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Sunday, March 27, 2011

NYT’s Expose: But GE Is Doing Exactly What is Expected of Them (Subtitle: Jeffrey Immelt is James Taggart in Ayn Rand’s Atlas Shrugged opening on April 15)

President Obama’s appointment of GE CEO Jeffrey Immelt as his job czar signaled his “move to the center.” The pro-business President declared a “government-business partnership” to create jobs, green technology, and other good things. Now a NYT investigation reports that GE paid no U.S. taxes, aggressively lobbied Congress for subsidies and sweetheart deals, and spends millions (billions?) to minimize its tax bill. The NYT was shocked, as was Claude Rains in Casablanca, to find such skullduggery, from GE, no less. The NYT concludes that one of the most striking advantages of GE is not its jet engines and washing machines but “its ability to lobby for, win and take advantage of tax breaks.”

Written to buttress the case against reductions in the corporate tax rate, the NYT investigation unwittingly strikes a deeper vein --- that GE is faithfully pursuing Obama’s vision of, what is called in other countries, crony capitalism. Under this philosophy, “crony corporations” should follow where government incentives lead them. If Obama wants green jobs, they will build windmills, with healthy subsidies of course. If the government wants more lending, crony corporations will lend with a bailout if the loans go bad. A “green car” should be no problem. The government will pick up most of the price tag for leery consumers. Insofar as crony corporations, like GE, can “negotiate” their tax bill with Congress, they are a ready source of campaign contributions or other perquisites.

Such crony capitalism changes the normal rules of economics. Those who play the “business-government partnership game” better than others win. Those who do not play well lose, even if they are superior entrepreneurs or innovators.

From an economic perspective, it is not even clear that GE is a real “winner.” In pursuing subsidies and tax advantages, GE engages in activities that yield lower returns than other alternatives. The government payoff compensates them for making otherwise unwise economic decisions. The GEs of the world also have to waste enormous resources on the lobbying game.

If we factor in all these economic costs and losses, GE may have been better off not playing the crony capitalism game after all. The public, surely, is made worse off by the misallocation of resources and other economic losses.

The NYT’s disclosures, coupled with Obama’s appointment of Immelt, are an embarrassment, but they offer a rare backroom glimpse of crony capitalism in action. Our crony capitalism takes place, respectably and legally, in board rooms, in congressional and executive offices, or “on bended knee” before Charles Rangel. In other less civilized countries, it takes the form of shakedowns, threats of violence, and arbitrary prosecutions, but the game is played with the same results. In Russia, it is called State-Mafia capitalism. In the U.S., it is corporate welfare.

Saturday, March 26, 2011

More on BP in Russia: Predicted Final Score: Russia ¾, BP ¼

Friday and Saturday’s papers brought more news of BP’s travails in Russia and, I think, a great deal of misinterpretation. Whatever the case, BP’s chances do not look good.

Background: BP signed a stock-swap deal with Rosnet (Russia’s largest state owned oil company) to jointly develop arctic reserves, splitting the proceeds fifty-fifty. BP’s other Russian partnership (TNK, for short), of which BP owns half (but lost management control to its Russian partners’ strong-arm tactics), sued to stop the BP-Rosneft deal as violating the BP-TNK shareholder agreement. A Stockholm arbitration court has placed an injunction on the BP-Rosneft deal. While the injunction is in effect, BP cannot proceed with the Rosneft deal, and more than a billion dollars of dividends from TNK operations are held up as well. TNK offered to substitute TNK for BP in the Rosneft deal, but BP vetoed this proposal (casting the sole negative vote). Confusing to say the least! If the TNK proposal had been adopted, the Russian side would end up with ¾ of the BP-Rosneft deal and BP with ¼.

Press reports picture this as a power struggle between two Russian sides – Rosneft as represented by its chairman (and Russian deputy prime minister), Igor Shechin, and BP’s Russian oligarch partners in TNK, led by banking mogul, Mikhail Fridman. The delay in the BP-Rosneft deal is pictured as a defeat for the Kremlin and a victory for the private oligarchs. If there were such a power struggle, it would be lopsided. If Putin really wanted to end the controversy, he need only remind his oligarch friends what happened to Mikhail Khodorkovsky.

The outcome of this “power struggle” seems clear to me. BP will have to back down and accept a ¼ interest. The “Kremlin” gets one half and the “rogue” Russian oligarchs get ¼, while bringing little to the table other than their ability to scuttle the deal. This is by no means a defeat for the Kremlin: BP will give in voluntarily, and Russia will only have to give up one quarter of its “national treasures” to foreign interests.

BP should have learned its lesson last time. It should know by now that only foreign companies obey Russian shareholders agreements and international law. If a Stockholm court rules against a Russian partner, the ruling will be ignored or a way will be found around it. BP, however, must abide by the law.

BP should also have learned that there is no one on the Russian side really concerned about the Russian national interest. With this debacle, Russia’s reputation as an international partner will suffer again, but no one really cares.

The lure of its reserves are such that another BP will step forward. The deal will make Russia’s oligarchs richer and more powerful and the Kremlin insiders will get their rewards. Moreover, the turmoil in the Middle East has driven up oil prices again; so the Russian budget is in better shape. Who really needs foreign money?

Thursday, March 24, 2011

Medvedev Can Restore Russian Democracy with Four Orders

Russia has been downgraded by Freedom House from “partially free” to “unfree” with good reason: regional and municipal officials are no longer elected, but appointed by the Kremlin. Opposition candidates are excluded from election lists, denied access to the media, beaten and harassed. Journalists are intimidated or killed with no repercussions. There is no rule of law.

The loss of Russian democracy is the work of Vladimir Putin and his “KGB state.” His partner, President Dimitry Medvedev, in the “tandem” that rules Russia is on public record as being opposed to these developments and promises to do better. If Medvedev is sincere, he has the constitutional authority as the duly elected president of the Russian Federation to restore Russian democracy, which he can do by issuing the following four orders:

First, fire his Prime Minister, Vladimir Putin.

The average tenure of Russian prime ministers is about a year and a half, and it is the prime minister who takes the fall when things go wrong. Medvedev can cite two reasons for firing Putin: First, Putin’s criticism of his Libyan foreign policy was an act of insubordination. Second, the Russian economy under Putin’s tutelage has suffered a crisis more severe than its neighbors and is still as dependent on oil as it was a decade ago.

Second, issue an amnesty for Mikhail Khodorkovsky.

It is clear to all that Khodorkovsky has been twice sentenced on sham charges under Putin’s direction for daring to challenge him. The Khodorkovsky case clearly reveals Russia’s lack of rule of law and discourages foreign and domestic investment. Khodorkovsky’s release signals that Russia intends to abide by the rule of law.

Third, order the Central Election Commission to allow opposition candidates on election lists and access to the media.

In previous national, regional, and municipal elections, opposition candidates have been arbitrarily excluded from election lists by illegal or arbitrary means and they have been denied access to the media. Such an order would tell the world that Russia intends on having free elections.

Fourth, order the police, militia and security forces to honor the constitutional guarantee of freedom of assembly.

Attempts to organize political demonstrations have been violently suppressed by the police and paramilitary thugs despite the explicit guarantee of freedom of assembly in the Russian constitution. A key safeguard of democracy is the freedom of assembly.

It is time to call Medvedev’s bluff. Does he only like to talk about lofty principles such as free elections and rule of law or is he willing to actually do something, even if the course is risky, to say the least. If Medvedev is brave enough to issue these four orders, he would go down as a significant figure in history.

Monday, March 21, 2011

Egypt’s Chances for Democracy: The Freedom House Rankings

The collapse of the Soviet Union and its empire in Eastern Europe created a real-world laboratory for spawning democracy. U.S. and Western advisors were sent to these countries to explain how to create electoral democracies. With its Sunday vote in favor of quick elections, Egypt is about to embark on what many hope will be its road to electoral democracy.

The results of the great wave of democratizations in the former Soviet Union and Eastern Europe appear encouraging at first glance. Fifteen of the twenty one countries today are classified by Freedom House as “free” or “partially free.” Two of these, Ukraine and Kirgizia, may lose this ranking in the near future. In any case, these statistics suggest an encouraging three-quarters probability of success in Egypt.

Upon closer examination, the picture is less encouraging. The countries that successfully democratized had characteristics that Egypt clearly lacks: They had a democratic tradition from the recent past (Hungary, Czech Republic, and Latvia), most of them were invited to become members of NATO or the European Union, or they had strong pro-democracy leaders (Poland, Lithuania).

The “unfree” countries, like Belarus, Russia, Kazakhstan, and Turkmenistan, look more like Egypt: They lack a recent democratic past. There is no pro-democracy leader who can symbolize the hopes of democracy to the nation like Walesa in Poland, Yeltsin (in his prime) in Russia, Havel in the Czech Republic, or Brazauskas in Lithuania. Surely El Baradei cannot serve this role. Instead of pro-democracy leaders they have anti-democratic leaders from the old regime. They lack viable pro-democracy parties or even political parties in general. The parties that have formed are mouthpieces of the leading elite; their role is to preserve the status quo.

Much is being made in the press about the importance of the two-term limit for the president in Sunday’s referendum. Experience in the “unfree” “new democracies” is that constitutional terms limits can be gotten around. There can always be a “popular call” for the leader to be made leader for life, or a crony can fill the job while the real leader operates behind the scenes.

Egypt will likely follow Russia’s example: Mubarak’s National Democratic Party will play the role of the decaying Russian Communist Party – a significant vote getter but not a real challenger. The political party of the Muslim Brotherhood will be the well-organized “party of power” (what is now Putin’s United Russia). The pro-democracy forces will play the role of the liberal Yabloko party, which will be gradually marginalized.

This is not an outcome democracy advocates welcome, but it is the most likely.

“Kill Qadaffi” (Plus Other Thoughts)

Despite protestations that we are not after regime change, the allied bombing makes no sense unless this is our goal. Our stated objective is to reduce civilian casualties, but if Qadaffi remains in power, the loss of civilian lives will be huge as he wreaks his revenge on anyone he suspects of disloyalty or even wavering. Civilian losses near the battlefield will be trivial compared to a surviving Qadaffi’s political repressions. We can only protect civilian lives by getting rid of him. I suspect everyone understands this but cannot speak the words “Kill Qadaffi!”.

A second thought: I wonder how the American public’s stomach will hold up when Qadaffi starts displaying civilian casualties. If there are none, he can always create some. The media’s sympathies are against Qadaffi, but they will not be able to ignore the story when he piles up the bodies and women and children. These grisly displays will run counter to the French, British and U.S. militaries’ descriptions of antiseptic surgical strikes. The outrage of antiwar groups in the U.S. and Europe, who do not like cost-benefit analysis of casualties, will rise to the boiling point.

I must confess that I am puzzled by China’s and Russia’s abstentions at the U.N. Security Council. Their votes might be less puzzling if Qadaffi were clearly on his way out, but the outcome is up for grabs. Russia is remarkably consistent; Putin gains from stirring the pot of unrest. Uncertainty raises oil prices, which he desperately needs to repair his state finances. Russia likes to side against the U.S. in just about any and all matters. China’s abstention is even more puzzling. China is consistent in opposing any outside intervention to strike at political oppression. They understand that attention could turn to them at some point.

If Qadaffi survives the first week of bombardments and turns this into a protracted civil war, he can win. Russia and China will raise their level of criticism. Anti-war sentiment will rise as civilian casualties mount. Qadaffi can move beyond the immediate emergency to the slaughter of opponents in areas he controls.

Friday, March 18, 2011

Qadaffi’s “Cease Fire:” What Would Stalin Do?

Republicans sometimes ask: “What would Reagan do? Christians ask: “What would Christ have done in this situation.” Dictators like Qadaffi, Saddam Hussein, and Kim Il Sung could ask the same question of their patron saint: Josif Stalin. Stalin wrote the playbook for dictators – how to grab and hold onto power. In actuality, unconstrained dictators, of the Stalin type like Qadaffi, do not need his advice. They became brutal dictators by being the best specialists in political terror. They intuitively understand what Stalin would have advised.

Qadaffi’s “victory within 48 hours” appears to have been snatched away at the last minute by the remarkable U.N resolution to establish a no fly zone and apply necessary force to save civilians. Qadaffi’s road to survival has unexpectedly become rockier. What would we expect the Qadaffi/Stalin dictator to do next?

First, like Stalin, Qadaffi would be most frightened of the threat of external force. Stalin signed the Molotov-Ribbentrop non-aggression pact at great cost to head off Hitler’s troops. Qadaffi, likewise, will do anything necessary to head off any foreign intervention. He will promise to abide by a cease fire. He will assure the outside world that he values civilian life, and will do everything necessary to protect his people “who love him” He will continue to hold territory his loyalists occupy and will probe only at the margins – never giving outside forces a reason to act.

Second, like Stalin, Qadaffi understands that the external threat will hearten his domestic enemies, which he now understands are everywhere. Any increase in the external threat must be countered by extreme political repression in territories he holds, especially Tripoli. Like Stalin, he understands that the ensuing bloodbath must be kept as quiet as possible. Western journalists must be kept away at any cost, even if it means killing them. Arrests will take place at night. Neighbors know that if they say anything, they are next.

Third, like Stalin, Qadaffi will upgrade his propaganda efforts, what Stalin called "mobilization." In this case, he lacks Stalin’s advantages of gullible Western intellectuals and journalists who sympathize with his cause of “building socialism.” Qadaffi, who has few remaining friends, will be hard pressed to find his NYT’s Walter Duranty or Guardian reporters to deny the Ukrainian famine or vouch for the veracity of his Moscow Show Trials. Qadaffi does have cash; maybe he can find some mouthpieces who can make his case credibly and make a difference.

Fourth, like Stalin, Qadaffi will shorten the leash on his state security apparatus. His state security officers will receive outrageous benefits and will be given to understand the price of disloyalty. The control of state and security will devolve to his immediate family and most trusted loyalists.

Will Qadaffi survive by employing these tactics? Unless the Western powers are willing to bomb Qadaffi troops that are, by all intents and purposes scrupulously observing a case fire, he has a good chance.

Thursday, March 17, 2011

Is the Press Causing More Damage than the Japanese Nuclear Accident Itself?

I have no scientific expertise on nuclear power plants. I followed closely at the time the Chernobyl disaster of 1986 and listened to accounts of a Russian nuclear scientist-friend who worked on the damaged roof of the Chernobyl plant the day after the explosion. He suffered no known health consequences, although he still has to be checked each year. I also know many young Ukrainians who were evacuated from Kiev and whose thyroids had to be monitored through their young adulthood. I also know that the Chernobyl accident, the worst nuclear-power plant disaster in history, claimed (according to the authoritative report issued in 2005 by the Chernobyl Forum) “fewer than 50 deaths directly attributed to radiation from the disaster, almost all being highly exposed rescue workers, many who died within months of the accident but others who died as late as 2004.” In the future, The Chernobyl Forum speculates there may be an additional 4,000 deaths from cancer. They do not explain this estimate, but a quarter century has already passed since the accident with relatively few deaths.

Strikingly, the report labels the mental health impact of Chernobyl as “the largest public health problem created by the accident” and partially attributes this damaging psychological impact to a lack of accurate information. These problems manifest as negative self-assessments of health, belief in a shortened life expectancy, lack of initiative, and dependency on assistance from the state.

The current hysterical press and TV reports are indeed creating a “mental health impact” as large as or larger than that of Chernobyl, despite the free flow of information in this case and Gorbachev’s attempted cover up of Chernobyl. The press feeds upon irresponsible statements, such as from the European Union's energy chief, Guenther Oettinger, who characterized the situation as out of control. "We are somewhere between a disaster and a major disaster…There is talk of an apocalypse, and I think the word is particularly well chosen." The media also pounce on pronouncements like radiation “twenty times normal,” where “normal” is usual background radiation. No one bothers to explain what 20 times more than about zero actually means in terms of health risks.

The scientists whom I found in my own search of the web agree that there is no nuclear fission inside the plants (the fuel rods have been withdrawn) and the problem is the heating up of spent fuel. According to one expert: “We could not have a …nuclear explosion. It's physically impossible in this kind of system."

The worst case scenario would occur if the cooling efforts fail and the fuel rods melt down and break through the thick concrete structure, leading to what today’s New York Times calls “an uncontrolled release of radioactivity.” The New York Times stops at that point and does not explain further. As I understand it, such an uncontained meltdown would place the Japanese disaster somewhere between Three Mile Island and Chernobyl, but closer to Three Mile Island because there has been no Chernobyl-like full-scale explosion and Chernobyl did not even have a containment structure. Those most threatened by this worst case scenario would be plant and rescue workers and residents within a thirty-mile or so radius of the plants.

The media and press have indeed created a “mental health impact” that will likely be greater and more long-lasting than Chernobyl, no matter how benign the eventual outcome. This morning at breakfast, my wife (who watches a lot of television news) asked me if we should leave California! Consumers throughout the world will now fear Japanese products. The Japanese people will conclude that they face a life of poor health, in a suicide-prone society. There may be a rash of abortions, such as in the wake of Chernobyl, as expectant parents fear birth defects. Countries like Germany, confronted with a politically powerful anti-nuclear power lobby, will shut down their nuclear power plants at huge costs. Given that we do not have the “green” technology to replace coal-fired plants, we will use more coal-fired plants which have health and mortality costs likely in excess of the health risks of radiation.

I think it is the responsibility of the media and press to present a balanced picture of risks to let their consumers draw reasoned conclusions of their own. Stories of unimaginable catastrophe draw more customers than reasoned accounts. Consumers of media and press should not have to go to the internet (as I did) to find the information needed to draw informed conclusions.

Wednesday, March 16, 2011

Putin Takes an Electoral Shellacking and No One Notices

Russia’s regional and municipal elections on Sunday resulted in a shellacking of Putin’s United Russia that few noticed. Putin’s United Russia failed to achieve majorities in seven of the twelve regional elections. In Kirov and Kaliningrad, United Russia got less than forty percent. These results were overshadowed by events in Japan and the Middle East and few observers know how to interpret them.

To understand the failure of United Russia to win majorities, consider a U.S. election in which Republican candidates are banned, and Democratic candidates vie against candidates of the Green Party, the Libertarian Party, and the Mountain Party and THEY FAIL TO WIN A MAJORITY. This was the case in Russia on Sunday.

United Russia candidates contended against the shop-worn Communists and the “powerhouse” “Patriots of Russia” and the “Right Cause.” Candidates from the crippled Yabloko party and independent candidate were largely excluded from the election lists. In all, fifty percent of candidates from parties without seats in legislatures and forty percent of independent candidates were not allowed to register for elections. Only United Russia candidates were allowed in the media or granted permission to rent space for meetings. Election violations in favor of United Russia were recorded in virtually all precincts.

These regional and municipal elections are a dress rehearsal for December’s elections to the State Duma. We can expect that Putin and United Russia will intensify their election tricks to exclude serious rivals such as Gary Kasparov, Boris Nemtsov and Mikhail Kasyanov.

We know little about the “kitchen” in which Russian public opinion sampling is done, notably by the Levada Institute. Their “ratings” of Medvedev, Putin, and the Russian government are supposed to be honest. They do show Putin’s ratings falling from the stratosphere of 80-88 percent to 72 percent in January. In the last year, the disapproval rating of the “Russian government” rose from 43 to 47 percent. These are ratings U.S. politicians would die for, but they do show erosion at the top.

If these ratings are accurate, it is unclear why the ratings of Putin and the Russian government remain in the stratosphere (relative to the rest of the world), despite a recent terror attack, inflation, high unemployment, and the after effects of a severe economic crisis. Putin has always used his high ratings to justify whatever he does as the will of the people.

If we look at results not associated with personalities, we see an emerging picture of dissatisfaction, beginning in 2007. In 2006, 14 percent of Russians thought “state power was weak.” This figure fell below ten percent in 2008 and 2009 and currently stands at ten percent. Russians may be getting tired of the “iron hand” of the Russian state. In 2006, 33 percent of Russians were worried about corruption, bribe-taking, and arbitrary behavior of officials. Now, this figure approaches fifty percent. As in other countries, the main concerns of Russians are rising prices, poverty and unemployment. In any other country, the government and the national leader would be held responsible. Why is this not the case in Russia? Either the Russian people are forgiving of their leaders or the Putin/Medvedev ratings are exaggerated.

In any case, we can expect extreme brutality, fraud and intimidation in the upcoming December elections. I would not like to be in the shoes of those brave figures who stand up to Putin and his United Russia.

Monday, March 14, 2011

The Economic Costs of Natural Catastrophes: History’s Lesson for Japan

The earthquake that struck Northern Japan on Friday is a human disaster of frightening dimensions. Early estimates place the loss of human life at ten thousand, but such a figure will regrettably prove a gross underestimate. Our first thoughts go to those victims, killed, injured, or suffering the hardship of little food and no electricity.

The Japanese markets opened as usual on Monday morning. Not unexpectedly Japanese stocks fell five percent, and the discussion of the earthquake’s economic cost to Japan has already begun. Talk has turned to how much Japanese GDP will be lost, thereby compounding the problems of Japan’s feeble recovery.

In such cases, economic historians are naturally drawn to past natural catastrophes and their effects on economic output. Some of the worst natural disasters occurred in a past, so remote that we do not have the necessary statistics. Also, we must recognize that historical statistics are much less inaccurate than the current ones, especially when it comes to estimating annual figures. With these reservations in mind, my methodology is to take the country’s GDP the year prior to the natural disaster and then calculate the loss of output until GDP returned to or exceeded its pre-disaster level. This is a primitive method. The correct method would be a counterfactual analysis of the loss of output as measured by what output would have been in the absence of the disaster.

Here is what the statistics show:

1. Of the four major earthquakes of the twentieth century (Italy, 1908, Japan, 1923, Peru, 1970, Iran 1990), I found no case in which GDP declined as a consequence of the earthquake, even though the loss of life was horrendous (ranging from 50,000 for Iran and 200,000 for Japan 1923). Clearly, output would have been higher without the earthquake, but the earthquake’s effect was not strong enough to cause output to actually decline.
2. Major famines caused a much greater loss of output than earthquakes. The greatest recorded loss was a twenty-one percent decline in output from the Russian famine of 1891-92 (500,000 lives), followed by a three percent loss from the India-Bengal famine of 1943, which cost two million lives. China’s 1976 famine cost two hundred thousand lives and a one percent loss of output. We still do not have accurate statistics on Mao’s Great Leap famine of the late 1950s, but it claimed the most lives of any famine of modern history.
3. Floods have also had a minimal impact on economic output. China’s 1935 flood which claimed 3.5 million lives was accompanied by a robust seven percent rate of growth.
4. Epidemics can have a substantial effect on output. The French-German smallpox epidemic of 1870 cost half a million lives and a drop of five percent in output.
5. Political upheavals, such as war, civil war, and revolution can eclipse the economic effects of natural disasters. The Russian civil war caused a drop in output of fifty percent, and the “small” 1905 revolution caused a staggering fourteen percent decline in GDP.

Does history provide any guidance to estimating the effect of Japan’s March 2011 earthquake on Japan’s GDP? Judging from past natural disasters, the impact on GDP depends on the affected area. Floods and earthquakes can kills hundreds of thousands, but they tend to be confined to a particular geographic region. This limits their impact. Famines can cause huge drops in output in relatively poor agricultural countries (like Russia and India) because agriculture is the economy’s major output, and most of the population is in rural areas. Epidemics that transcend national boundaries such as the French-German smallpox epidemic of 1870 or the Spanish Flu epidemic of 1918 (or the Black Death of the Middle Ages) cover large swaths of territory and population and can have large impacts on economic output.

If history is a guide, the March 2011 earthquake will not have a large effect on Japan’s GDP. There is no denying it could not have come at a worse time for the Japanese economy, which, like the United States, was in the process of emerging from the great recession of 2007- present.

The greatest long-run effect will be to slow down the development of nuclear power plants worldwide.

Friday, March 11, 2011

Let’s Face It. Gaddafi Has Won

As the Western powers dither and deliberate, Gaddafi has won. He will stay in power even if we establish no-fly zones or impose sanctions with sharp teeth. Short of actual invasion, Gaddafi will stay in power and will likely pass his power on to his sons when he dies. The Western press will continue to hope as a civil war continues, but its outcome is preordained.

There is a prominent historical pattern which explains why Gaddafi has won. There are virtually no cases of unconstrained dictators being overthrown. An unconstrained dictator is a Stalin, a Kim Il Sung, a Saddam, and a Gaddafi who is willing to take any measure, no matter how brutal or repulsive, to stay in power.

The state security organizations of unconstrained dictators reach even down into neighborhoods and report directly to them; prison or worse is the price even modest dissidents pay; they shoot first, not particularly worrying whether their victim is a threat or not. They make the price of resistance of any kind so high that only a brave few are willing to take the risk. Any potential rival is a dead man.

These brutal measures have served unconstrained dictators well. Stalin in his three decades of rule faced not a single assassination attempt. (There were two attempts on Lenin’s life in the early days of Bolshevik power. He had not yet had time to build his state security network). Father and son, Kim Jong Il and Kim Il Sung, ruled North Korea for a half century despite incredible economic failure and deprivation of their people too downtrodden to resist.

The recent events in the Middle East have taught us a new and bitter lesson: Even mass popular uprisings are not enough to topple an unconstrained dictator. We had hoped that popular uprisings would eventually topple the Iranian mullahs, Syria’s Assad, and Kim Il Sung. The Libyan experience proves that they can survive almost an entire nation rising up against them. They do so by killing as many people as necessary and by placing a high price on any form of resistance.

Popular uprisings are, however, sufficient to topple constrained dictators, as Mubarak’s experience in Egypt shows. Earlier the constrained Shah fell to a popular uprising and even the East German dictatorship was unwilling to use force against demonstrators in Leipzig.

The few cases of overthrow of unconstrained dictator take the form of internal coups and invasions. The Romanian dictator Ceausescu was shot dead by his inner circle after being booed by a crowd. Beria, Stalin’s head of state security, was executed by his Kremlin colleagues, when he tried to succeed the deceased Stalin. Hitler committed suicide before Soviet troops reached his bunker.

What signal does past and current history send to constrained dictators? What message does it send to Chavez in Venezuela, Ortega in Nicaragua, Hamas in Lebanon, or Assad in Syria? The message is that only the most vicious and brutal dictators survive. There is no payoff from restraint. “Reforms” will do them no good and are to the contrary quite dangerous. They will heed Machiavelli’s advice that the “prince must learn to be less good..

A Libyan civil war will likely follow the pattern of the Russian civil war. In this civil war, there were almost a half million executions, as the Red Army and the Cheka carried out Lenin’s Red Terror. The White forces were divided and more timid (except the Cossacks, who matched the Reds in brutality). The interventionist forces used only half measures and pulled out with their tales between their legs. Tribal enmity will likely keep a Libyan war going for a while but the outcome is not in question.

If history shows that palace coups are the most likely way to topple an unconstrained dictator, should US policy aim at promoting an insider conspiracy among Gaddafi's lieutenants? I am sure that Gaddafi has organized his state security to prevent just that. The odds of an outsider successfully organizing a palace coup are about zero. Even if a palace coup worked, the result would likely be a new leader slightly less bad than Gaddafi.

Friday, March 4, 2011

BP’s New Russian Nightmare? Imagined Conversations

A meeting in the Senate Building of the Kremlin between Igor Sechin (Vladimir Putin’s Deputy Prime Minister and Chairman of the state oil company Rosneft) and Mikhail Fridman (Chairman of Alfa Group and President of the TNK-BP joint venture). Both are ultimate Kremlin insiders. They know each other inside out.

Sechin (to Fridman): We can understand that you and your associates want in on Rosneft’s deal with BP. Maybe you do have some kind of shareholder’s agreement with them that raises questions about our new deal with them. Exactly what do you suggest?

Fridman: Well, we propose to substitute TNK-BP in place of BP as Rosneft’s partner. This means that this “national Champion” project will be owned 75 percent by Russians and only one quarter by foreigners. BP really should not get half anyway. These reserves are Russian national treasures. If this is done, we’ll withdraw our objections to the deal, and everyone will be happy except BP.

Sechin: But we need BP’s capital and arctic drilling technology. What is to prevent them from withdrawing from the deal entirely?

Fridman: BP desperately needs this deal to replace the reserves it lost in paying for the Gulf spill disaster. Getting a quarter of the deal for them is better than nothing. We already know that BP caves in when we play hardball. They gave us the management of TNK-BP when we refused to grant their Robert Dudley (then President of TNK-BP) a visa and harassed their lawyers. They’ll cave again in this case.

Sechin: What if they don’t cave this time? Is there anything else we can do to be sure they will go along?

Fridman: It’s very simple. You can threaten to sue TNK-BP for damages to Rosneft if the deal does not go through. You know better than anyone how to get a huge fine out of our courts. As fifty percent owner of TNK-BP, BP is liable for half of this fine. That should scare them to death. Their liability could be as great as the Gulf coast spill. We can work out among ourselves the “damages” that we pay.

Sechin: But will not this be bad for our image among international investors? We need them now. Medvedev was already getting a lot of flak in Davos over the Khodorkovsky case. And the Hermitage Capital guy was mouthing off against Russia again.

Fridman: You should present this as a Kremlin split. After all we are private investors looking after our own interests. You can publicly warn us not to do this in the name of the Russian government. We’ll just ignore what you say, and the international press will play this as a real split between the Russian state and Alfa Group. We already have prepared as press statement for you. Here it is:

“I hope all the misunderstandings will be eliminated, but, if the deal fails, Rosneft will calculate its losses from the failed deal and will ask for compensation from those who would have inflicted the losses.”

Sechin: I think I can convince the Boss to go along with this. I assume there will be the usual financial arrangements.

Fridman: Yes, of course.

Sechin: One final word: This scheme may not work out as planned. BP may hold a wild card in its deck. If we conclude that you have to retreat, you will follow our orders. We need not remind you of what happened to your former colleague Khodorkovsky.

An imagined conversation in BP headquarters (London)

Dudley: It looks like the Russians have us backed into a corner. Our TNK partners have called a meeting in Berlin to approve the substitution of TNK-BP for BP in the BP-Rosneft deal. They want it in Berlin so their “independent” director Gerhard Schroeder (former German Chancellor) can give it the cover of respectability

BP lawyer: If there are fines, BP will have to pay as a law abiding company. There will really be no way to determine whether our TNK partners will also pay up.

Dudley: So what do you suggest?

BP lawyer: The only thing we can do now is not attend the Berlin meeting to avoid a quorum. Maybe we can think of something.

Both conversations are fictional. They may seem far fetched but anyone doing business in Russia encounters such things routinely. Even if these conversations never took place, they will be imagined by Western parties who know that the worst can happen to them in Russia.

Wednesday, March 2, 2011

How To Distort Polls: The NYT/CBS Poll on Public Sector Workers

The big surprises of yesterday’s NYT/CBS national poll on public sector unions were that 61 percent of adult Americans think that public employee salaries and benefits are “too low” or “about right,” 56 percent oppose cutting public employee salaries and benefits to reduce state deficits, and 40 percent prefer increasing taxes to decreasing spending on other things, among them public employee salaries and benefits. (The poll reports that even a slight majority of Republicans said public employee wages and benefits were “too low” or “just about right.”).

These results raise eyebrows. They seem to contradict the November election results. Perhaps the fickle electorate has changed its mind since November? Last night’s political talk shows were abuzz.

These poll results are so out of line with conventional thinking that they require careful scrutiny. My own (admittedly non-expert) examination raises three red flags:

FIRST: Why are there so many public-employee and union households in the sample?

The NYT/CBS pollsters conducted telephone interviews with 984 respondents using procedures that “in theory, in 19 cases out of 20”will “differ by no more than three percentage points” from an interview of all American adults. Their procedures include adjusting for under- or oversampling of various demographic characteristics. There are no adjustments for public employment, labor union membership, or political identification.

Twenty five percent of the NYT/CBS respondents are from households that had a public employee (versus 17 percent for the U.S.) and twenty percent had a union member in the household (versus 13 percent for the US). If we combine the two (while avoiding double counting as best we can), some 34 percent of the sample are either public employees or union members (versus 23 percent for the US population).

If we assume (rightly or wrongly) that all public employees and union members responded in the most pro-public-employee way to the survey questions, the pro-public-employee majorities wither away without them. The survey therefore shows that Americans who do not have a union member or public employee in the household think public-employee wages and benefits are too high, oppose raising taxes to cover deficits, and favor reduction of collective-bargaining rights.

(To adjust for the oversampling of public employees and union members alone, one should subtract some eleven percentage points from the more favorable public-employee response rates, as I see it).

SECOND: Are Republicans underrepresented?

The NYT/CBS poll asks questions about today’s most politically heated issue. It would therefore seem appropriate to weight the sample to make it 29 percent Republican, 31 percent Democrat, and 38 percent independent (according to recent Gallup reports) before reporting results that are supposed to capture the “national” mood. At a minimum, the NYT/CBS pollsters should provide the breakdowns of their respondents by political affiliations so that users can make their own adjustments if one group is underrepresented. The high public employee and labor union share already suggests an oversampling of Democrats. There is also the fact that Republican response rates to telephone surveys tend to be lower, requiring that their share be adjusted upwards for this reason alone.

Let the NYT/CBS pollsters release these results. I went to NYT.com/polls and failed to find any of these details.

THIRD: Why are results not broken down by political affiliation?

The NTYT/CBS pollsters clearly have results in their hands broken down by political affiliation. They proudly report that “61 percent of those polled — including just over half of Republicans — said they thought the salaries and benefits of most public employees were either “about right” or “too low” for the work they do.” Later they report “there was also strong opposition from independents: 62 percent of them said they opposed taking bargaining rights away from public employee unions.”

If we have the results and respondent shares broken down by political affiliation, we can calculate ourselves the “national” responses adjusted for political affiliation.

The NYT/CBS poll is an example of the not-so-subtle use of polling to support a political cause. This practice is not limited to the left. My suggestion is that next time, NYT/CBS put much more detail on their website (including the cross tabulations that I find sorely missing). Skeptics can therefore examine the results for themselves so that they can draw proper conclusions from the survey.