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Thursday, June 30, 2011

IMPORTANT NOTICE


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paulgregorysblog.blogspot.com

I apologize for the inconvenience and hope you continue to read my blog.

Why the NYT-Liberal Assault on Shale Gas? How About the Volt?

The New York Times has devoted more than four thousand words to the impending crisis of shale gas over the past four days. The attack began with a full-page investigative report in its Sunday edition. The barrage continued and Wednesday’s edition featured calls by Democrats for Congressional investigations.

You would think the NYT and its Congressional supporters would welcome a new technology that increases domestic energy, lowers the price of a clean fuel, turns us from an importer to an exporter, and creates new jobs.

Why this all-out assault? They need to rub “Big Energy’s” face in the mud in the mainstream press and the halls of Congress to divert attention from real problems.

What is the beef?  According to the NYT and Congressional Democrats, the evil energy giants have hatched another nefarious plot to dupe the gullible Federal Energy Information Agency, uninformed investors, and the general public into accepting an “irrationally exuberant” picture of the industry.  

E-mails obtained through open-records worry that gas “may not be as easy and cheap to extract from shale formations, and that  companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves.” The NYT praises skeptics “who question endorsing shale gas without understanding its economics.” They even complain “that dozens of black churches in Fort Worth signed leases on the promise of big money,” risking their tax exempt status.

This frontal assault on shale gas shows a profound lack of understanding of technology, economics, business, and energy.

Extracting gas from shale is a new technology that combines two established technologies – horizontal drilling and water flooding (which has been used at least since the 1950s and has not polluted our drinking water yet). As a new technology, we have no history to predict the future. Even with the best and most honest of efforts, we do not know how to extrapolate reserves from existing wells, and what the eventual extraction costs will be.

With such uncertainty, there will be a wide variety of estimates of reserves, some optimistic, some pessimistic. No one knows the truth at this point. There is nothing sinister on the part of those who choose to be optimists. All major innovations are made by optimists, not pessimists.

The reserves of any underground resources that can be economically extracted depend on prices now and in the future. If gold rises to $5,000 per ounce, there will be a new gold rush in the United States. The problem is that we do not know the future prices of natural gas. All we know is that it has fallen dramatically since shale oil extraction began. As long as we do not know the future price, there is no way to know the amount of reserves that can be extracted at a profit.

Presumably investors worth their salt know these two facts. They also know enough not to rely on a federal bureaucracy to make their investment decisions. After all, shale gas companies are not selling shares at Wal-Mart. Investors who are optimists will invest. Pessimists will not. Technology and market forces will decide who is right, not the NYT or Congress.

The NYT attack ends with a truism: “If natural gas ultimately proves more expensive to extract from the ground than has been predicted, landowners, investors and lenders could see their investments falter, while consumers will pay a price in higher electricity and home heating bills.”  Yes, if shale gas is a bust, investors will lose and prices will be higher, but what’s new? Why all the fuss? Why should this be Congress’s business?

My two pieces of advice:

First, to the natural gas industry: Avoid at all costs federal subsidies of cars powered by natural gas. This will give the federal government the right to stick its nose into your business.

Second, to the NYT and democratic members of Congress: Obtain e mails of internal discussions of the Volt or of lithium battery manufacturers to see whether  investors, taxpayers, and consumers are being sold an “irrationally exuberant” picture. I may have to wait a long time before the NYT takes me up.  

Tuesday, June 28, 2011

Blago Verdict: Only Broke Motor-Mouths Get Caught

The inevitable has occurred. Former Illinois Governor, Rod Blagojevich, has been convicted for his role in trying to personally benefit from selecting (selling) Barack Obama’s Senate seat.  He was found guilty on seventeen counts. The bad guys have been caught. We can rest more easily. Justice has been served.

The majority of long-serving members of Congress (or their spouses or offspring) are multi-millionaires. Most entered office with relatively modest wealth. Their incumbency wealth is unlikely the result of business or investment acumen.

Poor Blago! His crime was that he was an incompetent thief. He had maxxed out his credit cards, he had little to his name, he couldn’t keep his mouth shut, and he used cuss words (just like Nixon!). Those with whom he “negotiated” for the vacant seat were more clever. They knew the right words to use, how to say indirectly what poor Blago said openly. They emerged from this mess unscathed.

Congress hands out tax and spending favors right and left. If you stay on the good side of the administration, regulators will not harass you.  If you do not give enough, someone may sic the NLRB, EPA, or SEC on you. The cumulated effect of  these inducements, favors, and threats are of a greater scale than the sale of one measly Senate seat. Moreover, all these actions can be packaged as protecting the nations’ health, preventing mining accidents, keeping the public safe, or warding off the next bubble. Everything is perfectly legal and above board.

Thomas Friedman’s Shock Therapy (Insight into the Liberal Mind)

Thomas Friedman’s friends appear to be disgusted with American politics. They have concluded that the two parties think only of reelection and their special-interest constituencies. They cannot imperil their chances of reelection by doing the four things -- spend, cut, tax and invest -- that must be done simultaneously “if we have any hope of maintaining American greatness.”

Friedman’s disgusted friends are looking for a serious Third Party candidate to “deliver shock therapy to the corrupt, encrusted, two-party duopoly now running the show in America.”

In my vocabulary “shock therapy” describes a rapid course of transition from planned socialism to capitalism. Therefore, I expected more than I got from Friedman’s shock therapy, which consists of the following four points:

1)                  More stimulus to keep the economy from slipping back into recession.

2)                  An accompanying credible long-term plan for spending and deficit reduction — e.g., the Simpson-Bowles deficit-reduction plan.

3)                  New revenues (a gas tax and a carbon tax) to “reinvest” in education, infrastructure and government-funded research to push out the boundaries of knowledge.

4)                  Assorted other things like “shrinking” our presence in Afghanistan and raising mandated mileage standards on new cars.

Friedman opines that his hypothetical “spend, cut, tax and invest” platform is sure to attract his reasonable, sophisticated, and intelligent friends from both sides of the aisle.

I interpret it as a platform that elected liberals are too cowardly to pass for fear of voter backlash.

Why is this program the liberal Holy Grail?

Friedman’s “spend, cut, tax and invest” raises government spending now (bigger government), despite the failure of the massive fiscal and monetary stimulus of the past few years. (If once you do not succeed, try, try again). In return, Congress adopts Simpson-Bowles, which cuts spending and deficits over the long run (and perhaps never) by a combination of spending cuts and, yes, TAX increases.

But wait: Friedman is talking about cuts in “spending” not in “investment.” Government spending on research, infrastructure, green technology and other fads in liberal favor can boom because of new dedicated revenue from national gas and carbon taxes. No, the gusher of new tax revenue will not go into deficit reduction but into new windmills, bullet trains, and studies of the sex habits of mice, without which our economy cannot survive in the twenty-first century. I guess, in Friedman’s mind, we will have no innovation, no technological progress unless it is ordered and paid for by the state.

Friedman’s “spend, cut, tax and invest” is nothing more than a stealth program for ever larger and more intrusive government, in which the liberal state can pass out favors to its crony capitalists and labor allies.

A truly bold Friedmanian Third Party candidate could set the gas and carbon taxes high enough to raise total government spending to half the economy. With this accomplishment, we can at last join the genteel European brotherhood of enlightened welfare states, and  Thomas Friedman can return to foreign affairs, where he belongs.


Thursday, June 23, 2011

The Red Campaign’s Allure: China Chooses Its Course

In 2012, the Chinese Communist Party chooses a new Politburo. This once-in-a-decade event will set China’s course through 2025. The new Politburo must decide whether the Communist Party will continue as the dominant force in politics and society, or will China evolve towards some kind of pluralism.

China’s successes over the past three decades should give “liberals” a strong claim to a solid Politburo majority. Under a continuing “liberal” majority, private enterprise will outgrow state enterprise, China will deepen its integration into the world economy, the party will explore pluralism, at least at the local level, and Maoist philosophy will become a remnant of the past.

The “Red Campaign” offers a quite different path: The party reasserts its central role, rejects Western or universal values in favor of “red culture, enacts statist policies to replace free-wheeling capitalism, and crushes challenges with a powerful security apparatus. 

The pilgrimages of top party leaders to Chingqoing party boss Bo Xilai are much in the news. New Leftist Bo, a favorite to take one of the Politburo seats, proposes to apply his brand of patriotic TV programming, red singing shows, extra-judicial crackdowns on crime and dissent, and government spending on worker housing to all of China. Bo’s “Red Campaign” has clearly struck a responsive chord.

Why this nostalgia for the Mao era despite its horrors and China’s enormous economic successes? President Obama would have few 2012 election jitters with such an economic record. The New Leftists are, in effect, proposing dramatic changes to what the rest of the world views as a most successful policy.

Let me suggest possible explanations:

1). China’s communist party faces irrelevance under the current course. As the state enterprise share shrinks below one fifth, all pretense of China as a socialist market economy disappears. The private sector will be clearly exposed as the engine of growth, not the “wise leadership” of the Communist Party, as is currently claimed.

A market economy integrated into a global economy does not leave room for party domination. Markets replace plans and administrative allocation, and state influence is exercised through macro policy and regulation, as it is elsewhere.

To avoid redundancy in the economic sphere, the party must reestablish a statist economy based on party direction of a dominant state sector, as proposed by the Red Campaign.

2) China’s “New Left” believes that the Chinese people associate the market economy with the corruption of party officials and their Princeling offspring. They offer a  “pure” party and a statist economy as a cure.

China’s communist party finds itself in much the same position as Boris Yeltsin’s “democrats” in the 1990s.  The Soviet Communist Party was no longer around to take the fall for corruption and unpaid pensions, so democracy and capitalism got the blame.

In China, the party is still very much around to be blamed for theft, corruption, illegal land grabs, unemployment, and the Princeling Mercedes Benzes that run over workers on the streets

The Red Campaign offers a simple solution:  A return to the days of a pure party motivated not by money but by ideology. The party of Mao made disastrous mistakes, but al least it did not steal.  Although the mass starvation of 1958-1960 and the Cultural Revolution of 1965-1968 left dark shadows on millions of Chinese families, the New Left counts on such memories dimming.

Many Russians feel nostalgia for the “old days” when the party kept order, they had their jobs, and party theft was limited.  For Russians, the Stalin terror and famine lay almost a half century back. The Chinese New Left hopes to play on similar nostalgia, especially now that Mao’s excesses lie more than thirty years in the past.

China in 2012 confronts the same choice as Gorbachev in 1989, but under quite different circumstances. Gorbachev in 1989 was firefighting the crisis of the collapsing command economy. The Chinese Politburo in 2012 will face a non-crisis. Even with slowing growth, China will still be among the world’s fastest growing economies and an envy of the world.

Confronted with his crisis, Gorbachev chose to end party dominance of the economy and weaken the party’s central apparatus.  His Politburo hardliners timidly acceded at first.  Their amateurish coup, launched to save the party, came too late.

If China’s 2012 Politburo attempts to implement the Red Campaign, it will discover the genie of private enterprise cannot be put back in the bottle. They can restore the dominance of state companies only through extreme favoritism and even repression of the private sector. The New Left will find themselves like a King Canute trying to hold back the sea. They cannot mount enough political power to revert back to the economic statism of earlier years.

Gorbachev did not understand that the reforms he launched would inevitably end the Soviet economic and political system. Had he understood, he would have followed the course of his predecessors. The Chinese New Left apparently sees the handwriting on the wall. They see 2012 as their last chance to save the party as they want it to be.   

Wednesday, June 22, 2011

Obama Didn’t Save Union Jobs, He Saved Union Pay

Contrary to popular belief, bankruptcy does not mean companies close their doors and send employees home. This is the false message President Barack Obama tried to sell on his victory tour of Detroit. If General Motors had gone through a normal bankruptcy without taxpayer bailouts, there would still be GM jobs–maybe even more than there are now. We do not know because that was the road not taken.

We do know, however, what happened to the airlines that went through bankruptcy. Their planes kept flying, and pilots, mechanics and flight attendants reported to work, even if there were fewer of them.
Over the past decade, no industry has had worse breaks than the airlines. They took a huge hit from 9/11. They have been buffeted by fuel prices. The TSA’s intrusive airport screening angered passengers. Furthermore, the airline industry is cyclical; it suffers disproportionately from economic downturns.

Compared to the airlines, GM has had a cake walk.
Continue reading Paul Gregory at Forbes.com

Tuesday, June 14, 2011

The Earth is Full of Thomas Friedman's Hot Air


I thought that our esteemed and informed intelligentsia would be aware of the 1972 Club of Rome “Limits to Growth” debacle and Julian Simon’s winning bet with Paul Ehrlich in 1990. Respected New York Time columnist Thomas Friedman must have forgotten these earlier lessons in the haze of globe-trotting, closed-door conversations with world leaders, and speaking engagements.
In his “The Earth is Full” column (NYT, June 8), Friedman appears to concur with the warnings of Paul Gilding, identified as a veteran Australian environmentalist-entrepreneur (What is an environmentalist-entrepreneur?). Gilding predicts spiking food prices, soaring energy costs, surging world population, tornados plowing through cities, floods and droughts setting records, displaced populations, and threatened governments. Friedman (or is it Gilding?) wonders: How can we not panic “when the evidence was so obvious that we’d crossed some growth/climate/natural resource/population redlines all at once?”
To read rest of article on Town Hall.com click here




The President’s Waste-of-Time Jobs Council

It took GE’s Jeff Immelt and Amex’s Ken Chenault and their “26 private sector leaders and people standing up for the rights of workers” 90 days to issue five “fast-action” recommendations to create “more than one million jobs.” (WSJ, June 13 “How We're Meeting the Job Creation Challenge”).

The Presidents Jobs Council’s recommendations are either:

1) Obvious (better education and training), or

2) Require more government spending (more SBA loans, more infrastructure spending), or

3) Make money for GE (install energy saving devices in buildings) or for Amex (issue more tourist visas), or

4) Call upon federal, state, and local licensers to do their jobs expeditiously as they are supposed to do anyway.

The Jobs Council will issue longer-term recommendations later. I lose all optimism, when I read that “government, business and labor (read: crony capitalists and big labor) need to work together to get this done.”

I do not need 90 days and millions of government money to give you my “Jobs Council” recommendations:

1) Reduce energy costs by halting the EPA’s attack on coal and drop regulations that require renewable energy to produce electricity. These measures lower the costs of doing business and encourage hiring.

2) Limit the duration of unemployment insurance. Unemployment insurance cannot be a permanent entitlement. Empirical studies show unemployed persons exit unemployment near the end of their benefits.

3) Withdraw the NLRB’s ruling against Boeing’s new plant in South Carolina. The federal government and its regulators cannot be seen as blatantly anti-business. We cannot have an economy in which the government interferes in key investment decisions.

4) Allow for increased mobility of occupational licenses across state borders by attacking special-interest protection of licensed occupations. Increased mobility lowers unemployment.

5) Drop all attempts to prop up underwater mortgages and let the housing market clear as quickly as possible. Phase out Fannie Mae and Freddie Mac. Housing will not expand until the industry reaches an equilibrium.

6) Have a bi-partisan agreement that reduces government spending and debt now, not in the distant future. The lack of agreement creates too much uncertainty about future taxes.

7) Provide businesses certainty as to their current and future tax liabilities. No business will hire without knowing its bottom line after taxes. Keep marginal tax rates low.

8) Adopt a bi-partisan solution of the unfunded liabilities of Social Security and Medicare starting now, not in the distant future.

9) Reform the education system to teach everyone basic skills of reading, writing, and math. With these skills, people can acquire the specific skills business needs.

10) Put teeth in the requirement that all regulations must produce benefits in excess of costs with realistic estimates of both.

11) Repeal Obama Care to give employers certainty as to their true employee costs. Let employers compete for workers by offering better health insurance and employees choose among employers for health insurance benefits.

12) Follow the dictum of Franklyn Delano Roosevelt and prohibit collective bargaining for public employees. The public is the "boss" of public sector workers not greedy capitalists.

13) Ratify outstanding free trade agreements. Expansions of trade lead to job expansion.

I guarantee that my jobs program will actually create jobs and economic growth. I imagine most honest economists would agree with me.

Neither political party, however, has the will or gumption to enact it.

Friday, June 10, 2011

If This Were Russia, Nancy Pelosi Would Own Google (But There Would Be No Google)

In my many conversations with Russian entrepreneurs, they repeatedly told me: “We cannot become too big or too profitable. If we do, ‘the structures’ will notice us and gobble us up.” Instead of rewarding success in business, Putin’s Russia offers entrepreneurs “deals” they cannot refuse. The “deal” is that powerful state and state-connected officials will take their share of your success.

I used to dread flying into Moscow’s Sheremetova airport, consistently rated the worst international airport in the world. There were no lights, the lines were endless, and restrooms were disgusting. In a word, it was terrible. I then learned to fly into Domodedova (airport code DME).

Under the private management of East Line Group, DME was transformed from the dismal hulk I flew out of in 1993 to a brightly-lit, passenger-friendly airport scarcely distinguishable from any other international airport. There were some 90 check-in counters, manned by friendly personnel. International carriers got the message: They switched operations to DME. DME’s revenues rose to $1 billion per year – one of the few success stories of private business in Russia.

East Line Group decided last May to go public with an IPO. It was time to cash in and to raise more capital for expansion.

Not so fast. The prosecutor general initiated an investigation that declared East Line’s offshore ownership “unacceptable,” designed “to hide the real owners.” Offshore ownership is standard in Russia and is a favorite tool of the Russian nomenklatura. We have no idea who owns the multi-billion dollar shadow offshore companies through which top government officials (including Putin himself) hide their considerable wealth.

With the threat of government reprisal, East Line shelved its IPO. Who would pay good money for a company that may share the fate of Khodorkovsky’s Yukos?

All hope is not lost. It turns out that a former energy minister under Putin and special deputy of Medvedev has come forward as a potential “peacemaker” between the government and the airport’s owners. His group of investors (imagine who they might be) will purchase a big chunk of East Line Group for pennies on the dollar, and in return they will call off the prosecutor.

Such a shakedown would make the New Jersey mafia proud. They could not have done it better. The difference is that, instead of thugs threatening murder and mayhem, this mafia is “respectable” state servants in business suits. The result is the same.

The outcome is obvious: East Line Group must cave to the state mafia. The return from its entrepreneurship will go to the bureaucratic mafia in business suits and they will be allowed to carry on.

What is going on at DME is the equivalent of Nancy Pelosi deciding she needs a 20 percent stake in Google for pennies on the dollar as a payment for shutting down an anti-trust suit.

Any U.S. company considering doing business in Russia must consider the East Line case. Any potential Russian Bill Gates, Steve Jobs, or Sergei Brin should think twice about founding any company, investing any capital, or taking any risk. The result: There will be no Microsofts, Apples, or Googles in Russia, despite the high-tech city that Medvedev and Putin are building in Skolkovo.

For more on this, see Joe Nocera, “How to Steal a Russian Airport,” NYT, June 6, 2011.

Wednesday, June 8, 2011

Why the Chinese Communists Are So Scared (Is It Time to Wither Away?)

Marx and Engels wrote that the state would wither away after the Communists Party accomplished its tasks. The Chinese Communist Party fears that someone may ask: “Is it time for us to wither away?”

The threat of a Jasmine Revolution scared the Chinese Communist Party. The Chinese Communists reacted to fear of contagion from the Arab Spring by stepping up repression, but their concerns have deeper and more permanent roots.

China is much different from the Arab Spring countries. Its economy is booming. Real incomes are rising. China is less corrupt, and people believe central authorities are relatively honest. China is said to be run by a competent government that deftly avoided the world financial crisis and created growth.

So why are the Chinese Communists so fearful? Why are informal church services, poets, film makers, artists, and nationalists of any stripe suppressed with extreme brutality? Why does every demonstration, no matter how small, strike fear into the hearts of authorities?

Why do not the Chinese Communists, with their record of achievements, feel secure?
Answer: The Chinese Communist Party no longer has a claim to legitimacy. It has no real purpose other than to keep itself in power. It is that simple.

The preamble to the Chinese Constitution illustrates the quandary: It tells of the glorious victory of the heroic Chinese Communist Party in 1949, fighting with long odds against the imperialists, the revanchists, and the nationalists to set the Chinese people on the “socialist road guided by Marxism-Leninism and Mao Zedong thought.”

After the glorious victory, the Communist Party’s role was to lead the “continuous revolution under the dictatorship of the proletariat … to achieve great victories both in socialist revolution and socialist construction.” Without the Communist Party’s leadership, the battle “between the socialist road and the capitalist road” could still be lost. The Party’s role was not limited to politics. It was needed to secure economic victory by “practicing economic planning on the basis of socialist public ownership.”

Without the Communist Party firm hand, hard-fought political and economic achievements were at risk, or so it was said.

The 1975 Constitution makes the case: The Communist Party is legitimate because the people and the party are one, and daunting task lie ahead. As Article 2 states: “The working class exercises leadership over the state through its vanguard, the Communist Party of China.”

This heroic narrative loses its glow in the haze of the constitutional amendments from 1982 to 2004, which were required by the reality of Chinese reforms.

China now aims for “socialist modernization.” Instead of “continuous revolution,” the Party advances society “along the road of Chinese-style socialism… persists in reform, improves socialist institutions, develops a socialist market economy, advances socialist democracy, improves the socialist legal system and turns China into a powerful and prosperous socialist country.” The state no longer plans the economy because "the state has put into practice a socialist market economy.” The State is reduced to “formulating economic laws, improving macro adjustment and control” like any other conventional state.

In effect, the “New deal” is that the Chinese Communist Party offers the people growth and prosperity if they refrain from asking the “withering away” question.

As the Communist Party loses its raison de etre, it is increasingly threatened by the constitutional guarantees of “freedom of speech, correspondence, the press, assembly, association, procession, demonstration and the freedom to strike, and enjoy freedom to believe in religion and freedom not to believe in religion and to propagate atheism.”

If people are free to gather, criticize, and express opinions, they may ask: “Why do we even need the Communist Party? If we are allowed to vote, why is there only one slate of candidates?

The asking of such questions has dire consequences. “The exercise by citizens of their freedoms and rights may not infringe upon the interests of the state, of society and of the collective, or upon the lawful freedoms and rights of other citizens.” Private correspondence can be censored according to the “needs of state security.” Citizens can complain about officials “but fabrication or distortion of facts with the intention of libel or frame-up is prohibited.”

Notice that virtually any exercise of constitutional rights can be deemed “contrary to the interests of the state or the needs of state security.” Dissidents cannot judge the consequences of their acts, although they know the reaction will be negative.

In 2012, a new majority of the Communist Party Politburo will be chosen from among leaders who were not alive in 1949. The contenders must understand that the Communist Party dictatorship has lost its reason for being. The “Maoists” will argue that China must regain its revolutionary fervor. It must return to a “pure” socialist road. The “Reformers” may decide that a “dictatorship of the proletariat” is not longer appropriate for a society of private ownership, foreign investment, and an integrated world economy.

How they decide will have a stunning impact on the world in which we live.

The Coming Clash of Titans: Environmentalists Versus Global Warmists

Robert Bryce (“The Gas Is Greener” NYT June 8, 2011) provides ballpark calculations of the land requirements to meet the California mandate that one third of its electricity be from renewable energy by 2020. I use his calculations to ballpark the requirements for a nation-wide mandate of the same proportions.

Here is what I get:

1,300 square miles of land to meet the solar requirements (an area about equal to Delaware)

18,200 square miles of land to meet the wind power mandate (an area about equal to New Hampshire and New Jersey combined)

One half the nation’s steel production to produce wind turbines

These calculations do not include the long swaths of land needed for new power lines.

With such massive land requirements, consider the clash between global warmists and environmentalists: The Mohave Desert is an ideal location for solar farms. But the desert tortoise is on the endangered species list. The Bureau of Land Management has already ordered the halt of construction of part of the Ivanpah Solar plant because it threatens the habitat of the desert tortoise. Environmental groups also have sued to halt the Sunrise Powerlink to carry electricity from renewable sources to San Diego because it cuts through a national forest.

With land requirements equal to Delaware, New Hampshire, and New Jersey, there is no telling how many snail darters, beetles, blossom clams, thorn mint plants, and Tobush cactus are threatened.

At last global warmists and environmentalists understand the notion of opportunity costs. Neither has much concern abut the increased cost of energy to industry and the consumer, but the loss of desert tortoises is something they can worry about.

The Khodorkovsky Ruling: Something Fishy in Strasbourg?

The European Court of Human Rights ruled on May 31 that Mikhail Khodorkovsky, the jailed former owner of Yukos, had not proved political motivation in his prosecution on charges of fraud and tax evasion:

“While Mr. Khodorkovsky’s case might raise some suspicion as to what the real intent of the Russian authorities might have been for prosecuting him, claims of political motivation behind prosecution required incontestable proof, which had not been presented.”

The Strasbourg Court did rule that he had been illegally arrested and held under inhumane conditions and levied a nominal fine on the Russian government.

The Strasbourg ruling set off elation in Putin’s “power” ministries of justice and the procuracy. Although Khodorkovsky’s supporters welcomed the court’s rebuke for illegal arrest and inhumane conditions of confinement, no international court ruling was really necessary. Any picture of Khodorkovsky – a non-violent white collar defendant – held in a glass cage for months in a Moscow court was more than enough to prove this point.

The European Court of Human Rights exudes an aura of impartiality and stature. If we dig beneath the surface, however, we find it is a political institution that must consider member countries, like Russia. Suspicious is the fact that Russia blocked the court’s expedited review until it was guaranteed in January of 2010 that Russian judges would review complaints against Russia.

Up to that date, one third of complaints had been filed against Russia, and the Court had already found Russian officials guilty of corruption, torture and other misconduct.
Putin could not risk a similar ruling in the Khodorkovsky case.

Indeed, of the seven judges who wrote the Khodorkovsky decision, one was from Russia and another from a Russian ally (Azerbiajan) and another from Croatia. Decisions are by majority vote. There was no dissenting opinion issued.

Notably, the Strasbourg court did not review the facts of the case. It punted the football by basing its decision on fear of setting a precedent for others is a position similar to Khodorkovsky. I quote:

“The fact that Mr. Khodorkovsky’s political opponents or business competitors might have benefited from his detention should not have been an obstacle for the authorities to prosecute him if there were serious charges against him. Political status did not guarantee immunity. Otherwise, anyone in Mr. Khodorkovsky’s position would be able to make similar allegations, and in reality it would be impossible to prosecute such people.

The Court, persuaded that the charges against Mr. Khodorkovsky had amounted to a “reasonable suspicion” and hence had been compatible with the Convention, held that there had been no violation of Article 18 in conjunction with Article 5.”

It seems that Strasbourg declined to examine the facts for fear of a rash of other complaints concerning Russia, asserting political motivation. Their docket is already bursting at the seams.

As far as I can see, the Strasbourg Court is a court in name only. It has no subpoena power, does not appoint a prosecutor, lacks power to punish perjury, etc. It seems more a political forum, and it cannot afford to have its business held up by an angry Russia.

The Strasbourg court’s “incontestable proof” standard makes any judgment of “political motivation” impossible for Russia cases. How can anyone establish “incontestable proof” in a country whose own President declares it has no rule of law?

The Strasbourg Khodorkovsky ruling means that “serious charges” brought by a non-rule-of-law country establishes “reasonable suspicion” for proceeding against a defendant. In such a setting, “incontestable proof” of political motivation is an impossible standard. Political and legal authorities make individual and arbitrary judgments in each case in non-rule-of-law countries. Political motivation can only be discovered by examining the facts, where the political motivation will be carefully concealed.

In the Khodorkovsky case, there exists no “smoking gun” whereby Putin issues a written order to jail Khodorkovsky because he represents a political threat. Perhaps the Strasbourg court would not find even that “incontestable proof.”

At the time of Khodorkovsky’s arrest, taxes were levied arbitrarily based on connections, bribes, and political considerations. Khodorkovsky himself gamed the tax system when he was an oligarch in good favor. After Khodorkovsky fell afoul with Putin, Putin’s tax police placed Yukos’s tax liabilities in excess of annual revenues – a common strategy at the time to force bankruptcy. Indeed, Yukos was purchased on the auction bloc by a shadow company headquartered in shabby storefront that immediately resold Yukos’s assets to Gazprom. At that juncture, Yukos’s tax liabilities miraculously disappeared into thin air as if they had never existed.

Amid such chaos, political racketeering, and incredible chutzpah, who in the world can offer “insurmountable proof” of anything? It is hard enough to believe what had just gone down.

If Strasbourg reviews Khodorkovsky’s second conviction, they must confront something closer to “incontestable proof” of political motivation. Two court officials have gone public to state that the Moscow court decision was dictated to the presiding judge by his superiors, over his objections. But by the time Strasbourg gets to the second conviction, these witnesses will have disappeared or will recant their testimony to save their skins.

It seems as if Putin and his power ministry gang can rest easily. So far, the European Court of Human Rights has proven itself as paper tiger. Such a court might work for countries that have a reasonable rule of law, but it is citizens of the Zimbabwes, Russias, and Chinas of this world that require the protection of such an international court.

Monday, June 6, 2011

The Genius of Peggy Noonan: Two Campaign Slogans That Could Turn the 2012 Election

“He made things worse.”
“We don’t accept that card (Medicare) anymore.”

Thursday, June 2, 2011

David Brooks’ Country-Club Valedictory: It Is About You

“Conservative” David Brooks’ column “It’s Not About You” (NYT May 30) is incomprehensible fluff until you realize its audience.

Let me quote some key passages to illustrate:

“This year’s graduates are members of the most supervised generation in American history… they have been monitored, tutored, coached and honed to an unprecedented degree. Most will spend a decade wandering from job to job and clique to clique, searching for a role. No one would design a system of extreme supervision to prepare people for a decade of extreme openness.”

So we learn from Brooks that today’s graduates, the “most supervised in American history,” are being thrust into a “decade of extreme openness.” My own impression is that today’s latch-key, single parent, web-surfing, text-messaging graduates are among the least supervised in history. I must admit I do not understand Brooks’ “decade of extreme openness.” Graduates, it appears to me, are just entering the uncertain job market characteristic of a weak economy.

After some serious thought about who might read this column, it began to make more sense. By “graduates,” Brooks has in mind graduates of elite institutions, not college graduates in general. It is they who have been “monitored, tutored, coached and honed to an unprecedented degree.” Their mothers competed for slots in elite toddler academies in Manhattan or Cambridge. It is they who have been coached and tutored in preparatory academies and by SAT coaches. They have been “honed” for admission to Stanford or Harvard.

Graduates of state schools and, even worse, junior colleges do not fit into Brooks’ picture of the country-club elite. I guess they are not the ones who count.

Now these “supervised” graduates are being thrown into a cruel world of job insecurity and, gasp, “team work.” No longer does a secure spot in Daddy’s Lehman Brothers await them.

Brooks’ advice: Instead of focusing on “finding yourself,” find a cause – a problem to solve. “It’s the things they did to court unhappiness — the things they did that were arduous and miserable, which sometimes cost them friends and aroused hatred. It’s excellence, not happiness, that we admire most.” So the greats of the past succeeded because they were willing to be miserable and friendless. They did not become great through the joy of discovery, invention or entrepreneurship.

If I had taken out student loans to graduate from a good university with a meaningful degree and David Brooks delivered this as the commencement address, I would have asked for my money back.

Are We Misinterpreting China’s Decline in Growth?

The press is filled with accounts of the “planned” decline in Chinese economic growth. The standard interpretation appears to be the following:

To confront rising raw material prices, China’s bankers have applied the brakes. There will be less lending for large state enterprises and infrastructure investment will be cut back. In the mean time, China’s growth with fall slightly, but it can resume after tight money has done its job. The decline in growth is a cyclical response by wise Chinese monetary authorities. When the emergency passes, rapid growth can resume.

I would like to offer an alternative explanation which has much longer term consequences.

The press is also filled with accounts of rising pressure on the Chinese labor market. Wages appear to be soaring everywhere. Business is moving from the coast inward, and interior areas are playing catch up. Migrant labor is drying up. Residents from the interior say they no longer need to commute long distances. The jobs have come to them. In the press, this wage inflation is, almost comically, explained as a deliberate state move to grow the Chinese consumer market. It is not. Wage inflation is the result of deep economic forces.

In a word, China’s era of unlimited supplies of labor has ended as is evidenced by the incredibly rapid wage inflation.

W. Arthur Lewis earned a Nobel Prize for his 1954 analysis of economic development with unlimited supplies of labor. With labor supply unlimited, an economy can grow by redistributing labor to the “modern sector” without driving up wages. The economy grows rapidly but only until the unlimited labor is exhausted. The signal that labor has become limited is economy-wide wage inflation. At that point, the economy reaches an inflection point, and future per capita growth is determined by technological progress and more capital per worker. No country in history has grown at China’s per capita rates based on these two factors.

Over the next months or year, we will see that China’s growth has indeed declined, but we will not know whether this is the consequences of tight money or the exhaustion of unlimited supplies of labor. We will also see less infrastructure investment as the central bank reduces lending.

But real Chinese growth occurs elsewhere. Chinese banks lend only to large state (or state connected) companies. They do not constitute China’s real credit market, which lends informally at high rates to private companies that have so far earned huge rates of return. They are the true drivers of Chinese growth. If their profits drop and their growth declines, China’s era of easy growth is over.

Wednesday, June 1, 2011

My Arab April Spring Scorecard

Losses:

Syria’s Assad remains in power despite (thanks to?) brutal suppression. The modest sanctions imposed on his regime will make no difference. Despite Assad’s close alliance with Iran, the political assassinations in Lebanon, and support of Hezbollah, the strange argument still prevails that we would be worse off without the “potential reformer” Assad.

Bad Mistakes:

The Egyptian military’s decision to try Mubarak and the international court indictment of Kaddafi send the message that dictators should hold on to power until their last breath. There is no such thing as a graceful exit. Yemen’s President Saleh got the message and is now refusing to resign. Kaddafi and sons have received the message as well.

Unlikely Wins:

Egypt’s military understands that real democracy can cost it its control of Egypt’s economy and wealth. It will not allow liberal democratic forces time to form real political parties. Egypt’s military will remain in control perhaps in cahoots with the Muslim Brotherhood. They will increasingly suppress true democratic reformers in subtle but effective ways.

Possible Wins:

Even uncoordinated and weak support from NATO is preventing a defeat of rebel forces by Kaddafi loyalists. As hostilities drag on, a missile is likely to get Kaddafi. Until that happens, there will be a protracted civil war in Libya. If Kaddafi is not killed, NATO countries will lose the will to fight and Kaddafi survives.