If You Love or Hate My Blog, You’ll Love My “Politics, Murder and Love in Stalin’s Kremlin”

Let me engage in some crass advertising, probably in violation of all rules of blogging etiquette. Readers may have noted that I do not worry much about such things.

Although I write on economic and political issues, my real specialty is Russia. My “Politics, Murder, and Love in Stalin’s Kremlin: The Story of Nikolai Bukharin and Anna Larina” tells one of the great love stories and political intrigues of the 20th century. It uses letters, transcripts and eyewitness to tell of Bukharin and Larina’s losing battle to Stalin in their own words. Arthur Koestler’s Darkness at Noon is a fictionalized version of Bukharin’s trial. Mine is the true account.

“Politics, Murder and Love in Stalin’s Kremlin is a great buy and a short and easy read.

Buy it at Amazon where it has a five-star rating:

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Holder’s New Bluster: The Fraud Task Force on Gas Prices

Strapped American families can rest easy. On Thursday April 21, Attorney General Eric Holder Attorney rode to our rescue with the following announcement:

“Rapidly rising gasoline prices are pinching the pockets of consumers across the country. We will be vigilant in monitoring the oil and gas markets for any wrongdoing so that consumers can be confident they are not paying higher prices as a result of illegal activity. If illegal conduct is responsible for increasing gas prices, state and federal authorities should take swift action.”

Holder’s new Financial Fraud Enforcement Task Force Working Group (acronym FFETFWG) will protect us from the sinister forces that raise gas prices by “monitoring oil and gas markets for potential violations of criminal or civil laws to safeguard against unlawful consumer harm.”

I guess Uncle Sam is in the business of deciding what is a “just” price of gas!

Holder’s announcement sent me to Google to download the last 120 months of data on U.S. crude oil and gas prices. As a patriot, I should assist him in this worthy investigation of gas price gouging.

Here is what I learned from my 30-minute investigation:

1) Gas prices are determined about 72 percent by oil prices. On average, for every plus or minus dollar change in crude, the gas price changes plus or minus 2.5 cents.

2) Factors other than crude prices, such as weather, economic conditions, consumer hoarding, expectations, and random factors explain the other 28 percent. How in the world will Holder’s agents sort out the fraud they have been charged to find from these other factors? I do not envy them in their task.

3) In some cases, a dollar increase in crude raises the gas price by more than 2.5 cents, and a dollar drop in crude lowers the gas price by less than 2.5 cents. (Aha: We seem to have evidence of chicanery!) But in almost as many cases, the rascally oil giants raise the gas price by less than 2.5 cents and lower the gas price by more than 2.5 cents. (I guess they do this to throw the Holder Fraud detectives off their scent).

My main finding is that the Holder fraud-seekers should expand their portfolio to investigate “cases of the unlawful and artificial holding down of retail gas prices.”

If “Big Oil” does not always pass crude price increases fully on to the gas consumer, Holder’s agents should track down cases of “unlawful” holding down of gas prices for the purpose of discouraging alternative green fuels. They could perhaps find some Saudi Sheikhs behind this sinister plot. We might as well throw this into the mix as well.

Attorney Generals should do what Attorney Generals are supposed to do. There is no point to his Fraud Task Force other than to intimidate, to score political points, and to shakedown campaign contributions.

I was Right All Along: BP ¼, Russia ¾

In my March 4 posting, I wrote that BP was about to be rolled by Russia again. On Friday, the debacle took place.

BP’s share swap deal with Russia’s national oil company Rosneft was supposed to give it a half interest in the development of rich Arctic offshore reserves. BP’s billionaire partners in its ongoing TNK-BP venture objected. BP had signed an exclusive agreement with them, and an arbitration court agreed. To go along, the billionaire partners demanded half of BP’s half. BP vetoed that offer at a TNK-BP board meeting in early March. BP had expected Putin to take care of the billionaires’ objections. He did not. Putting Khodorkovsky in jail was one thing, but the TNK billionaires are his friends.

BP now understands that what they were offered in early March is the best deal they will get.

My March 4 prediction was that BP would end up with a quarter of the deal (instead of a half) and Russia (Putin and the billionaires) would get the three quarters they wanted.

Low and behold, BP announced on Friday, May 6, that it would hand the deal over to TNK-BP (thereby reducing its share to ¼) with the hope that its Russian partner, Rossneft, would agree. Rossneft greeted BP’s offering with grumbling. Maybe BP will get ¼, but they will have to make further concessions to get even that.

This outcome will not endear Robert Dudley to his shareholders, who accuse him rightly of misreading Russian politics. It is also another cautionary tale about doing business in Russia.

Tax Preferences and Idle Chatter: Should We Tax “Big Oil” or “Big Hollywood”? Why Everyone Gets Breaks Except the People

"When oil companies are making huge profits and you're struggling at the pump, and we're scouring the federal budget for spending we can afford to do without, these tax giveaways aren't right." They aren't smart. And we need to end them. (Barack Obama, Weekly Radio Address)

Let me begin with some background information:

The United States Internal Revenue Code is 44,000 pages, 5.5 million words, and has 721 different forms. A nightmare of unmatched complexity, it conceals, in undecipherable language, tens of thousands of favors, preferences, and influence buying, bordering on corruption.

Many provisions favor specific individuals, organizations, or companies. They are hidden deep without any attempt to justify them (Example: breaks for upgrading a motor sport race track). Others are justified as promoting green energy, reducing unemployment, encouraging home ownership, supporting research and development, or any other social engineering goal that sounds good.

Our complicated tax code breeds approximately 40,000 registered lobbyists at the federal and state level. Washington lobbyists spend $4 billion per year, much of it devoted to obtaining favorable tax treatment. Lobbyists either aim for specific tax breaks for themselves or form into interest groups, such as the National Association of Realtors, Chamber of Commerce, the NCAA, or the Service Employees International Union, to push for tax breaks.

House and Senate candidates combined receive one billion dollars in campaign contributions. The average costs of defending a House or Senate seat are $1.5 and $10 million, respectively. A seat on the House Ways and Means Committee costs more. After all, this committee drafts tax legislation.

All talk of tax reform is idle chatter. Why should we change a system from which everyone except John Q. Public benefits? The rules of the game are clear to the players: Individuals, businesses, universities, sports associations, labor unions, and any other organization that can hire good lobbyists get their tax breaks. Members of Congress and the President receive generous campaign contributions. Incumbents get more than challengers. The public has no way of knowing or understanding the horse trading going on. Everyone is happy.

The gains are huge: Tax breaks for specific businesses, organizations, and businesses are estimated to save $100 billion in tax obligations. Lobbying costs and campaign contributions are no more than $5 billion. What person or business can pass up a 2000 percent return? Politicians, who can hand out such windfalls (for windmills), are also happy. They get more than enough in campaign contributions. Of course, there is no quid pro quo.

Now let’s turn to tax breaks for “Big Oil” as the current political discussion is being framed. These breaks for greedy capitalists with soaring profits, we are told, deprive our depleted treasury of $5 billion. Isn’t it time they pay their fair share? This is a rare case where the Democrat Party is itching to put “Big Oil” tax breaks to a vote. Any Senator who votes in favor of “Big Oil” will be exposed as a corrupt stooge.

Such posturing is the equivalent of the bribe taker accusing the bribe giver of giving him a bribe!

If we dig a little deeper into the tax code, we learn that “Big Oil” tax breaks apply, in most cases, to other industries, not just to “Big Oil” as we are led to think. These other beneficiaries are not under attack. I guess they are either less successful or less greedy.

For example:

1) Depletion allowances apply generally to industries with finite supplies of natural resources above and below ground. They even apply to timber, which I thought was a renewable resource.

2) Intangible drilling costs allow oil companies to write off in one year costs associated with drilling, such as building roads and transporting supplies. Many other companies and industries have similar provisions (See Hollywood below).

3) The sheltering of taxes on profits earned abroad applies to all companies with international operations, not just to “Big Oil.” Microsoft may save as much from this provision as “Big Oil,” but Microsoft is not a target at this moment. Maybe later.

After reading Sec. 181 of the IRS code on “Treatment of Certain Qualified Film and Television Productions,” I became more concerned about “Big Hollywood” than about “Big Oil.” It turns out the film makers can write off the entire costs of film or television productions up to $15 million. In a deft touch of social engineering, I further learn that film makers can write off more if the costs are incurred in a low-income community (under section 4-D) or an isolated area of distress (designated by the Delta Regional Authority under section 20009aa-1 of Title 7). The latter must be a pay off to New Orleans. I can also imagine an IRS agent tracking film crews through treacherous slums to make sure they are spending their money in the hood.

Our poor politicians must constantly make such tough choices: Should we cancel the tax privileges of “Big Oil” or of “Big Hollywood”? Which will sell better to the public, who have little idea of what is going on. Right now “Big Oil” is a better target.

Let us see which politicians have a backbone. I imagine few.

Our tax code would be a joke if this were not such serious business. We berate less civilized countries for their lack of a rule of law. We also lack a rule of law with respect to our own tax system, if politicians can arbitrarily single out one industry or one company as a political scapegoat. In such a situation, who knows who will be next.

These problems would go away with a flat tax, but we will never have a flat tax in the United States. Politicians would have to give up much of their power over our lives.

Originally published at WorldNetDaily May 6, 2011 http://www.wnd.com/index.php?fa=PAGE.view&pageId=295377

Dissecting Chinese Growth: How Long Will It Continue?

Academic specialists know a great deal, but they are not good at sharing their results with general readers. What we know about Chinese growth is a case in point.

There is practically no question more important than the future of Chinese growth. If it continues unabated for another decade, its GDP would be fifty percent larger than the U.S., and its per capita GDP would be a third. If growth continued two decades, its GDP would be two and a half times ours, and its per capita GDP would be half. China would be a dominant super power, its people affluent, and an economic powerhouse. As some have argued, affluence may bring with it democracy.

Other countries – Japan, the USSR, Germany – had long episodes of fast growth that came to an end. They were all high savers, but not to the extremes of China today. We all know that China’s growth spurt must eventually end, but it is vitally important to know when.

We can apply growth accounting to explain Chinese growth. (I’ll try to make it simple but the results are important).

Growth accounting divides growth into three sources:

1) The growth of capital and labor,
2) Technological progress, which allows us to produce more from the same inputs, and
3) Reallocation of inputs from less to more productive activities.

Since 1978, China’s output and capital grew at exceptional rates ((9% and 12%, respectively), labor at a more normal (but fast) 2%. According to the growth-accounting formula, some two thirds of Chinese growth is due to fast labor and capital growth. The remaining one third is technological progress.

Japan (1953-1985) is the closest parallel to China. Japan’s output and capital grew 7% and 9%, respectively, and labor at 1%. Less than half of Japan’s growth was from labor and capital; more than half was from technological progress.

Germany, in the early postwar years grew at 7%, capital at 6% and more than 60% of its growth was from technological progress.

China is underperforming Japan and Germany in percentage terms in marshalling new technologies for growth, but its performance is nonetheless impressive.

Japan’s and Germany’s huge productivity growth in the early postwar period was due to the vast technology backlog that had arisen during the war. China also benefits from a backlog, not due to war but to its earlier isolation. Like Japan and Germany, its growth will drop as the backlog is worked off. China was relatively more backward than Germany or Japan when each began their move; it may take longer for China to work off the backlog.

What do such figures tell us about the future, especially in light of the newly released census results?

First, China’s labor force growth has stopped for all practical purposes. This factor should reduce China’s growth by one percentage point, still leaving enough room for continued rapid growth.

Second, urban and rural populations have reached parity and labor migration appears to have peaked. With about one fifth of Chinese productivity growth due to labor reallocation, we can knock off another 2 percent, more or less, from Chinese growth.

Third, improvements in educational achievements have been striking, but they may not be enough to offset the effects of aging in an assembly-line economy such as China.

Fourth, with the destruction of the extended family by the one-child policy, the government will increasingly have to care of the elderly. When this happens, China will suffer the growth declines characteristic of transfer economies.

Fifth, with the “easy growth” of labor expansion and migration behind it, China’s growth will depend increasingly on technology. Technology advances depend on continued inflows of foreign direct investment. If the West decides to switch its FDI to other (lower wage) countries, China will lose it major source of growth.

China is more dependent on us than many think.

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