Wednesday, June 30, 2004

International Trade: A tale of too many shrimpers ... coming trade war?

As the financial position of the USA becomes progressively worse, and it's clear that structural trade imbalanced along with artificial government intervention are to blame it's inevitable that trade wars will likely begin to erupt.

In fact, according to USA-Today it's already starting and the front line is the shrimp trawling industry.

Now, as Gulf Coast fishermen stay at the dock rather than continue to bleed money, shrimpers warn that the entire U.S. industry could disappear unless the government acts. Friday, the Bush administration is scheduled to announce whether it will impose steep tariffs on the low-cost imports.

While the lawyers argue in Washington, China's shrimp farmers are feeling the pain of tariffs yet to be imposed. The market is all but paralyzed as shrimp that would have gone to the USA stay home.

And amid election-year worries about the swollen U.S. trade deficit with China, the shrimp dispute is just one example of the conflicts that increasingly define the countries' commercial relationship.

"More and more anti-dumping cases will come. It has not reached a climax yet," says Ma Xiaoye, a former Chinese trade negotiator.

On June 18, the U.S. slapped more than $1 billion in tariffs on imported wood furniture, following moves against Chinese shipments of bras, television sets and textiles. In response, Chinese Foreign Ministry spokeswoman Zhang Qiyue charged Washington with "frequent and arbitrary use of anti-dumping measures." Beijing has retaliated with its own dumping investigations, most recently of Corning, a U.S. company that makes optical fiber.

Now it's uncertain whether in the long run whether the production pressure from so many Chinese shrimp producers would leave the US shrimp trawling business viable, but it's a dead certainty that with the Chinese exchange currency rate at an unrealistically low ratio that the shrimp trawling business will be put out of business. But the USA can't go on without a financial crisis if we demanded the Chinese stop buying our Treasuries to depress their currency to ours. So the political solution is to slap trade sanctions when the real problem is the underlying economic and financial market manipulation.

The fact that this is essentially a form of subsidy (FPIF) only illustrates how these agricultural subsidies come about in the first place. A nation creates an unrealistic financial posture through market manipulation. There are consequences. Bandaids are thrown at these consequences rather than attempting to restructure the economy so that the market could price the product, service, or commodity efficiently. This is the face of so-called "Free Trade".
Pity the U.S. shrimp industry. Over the last decade, shrimp have evolved from a delicacy only the rich could afford to the most popular seafood in America. The problem is, Gulf Coast trawlers can only catch 10% of the country’s demand. The rest comes from imports, and 230 U.S. companies, joined together in the Southern Shrimp Alliance, feel that is unfair.

In December 2003, the Alliance filed a $2.4 billion anti-dumping petition against six Asian and South American countries who export shrimp to the U.S. (A seventh country, Mexico, was not included in the suit after reportedly making a $1.3 million payment directly to the Alliance.) The U.S. Department of Commerce will make a preliminary ruling in the case in July. In order to impose punitive tariffs on imported shrimp, the U.S. government needs to prove that imports have caused harm to a U.S. industry and are being sold in the U.S. market under cost.

Neither claim stands up to the evidence. Higher tariffs on imported shrimp would benefit 13,000 people employed in domestic shrimp production—but hurt 250,000 other American workers in the distribution, sales, and service sectors. Imported shrimp do cost less, for the simple reason that production costs in developing countries are lower than in the United States. Shrimp farmers in poorer countries, the majority private entrepreneurs, depend on export markets to lift their families out of poverty. If they sold their products below cost, they would have no way to survive. Nguyen Thi Hong Minh, a bright and energetic woman who serves as Vietnam’s vice minister of fisheries, points out that “shrimp farming has helped improve the standard of living for three million Vietnamese in a short period of time.”

The companies in the Southern Shrimp Alliance aim to capture these gains for themselves, using a 2000 U.S. law, the Continued Dumping and Subsidy Offset Act, also known as the Byrd Amendment. The act provides for duty collected by U.S. customs officials in anti-dumping cases to be paid directly to U.S. producers. Each company involved in the petition would receive up to an estimated $1 million in payouts from dumping duties: a direct transfer from Third World farmers to the U.S. shrimp industry.

This is corporate welfare at its most crass, but the Alliance is finding support in unlikely places. A campaign by Ralph Nader’s consumer advocacy group, Public Citizen, attacks imported farm-raised shrimp for destroying mangrove forests, ruining coastal environments, and benefiting multinational corporations. Public Citizen blames “[i]nternational development institutions [that] are bankrolling the conversion and privatization of coastal areas to the detriment of the environment and citizens.”

On the contrary: local entrepreneurs entering the shrimp business in Vietnam are acutely aware of the environmental risks that, if not carefully managed, could wipe out their investment. They also know that only clean, high-quality shrimp will attract buyers in a competitive market. According to Nguyen Thi Hong Minh, reforestation has reversed the decline of mangroves in the Mekong Delta, as farmers “realize that it is in their long-term interests...to keep 70 percent of the existing forested area intact and use the remaining 30 percent for shrimp farming.”

Vietnam’s government is worried about both the potential economic impact of shrimp tariffs and the negative political precedent. “We went to great lengths to sign a bilateral trade agreement with the U.S. [in 2000],” a Vietnamese Embassy official told me recently in Washington. “But now almost every product that we sell successfully in the U.S. market has come under restrictions. First catfish, then quotas on textiles, and now shrimp. It seems that the trade agreement is a useless piece of paper.”

"Agricultural subsidies" is a large, abstract, and generic sounding category. What it means is that commodity by commodity, product by product, whenever it is politically expedient or convenient real free and fair trade arrangements are systematically broken to cover up for a more general long-term unsustainable market distortion and intervention that has created an unrealistic playing ground.

Vietnam can't be accused of manipulating its currency in order to exploit the US dollar exchange rate directly. It has no such leverage as the Chinese do or a banking system sophisticated enough to do this on any large scale. However the general problem of the trade deficit spills over into these matters because what can't be prevented from happening in China can instead be transferred elsewhere to be dealt with.

Is this what free trade really looks like? I would like to challenge any advocate of free trade to make a case where these sorts of situations are not symptomatic of a fundamentally flawed international economic, market, and trade posture. There can be no free trade when governments right and left intervene to manipulate the system. Attempting to pretend that the markets are allowed to efficiently price commodities, products, and services in this enrivonment is nothing more than delusion.

Monetary Policy: What Does Successful Policy Look Like?

In two words: not sexy. In one word, stodgy. The single word to avoid? Superstar. Central banking when properly conducted is utterly boring. There is no cult of personality. There is no celebrity. There is no worship of an individual who runs around "saving the situation". A proper central bank strategy is entirely unexciting, and unnoteworthy except in one single respect - namely that nothing noteworthy has occurred.

What do I mean by this? The Financial Times reports that the central bank has successfully contained inflation.

The eurozone's annual rate of inflation fell to 2.4 per cent in June from 2.5 per cent in May, suggesting price pressures had peaked.

The "flash" estimate on Wednesday by Eurostat, the European Union's statistical unit, appeared to vindicate the European Central Bank's "wait and see" stance on interest rates. May's figure had been driven higher by oil prices but economists now expect inflation to ease in the second half of 2004 and into 2005.

Nevertheless, inflation this year is still likely to exceed for the fifth consecutive year the ECB's price stability target of below but close to 2 per cent. The bank has a rate setting meeting on Thursday , when Wedneday night's decision by the US Federal Reserve will be reviewed. Although the Frankfurt-based central bank is expected to hold rates steady on Thursday an increase in rates is expected later this year by many ECB-watchers who assume the pick-up in economic activity will continue and feed through into the labour market - an indicator of whether a recovery is established.

But Jacques Cailloux, economist at JP Morgan, said the ECB "will only hike when they are confident that the recovery is sustainable" and some economists think rates might yet be cut. Robert Prior at HSBC said the fragile economic recovery and a possible slowdown elsewhere in the world, together with the prospect of inflationary pressures easing and possible economic upsets in the US, meant "our view is that the next move could still be downwards".

Now this isn't "exciting". People don't throw parties when inflation is contained. However what containing inflation means is that while we are going to go through a recession turning down after a year of sputtering force-fed growth, Europe with it's turtle approach compared to our hare is going to gradually pull into a genuine and healthy economic growth stage. The primary purpose of a Central bank is to act as a lender of last resort, insure liquidity, provide credit for economic growth, and price the asset base. All these things sound different but they're just different aspects of the same thing.

The genuine wealth of the country lies in assets - intellectual property assets, human resource assets, property assets, production assets - and the characteristic of an asset is that it has realizable future value. If you can cash it in, it's an asset. The Central bank except insofar as making credit available to businesses and entrepeneurs, cannot create wealth. Wealth is maintained by a positive balance of production against consumption. People use up stuff. It get's old. It needs to be replaced. Or other people need new stuff and services.

Deflation happens when consumption contracts because of structural reasons. People can consume no more (in the long run) than their structural production exchange value. You work, do stuff, make stuff, etc. and you trade that to other people. In exchange you get what you want and/or need. And around and round it all goes.

The idea that the threat of the economy in the last few years has been of deflation has been at once true and laughable. It's laughable because by fighting against it the Federal Reserve has created one of the largest fiscal and financial debacles of all time. When someone is in trouble, there's three ways it can end.

(a) They can continue consuming more than they produce structurally and accrue liabilities. Inevitably they can no longer service ("juggle") their liabilitie and obligations and the house of cards comes down. This is the road of bankruptcy and default. Because of the tendency to make more promissory notes than one can later pay off, it's also the road of inflation and hyperinflation.

(b) They can contract their structural consumption base to meet their production case. One cuts back on spending, to make ends meet from one's income and a bit more to produce a tiny surplus. Using this surplus one pays off one's liabilities and then undergoes slow growth after the contraction. This is the deflation scenario.

(c) One can borrow more money, but not use it for consumption (or speculation) but invest it to produce income producing assets and opportunities. By increasing one's production/income one gains a better financial portfolio and can eventually pay off one's debts. This is the FDR/WWII scenario.

If we had taken the last four years, and reworked Social Security and Medicare, fixed the highways, invested in new scientific research, made our governments more efficient, made the corporations clean up their management, etc. then we would have come out of this situation in a much stronger situation. Only we didn't, so we squandered all the money we borrowed and are even in a worse position financially as a nation than before. We continued consuming at an unsustainable rate without redressing production and income questions. We have lived beyond our means.

In the process we have created a speculative bubble of massive proportions (FT-news) whose first warning signs are only just now being felt.
Freddie Mac profits falls 52%
New York, June 30 (Reuters)

US mortgage finance provider Freddie Mac, struggling to straighten out its books and its reputation after an accounting scandal, on Wednesday reported its 2003 profit fell 52 per cent.

Freddie Mac said the decline was due to a drop in the value of derivatives it uses to hedge against interest rate swings, and warned of similar fluctuations in the future.

"To the extent changes in interest rates continue to be significant, our overall net income will remain volatile," it said in a statement. Freddie Mac in 2003 earned $4.9 billion, or $6.79 per share, down from $10.1 billion, or $14.18 per share, in 2002.

Analysts polled by Reuters Estimates were expecting a 2003 profit of $5.90 per share, with estimates ranging from $5.70 to $6.56 per share.

The government-sponsored mortgage enterprise issued restated earnings through 2002 in November, but delayed financial reports since then while it redesigned its accounting
systems.

In a reflection of continued reverberations from the restatement, Freddie Mac said that in preparing its 2003 financial statement, it discovered "immaterial errors" in previous earnings reports but that none of the mistakes would change net income.

"These errors evidence the higher level of operating risk that we are addressing," the company said in a statement.

Freddie Mac and Fannie May control trillions in US real estate loans that are exposed because of both the interest rate situation and the speculative bubble in housing prices. If those households purchasing the mortgages should default and the price of housing fall, then the underlying asset values of those properties will sharply decline. The losses could be in the hundreds of billions, quite easily. At that point the number of household bankruptices, already high, and foreclosures will skyrocket and it won't matter if the government chooses to bail the companies out or not. Inevitably the losses will be large.

This exposure is also just the tip of the iceberg. Because the asset base has become overpriced, a correction in the pricing at the same time the cost of credit is rising will cause large numbers of people to default. Consumer credit is already at an all time high. This could have been avoided, by either demanding as the price of further credit a consolidation of spending or a investment in future income. However in the face of the political failure to do either, restrict spending or invest in strurtural wealth creation, then the central banks duty was clear. It was to refuse to accomodate the political environment and therefore guide the country through an extended economic contraction that would have forced consumption and production to structurally realign.

It should have embraced deflation as consolidation if it would not promote production/income through genuine investment. The cost of allowing this easy money has been the fueling of the speculative asset bubbles that when the market corrects the prices of such it will begin a beggaring of America.

It's the Wages, Stupid: Low Wage Industries Dominant

Chiming in for its two cents is a study conducted at the request of USA-Today about the distribution of new job growth in the economy. Unsurprisingly the jobs created are generally in low wage industries, rather than the high wage information technology or "creative" jobs that the Free Trader ideologues have been promising us.

Jobs in lower-wage industries and regions are growing at a faster pace than higher-wage jobs, suggesting job growth is less potent for the economy because the majority of new work isn't accompanied by fat paychecks.

Lower-wage jobs have risen more than 1.5% since U.S. employers started adding to their payrolls in September. Higher-wage jobs have also been created, but at a slower rate. Jobs in that category have increased a little more than 1% in the nine months through May, the period of most recent data.

Nearly 14% of the jobs added have been temporary workers, who typically are paid lower wages. Restaurant workers, who also usually are paid lower wages, have been added, too. Higher-paid computer jobs have been added at a snail's pace...

USA TODAY asked two economic consulting firms, Economy.com and Global Insight, to study the recent job creation based on both industry data and geography.

If you're interested you can compare the growth of a major city near you to the national trend, or you can view the exact breakdown by industry in order to see the hot (and not) job growth sectors using the nifty charts that USA-Today has provided. One of my readers asked what areas they should guide their kids toward in order to obtain a decent standard of living. While I'll have more to say on that subject later, perusing the industry breakdown chart is a good place for him to begin.

For those optimists who still maintain that a growing economy, despite all burdens otherwise, will pull us into an eventual broader job growth pattern let me refer you to the report indicating that business growth is down since May as also reported by USA-Today.
The pace of expansion in business activity in the Midwest slowed sharply and unexpectedly in June, hit by weakness in the automobile sector, a report showed Wednesday.

The National Association of Purchasing Management-Chicago business barometer slid to 56.4 from 68.0 in May, and was at its lowest ebb since October. Economists had forecast the index at 65.0. A reading above 50 indicates expansion.

Patrick Fearon, economist at AG Edwards & Sons in St. Louis, said the report would give the Federal Reserve more breathing room for "measured" tightening of monetary policy.

"If this is suggesting a bit of moderation in the economic growth rate, then it should allow the Fed to raise interest rates at a modest pace going forward," Fearon said. "One positive here is that growth in employment remained at almost the same pace as May."

The employment component slipped to 53.6 from 54.8, but still strung together a rare three-month streak of expansion. The Chicago-area jobs index has been above 50 only seven times in about five years.

The momentum of the economy is clearly negative at this point. There have been multiple indications of this and the fact that Greenspan is going to tighten, gradual or not, indicates that the gravy train of economic stimulus is going around for one last round of drinks before the bar closes. This is not economic 'happy hour'. Given that, the growth we've seen in jobs will probably reverse appreciably by the beginning of the fall - say middle of September. How bad it becomes depends on whether there is a shock to the financial markets from some sort of systemic unraveling. If there is, the main street economy could easily be back in recession territory for 2005.

Columnist Watch: Bruce vs. Economist

This is an article that I found via Kevin Drum's site, on National Review Online. Kevin vouches for the honesty of the guy. The article discusses the upcoming budget crunch and the role of foreign debt in it.

If the Fed is able to keep to a gradual pace of tightening, financial markets should be able to adjust without trouble. But there is always the danger that mistakes will be made or that unexpected circumstances may arise that will trap the unwary and create a crisis situation. Among those risks are these:
Fannie Mae and Freddie Mac are now such huge players in the mortgage market that their combined debt is close to $3 trillion, as millions of Americans have refinanced their mortgages to take advantage of low interest rates and rising housing prices. This also means that even the tiniest mistake by these organizations could have massively disruptive effects on financial markets.

The U.S. is becoming more and more dependent on foreign capital inflows to finance the federal debt and domestic investment. Indeed, foreigners now own more than 50 percent of liquid Treasury securities. Even a slowdown in foreign Treasury purchases, perhaps due to fears of a fall in the dollar, would also be massively disruptive.

Among the largest purchasers of Treasury securities has been China, whose economy has been booming. But some analysts now believe that the Chinese bubble may soon burst, just as the telecom and dot-com bubble of the late 1990s burst here. That could force the Chinese to stop buying Treasuries and start selling them. Once again, this would be massively disruptive.

The result of any of these scenarios would be a sell-off in the stock and bond markets as great as or greater than the stock market crash of 1987. At that point, policymakers will be forced to adopt a significant deficit-reduction program. They will have no choice, because it will be the only policy action in their power to take and they will be strongly pressured to do so by the overwhelming force of public opinion.

The package will have to reduce the deficit by at least two percentage points of GDP annually to meaningfully affect financial markets and restore confidence, and it is unrealistic to think that this can all be done on the spending side. Therefore, taxes will be on the table.

As Stirling Newberry of BOP-news has point out, we have some big debt service problems coming up. We have added several trillion dollars of debt to the national debt by the liabilities incurred in the tax-cutting and spending-increase pattern since 2000. That debt is service by short term notes issued by the Federal Reserve Bank and Treasury system. The total result is that the debt service - our monthly interest payments on the national credit card so to speak - are highly sensitive to changes in the short end of the interest rate range. When the Federal Reserve raises its interest rates from a generational low currently of 1% those debt service payments will shoot up.

If we merely return to the low interest rate regime of the nineties, where short term interest rates were about 4% then we will be paying four times as much interest on our national debt as we are now. However we have added more debt since then. So paying four times as much debt service as we are currently now but on more debt than we had before is going to cause a debt payment crunch.

Part of the addiction that has fueled such a large increase in our debt has been the buying of debt by foreign banks for other than market value reasons. This government intervention was done to maintain favorable exchange rates to maintain favorable export trading conditions to the US market. It also allowed us to borrow money at ridiculously low interest rates. This easy money fueled our lack of fiscal discipline as politicians found they didn't have to make hard choices today, either taxing&spending as liberals or tax-cutting&spending as conservatives and deferring the hard choices of today toward an indefinite tomorrow.

What would it take to close that trade gap and remove the artificial incentive in order to borrow money instead of making hard fiscal choices? The Economist has a rather grim answer to that.
A recent study* by economists at the OECD illustrates the difficulty. To narrow the deficit by two percentage points by the end of the decade, they reckon the greenback would have to lose about a quarter of its current value (as measured against the currencies of America’s major trading partners) by the end of this year. Since China and Malaysia peg their currencies to the dollar, and many other Asian countries track it closely, Japan and the euro area would bear the brunt of the dollar’s fall. They would not bear it easily. America is such an important export market for both that neither would cope easily with such a loss of competitiveness. The European Central Bank (ECB) has some scope to ease the blow by cutting interest rates but the Bank of Japan has already cut them as low as they can go. As a result, the strengthening yen would cut Japan’s output in 2009 by more than 2% and condemn the country to another six years of falling prices, the study reckons...

Neither side of this debate is much willing to listen to the other. But what if they did? The OECD’s economists shed light on what would happen if each side took the advice of the other. Suppose, for example, that the governments of the euro area (and America’s other OECD trading partners) heeded Uncle Sam’s lectures and passed liberalising reforms that raised their trend rates of growth by 0.5%. This would do wonders for the euro area itself, but it would do little to narrow America’s trade deficit. The OECD economists reckon it would cut the deficit by just 0.2% of GDP by 2009. Despite what many Americans would like to believe, America’s trade gap is not simply an expression of its faster growth rate. The study found that America’s appetite for foreign goods is so much stronger than the rest of the world’s desire for American goods that even if the other rich countries raised their growth rates to match America’s, they would still sell more to America than it would sell to them.

Now suppose America gave in to the hectoring of Mr Chirac and others and put its finances back in order. The OECD’s authors imagine an administration prepared to raise taxes by 4.5% of GDP over the next six years while cutting spending by 1.5%. This would put the government into the black to the tune of 1.7% of GDP by 2009. But even such a massive fiscal turnaround, amounting to 6.6% of GDP, would knock only 2% of GDP off the trade deficit. Why? The OECD economists point out that private saving tends to fall when public saving increases. Between 1992 and 2000, for example, the Clinton administration turned a worrying budget deficit into a handsome surplus. But this only helped to unleash a private investment boom. Public saving was offset by private dissaving, ensuring that the country’s trade deficit continued to deteriorate. America’s budget and trade deficits may be twins but one, it seems, can survive without the other.

America’s deficit will not resolve itself without much pain, suggest the OECD economists. America must beggar its neighbours with a competitive devaluation of the dollar, or beggar itself with a massive fiscal contraction—or both. The consequences of letting America’s deficits continue are certainly worrisome, as Mr Chirac suggests. But he should be equally worried about the consequences of bringing them to an end.

* "Channels for narrowing the US current-account deficit and implications for other economies". Anne-Marie Brook, Franck Sédillot and Patrice Ollivaud, OECD working paper.[emphasis added]

So it's a question right now of which poison one prefers. There is such a huge imbalance in the system that no matter what resolving it is going to cause pain. A worldwide economic recession with a massive dollar devaluation and corresponding debt crisis, or a domestic depression, or possibly both are what the study concludes the general choices are. That's the probable consequence of Bruce's reduction of the debt by 2% GDP. Sounds pretty horrific right? I'm not saying he's wrong. I favor the path of taking our fiscal discipline medicine now rather than risking a systemic default crisis later when in FY2011+ the Baby Boomers start retiring in waves.

However the cost of acting now while less than delaying the decision are not inconsequential. The cost imagined in this scenario is a 4.5% of GDP increase in taxes and a 1.5% decrease overall in spending, and if military spending is increasing then the rest must decrease all the more. That's what the article from The Economist reminds us. There are no longer any painless solutions. There is only the lesser of two evils.

Tuesday, June 29, 2004

Military Watch: Close the window baby, that draft is mighty cold

The NYT reports that the Army is beginning the call up of retired and previously discharged soldiers.

WASHINGTON (AP) -- Digging deeper for help in Iraq and Afghanistan, the Army is recalling to active duty about 5,600 people who recently left the service and still have a reserve obligation.

In a new sign of the strain the insurgency in Iraq has put on the U.S. military, Army officials said Tuesday the involuntary callups will begin in July and run through December. It is the first sizable activation of the Individual Ready Reserve since the 1991 Gulf War, though several hundred people have voluntarily returned to service since the Sept. 11, 2001, terror attacks.

Unlike members of the National Guard and Reserve, individual reservists do not perform regularly scheduled training and receive no pay unless they are called up. The Army is targeting its recall at those who recently left the service and thus have the most up-to-date skills.

``This was inevitable when it became clear that we would have to maintain significant combat forces in Iraq for a period of years,'' said Dan Goure, a military analyst at the Lexington Institute, a think tank.

The Army is pinpointing certain skills in short supply, like medical specialists, military police, engineers, transportation specialists and logistics experts. Those selected for recall will be given at least 30 days' notice to report for training, an Army statement said.

Vietnam veteran Chuck Luczynski said in an interview Tuesday that he fears his son, Matt, who is getting out of the Army after four years, will be called back to active duty as part of the individual reserves. The son returned home in March after a one-year tour in Iraq with the 101st Airborne Division, and he's planning to start a computer programming business.

``I think that's on everybody's mind right now, that they took their turn and they would hope everybody took a turn so that a few don't carry the many,'' said the elder Luczynski, of Omaha, Neb.

The Army is so stretched for manpower that in April it broke a promise to some active-duty units, including the 1st Armored Division, that they would not have to serve more than 12 months in Iraq. It also has extended the tours of other units, including some in Afghanistan.

``It is a reflection of the fact that the (active-duty) military is too small for the breadth of challenges we are facing,'' Goure said.

The men and women recalled from the Individual Ready Reserve will be assigned to Army Reserve and National Guard units that have been or soon will be mobilized for deployment to Iraq or Afghanistan, unless they successfully petition for exemption based on medical or other limitations.

Members of Congress were notified Tuesday and a formal Army announced was scheduled for Wednesday.

Those in the Individual Ready Reserve are former enlisted soldiers and officers who have some nonactive-duty military service obligation remaining, under terms they signed when they signed on but who chose not to fulfill it in the Guard or Reserve.

The Pentagon had hoped to reduce its troop levels in Iraq to about 105,000 this spring, but because of increasingly effective and deadly resistance the level has risen to about 140,000.

Military officials have said they may need to stay at that level for at least another year or two, a commitment of forces that could not be maintained by the active force alone.

The Army frequently must integrate reservists with its active-duty forces, but it rarely has to reach into the Individual Ready Reserve. The Army has about 117,000 people in this category of reservist; the Navy has 64,000, the Marine Corps 58,000 and the Air Force 37,000.

The military has relied heavily on National Guard and Reserve soldiers in Iraq, in part because some essential specialties like military police are found mainly in the reserves rather than the active-duty force and partly because the mission has required more troops than planned.

Reserve troops make up at least one-third of the U.S. force in Iraq, and this month they have accounted for nearly half of all troops killed in combat.

In January, Defense Secretary Donald H. Rumsfeld authorized the Army to activate as many as 6,500 people from the Individual Ready Reserve, drawing on presidential authority granted in 2001.

Not until May did the Army begin looking in detail at the available pool of people.

At that point some Army recruiters caused a controversy when they contacted members of the Individual Ready Reserve and suggested they would wind up in Iraq unless they joined a Reserve or Guard unit. Some complained that they were being coerced to transfer into a Reserve unit.

So that's how it begins. There's no draft now but unless there's a "get the hell out of dodge" or "cut and run" sentiment that suddenly pops up. Barring massive drawdown of troop levels next year we'll probably have a draft after November, no matter who get's elected. There's already a plan on the block for another 25,000 soldiers after June 30th to raise the total standing troop numbers to 170,000. Most of those soldiers are already overdue by over a year to go home. There's no way we can maintain this force structure for more than six more months without massive recruitment or yes - the draft!

It's the Wages Stupid: Why Outsourcing Rhetoric is Wrong

The economy really is not doing well. It's pretty ill and about to take a dive. Don't take my word for it - even though the oldman has been verified as correct every time so far - take the word of J.K. Galbraith. (Salon- use the daypass option)

June 28, 2004 | Let me start by reminding you what I wrote in my Salon column just last month:

"The outlook, therefore, isn't for another noninflationary boom. It's for stagflation -- the combination of low performance and rising prices some of us dimly remember from the Vietnam War."

Let me also remind you that last March, when the United States had its first month of good job growth in a while, I labeled the ensuing media frenzy "a fit of ejaculatio praecox." Since which time, we've heard not a line of doubt from the business press. "The economy is strong and getting stronger," said President Bush, and like good soldiers, the commentariat fell in line.

But today we have news that is hard to avoid. Newly revised data are out from that exciting, inspiring, fantastic first quarter.

Real economic growth did not accelerate to 4.4 percent from the 4.1 percent pace of the fourth quarter of 2003, as first thought. Instead, the growth rate fell, to 3.9 percent. Meanwhile, inflation rose faster than predicted. The inflation rate was 3.5 percent for gross domestic purchases, as opposed to the previously estimated 3.3 percent. The chain price deflator (a commonly used measure of inflation) was up to 2.9 percent from 2.6 percent, and core inflation (excluding food and energy) was up to 2 percent from 1.7 percent.

Forecasters were caught flatfooted by these revisions. They had expected the growth rate to be unchanged at 4.4 percent -- not rising inflation.

Why is this happening? The most important reason is the effect of increasing demand on imports. Imports came in high, partly as an enduring consequence of outsourcing and the loss of domestic competitiveness during the Bush slump. With a falling dollar and a rising price for fuel, imports are also more expensive, putting a double whammy on the trade deficit.

Moreover, it was spending on nondurable goods (including gas) that was up -- by almost 7 percent -- while spending on durable goods actually declined. This is not a good sign.

Why the surprise? It lies partly in the incurable optimism of members of the business press. They want growth and rising markets. They believe in the psychological power of their own voices. But they have no underlying theory beyond the idea that psychology matters and that optimism leads to growth. Doubters therefore get squelched. Our voices are dissonant, and our arguments are, well, just a bit too difficult. But when bad things happen, we are not surprised.

So a sober clear look at the statistics, distorted as they are, show that they are poised for stagflation and not robust growth. Why is this occuring? Well look at this MSNBC article on the economic dynamics of the "new economy" of outsourcing wage pressures on compensation.
'Dirty little secret'
"The dirty little secret is that no one is really looking at the quality of new jobs created," said Lawrence F. Katz, a labor economist at Harvard University who has advised Kerry. "We don't know within these broad occupational categories what the new jobs actually are."

Federal Reserve Chairman Alan Greenspan made a similar point during a Capitol Hill hearing last week when he said that the recent wage gains appear to be spread broadly across industries, but the Fed does not know yet how the gains are distributed within industries. He repeated his concern about a growing earnings gap between highly educated skilled workers and those workers with less education and fewer skills.

The result, he said, has been that inflation-adjusted wages have been "flat to declining" for the lower half of income earners, and rising for the highest-paid quarter of the workforce.

"It's a problem caused basically by our skill mix not keeping up with the technology that our capital stock requires," the Republican Fed chairman said, calling it a structural problem "that can be and must be addressed, because I think that it's creating an increasing concentration of incomes in this country and, for a democratic society, that is not a very desirable thing to allow to happen."

Benjamin Tal, senior economist at CIBC World Markets, said that when the Labor Department's industry trends are compared with much finer occupational trends tracked by the Census Bureau, the pattern is clear: The average wage in industries that gained jobs over the past three years was 30 percent lower than the average wage in industries that lost jobs -- a sharp reversal from the previous five years.

Given the broader trends in the global labor market, that makes sense. Much of the political focus has been on the outsourcing of service and manufacturing jobs to low-wage countries, but the real issue is not the flow of jobs abroad but the impact of those labor markets at home, Tal said. The threat of labor competition in China and India is preventing workers in the United States from bargaining up wages, even as the economy begins growing in earnest.

"Job losses to globalization is the wrong focus," he said. "It really should be these deflationary forces."[emphasis added]

First of all there are more jobs being outsourced than is being widely admitted. That's because the counting is only of jobs directly transferred, not the "opportunity cost" of jobs not created in the USA because of capital flight preference of East Asian countries. They are growing the jobs there, and we aren't here so every loss we have is not compensated by new jobs created in the normal economic destructive/creative cycle of the economy. This leads to a net loss of jobs without necessarily incurring large numbers of open transfers. But even if you do have a job that is created here in the States to replace lost jobs, the competitive pressure from the potential of outsourcing overseas is driving down compensation.

So the story is for every "good" or high paying job brought here through outsourcing, invisibly there are multiple other jobs who have their wages depressed through competition with potential outsourcing in Asia and elsewhere. It's clearly showing in the macroeconomic aggregate statistics and it's clearly present in anecdotal stories.

That's why outsourcing rhetoric like this is just plain wrong. It's wrong because it's looking in the wrong place.

But these macroeconomic arguments are abstract, while anecdotes suffer from the accusation that they aren't representative. How to drive this home on the mesoscopic level of the real impact of outsourcing? Well Nathan Newman does an admirable job presenting the real face of outsourcing for most people, even those who won't lose their jobs to overseas competition directly.
Whatever jobs are being created, most aren't accompanied with health benefits.

So says the HMO executives who aren't seeing new enrollments in their plans:

It's fair to say that a lot of jobs that are being created may not be the jobs that come with benefits," Ron Williams, president of Aetna Inc. (NYSE:AET - news), one of the biggest U.S. health insurers with 13 million members, told investors in early June.

That echoes recent comments by others in the industry...

The HMO's just aren't seeing people getting enrolled in employer-paid health plans. That's because the new jobs have lost a classic part of compensation, the healthcare benefit. You can bet that those that are keeping them are seeing higher premiums which is another way of lowering compensation. So that's the real face of outsourcing. Don't let either economic happy talk or people who glibly focus on misleading statistics try to tell you otherwise. It's not something off in the future, it's already here and the face of it is the little kid whose parents have to decide between their meds and soccer afterschool, in the clothes being just a little bit more worn and frayed when they're replaced, in the numbers of people who don't go to the doctor for preventive or early intervention care and so become very sick, and in the higher number of bankruptcies of ruined households. It's here and it's ugly. Don't let anyone in a suit and an air conditioned office using a power point presentation tell you otherwise.

Oh and one more thing, in the previous article the oldman has discussed how government subsidies of education have risen to a spectacular high, masking the real inflationary costs of education increases. But Greenspan is still holding out an education solution. That's misguided. If our people become educated but people don't want to hire them, or offer them less in compensation for their skills, things are still going to take a dive. The problem is that we have higher fixed costs of labor here in the USA, and that is what is leading the jobs to go elsewhere. As can be seen by history now, a marked increase in government subsidy of education has not reversed or even slowed the offshoring trend. So Greenspan you're wrong.


More Bad Economic Reporting: Or was the Oldman wrong about rising college costs?

When I first read over the new USA-Today article about increasing affordability of college education, the oldman thought he was going to have to write up a retraction. One of the oldman's assertions is that college costs have been rising higher than the "overall" CPI weighted basket of inflation and was contributing to higher cost of living inflation. But the article only apparently contradicted that.

Tuition burden falls by a third
By Dennis Cauchon, USA TODAY

What students pay on average for tuition at public universities has fallen by nearly one-third since 1998, thanks to new federal tax breaks and a massive increase in state and federal grants to most students and their families.

Contrary to the widespread perception that tuition is soaring out of control, a USA TODAY analysis found that what students actually pay in tuition and fees — rather than the published tuition price — has declined for a vast majority of students attending four-year public universities. In fact, today's students have enjoyed the greatest improvement in college affordability since the GI bill provided benefits for returning World War II veterans.

What made the difference: a $22 billion annual increase in grants and tax breaks since 1998.

That 80% jump in financial aid — targeting middle-class families earning $40,000 to $100,000 a year — has more than offset dramatic increases in tuition prices.

"College still takes a big chunk out of most families' income. But the average student is much better off today than headlines would have you believe," says Sandy Baum, an economist who co-authors an annual report on college costs for the College Board, which oversees college entrance exams.[emphasis added]

When you first read the title it seems to promote the idea that college costs actually fell. But that's not the truth. What happened is that college costs are soaring out of control. What's also happening is that cost is being redistributed by taxes and tax cuts.

You see the cost of a college education is increasing, it's just that no one is complaining much because the government is subsidizing that education. However that subsidy is paid for by Federal borrowing or taxes, and in either case in the end everyone really is still paying more for education. It's just another case of robbing Peter to pay Paul.

So it can be true that college costs are soaring unreasonably and that college become more affordable for a typical family. It's just that the burden of paying that cost was shifted a great deal to the general tax base. That's the diabolical market distorting power of subsidies. They can simultaneously make products and services more affordable even as they allow the costs to skyrocket. With the government - i.e. taxpayers - picking up the tab colleges (and I work at one) have no incentive to curb costs because their tuition is being priced out of the range of ordinary people. Which empowers them to let costs skyrocket even more. Let me also state that these cost increases are not going toward staffing or pay increases for the most part. That's a discussion for another time however.

The important thing to remember is that this article was presented rather badly. The title should have read something like: "College more affordable because of government help." or more radically "Taxpayers pay a third of higher tuition." That would have been the honest and accurate and precise journalistic message about this economic process.

In the end these higher costs are reflected in higher real inflation so the oldman has nothing to retract at all on this issue so far.

Military Watch: Were the soldiers whacked deserters?

Needlenose connects two events that I've been thinking about myself - the hostage Hassoun and the four other Americans killed under unusual circumstances a few days before we heard of this latest hostage drama.

The rumor is that Hassoun was making a break for Lebanon - e.g. deserting when he was picked up. More interestingly, the absolute silence of the Pentagon on the slain soldiers and their odd situ of death suggests they too were on the lam. Think about it. Hassoun is really sick of serving in the army. He speaks Arabic. He's got regional connections. But is he just going to walk out of there alone?

Say he has some buddies, American buddies who maybe are sick enough of service in Iraq - over a year, another extension, and no end in sight - to kiss life in the States goodbye.

What does Hassoun do? He talks them into making a break with him, maybe even suggests he'll help them set up a new life in Lebanon. So they all quietly go together. Only something goes wrong. They're made, the insurgency probably doesn't even realize they're deserters. It just thinks they're a bunch of stupido kafir with a Lebanese translator tour guide that got foolish or lost while going from point A or B. So it nails them.

The US army realizes post facto that they were AWOL when they got nailed, but it tries to keep the lid on things. Why? Because it doesn't want it widely known that morale is so bad that there are soldiers so desperate to get out that they're willing to desert and say goodbye to life in America forever.

That's the backstory that's firming up.

Monday, June 28, 2004

Housing Watch: Those Who Do Not Learn From History ...

This is an interesting article in the CSM that suffers from bad journalism.

Yet any housing slowdown will have a spillover effect on the economy. Last year, more than 10 percent of the nation's 3.1 percent growth rate was directly related to housing. It's currently still running about that rate - about double its historic contribution to the economy.

Housing is even more important in terms of its indirect contribution. When individuals buy a new home, they often buy new furniture, appliances, carpeting, lighting, even azalea trees. When all is totaled, 20 percent of the US economy may be related to housing, estimates Seiders.

Home values have been growing even faster than builders are pouring new footings. In some parts of the nation, such as California, New York City, Boston, and Washington, houses are up as much as 25 percent over the past year. Last week, the National Association of Realtors reported that nationally, prices of existing homes in May were up 10 percent over than May 2003.

The sharp rise has made some question whether the sector is "the next bubble." But in a study released last week, the Federal Reserve Bank of New York says it doesn't look like a bubble about to burst. Although some markets may be overbought, that's not the case on a national basis, say senior economist Jonathan McCarthy and vice president Richard Peach.

"We're not suggesting there are not pockets of exclusive areas where prices are up dramatically and they can come down dramatically," says Mr. Peach in an interview. "The main point we want to make is that the measures that people use to support the view that there is a bubble are flawed."

Flaws in housing 'bubble' theory

For example, Peach says the large drop in nominal interest rates in the past few years has meant that home buyers can afford larger mortgages. In 1990, the average nominal interest rate of a 30-year fixed-rate loan was more than 10 percent; today, it is closer to 6 percent. "Combined with a 50 percent increase in median family income, there's been a 130 percent increase in the mortgage a family can qualify for," he says. "Over the same period, home prices are up 72 percent - so it's a wonder [that] home prices have not risen [even] more under the circumstances."

Peach also disputes the view that an increasing number of home buyers using adjustable-rate mortgages during a time of rising interest rates constitutes a threat to the economy. "We have seen this before in the beginning of 1987 when there was a fairly big run-up in rates in a short period of time, and the world did not come to an end."[emphasis added]

What's wrong in this article? What else happened after 1987? Can anyone recall? Something related to loose credit, real estate speculation, and loan scandals? Hmmm ... that's right the half a trillion dollar S&L scandal bailout. Along the way we had the market crash of 1987 and "black monday".

So all this economist is saying is that we're looking at similar banking scandals and market crashes like 1987, so it's no reason to worry. Dear lord! Save us from economists! Where do they get these freaks?!?! And this guy is the Vice-President for the Federal Reserve Bank of New York?!?! Okay he can't be that much of an idiot. Obviously the Federal Reserve thinks we are however.

Personally I've always rejected any argument of a "coverup". However either the Federal Reserve Bank is completely inept and hired a moron, or they deliberately sent someone out there to spread disinformation to try to "coverup" a possible market panic/crash. The sad thing is that most Americans, like the journalist who didn't bother to ask the follow up question "...say didn't something bad or two happen to the markets after 1987?", will fall for this until it's too late.

How will it happen? Read Jenman here for the scoop on the disaster in the making. That post was made in 2001, however it's also true that the Fed hasn't been forced to raise interest rates until about now. The Banks can always extend more credit until inflation starts rising. Then they must choose between tightening credit and courting inflation that destroys the value of their asset base. If they tighten credit that's when the fall happens because the speculation has become fueled by credit financed buying that isn't sustainable. When it falls back to sustainable levels it always overshoots because the system needs to restabilize from all the margin calls.

That's how it'll happen. The scary thing is that prices have appreciated even more since this study was conducted. Scary.

Debt Slavery: The New Economic Order?

In the past, various conditions have arisen when the lower social classes have been legally disenfranchised by various elites. The outright notion of slavery itself is the most obvious form, but indentured servitude is frankly not much better. The current economic system and its mismanagement has spawned a new version - something that Stirling Newberry of BOP-news has calling "debt slavery".
Well let's look at it closely. What exactly does debt slavery look like? Well it looks something like what is reported by the NYT in two separate but together incidendiary articles. The first article is on consumer spending.

Consumers -- whose behavior plays a key role in the economy -- boosted their spending in May by the largest amount in more than two years...

When adjusted for inflation, however, consumer spending rose by a more modest 0.4 percent in May after being flat in April. And disposable incomes were unchanged in May, following a 0.4 percent rise. The government does not provide a similar price-adjusted figure for Americans' overall incomes, which include wages, salaries and Social Security benefit payments...

Consumer spending accounts for roughly two-thirds of all economic activity in the United States. Thus, it plays a key role in shaping an economic recovery.

Consumer spending on ``durables'' -- costly manufactured goods such as cars and appliances -- rose by 1.7 percent in May, a turnaround from the 0.6 percent decline reported for April. Spending on ``nondurables,'' such as food and clothes, went up by 1.2 percent last month, up from a 0.1 percent dip in April. Spending on services increased by 0.7 percent in May, up from a 0.5 percent rise the month before. All those spending figures were not adjusted for inflation.

With spending outpacing income growth, the nation's personal savings rate -- savings as a percentage of after-tax income -- dipped to 2.2 percent in May, from 2.6 percent in April.[emphasis added]

Don't you think it's curious that the government isn't keeping figures on how much total incomes are affected by inflation? You'd think that would be something that people would be interested in. This ommission however serves a strategic purpose of avoiding discussion of how well off Americans have become over time. The other problem with the article is that it suggests that consumer spending is up because savings are down. But if we invest more than we save, and we do, then this isn't merely saving less and spending more - it means that someone is going into debt.
By several measures, Americans are more indebted than ever. Through the first quarter, they owed nearly $9 trillion in home mortgages, car loans, credit card debt, home equity loans and other forms of personal borrowing — accumulating nearly 40 percent of this total in just four years, according to published Federal Reserve data. But most of the debt is at fixed interest rates. Thus it will be unaffected initially as the central bank begins its much expected quarter-point increases in the so-called federal funds rate, now at a 46-year low of 1 percent. The federal funds rate, in turn, influences the interest rate cost of most household and commercial debt.

Only one-fifth of the $9 trillion in total household debt, or $1.8 trillion, is borrowed at variable rates. Variable rates, like those that the Diffenderfers pay on their four credit cards, often track what the Fed does, which means they are likely to rise one-quarter of a percentage point over the next few weeks. The immediate cost for the nation's households as a result of this process could be as much as $4.5 billion, including the initial $35 increase in the Diffenderfers' monthly credit card bill.

The $4.5 billion is roughly 10 percent of the cost of the rise in oil prices so far this year. That is not a big number yet, but each quarter-point increase would be another step closer to matching the oil shock, which brought gasoline prices above $2 a gallon in many parts of the country.

While the oil shock quickly raised the gasoline and heating oil bills of nearly every household, the burden of higher interest payments falls most heavily in the early stages on lower- and middle-income families. They are the biggest users of variable rate debt, particularly on credit cards, various studies show.

Upper income families, on the other hand - that is, families with more than $80,000 in annual income - are more likely to have fixed rate debt, particularly mortgages, and to owe relatively little on their credit cards. What variable rate debt they do have is usually at lower interest rates than lower income people. Lower income people, as a result, are 10 times more likely than upper income people to be devoting 40 percent or more of their income to debt repayment, the Economic Policy Institute reports. In addition, upper income people are the nation's biggest savers, and a rate increase raises the return on their interest-bearing securities.[emphasis added]

Don't you notice this interesting correlation? On one hand, the government says consumer spending is up and savings is down. What it neglects to emphasis is that debt has been increasing - some 40% in consumer debt - in the past four years alone. If you count backwards four years is Y2000 or when the recession hit and the Federal Reserve cut interest rates and GWB started instituting his tax cuts. So there's been a wealth transfer, from the income of the lower social classes to the asset properties ("rent") for the upper social classes ("rentiers").

Is this a joke? Is what is happening just an accident or is it that insidious? I don't mean to imply a conspiracy. There is no conspiracy. This is simply the result of a lack of imagination on the part of the elites - the leaders. A structural economic transformation has to take place. The leaders and elites of the society don't know how to accomplish this. Indeed as Iraq has shown they have no idea how to run or build a country. So they institute steps to try to maintain the status quo. But underlying economic changes are occurring. It costs ever more and more and the price becomes higher and higher to implement policies that maintain the status quo. Stirling describes it here in an admirable summary of how these factors are tied together.
Our politics is dominated by a reactionary party that must have absolute power, that must pour every cent of the economy into the pockets of the wealthy, so that we can continue to buy oil. That may sound like a contradiction, but it is not. The profits from oil pile up in dollars, those dollars are used to buy assets. If our rich don't stay ahead of the arab rich, the arab oilarchs will own the country. It is the distortion that drives tax breaks for the wealthy, ever spirally consolidiation, and ever more incentives for everyone to park money in the Dow.

The weight of the oil is crushing us.

And in the machinations to secure that oil, and to secure the monetary arrangements that prop up the dollar - for example Japan's well documented financial self-flagelation of buy nearly worthless US Bonds to keep our deficit floated - that lies the heart of dark secrecy. We elect scoundrels in chief, because there is a sense that only criminals can do the job. We then shrug when they manipulate elections and economics for their own benefit - it is part of the job...

The desire not to hear about the problems of this world has gone to bizarre lengths. We did not talk about the coming recession in the election of 2000, nor the S&L meltdown in 1988. Yet they were coming for all to see. The real events of 2005 are not being mentioned now.

Which means that somewhere is lost the ability to actually come to a consensus on these matters. Instead we have "leadership" which means selecting a course of action, and then having every branch of government become part of a vast echo chamber to push it, and exclude any other alternatives. As I write this the EPA is telling people that there is no point in getting a more fuel efficient car.

I still believe that "we get the leaders we deserve". Stirling's analysis points to the underlying causative factor in this. Our society does not want to be discomforted by change. Change is hard and difficult. We must throw aside the shibolleths of the past and demand competence and progress. This threatens the present economic and social order as we know it, because over time many of the people in every sphere and walk of life have become parasitical. They have lived off the glory of their ancestors and know not how to steal fire from heaven for themselves. So they fear change. They take steps to try to avoid it.

They elect leaders that will protect them from change instead of ones who will guide them through it. These elites themselves are eager to protect their own interests. Therefore they support the unsustainable, until the collapse happens and it can go on no longer. Then all is lost. As time goes by forms of debt - college education debt, property debt, credit line debt, etc. - are hollowing out the American economy. They are also transferring our asset ownership in capital flight overseas and in order to right this the elites are diverting as much of that asset ownership flight into their own names. Better that an American buy it than a foreigner own it right?

Only according to Newsweek there is scientific evidence that this sort of reasoning simply doesn't work.
Economists have many ways of demonstrating the irrationality of their favorite experimental animal, Homo sapiens. One is the "ultimatum game," which involves two subjects—researchers generally recruit undergraduates, but if you're doing this at home, feel free to use your own kids. Subject A gets 10 dollar bills. He can choose to give any number of them to subject B, who can accept or reject the offer. If she accepts, they split the money as A proposed; if she rejects A's offer, both get nothing. As predicted by the theories of mathematician John Nash (subject of the movie "A Beautiful Mind"), A makes the most money by offering one dollar to B, keeping nine for himself, and B should accept it, because one dollar is better than none.

But if you ignore the equations and focus on how people actually behave, you see something different, says Jonathan D. Cohen, director of the Center for the Study of Brain, Mind and Behavior at Princeton. People playing B who receive only one or two dollars overwhelmingly reject the offer. Economists have no better explanation than simple spite over feeling shortchanged. This becomes clear when people play the same game against a computer. They tend to accept whatever they're offered, because why feel insulted by a machine? By the same token, most normal people playing A offer something close to an even split, averaging about $4. The only category of people who consistently play as game theory dictates, offering the minimum possible amount, are those who don't take into account the feelings of the other player. They are autistics.

I think 'autistic' is a good description of persons who argue that increased income inequality will work as long as the "bottom line" improvement of people's living standards occurs. First of all people's living standards are on median decreasing in real terms once you've corrected income for real inflation and debt figures. Second of all limiting income disparity is a simple matter of political stability.

Let me clear, I consider myself generally most sympathetic to the social elites. This post is not about 'bashing' elites since I am elitist myself. I am not 'against' capitalism. I am not for labor generally. However I am a forward thinking elitist. If I wish to enjoy elite status and become prosperous with a six figure income and pass that on to my children, playing a zero sum game that disenfranchises and therefore enrages the middle-class and proletariat is not in my best interests. That's what's happening here, the elites of our country have lost their capacity for forward thinking. We have a deficit of imagination and will. This will prove almost surely a fatal loss.

The Coming Storm: Oil Wars

In a previous post, "new era sneaks up on public" the oldman discussed that the real oil crisis was not a distant future inevitability, but something that was beginning now.

Now the WaPo has a new op-ed, "The Undeclared Oil War" by Paul Roberts that discusses the current geopolitical wrangling that will make the Middle-east the center of a vortex of violence and war increasingly over the next two decades.

The petro-rivalry has become so intense that Japan has offered to finance the $5 billion pipeline, invest $7 billion in development of Siberian oil fields and throw in an additional $2 billion for Russian "social projects" -- this despite the certainty that if Japan does win Russia's oil, relations between Tokyo and Beijing may sink to their lowest, potentially most dangerous, levels since World War II.

Asia's undeclared oil war is but the latest reminder that in a global economy dependent largely on a single fuel -- oil -- "energy security" means far more than hardening refineries and pipelines against terrorist attack. At its most basic level, energy security is the ability to keep the global machine humming -- that is, to produce enough fuels and electricity at affordable prices that every nation can keep its economy running, its people fed and its borders defended. A failure of energy security means that the momentum of industrialization and modernity grinds to a halt. And by that measure, we are failing.

In the United States and Europe, new demand for electricity is outpacing the new supply of power and natural gas and raising the specter of more rolling blackouts. In the "emerging" economies, such as Brazil, India and especially China, energy demand is rising so fast it may double by 2020. And this only hints at the energy crisis facing the developing world, where nearly 2 billion people -- a third of the world's population -- have almost no access to electricity or liquid fuels and are thus condemned to a medieval existence that breeds despair, resentment and, ultimately, conflict.

In other words, we are on the cusp of a new kind of war -- between those who have enough energy and those who do not but are increasingly willing to go out and get it. While nations have always competed for oil, it seems more and more likely that the race for a piece of the last big reserves of oil and natural gas will be the dominant geopolitical theme of the 21st century.

If this is the real geopolitical struggle we are in, then whoever wins the Presidency of the United States we will see a draft and an increase in the troop commitment to Iraq. The United States cannot afford to give up a beachhead and low-sulfur oil property in the Middle-east like Iraq. American boys and girls will be dying for oil not just through 2005 but for however long it takes to secure that energy resource.

Friday, June 25, 2004

Economy Watch: Government and NYT agree with Oldman

Okay I said I wasn't going to be blogging until I got back from my friend's wedding but when I saw this item on GDP growth from the NYT I couldn't resist throwing it up quickly.

Economy Grew More Slowly in 1st Quarter Than First Thought
By REUTERS

Published: June 25, 2004

WASHINGTON (Reuters) - The U.S. economy grew much more slowly than previously thought in the first quarter while inflation was higher, a government report showed on Friday.

The surprise downward revision to gross domestic product - which measures total output within the nation's borders - cut growth to a 3.9 percent annual rate in the first three months of 2004 from the 4.4 percent reported a month ago and below the 4.1 percent pace in the final quarter of last year.

Wall Street analysts had not expected the Commerce Department to change the GDP estimate. The department said the reduction in its final measure of first-quarter economic growth resulted from a sharp upward revision to imports - which subtract from GDP - and a downward revision to the amount consumers spent on bank services.

The government also ratcheted up a key measure of inflation, confirming an acceleration in price rises that has fueled expectations the Federal Reserve will begin raising interest rates next week to head off inflation.

As the oldman indicated in his previous posting: The Lollapalooza Indicator anyone who had been watching rock concert ticket sales for the summer would have found this news no surprise whatsoever. The oldman just scooped the market. Right now I'm writing from the waiting lobby of the local Honda dealer while I have my oil changed before my trip out east for my friend's wedding. Seeya all when I get back!

Thursday, June 24, 2004

Traveling Again ... Friends Wedding

Okay I'm traveling again this weekend, for a friend's wedding.

Btw before I take off, I have something to note. I saw a reference on a board regarding my article "The Lolapalooza Indicator" saying that they didn't believe it because they had a lot of hiring interest, etc.

Well as economists know, the mainstream economy precedes the labor market by about 3-6 months. If the point of falloff happened in May that means that the labor market which is called a "lagging indicator" will fall off sometime between July and October. In other words, you've still got a month or two of economic stimulus working it's way through the system.

After June 30th, the Federal Reserve will raise interest rates and things should start to unravel in a way that anyone can recognize from there.

Any other questions?

Okay gotta run to catch a friend's wedding!

We Report; You Decide: Walmart the Beast 666? ;-)

What am I talking about? Well as it so appears Walmart is helping advance the usage of scannable chips that can be used to keep track of all consumer goods and buying and selling. Where is it? Coming to a bank or border near you right now!

The technology has been around for a decade -- including use in the E-ZPass system that helps speed drivers through toll booths on many East Coast highways -- but RFID is now robust enough, and getting cheap enough, that it is beginning to transform numerous sectors of the economy by allowing unparalleled tracking of products and people.

Early this month, Reston-based Accenture LLP won a contract worth as much as $10 billion from the Department of Homeland Security that will include using RFID at U.S. border checkpoints.

Delta Air Lines Inc. is testing RFID baggage tags on its service between Jacksonville, Fla., and Atlanta, to help with security and lost luggage. In Great Britain, officials are weighing proposals to embed tags in vehicle license plates. International Business Machines Corp. is seeking to convince banks that their best customers could be issued cards with the tags, allowing them to be immediately recognized when they enter the bank and given red-carpet treatment.

What does this have to do with Walmart?
But Wal-Mart is pressing ahead, announcing last week that it was expanding the program to its top 300 suppliers by 2006. Target Corp. and Albertson's Inc. have announced similar initiatives, as has the Department of Defense, which will affect hundreds of suppliers of everything from bullets to rations.

"RFID will revolutionize . . . the way we do business around the world, and deliver unimaginable benefits," said Simon Langford, Wal-Mart's global director of RFID.

Considering the size and market penetration on a national scale of Walmart, it could be the first step in expanding the electronic tracking of all buying and purchasing. Of course, the industry experts tell us that our fears are overstated. Of course the industry experts on cigarette smoking, asbestos, and PCB's said the exact same thing.
Industry dismisses those kinds of scenarios as paranoia, but Albrecht and other activists have forced companies to pay attention to them. A store in Rheinberg, Germany, took RFID tags out of its loyalty cards after protests. Many large firms working with RFID now have extensive disclosure statements on their Web sites.

"Anonymity is an important issue that must be handled very thoughtfully," said Elliot Maxwell, who heads an international committee that advises EPCGlobal on privacy and other policy issues.

But he also recognizes the RFID paradox: "In order to have the most value to both individuals and society, the infrastructure [to read tags] needs to be widespread," he said, citing medical monitoring and the ability to track toxic products, or stolen guns, as examples. "And yet it is just that widespread infrastructure that raises the most questions."

Well how bad is the technology?
Currently, tags cannot be read at more than about 20 feet, but many say that reading capability will rapidly advance. And given RFID's potential to track stolen goods, privacy activists wonder how long it will be before tags are embedded in money.

But few applications raise more eyebrows than RFID tags implanted in people, a business pursued by Applied Digital Solutions Inc. and its subsidiary, VeriChip Corp., of Palm Beach, Fla.

The company has for years provided rice-grain sized tags for implants into pets and cattle. But it made waves two years ago when a Boca Raton man, his wife and 14-year-old son agreed to let the tags be implanted in them.

The company and the family hoped the tag would speed patients through frequent hospital visits or in the case of an emergency by quickly alerting doctors to a person's identity and medical history. But the FDA quickly stepped in and deemed medical uses of the technology subject to government approval, which is still pending.

Hmmm... what does that remind me of? It's coming to me... coming to me...
The Beast out of the Earth

11Then I saw another beast, coming out of the earth. He had two horns like a lamb, but he spoke like a dragon. 12He exercised all the authority of the first beast on his behalf, and made the earth and its inhabitants worship the first beast, whose fatal wound had been healed. 13And he performed great and miraculous signs, even causing fire to come down from heaven to earth in full view of men. 14Because of the signs he was given power to do on behalf of the first beast, he deceived the inhabitants of the earth. He ordered them to set up an image in honor of the beast who was wounded by the sword and yet lived. 15He was given power to give breath to the image of the first beast, so that it could speak and cause all who refused to worship the image to be killed. 16He also forced everyone, small and great, rich and poor, free and slave, to receive a mark on his right hand or on his forehead, 17so that no one could buy or sell unless he had the mark, which is the name of the beast or the number of his name.
18This calls for wisdom. If anyone has insight, let him calculate the number of the beast, for it is man's number. His number is 666.
[emphasis added]

Well I'm not into apocalyptic fundamental Christianity, but I can't help but be creeped out by this. If nothing else, purely for the reason that I can imagine Ashcroft staying up late nights looking through electronic files to see whether the men's magazine I prefer is Maxim, GQ, or Playboy. That's creepy enough without any of this Beast 666 stuff!

Geopolitics: Nuclear Crisis, a real NSA speaks

Brent Scowcroft writing in the WaPo has this to say:

Should Iran now be permitted to develop the capability to enrich uranium, it is almost impossible to imagine that other countries could be dissuaded from creating their own enrichment capabilities and consequently the capacity to produce weapons-grade material for nuclear weapons.

We are at a critical moment. Are we serious in our efforts to prevent nuclear proliferation, or will we watch the world descend into a maelstrom where weapons-grade nuclear material is plentiful and unimaginable destructive capability is available to any country or group with a grudge against society?

Staring into that abyss should stir us to action. What can we do? The United States, Britain, France and Germany have already shown an encouraging, if insufficient, degree of cooperation with respect to the Iranian nuclear program. Russia has been the principal source of assistance in the development of Iranian nuclear power. But Russia has already informed Iran that it would expect spent nuclear fuel from the Bushehr plant to be returned to Russia, appearing to indicate that it too has no interest in allowing Iran to develop a nuclear weapons capability.

...

Now is the moment of truth.

He's absolutely right. The problem is that we don't have an option in Iran. The reason why we don't have an option in Iran is we're tied down in Iraq. There's no way short of a draft that we're going to invade Iran. There's no way short of completely despairing of winning the election that GWB will declare a war with Iran (I understand that this is unConstitutional, nonetheless it would happen that way if it happened) and declare a draft (again normally an act of Congress) in order to invade.

Once Iran goes over the edge, it'll be impossible to stop Brazil. If Brazil can't be stopped a host of other nations will go right over that nuclear edge. Nuts. But that's the new normal cause we're boxed in regarding Iraq. And if GWB declares a draft, invades Iran, and wins the election I can guarantee you that there'll be a civil war in America.

Wednesday, June 23, 2004

Economy Watch: The Lollapalooza Indicator

The oldman is guessing that the economy is in real terms contracting right now. What is the oldman's evidence for this?

The Lollapalooza Indicator - read it for yourself hot off the electron presses at the NYT

Lollapalooza Tour Canceled Amid Weak Concert Season
By BEN SISARIO

Published: June 23, 2004

In a blow to the summer concert season already hurt by the loss of big tours by Britney Spears and Christina Aguilera, the touring Lollapalooza festival has been canceled because of poor ticket sales, the festival organizers said yesterday.

The tour, which was to have begun on July 14 in Auburn, Wash., and travel to 16 cities through Aug. 25, had booked Morrissey, Sonic Youth, P. J. Harvey, String Cheese Incident, Modest Mouse, the Flaming Lips and many other alternative rock groups for 31 engagements across the United States.


Marc Geiger of the William Morris Agency in Los Angeles, who founded the tour in 1991 with the singer Perry Ferrell, said in a statement: "I am in utter disbelief that a concert of this stature, with the most exciting lineup I've seen in years, did not galvanize ticket sales. I'm surprised that given the great bands and the reduced ticket prices that we didn't have enough sales to sustain the tour."

Representatives of the festival did not disclose sales figures for the concerts, but Mr. Geiger said that if the concerts had not been canceled, the promoters would have faced losses in the millions.

The cancellation comes at a difficult time for the concert business. Many large tours are said to be having difficulty selling tickets, despite strong economic signals for the business earlier in the year.

"We had a very strong first quarter, which allowed people to be a little overly optimistic going into the summer," said Gary Bongiovanni, the editor of the concert trade magazine Pollstar. "But ticket sales dried up in mid-April, right after tax day, just as the big tours started to gear up."

Mr. Geiger said ticket sales had been uneven around the country, with relatively strong sales for the Aug. 16 and 17 concerts at Randalls Island in New York, where the Pixies were to make one of their only two appearances on the tour.

But in many markets, the concerts were said to have sales not much higher than one of the headlining acts might have drawn on its own.

"Sometimes one plus one plus one equals one in this business," Mr. Bongiovanni said...

Mr. Geiger blamed the slow concert season for the festival's woes, citing poor sales for the Dead, Dave Matthews, Van Halen and Kiss. "My question is, what is doing well?"

The important thing to note that it isn't the problem just of a single rock tour. Apparently it's spread to a variety of musical genres - Dave Matthews doesn't have much in common with Kiss. When government statistics begin to lie or be untrustworthy, you have to be smart and look at other economic indicators to see the real picture.

The real picture of how people are voting with their pocketbooks is that the economy seems to be contracting in real terms despite the big press to the otherwise.

Dept. of Naval Gazing: Why liberals aren't taken seriously

One would think that after three years of unmitigated corruption, lying, and abuse of power that people would be so heartily sick of Republicans that they would never vote for them again. To be frank my gorge has risen several times, and there doesn't seem to be any end to the shoe dropping. In the interest of fairness, John Kerry has in fact pulled ahead despite the continued drag from the Nader-albatross. However given the incompetence and irresponsibility, one would think that liberals would be ready for another few decades of dominance by now. The reason why they're not?

Because sometimes they open their mouths and stuff comes out that makes the stomachs sink of even conservatives like me who have washed their hands of the Republican party madness.

What am I talking about? How about the latest TPM guest post?

During the Cold War, American officials discovered that one of the best ways to promote democratic capitalism at the expense of communism was by luring foreign students to American colleges. Some of these foreign graduates returned home to become the leaders of reform movements in their countries. Others stayed in the United States and contributed their skills to the great postwar boom. The same reasoning that prevailed during the Cold War should prevail during the war on terror. The United States should be eager, one would imagine, to expose students from abroad to democracy and religious pluralism, as well as to take advantage of their skills. But not the Bush administration and the Republican Congress. They are oblivious to any foreign policy measures that aren't repressive. Their response to anti-Americanism is to wall off America from its potential critics.

In the wake of September 11, the Bush administration tightened visa rules for foreign students. Prospective students have had to pay a $100 fee to file a visa application. And it has taken up to eight months to process the applications. As a result, foreign applications to American colleges have plummeted. According to the Financial Times, graduate school applications have declined 32 percent this year. "The word seems to be out that you can't get a visa to come and study in the US, so why bother," said Liz Reisburg, who helps recruit foreign MBAs.

Undoubtedly, some aspects of this new visa program were unavoidable in the light of how the September 11 terrorists entered the country. But one would hope that the Bush administration would be trying to streamline the program, and to reduce the delays, so that students would once against be drawn to American universities, as they were during the high-tech boom of the 1990s. Instead, the administration is on the verge of putting still another and greater obstacle in the face of foreign students.

The legislation establishing the Department of Homeland Security included a provision creating "Sevis." a database for keeping track of international students. Each student would have to register with the Sevis. Last October, the Department of Homeland Security proposed that in addition to the $100 visa fee, every prospective student would have to pay another $100 to fund Sevis. The payment would have to be through a credit card or dollars. Universities have not objected to the program itself; but they have objected strenuously to imposing another fee on foreign applicants. "Having yet another thing students have to do to come to the US that they don't have to do in any other part of the world will drive more people away at a time when enrollments are declining," said one official from the Association of International Educators.

The universities, of course, are understandably worried about declining enrollment, but what is most disturbing about the administration's program--and about its general approach to foreign students--is its hostile attitude toward the outside world. It's fortress America applied to educational policy. Such an approach won't necessarily prevent terrorist attacks, but it will in the long run encourage the anti-Americanism on which al Qaeda and other terrorist groups feed.

-- John B. Judis

What's the problem with this? Well undoubtedly the KGB had corrupted more than a few of those foreign exchange students, but their primary purpose was infiltration and spying. The problem with the current situation is that the system is open suicide bombers and terrorists coming over with the technical expertise to conceivably launch terrorist cells and potentially even help carry off a WMD attack one day. That's the difference.

Now I work in a university environment and I understand first hand how the visa problems have created snarled up conditions that have personally impacted my own work. This is a pain in the ass. I do hope that the Department of Homeland Security and the State Department get this worked out real soon. It's intolerable that it's taken this long.

However the simple fact is that the student visa system was one of the ways that Alqueda penetrated the United States to set up cells and directly contributed to the teams that carried off the 911 attacks. The fact that this person is so casually suggesting a return to previous conditions while blithely not considering the incredible harm it could do us, is mind boggling. It's also one of the reasons I think myself and many other Americans can't muster much enthusiasm for a Democratic takeover of the WoT despite our realization that GWB has gone off the deep end. (Capitol Hill Blue)

President George W. Bush’s increasingly erratic behavior and wide mood swings has the halls of the West Wing buzzing lately as aides privately express growing concern over their leader’s state of mind.

In meetings with top aides and administration officials, the President goes from quoting the Bible in one breath to obscene tantrums against the media, Democrats and others that he classifies as “enemies of the state.”

Worried White House aides paint a portrait of a man on the edge, increasingly wary of those who disagree with him and paranoid of a public that no longer trusts his policies in Iraq or at home.

“It reminds me of the Nixon days,” says a longtime GOP political consultant with contacts in the White House. “Everybody is an enemy; everybody is out to get him. That’s the mood over there.”

In interviews with a number of White House staffers who were willing to talk off the record, a picture of an administration under siege has emerged, led by a man who declares his decisions to be “God’s will” and then tells aides to “fuck over” anyone they consider to be an opponent of the administration.

“We’re at war, there’s no doubt about it. What I don’t know anymore is just who the enemy might be,” says one troubled White House aide. “We seem to spend more time trying to destroy John Kerry than al Qaeda and our enemies list just keeps growing and growing.”

Okay, I agree GWB needs to be removed before something terrible happens. However before Democrats can be trusted by Americans like myself, we need to feel that they "get it". Naval-gazing rhetoric like that displayed by Judis just gives us the same sinking feeling that led so many (not myself) to pull the lever for the elephant. Show us that you "get it" and you'll get swept into power so fast that your head will spin. Continue to display that oblivious ignorance of real American concerns, and our support will be lukewarm at best. Maybe Mad George does have to go, but that doesn't mean that liberals are going to get everything handed to them on a silver platter unless they can demonstrate the seriousness to govern in an age of mass-terrorism.

Tuesday, June 22, 2004

Economics and Law: The Class Action Suit as Backdoor Collective Bargaining?

A Judge certifies a class-action lawsuit against Walmart. (MSNBC)

A federal judge on Tuesday approved class-action status for a sex-discrimination lawsuit against Wal-Mart Stores Inc. that has become the largest private civil rights case in U.S. history.

It could represent as many as 1.6 million current and former female employees of the retailing giant.

The suit alleges Wal-Mart created a system that frequently pays its female workers less than their male counterparts for comparable jobs and bypasses women for key promotions.

Wal-Mart, the nation’s largest private employer, sought to limit the scope of the lawsuit that was filed three years ago.

Wal-Mart spokeswoman Mona Williams told The Associated Press earlier Tuesday that the Bentonville, Ark.-based company will appeal the ruling and is confident that it does not discriminate against women employees.

On the merits I'm not sure what basis the judge would have had for denying the lawsuit. The class action faq states:
Class actions serve several important functions in our legal system. Of primary importance, class actions enable a large group of people injured by similar misconduct or a defective product to have their claims joined together in a single lawsuit. This is critical in situations involving hundreds or thousands of class members, where individual damages maybe small compared to the cost of a lawsuit so that no one individual would bring a claim because it does not make economic sense for them to do so. In this regard, a class action provides a way for persons and businesses with relatively small claims that would not, by themselves, justify hiring an attorney, to pool their claims against an alleged wrongdoer.

This pooling of claims levels the playing field against a typically larger and more well capitalized wrongdoer by leveraging all of the smaller claims into one large claim to be handled in a single case. The class of claimants gain "strength in numbers" in making their claim that they would not otherwise have when making an individual claim. This ability to form and bring a class action consolidating the claims of many claimants into one serves an important function of deterring harmful or damaging behavior by persons or entities who have a responsibility to deal fairly and reasonably with the public.

A class action further serves to save time and money to our system of judicial administration. By allowing similar claims to be lumped together in one case, a class action relieves the extreme burden on our court system that comes from having jury after jury seated to listen to thousands of cases, all involving the same claims.

And lastly, the class action procedure also provides persons and businesses who cannot otherwise afford legal representation with access to qualified and experienced legal counsel who will represent them and the class as a whole with regard to their meritorious claims.

Walmart has been very successful at keeping labor unions out of their workplaces. Fair enough, I don't like labor unions either. However this brings out the question what venue do persons have in order to settle systematic employer discrimination or unfairness issues? Well the legal answer to that question is the class-action suit. I'm not sure however if Walmart likes that answer. Walmart could have headed off this suit by making concessions, promoting women, encouraging gender fairness in its training and rules, etc. However they seem to have been pretty adamant about not making concessions. I'm not in favor of large class action suits generally myself, but when large corporations have obstructed other means toward settlements who can they blame but themselves for taking things to this point?