I always knew the French were behind it...

Now this is simply smashingly deadly: the French were largely behind and profited from the international slavery trade that led up to the American civil war.

And can anyone out there tell me with a straight face that the French have ANY basis for being able to take ANY moral high grounds anywhere on this planet?

Not that it will make any difference to the French...

Great post from the folks at Done With Mirrors: read it often and go back there as well.

John

How to Destroy an Institution

Hi -

What, another post *already*?

Yep.

This afternoon a new report will be coming out on the estimation for tax income for the German government. This is widely expected to be wildly optimistic, based on something like over 1% growth (Yipee! This is, after all, Germany...), which means that the government will plan on taking in x Euros, but will take in something like x-many millions of Euros, resulting in further increase in the German national debt.

What's the problem here? The problem is that what we call the Five Wise Guys (Sachverständigen Rat), the five leading German public research institutes, have utterly failed in their charter, to provide advice to the government and technical expertise.

Their technical expertise remains, but that's all there is: no one takes them seriously anymore, since they consistely remain uncritical of what is increasingly obvious really bad economic policies. They don't see being openly critical as part of their charter, and as a result they fail to fulfill their own charter.

The problem is that German politics is so thoroughly ideologized that it brokes no criticism: all political parties of note here are adamantly refusing to recognize that A) the German economy is, domestically, in very bad shape and B) Germany's rather generous social instracture means that Germany is living beyond its means (due to A), and has been doing so for at least 20 years.

If not longer.

Germany is, bluntly, broke. And has been for a while, covering up the problems with mounting debt and tax burdens.

And the institutions that are supposed to jump up and down pointing out the obvious are on the sidelines reestimating their equations to see if they can get a better fit so that their models continue to show growth rates that are politically acceptable.

A "proper" forecast would show that Germany won't show economic growth until the government is downsized and the tax burden is, if not reduced, then at least made more progressive, so that people actually have some money to spend.

These five institutes are basically blind to these problems because it doesn't fit the accepted orthodoxy of German politics. But by failing to be unorthodox, by failing to provide critical advice, they are ultimately destroying what utility they can provide. No one reads their twice-yearly reports on the German economy, because there is nothing of meaning there.

John

Death of Effective Economic Policy in Germany

Hi -

The title of this post says it all.

How do you do effective economic policy? Especially in these days of restrained marginal government spending ability?

You can simply spend money on pet projects, adding to the debt and maybe or maybe not achieving your politico-economic goals. Not the cleverest way of doing things, but effective for your cronies and friends.

Or you could give tax breaks to investments in those areas where you want people to invest. No direct government outlays, no program costs. What you are doing is accepting that you'll have less government revenue on the value added by those investments in exchange for those investments.

Elegant, effective. Want people to invest in real estate in Berlin, to revitalize the run-down portions of East Germany and save in many cases some great architecture? Give investors there a tax break so that for high-value individuals it's sort of a no-brainer to invest, even if the returns are mediocre or even non-existent.

Want people to invest in ships built in Germany (as opposed to Korea or China)?
Give them a tax break to do so.

Want to support the German film industry?
Give them a tax break to do so.

Want to support wind energy farms?
Give them a tax break to do so.

It's a fairly elegant tool to implement government political-economic industrial policy. Low cost, easily manageable (the market does it, not the government). It attracts high-income people, since by investing €100T you can, in many cases, reduce your taxable income by at least that amount, if not more, meaning if you have an income of €500T, you've just saved €50T taxes, meaning you get a 50% return on your investment of €100T in the first year: for many, anything after that effect is gravy.

Downside: your money is tied up for 10-30 years, and in the case of ships or airplanes, will see heavy depreciation that will be balanced out by a revenue stream. But it's that heavy first-year tax write-off that makes it interesting: immediate reward for making that investment choice.

But no more.

The German government, in it's ***infinite*** wisdom, has decided to kill this entirely by changing §15 of the German tax code. This means that any tax break envisioned can no longer be used to compensate current income from other sources, but can only be used to compensate future incomes from that particular investment. So that investment of €100T generates a tax break of €50T that can be used against future tax liabilities from income flows from that investment.

As a high-value individual, there is no incentive to make the long-term investment.

None whatsoever.

So a government faced with really weak investments decides to kill off the best instrument for effective investment policy that it has ever had.

There is no hope for the German economy under the current administration: if anything, it's gonna take years to undo the damage.

John

Just a short note...

Yet again posting here will be short: I've got 1400 equations to redo.

Finally a fisking ...

Hi -

Posting here has been weak, due to work, family and and and and...

My father sent me the following link to an article by Peter Drucker in The National Interest.

There's so much wrong with it I felt I had to take a wing at fisking it...

Let's fisk this one: go get a cuppa, 'cause this is gonna be a long one.

The New world economy is fundamentally different from that of the fifty years following World War II. The United States may well remain the political and military leader for decades to come. It is likely also to remain the world's richest and most productive national economy for a long time (though the European Union as a whole is both larger and more productive). But the U.S. economy is no longer the single dominant economy.

First of all, the EU is not more productive than the US. Second, he's using a sleight of hand to confuse the reader: the EU is not richer and more productive than the US, but does have a larger population, given the recent expansion. US GDP has been larger than that of the EU for about 2 years when you take into account the differing ways that people calculate GDP (don't get me started on chained weights and hedonic deflators, no one except economists have that sort of attention spans...).

The emerging world economy is a pluralist one, with a substantial number of economic "blocs." Eventually there may be six or seven blocs, of which the U.S.-dominated NAFTA is likely to be only one, coexisting and competing with the European Union (EU), MERCOSUR in Latin America, ASEAN in the Far East, and nation-states that are blocs by themselves, China and India. These blocs are neither "free trade" nor "protectionist", but both at the same time.

Here Drucker leads into the paragraph as if the world economy was never a pluralist economy. But what is he really leading to? In the last sentence of the previous paragraph, he claims for the US to date the role of the dominant economy on the planet.

Duh. After WW2 the US produced something on the order of 40% of world output. It's now "down" to 25% and will head to 20%-15% over the next 20 years. But this is meaningless: what is happening is that the rest of the world is catching up, that the rest of the world is becoming wealthier. And this is a bad thing? But this digresses from the fundamental point: Drucker is severely confused. There are no "pluralist" economies: you can't have a free market economy mixing with revolutionaries appropriating the means of production. You can have pluralist politic systems, as does the EU and to a lesser extent the US (the EU has centralist democracies, constitutional monarchies, federalist republics and kleptocracies all mixed together, while the US has Napoleon code of justice in Louisiana and California with all its myriad attempts at direct democracy with referendums), but using the word pluralism to describe economies is like using the word evil to describe a tidal wave.

Further these blocs exist right now. They aren't the monolithic, 1984-style blocs that Drucker seems to think they are, but more a collection of interests with some common trade policies than the mercantilist, monolithic blocs of Drucker's fantasy world. The problem of nominally free-trade economies also being protectionist of certain industries is a political choice, not a consequence of economic policies. Here Drucker is deliberately muddling the waters.

Even more novel is that what is emerging is not one but four world economies: a world economy of information; of money; of multinationals (one no longer dominated by American enterprises); and a mercantilist world economy of goods, services and trade. These world economies overlap and interact with one another. But each is distinct with different members, a different scope, different values and different institutions. Let us examine each in turn.

Here Drucker again confuses aspects of economic activity by making them into autonomous economies, placing them on the same level as national economies. He is looking at four aspects of one thing, the world economy. He points this out by saying they overlap and interact: duh, they don't just do that, they are deeply and fundamentally intertwined and interdependent. If the world economy of manufacturing falters, it takes down the world economy of money, multinationals and information. This is intellectually sloppy, while sounding neat: these economies are constructs that represent aspects of a greater reality.

Information as a concept and a distinct category is an invention of the 18th century--of the newspaper in England and the encyclopedia in France. Within a century, information became global with the development of the modern postal system in the 1830s, followed almost immediately by the electric telegraph and the first computer language, the Morse Code. But unlike the newspaper and the encyclopedia, neither the postal service nor the telegraph made information public. On the contrary, they made it "privileged communication." "Public information" by contrast--newspapers, radio, television--ran one way only, from the publisher to the recipient. The editor rather than the reader decided what was "fit to print."

Information is an invention of the 18th century? Several millenia of philosophers would tend to disagree. What he means is that the business of information is an invention of the 18th century. But this is also a simplification at best. But he is right on one thing: public information today remains fundamentally filtered and priveleged, with someone between you and reality who is telling you the way he/she thinks you should think how things are.

The Internet, in sharp contrast, makes information both universal and multi-directional rather than keeping it private or one-way. Everyone with a telephone and a personal computer has direct access to every other human being with a phone and a PC. It gives everyone practically limitless access to information. And it gives everyone the ability to create information at minimal cost, that is, to create his own website and become a "publisher."

First: This is a bad thing?

Second: he is naive to think that this means that you have practically limitless access to information. Information isn't "created": rather, it is reported and by the mere act of reporting you introduce human bias and distortion into the information. We all know how small nuances in reporting can bias a piece to create one impression, deliberate or not, and the use of punctuation is a primary tool: by placing "scare quotes", you can alter the meaning of straight reporting significantly. There is a huge difference when you say "An expert determined x" and "An 'expert' determined x".

What the internet gives you is the ability to create opinion at minimal cost and get your opinions out there: now, given the amount of rancor over the role of the internet in the last US election with opposing web sites spewing out an enormous amount of vitriol - and if you don't think this has an effect, then welcome to the real world - can one make the case that opinion is information? The electorate wasn't informed, but rather pounded by opinions demanding to be accepted as facts, which meant that winnowing facts from fancy was really hard. This is, if anything, the exact opposite of information: disinformation is in some circles of political activity a highly polished tool, and you don't want to know who I am thinking of. But let's "move on" ...

In the long run, the most important implication is probably the impact of information on mentality and awareness. It creates new affinities and new communities. The woman student in Shanghai who taps into the Internet remains Chinese, but she sees herself at the same time as a member of a worldwide, non-national "information society."

Really? I guess then that I can understand why the Chinese government thinks it is justified in keeping the internet under government control. There is no "information society": what you have is an inceasing openness of communication. It doesn't create affinities, it merely aids them: 'new' communities do emerge, but they are virtual and intellectual, not real and societal.

Businesses and professional groups such as lawyers and doctors have, of course, had access all along to worldwide information in their own field. But the Internet gives such access to the ultimate customer. In the United States at least (but apparently also in Japan and Europe), the ultimate customer now gets his information about plane schedules and airfares from the Internet rather than from a traditional travel agent. And while a good many book buyers in the United States still pick up and pay for the book of their choice at a bookstore in their neighborhood, an increasing number of them decide what books to buy by reading about them online first. An automobile still has to be serviced by a local dealer. But increasingly, buyers first study both their choice for the new car and their options for trading in their old car online before visiting a dealer.

Businesses and professional groups' access to worldwide information about their own fields is most certainly an invention of the 20th century and not one that has been there all the time. The number of businesses that failed to see international developments and went under is too long for any post that can be read by a normal email reader. The same applies to lawyers and doctors. In fact, the only professionals that really worked at having international information about what was going on has been academics of any field, the Catholic church and the various intelligence agencies, and if anyone has excelled at this, it's probably the Catholic church. The rest of his examples have to do with channels of how people do business: it's a great deal simpler to use the internet, just as it was a great deal simpler to use a travel agent instead of dealing directly with dozens of airlines and other means of transportation.

But this doesn't mean that there is more information or that the information is available to users on the internet: in the case of travel agents and booking online, the savings you can achieve online - which is why you use it, right? - isn't the result of you having the same information as the travel agent or even more, but rather you, as the online user, are being targeted by what is available online. You don't get access to the same systems that travel agents have, but rather to online systems that have significantly less information.

So he's really making the case that it's easier access to information that is driving internet usage: duh. But making access to information easier doesn't mean that there is an "information economy", as he argues.

What is already discernible is that, like all new distribution channels, this new information economy will change not only how customers buy, but what they buy. It will change customers' values and expectations, and with them how to promote goods and services, how to market and sell them, and how to service them online. In other words, Internet customers are becoming a new and distinct market. In the early years of the 21st century, power is shifting to the ultimate consumer.

Now he recognizes that the internet is "merely" a distribution channel: how does this make it an economy? It doesn't: Drucker is being sloppy about his language. Lack of information, information asymmetry, is a long-studied problem in economics, especially market economies (but it was also one of the fundamental reasons, if not the primary reason, for the collapse of command economies as well: if you look at the feedback loops involved in, for instance, the East German NOeSPL command economy cybernetic system, adapted from a Soviet system, you can see where deliberate information management could lead to positive feedback loops that first paralyzed and then shattered the command economies of Communism of all kinds). Hence consumes are making decisions based in increasing knowledge, reducing the asymmetric information friction that causes market inefficiencies. That doesn't mean that power is shifting to the consumer: it means that companies can no longer rely on consumer ignorance about prices and product quality to exploit information inefficiencies. In our economies, the consumer is always been and always will be in power: it's simply a question of how much he or she knows about this. Consumer boycotts aren't something new, but date back to the middle ages, where guilds simply ensured that challengers to the guild system would be boycotted by consumers who believed the guild members that a toolmaker whose tools weren't sanctified by the guild were fundamentally inferior, if not outright heretical.

But that doesn't make an information economy, especially when you see how sloppy Drucker is with his wording: at one point he means by information opinion; here he means an aspect of a distribution channel. I don't think Drucker knows what an information economy really is: it's an economy where the fundamental value added in the economy is based on the usage of information, rather than the making of things. It doesn't mean that things aren't made, but rather things are made based on information, i.e. you don't make 10,000 plush toys and hope you sell enough to cover your costs, but rather are making 10,000 customized plush toys that are pre-ordered by your consumers. That's how Dell works and has been so enormously successful.

But I digress...

There is no distance in this world economy. Everything is "local." The potential customers searching for a product do not know--and do not care--where the products come from. This does not eliminate or even curtail protectionism. But it changes it. Tariffs can still determine where a product or service has to be bought. But they are increasingly unable to protect the domestic producers' price.

Now this is silly. In the internet, there is no "there" there. Local, international, it means nothing: it doesn't mean that everything is local, but rather that the laws of geography are meaningless. Unless, of course, you are at the very long end of a thin internet pipe. :-)

Here Drucker also makes a leap: customers don't care where products come from, but this doesn't change protectionism. Huh? Where is the connection here that Drucker is trying to make?

First of all, many consumers do care where things come from: think of "Buy American" or the international equivalents (try buying Louisiana rice in Japan...). However, as homo oeconomics rationalis, consumers may well rant about cheap and shoddy foreign products, then go to his local media supermarket and buy himself a new TV and chortle about getting such a great deal while not noticing he's helping put the national TV maker out of business. That's an old economic problem: that maximizing consumer benefits can often have negative effects.

And tariffs most certainly have something to do with domestic producers' prices: they destroy them, since under ceteris paribus demand drops when prices rise. But that doesn't have anything to do with where a product or service has to be bought: I can buy my software from a dealer in the US and pay a 15% import tariff and still be better off than a local purchaser, since there remain significant price differentials based on incomes and costs. The tariff doesn't change that, especially if I want an English-language version of a program that is otherwise not available due to a decision by the software maker that versions sold overseas are only available in the localized version (Hi there, Adobe and AutoCAD). And this is more a threat to the local seller than the price problem is.

One example: To get the industrial Midwest with its 140,000 steel workers to vote Republican in congressional elections, President Bush slapped a prohibitive tariff on imports of steel from Europe and Japan in 2001. He got what he wanted: a (bare) Republican majority in the Congress. But while the large steel users (such as automobile makers, railroads and building contractors) were forced by the tariff to buy domestic, they immediately set about cutting their use of steel so as not to spend more on it than they would have had to spend had they been able to buy the imports. Bush's tariff action thus only accelerated the long-term decline of the traditional midwestern steel producers and the jobs they generate. Tariffs, in other words, can still force users to buy domestic, but they are no longer capable of protecting the domestic producers' prices. Those are set through information and on the world-market level.

So, this is the first time Drucker gets it half-way right. But only half-way, since he confuses cause and effect. It wasn't the workers who were lobbying, but rather the steel companies. The benefit were the votes, not the cause. The cause is the fact that there is a world-wide excess capacity in steel manufacturing, excaberated severely by Chinese and to a lesser extent Russian and Korean dumping - and dumping really does exist and is used as trade policy by a number of countries - and prices had at that point in time collapsed. They are now drastically higher in the wake of huge demand from China for raw materials - coke and iron ore - that have driven costs and therefore prices up massively, but I digress.

Steel users weren't forced to buy from domestic makers, but rather chose to do so because they were cheaper than imports. But prices went up and users started looking for altenatives. And the point is? This is really basic economics. And Drucker's premise is wrong, wrong, wrong: tariffs can only cause prices to increase, they cannot force users to buy domestic: there was no limit to the amount of steel imported, but rather a tariff imposed. And I am intimately aware of the one attempt to limit via the amount of an import: the Voluntary Trade Agreement (which was not voluntary at all and not much of a trade agreement) with the US, Japan, Taiwan and South Korea in the 1980s: the number of machine tools that these countries could import into the US was curtailed according to a complex equation of market demand and volume. It had the unintended effect of making these countries switch from commodity goods to high-value goods, since if you can only import 2000 machines of a certain kind, you were able to bring in higher-value machines, thus worsening US competitiveness in high-end machinery in an attempt to protect them in commodity goods. And it gave the importing countries effectively guaranteed market shares as well.

But let's also take a look at how prices are set, which Drucker has only half right. Prices for goods are largely determined by supply and demand, at least in the industrialized west. There are exceptions, such as defense goods and pharmaceuticals, but these are a different story entirely.

How does a company determine prices? Now, y'all know I'm an industrial economist specializing in forecasting and rating of industries. Where I work we're expanding into the rating of individual companies within a complete forecasting framework, providing something much better than S&P or Moodies, which rate on the basis of past performance and balance sheets. We rate on the basis of past performance, balance sheets, and benchmarking forecast growth against the average forecast growth of the average company of the given industrial sector. So I have a inkling of how industrial pricing works.

First you've got fixed and variable costs: any company selling at under cost will either go bankrupt or receives significant subsidies for doing so. No other way about it: those selling under cost at time x will have to recoup those costs at a future time x1 in order to stay in business. Fixed costs are those costs that you always have to pay: payroll and capital costs; variable costs are the inputs into your products. The fixed costs change according to capacity and worker productivity, the variable costs change according to input factor prices and can be varied by choosing different suppliers, buying differently (economies of scale), and changes in the production process. Any company intending on staying in business for the long-term must cover these costs and be prepared to react when they change.

Prices, unfortunately for the making company, aren't autonomously determined, but rather are a function of competitors on the market. If everyone were to agee on a price without running foul of anti-trust, then prices would probably reflect what is called a monopoly rent, i.e. would be as high as possible without reducing demand. But given the fact that price competition is the major factor in market position, prices are a function of domestic demand (maintaining market share) and foreign competition (based on foreign prices plus exchange rate effects). Hence a company may well have domestic price x with export price 2x because foreign markets allow it to price its goods at that price; not unusual for the reverse to also be true (which is why dumping is a very thorny problem: determining whether a price is under cost is not that easy).

But prices aren't set on information - which "information"? opinion or distribution channel? - and only world-level based on the degree of market participation by foreigners. The price of haircuts in China has no bearing on the price of haircuts in Chicago, unless you are willing to go to China for a haircut. Even knowing that price won't help you in getting a better price in Chicago, since any barber should quite properly retort that if you don't like his prices, then go get a haircut in China. Prices are set by managers who want to maximize any number of factors: perhaps they need to show maximum profits, or keep capacity used, or meet a market penetration criteria. By setting such a price, they enter the market and demand decides whether they are successful or not.

But not "information".

This development underlies the steady shift in protectionism: from tariffs--the traditional way--to protection through rules, regulations and especially export subsidies. World trade has grown spectacularly in the last fifty years. The largest growth has been in subsidized farm exports from the developed world: western and central Europe, Australia, Canada and the United States. Farm subsidies are now the only net income of French farmers, as their crops produce nothing but net losses and are grown only as the entitlement for the subsidies. These subsidies are in fact a major--perhaps the major--cement of the Franco-German alliance, and with it, of the European Union.

Now here I don't understand where Drucker is coming from at all. First of all, this development isn't new, but has been around since the 19th century. Tariffs are also not the traditional way - except perhaps in the US - of protecting domestic industries. No one remembers, I guess, the Japanese import inspections of the 1950s-today or the French review of electronic imports in the 1960s through the 1980s (for a while, all French imports of video recorders went through a very small customs office in the middle of nowhere, where each videorecorder was unpacked, plugged in and verified that it was indeed a videorecorder. Took around 2 hours for each VCR, effectively blocking all imports. Ended when the French electronics makers started making VCRs in Korea. Just magically disappeared).

I won't argue with Drucker on farm subsidies: they are an evil that has directly caused starvation in Africa, done by French companies to destroy domestic markets in their former colonies to ensure that export markets for subsidized French companies would be created. Disgusting and despicable. And it's not merely the cement ensuring the functioning of the EU, it's also one of the major causes of corruption within the EU, which makes the rest of the industrialized west look like pikers.

The international organization designed to set world economic policy is the World Trade Organization (WTO). But its meetings and agreements deal less and less with trade and tariffs, and instead with rules, regulations and subsidies. The discipline of international economics still, in large measure, concerns itself with international trade--that is, with the flow of money, goods and services. But the essence of the new world economy is that it is, above all, an economy of information and truly a global economy.

The WTO sets economic policies, but these policies are the result of conflicting national interests, not anything else.

And considering the "new world economy" as new is an indictment of how far-off Drucker is here: the world economy has always been a global economy: international trade has always been strong despite the efforts of mercantilists and protectionists. Italy wouldn't be eating pasta if it hadn't been imported from China (and the Koreans claim the Chinese got it from them...), and that was an exchange of information and not one of products. Drucker is once again stating the obvious.

The next major economic crisis will most probably be a crisis of the U.S. dollar in the world economy. It will put to a severe test the oligopoly of the central banks of the developed countries that now rules over the world financial economy.

Sixty years ago, in the Bretton Woods meetings of 1944, which tried to refashion a world economy that had been devastated by depression and war, John Maynard Keynes, the 20th century's greatest economist, proposed a supra-national central bank. It was vetoed by the United States. The two institutions that Bretton Woods established instead, the Bank for International Development (World Bank) and the International Monetary Fund (IMF), are, despite their impressive names, auxiliary rather than central--the former mainly financing development projects, the latter providing financial first aid to governments in distress.

Sigh. Where to start?

Fundamentals: economies around the world develop differently and at different rates. Some have strong inflation, others very low; as a result, the cost of money - aka interest rates - differs between countries. As a result of differing rates of economic growth and differing costs for money, exchange rates differ. This is how markets deal with differing environments between countries.

As a result there are imbalances in the world system. A country with high interest rates will, ceteris paribus, attract internationally mobile capital since the returns are higher. As demand for that country's currency increases, so increases the exchange rate and the resulting shift in values makes the investment look less attractive: this is a basic description of the international currency market. It can be manipulated - Hi, George Soros - and is not always efficient, but that is how exchange rates are driven.

Now, how can you deal with such imbalances if you were to have a single supranational central bank?

No idea?

Really?

Guess what: no one else does either. The US handles differentials in the US economy by changing reserve requirements in the seven Fed districts, effectively slowing or increasing banks' ability to loan money. The EMU and the EU central bank here in Frankfurt don't want to do this and lets the old national central banks meet the targets set in their own manner, which is usually basically the same solution.

But both of these set-ups work within a single currency. Hence there is no devaluation of the dollar betwen Alabama and New York, nor is there a devaluation of the Euro between Ireland and Germany.

So: an oligopoly of central banks?? First of all, central banks aren't in business and don't take part in market activities. Rather, they regulate market activity via interest rates and reserve requirements, coupled with intervention in exchange rate markets. But they don't form an oligopoly, which is defined as a limited number of suppliers facing a very large number of consumers. Or is the SEC called a monopolist because they're the only one regulating capital markets?

This is incredibly sloppy from Drucker and he should be ashamed of trying to pull this one over anyone.

The Bretton Woods system was never the stable, "non-political" system Keynes wanted. It could not and did not prevent currencies from being overvalued or undervalued. Still, although it limped from one crisis to the next, the Bretton Woods system worked for most of the half-century after World War II. And there was only one reason why it worked (however poorly): the commitment to it of the United States and the strength of the U.S. dollar as the world's key currency.

I think that what Keynes wanted is plain and simple wrong: I've tried to show above that you need a non-stable system in order to deal with the differences in international development. It will undergo changes and won't be nice to failing countries, but that is how any good system of maintaining equilibrium works: if something is off balance, it will be corrected over time to recover balance. But that leads to long-term stability of the entire world economy, rather than allowing it to crash and burn because some yahoo politican decides that an industry must be protected.

Of course Bretton Woods didn't prevent currencies from being over- or undervalued: it tried to be more clever than markets, and history is full of such corpses. That it worked for so long was due to a political commitment and not anything else. Ok, Drucker says that. Like I said, he gets some things right. But appeal to authority (Keynes) is a logical fallacy.

The dollar is still the world's key currency. But the Bretton Woods system is being killed by the U.S. government deficit, which is fast becoming the sinkhole of the world financial economy. The persistent U.S. deficit creates a persistent deficit in the U.S. balance of payments, which make both the U.S. economy and the government increasingly dependent on massive injections of short-term and panic-prone money from abroad. The U.S. savings rate is barely high enough to finance the minimum capital needs of industry. It could, in all likelihood, be raised considerably by raising interest rates. But that is not only politically almost impossible; it would also require that a larger share of incomes go into savings rather than into consumption, with an inevitable collapse of an economy based on consumer spending and low interest rates, as for instance, the U.S. housing market.

Present tense with Bretton Woods? Sorry, Nixon killed that one! Bretton Woods collapsed in 1971 and was buried with the Smithsonian Agreement. And in 1973 it was completely abandoned. Drucker should be saying: it was killed by the US government deficit, but even this is a question that economists continue to debate (we're easily amused). Bretton Woods was a deal to maintain exchange rates within a very narrow range and was doomed to failure.

Now Drucker gets silly: what is his basis for viewing foreign investments in the US as short-term and panic-prone? If anything the opposite is the case: foreign investments are usually long-term and based on either serving the US market or as a safe haven.

While the US savings rate as defined in the NIPA (National Income and Product Accounts) used to determine GDP is low, this is less a savings problem and much more an accounting problem (for instance, 401k payments are taken off your gross salary before taxes, reducing the level of disposable income before taxes, but the NIPA starts with looking only at taxable income). If you look instead at the Fed's Flow of Funds accounts, a rather different picture appears.

The government deficit is therefore being financed almost in its entirety by foreign investments in the United States, mostly in government securities like short-term treasury notes and medium-term bonds. The Japanese are converting most, if not all, of their trade surplus with the United States into dollar-denominated U.S. government securities and have thus become the largest U.S. creditor.

Superficially correct, but meaningless. Truly meaningless, since US debt is held in US dollars. This becomes more important shortly.

It is often argued, especially in Washington, that the deficit is mostly an accounting mirage. Defense spending--the main cause of the deficit--enables other free countries to keep their own defense spending low, which then generates the surpluses these countries invest in U.S. government securities. But this is a political argument. The economic fact is that the United States increasingly borrows short term (U.S. securities can be sold overnight) to invest long term and with very limited liquidity. This, needless to say, is an unstable and volatile system. It would collapse if the foreign holders of U.S. government securities (above all, the Japanese) were for whatever reason (such as a crash in their own economy) to dump their holdings of U.S. government securities. It certainly cannot be extended indefinitely, which, among other serious drawbacks, calls into question the long-term viability of the Bush Doctrine's goal of defending and extending the "zone of freedom" around the world.

Here is the fallacy that many are seemingly buying into: that foreigners would dump US government securities.

Even if Drucker's basic nightmare scenario would come true, that significant holders of US securities were to liquidate their holdings in order to deal with a national emergency (in their countries): what are they going to do with their holdings? If they were to dump, the price of securities would drop dramatically, since excess supply depresses prices. But their holdings would remain in US dollars: if they were then to try to repatriate the dollars, it would depress the value of the dollar for the exact same reason, resulting in a further reduction.

International investors don't behave this way. They are rational actors. First of all, international holdings don't care where their money is, just that capital appreciation gives them a decent return with a minimum of risk. Poeple buy US government securities because it gives them liquidity within the US dollar sphere, coupled with adequate return and basically no risk.

Without getting bogged down, the scenario is so unlikely that it is akin to asking what the effects on the New York Stock Exchange would be if Kansas was hit by a major earthquake.

The World Economy of the Multinationals

There were 7,258 multinational companies worldwide in 1969. Thirty-one years later, in 2000, the number had increased ninefold to more than 63,000. By that year, multinationals accounted for 80 percent of the world's industrial production.

But what is a multinational? Most Americans would answer: a big American manufacturer with foreign subsidiaries. That is wrong in almost every particular.

American-based multinationals are only a fraction--and a diminishing one--of all multinationals. Only 185 of the world's 500 largest multinationals--fewer than 40 percent--are headquartered in the United States (the European Union has 126, Japan 108). And multinationals are growing much faster outside the United States, especially in Japan, Mexico, and lately, Brazil.

So what? Why is this a problem? He keeps on going and proves that multinationals are not the boogeyman:

Furthermore, most multinationals are not big. Rather, they are mostly small- to medium-sized enterprises. Typical perhaps is a German manufacturer of specialized surgical instruments who, with $20 million in sales and with plants in eleven countries, has around 60 percent of the world market in the field. And only a fraction of multinationals are manufacturers. Banks are probably the largest single group of multinationals, followed by insurance companies such as Germany's Allianz, financial-services institutions such as GE Finance Corporation and Merrill Lynch, wholesale distributors (especially in pharmaceuticals), and retailers like Japan's Ito Yokado.

So we don't need to be afraid of multinationals, is this the message?

The traditional multinational was indeed a domestic company with foreign subsidiaries, like Coca-Cola. But the new multinationals are increasingly being managed as one integrated business regardless of national boundaries, and the managers of the "foreign subsidiaries" are seen and treated as just another group of "division managers" rather than as top managements of semi-autonomous businesses. Internally, new multinationals are often not even organized by geography, but worldwide by products or services, such as one worldwide division for cleaning products or short-term inventory loans. They are increasingly organized by "markets": fully-developed markets (such as western and northern Europe or Japan); "developing markets" (eastern Europe, Latin America and parts of East Asia); and the "underdeveloped markets" and big "blocs" (China, Russia and India)--each with different objectives and strategies.

Ah, so it's not multinational we need to worry about, it's "new" multinationals. Earth to Drucker: he's describing the way that multinationals have been managed and run since companies start making more money overseas than domestically. That's as true for German makers of laser cutting equipment as it is for any megabusiness. This is supposed to be something new? Repackaged International Business Economics from 1983 if you ask me (that's when I learned it).

Finally, the new multinationals are increasingly not domestic companies with foreign subsidiaries, but are more likely to be domestic companies with foreign partners. They are being built through alliances, know-how agreements, marketing agreements, joint research, joint management development programs and so on. They require very different management skills; they must persuade, not command. The typical old multinational began planning with the questions: "What do we want to achieve? What are our objectives?" The first question in the new multinational is likely to be: "What do our partners value? What do they want to achieve? What are their competencies?" And in turn: "What do they need to know about our values, our goals, our competencies?"

We have almost no data on the world economy of the multinationals. Our statistics are primarily domestic. Nor do we truly understand the multinational and how it is being managed. How, for instance, does a multinational pharmaceutical company decide in what country first to introduce a new drug? How does a medium-sized multinational, like the German surgical-instrument maker mentioned earlier, decide whether to keep importing into the United States? To buy a small American competitor who has become available? To build its own plant in the United States and to start manufacturing there? Our dominant economic theories--both Keynes and Friedman's monetarism--assume that any but the smallest national economy can be managed in isolation from world economy and world society. With an estimated 30 percent of the U.S. workforce affected by foreign trade (and a much higher percentage in most European countries), this is patently absurd. But an economic theory of the world economy exists so far only in fragments. It is badly needed. In the meantime, however, the world economy of multinationals has become a truly global one, rather than one dominated by America and by U.S. companies.

Now this is so much bull: there is no world economy of the multinationals. And statistics worldwide are domestic, but you can most certainly put the numbers together. And not understanding the multinational? What do MBA schools teach nowadays if anything but this?

And for the decision making, this is no different to normal decision making. He does correctly criticize Keynes and Friedman as assuming that an economy works in splendid isolation. But hey, guess what? Keynes and Friedman aren't the only economists out there, maybe Drucker should go and check out some of the "newer" literature, like Mundell-Flemings models, which were first proposed in the 1960s. A general equilibrium theory most certainly gives the framework for an economic theory of the world economy, and it works quite well, thank you very much. I've been using general equilibrium models for the last 15 years to forecast international industrial developments, both short-term (next quarter) and long-term (right now I'm rebuilding models out to 2020 and my real-estate colleagues run their forecasts out to 2040).

This is embarrasing. Drucker really seems to have stopped learning in the 1970s or 1980s at the latest. Large-scale general equilibrium models have been around since 1983 or so on a commercial basis and there are at least a couple of multinational companies who offer them: I've worked for two of them over the last 15 years.

The modern state was invented by the French political philosopher Jean Bodin in his 1576 book Six Livres de la Republique. He invented the state for one purpose only: to generate the cash needed to pay the soldiers defending France against a Spanish army financed by silver from the New World--the first standing army since the Romans' more than a thousand years earlier. Mercenaries have to be paid in cash, and the only way to obtain a large and reliable cash income over any period--at a time when domestic economies had not yet been fully monetized and could therefore not yield a permanent tax--was a revenue obtained through keeping imports low while pushing exports and subsidizing them.

Now this is a really unique take on the establishment of the modern state. Bodin can be considered one of the early thinkers, but he didn't invent the modern state: that was done in the Treaty of Westphalia in 1648. Got news for Drucker: states don't exist for economic reasons, but for political ones. They might have economic policies that drive them, but even the Hanseatic Guild, the penultimate mercantilists, were driven by politics and not by mere economics. This massive failure to understand history - or perhaps more gently the massive bending of history - weakens his arguments significantly, such as they are.

And that is why I am not going to critique the rest of his arguments: they are based on this absurd reading of history, that multinationals are the inheritors of the mercantilist states.

Well, actually I will, but without the quoting. The errors that Drucker makes are multifold: he fails to understand how countries can act to protect their economies against mercantilistic policies, such as the French have towards Africa, without abandoning free trade. Much of his critique centers on this misunderstanding and places the onus on both parties, where in reality it is mostly the EU with its desperate attempts to retain colonial dominance in the Third World that has led it to adopt frankly mercantilistic policies.

And his "warnings" are, frankly, rather jongoistic and simplistic. The US may be facing increased competition, but also has an outstanding track record of reinventing the US economy and creating new industries out of scratch. Information technology is just one small aspect of these developments, and indeed his implied solution - that the US had better get serious about protecting its markets - is the exact opposite of what needs to be done. The US has the most flexible of all the world's economies, able to react to changes relatively quickly and without major make-or-break government intervention into markets, and to reduce this flexibility by protecting those markets and removing the need to remain flexible would be a major disservice to the US economy, if not the world economy.

What needs to be done is to increase pressure on the EU to drop its subsidies and protectionism: but the idea that their economies need to be flexible and capable of handling massive changes in operating environments is a severe anethema to the technocrats running the EU. That's got to be the challenge.

Pathetic blogging...

Hi -

My blogging right now is nothing less than pathetic. But I got reasons!

1) 110 new industrial models estimated with interdependencies based on 2000 I-O tables
2) 110 new dossiers
3) expansion of derived rating towards complete coverage of NACE rev 1.1
4) other increases in productivity that will allow me to get done in 2-3 weeks what now takes 4-6 weeks, with the emphasis on heading towards 1 1/2 weeks
5) explaining chained-weight statistics to colleagues
6) financial planning heading towards being able to think about retirement in anything less than 20 years
7) helping my daughters out with understanding quadratic equations
8) the complete Farscape, seasons 1-4 with the miniseries (thanks, Cord!)

So, that's the reason things have been so meagre here. Improvement will come after I get the
2005Q1 delivery out to my customers.

Ta for now, won't be back until then. :-p

John

Money quote...

Here Jeff Simmermon writes the money quote:

You may think that you have felt dumb before, but let me tell you something: until you have stood in front of a man who knows real pain and told him that you are against your country's alleviation of his country's state-sponsored murderous suffering, you have not felt truly, deeply, like a total fucking moron.

Is there yet hope?

Prostitution is just a job...

Hi -

Well, a number of sources have confirmed this story, that the German attempts to get people off the dole and back to work are having some unintended consequences. The story is not exaggerated: the original German is here and there's little in the Guardian article that doesn't hold up.

It's a typical clueless bureaucratic screw-up: if a bordello, which is legally operating and is willing to provide the usual amenities to working there (health care, pension, etc), makes any woman looking for work an offer to work in the bordello - it doesn't have to be as a prostitute, but... - and the woman refuses, she may be docked on her dole payments for refusing employment.

Prostitution has been legal here since 2002. As an economist, I know that it is NACE rev 1.1 category 93.05, Other service activities n.e.c., i.e. other personal service activities not elsewhere classified. This is, of course, based on ISIC Rev 3.1 code 93.09, which corresponds to NAICS 2002 classification 81.2990.

This class includes:

- activities of Turkish baths, sauna and steam baths, solariums, reducing and slendering salons, massage salons etc.

- astrological and spiritualists' activities

- social activities such as escort services, dating services, services of marriage bureaux

- pet care services such as boarding, grooming, sitting and training pets

- genealogical organizations

- shoeshiners, porters, valet car parkers etc.

- coin-operated personal service machines (photo booths, weighing machines, machines for checking blood pressure, coin-operated lockers etc.)

The key is here identifying escort services and data services as being the closest analogues to bordellos, which are specifically not classified (illegal activity in most classification countries: for this reason there isn't a category for illegal drug trading, unless you decide to use the classification 99.00, which is...

activities of international organizations such as the United Nations and the specialized agencies of the United Nations system, regional bodies etc., the International Monetary Fund, the World Bank, the World Customs Organization, the Organisation for Economic Co-operation and Development, the Organization the Petroleum Exporting Countries, the European Communities, the European Free Trade Association etc.

But getting back to the point of the article above: it's just a bureaucracy running its mindless way through its procedures. At some points virtually all such bureaucracies will come up with something mindless - when I got married, I had to provide proof that I didn't have a police record, an easy thing to get in Germany but impossible in the US: I had to file a form for the release of the requirement of providing proof that I didn't have a police record - and shouldn't really be taken as proof of the perfidy and licentiousness of German society.

Because if you live here for any length of time, you realize that you often don't need proof.

John

Social Security...

Hi -

Short post on this topic...

Here is a link to a great take on social security.

He wants out of it entirely. Unfortunately, that ain't easy.

But I still think that social security boils down to a simple point, that income transfer is, long-term, dependent on demographic factors that any social security system using income transfer cannot control. And demographics are invariably ignored until it is too late (as the Europeans largely are finding out).

The alternative to income transfer is to save. Either you have to all-of-a-sudden come up with whatever gazillions of dollars you need to create what are basically trust funds with annuities for all retirees when you set up the system, or you make the transition take two generations to be complete: the first generation continued to be funded by income transfer; the second generation starts saving in addition to income transfer, and the third generation is purely savings.

Anything wrong with this? The major arguments I am seeing are rather obvious partisan resistance to fixing the system before it is broken. The problem here is that if you even get close to waiting for the system to break, you have to transition over several more generations before the system is fixed.

John

Blog Blog Blog...

Damn. I've been trying to get some time free, and with the combination of work and family it simply hasn't happened.

But here is something worth posting about. It's from Cold Fury and looks like this.

Now there is a man of brevity that I can agree with.

Now I will take a moment and rant.

One of the things I'm trying to deal with at work is new data sets. The EU is finally getting around to moving to chain weighted time series for NIPA data; the problem is getting people's minds around the concept.

Basically, it means that as long as our customers haven't made the transition from 40 years of economics teaching - that the deflated components of GDP add up - to the new, bright and improved way of statistics - that the deflated components of GDP no longer add up - we are screwed. Of course, we can't do anything about that: Eurostat et al make these kinds of decisions without, apparently, thinking these things through.

So we abandon 40 years of economics that accepted substitution bias in NIPA deflators and periodic revisions that sometimes turned recessions into non-recessions and have replaced it with something that no one except statisticians and economists understand. Or have I missed something here? All I know is that my colleagues aren't happy, especially those who are trying to work with NIPA accounts, and that trying to explain this brave new world of statistics to customers isn't gonna be easy.

But then again, we, the poor data users, aren't the customers of statistical offices: we are the users. From what I can see of the arguments made for using chain weights, it means that politicians - and politicians are the true customers, even if virtually none of them actually use the numbers - no longer have to fear statistical revisionism that eliminates whatever claims to glory that politicians can make to having caused or aided economic growth - we all know that in reality the vast majority have little or nothing to do with aiding growth, and if truth be told the majority probably hold growth back - and that those running statistical offices can now truthfully claim that their numbers will indeed be more accurate than they have been in the past.

But it doesn't mean that the numbers will necessarily mean the same. And working out what the numbers actually mean is a significant portion of my work, and it just got harder.

So posting will remain fairly sparse until I get my numbers set up in nice and tidy rows, ready to be crunched for new models...

John

PS: On the other hand, I can no build my models with consistency between NIPA, Input-Output and Industrial statistics, something that pretty much has been very, very tenuous in the past, to put it mildly... and I've got some really, really great deflators now for my services sectors that are the best I've ever come up with. You see, we have only nominal numbers for our services sectors and by calculating the prices - price as a function of input costs plus profits - I can then calculate real numbers, which is what we forecast. While the calculated prices are not the ones that Eurostat recommends using in its handbooks, the reason for not using them is that prices should be a function of value times amount. But when you don't have amount, then you do it via calculated prices. And it beats not being able to do it at all!

Getting Back in to the Swing of Things...

Hi -

Well, I actually have a "Stack of Stuff" ready to go but will need a few days to get some of the things connected.

Suffice to say, and this bears repeating and repeating: there are more things going on that most people can or would want to believe. Stay tuned...

European Superiority?

I've just sent this to the folks at Powerline for this particular post and thought I'd make some amends for not having written much in the last several weeks...

Hi -

I've been living in Europe now for almost 20 years (did my graduate degree here, then worked in Switzerland for 6 years and have been working in Germany now for the last 7 years for Europe's biggest private economic and financial research institute as econometrician, industrial forecaster and rater of closed real estate investment funds in Germany). Hence I feel somewhat qualified to speak out on these matters... :-)

I've seen those books you mentioned yesterday. I'm intimately familiar with the European economies, especially on the supply side of economic development (GDP is created by the supply side; most economists only pay attention to the demand components of GDP, since it's a *lot* easier to understand where the value added is spent, instead of where it is created!), and there huge problems with the European economies that make me simply shake my head in wonder when anyone speaks of "European superiority".

Let's put some of this in perspective: indeed, perspective is the operative word here. The European economies we see today have evolved according to careful planning and with a clear view of where they want to go. It's a world-view based on the events of the 20th century, the destruction that accompanied these events, and a fervent desire to avoid the social dissensions and tensions that ultimately led to WW2. Hence the development of the social state in Europe, of cradle-to-grave government control and the abdication of personal responsibility for social responsibility. The thinkers of Europe that were behind the development of Europe as we understand it were convinced that poverty, social "injustice" and above all societal dislocation were the cause of fascism and, to a lesser extent, communism. The thinking of Marx and his failed and degenerate followers is part and parcel of the European identity (I'm generalizing, of course: but I don't think I'm overdoing it), and the idea that the state is ultimately responsible for ordering society ***and*** ensuring that there are no societal dislocations that destroy the existing structures of political stability and economic wealth cannot be avoided in virtually all aspects of European political life.

I've placed the emphasis on the "***and***" deliberately: it is where the Europeans have dealt with their trauma of the destruction of European society in first WW1 and then more totally so in WW2. In WW1 European society was bled white, with an entire generation lost to the trenches; in WW2 came the collapse of civil society, replacing it with the barbarities of fascism, communism, socialism and the Final Solution.

This is the specter that haunts Europe: that there will be again such an upheaval.

Now, an astute reader of history and current events will realize that this is exactly what Europe is facing: it is teetering along a dangerous, treacherous path in its history, one of its own making: it has both succeeded beyond its wildest dreams yet at the same time failed miserabley. It's success is European peace and prosperity, going far beyond what anyone conceived of even 15 years ago. It's failure is the failure to integrate indigestible portions of it's population, deliberately ignored and belittled over the last 30+ years: the foreign ghettos and colonies that spot and spatter Europe with cultural confrontation and a new barbarity that the Europeans are, collectively, unable to deal with.

So why the books on European superiority? I see it as simple compensation, coupled with a mistaken belief that the positive developments in European society will compensate for the failures.

Put simply: if your goal is to avoid societal conflict in your base society, of ensuring that there is no repeat of history such that Europeans revert to barbarity and yet another World War, then Europe has largely achieved these goals and should rightly be proud of these accomplishments. Hence the feeling that Europe is oh-so-superior than the US: European societies don't have many of the strains and tensions that we have in the US (more often than not as the result of *successful* integration of minorities, but that's another story...), and life in Europe as someone living here is in many ways "carefree": I've got adequate health care, I don't have to deal with HMOs and the like to get it, and if I feel like I need to, I go to the doctor and get taken care of. Like I would if I were working for a major US company with a really nice benefits package, but with the employer picking up all my costs. This is largely universal in Europe and every expects it: it is a common entitlement, and for the political body here an important one.

But does this make it better? Of course not. It's different priorities and goals, and the idea that Europeans are somehow "superior" is deeply, deeply ingrained in European society, especially that of the European elites, who, after all, run things in Europe in ways that are sometimes really, really hard to comprehend.

I don't want to bore you with all the details, but let this suffice: Europe is run the way that the blue-blood Democrats in the US would dearly, dearly love to run the US. A relatively small elite, intermarried and sharing common roots, experiences and goals, runs the European economy and runs European societies. We're not talking a few hundred people here, but rather a few hundred thousand that accord themselves the elite of Europe. This is the core of European state-ism (and statism as well!): there are vested interests in maintaining the status quo that have no real challengers. Everyone within the political system has a vested interest that the system as such doesn't change.

But lack of change and lack of the ability to even contemplate change is destructive, especially in the face of the challenges that Europe is facing, facing from within and without.

Europe is not a future that works: it is a past that has realized its dreams. It is not a present that can react to challenges, but structurally bound not to be capable of structural changes, since exactly these kinds of structural changes are societally disruptive.

Holiday Break

Duh. Mother-in-law is here and the wife and the kids are decorating the tree. I've got a life!

Will resume shortly, but not for now...

Adding Two and Two...

So, here's an attempt to put something together.

Professor Bainbridge makes the point that the US may at this point need to reorganize its military to adjust to changing world circumstances, largely an expansion of the army back out to 18 divisions. Chrenkoff makes a similiar point, but with a slight difference: he looks at what is happening in East Asia with Japan's military stance.

Is this the shape of things? Chrenkoff makes it clear that Japan now apparently sees a confrontation with Russia as a lesser threat than a confrontation with China. The Europeans appear to be quite willing to play the evil capitalist role and drop any sort of limitations of selling military equipment to the Chinese.

I fear that we are heading back into a state of affairs where "The Great Game" of geostrategical politics will be played. Or rather, is being played.

The Cold War led everyone to play the game of Go, where you tried to prevent your opponent from taking your pieces off the board by taking his pieces off the board (massive simplification of the game, of course). A lot of locally bad politics was justified by the overall scheme of things: hence the US supported dictatorships in order to prevent communist-subverted movements from taking country x into the Soviet sphere, and the Soviets were more than glad to enter into ultimately destructive relationships (Cuba, ME client states) in order to tie the West up in knots.

But now it seems that one of the former grand masters of colonialism, the French, are back to playing the Great Game. I think that they are trying to manipulate purpoted partners into situations not of their own choosing where they think they can control the game.

Hence the massive push to re-allow the sale of advanced weaponry to China, who desperately needs it in order to achieve any sort of parity with US power. China, of course, is following its own path where it will increasingly pay attention to maintaining access to raw materials and captive markets at any cost - Greater Asian Co-Prosperity Sphere, anyone? - while other countries will try and avoid having to make the decision to start spending money on the military, since they've avoided doing it until now.

We may well end up with a resurgent China that behaves like expansionist Japan, a Japan that will resemble the UK post-WW2 (successful but exhausted from empire with population problems) and a US that is distracted elsewhere.

Or have I been reading too much Clancy?

The Chinese are clearly after key technologies and already have some of them: take a look at this and scroll down to where you will find the following:

The Type 98 is powered by a liquid cooled, turbocharged 1,200 hp diesel derived from Germany WD396 diesel technology. At its current battle weight of 52 tons, this gives a power-to-weight ratio of about 23 hp/tonne.

If you go here, you will also find this:

The original proposal was to develop an MBT based on the hull design of the T-72, and fit it with Western 120 mm smoothbore gun and advanced fire control equipment. This plan was later temporally halted due to the boycotts by the Western countries after 1989.

But this, at the same place, is also chilling:

PROPULSION: At least four diesel powerpacks have been tested on the Type 90-II/Al Khalid MBT, including two supplied by the Perkins Engine Company and each comprising of a CV-12 Condor diesel of 1,200 hp (as fitted in the Challenger 1 and 2), coupled to a French SESM ESM 500 automatic transmission (as installed in the Leclerc).

The Pakistan-manufactured Al Khalid MBT is reported to be fitted with a Ukraine built 6TD diesel (as fitted in the T-80UD). Claimed to be the most compact MBT diesel engines in the world, the 6TD series are two-stroke, liquid cooled and supercharged with horizontal cylinders and opposed pistons. At its current battle weight of 46 tons, the engine gives the Al Khalid MBT a 26 hp/tonne power-to-weight ratio and a max speed of 72 km/h.

In other words, Perkins is involved as well. So the Chinese are recreating their former mass military into a more modern fighting force with the help of the Germans, the French, the Ukranians and even the US.

And don't pshaw these developments as being trivial: the Chinese haven't had decent tanks, let alone ones that can stand up to the M1 and its variants. Given these developments, they may well be on their way to developing them.

What was that about capitalists selling the rope used to hang them? I guess today Lenin would rephrase that to point out that capitalists would actually finance the rope as well, offer volume discounts and provide generous kickbacks while doing so.

John

Yet Another Brick In The Wall

Over at The Diplomad there's another fine comment on NGOs. Too much to comment directly on here, except it's good: Read The Whole Thing.

I used to collect for UNICEF as a kid. I remember going from door to door and playing the game of pulling at people's heart strings. I believed in UNICEF and how it was helping out kids. I remember even the amount I collected the last year I did this (it was 1967 and I was 11): $167.42, back when that was real money. I was also thrilled to be thanked by UNICEF for collecting so much.

Gee, what an amazing discovery that the lunatics here have also taken over the asylum. Or that hidden agendas are driving policies that otherwise would be rejected outright.

I've heard too many stories from people at the Red Cross, at UNICEF, at WHO and other UN-related activities to give money to them for any purpose whatsoever. Out-of-control finances, outright lying in order to scare-monger for fund-raising purposes, extraordinarily wasteful spending (flying First Class and enjoying 4-star hotels is just scratching the surface), all add up to one thing: if someone comes to you asking for money to save the children, it means that not only will only a few children be saved, but that you are probably perpetuating the problem and not helping to solve it.

And it's perverse and no, I don't have an answer except this: there are charities out there that haven't taken the blue pill. Find them and give to them generously. We do it directly, since my wife travels a lot more than I do and has a number of projects aimed directly at helping a few locals who are actually trustworthy and haven't spent the money on Oakey shades and Jack Daniels instead.

Schroeder The Elephant

Well, Spiegel has now updated its report in Schroeders demand and it does appear that perhaps at least one or two people in politics here get it.

While some see it as a logical thing - if Germany gets a seat, it should have a veto as well - Werner Hoyer, FDP, put it brilliantly: one can only stand there in amazement watching the government behave like an elephant in the porcelain store of international relations.

Well, it sounds better in the original German, I guess:

Man steht fassungslos davor, wie elefantös die Bundesregierung durch den Porzellanladen der Internationalen Beziehungen wandelt.

Pflüger, CDU, seems to feel that if Germany gets a seat, it has to act as a trustee for the rest of Europe and use its seat as a way of pacifying such unruly peasants as Italy. Pflüger is usually fairly coherent, but in this case he underscores how little Germans want to take on responsibility: by acting as a trustee for Europe, Germany can remain passive and avoid responsibility.

Angela Merkel, who has been trashed a lot lately in the German press, put it correctly: if Germany wants a permanent seat, then it means taking on the appropriate responsibilities. If Germany doesn't want those responsibilities, then it has no place on the Security Council.

Her standing just went up in my estimation: she may be the only German politican of note today that actually understands what is at risk and what the consequences are.

NGOs Redux

Here is yet again a good piece by Andrea McCarthy: just what is international law?

To be honest, it's a crock. International law is not merely written agreements, such as treaties, etc.. If it were it'd be simple to interpret: written law has the advantage of being (fairly) immutable. If a treaty says Gibraltor belongs to England, then it does and nothing Spain can do short of war or getting a new treaty is going to change that.

While written agreements usually can't be ignored, they aren't the bread and butter of "international law": "customary" principles, unwritten rules that "are said to" reflect "universal understandings" (right); principles expressed in treaties and protocols, even (and especially those) unratified; writings by "specialists"; opinions and resolutions by international bodies; and finally "judicial" decisions by "international tribunals".

(Shucks, I think I'm going to set up an International Tribunal for Love, Peace And Justice. I've just decided to outlaw pink postage stamps as discriminatory to homosexuals: now we've established a principle of international law. You may link and quote at your leisure, you heard it here first!).

I've used a lot of Reuters-type "scare" quotes for a reason: everything in these quotes is a matter of opinion and not a matter of law. IANAL, but there isn't such a thing as customary principles, there isn't such a thing as universal understandings. There are local interpretations of what activists think should be customary principles and universal understandings: as McCarthy so beautifully puts it: "Cabals of self-interested countries, NGOs, scholars and, of course, "international law experts" convene". Repeat and repeat and repeat and aspirations start to appear as principles and end up appearing in print as "international law".

Let's keep it simple: International Law (with capital letters) exists only when it is written in treaty and/or established by an international executive. There is no international executive, regardless of what people think of the UN.

And McCarthy has it absolutely correct: No one in the United States voted for these people.

The international community - whoever they are - can't make a claim on the US that violates US laws: the US did not give away its sovereignty to nameless and faceless institutions.

And in my opinion it's the NGOs that are the worst offenders. We've got to find a new name for these folks: non governmental organizations is simply a misnomer. How about International Interest Groups? You could really call them International Parasites and Bloodsuckers, but IPB isn't so catchy.

And McCarthy correctly points out that the International Court of Justice is a travesty. The ICJ wants nothing less than the ability to make domestic law in countries whereever it may choose to do so.

Who elected these busybodies? Want the rule of International Law? Fine: walk the walk. Try and get a World Constitution - or call it whatever you like - and get the countries of the world to transfer power to such constituted bodies that are included in such.

But don't try and sneak international obligations based on hidden agendas and sleazy politics.

If you want a International Court of Justice, you have to have an International Congress and an International Presidency as well: otherwise you have international law with absolutely no legitimacy whatsoever.

No powers without responsibilities, no powers without limits. Why do people keep on forgetting this?

You might even make the case that the activists are their own worst enemy: by pushing things to fast and raising alarm bells, they are undermining exactly what they are trying to achieve: the robbing of sovereignty by an unelected, illegimate group of activitsts with no controls or limits whatsoever.

The International Court of Justice, right now, has about as much international legitimacy as the International House of Pancakes. And what they are trying to force down our throats is a lot less tasty.

Schroeder and German Hubris

The chuzpah of Schroeder, Germany's chancellor, is impressive. Here he demands a veto right for Germany in an expanded UN security council.

Now, there's been talk going on about expanding the security council for quite a while, underscoring the fact that there are a number of pretty bright people who don't understand at all what the security council is about.

The Germans want in. They want to taste command, to taste power. They want people to listen to them as if they really actually meant anything on the world stage. But they have so obviously failed to walk the walk that it's pathetic. Schroeder declared Germany to be a country whose foreign policy would be dominated by a radical pacifism in order to be re-elected: he was re-elected and has been an absolutely t e r r i b l e chancellor of Germany. He had a policy of "hands-off" while the economy was tanking and unemployment increasing. He has no policies that anyone can make any sense of, instead reacting to whatever comes up. The popularity of the SPD is at all-time-lows.

But the really, really sad thing is that right now there's no alternative to him: the conservative German parties (CDU/CSU, FDP) are so incredibly clueless that they couldn't, right now, get Jesus in his second coming elected mayor of Munich, let alone chancellor. They've lost the idea of political parties: get elected.

But I'm meandering (has to do with being rather light-headed from coughing up half my lungs a few minutes ago...).

What is the role of the security council? It's where the big boys meet to thrash things out and to make wonky speeches, right? Wrong. The security council is responsible for the maintenance of international peace and security.

Now this is the key point. The security council is ultimately made up of those powers who back then were the players: China, Soviets, France, the UK and the US. What makes these guys so special, why are they the ones to make the decisions?

Simple. They're the ones that hold the power of nuclear weapons and hence the responsibility to ensure that conflicts never get so out of hand that people start to want to use them. There are other countries holding nukes as well, but they aren't the big playes (except regionally: that is why Pakistand and India have nukes to begin with...).

Responsibility without power is a heavy burden. But you can't start telling nuclear powers what they may and may not do in terms of international security unless you are in their shoes.

We all might not like the nuclear genie, but it's there. The possession of nuclear weapons means that you can destroy countries, kill millions, poison vast spreads of countryside. Shucks, put a nice sheath of cobalt on a couple, toss 'em up into the stratosphere, and there's no hiding from the fallout: nukes are doomsday weapons, the wrath of God focussed on a small point in time and space.

There is a great satisfaction in saying things like "nuke 'em 'til they glow" or "turn country x into a glass parking lot": the point is that only two weapons have been used, and that to end a war, not to pursue one.

It's a question hence not merely of power, but more fundamentally of responsibility. While there are plenty of people who think the US is irresponsible, how many times has the US - or China, or Russia, or the French or the Brits - initiated fusion points outside of testing? None.

Because they know what happens: Hermann Kahn called it thinking the unthinkable. The whole balance of terror, strategic calculus (when missile x can take out a missile silo with hardness y with a success rate of 82%, how many x missiles does it take to ensure 100% destruction of 3,000 missile silos with hardness y? Hardness 2y?), correlation of forces (great favorite of the Soviets and WarPact, that one), strategic balance, etc existed to try to understand what the implications were.

At the end of the day, the implications were that nuclear war was too costly for anyone to really consider it as anything but the last thing that one could do. If that.

The point here is that Germany is talking the talk, but is patently, given the radical pacifism of Schroeder, incapable of walking the walk.

Sure, people want Germany to play a greater role in world politics: but that is because it isn't playing much of a role at all. German foreign policy, as far as I am concerned, is being made in Paris and will turn out have been a very costly and foolish policy.

You see, the charter of the security council states is clear (Article 24): the members of the security council are charged with primary responsibility for the maintenance of international peace and security. No one else.

Germany's current foreign policy has two parts: passive member of any organization and active measures to sell German goods overseas (the latter is perfectly legitimate, but is somewhat tainted due to the possibility of political/corporate collusion to close markets). I can't remember any successful German initiatives in the area of international security since the end of the Cold War.

None. The end of the Cold War for Germany was a dream come true: the peace dividend of not having to maintain an army to fight the WarPact, the chance to enjoy unification. So the Bundeswehr, Kriegsmarine and Luftwaffe were all slowly starved of funds, with increasingly antiquated equipment and increasingly outmoded tactics.

If Germany wants to share in the power, it has to share in the responsibilities as well. Such responsibilities mean not merely some peace-keepers - and indeed there were some German troops in the taking of Afghanistan, but you wouldn't know that in Germany - but rather an active participation in international affairs. The Germans defer to the French here: it's the way of the new Europe.

Damn, I'm off the topic again and am too bushed to do a serious re-edit.

Why should a country that refuses to walk the walk be given a voice on the security council?

The security concil almost died because of Iraq. You had all those resolutions demanding action and insisting on results, and Iraq weaseled its way through them. Then you had 1441 which was the final ultimatum, and what happened? France weaseled. France stated simply, even before debate, that they would under no circumstances condone military action, and that despite Resolution 1441 which explicitly warned of "serious consequences", which any foreign policy wonk knows means exactly that.

The decision of the US to depose the ruler of Iraq saved the Security Council from irrelevance and saved the UN from meaninglessness. Iraq, with the support of its covert friends in France, Russia and elsewhere - we know now who they were due to the ongoing scandals about the Oil For Food program - was about to get away with defying the UN.

Defying the people who are responsible for international security. If they had gotten away with it, the UN would have properly lost credibility: France and Russia would have more international clout with clients than the UN would have.

But what does losing credibility mean for those responsible? It means that at some point, you have to re-establish credibility: that can only be done by walking the walk. The US is at this point nothing but credible in enforcing UN resolutions. The US and its allies have walked the walk.

Germany with a vote on the UN security council? It's just another way of weakening the security council and making the UN meaningless.

The best part of the story above is the last line: Schroeder praises the "untadelige" Kofi Annan. German readers - like I got any - might well agree that this is a hard one to translate: it means someone without any fault, nay, someone who is so immaculate that there is nothing to criticize.

Guess Schroeder doesn't get out much.

John

Under The Weather

Sorry for the paucity of posts, am home from work with some sort of lung-sucking bug. Hope to be back up for more soon. Got year-end deadlines coming up, though, and until the 17th of December posting will be light due to work load. But I'll try and get an occasional post up...

John

Subsidies and Competitiveness

I usually don't read Newsweek, Time and the US magazines, largely because I have too much other stuff to read. I read three newspapers a day (Handelsblatt, FAZ and the FT), as well as 2 Austrian dailies on their respective web sites.

I did, however, see this article on the Newsweek web site. Woops, just tried to link to it and I don't know how.

It's by Robert J. Samuelson and it's called "No Free Launch". It's one of the better pieces I've read on subsidies in terms of making airplanes.

I'm going to expand on this briefly.

Fundamentally, Airbus and EADS are the product of European industrial policy. The French, Germans and the UK decided that they did not want to lose their aerospace industry: so they created Airbus to develop new aircraft and - and this is the critical point - they put their money behind it. Airbus has, according to Samuelson, spent something like $15 bn in taxpayer monies in order to develop aircraft.

First of all, Airbus does make nice planes: they have more or less identical cockpits, meaning that once you as a pilot get your multiengine license and have gone through training for one Airbus aircraft, you don't have to go through a lot to fly a different Airbus. This isn't the case for Boeing or Lockheed aircraft: you need to go through some new training to be certified for a 747 when you've been flying 757s.

But while the planes are nice, the methodology behind them isn't. The European aircraft industry hasn't had the greatest history of success when out there with private money and was well on its way to failure in the market place. Boeing, Lockheed, McDonnel-Douglas in the 1960s and into the 1970s had overwhelming market presence.

Airbus is heavily subsidized, and in more ways than one. It gets money up front for design and development, one-third of which is repayable only if the airplane is a commercial success, and the rest of which is loaned at below-market rates (i.e. there are government guarantees involved, which means that any credit risks involved are reduced to sovereign risk, which in this case is basically irrelevant, meaning that Airbus has its seed money well below market rates.

This is the first market distortion and a critical one.

Secondly, aircraft sales are never at list price, but are rather a highly political issue, especially when you are competing based on market share, rather than actually making money at what you are doing. Usually, and this applies to US sales as well, no one actually knows (outside of the parties involved) what the prices for new aircraft are, since this tells competitors what sort of prices and finances their competitors are playing with. In dealing with closed investment funds, I've seen a number of aircraft financed in Germany, mostly Airbus planes, but also 747s and some smaller machines, and know that these prices vary widely for what appear to be the same machines.

Further, there are often serious tax advantages to leasing planes rather than buying them. A very large number of aircraft out there don't belong to airlines, but rather obscure (at least to the general public) leasing companies that don't advertise much and certainly don't talk much about what they are doing.

Because the market is intransparent - sellers and buyers have asymmetrical information - it means that when one competitor enjoys essentially unlimited pockets for subsidizing their sales, the market will tend to buy those planes. While everyone in the industry gives price and other breaks to close deals, Airbus isn't primarily interested in making money, but rather in achieving at least market share parity with US makers, meaning Boeing.

This means that Airbus' subsidies have distorted the market.

Airbus counterclaims that US companies benefit from subsidies from NASA and the military. There is a difference, and this is fundamental: NASA and the military pay for maintaining research and design capabilities by funding research and design efforts on an ongoing basis. The government gets something for the money: what the government does with this is another question. The 747, for instance, was designed for the US government as the Air Force was looking for a large cargo plane: it was Boeing's entry that lost to Lockheed's C-5 design.

But Boeing didn't get paid to design a commercial aircraft that was to compete with foreign companies: it got paid to design a plane that was to be used to transport large numbers of heavy items. It then went on to bet the company that it would be a commercial success, and it was. Others, like Lockheed with its three-engine L-1011 failed and either went out of the commercial aircraft business or merged with others to survive in the defense industry.

So US taxpayers didn't fund Boeing and the others to keep the industry around, but rather because the US government has an industrial policy that relies on competition in the marketplace to come up with the best design.

Airbus distorts the market to achieve the same thing.

Boeing in its design and building of its new plane - the 7E7 - also uses subsidies. The Japanese government is giving Boeing and its suppliers tax breaks so that a significant portion of the 7E7 is made in Japan. Localities are also giving tax breaks and infrastructure support to attract jobs from Boeing.

What's difference? Boeing's subsidies do not distort the market. They might grant Boeing better designs or competence, but do not grant Boeing commercial advantages via capital at rates that no other commercial company has access to. To repeat: subsidizing market share distorts markets directly; subsidizing research and development by funding research and development doesn't distort the markets for the products involved.

Why is this important? Airbus doesn't understand the US subsidies as being different than their own: they see them as being fundamentally the same. That's because industrial policy in Europe doesn't deal with markets, but rather the players in the markets. France decides it needs to have a maker of mainframe computers and then spends billions over the years to keep Bull alive; it ends up with a money hole and no market player, since Bull ultimately became very, very good at getting subsidies and pretty bad about making computers.

The Europeans sees such subsidies as the natural order of things: in order to achieve success in markets, you need to either distort the markets or you need to eliminate the competition. The sad thing is that this is the natural order of things in European markets. That's why the European Union sees nothing wrong with its subsidies for Airbus.

But enough for now: suffice to say that this will be a major point of contention over the next several years as things now stand.

John