Monday, October 31, 2011

More Advice for Obama from a Soviet Planner

To: Paul Gregory
From: Alexander Vaibakov
Former Head of Technology Planning
Gosplan USSR

October 31, 2011

Dear Mr. Gregory:

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

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

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

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

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

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

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

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

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

Colonel Gaddafi's Lesson for Dictators

Joseph Stalin wrote the playbook for dictators. His rules remain as current today as when he developed them in the 1930s. Clearly, Colonel Gaddafi could not follow them in full. If so, he’d be alive today, but some matters were outside of his control. Bashar Assad must be feverishly reviewing Gaddafi’s last months to make sure he does not end up with a bullet to the head himself.
As political scientist Beuno de la Mesquita has shown, dictatorial regimes have long lives. The overthrow of a dictator is actually a rare event. It is even rarer for dictators unconstrained by morality or convention.

Tuesday, October 25, 2011

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

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

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

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

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

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

Sunday, October 23, 2011

Of Course They Shot Gaddafi and They Should Have

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

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

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

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

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

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

Friday, October 21, 2011

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

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

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

Obama does not understand adverse selection

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

Sunday, October 16, 2011

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

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

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

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

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

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

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

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

Thursday, October 13, 2011

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

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

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

What does the Morgenpost not like about Cain?

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

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

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

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

Wednesday, October 12, 2011

Thomas Sargent, Rational Expectations and The Keynesian Consensus

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

Tuesday, October 11, 2011

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

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

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

Monday, October 10, 2011

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

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

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

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

Sunday, October 9, 2011

Advice to Obama's DOE From a Former Soviet Planner

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

go to

Medvedev is “Dizzy From Success”?

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

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

Thursday, October 6, 2011

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

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

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

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

Monday, October 3, 2011

State Capitalism, Hubris, And What China Owes Us

Times have changed. A decade back, the United States lectured the rest of the world on the advantages of democracy and its private enterprise system. Now, countries like China and Russia tout their “benevolent” one-party system and state capitalism as growth engines that correct the mistakes of the free market. Russia’s Putin characterizes the U.S. as a “parasite that lives off the global market.”
China, in a show of Schadenfreude, lectures us to get our economic house in order before we ruin everyone else. Domestic critics bemoan the pathologies of unfettered markets and political stalemate and point to China as a model for us.
I’d like to ask: Who is living off of whom?

Sunday, October 2, 2011

The European Mess (Berlin Journal #2)

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

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

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

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

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

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

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

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

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