti-Putin Demonstration, Saturday, December 10

A Blogger Could Start Russia's Arab Spring (Russian Election Update)

The new face of the Russian opposition is a young whistle-blowing, shareholder activist, muckraking blogger by the name of Alexei Navalny. At 2:15 p.m. on Monday, he called his huge internet following to a 7 p.m. demonstration at the Chistye Prudy park to protest “the rotten total fabrication of Moscow election results.”  He wondered why some Moscow districts reported 20 percent while identical districts next door reported 70 percent votes for United Russia.

to read the rest

(PS I find it notable that Gorbachev has called for a new election. Putin cannot deny Gorbachev a bully pulpit.)

A Hayseed Economist Responds To The Times' Bill Keller

Bill Keller, the former editor of the New York Times, has ventured into economic commentary after tutorials from “a few economists respected for the integrity of their science.” Presumably, they all have impeccable Ivy League or Wall Street credentials.

Keller concludes that the state of economics is “rotten” because the “democratization of media has diminished the authority once held — and sometimes abused — by a few big newspapers and broadcasters.”

 I, hayseed that I am,  had not realized that the New York Times and CBS – not the editors of the American Economic Review, the Journal of Political Economy,  or the Quarterly Journal of Economics -- are (or were to Keller’s regret) the true arbiters of what is good or bad economics. 

http://www.forbes.com/sites/paulroderickgregory/2011/12/04/a-hayseed-economist-responds-to-the-times-bill-keller/ 

Russia's Voters Have Spoken: Anybody But Putin

According to exit polls, Vladimir Putin’s United Russia lost its majority in the Russian parliament in Sunday’s voting. United Russia fell from a two third majority to under fifty percent. Prior to the election, Putin muzzled independent election monitors; so the actual vote was much worse for his former majority party.
To understand the magnitude of this electoral drubbing, consider a U.S. election in which Republican candidates are banned, and the Democrats vie against the Green, Libertarian, and the Freedom Socialist Parties, and THEY FAIL TO WIN A MAJORITY. This was the case in Russia on Sunday. The majority of ballots were not for someone but against the Putin regime.

go to Forbes.com

ClimateGate 2 Emails: The Real Smoking Gun (DOE Should Answer Before Congress)

The universal  rule of ethical conduct in scientific research is the requirement to share data. Other scientists must be given the opportunity to replicate results and to conduct sensitivity analysis to determine whether alternate data handling and transformations yield different results. Unless this basic ethical requirement is observed, we can have no confidence in scientific results and the scientific method cannot work. (I have discussed climate research and the scientific method in an earlier post).

Consider the National Science Foundation’s requirements on “dissemination and sharing of research results." I quote them in full:

 Investigators are expected to share with other researchers, at no more than incremental cost and within a reasonable time, the primary data, samples, physical collections and other supporting materials created or gathered in the course of work under NSF grants. Grantees are expected to encourage and facilitate such sharing. Privileged or confidential information should be released only in a form that protects the privacy of individuals and subjects involved.   

Now consider the e mail that  Phil Jones of  East Anglia University wrote to colleagues:

I've been told that IPCC is above national FOI [Freedom of Information] Acts. One way to cover yourself and all those working in AR5 would be to delete all emails at the end of the process.  Any work we have done in the past is done on the back of the research grants we get – and has to be well hidden.  I've discussed this with the main funder (U.S. Dept of Energy) in the past and they are happy about not releasing the original station data.

I suggest that Congress call in the Department of Energy administrators responsible for funding Jones’ IPCC work to determine whether they are indeed “happy about not releasing the original station data.” If Jones’ assertion is true, I suggest that they be relieved of their positions.

It is my understanding that the raw station data provide the core long-term temperature readings on which much of the IPCC research findings are based.

P. S.  In support of my comments above, I  wish to direct readers to the complaints of biomedical researchers about the frequency with which they cannot reproduce results published in academic peer reviewed journals, which they attribute to the pressure of getting positive results in order to publish and get more funding.

The WSJ article Scientists’ Elusive Goal: Reproducing Study Results reports: “Most results, including those that appear in top-flight peer-reviewed journals, can't be reproduced. ‘It's a very serious and disturbing issue because it obviously misleads people" who ‘implicitly trust findings published in a respected peer-reviewed journal, says Bruce Alberts, editor of Science. On Friday, the U.S. journal is devoting a large chunk of its Dec. 2 issue to the problem of scientific replication. Reproducibility is the foundation of all modern research, the standard by which scientific claims are evaluated.”

 

Someone Must Eventually Say No. Warnings on the Europe Crisis

Yesterday’s Wall Street rally was indicative of a world investment community desperate for a shred of good news. The U.S. employment figures were better than expected and a consortium of central banks, the Fed included, agreed to prop up European banks with temporary funding.

Everyone now knows the meaning of “moral hazard” – a term foreign to the business vocabulary twenty years ago. It first came to the fore with the Asian Crisis of the summer of 1997. Buyers of bonds of the emerging Asian economies, expecting a lender of last resort, sought to profit from high interest Asian bonds and fixed dollar exchange rates. The two most recent episodes of moral hazard are the U.S. mortgage disaster and the toxic debt of  Ireland, Greece, Portugal, and now Italy. In both cases, investments were made assuming a lender of last resort. Things are different from 1997: We have no credible lenders of last resort who can make whole creditors who stand to lose not billions but trillions.

Moral hazard and lenders of last resort are addictions. We realize their costs only after the fact, and then we must agree to yet another bailout. Otherwise the costs are too high.

We now stand at a watershed in Europe. Creditor countries and Eurocrats tell Germany, the European Central Bank, and the IMF that the costs of yet another bailout are small compared to the alternative. Apparently, the world’s central banks yesterday caved in, at least partially. Only the German voter and perhaps the European Central Bank are left standing against the bail-out consensus. It is argued that somehow the European Union needs time to discipline the spendthrift Greeks, Portuguese, and Italians. But the central bank signal to them is “continue as is. Pretend to change your ways. You are too big too fail, so don’t worry.”

Overlooked in all the confusion is that the central bank loans and European emergency funds are tiny compared to the total bailout costs. Sufficient funding can only be had if private lenders participate. But so far, there are no signs of interest on their part. A more likely result is that private speculators will test the resolve of European governments and central banks to back toxic debt.

Once Soros and others enter the ring, my bets are on the private speculators. Taxpayers around the globe will pay dearly, and we will learn again that moral hazard has substantial costs. We will then immediately forget this lesson until the next catastrophe.

Historians Versus Stalin and His Gulag: A Report From the International Conference on the Gulag, Moscow, October 28-29.

Russian and international scholars gathered at the end of October in Moscow to discuss Stalin’s Gulag.  The Russian State Archive on Social and Political History, in which the Katyn execution order and Stalin’s July 3, 1937 “mass operations” telegram reside, provided an appropriately somber setting. 

Russian scholars largely from the provinces, presented their findings from their research in local and regional archives.  This cadre of dedicated and relatively young scholars represents Russia’s best hope of eventually coming to terms with its tragic past. They have provided invaluable case studies of camps, special settlements, and sharashki in which millions of innocent Russian citizens were imprisoned and in which many perished.

Stalin continues to hold his own despite this amassing scholarly evidence on his crimes against the Soviet people. Illustrious keynote speakers reported with regret that some half of the Russian people continue to view Stalin in a positive light. Without his iron fist, the backward USSR could not have carried out its “overtaking development,” they believe. Too many Russians believe in a presumed defective genetic code that requires authoritarian rulers for Russia. Too many look at remote Norilsk or  the Moscow University Skyscraper and conclude: “We would not have these things without the Gulag.”

Few Russians think about the immense economic and social costs of  Stalin’s crimes. Few know that Russia had the fastest growing industry in Europe on the eve of 1917. Too few ask how other backward countries, such as Japan, “caught up” without the slaughter of  their people, or how can any mass extermination of innocent people serve any positive function?

According to figures presented at the conference, more than a quarter of the adult Soviet population had been a victim of Stalin’s repression the day Stalin’s death was announced to a hysteric and grieving Russian people. Less than a quarter of these would be considered “criminal” in other societies. In the United States, lower rates of incarceration among black youths have basically destroyed the black community.

The corrosive effect of  the repression of one in four adults, most innocent of any real crime, can in no way be compensated for by the so-called economic achievements of the Stalin rule.

Chinese Stock Alarm? Sino-Forest May Be the Best of the Bunch

Sino-Forest is a Wholly-Owned Foreign Enterprise that harvests, processes, and sells wood from leased or owned tree plantations in various Chinese provinces. Its international management hails from Hong Kong, China, and Canada. Sino-Forest trades on the Toronto Exchange, is audited by Ernst & Young, and its glossy annual reports boast of master agreements, huge markets, a plantation strategy, and possible a billion dollar loan from Chinese banks.

If you want to invest in China, Sino-Forest appears (or appeared) to be among your best bets.

Sino-Forest’s compelling story generated a market capitalization of six billion dollars and a share price that rose from $10 to $23 while stocks were collapsing worldwide.

That was then. A critical report sent the share price tumbling eighty percent, trading has been suspended for possible violations of security laws, and the Canadian Mounties are investigating for fraud. The company’s outside directors hired PriceWaterhouseCoopers to investigate.

The investment community finally got a clear picture of how business is done in China, did not like what it saw, and dumped the stock. It’s as simple as that.

go to Forbes.com 

The Booing Heard Round the World

Vladimir Putin accepted his party’s nomination to be its presidential candidate. No surprise in this. But this time round, he goes before the voters without a claim to legitimacy. Russian politics have entered a new phase. The public has awakened to his corruption and stumbling economic policies. They do not want him back.

In his last election, Putin would have won big even without his evisceration of liberal opponents.  Oil prices were high. He could compare the relative stability of his years with the chaos of the Yeltsin years. Now, Putin’s public-opinion favorables are falling and his negatives are rising. His administration tried to suppress videos of the unprecedented booing he received at an appearance at a martial arts competition, but cell-phone videos of his embarrassment have gone viral on the internet.

Putin’s reelection is inevitable. He will not allow any legitimate challenger on the ballot. His only opponents will be the communist and nationalist parties, whose leaders both have negative popularity ratings.

 Russia will join a large number of countries with an unpopular leader who could not be elected in a fair race. Putin’s third term will be for six years, and he is eligible for another six. He will become Russia’s Mubarak and well understands this fact.

In Many Cases, There Is No Compromise

The Arab League and everyone else tell Bashar Assad to compromise with the Syrian protesters. Republicans and Democrats are urged to be “moderate.” The European Union urges Germany to put up more bailout money to save the spendthrifts of the South.  Protesters tell the Egyptian military to be gone.

Compromise is not possible when there is no middle ground. It seems this truth escapes domestic and world politicians and pundits.

The majority of the citizens of Syria want Assad either dead or gone. He wants his opponents dead, in jail or thoroughly cowed. There is no middle ground. The outcome is  “either or.”  Either Assad is killed or flees or he kills or jails enough of his opponents to subdue them. He knows he must lose if he cedes ground.

The Democrats want a larger and more intrusive federal government.  The Republicans think the federal government is already too large and powerful. The “middle ground” is nonexistent. Republicans fear that any further increase in government will lead to more increases. Democrats fear that even small reductions in the size of government will be a repudiation of the New Deal. Neither will budge in such a situation. It was foolish to expect “compromise” from the congressional deficit commission.

The thrifty Germans do not want to bail out the spendthrift Greeks, Portuguese and Italians. Germany’s southern neighbors would like to continue as is with the help of German transfers. Germany’s taxpayers will not accept further bailouts of their southern neighbors, and the Greeks, Portuguese and Italians do not intend to enact real austerity measures.

Protesters on Tahir Square tell the Egyptian military to “leave” and to give up power. The military controls much of the Egyptian economy and is not about to give up this largess. Where is the compromise on such an issue?

In democracies, we hope that elections will resolve such impasses. In authoritarian states, impasses are resolved by violence, not by diplomacy.

Why Are the British Investigators Looking Only at the Murdochs?

I have not paid attention to the British tabloid scandal. All I know is that Murdoch’s News of the World stands accused of sleazy and perhaps illegal tactics in gathering news stories on celebrities and crime victims. The allegations broke when Murdoch’s company was about the acquire Sky News and turn it into a British Fox News. The timing looks suspicious to me.

From the press coverage, it would seem that only News of the World engaged in such dirty tricks.  Can this be true?

I understand that British tabloids compete against each other fiercely. If only one uses sleazy techniques to get juicier stories, the others would lose out in the competitive struggle.

As an economist, I pose a hypothesis: If only the Murdoch papers (News of the World and the Sun) used underhanded and sleazy methods to get news scoops, their share of the tabloid market would be rising over time. Only they had the really salacious stories. Other tabloids would be boring in comparison.

British tabloid circulation statistics do not support the hypothesis. Both News of the World’s share of Sunday tabloids and The Sun’s share of daily circulation remained stable against a backdrop of declining overall tabloid circulation.

This statistical fact tells me that “everyone did it.” But why are only the Murdochs being investigated?

Are One In Five American Children Hungry?

Childhood hunger is a nice, safe issue. No politician can be against hungry children, and we are told that the U.S. faces a child hunger problem of massive proportions. Advocacy groups repeat over and over that 16.2 million children (one in five) “struggle with hunger in the United States.” Television appeals show dispirited children going to bed hungry.

Childhood hunger and nutrition are one of the constants of political discourse. While the Super Committee stalemates, Congress debates whether pizzas should be counted as a vegetable in school lunch programs. The Occupy Wall Street crowd deplores childhood hunger as “violence against children.” Liberals complain that Rush Limbaugh jokes about childhood poverty. Sinister pizza, cola, and salt lobbyists block valiant efforts to make school lunches healthier.

Statistics that become part of our folklore should raise suspicion. When we dig into them, they are usually wrong. I cite as examples Bill Clinton’s “100,000 new cops on the street” or the “miserly pay of teachers.”

 go to Forbes.com

“Die Linke:” A Platform For Occupy Wall Street?

The Occupy Wall Street crowd is criticized for not offering an alternative to the capitalism that it says has failed. Maybe they should take the platform of Germany’s Die Linke (The Leftist) Party. It seems to suit their protest signs.
Die Linke’s base consists of young radicals and true-believer former members of the East German communist party. Its top leaders broke with the mainstream Social Democratic Party for having forgotten its Marxist roots.

As a minor party, Die Linke’s goal is to win enough votes to enter the German parliament and do well in local and state elections. Their platform rules out participation in coalition governments. It is therefore an electoral party that can be fairly open about its anti-capitalist agenda. It only has to win about five percent of the votes nationally to be a success.

In its party congress in Erfurt, symbolically a century after the Revolutionary Social Democratic party adopted its famous Erfurt Program, Die Linke adopted the following platform for the upcoming national elections:

Taxes:

53 percent tax rate for incomes of 65,000 Euros for singles or 130,000 for married couples (one Euro equals around $1.34).
5 percent annual wealth tax on a million Euros or more.
One percent tax on all security market transactions.

Economy:

Investment program of 200 billion Euros per year to create two million jobs, half in the public sector.
Nationalize banks.
State control of the financial sector
Employees get ownership shares of companies that receive subsidies.

Energy:

All atomic power generation should be stopped.
All energy from renewable energy.
Energy concerns to be nationalized.

Labor and Social Sphere:

Minimum wage of 9 Euros per hour to be raised each year.
Long term unemployed receive unemployment benefits basically for an unlimited amount of time.

Health:

All citizens must pay into “citizen’s health insurance” program.
All health care is free.
Employees in health care should be compensated according to fixed wages.

Foreign policy:

Replace NATO with a collective security system including Russia.

I imagine the American Left would embrace Die Linke platform, if it, like its German brethren, could be honest with the voting public.

The five percent wealth tax on a million Euros would be attractive. Millionaires who earn less than five percent will see their wealth fall each year. In a world of bad markets and low interest rates, we could get rid of marginal millionaires in a few years.

Berezovsky vs. Abramovich: Insecure Oligarchs Spell Bad Russian Economy

Two Russian oligarchs are battling in a London civil court over the spoils of Russian privatization.  One is “in” with the Kremlin. The other is “out.” The one who is “out” played the game of Russian politics and lost. Their case shows that the Kremlin decides whether they can keep their spoils or not. Their testimony reveals why such insecure oligarchs have little incentive to create value. As long as the owners of Russia’s “national champions” have such insecure property rights, Russia cannot be a major player in the world economy, member of the WTO or not.

read the rest

Back to Constitutional Basics: Madison On Class Warfare

James Madison was the Father of the U.S. Constitution. Madison, more than any other of the Constitutional framers, insisted on limited government. Madison argued that the Constitution’s task was to limit the powers of government:  “You must first enable the government to control the governed; and in the next place oblige it to control itself.”

Few today know that Madison’s greatest fear was of an “overbearing majority” that would act against minorities. Madison and the other founding fathers used the separation of powers and the protection of private property (the Fifth Amendment) to rein in out-of-control majorities. In Madison’s words: “Measures are too often decided, not according to the rules of justice and the rights of the minor party, but by the superior force of an interested and overbearing majority.”

What minorities might fear the majority? In a burst of what today might be regarded as political incorrectness, Madison wrote: “The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government.”

In other words, people have different skills, education and talents. Hence income and wealth will be unevenly distributed. The majority will have less income and wealth than the fortunate minority and it “must be rendered, by their number and local situation, unable to concert and carry into effect schemes of oppression.”

Government must protect minorities against unfair laws: “It is of great importance in a republic not only to guard the society against the oppression of its rulers, but to guard one part of the society against the injustice of the other part. Different interests necessarily exist in different classes of citizens. If a majority be united by a common interest, the rights of the minority will be insecure.”

If we translate the Father of the Constitution into modern English, we can say that Madison warned about class-warfare appeals to an overbearing and jealous majority.  This was Madison’s fear.

We are about to enter Madison’s nightmare. Although class-warfare appeals are as old as the hills, we now have an income tax system in which soon a majority of the population will pay no income taxes. Those we do not pay income taxes, but receive benefits from the state will be “overbearing” in their support of higher taxes on the “rich.” They will be unable to view the problem of this type of approach from Madison’s eagle-nest view.

They do not understand that such policies can kill the golden goose.

Moscow Sights and Sounds: November 2011

Over the past decade, I visited Moscow some twenty five times.  But this visit to attend the International Conference on the Soviet Gulag was my first in three years.  The conference hotel was in the center of old Moscow, a few minutes from Tverskaya and the Kremlin. I had a chance to walk around and check out familiar sights.

My ten-minute walk to the conference, in the former Institute of Marxism Leninism, took me past the Moscow Mayor’s office. Older people still refer to it as the Moscow Soviet (Mossovet), but most call it the Maiory (Mayor’s office). Nikita Khrushchev occupied this historic red-brick building as head of Moscow during Stalin’s rule.

Each time as I passed by the Mayor’s office, I counted the number of black Mercedes, Audis and BMWs waiting outside for their bosses. The average number was around thirty. The chauffeurs and body guards engaged in idle conversation as they waited. Russian politicians do not mind displaying their wealth and influence.

I do not like Russian television. It is idiotic game shows (20 years ago the prizes were like worth $10), singing contests, or soap operas, but I forced myself to watch the evening news one evening. In Soviet days, a dour announcer read the news accompanied by impersonal news reels.  Things are different now.

The news segment I watched was a slickly-produced exercise in modern PR.  It featured Moscow’s new mayor, appointed to replace long-time mayor Luzhkov, strolling through the city with a TV reporter lobbing softball questions at him. The Putin-Medvedev team decided that Luzhkov was too powerful, and they put this guy in his place. (Luzkov and his billionaire wife are hiding somewhere in Europe).  He like every other politician was so corrupt that no one seemed to regret his departure.

At each destination, the telegenic new mayor cheerfully pointed out how he had corrected the mess that Luzhkov had made. He removed the more noxious billboards from Tverskaya. Gorky Park  now had free rides for children. Most importantly,  he rid the markets around  train stations of criminal dark-skinned elements.  The message was more subtle than in Soviet times but was perfectly clear.

The segment ended with a preview of an expose of Luzhkov, showing him clad in a tux waltzing with his wife at a gala ball. (Quite a change. They used to show him as ordinary-Joe playing football with his team).

Back to automobiles: As one walks along Tverskaya,  cars enter from arched side streets. In virtually any other society, the drivers watch out for the pedestrians, but if the car is a black limo with official license plates, pedestrians must make way. Experienced Muscovites know that the back limo has right of way and will not hesitate to run them over. I learned this rule quickly when  one almost took me out.

The biggest improvement I encountered is Aero express –   non-stop trains from the three major airports to inner-city train stations. Arriving air passengers are now spared the nightmare of Moscow traffic. The Domodedovo Aero express has been operating for quite a while, but now it is spotless, offers a business class section, and has on-board catering. I assume Aero express is privately owned, but its slick brochure does not mention by whom. I could imagine the “fees” it has had to pay to get the rights of way. I can also imagine that it will be “taken over” by the political elite if it becomes too successful. Another Russian entrepreneur will eventually bite the dust.

On the Aero express back to Domodedovo, I  engaged in an impromptu conversation with a woman who works as a lawyer in the criminal court system. She was fed up with Putin and with corruption and didn’t mind telling a stranger about this (Another significant change form the Soviet period). According to her, criminal justice is for hire. You can buy your way out of a serious criminal charge for less than one thousand dollars. You can buy yourself out of a murder conviction for more, but crooked judges and defense attorneys must first locate a fall guy to confess. The fall guy’s family is then taken care of financially. She herself has been approached but has refused. They know not to come to her any more, but she is one of few. She is counting the days to retirement.

I was not able to talk with many people from diverse backgrounds on this trip, but I did not find one person who wanted Putin to return to the presidency. The results of my fully unscientific poll do not jibe with the official polls that show Putin overwhelmingly popular.

The people with whom I spoke registered a deep sense of frustration and helplessness. They were going to the stuck with “that guy” for other six or twelve years. I do not envy them or Russia.

If State Capitalism Is So Good, Why Are Russian And Chinese Entrepreneurs Fleeing?

State capitalism was touted by Lenin as a positive step on the road to socialism. By state capitalism, Lenin meant a “commanding heights” of large businesses and trusts controlled by a state that served the interests of the working class.

Lenin’s transitory state capitalism of the 1920s was replaced by Stalin’s command economy. Postwar France’s dirigisme and Japan’s industrial policy were both failed experiments with state capitalism, but it is alive and, some think, well in China, Russia, Brazil, and many other countries.

I spent four days in Moscow last week, attending a conference on the Gulag system and renewing old acquaintances. On my last visit three years ago, I encountered mixed opinions on Vladimir Putin. He had some strong defenders and few vehement opponents.  This time, the common response to Putin’s return to the Presidency was: “Why do we need that guy back?”

go the Forbes.com

More Advice for Obama from a Soviet Planner

To: Paul Gregory

From: Alexander Vaibakov

Former Head of Technology Planning

Gosplan USSR

October 31, 2011

Dear Mr. Gregory:

Thank you for publishing my offer of help to the DOE Energy Loan Program in your Forbes.com blog.

I see great opportunities for Gosplan planners like myself in the administration of President Obama. I still hope to hear back from Mr. Silver of the DOE. There is not much work in Russia for planners like me. My bosses got rich. I got unemployed.

My brother, Mikhail, wants to offer his services for your President’s health-care program. He worked in health planning, and he, better than anyone in your country, understands how a “single payer” system works. Our “single payer” was the consolidated state budget. We planned medical services according to norms. No patient had to pay, but our better doctors received a lot of expensive gifts.

Mikhail (who speaks good English) could work in one of Obama Care’s committees of health specialists.

At Gosplan, he allocated dentists and supplies of silver fillings among cities and regions. We had plenty of silver fillings in those days, and he ordered state dentists to fill at least one tooth per school student each year.

Our new private-practice dentists have sure earned a lot correcting all the damage this program caused, but don’t tell anyone about that.

Our Gosplan medical experts did not do much of what you call rationing. We planned the numbers of physicians, nurses, hospital beds and the like and then we let our people stand in line. Those with “connections” got what they needed. Those without waited and waited.

We set aside our best physicians and facilities, of course, for our nomenklatura. Your Congress and administration would like to hear how we did this. Surely they do not want to be lumped together with the common people.

Let’s stay in touch. I am sure the Obama administration will come to its senses and hire me and brother Mikhail. We could sure use the money.

Colonel Gaddafi's Lesson for Dictators

Joseph Stalin wrote the playbook for dictators. His rules remain as current today as when he developed them in the 1930s. Clearly, Colonel Gaddafi could not follow them in full. If so, he’d be alive today, but some matters were outside of his control. Bashar Assad must be feverishly reviewing Gaddafi’s last months to make sure he does not end up with a bullet to the head himself.

As political scientist Beuno de la Mesquita has shown, dictatorial regimes have long lives. The overthrow of a dictator is actually a rare event. It is even rarer for dictators unconstrained by morality or convention.

to continue reading

Now We Can We Rest Easy: Brussels Bureaucrats Are Protecting Us From Financial Risk

The Soviet leadership did not publish deliberately falsified statistics. They just dropped statistical reporting when things went bad. Outside observers could get a sense for how well the economy was doing by the number of pages in the annual statistical handbook.

It seems as if Brussels bureaucrats have learned from Soviet practice.

The European Union Commission, in its latest proposed regulations of financial markets, wants to prevent rating agencies from releasing their reports on European Union member countries. According to the Commission spokesperson: “When the Commission comes to the conclusion that a rating is not correct, it can set it aside for a specified period of time.” The temporary ban should prevent rating agencies from pushing debtor countries deeper into crisis, the spokesperson declared.

This provision makes Brussels bureaucrats arbiters of whether ratings agencies know what they are doing. Politician/bureaucrats, not Fitch, Moody’s or S&P, decide the level of risk of a country’s sovereign debt. Rating agencies about to lower the rating of a crisis country can be muzzled by the EU regulators. (And I guess no one will know about this!)

Speak about shooting the messenger bringing bad news! Such brilliant measures will surely make the financial world a safer place.

Of Course They Shot Gaddafi and They Should Have

The Western world is shaking its collective head over what appears to be the cold-blooded shooting of Gaddafi. Editorialists and pundits solemnly tutor the “barbaric” Libyans that justice should have been done, even for someone as evil as their deposed dictator. Libya and the world would feel better about itself if Gaddafi had been accorded a proper trial.

No. This is not the case. Whether ordered from higher up or not, the bullet to Gaddafi’s head was the best course of action. The “gruesome” display of his body was also called for. The Libyans needed to be convinced that he was dead to head off legends of a return from the desert. The television coverage I saw showed solemn and almost respectful crowds waiting in line to view the body. They knew why they were there and why they brought their children.

If Gaddafi had been taken captive, the new Libyan state would have had to figure a way to organize a trail. They would be pestered by their NATO saviors with advice bordering on instructions.  A Libyan trial would be second-guessed as a kangaroo court. The rabid anti-capital-punishment Europeans would oppose the death penalty the Libyan court was bound to impose. The Libyans would also have to consider requests to turn Gaddafi over to the Hague Court. If they did Gaddafi would survive, albeit in jail.

A captive Gaddafi would have been a large liability to a people already facing huge problems.

We apparently faced a similar choice in the killing of Bin Laden. Presumably, we decided we were better off with a dead Bin Laden than a live one.  Also I do not think Iraq and the Western world gained much from the Saddam Hussein trial. It was clear the verdict was predetermined and the court proceedings resembled a keystone cops movie.

Let’s accept the fact that the Libyans made the right choice and leave them alone. Let’s be glad they began their building of a new state with a good decision.

Don't Hold Your Breath For A Brussels Solution To Europe's Crisis

Despite high hopes, this weekend’s summit of EU finance ministers and heads of state will find no magic silver bullet. Ignore the obligatory optimistic communiqué at the end of the summit. The crisis will continue with no end in sight.
The European debt crisis has lasted so long because there are so many players with too many different interests, and even minor players can sabotage a final resolution. With the myriad of competing and incompatible interests, the crisis will continue as a slow bleed that will make recovery of the world economy difficult, if not impossible.

Let me use a series of images to illustrate why there is no immediate solution to the  crisis.

go to Forbes.com to read the rest

Obama does not understand adverse selection

We economists discovered moral hazard and adverse selection in the mid-1980s. These terms came to us from the insurance industry and fit in well with our growing interest in information economics.
Of the two concepts, moral hazard has gotten more play than adverse selection. “Moral hazard” is a term used frequently in the business press. It explains current and past financial crises by showing that bad things happen when investors expect bailouts by lenders of last resort. The Southern European countries expect bailouts from their northern neighbors. Private mortgage lenders expect automatic bailouts from Freddie and Fannie. Buyers of Asian sovereign debt in the 1990s expected international agencies to bail out the lending countries.
Obamacare has brought adverse selection to the forefront. It explains and will continue to explain why Obamacare will not work. Adverse selection is routinely taught in law schools. I would imagine that President Obama encountered it in the course of his law training.

Read more: http://dailycaller.com/2011/10/20/obama-does-not-understand-adverse-selection/#ixzz1bOmbIESh

Very Harsh Words from Germany for Obama (Berlin Report #6))

The Spiegel is Germany’s most widely read political magazine. Like other German print media, it gushed with enthusiasm for Obama, but no more. The Spiegel’s adulation has turned to a scorn that approaches rage.

Heinrich von Kleist’s play “The Broken Mug” introduced Village Judge Adam as one of the classic  comedy figures of world literature.  One of Judge Adam’s many tricks was to sentence others for the same crimes that he committed. At the end of the play, Judge Adam  flees before angry villagers can capture him.

The Spiegel does not restrain its scorn: “ Barack Obama is a modern variant of  Kleist’s village  judge. In ever growing volume, he condemns the Europeans, complaining their restrained fiscal policies are making the crisis worse. But the European public understands that the miseries about which Obama complains originated no where else but in the Obama-run USA.”

The Spiegel particularly does not appreciate Obama’s preaching of “Turbo-Keynesianism.” Instead of focusing on long-term growth policies, Obama’s use of Keynesian stimulus has not brought the U.S. on course but on a “crash course.” And now Obama advises Europe to adopt his failed policies of easy credit and fiscal stimulus. “Like a doctor caught doping, Obama does not want to put aside his steroids but to administer them to all athletes.”

The Spiegel ends with this advice: Obama should recall his proposals. Otherwise, he could end up like the village judge of Kleist’s comedy. “As his swindles are discovered, he must flee and his days in office will end.” On other words, Obama should butt out and come back with his advice when he has some successes to boast about.

I find the bitter tone of the Spiegel article reminiscent of a nasty divorce of a couple that was once deeply in love.  Such animosity can only be explained by the deep disappointment of an estranged lover.

Michael Sauga, “Der Dorfrichter von Washington: Kommentar,” Der Spiegel, October 1, 2011.

Berlin Report #5: The German Press Really, Really Does Not Like Herman Cain

The Berliner Morgenpost is a middle-of-the-road daily newspaper. Its recent piece on Herman Cain is one of the most vitriolic hatchet jobs I have ever read. I imagine it expresses the German press’s and public’s disquiet about the Cain candidacy.

It warns that Cain’s candidacy may be a serious one. Now that he is surging in the polls, he is no longer “playing the role of a comedic Uncle Tom” (Yes, that is what it says).

What does the Morgenpost not like about Cain?

First, he has Tea Party support, which, in Germany, immediately brands you as an eccentric, fool, or idiot. Anyone supported by the Tea Party, the German establishment will dislike.

Second, the German press cannot understand how American voters could take a non-politician seriously. German parliamentary coalition politics requires a long grooming period  in the bank benches. Only gradually do you work your way up  into the leadership ranks. Thus, almost by definition, American politics is made up of amateurs, at least until they have built up considerable seniority.  How could the Americans even think of electing a rank amateur? They do not understand that the American people may be fed up with “politics as usual” and is looking for an untainted candidate.

Third, the Morgenpost did its homework on Cain’s business background. It tutors its readers that Cain’s pizza company did not expand under Cain, its revenues fluctuated, and Cain’s claims of business success are exaggerated.

If Cain is the republican nominee, it will be interesting, to say the least, to follow the German press.

Thomas Sargent, Rational Expectations and The Keynesian Consensus

The Nobel Committee has again awarded the Nobel Prize in Economics to an economist who helped shatter the Keynesian consensus. We can now add Thomas Sargent’s name to a growing list of  Nobel laureate Keynesian skeptics. According to my count, we now have eight Nobel Prizes  to economists who cast doubt on the Keynesian model, and zero to economists for advancing the Keynesian agenda.
Whereas Robert Lucas (Nobel Prize 1995) provided the theoretical foundations of rational expectations theory, Thomas Sargent tested rational expectations against real-world data. Lucas’s and Sargent’s seminal research was carried out in the 1970s during the era of stagflation that was ended by Ronald Reagan and Paul Volcker.
Newspaper explanations of the contributions of Nobel laureates in economics leave readers more confused than enlightened. Readers either wonder why a Nobel Prize was awarded for such an obvious idea or their heads spin from the reported complexity of the idea.  The accounts of the Sargent award in both the Wall Street Journal and New York Times are less than clear. This is a shame because Sargent’s work speaks directly to policy issues as relevant today as they were in the 1970s. It is noteworthy that the New York Times account does not mention its anti-Keynesian implications.
Continue reading Paul Gregory…

My Comment on Robert Reich's SF Chronicle Piece: I Guess It Was Rejected

I sent this comment off to SFGate. I have heard nothing back; so I guess I have to self publish. Here it is:

Robert Reich in his “Poor bear brunt of GOP’s morally bankrupt plans” provides a laundry list of government programs for the poor that republicans are itching to cut. Clearly, the democrats are the party of the poor, the republicans of the rich. Reich neglects democrat programs that damage the poor in the market place. Obama’s limited drilling and European-style gas prices hit  poor families hardest. They spend more than $1,300 at the gas pump. (If the price dropped to pre-Obama levels, the poor would be $500 richer).  The children of the poor, denied access to decent schools by democrat (and teacher union) opposition to vouchers, earn, on average, $20,000 less per year, according to government statistics. Democrat support of open borders has flooded our labor force with some ten million undocumented workers who push down the wages of the fifteen  million high school drop outs in the labor force. Economists agree the effect on unskilled wages is negative but disagree on its size. Reich’s programs of welfare dependency are no substitute for giving the poor a chance to escape poverty. Until the democrats support school vouchers for the poor, they cannot claim to be the party of the poor.

The Polish Plumber Who Never Came: A Lesson for us (Berlin Journal #4)

Germany and Austria delayed free immigration from the Eastern European Union states for six years. Other EU countries began the free movement of labor from countries like Poland, Czech Republic and Hungary much earlier. German and Austrian labor unions particularly feared being flooded with cheap Polish plumbers and other craftspersons.

The six years are up, and there are few Polish plumbers in sight in Germany.  Even though Germany is undergoing a shortage of skilled labor, German firms have little success in recruiting in Poland and Hungary. Polish and Hungarian workers have concluded their own economies are more dynamic and offer them more promising careers. In Germany and Austria, they do not earn well, and their living conditions are better at home. Polish workers in particular are reluctant to leave an economy that is growing rapidly.

Poland and Germany show how easily our  illegal immigration problem could be solved by dynamic growth south of the border. If Mexico, El Salvador, and Columbia could match Poland’s growth, their citizens would stay put to take advantage of more rewarding careers at home.

Advice to Obama's DOE From a Former Soviet Planner

To: Jonathan Silver
Head of Department of Energy Loan Program Office
From: Alexander Vaibakov
Former Head Technology Planning, USSR State Planning Commission (Gosplan)
October 10, 2011
Dear Mr. Silver:
I see from the New York Times article “Market Risks Are Seen in Energy Innovations” that you could benefit from my over thirty years of experience with Gosplan (The USSR State Planning Commission). Apparently, Congress has given you the job of the central planning of new green new technologies. I cite your testimony: “Congress directed us to identify technologies that could be brought to market in an effort to leapfrog the United States forward and re-establish innovation leadership. Our job is to identify those technologies and build them out.” I appreciate your command of jargon and buzzwords. We were masters of that in Gosplan. With the Solyndra case heating up, you need to be able to speak so that no one understands you.

go to Forbes.com

Medvedev is “Dizzy From Success”?

Most older Russians know the meaning and context of “dizzy from success.” As collectivization and war against the peasants threatened to get out of hand in 1930, Stalin published his “Dizzy From Success” article in Pravda. In this piece, he criticized local leaders for excesses, which he claimed he did not intend. Encouraged peasants reduced their resistance and began to leave the collective farm. Shortly thereafter Stalin ordered a resumption of terror in the countryside.

In Krasnodar at a campaign rally, Medvedev warned party activists that if they come to  feel superior and complacent: “You get what the classic called 'dizzy with success.'" It is strange, to say the least, to refer to Stalin as “the classic.” Either Dmitry Medvedev is ignorant of Russian history or has decided to take a page from Stalin’s playbook. Let’s hope the answer is ignorance.

Minijobs, Milton Friedman, and an Overlooked Success Story (Berlin Journal #3)

One of several reasons why Germany has the lowest unemployment rate in Europe is the “minijob.” Long-term recipients of unemployment benefits and social assistance (Haartz IV recipients) can keep extra earning from “minijobs” up to 160 Euros per month. They can earn up to 400 Euros but their benefits are reduced for earnings above 160 Euros. This works something like Milton Friedman’s negative income tax. Persons with minijobs are counted as employed.

Notably, the German Federal Labor Agency reports that 93 percent of minijob holders earn 160 Euros. Who says the long-term unemployed cannot count?

October 3 was the Day of German Reunification – a national holiday. The streets were empty except for huge crowds in downtown Berlin and Bonn. Nightly television ran documentaries and showed films about life in a divided Germany. Overlooked was a major success story. The most respected  public opinion survey research organization reported for the first time a near parity in life satisfaction between the East and German populations. At huge cost and effort, it seems German reunification has been completed. No one seems  to notice, which is a victory in itself.

State Capitalism, Hubris, And What China Owes Us

Times have changed. A decade back, the United States lectured the rest of the world on the advantages of democracy and its private enterprise system. Now, countries like China and Russia tout their “benevolent” one-party system and state capitalism as growth engines that correct the mistakes of the free market. Russia’s Putin characterizes the U.S. as a “parasite that lives off the global market.”

China, in a show of Schadenfreude, lectures us to get our economic house in order before we ruin everyone else. Domestic critics bemoan the pathologies of unfettered markets and political stalemate and point to China as a model for us.

I’d like to ask: Who is living off of whom?

go to Forbes.com 

The European Mess (Berlin Journal #2)

More than a week of speaking with people, reading the press, and watching the nightly news in Berlin has brought home what a mess Europe is in.  The European Union now consists of 27 member states. Nine more are lined up to join, the most contentious being the “non-European” Turkey.  Seventeen countries have the Euro as their common currency. EU member countries range from small and desperately poor (Albania), to South Mediterranean spendthrifts (Greece), to large, wealthy, and thrifty (Germany). Each night’s TV news headlines leads with the latest attempt to save Greece from default.

The European Union has a parliament chosen in elections that attract little attention. It has a Council of Ministers, and a proliferation of high-paid Euro-bureaucrats. It operates ad hoc on the basis of a series of treaties. Its one attempt to draft a constitution failed. Key decisions require unanimity; others do not.

No one appears to understand what power the EU concoction has – in what cases it can trump national decision making.

If we think we have a mess sorting out federal-state issues, we have it easy compared to Europe. Let me take just one news item from the Frankfurter Allgemeine, September 29  to illustrate. The article is entitled “EU Parliament Approves Reform of Stability Pact,” and here is my reaction to it.

In its wisdom, the EU parliament approved “sanctions with teeth” for those countries like Greece and Portugal that run large deficits. Those who break the stability pact rule (deficit no more than three percent of GDP) will have to pay large fines. (They were already supposed to pay fines, but now the EU is really serious, I guess). The minority socialists, greens and leftists voted against this “blind savings fever.” The Christian democrats countered against torpedoing the stability pact “with worn ideas from the socialist mothball chest.” No one ventured to ask how countries that are broke are going to actually pay these fines.

Then things get even wackier. The EU parliament ruled that it could impose sanctions against countries with “excessive imbalances in their trade accounts.”  A green delegate argued that countries with export surpluses (like Germany) should make “fair wage agreements and future investments” to correct their imbalances.” In other words, Germany should take measures to reduce its competitiveness and efficiency so that inefficient spendthrift countries can sell to Germany!

I assume that such talk was just hot air. How can anyone force a country to become more or less efficient?

What I see generally is an endless struggle between Europeanists and nationalists. The EU will increasingly seek independent taxing authority so as to have its own sources of revenue. The EU proposal of a tax on financial transactions is a case in point. The poor countries will favor EU wide rules and taxes, and the richer countries will resist. In a United States of Europe, the poor countries know they can count on a steady stream of transfers from the rich countries. There are many more of them than rich countries.

The rich countries realize that they are being set up, but they have been conditioned to be “good Europeans.” On the Sunday (October 2) political talk shows, the head of the conservative CSU (part of the ruling Merkel coalition) explained that he voted for the German bailout of Greece because “we must all be good European neighbors.” He warned, however, that there were limits to neighborliness. He would not vote for any more money for Greece. If he did, his Bavarian base would throw him out of office.