Streetwise Professor

September 6, 2018

Carter Page’s Good Deed Was Punished: Will the Same be True of the FBI’s Bad Deeds?

Filed under: Politics — cpirrong @ 6:36 pm

Paul Sperry reports the least surprising news evah: the FBI omitted crucial details about Carter Page’s involvement with (convicted) Russian spies, including the fact that they thought he was an “idiot” when applying for a FISA warrant on Page.

This is my shocked face.

But Sperry doesn’t note two other facts that make this even more damning.

First after two of their operatives had been caught three years before, they would have gone back and tried to identify everyone they had interacted with.  Everyone.  They surely would have identified Page, not least because the statement of an FBI agent filed with the court in February, 2015 contained details that would have led them to identify Page as “Male-1.”  Further, since the filing states that the FBI had interviewed “Male-1”, the Russians would have known that Page had cooperated with the FBI.

So this is a guy they are going to use as part of a clandestine scheme to bribe Donald Trump?  Not in several thousand lives of the universe.   They would have considered him a threat, not an opportunity.

The only way they would have used Page is to try to pass disinformation back to US intelligence.

Failing to detail Page’s full involvement with the prosecution and conviction of the Russian agents was therefore another crucial omission from the FISA warrant application.  Given this information, Page’s plausibility as a Russian agent would have been zero.

Second, Sperry doesn’t remind us that after failing in its first try to get a FISA warrant on Page, a dossier report miraculously appears which contains the account of a meeting in which Sechin supposedly offered Trump, via Page, a stake in Rosneft.  Presented with the new “information” of Page’s deep ties with the Russians, et voila!, the court issues the warrant.

This makes it highly likely–certain, in my view–that Steele was a short order cook serving up made-to-order material intended to advance the anti-Trump campaign.  His–and the FBI’s/DOJ’s.

The FBI’s cynicism here is off the charts, and appalling.  Carter Page helps them out in an investigation of Russian spies.  But Peter Strzok and his fellow badged gangsters saw that Page was now useful in their attempt to sabotage Trump, so they viciously twisted his previous cooperation with them into evidence of connivance with Russian intelligence by leaving out the crucial details of his cooperation, the Russian views of him, and the likely Russian knowledge of him.

Moral of the story? Support your local sheriff, perhaps, but the FBI–you’d be a complete fool to do so, because they will F*** you sideways when it is in their interest to do so.  Page is the poster boy for “no good deed goes unpunished.”

Carter Page should have a massive civil rights case against the US government, and the individuals who lied and conspired to deprive him of his 4th Amendment right against unlawful search and seizure–Strzok, McCabe, Comey, Yates, and others.  And quite frankly, it should be a class action lawsuit, including in the class everyone who was surveilled, or whose communications were read, pursuant to the Page warrant.

Let’s hope that the karma for Page’s punishment for good deeds will far more draconian punishment of those who committed bad deed after bad deed when using Carter Page to achieve their sordid goals.


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September 5, 2018

Nothing New Under the Sun, Ag Processing and Trading Edition

Filed under: Commodities,Economics,Politics,Regulation — cpirrong @ 2:30 pm

New Jersey senator Corey Booker has introduced legislation to impose “a temporary moratorium on mergers and acquisitions between large farm, food, and grocery companies, and establish a commission to strengthen antitrust enforcement in the agribusiness industry.”  Booker frets about concentration in the industry, noting that the four-firm concentration ratios in pork processing, beef processing, soybean crushing, and wet corn milling are upwards of 70 percent, and four major firms “control” 90 percent of the world grain trade.

My first reaction is: where has Booker been all these years?  This is hardly a new phenomenon.  Exactly a century ago–starting in 1918–in response to concerns about, well, concentration in the meat-packing industry, the Federal Trade Commission published a massive 6 volume study of the industry  The main theme was that the industry was controlled by five major firms.  A representative subject heading in this work is “[m]ethods of the five packers in controlling the meat-packing industry.”  “The five packers” is a recurring refrain.

The consolidation of the packing industry in the United States in the late-19th and early-20th centuries was a direct result of the communications revolution, notably the development of railroads and refrigeration technology that permitted the exploitation of economies of scale in packing.   The industry was not just concentrated in the sense of having a relatively small number of firms–it was geographically concentrated as well, with Chicago assuming a dominant role in the 1870s and later, largely supplanting earlier packing centers like Cincinnati (which at one time was referred to as “Porkopolis”).

In other words, concentration in meat-packing has been the rule for well over a century, and reflects economies of scale.

Personal aside: as a PhD student at Chicago, I was a beneficiary of the legacy of the packing kings of Chicago: I was the Oscar Mayer Fellow, and the fellowship paid my tuition and stipend.  My main regret: I never had a chance to drive the Weinermobile (which should have been a perk!).  My main source of relief: I never had to sing an adaption of the Oscar Mayer Weiner Song: “Oh I wish I were an Oscar Mayer Fellow, that’s what I really want to be.”

Back to the subject at hand!

Booker also frets about vertical integration, and this is indeed a difference between the 2018 meat industry and the 1918 version: as the Union Stockyards in Chicago attested–by the smell, if nothing else–the big packers did not operate their own feedlots, but bought livestock raised in the country and shipped to Chicago for processing.

I am a skeptic about market power-based explanations of vertical integration, and there is no robust economic theory that demonstrates that vertical integration is anti-competitive.  The models that show how vertical integration can be used to reduce competition tend to be highly stylized toys dependent on rather special assumptions, and hence are very fragile and don’t really shed much light on the phenomenon.

Transactions cost-based theories are much more plausible and empirically successful, and I would imagine that vertical integration in meat packing is driven by TCE considerations.  I haven’t delved into the subject, but I would guess that vertical integration enhances quality control and monitoring, and reduces the asymmetric information problems that are present in spot transactions, where a grower has better information about the quality of the cattle, and the care, feeding, and growing conditions than a buyer.

I’d also note that some of the other industries Booker mentions–notably bean and corn processing–have not seen upstream integration at all.

This variation in integration across different types of commodities suggests that transactional differences result in different organizational responses.  Grain and livestock are very different, and these likely give rise to different transactions costs for market vs. non-market transactions in the two sectors.  It is difficult to see how the potential for monopsony power differs across these sectors.

Insofar as the major grain traders are concerned, again–this is hardly news.  It was hardly news 40 years ago when Dan Morgan wrote Merchants of Grain.

Furthermore, Booker’s concerns seem rather quaint in light of the contraction of merchant margins, about which I’ve written a few posts.  Ironically, as my most recent ABCD post noted, downstream vertical integration by farmers into storage and logistics is a major driver of this trend.

To the extent that consolidation is in play in grains (and also in softs, such as sugar), it is a reflection of the industry’s travails, rather than driven by a drive to monopolize the industry.  Consolidation through merger is a time-tested method for squeezing out excess capacity in a static or declining industry.

Booker’s bill almost certainly has no chance of passage.  But it does reflect a common mindset in DC.  This is a mindset that is driven by simplistic understandings of the drivers of industrial structure, and is especially untainted by any familiarity with transactions cost economics and what it has to say about vertical integration.

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September 3, 2018

The McCain Funeral: The Political Version of the Dunning-Krueger Effect

Filed under: Politics — cpirrong @ 5:49 pm

I am still agog at the most flagrant public display of political onanism in living memory, by which I am of course referring to the McCain funeral.

Although ostensibly praising the deceased, the praise was really for the (unfortunately) still breathing–the political establishment.  McCain was wonderful! McCain was one of us! Therefore, we are wonderful! Wonderful beyond words!

I was going to ask, rhetorically, whether these people could be THAT clueless?  But the answer is obvious, which kind of saps the force of a rhetorical device.

This is nothing less than the political version of the Dunning-Krueger effect: an entire class of individuals with low ability, a history of poor performance, and a complete lack of perception and self-awareness, believing that they are God’s gift.  And believing that the hoi polloi who voted for Trump are vicious ingrates for not recognizing how totally awesome the elites are.

Almost two years after the election, these people still fail to comprehend that the reason they have been rejected and scorned by tens of millions of ordinary Americans is their litany of failures post-1990.  It is a record unblemished by success.  A perfect record, in a perverse sense.

By failing even to question their own genius–and indeed, to loathe anybody who dares do so–they are only feeding the disdain in which they are held.

The cluelessness is crystalized in a tweet by a person laughably described as the Washington Post’s conservative voice–the truly repulsive Jennifer Rubin:

It is disgusting enough to equate the Trump presidency to 9/11–and have no doubt that is what she is doing.  The fact that she actually thinks that the funeral “eschew[ed] tribalism” is beyond belief.  As I said in my post the other day–it was all about tribalism.  It was the two clans of the political establishment tribe uniting to excoriate The Other under the pretense of having a funeral.  Rubin’s assertion is an inversion of reality.

Several historical comparisons come to mind when thinking about the funeral bloviations.

The first is Talleyrand’s remark about the Bourbons, who learned nothing and forgot nothing.

The second is Pericles’ funeral oration.  I watched a BBC show about the Spartans the other day in which the narrator summarized the oration as: “Everything about the Athenians is right.  Everything about the Spartans is wrong.”  Substitute the US political establishment for the Athenians, and Trump for the Spartans, and you have the McCain funeral orations to a “T”.

The third is that funeral was a perverse reversal of Mark Antony’s line in Julius Caesar.  Instead of “I have come here to bury Caesar, not to praise him” the assembled bloviators in DC in effect said “we come here pretending to praise McCain, but actually to bury Trump.”

This got me thinking about  some parallels between Rome in the 40s BC and DC today. Caesar was a member of the elite who appealed to the masses–both in the sense that he directed appeals to them, and that they found what he said appealing.  He also insulted the elite at every turn, and implemented policies that attacked their interest and affronted their inflated sense of dignity.  This frightened, incensed and enraged the Roman establishment, which was centered in the Senate.  Caesar’s popularity, his disdain for the elite, and his refusal to kowtow before it, combined with the elite’s obsession with its power, privileges, and amour propre, brought the country into civil war.

No, history does not repeat, and late-Republican Rome is vastly different in many (most) ways from (hopefully not late-) Republican America (referring to the form of government, not the party).  Yet the present spookily rhymes with the distant past, with Trump playing the role of Caesar, and the US Senate playing the role of, well, the Roman Senate.

Again, I’m not pushing the analogy too far.  But there are enough points of comparison to make thoughtful people take pause.  But, alas, the phrase “thoughtful people” is not one that describes the assembled “mourners” at McCain’s funeral, or their camp followers.

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September 1, 2018

Robert Mueller Does Mr. Micawber

Filed under: Politics — cpirrong @ 7:43 pm

Robert Mueller brings to mind Dickens’ character Wilkins Micawber: “Something will turn up.”  McCawber was vexed by his inability to strike it rich: Mueller by his inability strike the collusion goldmine he was tasked to find (perhaps unconstitutionally).  While he is waiting for collusion to turn up, Mueller is hustling after penny ante process crimes.

The latest was a plea to the federal crime of failure to register as a foreign agent by lobbyist Sam Patten, whose heinous offense was to find someone who would buy tickets to Trump’s inauguration for a Ukrainian oligarch who tried to buy them directly–but was turned down by the Trump inauguration committee.  In other words, if the guy tried to bribe Trump, he was rejected! That kinda contradicts the collusion narrative, don’t it?

Compared to this, jaywalking is mass murder.

And if justice were enforced blindly–I know, don’t laugh–would we have enough jails to hold all the malfeasors? For certainly with truly fair justice that is more than an exercise in scalp collecting to justify the continued existence of Mr. Mueller and his Merry Band, Mr. Patten should have plenty of company, starting with pretty much anyone involved with the dossier not to mention every lobbyist in DC.

It was sickly amusing to watch the hyperventilating media.  The New York Times covered the story with five–five!–reporters.  I know NYT reporters are pretty dim, but wouldn’t three have sufficed?  Thursday night I saw a tweet by some media bigfoot (which of the idiots, I can’t remember) breathlessly advising us to read the news Friday, because Mueller would drop some bombshell in the morning. Instead, this dud landed with a thud.

The media is also barely able to contain itself over the claim by George Papadopolous (in his sentencing brief for his heinous process crime) that Trump nodded when George suggested a meeting with Putin. Nodded, I tells ya! Um, if Putin owned Trump–or had him “over a barrel”, in the words of Christopher Steele–why would it be necessary for George to suggest a meeting?

If it wasn’t so serious, this would be the most farcical farce in the history of farces.  Alas, Micawber-Mueller’s waiting for something to turn up is morphing into waiting for Godot–a play with no point and seemingly no end.  But it will go on, and on, and on, because it is in the interest of the political class for it to do so.  So even if nothing turns up, its very existence has its political uses.

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I Honor the Veteran, Not the Senator

Filed under: Politics — cpirrong @ 6:33 pm

Do you remember the commemoration of the passing of Leo Thorsness?  George Day? James Stockdale?

Perhaps you are not familiar with the names.  They were all Vietnam War POWs.  Day shared a cell with John McCain, and McCain made a sling for Day after his arm was horribly injured by torture.  Their records prior to capture were far more distinguished than McCain’s: Thorsness won the Medal of Honor for his acts in air combat in an F-105.

Although it is perhaps unfair to compare or judge the conduct of those who endured the hell of North Vietnamese prison camps, it is worth noting that Day’s and Stockdale’s actions as POWs were deemed so exceptional even by comparison with other POWs that they were awarded Medals of Honor.

McCain shared this hell with them, and he is as deserving of as much recognition for his courage, perseverance, and suffering  as a POW that they received.  But he has received far, far more.  Flags are at half-mast.  He will lay in state in the Capitol.  The media praise has been fulsome, and almost non-stop since his death.

The difference in honors paid to McCain on the one hand, and Thorsness, Day, and Stockdale on the other, therefore cannot relate to his military service and captivity: instead, it is a tribute to his political career.

This is an inversion of priorities. I can think of few politicians who deserve such veneration.  Very few.  And John McCain is not one of them.

Formally, John McCain was a Republican.  But he reveled in tweaking his party, often to aggrandize himself and to attract praise from the “elite” media and the DC establishment.

The fact is that McCain was a member of the party of government.  On every major issue, especially during the period of his greatest power and fame, McCain supported expansion of the scope and power of government.  Sometimes he talked the limited government talk, but he very, very seldom walked the walk.

One of the refrains in the encomiums is that McCain was a strong believer in an practitioner in bipartisanship.  This is hardly an endorsement.  Bipartisanship is the religion of the party of government. And in DC, it is pretty much a one-way street.

In practical terms, “bipartisanship” usually entails a conspiracy of the two parties to stitch up the rest of us.  When someone praises bipartisanship, I grab my wallet and watch my back.

McCain’s signature issue–campaign finance “reform”–is a case in point.  From the first it was designed to protect incumbents and the institutional parties from competition and accountability.  I prefer gridlock and conflict: if they are fighting one another, they are less likely to shaft me and mine.

Further, today’s funeral featured speech after speech lauding McCain’s bipartisanship–and blasting Trump.

If you are mystified as to how paeans to bipartisanship mix (at a funeral no less) with relentless partisan attacks, let me explain.  Bipartisan in Washington-ese means the shared interest of the institutional parties and incumbents in protecting their sinecures and power.  Trump threatens both.  So rank partisanship–again, at a funeral!–is perfectly compatible with the DC meaning of “bipartisan” because Trump and his supporters are not part of the “bi”, and indeed threaten its parasitic existence.  This is one tribe–the establishment tribe–attacking The Other.

In recent years, moreover, McCain has wanted to involve the US in yet more wars, especially in the Middle East.  His advocacy of intervention in Syria in particular speaks very poorly of his judgment, especially in light of American experience in Iraq and Afghanistan.

And let’s be real here.  If McCain had died when Obama was president, or had Hillary been president, he would not be receiving nearly the amount of praise and attention as he is receiving in the Age of Trump.  McCain was a vocal critic of Trump, and praising McCain to the heavens is just another way of damning Trump.

It is particularly nauseating to see many of those who savaged him during his hapless presidential campaign celebrating him today.  As if further proof was necessary of the situational nature of political “ethics” in the US.

For his part, Trump has been less than gracious in his response to McCain’s death.  “Don’t speak ill of the dead” seems to be his operative principle.

At least he’s not a hypocrite on this matter, which is another thing that sets him apart in DC.

Further, let’s not delude ourselves into believing that McCain was some latter-day “happy warrior” to be contrasted with a vicious Trump.  He in fact had a mean, vindictive, and petty side–as demonstrated by his disinviting Sarah Palin from his funeral.  Methinks that much of McCain’s criticism of Trump’s behavior was projection.

And let’s not forget that in addition to being a vicious vocal critic of Trump (and I think “vicious” is a fair characterization), McCain played a low and dishonorable role in injecting the Steele dossier into the body politic.  It is sickly ironic that a man who believed that Russia is a mortal enemy of the United States has done far more to advance Putin’s objective of destabilizing American politics and society than anything Putin has done, or even could do, himself.

So I am quite willing to acknowledge and honor McCain’s service and sacrifice in the years ending in 1973, just as I did (and do) honor that of Leo Thorsness, George Day, James Stockdale and other Americans who served with honor and distinction in Vietnam.  But his political career, and the ongoing celebration thereof, are a testament to the dysfunctions of American government and politics, so I will not be joining in the hosannas for Senator John McCain.

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August 28, 2018

What Happens When the Putin Hamster Wheel Stops Spinning?

Filed under: China,Politics,Russia — cpirrong @ 6:30 pm

In a Bloomberg interview, Russian sociologist Olga Kryshtanovskaya basically echoes things that I’ve written here for over a decade.

First, though she doesn’t use this exact terminology, Putin’s Russia is a quasi-feudal “natural state” in which Putin is the balancer, and maintains balance by allocating rents among jostling elite clans.

Second, the transition to a post-Putin Russia will be messy.  Kryshtanovskaya sketches out the game theory, which I’ve done in the past.  It’s not that complicated–collusive/cooperative arrangements among rivals unravel as the end game nears.  With a mortal man playing such a crucial role in enforcing the cooperative agreement, such an unraveling is inevitable.

Putin is subject to constitutional constraints that would, in theory, cause the end game to precede his demise or dotage, but he recognizes this, and will find some new role that concentrates power in his hands, thereby effectively neutering who ever succeeds him as president.

But that just delays the inevitable. As he ages, and the clans he keeps in check believe that the cooperative horizon is shrinking (perhaps due to observation that Putin is slipping mentally or physically), one (or all) will make a power grab.  That could lead to chaos.

One wildcard that  Kryshtanovskaya doesn’t mention, and which wasn’t as big of a factor when I was writing about this years back, is Kadyrov.  He is another actor–and a mercurial and dangerous one–who could play a decisive role in the end game.  Although it has been suggested that he has ambitions to rule Russia, it is more likely that he will make a play for greater autonomy when the center weakens, and will also throw his weight to influence the outcome of the battle to succeed Putin.  And once that is settled, it is not difficult to imagine that his demands and independence will result in a Third Chechen War.

It is precisely this inherent instability in a de-institutionalized, personalized political system that limits Russia’s long-run challenge to the US.  Periodic, episodic turmoil is not conducive to posing a persistent geopolitical challenge.

Until recently, China’s more collective leadership system and periodic, regular transfers of power have been another factor that makes it a more dangerous challenger to the US than Russia.  Interestingly, Xi’s concentration of power in his person may bring all of the trade-offs that Putnism has, with the biggest downside being instability and potential chaos when succession looms.

I’d say that bodes well for the US in the long run, but since we appear to be converging to Russia from above, perhaps not.  On that subject, more later.

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August 20, 2018

Goodhart’s Law on Steroids, PCP, and Crack: Chinese GDP

Filed under: China,Commodities,Economics,Politics — cpirrong @ 6:46 pm

Goodhart’s Law states that if a measure becomes a target, it ceases being an informative measure.  If you want to see an illustration of Gooodhart’s Law in action on a humungous scale, just look at China.

Michael Pettis has a piece in Bloomberg which, in brief, says that China has a GDP target.   If it appears that the country will fall short of the target, local governments get the high sign to invest in infrastructure, construction, and the like.  Local governments control credit creation (by guaranteeing bank debts) so banks are willing to lend to finance this investment: further, frequently the government will jawbone banks, or will twiddle the knobs in the banking system (e.g., lowering reserve requirements) to get banks to supply the necessary funds.

The investments are guaranteed (though what revenue stream or assets back the guarantees Pettis doesn’t say, and there are reasons to doubt the value of these guarantees in a crunch).  Hence, banks never have to write down the debt even if the investments turn out to be junk, with a value far less than the cost incurred to create the underlying assets.

So basically, the Chinese government can produce any GDP number it wants.  Voila, apropos Goodhart, the GDP number is useless.

You’d like GDP to measure the value of goods and services (including investment goods) created.  Instead, in China on the fixed asset side in particular, it measures cost, which may bear little relationship to value when economic decisions are made according to the process that Pettis describes.  In market economies where banks and borrowers have hard budget constraints, investments that don’t pan out are written down, and the losses are deducted from income.  That doesn’t happen in China.

So what is national income in China?  I’d start with consumption, though even there due to issues with price indices/inflation measurement that may be overstated.  Then I’d add a constant X times reported fixed investment, where X<1.  Probably a lot less than 1, to take into account the fact that much investment has a cost that exceeds value.  Further, I’d deduct some fraction of accumulated past investment to reflect writedowns that should be made, but aren’t.

The focus of this analysis should be on determining X.  X should be a function of something related to estimated shortfall of GDP from target absent stimulus: the bigger the shortfall, the smaller X (because more bad investment is likely when the shortfall is big, as it’s then that the government encourages investment to make up the shortfall).  It could be a function of the increase in fixed asset investment, or construction investment, with a smaller X when investment in those categories shoots up.

A few other remarks.

First, it is stories like Pettis’ that convince me that modern China represents the most colossal misallocation of capital in history.

Second, it also makes me skeptical about Scott Sumner’s use of state-owned-enterprise (SOE) share of employment as a measure of centralized control of the economy. Most of the capital, and related employment, that results from the GDP targeting channel that Pettis analyzes flows through private firms.  The government controls/affects resource allocation via incentives given to local governments, which in turn incentivize banks and private firms to achieve the government objective.

Spitballing here, but I think a better measure would be something along the lines of the ratio of the volatility in fixed investment to the volatility in GDP.  Or maybe the ratio of the volatility in credit creation to the volatility of GDP.  Chinese GDP volatility, especially post-crisis, is laughably low.  The channel that Pettis identifies stabilizes GDP (reducing its volatility) by changing investment/credit creation in response to changing economic conditions (thereby increasing its volatility).  The only problem with this measure is that there is a real risk it will become infinite.

In (relatively) market-oriented economies, investment is the most volatile component of GDP, so the ratio I propose would be positive in those economies.  But that could serve as a market economy benchmark against which to compare China.  I’m guessing that China’s ratio would be substantially larger.

Third, when looking at the demand for commodities, the potential for shortfalls of economic performance from government target should be decisive.  These shortfalls induce the turning of the credit spigot which juices the demand for commodities.

In sum, what matters in China is not whether or not GDP hits the target–it will! The question is what the government has to do to hit it.

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August 16, 2018

Why ABCD Sing the Blues, Part II: Increased Farm Scale Leads to Greater Competition in Capacity and Less Monopsony Power

Filed under: Commodities,Derivatives,Economics,Politics,Regulation — cpirrong @ 6:34 pm

In “Why Are ABCD Singing the Blues?” I called bull on the claim that ag trading firms were suffering through a rough period because of big crops and low prices.  I instead surmised that gains in capacity, in storage and throughput facilities, had outstripped growth in the amount of grain handled, and that this was pressuring margins.  In yesterday’s WSJ, Jacob Bunge (no relation, apparently, to the grain trading family) had a long and dense article that presents a lot of anecdotal support for that view.  The piece also provides other information that allows me to supplement and expand on it.

In a nutshell, due to increased economies of scale in farming, farms have grown larger.  Many farms have grown to the point that they can achieve efficient scale in storage and logistics to warrant investment in storage facilities and trucks, and thus can vertically integrate into the functions traditionally performed by Cargill and the others.  This has led to an expansion in storage capacity and logistical capacity overall, which has reduced the derived demand for the storage and logistics assets owned and operated by the ABCDs.  Jacob’s article presents a striking example of an Illinois farmer that bought a storage facility from Cargill.

In brief, more integrated farms have invested in capacity that competes with the facilities owned by Cargill, ADM, Bunge, and smaller firms in the industry.  No wonder their profits have fallen.

The other thing that the article illustrates is that scale plus cheaper communication costs have reduced the monopsony power of the grain merchants.  The operation of the farmer profiled in the piece is so large that many merchants, including some from a distance away, are competing for his business.  Furthermore, the ability to store his own production gives the farmer the luxury of time to sell: he doesn’t have to sell at harvest time to the local elevator at whatever price the latter offers–which was historically low-balled due to the cost of hauling to a more distant elevator.  Choosing the time to sell gives the farmer the value of the optionality inherent in storage–and the traditional merchant loses that option.  Further, more time allows the farmer to seek out and negotiate better deals from a wider variety of players.

The traditional country market for grain can be modeled well as a simple spatial economy with fixed costs (the costs of building/operating an elevator).  Fixed costs limit the number of elevators, and transportation costs between spatially separated elevators gave each elevator some market power in its vicinity: more technically, transportation costs meant that the supply of grain to a country elevator was upward sloping, with the nearby farms willing to sell at lower prices than more distant ones closer to competing elevators.  This gave the elevators monopsony power.  (And no doubt, competition was limited even in multi-elevator towns, because the conditions for tacit collusion were ripe.)

Once upon a time, the monopsony power of elevator operators was a hot-button political issue.  One impetus for the farm cooperative movement was to counteract the monopsony power of the line elevator operators.  The middlemen didn’t like this one bit, and that was the reason that they excluded cooperatives from membership of futures exchanges, like the Chicago Board of Trade: this exclusion raised cooperatives’ costs, and was effectively a raising-rivals-cost strategy.  Brokers also supported excluding cooperatives because as members cooperatives could have circumvented broker commission cartels (i.e., the official, exchange-approved and enforced minimum commission rates).  This is why the Commodity Exchange Act contains this language:

No board of trade which has been designated or registered as a contract market or a derivatives transaction execution facility exclude  from membership in, and all privileges on, such board of trade, any association or corporation engaged in cash commodity business having adequate financial responsibility which is organized under the cooperative laws of any State, or which has been recognized as a cooperative association of producers by the United States Government or by any agency thereof, if such association or corporation complies and agrees to comply with such terms and conditions as are or may be imposed lawfully upon other members of such board, and as are or may be imposed lawfully upon a cooperative association of producers engaged in cash commodity business, unless such board of trade is authorized by the commission to exclude such association or corporation from membership and privileges after hearing held upon at least three days’ notice subsequent to the filing of complaint by the board of trade.

Put differently, in the old days the efficient scale of farms was small relative to the efficient scale of midstream assets, so farmers had to cooperate in order to circumvent merchant monopsony power.  Cooperation was hampered by incentive problems and the political nature of cooperative governance.  (See Henry Hansmann’s Ownership of Enterprise for a nice discussion.) The dramatic increase in the efficient scale of farms now means (as the WSJ article shows) that many farmers have operations as large as the efficient scale of some midstream assets, so can circumvent monopsony power through integration.  This pressures merchants; margins.

Jacob Bunge is to be congratulated for not imitating the laziness of most of those who have “reported” on the grain merchant blues, where by “reporting” I mean regurgitating the conventional wisdom that they picked up from some other lazy journalist.  He went out into the field–literally–and shed a good deal of light on what’s really going on.  And what’s going on is competition and entry, driven in large part by economic and technological forces that have increased the efficient scale of grain and oilseed production.  Thus, the grain handlers are in large part indirect victims of technological change, even though the technology of their business has remained static by comparison.


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August 15, 2018

The Zinke Firestorm: Mitigation of the Impacts of Climate Change vs. Using Climate Change as Justification for Reordering the World

Filed under: Climate Change,Economics,Politics — cpirrong @ 2:07 pm

Interior Secretary Ryan Zinke ignited a firestorm by blaming California wildfires on environmental extremists who oppose logging and other measures (e.g., controlled burns) to reduce fuel load, and denigrating the contribution of global warming.  For this, he has been accused of heresy, and no doubt many of those accusing him would like to consign him to the flames at the stake.

One particularly disturbing aspect about this debate is its polarity–it’s framed as forestry management vs. climate change.   And here, both Zinke and his critics are culpable.

It doesn’t have to be that way.  Policy on forest management can be analyzed quite independently of climate change.   Indeed, to the extent there is a dependence, logically one should be more supportive of measures to mitigate fire risk if you believe that other factors–including warming–have raised that risk.  That is, the warmists, and those who believe there is a connection between warming and fire risk, should be the biggest supporters of reducing the factors that increase the frequency and intensity of fires–and reducing fuel load would be at the top of the list.  These are measures that can be taken in the here and now, and which do not involve wrenching costs.

But that requires pragmatism, and that is something that is conspicuous by its absence on the environmentalist left.  Indeed, they largely view mitigation and other pragmatic, gradualist responses to climate change as a serious moral failing requiring a response befitting the Inquisition, culminating in an auto de fe.  That is, the response is religious in nature, and not logical or pragmatic.  Mitigation is about trade-offs, and evaluating costs and benefits.  These are not the terms of religious debate.

Indeed, I surmise that one of the reasons for raging against mitigation–and likely the most important reason, especially among the more strident–is that mitigation undermines the case for the totalitarian measures that many on the environmental left ardently support.  And if you think totalitarian is too harsh a word, I think you are quite wrong.  Fighting climate change is the justification by many on the left for a complete reordering of economic and social systems, achieved by coercion and force if necessary.

If mitigation reduces the harm, the case for such totalitarian measures is undermined.  And since for many on the left the primary value is not the environment per se, but a complete reordering of economic and social systems, this represents a mortal threat to their political agenda.

That is, environmentalism and climate change are largely instrumental–Trojan Horses, as it were.  This is why mitigation strategies are met with such intense hostility.  What’s the point in mitigation, if it deprives you of an opportunity to reorder society?

As a matter of rhetoric, people like Ryan Zinke (and Trump, for that matter) would be better to separate issues relating to mitigation of risk from the climate change issue, or to the extent that they bring up climate change at all, emphasize that mitigation is even more valuable to the extent that climate change does increase the risk of things like wildfires.  Do not let the Trojan Horse into the debate.  Emphasize that such measures can be a pragmatic response to a risk.  I think that would resonate much more with ordinary people, as much as it infuriates ideologues.


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August 10, 2018

There is Much Ruin in a Country, Turkish Edition

Filed under: Economics,Politics — cpirrong @ 6:58 pm

In June, I spent 9 days in Turkey.  For someone as interested in history as I am, it was a phenomenal visit.  From the Hittites to the tomb of Midas in Gordium to Ephesus to Cappadocia, it is a series of historical marvels, and I only scratched the surface.

Since I am fascinated by Mustafa Kemal Ataturk, one of the most interesting historical figures of the 20th century,  one of the highlights of my visit was a trip to his mausoleum and museum in the Atakabir in Ankara.  The visit was particularly timely, given that Ataturk’s legacy and handiwork is currently at risk.

The political environment in Turkey was febrile during my visit.  I left exactly one week before the (snap) presidential election, and the deep political divisions in Turkey between the Islamist followers of Recep Tayyip Erdoğan (concentrated in central Anatolia, where I visited) and the remaining adherents of Kemalism (mainly in the west, centered in Izmir, where I visited as well) were on full display.

I had some thoughts (hopes, maybe) that enough Turks would realize that Erdoğan would use an election victory to Islamize and revolutionize (and not in a good way) the country further, and would deny him an outright victory that would allow him to realize his Ottoman pretensions.  But the tribal loyalties to Erdoğan are too wide, deep, and intense, and he won a victory.  Not a landslide, but not all that close, either.

And true to form, he took a couple of point election win as an invitation to act out his political and economic fantasies.  Turkey has fared well growth-wise for the past decade-plus, but it exhibits many of the fragilities of an emerging market, and especially a fast-growing emerging market.  Navigating this situation requires prudence, and some willingness to let the monetary authorities rein in excess.

But these are two things that Erdoğan quite clearly lacks, and indeed scorns.  In particular, he has a fixation about interest rates, which he believes are evil, and should be zero.  His natural inclinations are egged on by some of his biggest business supporters, who are construction magnates addicted to cheap credit.

Fear of Erdoğan’s monetary profligacy had already caused substantial declines in the lira prior to the election, and his statements shortly before the election on Bloomberg TV about taking control of monetary policy caused a further selloff. Then post-election, he appointed his son-in-law as finance minister.  (I guess it could have been worse: at least he did not appoint his truly idiotic son.) That stoked fears even more.

Then, post election, he has gotten into a confrontation with the US over buying S-400 air defense systems from Russia, and over the arrest of an American pastor accused of treason.  He has refused to give an inch on the preacher, despite warnings from the US, and a shot across the bows in the shape of sanctions imposed on two Turkish government ministers.

This is an utterly stupid and pointless conflict, and likely reflects Erdoğan’s obsession with FETO and the Gülenist movement led by his former confrere, and now archenemy, Fetullah Gülen–an obsession that has been at a fever pitch since last July’s abortive coup.  One needs to pick battles carefully, and this is not one that a rational man would choose to fight.

The escalation of this conflict has been mirrored by further declines in the lira.

Perhaps Erdoğan could have gotten away with this with Obama, or a Bush, or a Clinton in the White House.  But it is beyond insane to wave a red flag in front of Trump, and Trump has responded predictably to what he perceives to be a challenge.

Today Erdoğan gave a speech that was intended to ease fears, but it didn’t.  It fed them, as his answer to the currency crisis was for Turks to sell foreign currency and buy lira.  Great plan! Except the Turks who adore Erdo don’t have dollars and euros, and the Turks who have dollars and euros pretty much hate Erdo.  So the speech triggered an implosion in the lira.

At which point Trump put the boot in, announcing punitive tariffs on metal imports from Turkey (steel being a particularly big industry there), embellished with a Trumpian suck-on-this-one-Recep tweet.  The free-fall intensified. Now a full-fledged crisis looms, and Erdoğan is constitutionally temperamentally incapable of dealing with it, as this would require him to make a humiliating public climb-down on firmly held beliefs and positions–the most notable of these being the greatness and destiny of Recep Tayyip Erdoğan.

So Erdoğan has doubled down, ranting about economic warfare and economic hitmen.  That may play in Anatolia, but it won’t in the currency and capital markets.

Once upon a time the military would have stepped in.  But Erdoğan has neutered it as a political force.  Some of the neutering took place after the coup, but the utter incompetence of the coup suggests that his earlier efforts to destroy the foundations of Kemalism had made considerable progress.  (The coup was so botched that it is not unreasonable to think that Erdoğan let it proceed, knowing it would fail and that he could exploit it.  Indeed, it’s not outside the realm of possibility that he facilitated it.  He has certainly been the beneficiary.)

Erdoğan is sometimes compared to Ataturk.  Ataturk was a transformative figure, and Erdoğan certainly wants to be one, and has indeed already engineered considerable transformation of Turkish state and society (although in this he was aided greatly by demography, which has seen the population of the Anatolian heartland explode and the population of the Rumelian regions stagnate.)

But although Mustafa Kemal had grand visions to Make Turkey Great Again, he was remarkably prudent in his actions.  Most importantly, whereas Erdoğan has pretensions to make Turkey a regional hegemon, and indeed, a new Ottoman Empire, Ataturk concentrated on nation building at home.  He was incredibly wise in avoiding entanglements in the looming European war, and his successor İnönü followed that lead and stayed out of WWII. Erdoğan’s involvement in Syria was a catastrophe from the word go, and his religiously-driven antagonism towards Israel, a natural ally, has been foolish in the extreme.

Under Ataturk and his successors, by focusing on domestic changes, Turkey had the breathing space to construct a functioning state and avoided the disaster that afflicted every other country in Eurasia from 1939 to 1945.   Erdoğan is not so wise.

Where does it end?  I can’t seeing it end well.  Erdoğan will likely be able to rely on his fervent political base to remain in power, and has shown no reluctance to crush opposition by any means necessary.  He has already used, and likely will continue to use, the economic crisis to stoke the us vs. them passion that has been an important part of his political success.  Turks are nationalistic (a legacy of Ataturk, ironically), many past the point of chauvinism.

We see too many examples from around the world (Venezuela, Syria, Iran) of how autocratic leaders can survive economic crisis.  Turkey is not even close to becoming one of those basket cases, and if a Maduro can hang on, so can Erdoğan.  As Adam Smith said, there is much ruin in a country, and Recep Erdoğan is likely to show how much ruin there is in the Turkish nation.

An aside. Trump has been playing Godzilla the currency markets.  Yes, Turkey is the worst (well, not counting hyperinflating Iran and Venezuela), but most other emerging market currencies have been cratering, and the dollar has been advancing.  Of particular interest is the decline in the ruble (and the simultaneous sharp drop in Russian stock prices).  Sanctioning Russia over Skripal, and the threat of more, have caused the RUB to fall by around 8 percent, 5 percent on Thursday alone.

Obviously he’s in Putin’s pocket.

Well, if he is, he’s picking it.  So much for collusion.

Putin has been conspicuously silent through this, and Russia has made sounds about trying to reach some rapprochement with the US.  Of course, Medvedev was trotted out to denounce the US.  But that just illustrates that Putin is playing it smarter than Erdoğan: Medvedev is meaningless, and his only role is to take the heat for Putin.  `

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