Four Shocks That Could Change China

 

In the past four months, the Chinese Communist Party (CPC) has experienced four shocks that could materially affect, if not eventually end, its “leading role” in Chinese society.

First, on December 13 of last year, a mob of villagers forced out local party leaders and the police and took control of the town of Wukan. Enraged by illegal land grabs and police brutality, the villagers installed their own representatives after gaining concessions from national authorities. The Wukan uprising is symbolic of the two hundred thousand mass protests reported for 2010.

The Chinese people are fed up with the corruption, indifference, and incompetence they encounter from local government.

Second, on February 27, a key government think tank issued its China 2030 report in conjunction with the World Bank. Rapid growth could only be sustained, the report argued, by giving free rein to the private sector and ending the preferential treatment of the state economy: The role of the government “needs to change fundamentally” from running the state sector to creating a rule of law and the other accoutrements of a market economy. A month later (on March 28), the state council approved a financial reform pilot experiment to legalize private financial institutions and allow private citizens to invest abroad.

China 2030 is an open warning that China’s vaunted state capitalism model cannot sustain growth and usher China to the next level. A faltering economy would pose an imminent threat to the CPC’s claim to its leading role.

Third, on April 10, charismatic regional party leader, Bo Xilai, was fired as party boss of Chongqing and expelled from the Politburo. Bo Xilai embodied the party faction favoring state-led economic development and Maoist ideology. Bo’s status as the son of one of China’s “Eight Immortals” did not save him from charges of political deviation and corruption. Bo’s influential wife was arrested under suspicion of murder of an English business associate.

The ringleader, cheerleader, and most visible practitioner of China’s party-led state capitalism is no longer a power broker.

Fourth, on April 27, blind dissident and noted civil rights lawyer, Chen Guangcheng, evaded the security guards guarding his house in his home village and made it to Beijing, where he gained refuge in the U.S. embassy. Guangcheng’s escape shows the sophistication, dedication, and coordination abilities of the dissident community and is an embarrassment to the CPC and its security forces.

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Are There No Limiting Principles? An Electoral Dilemma That Needs to Be Addressed

President Obama is telling his presumed constituents of college students that he is fighting for them against the evil republicans. They want to raise the student loan rate back to 6.8 percent (already a bargain) from its temporary low of 3.4 percent. Republican nominee Mitt Romney has already caved out of fear of giving Obama another campaign sound bite. Support for the 3.4 percent rate is already prominently featured on Obama’s campaign web site.

Government-backed student loans, let me tell you, will be our next financial catastrophe. The default rate is rising and banks (and the government as guarantor) will be again left with toxic assets. Government backing of student loans is already an enormous asset for college students. Banks would not otherwise lend to students based on the promise of higher future earnings. They should be happy to get the loans at 6.8 percent because scholarly studies place their lifetime annual rate of return from a college education between 8 and 13 percent. A college education is a ticket to the upper middle class.

The trap Republicans face is that Obama can promise to have the government pay for any meritorious good – green cars, condoms, books, laptops, free public transportation, virtually anything – and paint those who oppose as miserly ogres who do not want to help. Mitt Romney cannot cave in to every such “caring” gesture of candidate Obama.

How and where can we draw the line?

American Airlines: The Way Bankruptcy Is Supposed to Proceed

American Airlines is in Chapter 11 bankruptcy supervised by a bankruptcy judge in federal court following normal procedures. American’s goal is to emerge from bankruptcy as a profitable concern.  All of American’s stakeholders – unions, creditors, management, etc. -- are represented and are fighting each other tooth and nail, as they should. American’s management wishes to abrogate union contracts that have made it the highest-cost carrier in the business. Management is trying to extract work rule concessions from reluctant unions. Unions are fighting to protect their contracts and pensions and minimize layoffs.  Another carrier, U.S. Air, is circling overhead, trying to lure stakeholders into a U.S. Air-American Airlines merger.

No matter what, jobs will be lost but probably not more than ten percent. Either a stand-alone American or an American merged with U.S. Air will emerge from bankruptcy, and all the interested parties will have defended their legitimate interests as best they can before an impartial judge. If all goes well, American can survive and make profits.

The American Airlines bankruptcy shows how the GM and Chrysler bankruptcies should have proceeded. Instead the of federal government grabbing the bankruptcy proceeding in a biased way towards the unions and to the disadvantage of creditors or potential third-party bidders, GM and Chrysler could have gone through a normal bankruptcy and emerged with lower costs, free from government diktat, and able to make  their own decisions.

The American bankruptcy case again exposes the emptiness of Obama’s claim that “he saved Detroit.”


Dr. Gregory's latest book can be found at Amazon.com.

French Socialists Test Ride Obama Platform

French voters went to the polls today to winnow a ten-candidate presidential field down to the “right-of-center” incumbent (Nicolas Sarkozy) and his socialist challenger (Francois Hollande). The two will face each other in a  runoff election on May 6. A Sarkozy loss would be the first of an incumbent French president in  thirty years. It would threaten the German-French sponsored European Union rescue package. It is no surprise that Germany’s Angela Merkel openly supported Sarkozy’s candidacy.

The French election previews the U.S. November election contest between incumbent Barack Obama and challenger Mitt Romney in the following four ways:

1). Both Obama and Hollande offer almost identical leftist platforms (details on this below).

2) The bland challengers (Hollande and Romney) ignite electoral passions less than their more colorful opponents (playboy Sarkozy with his celebrity wife and Obama, the first black president).

3) The sorry state of the economy gives both challengers a hefty leg-up.

4) The French and American elections are foreshadowed by electoral disasters for the incumbent party in off-year races in 2010 and 2011. In both, the incumbent  party lost long-held majorities in one house of Congress or parliament.

Whereas the outcome of the U.S. election is currently too close to call, opinion polls show the French socialist candidate poised to win decisively in the run off. As the odds tip increasingly in favor of a Hollande victory, the risk premium on French bonds will rise. It is no secret that the investment community views a Hollande victory  a threat to France’s solvency.

A victory of France’s socialist candidate Hollande will not translate into electoral success for his American soul mate, Obama, for three reasons:

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Dr. Gregory's latest book can be purchased at Amazon.com.

Two Major Events in International Oil: Argentina's Nationalization of YPF and Exxon's "Hostage" Deal With Russia

One of the greatest Latin American success stories was the privatization of Argentina's YPF in July of 1993 against enormous political and labor opposition. The Kirchner government reversed  this hard-won success yesterday with its nationalization of YPF. The nationalized YPF will again become a bloated political rent-seeking machine to pay off Kirchner's supporters. YPF's expropriated partners (mainly Repsol of Spain) will get little.

At about the same time, ExxonMobil signed the only possible deal with Russia's national oil company Rosneft to jointly develop Siberia's energy reserves. The key section of the deal gives Rosneft properties of equivalent value in the United States. This time when Putin decides to expropriate ExxonMobil's investment in Russia, they can take back Rosneft's U.S. holdings. Putin has forced Western energy companies into such "hostage" deals. Let's see if they work.

How Krugman Would Ru(i)n Steve Jobs’ Apple

The Left considers Steve Jobs, the charismatic PC pioneer, a self-centered individualist, who did not to conform to elite etiquette. As Warren Buffet and Bill Gates gave away money with great fanfare, Jobs quietly devoted himself to creating value in Apple. He was conspicuously silent as Buffet recruited the super rich to argue for higher taxes. He told President Obama unwelcome truths (“Apple jobs are not coming back to America”).  He advocated school vouchers and he emphasized the importance of the family (oral history interview). He did not dash to DC to testify on the latest fad or navigate the elite cocktail party circuit. He had more important things to do.

Although Steve Jobs was a major donor to Democrat causes, his errant behavior did not sit well with the “progressive” political class. Now six months after his death at age 46, the attack on his legacy is in full swing, fueled by Apple Computer’s new status as the world’s richest corporation.

The Left’s standard bearer, Paul Krugman  snidely labels Steve Jobs (Jobs, Jobs, and Cars) the “heroic entrepreneur, the John Galt, I mean Steve Jobs-type ‘job creator’ Republicans love.”  Krugman rates Jobs’ achievements as inconsequential relative to Obama’s Detroit bailout – “the single most successful policy initiative of recent years.” Per Krugman, real heroes preserve vital “economic ecology and industrial clusters,” even if it takes taxpayer money. The heroes are not rugged individualists but union-industry-government partners, who, according to Obama’s State of the Union address, “work as a team” and “get each other’s backs.” 

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Steve Jobs on School Vouchers

Smithsonian Institute Oral History Interview Transcript, April 1995

The Costs of Education - Alternatives

SJ: And there's a warranty. That's right. But in schools people don't feel that they're spending their own money. They feel like it's free, right? No one does any comparison shopping. A matter of fact if you want to put your kid in a private school, you can't take the forty-four hundred dollars a year out of the public school and use it, you have to come up with five or six thousand of your own money. I believe very strongly that if the country gave each parent a voucher for forty-four hundred dollars that they could only spend at any accredited school several things would happen. Number one schools would start marketing themselves like crazy to get students. Secondly, I think you'd see a lot of new schools starting. I've suggested as an example, if you go to Stanford Business School, they have a public policy track; they could start a school administrator track. You could get a bunch of people coming out of college tying up with someone out of the business school, they could be starting their own school. You could have twenty-five year old students out of college, very idealistic, full of energy instead of starting a Silicon Valley company, they'd start a school. I believe that they would do far better than any of our public schools would. The third thing you'd see is I believe, is the quality of schools again, just in a competitive marketplace, start to rise. Some of the schools would go broke. Alot of the public schools would go broke. There's no question about it. It would be rather painful for the first several years

DM: But deservedly so.

SJ: But far less painful I think than the kids going through the system as it is right now. The biggest complaint of course is that schools would pick off all the good kids and all the bad kids would be left to wallow together in either a private school or remnants of a public school system. To me that's like saying "Well, all the car manufacturers are going to make BMWs and Mercedes and nobody's going to make a ten thousand dollar car." I think the most hotly competitive market right now is the ten thousand dollar car area. You've got all the Japanese playing in it. You've got General Motors who spent five million dollars subsidizing Saturn to compete in that market. You've got Ford which has just introduced two new cars in that market. You've got Chrysler with the Neon.

DM: So you're spending thirty-two thousand and getting a five hundred dollar car in some cases.

SJ: The market competition model seems to indicate that where there is a need there is a lot of providers willing to tailor their products to fit that need and a lot of competition which forces them to get better and better. I used to think when I was in my twenties that technology was the solution to most of the world's problems, but unfortunately it just ain't so. I'll give you an analogy. Alot of times we think "Why is the television programming so bad? Why are television shows so demeaning, so poor?" The first thought that occurs to you is "Well, there is a conspiracy: the networks are feeding us this slop because its cheap to produce. It's the networks that are controlling this and they are feeding us this stuff but the truth of the matter, if you study it in any depth, is that networks absolutely want to give people what they want so that will watch the shows. If people wanted something different, they would get it. And the truth of the matter is that the shows that are on television, are on television because that's what people want. The majority of people in this country want to turn on a television and turn off their brain and that's what they get. And that's far more depressing than a conspiracy. Conspiracies are much more fun than the truth of the matter, which is that the vast majority of the public are pretty mindless most of the time. I think the school situation has a parallel here when it comes to technology. It is so much more hopeful to think that technology can solve the problems that are more human and more organizational and more political in nature, and it ain't so. We need to attack these things at the root, which is people and how much freedom we give people, the competition that will attract the best people. Unfortunately, there are side effects, like pushing out a lot of 46 year old teachers who lost their spirit fifteen years ago and shouldn't be teaching anymore. I feel very strongly about this. I wish it was as simple as giving it over to the computer.

Making Sense of China’s Bo Xilai Earthquake

The removal of Chongqing party boss Bo Xilai from the Politburo and the announcement that his wife is under investigation for murder are a political tsunami, the likes of which have not been seen in China since the defeat of the Gang of Four shortly after Mao’s death.

To put this in perspective: Bo’s fall is the equivalent of a RFK III and George Bush Junior announcing that Richard Daley III has been banned from politics for life and his wife, Amanda Cabot Lodge-Daley, has been placed behind bars.  All the players are the sons and daughters of the Maoist elite, many survivors of the Long March. Bo had been expected to be promoted to the elite standing committee of the Politburo, where he could have become a contender for the top position as general secretary of the CPC.

The true story behind Bo’s fall will perhaps become known with the passage of time, but here is what can be pieced  together from news accounts and from the Chinese rumor mill: 

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The Tea Party Already Saved Taxpayers $300 Billion (Maybe a Half Trillion)

A “counterfactual” is an analysis of “what would have happened if.” President Obama’s claim that “the stimulus added as many as 3.3 million jobs” is the most famous example of this genre. 

Counterfactual analysis of the effects of the 2010 election on federal spending can be executed, unlike the jobs-saved analysis, on a more solid foundation with nothing more than a pocket calculator. The procedure is simple: First, we find what the Obama administration intended to spend in 2011 and 2012 on the eve of the November 2010 election (and not knowing that an electoral disaster lay in store). Second, we compare these figures with what was actually spent in 2011 and what is likely to be spent in 2012.  For example, if the administration planned to spend $3 trillion in 2011 but actually spent $2.5 trillion after the Republicans gained the House, the “counterfactual saving” for 2011 is $.5 trillion.

According to my arithmetic, the unanticipated Republican November 2010 sweep of the House with victories of fiscally-conservative freshmen saved or will save taxpayers at least $300 billion dollars for the two-year period 2011 and 2012 alone – a figure that may understate the saving by another two hundred billion.

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An Inconvenient Truth From the NYT on Hybrid and Electric Cars

The venerable New York Times has been a reliable cheer leader for electric and hybrid cars in its A “news” section. Its "Business Day" section is for readers who base business decisions on what they read. They don’t want to be bothered with political correctness – just the facts. Except for a slip here or there, there is little difference between the Times Business Day and Wall Street Journal business reporting. With its table “The Cost of Higher Fuel Economy,” the Times has blown the cover of the electric or hybrid car. They do not make economic sense even at much higher gas prices.

I see that Drudge has picked up this story. Now everyone will know the house of cards on which the Volt is built.

In its Payoff for Efficient Cars Takes Years (April 5), the Times publishes a table that shows that buying an electric or hybrid car makes little business sense as compared to buying the closest conventional model from the same manufacturer. For example, a buyer choosing between a Chevy Cruze Eco and a Volt requires 27 years to break even. The best buy appears to be  the Jetta TDI  (which sells for only $500 more than the conventional Jetta) and breaks even in a year.

It takes much too long for the fuel savings to pay for the higher sales prices – even at $5 or $6 gas. It would take $12.50 gas to make the Volt a decent buy even after the $7,500 government credit.

The Times article concludes that people buy Volts and Fiesta SFE’s because it makes them feel better and more civic minded. That is not a very solid foundation on which to build a market.

The Euro Crisis Is Over but No One Told me

Yesterday I caught the tail end of  an MSNBC commentator saying something to the effect: "Now that the Euro crisis is over...." This caught me by surprise. Yes, bankrupt Greece received a tranche of rescue funds (and was declared officially bankrupt). These funds were given on the condition that Greece stick to the austerity measures promised by its two major parties. The conservative government in Spain is apparently amending bit by bit its austerity measures. In France, the socialist candidate currently stands to beat Sarkozy in a run off election. In Spain and Portugal there are almost daily demonstrations and riots. Greek palace guards must be equipped with special eye drops for tear gas. Yes, Germany apparently agreed to increase its contribution to the stabilization fund to the outrage of German voters. Newspaper accounts inform me that few Irish are paying their property taxes.

The Euro crisis is far from over. Imagine that the two major Greek parties lose to the nationalists, communists, and other splinter parties, the Spanish conservative government dilutes austerity, and the stimulus-inclined socialists win in France. Those saying the crisis is over would be proven fools.

Obama Care’s Commissar’s Conceit

As a writer on  Soviet planning, I am struck by its parallels with Obama Care.  Both believe their planning is “scientific” and executed by “the best of the best,” who know what is best for ordinary people. Both types of planning commissars suffer Hayek’s “fatal conceit” – the belief that they can plan incredibly complex economic systems. Their “scientific” plans, however, fall apart under the weight of unintended consequences as ordinary people circumvent their genial rules and instructions.

The New York Times’ Mr. Health Care Mandate features economics professor cum scientific planner, Jonathan Gruber. After the Supremes’ brutal questioning, the Times probably felt that Obama Care needed a boost from Gruber, who, by his own admission, “knows more about this law than any other economist.” It was to Professor Gruber that the White House turned to design its new health care law.

The Times reassuringly describes Gruber as “the numbers wizard at MIT,” who has “spent decades modeling the intricacies of the health care ecosystem.”  Gruber has “brought a level of science to an issue that would otherwise be just opinion.” The Soviets reserved such praise for their planning commission, Gosplan. I draw little comfort from Professor Gruber’s scientific-planning credentials, especially when I learn “he’s the only person you can go to for that kind of thing.”  Gruber, aided by his MIT graduate student assistants, is a one-man Gosplan. Science is better served by competing ideas not by monopoly.

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