Friday, July 29, 2011

The Speech of a Grown-Up President

My Fellow Americans:

I come before you tonight as the President of all the people, Republican, Democrat, and Independent. Just as your Commander in Chief is responsible for our national defense, so must  he or she guarantee the full faith and credit of the United States of America.

We are now engaged in a national debate over the future of our country. In this debate, we have put forth a vision of a country in which its government forcefully provides for the health and welfare of our people. The opposition Party puts forward a different vision of smaller government with more self reliance of the people. This is a legitimate and valuable political debate. In our democracy such issues are resolved by the ballot box, and the voters will be called upon to decide in the looming 2012 election.

Issues such as the proper size of government, how that government will pay for itself, and its expanding role in health care and regulation are not resolved overnight. They must be carefully debated for the voter to decide.

We have engaged this debate. We can see how difficult it is to resolve, but in the mean time, we must make sure that this healthy and ongoing debate does not harm the full faith and credit of the United States of America. We cannot allow politics, in any way, to jeopardize our national creditworthiness. We must remove any fear mongering on this issue from the political discourse.

Therefore, I have instructed the Secretary of Treasury to prepare a plan that insures that due interest and principle by paid to all of our bondholders, both at home and abroad, until we reach an agreement on raising the debt limit. We have sufficient revenues incoming to make sure we will meet our debt obligations as a nation.

I have also instructed my administration that all social security checks be sent out on schedule. The American people have made their Social Security Contributions into the Social Security Trust Fund in good faith, and we must honor our obligations to them as well. The Social Security Trust Fund is solvent, as we have stated in the past. There is no reason not to meet our obligations to retirees and other recipients who rely on these checks.

The plan that the Secretary of Treasury is preparing will prioritize our needs and see us through this difficult period, if necessary, by minimizing the impact of any disruptions in government services.

In closing, let us resolve this national debate in an orderly fashion through normal political processes without scare tactics and fear mongering, which will only make things worse. As President Roosevelt said many years ago: “We have nothing to fear but fear itself.”  We have seen the harmful effects of fear in the past three years. We have had enough of it.

Monday, July 25, 2011

China's Flawed Case For One-Party Rule

In democracies, leaders who make bad and even disastrous decisions are punished at the ballot box.

Robert Lawrence Kuhn, an international investment banker, biographer, corporate strategist and paid advisor to the Chinese government, is the face of China's PR campaign for the Chinese Communist Party's (CPC) 90th anniversary. The publication of his China Daily article "China 'best served'' with CPC at the helm" as two-page advertising supplements in the New York Times and Wall Street Journal shows China's desire to legitimize itself in the eyes of the international community.

Kuhn is not the only advocate of Chinese-style one-party rule. Among those joining him are New York Times journalist Thomas Friedman and investor-philanthropist George Soros. Both praise the CPC's sound and timely decision making. Some scholars also argue that "benevolent" one-party rule is better for poor countries that cannot afford "messy" democracies at early stages of development. They point to contemporary China, South Korea and Taiwan in their early years as cases in point. (Both South Korea and Taiwan transitioned to democracy within two decades. The CPC has exercised one-party rule for more than a half century with no end in sight.)

for rest of article at

Sunday, July 24, 2011

Must We Sacrifice Social Security Checks? Whatever Became of the GAO Report on Waste and Duplication in the Federal Government?

Today’s Sunday talk shows obsessed with the possibility of default. Treasury Secretary Geithner made the rounds with doomsday warnings: The elderly will not get social security checks, the unemployed will miss unemployment benefits, and the poor will be denied medical care, if the rascally Republicans force a default on sacred government debt.

Geithner refused to spell out what steps his treasury department is taking to prepare for the possibility that a deal will not be reached in time. According to him, there are no plans. There is no prioritization. The only possibility is a disaster from which we will not recover. Surely, it is time for the recalcitrant Republicans to come to their senses.

We seem to have forgotten the May 25, 2011 GAO report entitled “Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue.” Less than two months have passed since its release. Washington, I guess, has a very short memory span.

The GAO report was prepared to meet the statutory requirement to identify federal programs, agencies, offices, and initiatives—either within departments or government-wide—that have duplicative goals or activities. In this report, the GAO identified 81 areas of opportunities for eliminating duplication, reducing operational costs, or enhancing revenue. Although the total savings are difficult to add up, they equal hundreds of billions of wasted federal dollars.

The reaction of one Senator to the report sums it up well: “At a time when our country has an unsustainable debt of $14 trillion, there simply can be no excuse for such waste, duplication, and inefficiencies.”

I include for Secretary Geithner a link to the GAO appendix (Appendix 1) that identifies federal-government waste and duplication. (

In particular, he might look at the seven agencies for the homeless, ten agencies on teacher quality, twenty four agencies on federal data, thirty one agencies for war fighter urgent needs, and five agencies for surface transportation.

I recommend to the treasury secretary that he consult this appendix to prepare for the doomsday scenario. There are more than enough cuts that can be made without jeopardizing the effectiveness of the federal government. More than one agency is already taking care of the problem. In some cases, we have more than thirty doing the same thing.

The treasury secretary is fortunate that the GAO has done his work for him. Let him cut the areas of waste and duplication so that he can send out the social security checks on time.

Saturday, July 23, 2011

Media Slant: Guess Which Newspaper Ran Which Story: Wall Street Journal or New York Times?

1. "Grand Bargain Talks Collapse"

WASHINGTON—A high-stakes effort by President Barack Obama and House Speaker John Boehner to hatch a landmark deficit reduction deal collapsed in anger Friday, sending Washington into a weekend of negotiations over how the world's top financial power can make good on its debt obligations.
In a letter to his colleagues, Mr. Boehner said he called off talks with the president. He informed Mr. Obama Friday night he planned to start negotiations with the Senate to seek what would likely be a smaller deal.
"In the end we couldn't connect. Not because of different personalities, but because of different visions for our country,

2. "Debt Ceiling Talks Collapse as Boehner Walks Out"

WASHINGTON — Negotiations over a broad deficit reduction plan collapsed in acrimony on Friday after Speaker John A. Boehner suddenly broke off talks with President Obama, raising the risk of an economy-shaking default.
A visibly angry President Obama, in a hastily scheduled White House news conference, demanded that Congressional leaders come to the White House on Saturday morning. “I want them here at 11 a.m. tomorrow,” he said. “They are going to have to explain to me how it is that we are going to avoid default.”

Answer (if you need an answer: WSJ =1, NYT =2)

Thursday, July 21, 2011

Green Fallout: RFK Jr., Wind, “Sacred Views,” and Deeper Issues

Robert F. Kennedy Jr. opposes Cape Wind’s long-stalled plan to cover 25 square miles of Nantucket Sound with 130 massive steel windmill-turbine towers. Among his objections: Wind-powered electricity costs four times more than cheap hydro power from Canada. Even worse, the windmills obstruct views of the sunrise and sunset “sacred” to Native Americans.

RFK Jr. also complains of political chicanery. He is shocked by crony capitalism, in Massachusetts no less! Regulators, he warns, are striking sweetheart deals behind tax payers and rate payers’ backs. Under the influence of “heavy-handed Cape Wind backers,” Massachusetts regulators are holding up a proposed merger of two electric companies until they agree to buy Cape Wind's power.

RFK Jr’s detractors counter that his real agenda is to preserve unobstructed views from the Kennedy compound not his professed concern about costs or “sacred views.” They also point out that his “ecologically pure” proposal to substitute cheaper Canadian hydro power requires building transmission lines through the “sacred” forests of three states. RFK Jr’s detractors also point out that Cape Wind will only raise average electricity bills by $1.25 per month. They even suggest inconsistency or worse. RFK Jr. lobbies for solar power, which shares the inconveniences of higher costs and voracious land use with wind power.

This amusing tussle among the green elite offers revealing insights and raises a series of questions about the economics and political economy of green electricity.

Question No. 1:

Why did Cape Wind propose to locate 130 steel windmill-turbines in RFK Jr.’s backyard, knowing it would raise the ire of the Kennedys, local fishermen, and tourism interests?


Wind power can only be applied in areas that have sustained winds of over 30 miles per hour.  In the United States, such areas are located in the Mid West, Northwest, Hawaii, and coastal areas (like Cape Cod). In other words, there are only a few locations suited to wind power. These areas are either already occupied, or are remote, requiring huge investments in infrastructure and transmission.  If you must have wind power in New England, off-shore Nantucket is probably your best bet at least that is Cape Wind’s conclusion, not shared by RFK Jr.

Question No. 2:

The most popular internet postings claim that wind power is almost competitive with coal powered electricity. Why are RFK’s cost figures so high for wind-powered electricity?


Engineering estimates show that offshore wind power is twice as expensive as onshore wind power. If political mandates or environmentalist pressure dictate the use of wind power in a state like Massachusetts, there are no possible onshore locations. There is no choice but to locate offshore with the associated capital costs and high prices.

Question No. 3:

Why is so much offshore land (25 square miles) land required?


An underappreciated fact is the land intensity of wind (and solar) power.  Under the best of conditions (Offshore Horns Rev Denmark), it takes 13 square miles to produce one twh of electricity. With such a ratio, it would take more than one third of Germany’s land mass to produce Germany’s annual electricity needs (assuming the impossible that Germany could find enough land with high wind intensity).

Question No. 4:

If the cost differences are so great, how is it that Massachusetts electricity consumers will see only minor hikes in their bills? (I imagine Mass households still will not welcome the $1.25 per month increase).


The American Recovery and Reinvestment Act (ARRA) of 2009 provided a cornucopia of benefits and subsidies and continue a long tradition of preferential treatment of green electricity. Among the many benefits is a 2.2 cent subsidy for each kwh produced by wind. Below the surface fester a wide range of other promotions and benefits. These subsidies and benefits transfer costs of wind power from the consumer to the unaware tax payer. The $1.25 price increase, however, confirms the very high price of wind power, despite all the subsidies. Wind power is just a tiny percentage of the total.

Question No. 5:

Are low prices to consumers a good idea?


Economics teaches that prices should reflect costs. If wind power is more expensive, the price to consumers should reflect this fact and send proper signals of scarcity to consumers to use less electricity. These direct and hidden subsidies mask the true resource costs of wind power.

Question No. 6:

Is Cape Wind an example of crony capitalism as RFK Jr. claims?


Of course.  In 2009, the Wind Power Energy Association spent $5 million on lobbying. This figure is trivial in comparison to the lobbying, political influence, and crony capitalism of GE, the major wind turbine manufacturer, and other fat cats of the “Big Wind Complex.”  Note that Massachusetts regulators (and probably Washington’s) are also party to the conspiracy. By holding the merger of the two electric-power companies hostage to Cape Wind, they are forcing them to buy green electricity they do not want.

Question No. 7:

Is RFK Jr. being inconsistent or hypocritical?

According to his detractors, RFK Jr. lobbies for solar power, which has all the Cape Wind disadvantages about which he complains. According to the textbook definition, the hypocrite label seems to fit.

Question No 8:

What is the biggest lesson to take away?


Everything speaks against the state of Massachusetts as a site for significant wind power generation. Na├»ve idealists and special interests decided that the state should have wind power generation. The result is high-cost power that adversely affects other activities, such as tourism, fishing, and the unobstructed views from the Kennedy compound. But at least the people of Massachusetts can have a warm and fuzzy feeling that they are saving the planet, G.E. can sell more of its wind turbines, and Cape Wind’s backers can make some big bucks.


Robert F. Kennedy JR. “Nantucket's Wind Power Rip-off,” Wall Street Journal, July 18, 2011.


Cape Wind’s Response to Robert F. Kennedy Jr.  Op Ed in Wall Street Journal, July 18, 2011.

Thursday, July 14, 2011

A “Serious” Jobs Program: Germany’s Haartz IV (Will Obama Repeat the Elder Bush’s Mistake?)

I am taken aback, to say the least, that I have yet to see a “serious” jobs program offered for our widely proclaimed “jobs crisis.”  We hear mainly Keynesian rhetoric and the wrong policy proposals: Keynesians warn we must increase aggregate demand so that there are more jobs to make the products in greater demand. Also we must continue unemployment insurance to bolster aggregate demand, and, by the way, the unemployed spend every penny, so we get a larger multiplier. On the other side, we get good advice: Economic growth creates jobs; so we must craft a pro-growth fiscal policy which in the long run will create jobs. This position is correct but it offers long-term rather than short term solutions.

Economics 101 texts provide an alternate view of unemployment that has been  overlooked in the current debate. It began with the natural rate of unemployment work of Milton Friedman and Edmund Phelps. They suggested we consider employment and unemployment as yet another of our economic decisions. In the job market, we have people looking for jobs (even those currently employed look for better jobs) and we have jobs being offered. The labor market matches people to jobs via a search process in which employers and job searchers do not have perfect information.

How quickly people find jobs depends on costs and benefits, just like any other economic decision. A longer search might land me a better job than the choices I have right now.  If my spouse is working, the costs of continuing to search are lower. If I have generous unemployment benefits, the costs of remaining unemployed are lower.

This brings me to unemployment benefits and unemployment. In the current debate, the extension of unemployment benefits is perversely presented as a “pro jobs” program. In reality, it is an anti-jobs program. Empirical studies have shown that the unemployed are most likely to accept jobs on the eve of the expiration of unemployment benefits. If policy makers want the unemployment rate to drop, they should not extend unemployment benefits.

A case in point is Germany after 2005, when Germany began to reduce benefits associated with the state of unemployment. In Germany, the unemployment rate fell from 11 percent to slightly over six percent, while unemployment rates were rising elsewhere.

In Germany, the so-called Haartz IV program that was passed in  2004 called for the reduction of unemployment benefits for the long-term unemployed for whom unemployment benefits and “social help” had become an entitlement. Since 2004, unemployment benefits have fallen gradually and new types of jobs have been created that lower the costs of employment to German employers. In 2011, additional adjustments to Haartz IV were made to ensure that people who worked earned more than those who did not. The Haartz IV legislation was passed despite fierce opposition from the SPD, but it is largely credited for the new German miracle – a growing economy located in the heart of Europe with falling unemployment during an anemic world economic recovery.

The U.S. is about to begin its own Haartz IV experiment. Extended unemployment benefits are set to expire, earlier in some states than others. We can therefore capture the effects of expiring unemployment benefits at different times and in different places.  If the search theory of unemployment is correct, we should see a falling unemployment rate first in those states in which unemployment benefits expire first.

The Haartz IV program in Germany also de facto reduced minimum wages. It introduced different types of jobs, one of them called “mini jobs,” that, in effect, set aside minimum wage standards. Employers were encouraged to hire by the offer of low-wage employees.

Currently, the majority of forecasters foresee a high rate of unemployment rate in the United States on Election Day. If the administration wishes to see it lower, they can do two things: First, make sure that unemployment benefit eligibility is not further extended. Second, they must lower the minimum wage, especially for youths.

The unemployment rate measures whether people have jobs or not. It does not measure the quality of jobs. In Germany, the main reason for the falling unemployment rate is the fact that people, who earlier would not have taken jobs below their expectations, now do. The same will be true for the United States. All we will see will be a falling unemployment rate.

George H.W. Bush was bullied by Congress into extending unemployment benefits in the run up to his reelection campaign against Bill Clinton. Although the unemployment rate was dropping on election day, it was still too high. It gave Clinton the opening to claim, almost comically,  “the worst economy since the Great Depression.”

Tuesday, July 12, 2011

American Labor Unions: Underpaid, Overproductive Or Overpaid?

None of the common arguments for labor unions hold water.

Let me begin with three quotations used in defense of unions and of higher union wages:
Our entire economic system rests on the principle of paying someone less than his or her labor is worth.
There are reasons (unionized) workers in the North get $28 an hour while down in the South they get $14 or even $10. Adam Smith could explain it: "productivity," "skill level," "quality

read further at

Sunday, July 10, 2011

Putin Retakes the Commanding Heights “Communism is Soviet power plus electrification” Lenin

Nothing symbolizes Russia’s economic problems better than its creaky electricity network.  Russia’s electricity generation and transmission capacity was already stretched to its limits during the Soviet period. Most equipment dates back to the electrification drive of the 1930s. Electricity supply is unreliable. Few customers pay enough to cover costs. There is no real regulatory framework.

With the collapse of the USSR, the state-owned Unified Energy System (UES) succeeded the Ministry of Electricity. Prior to 2003, there was virtually no domestic investment in the electricity system. Electricity remained a political football. Regional and municipal governments sold electricity below costs or gave it away free to households. Providers covered their costs, if they were lucky. There were no funds in national or regional budgets for investment in electricity infrastructure.

Russian reformers, headed by UES chairman Anatoly Chubais, saw the electricity system’s salvation in privatization and competition. They peddled promises of market liberalization, deregulation and government assurances to bring in Western investment.

From 2003 to 2008, the government broke up UES and drew in billions of dollars in foreign investment to modernize the industry and create a competitive market for power. The Russian state sold generating and transmission assets to Russian private companies and to European energy giants, such as E.ON,  Enel SpA and Fortum Oyj. The primary concern of investors was whether the Russian government would really allow rate increases to pay off the investment, but these deals were not negotiated in a back room. E.ON’s six billion dollar investment in the Urals and Siberian electricity generating company OGK-4 was signed in the presence of Vladimir Putin and Angela Merkel.  

I can imagine the shock of E.ON and other Western investors to learn that on July 7   Russia announced its intention to de facto re-nationalize the electricity market. Russia’s natural gas giant Gazprom and “privately-held” IES Holding agreed to combine their electricity assets. The new company will supply 70 percent of Russia’s electricity.

The majority shareholder of Gazprom is the Russian government. The Kremlin-friendly billionaire Viktor Vekselberg owns IES. In addition to Gazprom and IES, InterRAO, a state-controlled electricity trader created during privatization, has also been buying power assets to bring more of the industry under state control.

In the announcement of the Gazprom-IES deal, Veksleberg stated that the new company could save billions because “it can buy natural gas cheap from Gazprom.” In other words, over seventy percent of Russian electricity will be produced by a monopoly that uses subsidized natural gas to produce at much lower costs than competitors.

So much for increased competition  and deregulation of Russia’s electricity market. This announcement should send Western investors scrambling for the exit.

As in oil and gas, Putin has recaptured the “commanding heights” of Russian electricity for the Russian state. This is not good news for the Russian economy. It is another slap in the face for Western investors.

Nanny Steven Chu: “We Are Taking Away a Choice that Lets You Waste Your Own Money!”

Steven Chu was a co-winner of the Nobel Prize in Physics in 1997. That he developed methods to cool and trap atoms with laser light does not mean he understands economics, consumer choice, or politics. A Nobel Prize does not even guarantee common sense. Often it guarantees the opposite.

In a Friday conference call with reporters, Chu argued against a House bill that would repeal a 2007 federal law outlawing incandescent bulbs. Many Americans object to being told that must buy the fluorescent, halogen, and LED bulbs starting in January of 2012 as dictated by federal law.

Chu argued the more-efficient bulbs mandated by Congress save consumers money over the bulb’s life even though the up-front price is higher. Chu defended Congress’s right to dictate what kind of light bulb Americans buy because:

“We are taking away a choice that continues to let people waste their own money."

There are many things that cost more up front and “pay for themselves” in terms of longer life or lower operating costs. Think of insulation which costs a bundle but lowers utility bills, or electric cars that costs $10,000 more but save on gas. So far, we have allowed the people themselves to decide:  More money now, but less later? Or: Less money now and more later? That is my or your decision.

The choice of light bulb is a classic problem of economic choice over time. Consumers, who place a high value on money now, do not buy insulation, electric cars, or fluorescent lights. We have different time preferences. People who pass on insulation, electric cars and fluorescent light bulbs are by no means wasting their money. They are making choices that are perfectly rational for them.

This basic point of economics escapes Nobel laureate Chu.

Which light bulb is better for you is not an easy calculation. The compact fluorescent costs about six times more and contains hazardous mercury, but lasts six times longer and saves energy. There are also matters of taste and aesthetics. Some will find the new light bulb shape ugly. Others will not like the light it emits, but there will no longer be any choice. Just like we lost Freon in 1995, we will lose Edison’s light bulb in 2012.

Chu says the state should make the choice of light bulbs for you, but why should he stop there? Why not insulation or which car to buy?

Welcome to the Nanny state.

PS I cite below the EPA's recommednations for cleaning up a broken mercury bulb:

This page presents only the most important steps to reduce exposure to mercury vapor from a broken bulb.  View the detailed recommendations.

Before cleanup 

  • Have people and pets leave the room.
  • Air out the room for 5-10 minutes by opening a window or door to the outdoor environment. 
  • Shut off the central forced air heating/air-conditioning system, if you have one.
  • Collect materials needed to clean up broken bulb: 
    • stiff paper or cardboard;
    • sticky tape;
    • damp paper towels or disposable wet wipes (for hard surfaces); and
    • a glass jar with a metal lid or a sealable plastic bag.

During cleanup

  • Be thorough in collecting broken glass and visible powder.
  • Place cleanup materials in a sealable container.

After cleanup

  • Promptly place all bulb debris and cleanup materials outdoors in a trash container or protected area until materials can be disposed of properly. Avoid leaving any bulb fragments or cleanup materials indoors.
  • If practical, continue to air out the room where the bulb was broken and leave the heating/air conditioning system shut off for several hours.

Thursday, July 7, 2011

How Russia is Ruled: Inights from the BP Failure

The failure of BP’s venture with Rosneft provides tantalizing hints about how Russia is governed and its 2012 Election. BP joins with Shell, Exxon, and other major international energy companies in chalking up yet another failure in Russia’s lawless investment climate. BP should have known better after losing management control of its TNK-BP venture to its Russian AAR partners. But this time, BP felt it had the right people on its side.

When BP signed with the Russian state oil company, Rosneft, to develop offshore arctic reserves, I expected this would prove to be yet another misadventure. But BP thought this deal would be different. It was negotiated with Putin’s right-hand man (Igor Sechin) and blessed by Putin himself at the signing ceremony. There was the small matter of an exclusivity agreement with BP’s billionaire-Russian partners in its TNK-BP venture, but BP thought that matter would be “taken care of” by the Russian side (a la Khodorkovsky?). Surely the Russian state would back a deal that could rejuvenate Russia’s lagging energy production and fill state coffers.

The oligarchs behind AAR -- Mikhail Fridman of Alfa Group, Len Blavatnik of Access Industries, and  Viktor Vekselberg of  Renova--  proved too formidable for BP. They also brought to the table an unusual weapon for Russian companies – a legal position that carried weight in international courts.  

Putin did not take care of the Russian side. The AAR partners took BP to court outside of Russia and won an injunction that quashed the whole deal. Fridman, Veksleberg, and Blavatnik did offer BP a “deal” early on  -- that they take half of BP’s half in the arctic venture with Rosneft.  BP first boycotted the meeting called to vote on this proposal and then vetoed it outright.

My first take was that “the Russian side” had set BP up from the very beginning. AAR, Sechin and Putin had agreed to squeeze BP’s share of the deal down to a quarter, leaving one half for Rosneft and  one quarter for the three billionaires. Maybe one quarter would be enough for a BP teetering in its recovery from its Gulf  oil spill disaster.

I was wrong. It appears there is no “Russian side.” The deal is dead. Sechin is mad  at the three billionaires and is threatening them. Rosneft has to find another partner, but what major oil company would get involved in such a mess now? BP is not out of the woods. Rosneft could sue it for damages resulting from the failed deal. This is clearly a deal gone bad for all parties. There are no winners – only losers.

BP’s saga gives us insights into how Putin’s Russia is run. Instead of  well-defined hierarchical relationships, the Russian system of governance is  comprised of swirling forces, competing against each other. Equilibrium is never reached. There are never any final victories over competitors. According to this interpretation, Russia is far from a “KGB state” of former KGB officials and allied oligarchs, who obey the “Master” Putin. Putin is the most important player, but one of many.

Monday, July 4, 2011

“We Can Make the Cars, but Will People Buy Them?” Or: The State Cannot Mandate Average Fuel Efficiency Standards

The Obama administration proposes to raise fuel efficiency to an average of 56.2. miles per gallon by 2025, putting the U.S. on par with Europe. If achieved, average 2025 fuel efficiency would double its current level. Supporters claim the higher standards will save gasoline, reduce global warming, and cut oil imports.

The administration neglects one important fact: Europe achieves higher average fuel efficiency because its gas prices are more than twice ours. Europe’s astronomical gas prices, not EU standards, cause Europeans to purchase fuel-efficient cars.

For the U.S. to achieve average European fuel efficiency, we must have European-style gas prices!

Auto makers understand this point very well. Said one auto executive: “We can build these vehicles. The question is will consumers buy them?”

As long as we are allowed a free choice of vehicles, average fuel efficiency depends on the price of gas. Currently, gas averages $8 per gallon in Europe. In the U.S., it is slightly under $4 per gallon, and we think that is very high.  Europeans have had to pay more than twice what we pay in the United States for gas for a very long time. Their purchases of fuel-efficient cars reflect the higher gas prices.

Average mpg equals the share of large cars times their mpg plus the share of small cars times their mpg. As long as US gas is cheap relative to Europe, we’ll purchase larger cars and have lower average mpg, even if we are given exactly the same choice of cars.

As far as I see it, we can achieve European average mpg by 2025 in three ways:

1)      Raise our gas prices to European levels, which would be more than a doubling from today’s high prices.
2)      Take away freedom of choice by outlawing certain low-efficiency vehicles.
3)      Bribe people to buy fuel efficient automobiles by means of subsidies and other incentives paid for by taxpayers and penalize purchasers of low-efficiency vehicles by higher taxes and other penalties.

As I write this piece I am sitting outdoors at a Starbucks in Menlo Park, California waiting for my wife to waive to me that she has finished shopping at Safeway across the way.  She can see me and I her only if non-SUVs are parked curbside. We do this every week, and I must report it is a rare occasion when our view is not blocked by a solid row of SUVs.

To rephrase the auto executive: We can make them but we can’t force people to buy them, even in Northern California.

Sunday, July 3, 2011


My url has changed from “”


I am reposting as few posts that got caught in the transition

Saturday, July 2, 2011

Bank of Moscow Bailout/Takeover: All You Need to Know About Crony Capitalism

Russian bank regulators and state-controlled bank VTB Group announced a $14 billion loan (at half a percent interest) to take effect after VTB boosts its share of Bank of Moscow to 75%. According to regulators, the bailout of Bank of Moscow was needed because it made more than half of its loans to its own businesses, including to a real-estate company of Elena Baturina, the billionaire wife of the recently fired Moscow mayor. No one outside of a narrow circle knew the bank’s loan portfolio because former Mayor Yuri Luzhkov prevented anyone from asking "unwelcome questions." The results shown to investors and the central bank, according to one banking official, were pure fraud."

In an understatement, a bank analyst stated: "We cannot rule out problems in many banks."

Bank of Moscow’s former head expressed surprise (after fleeing to safety abroad) at the size of the state aid to VTF and cited “political motivation’ as the real reason for the takeover and bailout. After all, he conducted Bank of Moscow business like any other bank.

This example shows crony capitalism in action. It is repeated daily in China, Brazil, Kazakhstan, Nigeria, and the majority of countries around the globe. A non-crony banking system is the exception rather than the rule.

Crony banking works as follows: A politician or a politically-connected figure gains control of a bank. The bank makes “friendly loans” at low rates of interest to friends, relatives, connected businesses, and to persons from whom they need business or political favors. The borrowers either earn low returns (after sharing the loan proceeds with the banker) or are unable to repay, at which time they receive another loan. If necessary, the crony bank receives new capital from municipal, state, or national authorities (that is from taxpayers) to continue the Ponzi scheme. All the while, credit worthy businesses sit on the sidelines deprived of loans.

The current round of the Ponzi scheme ends when the politician-banker falls out of favor, is fired, and becomes a convenient scapegoat. At that point, banking officials and politicians express surprise and dismay that such things were going on under their very noses. They bring in new owners, currently in political favor, to start the Ponzi scheme over again. They lend to friends, relatives, and patrons, not to real businesses in real need of finance.

Every Moscow resident knew what former Mayor Luzhkov and his wife were up to. In fact, he was popular. At least he gave a little of what he stole back to Moscow.  They probably had some feelings of regret when Putin and Medvedev decided it was time for him to go.

The story is not about Luzhkov and his bank-for-himself-and-friends. It is about how crony capitalism can ruin an economy. In an economy that is starved for capital, crony capitalism directs capital to projects that have low or perhaps no return and most capital ends up in the pockets of cronies. There is no way an economy can grow and raise its standard of living under these circumstances.

Has the New York Times Aided and Abetted A Crime? Environmentalists, Goat Farmers, and Market Manipulators

When I posted my June 30 article: “Why the NYT-Liberal Assault on Shale Gas? How About the Volt?”, I interpreted the NYT’s attack on natural gas fracking as a political diversion. It was time to hit “Big energy” again, only this time, it was “Big Gas.” I wondered why the NYT was so worried about investors in oil shale projects, in low energy prices, and black churches that had been duped by promoters.

I took the series of NYT articles seriously, read the e-mails quoted,  and wrote about the natural uncertainty associated with new technologies. I was shocked, to say the least, to read Jon Entine’s article, “Natural Gas ‘Bubble’ Report: Market Tinkering or Shoddy Reporting?”

In a real example of investigative journalism, Entine discovered that, of the two “named” NYT sources, one is an investment advisor (and long-time critic of gas fracking), listed as a “geologist,” whose firm and clients possibly stood to gain from speculation against shale oil stocks.

The other quoted sources, who the NYT lists as  an “Advisor” to the Dallas Fed, is a goat dairy farmer (on some citizen advisory board of the Dallas Fed) who has tangled with a natural gas company, accusing it of causing environmental damage to her farm. The NYT failed to report this as well as her membership on the steering committee of the Oil and Gas Accountability Project at  Earthworks, an anti-shale-gas advocacy group. It appears she lectures against gas fracking around the country.

The NYT’s sources are unnamed, but judging from their excerpted e-mails, they are simply stating the obvious, that this is a new technology and we do not know what the future will bring. I address in my post the e-mails that speak to the difficulty of estimating reserves in the presence of a new technology. We cannot know economically-recoverable reserves without knowing future prices, which we do not.

Anti-gas fracking democrat members of Congress have called for hearings. With the disclosures in Entine’s article, it now appears that hearings are necessary. The New York Times should be one of the first witnesses to testify given the possibility of market manipulation.


For Entine’s article, see:

For my earlier post, see:


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Blago's Motor Mouth Got Him Caught. Others Know What Not to Say

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.

Blago seems to have learned one lesson. As he said on the courthouse steps after the verdict: I should learn ot keep my mouth shut.

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.

No Shock in Thomas Friedman’s Shock Therapy

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.

China’s Red Campaign: Back to Mao?

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.   

Friday, July 1, 2011

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Chavez’s Cancer: Why Dictators Do not Name Successors

Hugo Chavez’s announcement that he has cancer will terminate his ascent towards dictatorship even if he survives. Dictators cannot appear to be mortal. They cannot name successors, unless the successor is a personal extension, such as a son.

Preparing the groundwork for a successor-son takes time and absolute power as the Kim dynasty in North Korea can attest. The more common approach is to name no successor and let the fight begin after your death.

Stalin wrote the game book on modern dictatorship. He removed immediately, and usually permanently, anyone even rumored as his successor. Stalin understood that dictator remains in power only as long as his subordinates do not coalesce into a coalition strong enough to unseat him.

The naming of a successor facilitates the formation of a coalition around the successor and that is the end of the dictator.

There is one other factor: Dictators do not have dynamic and forceful deputies around them. Instead, they prefer Yes Men. Nonentities are less likely to attract coalition followers. In Stalin’s case, the result was a USSR run by party hacks for almost fifty years.

In the Soviet and Chinese communist cases, the party dictatorship survived the deaths of their “Great Leaders” (Lenin, Stalin, Mao) because of its dominant position. But in each case, a power struggle ensued within the party. Power struggles fought without rules are the consequence of the dying leader not specifying a successor. Only Lenin wrote a political testament, but it concluded that only he was suited to run the country.

Chavez’s run towards a personal dictatorship is over. He has not built a strong party. He is surrounded by non-entities, who have already begun jockeying to replace him. Worst of all: Unlike Lenin, Stalin, and Mao, he has not had time to eliminate other parties and elections. The coming election will either pit an ailing Chavez or a Chavez non-entity against a real opponent in the midst of a collapsing economy.

There is again reason to be bullish on Venezuela.