Monday, May 31, 2004

Geopolitics: China Hardliners Advance Cause

The Washington Post has an important story about the internal struggle for power inside of China. The bad news is that this is undermining the argument (of which I have generally been a member) of the engagement "school" of foreign policy.

BEIJING, May 30 -- China's former president, Jiang Zemin, is strengthening his hold on power by promoting a hard-line approach toward Hong Kong and Taiwan, making it more difficult for the country's new leaders to consider concessions on either issue, according to sources in the government and the ruling Chinese Communist Party.

Jiang and his successor, President Hu Jintao, have not clashed over the policies, the sources said, and Hu also favors a firm stand against Taiwan's push for independence and Hong Kong's demands for democratic reform. But Jiang has limited Hu's room to maneuver in tackling two of the most sensitive problems facing his government, the sources said.

A prolonged struggle for power between Jiang's allies and those who support Hu has created a dynamic in which any senior leader who argues for even a slightly more moderate policy risks being attacked by rivals in the other camp as too weak to govern, said the sources, who spoke on condition of anonymity and said they favor neither faction.

Of course it's possible that after consolidating his internal power-base, the leadership may do an about face and perform a "Nixon goes to China". The backstory is that sometimes only someone who is perceived as being "tough" on the other side has sufficient credibility to cut a deal with enough concessions to advance detente. On the other hand, he may be so insecure in his power base that he will require increasingly hysterical rhetoric to maintain a lid on things as the economy rumbles along too fast.

Were we wrong to engage rather than confront China? It's too early to tell but I think engagement was worth a try. What bothers me is not the engagement but the terms of the engagement. We were weakened and they were strengthened. There is a such a thing as win-win but the short-sighted free trade policies have compromised our national security interest in the pursuit of a free market ideology that isn't matched by on the ground conditions. As it is this botch in the execution could invalidate an otherwise good idea. Same old same old as invading Iraq right? As they say, there is no substitute for success.

Sunday, May 30, 2004

Outsourcing Watch: LAT update - It's still bad out there

Despite the news of the "recovering" economy, the LAT does a story covering about how the trend of out-sourcing jobs overseas is still a sore point in the hi-tech industry.

With the crash of the technology sector and overseas outsourcing, thousands of U.S. jobs are disappearing and salaries are under pressure. The late-'90s sense of well-being is diminished.

Experts disagree over how much of the job loss and salary slippage can be attributed to outsourcing, but most say it has clearly been a factor.

"It is unprecedented, the turn of fortune that has occurred in the high-tech industry," said Marcus Courtney, president of the Washington Alliance of Technology Workers in Seattle. "Less than five years ago, we were talking of adding hundreds of thousands of new employees every year in this industry…. We've gone from that to widespread job losses and stagnant wages and benefits.

"The reason it's happening is companes are exporting jobs overseas to increase their profits and not creating jobs here in the U.S."

This growing class of dispossessed and demoralized tech workers is creating new economic and political fault lines. For the first time, large numbers of technical professionals are losing their jobs to lower-paid counterparts in other countries, a phenomenon once associated mainly with blue-collar factory work. Some remain unemployed or underemployed for long periods, and some are beginning to challenge policies that give rein to globalization.

The practice of requiring U.S. workers to train their replacements has become a flashpoint in the intensifying debate over "offshoring" jobs to other countries and the use of temporary visas by foreign nationals who come here to learn their employers' systems.

Critics have denounced the process as inhumane, and some members of Congress are trying to curtail it.

Apparently the insult to injury here is that they're being forced to train their replacements. The company does claim that it offers "competitive severance packages" - meaning I guess a sizable sum and probably help finding work in the form of workshops, etc.

Are new jobs being created? Sure. The problem is that competition from lower-cost individuals is forcing down compensation. As the article notes:

Although Cotterill has lost faith in Agilent, he hasn't given up on the computer industry. He has lined up a two-week contract with a small consulting company, and a manager at Agilent wants him to do several months of consulting on an unfinished project. The catch: He would receive less pay and no benefits.

Meanwhile, he has been applying for jobs online and received callbacks from four IT recruiters. Three of them had Indian accents, he said. Among the first questions they asked: "Can you work in the U.S.?"

Note that BLS statistics would treat this person as "employed" even though they're getting paid less and not getting benefits.

To be fair, here is a Financial Times report indicating that personal incomes rose recently.

Personal income rose by 0.6 per cent in April, its fastest growth since last November, suggesting that a strengthening jobs market is feeding through into higher wages.

There was also good news on the industrial front on Friday with the Chicago purchasing mangers index rising to its highest level since 1988.

Disposable income accelerated, to 0.5 per cent over the month. Income growth was led by another large gain in proprietors' income and strong compensation of employees. Wage and salary growth climbed to 0.5 per cent from 0.3 per cent in the previous month.

A fundamental question though is how large has been the inflation increases? With housing prices still sky-high in many places, medical costs rising, education costs rising, car prices high, fuel and heating costs high, food costs higher, does anyone actually believe that the nominal government cost adjustment is actually accurate anymore?

The figures showed no sign of substantial inflationary pressures. The consumer price deflator posted a 0.1 per cent rise - its smallest monthly gain in five months. Adjusted for inflation, real disposable income rose 0.4 per cent, its fastest growth since January, while real consumer spending posted a 0.2 per cent gain.

Apparently people who are in the government bureaucracy think prices are basically flat. Hmmm...

Saturday, May 29, 2004

Conservative Watch: The Cracks Widen

The Economist while quite fleet of foot to criticize technical matters has been on its political agenda almost preternaturally even handed toward GWB. This is not to discount the cover that stated baldly Resign, Rumseld or to downplay the cover that showed GWB as a cocky cowboy but overall those were two pitched comments amidst a sea of almost tranquil British aplomb and dry detached witty commentary. Now the Economist is documenting what has been a widening story this side of the Atlantic for some time - that the conservative base is getting restless.

Particularly worrying to such a partisan president is the fact that some mainstream Republicans are beginning to go wobbly. Pete Domenici, a usually loyal senator, told Donald Rumsfeld, the secretary of defence, that he could see no clear vision in the administration’s strategy in Iraq. Richard Lugar, who chairs the Senate Foreign Relations Committee, also demanded a clearer strategy. “If we cannot provide this clarity, we risk the loss of support of the American people, loss of potential contributions from our allies and the disillusionment of Iraqis.” Pat Roberts, the chairman of the Senate Intelligence Committee, went further: America must restrain its “growing Messianic instincts”, and stop engaging in “social engineering” designed to promote democracy around the world.

Mr Bush is sufficiently worried about loss of support within his own party—remember that it was Republican defections, as much as anything else, that cost his father his re-election in 1992—that he took the unusual step of travelling to Capitol Hill on May 20th to rally his allies. He duly got his standing ovations, but the speech produced a worrying bit of symbolism. He likened the handover to taking the training wheels off a bicycle: “It’s time for [the Iraqis] to take the bike and go forward.” A few days later Mr Bush fell off his own bike in Texas, badly scraping his face.

Two things explain the nervousness in the party leadership. The first is growing worries about Mr Bush’s competence as a leader. A small army of military brass has queued up to question the administration’s strategy in Iraq, The most prominent, and potentially damaging, attack was the broadside from Anthony Zinni, a former commander in the Middle East and special envoy to the region for Colin Powell. In a new book—“Battle Ready”, by Tom Clancy (Putnam)—General Zinni says that he has been moved to speak out by a catalogue of errors: “false rationales presented as a justification; a flawed strategy; lack of planning; the unnecessary alienation of our allies; the underestimation of the task; the unnecessary distraction from real threats; and the unbearable strain dumped on our overstretched military.”

There are also growing doubts, even among Republicans, about the decision-making process that led to war. The question that obsesses Washington at the moment is how Ahmed Chalabi gained such influence over the administration. The neo-conservatives’ favourite Arab, whose Baghdad offices were recently raided by Iraqi police supported by American troops, is widely suspected of feeding the administration false intelligence about weapons of mass destruction, possibly in Iran’s interests, and of seducing it into thinking that the Iraqis would welcome the Americans with flowers. This may be bureaucratic revenge: both the CIA and the State Department have always resented Mr Chalabi’s influence over the Pentagon and Dick Cheney, the vice-president. But the Chalabi firestorm has reinforced widespread doubts about Mr Bush’s leadership style.

This might seem merely a political movement to rein in Bush, but apparently the cracks really do go all the way through the bottom of the base. What's my evidence for this? Rupert Murdoc funds an environmental movie attacking GWB as a weak leader. When the owner of Fox News thinks you've gone too far then you better watch out! Kuntzman of Newsweek delivers the lines exploring the under-reported facts in this case.

May 28 - How do I know that George W. Bush can actually be defeated in November? Simple, I've just seen the big summer blockbuster movie.

That may not sound like the best way to determine the president's vulnerability—after all, summer blockbusters typically concern themselves with high body counts rather than high approval ratings—but this time, the summer blockbuster is "The Day After Tomorrow," a rabidly pro-environment, anti-Bush lecture released by Twentieth Century Fox.

Let's put that another way: when conservative media magnate Rupert Murdoch releases a movie that depicts President Bush as little more than a vapid pawn of Vice President Dick Cheney and decries him for, of all things, his environmental policies, you know the president is in trouble.

On the other end of the political spectrum, Billmon of Whiskey-Bar blog is back and indulging in some long-pent up gloating. I suppose it can be difficult to refrain from glee when one's political opponents are hitting a rocky stretch after having for so long evaded accountibility. I can share in no such rejoicing becaues I only hold a deep sadness that my party of the "old-right" has had to come to such straits before it can begin to throw off the neo-fascist "new-right" that had unfortunately clambered and bickered their way into power.

So this is what failure looks like – and, realistically, it’s much too late to look to the UN or NATO or our Arab “allies” to save us from the consequences of the administration’s folly.

Strategic failure on such a grand scale is obviously going to have huge repercussions, not just in Iraq, not just in the Middle East, and not just for the war against Al Qaeda. Much more than 9/11, a U.S. defeat in Iraq (or, at least, an outcome that is perceived as a strategic defeat both at home and abroad) has at least the potential to change, if not everything, then lots of things -- from the U.S. political balance of power, to the future of NATO, to the health of the global economy.

Old debates – about the limits of U.S. power and the consequences of U.S. decline – may be resurrected. America’s attractiveness as a destination for foreign investment – the main prop beneath our current prosperity – could be undermined. But the ultimate consequences of the Iraq fiasco are really almost impossible to predict. In other words, while we may not be looking into the abyss (to borrow Gen. Hoar’s phrase) we are certainly peering out over a dark and fog-covered landscape.

Unfortunately America truly is staring over the edge of the abyss. The stakes don't simply seem to be whether or not Iraq destabilizes, but whether Jordan, Syria, Saudi Arabia, and Egypt potentially destabilize as well. To those who shrug and say "Oh well," it should be reminded that however horrendous a leader Saddam was to his own people "20/20" hindsight has shown him to have been a stabilizing influence on the ever-critical oil-production region. His removal was begun unwinding a series of careful checks and counter-checks and as the dominoes fall the direction they are toppling is not democracy and liberalized secular societies. It's too early to see the full consequences of the fall of Iraq but it could essentially end up with the region being dominated by radical regimes or regimes beholden to radical forces to remain in power.

Currency Watch: The Economist's Big Mac Index

The Economist came up with a clever way in order to sample currency regimes and correct for the real picture of where economies stand by applying PPP - Purchasing Parity Theory - to the universal standardized commodity of the McDonald's Big Mac or as they like to call it in France Le Royale with cheese. The basic idea is that if you have the exact same thing it should theoretically cost the same anywhere you try to buy it, and this is one way of measuring if currency trading regimes are market efficient. They call it the "Big Mac" Index.

HOW fast is the world economy growing? How important is China as an engine of growth? How much richer is the average person in America than in China? The answers to these huge questions depend crucially on how you convert the value of output in different countries into a common currency. Converting national GDPs into dollars at market exchange rates is misleading. Prices tend to be lower in poor economies, so a dollar of spending in China, say, is worth a lot more than a dollar in America. A better method is to use purchasing-power parities (PPP), which take account of price differences.

The theory of purchasing-power parity says that in the long run exchange rates should move towards rates that would equalise the prices of an identical basket of goods and services in any two countries. This is the thinking behind The Economist's Big Mac index. Invented in 1986 as a light-hearted guide to whether currencies are at their “correct” level, our “basket” is a McDonalds' Big Mac, which is produced locally in almost 120 countries.

The Big Mac PPP is the exchange rate that would leave a burger in any country costing the same as in America. The first column of our table converts the local price of a Big Mac into dollars at current exchange rates. The average price of a Big Mac in four American cities is $2.90 (including tax). The cheapest shown in the table is in the Philippines ($1.23), the most expensive in Switzerland ($4.90). In other words, the Philippine peso is the world's most undervalued currency, the Swiss franc its most overvalued.

So once you correct the currency regimes for PPP then how do the world economies look at a glance?

Small wonder, then, that global economic rankings are dramatically transformed when they are done on a PPP basis rather than market exchange rates. America remains number one, but China leaps from seventh place to second, accounting for 13% of world output. India jumps into fourth place ahead of Germany, and both Brazil and Russia are bigger than Canada. Similarly, market exchange rates also exaggerate inequality. Using market rates, the average American is 33 times richer than the average Chinese; on a PPP basis, he is “only” seven times richer.

The way in which economies are measured also has a huge impact on which country has contributed most to global growth in recent years. Using GDP converted at market rates China has accounted for only 7% of the total increase in the dollar value of global GDP over the past three years, compared with America's 25%. But on PPP figures, China has accounted for almost one-third of global real GDP growth and America only 13%.

This helps to explain why commodity prices in general and oil prices in particular have been surging, even though growth has been relatively subdued in the rich world since 2000. Emerging economies are not only growing much faster than rich economies and are more intensive in their use of raw materials and energy, but they also account for a bigger chunk of global output if measured correctly. As Charles Dumas, an economist at Lombard Street Research, neatly puts it, even if a Chinese loaf is a quarter of the cost of a loaf in America, it uses the same amount of flour.[emphasis added]

Why my interest in The Economist Big Mac Index? Two-fold and they both have to deal with what should be every central banker's (or central banking junkie's and devotee's) obsession: inflation. If you look at the PPP corrected economic growth, it's abundantly clear that we are in a situation where we are incredibly vulnerable both to monetary-supply induced inflation from a dollar-regime correction and for more commodity-based inflation than the market is accounting for in either case.

Serendipitiously The Economist in the very same issue has an article explaining the exact impact of failing to do such corrections as the PPP and their impact from such flawed economic tools on decision making policy. This is partly why I love this publication, and the oldman uses the word love judiciously.

HOW big is the world economy? That sounds like a straightforward question. Simply to add up the size of all the world's national economies would seem to be the obvious way to answer it. But how that is done yields radically different results, and therein lies a tale. The most commonly used method is to convert national economic outputs to a single measure, namely the American dollar, using the market exchange rates of all the national currencies. That produces a figure of $36 trillion for 2003. But many professional economists think that it makes much more sense to use what they call purchasing-power parities (PPP), which take account of differences in prices of the same goods between countries, and so tries to measure the real purchasing power of inhabitants in each country, no matter what the world's fluctuating currency markets happen to be doing to exchange rates. Using this method, the world economy last year was worth $50 trillion.

The precise size of the world economy may not matter much from a policy point of view, though a $14 trillion difference is hardly small change. However, which method of measurement is used also affects more important matters: the global rate of growth, the relative size of economies, and the extent of inequality between rich and poor. In these cases, using market exchange rates can produce misleading results and hence stimulate bad policies.

The best reason for not using market exchange rates is that prices tend to be lower in poorer countries, so a dollar of spending there is worth more. Market rates therefore understate their real level of development (see article). Indeed, measured at market rates, developing economies' share of global income has fallen over the past two decades, to less than one quarter. This would back the claims of the anti-globalisation lobby that poor countries are being left behind. Yet measured at PPP, developing economies' share of world income has risen over the same period, to almost half of the total, which gives a more realistic impression.

The results have such important consequences as investigating the amount of carbon-production in the future. For the record, it's the oldman's position that we're already seeing global warming climate changes in the wide-scale weather oscillations. Whether we don't produce quite as much carbon from third-world development in the coming years is going to be a gnat on the elephant already sitting on the scales because the amount produced by developed nations and soon-to-be China and India will be quite sufficient to cook our collective gooses at the present rate much less any increased carbon-emission production. Nonetheless the IPCC scientists should have been more careful about projecting future growth so as not to inflate their already impressive case.

Education Watch: Decline of America's Greatness

The Washington Post has some very grim news concerning the future prosperity, success, and preminence of America on the world stage. This isn't new news for those of use inside of science and education, but it is dramatic and breath-taking in its scope as now revealed.

Starving Science
Saturday, May 29, 2004; Page A26

THERE IS BOTH good news and bad news in the flurry of reports describing the decline of American preeminence in science. Falling numbers of scientific papers and prizes, as well as the relative drop in levels of funding and students, provide evidence of this decline. The good news is that it means other governments across the globe have begun investing heavily in basic scientific research. It also means that foreign companies have been investing in research and development, creating opportunities that make more people want scientific careers in their countries. More research anywhere creates more possibilities for innovation everywhere.

Yet the reports from the National Science Foundation and elsewhere indicate that the decline is not only relative. It is also absolute: American science is growing weaker, although not across the board. The boom in research and funding for the biological sciences -- including genetics and molecular biology -- has been matched by a decline in funding for, and interest in, physics and math. Because the decline has multiple sources, the solutions will have to be multiple. Poor teaching, and especially poor high school math teaching, bears part of the blame. Even in an era of heavy testing, the standards for high school math are very low. The American Diploma Project pointed out that few states even require the basic Algebra I-Geometry-Algebra II sequence needed just for many entry-level jobs, let alone for higher education. Low expectations, in turn, have led to a dearth of teachers. In March, The Post reported that because of the lack of trained Americans, urban school districts across the country must now rely on international recruitment and generous visa rules to find any high school math and science teachers at all.

Since the Sept. 11, 2001, attacks, visa rules have grown tighter, making recruitment more difficult for schools as well as universities, where -- completing the vicious circle -- there is also a lack of students. Early this month the National Science Board reported that the number of Americans earning undergraduate science and engineering degrees is falling. As a result, more than half of engineering and computer science graduate students in the United States are now foreign-born. Yet even their presence on campus may begin to diminish: Since post-Sept. 11 visa restrictions kicked in, fewer top foreign graduate students have applied for visas, and those who do apply have greater difficulty getting in. By some accounts, graduate school applications from foreign students are down by as much as 30 percent. Fewer graduate students means less basic research, less innovation and ultimately fewer students.

Finally, government funding for the physical sciences has remained flat in recent years, even while funding for the biological sciences has risen. In part, this reflects the psychology of Congress and the public. Both are easily captivated by campaigns to cure diseases and less interested in pure mathematics: The nuclear physics that produced Chernobyl seems less appealing than the genetics that is producing new cures. In the long term, though, everything from improved environmental protection to successful computer software start-ups depend on this country maintaining its commitment to the physical sciences.

The beginning line of the editorial starts with the statement that there is both good and bad news, but I don't see a whole lot of good news in what's above.

For those of my readers still following me I should be done reading up on Dan Drezner's and the FPIF article tomorrow afternoon and I've decided to post my response in parts so that it will be more accessible instead of putting out one huge article.

Friday, May 28, 2004

Geopolitics Edition: India Rolls Back Privatization

Despite calm and hopeful words this past week from luminary publications such as The Economist, the BBC reports that India's government is bent on pursuing an agenda of rolling back privatization plans and increasing spending.

India goes cool on privatisation
Mrs Gandhi heads the alliance; Mr Singh is the prime minister
India's new government has scrapped key elements of its predecessor's privatisation programme.

The communist-backed coalition, led by the Congress party, said in a policy statement that it would not sell off profitable state-run firms.

Privatisations of loss-making firms would be decided "case-by-case".

Last week, Indian share prices posted a near-record slump amid fears that the new coalition would reverse the BJP government's economic reforms.

The prospect of slower progress on reform has also spooked foreign investors, who have sold some $800m worth of Indian shares so far this month.

Privatising some of India's profitable state enterprises in the energy and heavy engineering industries formed a central plank of the BJP government's economic agenda.

Fiscal pressure

The new government's policy document pledged to raise spending on education to 6% of gross domestic product, and to encourage more foreign investment in the oil and energy sector.

It also set a target for annual growth of between 7 and 8%.

Economists said the new coalition's economic blueprint could put India's already overstretched public finances under added pressure.

"How will the increased spending on education be funded?" said Kishlaya Pathak, economist at Standard Chartered Bank.

"This is crucial because our fiscal situation is a matter of concern."

India's central government deficit stands at about 5% of gross domestic product, prompting warnings that the country must do more to balance its books.

There are fears that without the proceeds of further privatisations, or deep public spending cuts, the budget black hole could widen sharply.

Cutting public spending - much of it in the form of politically sensitive subsidies and non-negotiable interest payments on public debt - has proved an unpalatable option for most Indian governments.

Despite reassuring words from those that would consider India's progress as a new service outsourcing center of the world to continue apace without interruption, it now seems more likely that the prosaic reality of popular democracy may interrupt their bucolic dreams of free-market hegemony. I am not against free-trade per se but the arguments in India about how it was "shining" proved insufficient to console average Indians that the free-market was fair to them. Similar poll results on Bush's claims about the economy (since Bush is the one touting the economy) seem to reflect that most Americans similarly feel that the last few years of economic market-led development haven't been particularly good to them either.

Geopolitics Edition: Hackworth Claims Retentions Down

David Hackworth, one of the most decorated soldiers around, runs a website where he talks about military issues.

In his most recent "Defending America" column he takes on the military statements that retention figures are just fine.

Voting with Their Feet
By David H. Hackworth

Top military managers insist that our all-volunteer Army isn’t stretched too thin from this country’s heavy and hazardous commitment to hot spots like Iraq and Afghanistan and cooler places in another 131 countries around Planet Earth. They spout positive numbers like carnival hucksters, hyping enlistment and re-enlistment rates they keep insisting are at an all-time high.

“Loyalty, patriotism and seeing the results of successfully accomplishing their missions are the key factors in this success,” said Col. Elton Manske, an Army personnel chief in the Pentagon.

Except that’s exactly 180 degrees out from what hundreds of soldiers have told me during the past few weeks.

It also doesn't square with the fact that the Army is currently extending 44,000 soldiers under stop-loss provisions – which, like a form of the draft, arbitrarily keep a soldier in service beyond the agreed-upon term of enlistment.

"Stop loss is not only a breach of contract, it’s a form of slavery,” railed a Special Forces (SF) senior noncommissioned officer. “There's a tidal wave of folks getting out. ... The number of senior SF NCOs leaving is amazing. Our battalion had three of five sergeant-majors retire, and our sister battalion had two of five. The number of master sergeants was well into double digits. I predict that the exodus will devastate the senior NCO corps at a time when experience and stability are most needed.”


Read the rest at Hackworth's site. If true that the military is lying (GASP! Would the military ever lie to us?!?!) about retention figures then it means that the plan to keep 138,000 soldiers in Iraq through the beginning of 2005 is going to have harsh consequences for our military preparedness. As Robert Kagan has written in the Weekly Standard as documented by Dan Drezner, the military has given orders to send the OPFOR forces to Iraq. The OPFOR forces are the permanently stationed "opposing forces" that all other army units train against. Therefore the Army can train no one better than the OPFOR force, however they are being deployed to active combat duty and so hence can do no more training of other units while in Iraq.

I've maintained before that we do have the potential force strength to both double our commitment to Iraq and to maintain that commitment - if and only if we begin raising the ceiling on the absolute size of the Army and Marines. Technically we do have more soldiers but they are committed to other countries, in logistical supply and support or administrative MOS's, or in other branches of the military - the Air Force or Navy - that don't have large amounts of operational ground combat troops to send to the Iraqi militarized zone. We could meet our present commitment or increase it, but not maintain either over a long period of time. It's clear that many of today's volunteer soldiers have not emotional commitment to near-constant deployment schedules. This is especially true in the Army Reserves / National Guard that never expected to be sent overseas for extended periods of time.

Then there's the question that the numbers aren't quite right. Both logistical supply and total troop numbers have something fishy about them. It's as if we're hoarding a large number of troops and logistically supplying them elsewhere. The military may be retaining combat readiness to deploy to another zone by holding back untouched certain groups of soldiers while tapping into Army Reserves and National Guards to send to the Iraqi "front".

In any case it's difficult to tell from published Pentagon numbers because they're almost surely "fixed" for public consumption. As a matter of fact, they could have another ten thousand or more soldiers off the books and in an army that size it wouldn't be that hard to hide it with appropriate paperwork jiggering. Why would they do something like that? Well with the knowledge of select Congress members they might be holding back our total military force so as to not leave us vulnerable to another attack. In fact I think this is what is actually happening. It would be a matter of National Security Policy at that point to lie about total troop number figures.

Subtracting this reserve quantity of soldiers out however, it would be logically okay to consider that the portion of the armed forces being dedicated to Iraq to be one the verge of morale, retention, and logistical supply train failure as published reports variously indicate and Pentagon reports deny.

Thursday, May 27, 2004

Sorry no posting Today - work intervenes

Sorry to all my readers, but work today prevents me from spending substantial time blogging. I've been reading Dan Drezner's (looong) Foreign Affairs Magazine outsourcing piece and a FPIF piece on the same topic as to comment to them but a simple and dry task like data processing (entering and collating experimental subject entries) is eating up a great deal of my time. Will get back to yall tomorrow.

Wednesday, May 26, 2004

Geopolitics Edition: Will You Dem's Rein In Kerry Please?

The sad thing is that the President is getting his head handed to him on everything from the Economy to kicking ass in the battleground polls and a slumping approval rating for his mishandling of Iraq. However right at this moment, Democrats step into the fray to jockey in order to seize defeat from the jaws of victory! (BBC)

Scepticism over US terror warning

President Bush's political opponents have given a sceptical reception to a new warning that al-Qaeda may be close to staging an attack in the US.
Attorney General John Ashcroft said information showed al-Qaeda intended was "to hit the United States hard". However, Washington has not raised the level of its national security alert.

The president's Democratic challenger, Senator John Kerry, said homeland security should not be part of the rhetoric of the campaign.

"We deserve a president of the United States who doesn't make homeland security a photo opportunity," he said at a rally in Seattle.

"We deserve a president who makes America safer."

A Democratic member of the Senate intelligence committee, Dick Durbin, said he thought there was growing scepticism about warnings from the Bush administration.

"We'll never know if the administration has new and justifiable information for this new warning," Mr Durbin said.

White House spokesman Scott McClellan denied they were overplaying the threat, pointing to a "stream of credible intelligence" over the last couple of months.

I have opposed this President as possessed of an incompetent Administration since before the 2000 election. However now is not the time to play partisan election-football with the issue of terrorism. It would have been far better to encourage the President to take more proactive measures against terrorism, and then in the event of any terrorist attack simply wait quietly for the American people to come to the realization that they had a bunch of nitwits running things. The way things are going now, if there is a terrorist attack this summer the Democrats will look like a bunch of scofflaws and naysayers doubting what in hindsight will look like a terrible threat against the United States of America.

For my money Alqueda is going to try to attack this summer. Certainly they would be fools not to try to play a little electoral pool with our slipshod and swiss-cheese anti-terrorism defenses. A better question for the Bush Administration would have been "Why after nearly three years are Americans no more safer from terrorists than they were in 2001?" or "How is it that Alqueda can simply announce how far they are along if we are really safer than we were four years ago?". These are hard questions the Admin should answer. However, the problem lies in the political ham-handedness of Democrats. Maybe they do need to lose again in order to learn how to act like a real political leadership. Then again Bush desperately needs some better help or we'll be even worse off than under the Democrats. (sigh)

Intellectual Property Rights Corner: Has Postrel Gone Nuts?

Virginia Postrel writes a very confusing piece, abetted by of all people an economist using what can be charitably described as fuzzy thinking.

An economist friend writes in response to my post below:
I believe it was Stravinsky who said that "Lesser artists borrow, great ones steal."
As [Joel] Mokyr pointed out in The Lever of Riches, technologically successful economies were happy to borrow the best ideas regardless of their source.

To the extent that the US is the least obsessed with protecting ideas in culture, science, and industry, we will continue to produce the goods with the highest economic returns that are also among the most difficult to copy whether in research, movies, music, or software.

To the extent that we close up or another country succeeds in replicating the US intellectual melting pot, we will decline. Otherwise we will continue to lead.

I agree--plus I'm happy to take any opportunity to plug Joel Mokyr's work. His Gifts of Athena: The Historical Origins of the Knowledge Economy is also a great book. (Here's my NYT column on it.)

Okay the logical extension of the idea that knowledge is a capital asset that creates wealth is not that you want to give it away. The logical extension of knowledge being a capital asset is that if you can steal it for free from other sources, then you can reap benefits you did not have to invest resources to produce. The above commentary makes absolutely no sense and therefore I must question Ms. Postrel's sanity.

Yes, the mark of a great society is that it is willing to steal the ideas of other societies. This is an openness to change and innovation and taking "what works" without prejudice as to its source in order to benefit from it. The innovation of jazz from African musical traditions and later Rock&Roll are two cultural examples. However any great society must also protect its assets from being raided by other societies. If India and China feel free to steal our capital assets of knowledge to add to their own R&D then they will progress on the back of our sweat and labor while we struggle to hold our own against them.

If Virginia is advocating a cultural openness to the adoption of new ideas this is good. If Virginia however is advocating ceasing to protect intellectual property rights then she is so ridiculously wrong that it cries for a rebuke from the gods of economics. In either case, this kind of fuzzy thinking is one of the reasons she's not one of my favorite sources. We shouldn't have to guess what her position is, she sould communicate it to us.


Housing Watch: Families being Outbid

Nathan Newman has a recent posting about how the higher prices in homes are forcing families out of the home-buyer's market even as nominal home-ownership rises.

This article cites a new report by the Center for Housing Policy that documents that all the media hype about rising home ownership disguises the fact that home ownership for families with kids is dropping, especially those in poorer families...

Essentially, this means that the rise in housing prices is benefitting richer folks, while leaving many poor families further behind.

Yet the Bush administration is advocating further cutting federal funds for rent subsidies for working families left behind in this housing cost crunch.

Meanwhile a friend of me sent me this article by CNN indicating that housing sales slumped in April right in line with what the oldman predicted would likely be the beginning of the end for the peak in the housing bubble. The bad news? It ain't over till the fat lady sings:

NEW YORK (CNN/Money) - New home sales posted the biggest monthly drop in 10 years in April, coming in much weaker than economists had expected, as rising mortgage rates started biting into the nation's housing market.

The Commerce Department said new home sales fell to an annual rate of 1.09 million last month, down 11.8 percent from the revised record high rate of nearly 1.24 million in March, when mortgage rates were near a 40-year low.

Economists surveyed by Briefing.com had forecast that sales would fall to an annual rate of about 1.2 million.

"This is a sign that the housing market is not exempt from the laws of gravity," said Anthony Chan, chief economist for Banc One Investment Advisors.

"Several times in the last year we've seen mortgage rates creeping up and housing hasn't responded. Now the Federal Reserve has put some credibility behind the increase in rates. I think it set a general tone for the housing market that it'll be a lot more muted."

He projected new home sales for the year will be little changed or down slightly.

A separate report Tuesday showed that existing home sales -- by far the lion's share of the nation's housing market -- rose to near record levels last month, bucking forecasts of a modest decline.

But the new home sales are closely watched by economists because they have a far greater economic impact. They create jobs in construction, and new home buyers are likely to spend more money on new appliances and furnishings than existing home purchasers.

Of course no one can tell exactly when the top of a market will be reached, but this is more evidence of a necessary divergence between supply and demand that is necessary for a later correction. It's not the end, but certainly it looks more and more likely that it's the beginning of the end.



Healthcare Watch: India vs Walmart

The Christian Science Monitor has an article reviewing the state of healthcare in India. India is experiencing rapid urbanization and the irony is that villagers are leaving behind better healthcare in rural regions to pursue job opportunities in the city.

For centuries, these two worlds have been symbiotic. Slums provide housecleaners, cooks, and drivers for the middle class. The middle class, meanwhile, tolerates the slums as a source of cheap labor.

But this system is buckling under the pressure of India's burgeoning urban population, particularly over issues of health. Urban slums are the fastest-growing sector of India's population, expanding five times faster than rural areas. How the government deals with this problem could have widespread implications, both for the country's ability to attract foreign investors and to convince upwardly mobile citizens that life is safe enough to remain in India.

"When you analyze the urban slums and the statistics that slums will be growing at faster rates than other [areas], this is a serious concern," says Prasan Kumar Hota, secretary of family welfare in the Indian Health Ministry.

Urbanization is a global phenomenon. In wealthier nations, most citizens already live in major urban areas or suburbs. But for poorer countries, the epic migration of villagers to cities is straining clean water supplies, sewer systems, and hospitals. Of the roughly 2 billion people to be added to the world's population over the next 30 years, more than 90 percent will be living in the cities and towns of poor countries, according to The Challenge of Slums, a recent report by the UN agency Habitat.

In India, there is a cruel twist. Decades of rural programs have brought clinics and healthcare to villagers. But now villagers are often leaving behind better healthcare in search of better jobs. In a recent survey in the state of Gujarat, for example, researchers found that 60 percent of surveyed villages had vaccinated their children, compared with 30 percent of slum dwellers.

A small collection of government bureaucrats, private volunteer groups, and feisty community leaders are starting to address the imbalance, one slum at a time.

This article is in part an answer to critics who say that the market will solve healthcare problems. What reality shows is that people given the choice between taking available healthcare or optimizing their income will choose to optimize their income. Therefore since a market works by supply and demand based on consumer choice, consumers will take short-term risks and become uninsured because healthcare is considered a separate issue from compensation. This flies in the face of conventional economic wisdom which is to treat healthcare as a part of total compensation along with payroll.

This is true from an employer's point of view, but not from an employees point of view. Which is why corporations can set up situations were they minimize compensation by reducing healthcare benefits while employees accept this in order to maximize payroll income. An example of this? Walmart in Chicago.

According to USA Today Walmart is again attempting to gain permission to set up shop in Chicago.

Wal-Mart asks to expand in 'new territory' of Chicago
By Debbie Howlett, USA TODAY

CHICAGO — Wal-Mart will try today, for the second time this month, to get approval from the City Council to build two stores within the city limits...

The Rev. Michael Pfleger, the pastor of St. Sabina Catholic Church a mile from the South side Wal-Mart site, sees a need for economic development. But not at any cost, he says.

"The mentality that the economy is so bad something is better than nothing — that's a slave mentality," Pfleger says. "We want jobs, but we want good jobs."

Dan Drezner has an article about Walmart trying to move into Chicago, but he focuses on (1) Jesse Jackson (2) the effects of competition from Walmart on local businesses.

My concerns are as follows (a) even thought I despise Jesse Jackson he's just a red herring here and (b) the issue isn't one of local-business competition but unfairly government-subsidized competition.

Even though traditionally medical insurance has been a part of total compensation from an employers point of view, Walmart's wage practices are made viable because it encourages its employees in order to get on Medicaid - a government funded health insurance program for the very poor.
A snapshot of Georgia's program for uninsured children shows that it's packed with kids of Wal-Mart employees. A state survey found 10,261 of the 166,000 children covered by Georgia's PeachCare for Kids health insurance in September 2002 had a parent working for Wal-Mart Stores. That's about 14 times the number for next highest employer: Publix, with 734.

Wal-Mart is the state's largest private employer. But when the top four companies on the list are measured by number of PeachCare children per the number of employees in Georgia, Wal-Mart still dominates.

Imagine potential employees of Walmart as contractors making bids for jobs at the corporation. Now all of them have fixed costs: food, health, etc. They are trying to get that job at Walmart and in order to do so they must make an attractive bid - low enough to get Walmart's employee contract but high enough to meet their costs. Now since employees do not see medical insurance typically as a part of total compensation in practice, what they will do is in order to get the bid they will put their families on Medicaid and bid less. This benefits Walmart.

If there was a law saying that employees could not get on Medicaid or had sliding scale limited eligibility, then these employees would not take Walmart jobs because they couldn't afford to. Then Walmart would have to raise wages in order to attract employees. However by systematically exploiting the Federal social programs Walmart can pass the cost of its employees compensation to taxpayers.

Nathan Newman has some more on the topic of Walmart stealing healthcare from taxpayers.

As a conservative I am against expanding social entitlement spending and doubly against corporate subsidies by the Federal Government. Furthermore this may be a violation of anti-trust or anti-competitive laws, since effectively the corporation is using its subsidized labor prices to lower its retail prices and thus undercutting other employers who do have to bear medical insurance costs as part of the compensation package for their employees. That Walmart is doing this in order to run out of business small companies who already have to pay systematically higher per capita insurance costs than large corporations is doubly an outrage against conservative law&order sensibilities.

Be a conservative therefore and oppose government subsidies to Walmart!


Blog Recommendation Edition: OUBS blog and Blame India Watch

Every once in a while it's good to read new blogger material. Two of my recent finds are OUBS Blog which is an business interest blog and Blame India Watch Blog.

For instance OUBS Blog has saved me the trouble of writing an article about foreign exchange rate mechanisms because they have already done so.

Forecasting foreign exchange rates

Unless you want to hedge all your currency exposure, you need to think about how to decide when to do it. There are four concepts that are said to explain international exchange rates, forming the four-way equivalence model together.

The purchasing power parity (PPP) is based on the idea that something should cost the same everywhere. Higher inflation will lead to adjustments in the exchange rates so that things cost the same again. In the short term, there are too many market imperfections for PPP to hold, but it does seem to work for the long term.

The fisher effect can be put into a formula:
1 + Nominal rate = (1+Real rate)(1+Expected inflation rate)
The real rates are thought to be the same worldwide, meaning that differences in nominal rates have to come from differences in the expected inflation rate.

The fisher effect together with PPP makes up the International Fisher effect, saying that interest rate differentials will be reflected in forward exchange rates. This means that on top of a devaluaton of the home currency in case of higher inflation, there will also be an increase in home interest rate relative to the foreign market.

The interest rate parity theory (IRP) is about the idea that the difference between interest rates should be equal to the difference between forward and spot rates of exchange. The arbitrage relationship is key to this parity condition.

Expectations theory is linked to the EMH, meaning all relevant information is reflected in market rates. So the forward rate of exchange reflects what the spot rate in the future will be. All these four theories together give the four-way equivalence model, meaning that they all come to the same conclusion. (Forward - Spot rates = interest rates difference)

There is actually a Big Mac index, linked to PPP, which actually allows some prediction on future movements. Yes, that's the price of Big Macs in different countries.

To forecast future exchange rates, some look at movements in a country's capital account (movements in financial investments) and current account (movements of import and export). e.g. if the current account goes into a deficit, there will be a bigger demand for foreign currency to pay for those imports and that will put pressure on the exchange rate.

The monetarist approach is about looking at the money supply.

Technical analysis is rather about a long term study of the market over time, with the chartists using graphics of prices and trading volumes. They believe the market takes long to reflect new information, while fundamental analysts state that the EMH would not allow for such a thing to take place. The EMH might not hold on the currency markets though as some countries might support a set currency over the long term.

If you have different estimates you can combine them in currency histograms, weighting them by their perceived reliability.

Read the rest, it's great. Blame India Watch on the other hand is dedicated toward outsourcing and business issues related to India.

MORE ON INDIAN CONTRACTOS IN IRAQ
Or, "Country, or Corporation: Whose War is This, Anyway?"


Though it's now passed into Last Week's News (hey! a new segment idea for BIW?) at least someone is still thinking about the issue of mistreatment of Indian staffers and military contractors. BIW brought up the issue in the wake of news about mistreatment of Indian staffers and military contractors, as it broke.

These are nice sites. Next however I think I'll respond to Dan Drezner's Foreign Affairs Magazine piece on outsourcing and address the FPIF piece that discusses the same topic. Both of these are long articles so it's going to take some time to go through them bit by bit.

Unresolved Capitalism Issues Edition: Prostitution in Korea

Of course we're talking about South Korea. The Asia Times has an excellent new article out documenting the sex-trade there. You think we have problems with the sex trade here? Oui vey!

...As long as South Korea maintains the illegality of prostitution while turning a blind eye to one of the fastest-growing industries in the nation, the industry itself escapes regulation and the sex workers do not enjoy even the most basic of human rights. In 2002 in a red-light district in Kunsan, 15 sex workers were killed when the building where they were confined caught fire. With the doors bolted from the outside and bars over the windows to prevent escape, the girls were unable to flee the flames, all suffering a horrific death. A Seoul court ruled in favor of the bereaved families, awarding them a total of $2 million in compensation from the brothel owner...

But even this very modest government initiative is encountering stiff and curious opposition from the association of brothel owners - the association's existence a testament to just how tacitly condoned the brothel business is. They are demanding that the government scrap its plans. Invoking their constitutional rights, the brothel owners are threatening to sue the government for infringing on their constitutionally guaranteed property rights if the government closes their brothels.

Through all of this, one fact is clear. The sex industry in South Korea is enormous and it is not about to go away. With most areas of South Korea's economy showing lackluster growth, the sex industry - the billions of dollars it generates and the hundreds of thousands it employs - cannot be legislated away. The still patriarchal Korean culture tolerates men seeking sex for pay. This may be contributing to family discord and divorce - South Korea's rate is almost 50 percent, making it second only to the United States. There are no signs, however, that the industry is slowing.

As long as the nation remains tacitly tolerant of the practice, the industry must be taken out of the shadows and into the open through legislation and regulation. The most abhorrent aspects of the industry - the abuse of children and trafficking and enslavement of women - must be abolished, while the revenues from the industry can be taxed for the benefit of the larger society.

David Scofield, former lecturer at the Graduate Institute of Peace Studies, Kyung Hee University, is currently conducting post-graduate research at the School of East Asian Studies, University of Sheffield. [emphasis added]


As a conservative I would point out the high price of such illicit activity both in the cost to human lives and in the discord in the marital rate. However I am concerned because the existence of the sex-trade, the "oldest profession in the world", is a conundrum of capitalism itself. If we are to take a view that the market should be the dictator of what commercial activities are to take place, then we would have to accept the defacto market in prostitution as a social reality.

However as a conservative I realize that while prositution is universal it is also not equally prevalent in all countries. On the other hand here in the United States the pornography industry is almost completely legal. I'm not sure what the distinction is between allowing people to be paid to have sex for cameras and not allowing them to pay other people to have sex. Yet at the same time I would rather not think about anyone being forced to have sex for financial reasons. It is indeed a cruel world we live in and so what is the solution?

I think as a realist and a pragmatist that certainly if there is already a huge sex-industry in place in Korea then the issue becomes one of both public health and the safety and protection of human lives. The realist solution is to create an HIV testing and certification regime and clean up the dirty parts of the business with whatever regulation and enforcement is necessary. However as a conservative this makes me wince and I would add that both social programs promoting the status of women, educating men on relationships (so hopefully they won't have to have to pay to have sex), and creating shades of legalization in exchange for making the process more discrete would have to done.

It's a thorny problem, that essentially boils down to an issue of all men wanting sex and some men being willing to exchange money to women who may be economically more disadvantaged in order for them to gain income. See this Independent article on coerced prostitution in refugee camp.

By Cahal Milmo
25 May 2004



Teenage rape victims fleeing war in the Democratic Republic of Congo are being sexually exploited by the United Nations peace-keeping troops sent to the stop their suffering.

The Independent has found that mothers as young as 13 - the victims of multiple rape by militiamen - can only secure enough food to survive in the sprawling refugee camp by routinely sleeping with UN peace-keepers.

Testimony from girls and aid workers in the Internally Displaced People (IDP) camp in Bunia, in the north-east corner of Congo, claims that every night teenage girls crawl through a wire fence to an adjoining UN compound to sell their bodies to Moroccan and Uruguayan soldiers.

The trade, which according to one victim results in a banana or a cake to feed to her infant son, is taking place despite a pledge by the UN to adopt a "zero tolerance" attitude to cases of sexual misconduct by those representing the organisation.

Fundamentally I'm not worried about upper class men buying sex from well-paid escort services. The Heidi Fleiss's of the world are not what I'm worried about. I'm worried about women forced into prostitution to pay off loan-shark style debts, about runaways forced into prostitution to survive, for refugees forced into prostitution to feed their hungry babies. The streetwalkers and the poor whores of the world exploited by men in night-clubs etc. are my concern. Why? They're human beings and as human beings they deserve dignity and hope and choice as well as some sort of reasonable security.

I absolutely personally disapprove of prostitution. I would never want to see it normalized or glamourized in any way. I'd never be completely comfortable with such normalization. However there are degrees of regulation and enforcement and decriminalization. I think that we need a serious rethink about the issue of prostitution both for developing nations and for the United States. Nobody wants to think of their daughter or their sister being forced into prositution by either financial considerations or for reasons of coercion. Ultimately I don't think things like sex-worker unions are the best thing for society. However in the short term prostitutes getting exploited by brothel owners isn't what I want either.

I'll be thinking about this issue more in days to come, and trying to come up with solutions. This is the ugly side of market capitalism. People pay to have sex. Other people for whatever reason get coralled into doing this. We have an incentive as a society and civilization to confront this problem and attempt to wrestle with it, for the least of our citizens is deserving of our full consideration as human beings.


Tuesday, May 25, 2004

Columnist Watch: Featuring Irwin Kellner

Thanks to Jim Coomes of Thailand who directed my attention to this article. It jives with my analysis below about stagflation and my continued interest in the failure of government indices to measure real inflation.

Stagflation makes a comeback
Commentary: Fed must fight inflation and slowing economy


By Dr. Irwin Kellner, CBS MarketWatch.com
Last Update: 9:58 AM ET May 25, 2004

HEMPSTEAD, N.Y. (CBS.MW) -- Don't look now, but just as inflation is speeding up, the economy is slowing down. Can you say stagflation?

After growing at a pretty good clip in the first quarter, the economy appears to be slowing down during the current period. Retail sales fell in April, pulled lower by motor vehicles. New home construction also declined, while most other data show slower rates of gain.

Ordinarily this would not be cause for alarm except for the fact that price increases are coming on thick and fast. The consumer price index is now almost 2.5 percent higher than it was a year ago; as recently as yearend, the 12-month change was a full point less.

You can blame some of this on the soaring cost of energy. Higher transportation costs are leading many firms to tack on a surcharge to the price they charge for their goods or services.

In other words - higher energy costs are spreading throughout the economy like a cancer. Not surprisingly inflation expectations are beginning to rise as well.

One way to measure inflation psychology is to compare the yield on the regular 10-year Treasury note with the yield on the inflation-indexed note, known as TIPS, for Treasury Inflation Protected Security. The greater the spread, the more worried investors are about inflation.

Currently the spread is almost 2.8 percentage points - the most since 1997. Since this is greater than the current rate of inflation, it shows that investors expect price rises to speed up.

The big question is where does this leave the Federal Reserve? Will it worry more about inflation than about the slowdown?

A lot depends on whether the Fed considers the jump in oil prices to be inflationary or deflationary. But what if it's both? Stagflation was the rule, rather than the exception in the 1970s, who's to say it can't happen again?

At the moment, Alan Greenspan and his band of merry central bankers are widely expected to hike the federal funds rate come the end of June, to show the markets that the Federal Reserve is not behind the curve when it comes to keeping an eye on inflation.

But how can the Fed ignore not only the widespread signs of slowing - but the fact that the economy is once again running into rather fierce headwinds?

As I pointed out two weeks ago, last year's stimulants have been replaced by this year's drags. There's no tax cut this year, rising long-term rates have all but choked off the re-fi boom, housing is slowing, the dollar is up while the stock market is down, and higher energy costs are sapping buying power. Read Kellner's earlier column.

The fed funds futures market currently expects the Fed to double the funds rate by yearend. It may happen - but then again, it may not.

The markets have wrongly predicted rising rates since the summer of 2001.


This pretty much tallies with my own analysis of the situation. Thanks for the reference Jim!


Outsourcing Watch: The South as a Haven of Jobs?

Back in the eighties and early nineties many companies experimented with moving plants and workforces down south. The lower costs of the south as it turned out were offset by a "different" work ethic and culture than the north's manufacturing environment. Call it outsourcing baby steps. Now the South has emerged a region of resilience in this up and down economy according to the CSM.

The South emerges as jobs haven

By Patrik Jonsson | Correspondent of The Christian Science Monitor

...Raleigh's unemployment rate recently dropped to 3.6 percent - among the lowest in the nation. It also helps explain a paradoxical job recovery in the South: Despite the thousands of manufacturing and technology jobs lost in recent years, this magnolia-scented region is now leading the nation in job creation.

From the Virginia Sounds to the mirror-skinned towers of Houston, large segments of the South are posting some of the highest employment gains in the country, which is particularly significant given the magnitude of the textile and other shop-floor losses of the past decade. Though pockets of hardship endure - and the region continues to lag in wealth creation - the economic growth has been impressive...

"When we talk about jobs being created [in the South], we're talking about everything from medical technicians to software writers to barbers," says Bernard Weinstein, director of the Center for Economic Development and Research in Denton, Texas. "We're not seeing an outmigration, even though a lot of basic industries were hit hard, and that's telling me there's a lot of fermentation going on underneath the surface."

The numbers bespeak some of the vibrancy:

• Total nonfarm employment in the South grew slightly over the past four years, while the nation as a whole lost a net of nearly 2 million jobs.

• From November 2003 to April 2004, the region's jobless rate dropped from 5.6 to 5.0 - the lowest rate of any US region.

• More locally, Virginia has posted a net gain of nearly 34,000 jobs the past four years, despite losing some 60,000 manufacturing. Florida has added nearly 278,000 positions. North Carolina produced more jobs, too, even though it lost 155,000 manufacturing positions.

However before outsourcing and globalism advocates shout "AHA!" in a note of triumph over this "example" of modern success, we should investigate the roots on which it is based. The economic successes of the south aren't based upon some sort of emphemereal "comparative advantage", but upon good old wage competition, labor organizing busting, and building up labor force capacity.

Behind the South's vigor lies a variety of forces, from low wage rates and "right to work" laws to a languid lifestyle. Certainly the region's enduring population boom contributes to the economic dynamism. More people are moving to the South - which now contains one third of the US population - than any other region. Retiring baby boomers have helped boost population growth across the Sun Belt by as much as 50 percent more than some other areas. The demographic surge is reflected in robust housing numbers: In March, 613,000 new homes were sold in the South - nearly as much as all other US regions combined.

One notable characteristic of the new migrants is that they are staying put. In the recession of the late 1980s and early 1990s, many laid-off Southerners moved elsewhere looking for work. In the more recent downturn, many hung around - and are now finding jobs in an emerging service economy.

In other words the South's economic success is built upon absolute advantage style competition and a regression to the mean for standard of living costs. That means that standard of living has risen so much on the coasts that people are leaving in order to seek lower cost situations elsewhere. As such the South's success continues to be built on jobs, people, and resources moving from other areas rather than some sort of dynamic trade or technological advantage. In fact according to the article the south still remains underadvantaged in large regions:

Still, economic disparities remain more pronounced in the South than anywhere else in the country. In fact, the overall poorest states are firmly Southern ones, including Alabama, Mississippi, and South Carolina. And experts point out that the job boomlet has largely bypassed Tobacco Road and the South's defining rural areas - the ones hardest hit by the manufacturing trend toward outsourced labor.

Those claiming that trade creates jobs should beware. Even in the well understood domestic economics inside the United States production and labor follow capital allocations based upon traditional relative cost structures and competition. The south is cheaper and the quality of life issues are better precisely because fewer people have moved (yet) or economically developed the south. In a sense the south is benefiting because the coasts have had "too much of a good thing" and this has driven cost competition for capital investment and standards of living up. So people look for opportunities elsewhere. The same thing is happening with capital flight overseas. I'm not arguing that this is necessarily a bad thing, but I do argue that it's not intrinsically a good thing unless we look at it as a competition we're prepared to win.

Columnist Watch: Conservative Case for Public Morality

This past Sunday I argued that there was a consistent thread connecting the conservative themes of distrust of central government intervention, the case for a right to privacy, and the argument for the need for high standards in public morality even if we ourselves fall short occasionally. The common thread is the primacy of culture as a focus of social progress as opposed to politics and bureacracy.

In the Guardian (UK) the commentator and liberal David Aaronovitch argues that conservatives have in fact been right about the linkage decay in moral standards and the liberal agenda of normalizing all behaviors.

Like Moore, Sontag identifies "America's ... increasingly out-of-control culture of violence" in which sex, entertainment and physical brutality are intertwined. And she extrapolates: "This idea of fun is, alas, more and more - contrary to what Mr Bush is telling the world - part of 'the true nature and heart of America'." The evidence, she writes, is everywhere, "starting with the games of killing that are the principal entertainment of young males", and extending to the phenomenon of "hazing", in which initiates to new colleges, schools or barracks are subjected to sexual teasing and - sometimes - violence. These acts, and "what formerly was segregated as pornography" are now being normalised, says Sontag, "by the apostles of the new, bellicose, imperial America, as high-spirited prankishness or venting".

But who - an intelligent conservative might ask - championed sexual freedom if it wasn't us on the liberal left? Who made films full of shocking violence and endless sex? Who wrote the 80s and 90s books on how to bring up your kid? If there has been a decline of the sort that Sontag laments, do the liberal "we" not share any responsibility? Didn't the conservatives warn us that all this would happen? [emphasis added]


Why yes we did. Yes, we did.

Now to be fair I need to state up front that I advocate moral standards in many areas that I myself have transgressed or promoted the transgression of - partially because I understand how perfectly easy it is to step over that line and the self-discipline needed not to do it for petty indulgence or self-gain. Among other things I repeatedly get involved even when trying to avoid doing so in love-triangles. This could be of either persuasion - two men pursuing the same woman, or two women with me. Through long internal struggle I suppose I've come to the conclusion that I'm probably emotionally "typed" or patterned so that I'd be happiest and most stable in a bigamist, polygamist, or similar type situation. In fact, unhappily every time I'd tried to reduce my relationships to a traditional pairing it has collapsed them every time. This is one of the reasons why I'm still single.

Nonetheless I formally and absolutely oppose the legalization of bigamy or polygamy. This is because I realize that greater social harm would be done by the irresponsible advantage taken by such sudden license by the unscrupulous, rather than my own proposed judicious usage of such a legal norm. Could I envision such an America in the future where such behavior was considered normal and legal? I could, but only after a natural and culturally oriented evolution of values. This is despite my own difficult struggle to attempt to fit in as a traditional couple and failing miserably in doing so.

What I would advocate is the decriminalization of legal arrangements that would essentially guarentee similar rights and financial arrangements as granted by spouses. Things such as power of attourney, specific written living and post-death wills, legal arrangements with insurance companies, etc. while possibily unweildly could be standardized into legitimate alternative arrangements. I would note that this is precisely GWB's avowed position on the topic.

So despite the fact that the legal standard has contributed to my personal romantic unhappiness and the social norm would view me as abberant - I was amused to note the defenders of homosexuals retreating to the position in the recent debate that at least it was better than polygamy (which was typically ranked with incest and beastiality often) - I would argue that attempting a legal imposition of a statuatory solution to my personal problem is both bad law and bad special interest politics.

A free society must also be a responsible one, and we cannot simply legislate morality. It just doesn't work. One can rightfully legislate protections against overt or systematic discrimination and assault, but one can never force acceptance. And that is the conservative position.

Monetary Policy Edition: Being set up for another Oil Crisis?

The Economist notes that while the economic situation of oil is still sustainable (price is only half of 1970's inflated adjusted level and GDP growth less dependent on it) that the price range is again approaching the level of being a threat to the world economy. Remember the price of oil would have to be about $80 pb sweet light crude, but then again if prices reached that level we'd also have oil-crisis style economic stagflation and near 25% unemployment which were also features of the seventies!

That price has been uncomfortably high of late. Last week, the benchmark price for West Texas crude reached a record of $41.85. Of course, adjusted for inflation, this is still only half the level prices reached in the oil-price shock of the 1970s. And western economies are now only half as dependent on oil as they were then. But if current record oil prices are less shocking than the hikes of yesteryear, they are quite upsetting enough to spoil the G7 finance ministers’ dinner. On Sunday May 23rd, they called on all oil producers to pump enough crude to bring prices down to “levels consistent with lasting global economic prosperity and stability”...

At the next official meeting of OPEC, in Beirut on June 3rd, Saudi Arabia will be asked to demonstrate solidarity with its co-conspirators in the cartel. The bargain that holds OPEC together—each member shows restraint in production, so that all can enjoy higher prices—is at stake, they will say. But it is widely assumed that Saudi Arabia must also keep its side of a more fundamental bargain. It must be conscious of American petrol prices, especially in an election year, and, in return, the world’s only superpower will continue to offer the desert kingdom its protection. The other members of the G7 have rather less leverage, but they are promising to flex whatever diplomatic muscles they can find. Nicolas Sarkozy, France’s newish finance minister, in particular, is not one to sit still while others decide the fate of his economy. Those oil-producing nations with which France is most “easily in touch” will be hearing from him soon, he promised in New York.

Mr Sarkozy’s powers of persuasion and America’s promises of protection may be enough, for the moment, to keep the Saudis on side and the rest of OPEC quiescent. Oil prices of $50 per barrel no longer look an immediate prospect. But, by the same token, oil prices of $25 per barrel may, as the Venezuelans insist, belong to a bygone era. If the Chinese economy continues to grow and security fears continue to mount, there may be little anyone, in New Amsterdam or Old, can do.

The oldman has noted before that it would take oil prices of about $90 to reflect a real crisis in oil instead of the current market premium of roughly $5-$7 US pb. That figure is simply based upon the inflated price of oil from the seventies oil crisis with the additional current security premium at it's high end. Can you say "oil-shock to GDP" nine times real fast? Of course other factors were involved such America going off the gold-standard peg rate and seeing an inflation of the dollar value undermining its gold purchase rate.

However contrary to what gut instinct might indicate, we see that actually raising interest rates inaugerated the stagflation era.

By the summer of 1969, Nixon had already applied or was in process of applying fiscal restraints and in July of that year, the Chairman of the Fed announced a hike in interest rates.

At that point, stagflation, though not yet christened, was born. In my book, The Multiple Abyss, I wrote - "In July 1969, six months into the first Nixon Administration and just twelve days before man took his first steps on the Moon, the Federal Reserve Board raised interest rates. In the midst of all the drama of the times, the raising of interest rates seemed a dull, stodgy, inconsequential event. So, not surprisingly, it was received with calm and, initially at least, understanding. The United States had spent enormous amounts of money on the Cold War, on the Vietnam War, on aid to less developed countries and, above all, on President Johnson's welfare society. The resources of even the mighty United States economy were stretched and prices were rising. So the Fed acted "to slow the economy down." Its action was, in the conventional wisdom of the time, "correct." But what happened then?

"One account [in The Indigent Rich, pp.41-2] said that - "...towards the end of 1969, that is, less than six months after the Fed had acted, policies instituted by the Nixon Administration began to push unemployment up. The intention of these policies was to stop inflation by reducing demand. Demand was to be reduced by reducing personal income, which was assumed to be a function of increasing unemployment. But President Nixon had already arranged in his message to Congress that 'if unemployment were to rise' the programme of unemployment insurance 'automatically would act to sustain personal income.' He had therefore undermined in advance his capacity to attack inflation through increasing unemployment and reducing personal incomes.

"But he was more shackled in his capacity to attack inflation by these means than even this contradiction in his policies demonstrates. For his policies, if they did not reduce incomes as much as the increase in unemployment would have done in an earlier period, they did reduce production. The number of unemployed shot up by more than one million in less than a year. The rate of increase in the gross national product dropped sharply. The President's Council of Economic Advisers estimated that the United States economy, in the second quarter of 1970, was operating at about 4 per cent below its potential capacity and that the real rate of growth of GNP in the third quarter was down to 1.4 per cent - or to 2.5 per cent, if the effect of the
General Motors strike were excluded. Growth in the fourth quarter was probably nil. The difference between these estimates and the real rate of growth of 5 per cent or more before the advent of recessive policies was substantial; and was borne out by data showing movements in industrial production. From a peak in July 1969, the index of industrial production dropped steadily to a point 7 per cent lower in October 1970. The decline was sharper as unemployment grew (and as the General Motors strike caused further production losses). The index which stood at 173.1 in October 1969, had fallen to 166.1 in September 1970, and 162.3 in October 1970".

Here was the essential cause of stagflation, identified (even before its baptism) in The Indigent Rich as early as 1971. By 1974, the term itself had been coined and in "Inflation: A Study in Stability", published in that year, I wrote - "If it is socially unacceptable to move demand down far enough to balance supply, then the only way of achieving balance in an inflationary situation is to move supply up or, at least, keep it up to meet demand. Our failure to try to do this explains why we have so often had 'stagflation'. When insufficiency of supply started to cause inflation, we have applied - and, indeed, we still do apply - monetary and fiscal policies that curtail certain areas of demand, including investment demand, and that curtail production. This reduction of supply while demand necessarily stays up under the pressure of government as well as of private outlays, achieved those twin evils of more unemployment and higher prices.

"When we have reached that point of ultimate frustration, we have then - just as we did in the 1930s - flailed around desperately for remedies roughly within the confines of our existing economic orthodoxies. Wage levels are said to be too high (that was a favourite in the 1930s too); therefore wages should be frozen or cut. Others say we need an incomes policy and price control. Or we should revalue the currency or cut tariffs.

Most governments have tried some of these; some have tried them all. None really works....."

Thirty years later, we still haven't moved far beyond where we were in 1974.

We now depend almost entirely on hiking or cutting interest rates to solve our problems of inflation - and just about everything else, domestic and external.

Of course as many have argued, the oil-price rise had a lot to do with the rise of staginflation.
While the entire world was affected by what essentially can be equated as a rise in the price of energy, the US economy found the dramatic rise in oil prices - an astounding 184% in just the first six months of 1974 - to be particularly detrimental: it created a unique situation known as stagflation, whereby the rise in oil prices resulted in an overall rise of all prices, or inflation. This in turn increased business expenses and thus decreased profit margins -- thereby setting the stage for a contractionary economy that ushered in an era of higher unemployment. The equation was simple yet devastating: inflation plus unemployment equaled stagflation, which resulted in a weak economy.

Of course if you believe in classical Keynesian economics there was no recession in the seventies because Staglation theoretically can't exist if the Phillip's curve is correct. (Wikipedia)

The Phillips curve, which is associated with Keynesian economics suggests that stagflation is impossible because high unemployment lowers demand for goods and services which lowers prices. This results in low or no inflation. By contrast, monetarism which argues that inflation is due to the money supply rather than to demand predicts that inflation can occur with high unemployment if the government increases the money supply.

Stagflation occurred in the economies of the United Kingdom in the 1960s and 1970s and the United States in the late 1970s. The difficulty in fitting its existence within a Keynesian framework led to a greater acceptance of monetarist theories in the 1970s and 1980s, but some still believe in Keynesian economics, saying that there was no recession at that time.

I propose a synthesis. What if stagflation required three major ingredients? It required the possibility of inflation by a excessively loose monetary supply, but at the same time rising interest rates to set off an initial GDP growth stunting slide, and the price rise of a key commodity such as oil because of supply-shock fundamentals?

Well we know that because of the devaluation of the dollar and the drop in confidence in the US Treasury debt, that the first condition of an excessive monetary supply growth has been met. There are more dollars than demand previously so hence the price has dropped. Furthermore with a potential repositioning of the Chinese Yuan and the Japanese Yen sliding toward the Euro perhap provides the downside for an even further slide: 10-30% by my previous estimates based on reading. That meets the first condition.

The second condition of rising interest rates in order to attempt to quell monetary supply growth and fiscal imprudence is being met because the Federal Reserve is raising interest rates. Granted they wish to be behind the curve admittedly, but the role of raising interest rates is just to provide an initial downturn in GDP to start off the slide. In the seventies interest rates were also raised, it was just that they were not raised enough while the central bank colluded to help Nixon get re-elected by turning a blind-eye toward massive social spending that "broke the bank" of US budgetary discipline. Does that sound deja-vu-ish for some reason?

Well surely we at least do not have the third condition, which is that the oil market isn't as sensitive as it was toward supply shocks because of the addition of more producers outside of OPEC right? Well according to David Ignatius in the Washington Post we have allowed ourselves to become manipulated by the Saudis who have used just in time delivery methods to increase price sensitivity to supply disruptions.

The Saudis were able to do this since only effectively they have spare capacity and so by manipulating their shipment schedules to prevent inventory pileups of oil that would act as price shock buffers from being built up.

Homemade Oil Crisis

By David Ignatius
Tuesday, May 25, 2004; Page A17

The "oil crisis" of 2004 is one more sign that a Bush administration that once hoped to transform the sources of instability in the Middle East is instead retrenching to a messier version of the old status quo...

The drama on the oil spot market has masked the fact that the recent price squeeze has been building for several years -- and is largely a result of conflicting policy decisions made in Washington and Riyadh. A rapidly growing Chinese economy meant that upward pressure on prices was inevitable. But neither the Saudis nor the Americans took appropriate steps to defuse the problem before it became a crisis.

The Bush administration contributed to the oil price squeeze in several ways, according to industry experts. First, it failed to address the fact that demand for gasoline in the United States was increasing sharply, thanks to ever more gas guzzlers on the road and longer commutes. The administration also continued pumping 120,000 barrels a day of crude into the Strategic Petroleum Reserve, making a tight market even tighter. And by letting the value of the dollar fall sharply over the past year, the White House all but forced the Saudis to raise dollar-denominated oil prices to compensate.

The administration's more serious mistake was that as energy supplies tightened, it did nothing to reduce U.S. demand. A year when the United States was fighting a war in Iraq would have been an ideal time to ask the country to sacrifice a bit, to reduce its dependence on oil from the Middle East. Instead, the Bush administration let SUV Nation roll on.

Meanwhile, as Americans burned their energy, the Saudis subtly fiddled with the oil market. By keeping inventories low and encouraging a policy of "just in time" deliveries to refiners, they kept spot prices on a knife edge. The result was that OPEC, after years of powerlessness, became in effect a central bank for oil.

"U.S. policymakers are guilty of denial," says Roger Diwan, a managing director of PFC Energy, a Washington-based consulting firm. "Tighter specifications for refiners, runaway demand and supply bottlenecks have indeed created market tightness. Blaming the producers doesn't solve the problems created by contradictory U.S. energy policies over the last two decades."

Bush administration officials who talked blithely in the run-up to the Iraq war about replacing Saudi Arabia as the locus of the oil market should be forced to drink a barrel of crude. As things have turned out, events have underlined the inevitability of Saudi Arabia as the supplier of last resort. An administration that set out to transform the Saudi-dependent status quo has ended up reinforcing it -- at the very time that terrorist attacks are showing the kingdom's vulnerability.

Conspiracy theorists will see these developments in oil markets as further evidence of a plot between the House of Saud and the House of Bush. That's nonsense. What we are seeing in the market is a result of clever policies in Saudi Arabia and dumb ones in the United States. This "crisis" is man-made, and the more it resembles the oil-crisis frenzy of the 1970s, the more nervous we should all be.


So according to David Ignatius we are again approaching a situation where we are vulnerable to oil supply shocks. This satisfied the third condition that the supply side of the oil market has to have business fundamentals conducive to a supply-shock setting off an oil-crisis.

With the three conditions having been met, we can suddenly see ourselves being very vulnerable economically to any untoward political or military events that would constrain the oil supply at least for the next several years until more capacity comes on line. The vulnerability of the US to an oil-crisis and attendant stagflation has never been more similar to the seventies than today. The depression in manufacturing and basic industrial production as well as price increases in other key commodities due to the growth of China is also fueling the possibility of a stagflation wave.

Nationally the economy was having a bad week:

WEEKLY MARKET COMMENTARY
Tuesday, May 25, 2004 10:59 GMT
Weekly Commentary
By: Cornelius Luca
http://www.gftforex.com


The dollar gave way broadly during the past week
The dollar gave way broadly during the past week, particularly versus the yen and the pound. Traders realized profits as the dollar had been increasingly overbought. It should see further weakness, but the dollar seems to have only a limited downside at this point. Perception that the Saudi Arabia will help trim by unilaterally increasing its oil supply to temper the exorbitant prices of gasoline should buffer dollar’s decline.

Past Week's Data and Events
United States


The dollar fell across the board last week amid mixed economic data.

Manufacturing in New York State declined to 30.2 in May from 34 in April. It had peaked at 42.05 in February.

In the same vein, the Fed Bank of Philadelphia's general economic index collapsed to 23.8 in May from April’s 32.5. Still, the dollar showed only a brief pullback following the weak reading.

Housing starts fell 2.1 percent in April to 1.969 million homes, down from a revised 2.011 million in March. Building permits, however, rose 1.2 percent to a 1.999 million rate.

The index of leading economic indicators rose 0.1 percent in April after a revised March increase of 0.8 percent, the biggest gain since May 2003.

The number of Americans filing initial claims for unemployment insurance rose to 345,000 last week from an upwardly revised 333,000.


If the "recovery" has peaked already then the hypothesis of a double-dip recession is gaining strength. Add to that a potential stagflation or just ordinary inflation (10%?) scenario and the news from here on out will likely be bad. The secondary real estate market deflation however would at last create a capital asset liquidation phase that might put the economy on firmer footing for a real recovery in mid-2005. That's just about the only real good news out there right now! Of course if stagflation hits, we could be entering truly difficult times economically.