Streetwise Professor

March 9, 2019

The Laundromat That Reveals Just How Dirty–and Doomed–Russia Is

Filed under: Economics,Politics,Russia — cpirrong @ 7:10 pm

The Troika Laundromat–a massive money laundering operation organized by the eponymous Russian investment bank–has been much in the news of late. Most of the coverage has focused on the western banks–including several in supposedly squeaky clean Nordic countries–that were the conduits for the money. But what is far more interesting to me about the story is what it says about Russia, and in particular how it illustrates with particular force what started me writing about Russia 12+ years ago.

Specifically, as a lower middle income country, with an educated populace and abundant natural resources, Russia should be a magnet for capital. Instead, it is one of the world’s all time greatest capital repellants. They say what happens in Vegas stays in Vegas: obviously, what is made in Moscow (and elsewhere in Russia) doesn’t stay, but gets out any way that it can.

So what overwhelms the forces that would otherwise draw capital to Russia?: the state, and the culture that supports it, and which it sustains. The predatory nature of the state, the predators the state protects, and the lack of basic legal protections make money vastly safer outside of Russia than in it. Put differently, although Russia is rich in human capital and resource capital, it is tragically poor in social capital. It is a low trust society, and one in which formal institutions do not compensate for the lack of trust, but exacerbate it.

Putinism has done nothing to encourage investment in social capital–the opposite is true. Yes, it arguably tamed the greatest excesses of the 90s, but this was essentially a matter of replacing roving bandits with a stationary bandit. An improvement, but hardly a launchpad for social and economic development.

This is a major reason why I consider all of the hyperventilating about the threat posed by Putin and Russia to be vastly exaggerated. It can raise Cain in its neighborhood, but beyond that the country suffers from debilitating weaknesses which are unlikely to change anytime soon. For all Putin’s strutting domestically, and on the world stage, to say that he (and Russia) have feet of clay is an extreme understatement. This is a country that is already far behind, and is doomed to fall even further behind with every passing year.

All the laundromats in the world cannot wash away that reality. Indeed, they are symptomatic of how filthy that reality is.

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Message to Merkel: Merging Two Piles of Manure Does Not Improve the Smell

Filed under: Economics,Politics,Regulation — cpirrong @ 5:29 pm

Reuters reports that Deutsche Bank and Commerzbank have begun merger talks. The German government has been pushing for such a merger. In part, Berlin is hot for a combination because it wants to create a “national banking champion”:

And as Mr Scholz and Mr Kukies’ clandestine London meetings show, the idea is now gaining traction in Berlin. Policymakers and corporate bosses see a stable national banking champion as the backbone of their export-led industrial policy, vital if the country is to weather the next downturn that many economists warn looms large.

This is hilarious and infuriating on so many levels.

First. Hmmm. “National champion” sounds kinda, uhm, I dunno, nationalist, doesn’t it? And Frau Merkel keeps telling us only bad people are nationalists, and nationalists are bad people.

Again–German hypocrisy knows no bounds.

Second, by what financial alchemy does merging two horribly underperforming banks create anything of championship caliber, unless you mean a national champion clusterf*ck? Both banks are priced at a huge discount to book–for good reason. Both have returns on equity that are at the bottom of league tables. Merging two manure piles will not improve the smell.

Further, Deutsche Bank in particular is already a bloated monstrosity. Successive CEOs have failed to rationalize it. Every merger faces huge integration challenges, which would only complicate the task of rationalizing and downsizing DB.

Moreover, Deutsche Bank is already a huge systemic risk, given its size and dodgy balance sheet. Mashing it together with Commerzbank will only increase its systemic importance, and its complexity, and hence its systemic risk.

And this is yet more hypocrisy: the Germans are always lecturing everyone (especially the Italians and Greeks) about financial imprudence, and the risks that they impose on Germany. Speak for yourself, Fritz. DB is the poster child for financial imprudence. So why not make it bigger? What could possibly go wrong?

Maybe sanity will prevail, and the merger will not go through. But the very fact that it is being thought of, and indeed pushed by the German government, tells you everything you need to know about how hypocritical, and how clueless, the German government is.

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March 6, 2019

The Libel Catch 22: Making the Media Unaccountable

Filed under: Politics — cpirrong @ 7:47 pm

Covington High’s Nick Sandmann–you know, the alleged evil smirker–is suing the Washington Post for defamation. It should be a pretty open and shut case, given that pretty much everything that the WaPo wrote about him was false. But no! Like all media, the WaPo has an ace card: for a public figure to prove libel, s/he has to show that not just was the story factually incorrect, but that the publication acted in reckless disregard of the truth.

Still you are probably thinking: How does that help the WaPo? Nick Sandmann was just an anonymous kid from Kentucky waiting in front of the Lincoln Memorial with his classmates for the bus to pick him up when a fraud got in his face. How can he possibly be a public figure?

Well, obviously you are not in possession of a sharp legal mind. According to the Atlantic, and the legal sources it quotes, Sandmann may indeed be a public figure–in large part because the WaPo wrote an article about him.

Wrap your head around that pretzel logic for a minute. An anonymous 16 year old can’t sue the WaPo for libel because he went from being anonymous to a public figure . . . because the WaPo wrote about him and therefore made him into a public figure.

Catch-22 logic at its best! Paging Joseph Heller!

Perhaps I overstate, but only slightly. Maybe it wasn’t the WaPo who made it a public figure, but people who talked smack about Sandmann on Twitter, and posted grossly misleading videos about him on YouTube (without getting permission to use his image, I might add). So once Internet trolls talk about you, you are a public figure, which gives the Post and other media outlets carte blanche to talk ridiculous smack about you without consequence, because, voila!, you’re a public figure and you have to prove not just that the smack was untrue, but the WaPo published the smack in reckless disregard of the truth. Good luck with that!

This is really a distinction without a difference. By this standard, everyone is a public figure, or one Tweet away from being one, especially in the social media age. Meaning that the least among us has no real recourse against a lying reporter.

It’s interesting to read the original Supreme Court decision–NYT v. Sullivan–which gave the press the “public figure” defense–or at least is credited with doing so. In fact, that phrase does not appear once in the decision: “public official” or “public servant” appear 40 times, making it clear that the intent of the ruling was to prevent government officials from deterring press scrutiny of their misconduct by threat of libel suits. The idea of “public official” has morphed into “public figure,” including private individuals who “thrust themselves” into the public eye on matters of public controversy.

But Nick Sandmann didn’t thrust himself–he was unwillingly thrust into the public eye by utterly mendacious people, of whom the WaPo was at the top of the food chain. Who now claim that they cannot be touched because he is in the public eye (because they thrust him there!) and hence a public figure.

It’s worth noting that the Atlantic quotes “thrust themselves to the forefront of particular controversies in order to influence the resolution of the issues involved,” but then says without quotes “Or Sandmann could be considered an involuntary public figure who has been thrust into the public spotlight against his will. This can apply to anyone at the center of a public controversy despite whether or not that person willed it.” This suggests that although the “thrust themselves” standard has been established in court (as is indeed the case, in one of the sordid Bill Cosby-related matters), the “involuntary public figure” standard is something the media would dearly like to assert is the law. Because if it is, then the Catch 22 pretzel logic applies universally: no matter how insignificant you are, if anyone publishes anything about you, even if it is totally false, you have little practical legal recourse because by virtue of their writing or speaking about you, you are a public figure. Which would make libel law a dead letter.

So why should the media be–what’s the phrase these days?–oh yes, privileged in this way? Well, they shouldn’t be, but they exert tremendous influence that they use to their benefit. The judiciary has been, for all intents and purposes, captured by the media.

I have personal experience in the way the media operates, based on my run-in with the New York Times a little over 5 years ago. The day after the story ran, a reporter who had won multiple Pulitzers with the Times emailed me and asked me to call. He told me that he was outraged by the story. He asked me a few questions, and after hearing my responses, told me that the Times had flagrantly violated its own written standards. He encouraged me to read them. So I did.

They said that because an adverse article in a prestigious publication like the NYT can have such devastating consequences for individuals (who knew?), reporters should strive to make sure their reporting is fair. Specifically, prior to publication, they should contact those mentioned in stories, read what will be said about them, and give opportunity for correction and comment.

Of course, David Kocieniewski never did this. Perhaps even worse, when I brought this to the attention of his editor, the response was . . . no response. Meaning that the “standards” are just so many high sounding words, that mean precisely diddly squat.

So I know how these motherfuckers roll.

And how do they roll, you ask? Like Ted Kennedy behind the wheel of an Oldsmobile, and for exactly the same reason: they know they are totally unaccountable, and can get away with murder. They can leave wrecked lives in their wake, and face no consequences for their behavior.

Clarence Thomas has called for a revisiting of the libel laws in the US. It is long past time. The laws are out of balance and reasonable exceptions for public figures have metastasized into a system in which journalists are a protected, privileged caste. Perhaps the Sandmann case can restore some sanity, but given the direction the courts are going, I am deeply skeptical.

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March 4, 2019

The New Green Trojan Horse

Filed under: Climate Change,Economics,Energy,Politics,Regulation — cpirrong @ 7:16 pm

My daughter alerted me to this interview of Rhiana Gunn-Wright, “one of the architects of the Green New Deal.” It’s annoying–I swear I would have gone completely mental had she said “right?” one more time–but educational. Not because you will learn anything about the way the world works, but you will learn the way the minds of the Green New Dealers work.

The interview is hosted by ex-Obamaite Jason Bordoff, now of Columbia University’s Center on Global Energy Policy. Given Bordoff’s current gig, he was obviously interested in the GND’s implications for energy. After all, the supposed raison d’etre of the GND is that our current energy system, dependent on fossil fuels as it is, is causing us to hurtle towards catastrophic warming.

But whenever Bordoff asked a question about energy, or climate policy, Gunn-Wright couldn’t even feign interest. Her responses were in the vein of “whatever”, and then she launched into impassioned monologues about what really interested her–a laundry list of progressive dreams from health care to child care to labor policy.

What’s clear from Gunn-Wright’s performance is that “climate change” is merely a Trojan Horse for a hard-core leftist agenda. The plan is to use climate alarmism to stampede voters into electing hard-left politicians who, once ensconced in power, will implement what good (I use that term ironically) socialists have been drooling to implement for decades–since before the original New Deal.

Meaning that if you think the GND as presented by the likes of AOC and Sen. Ed Malarky–excuse me, Markey–would be ruinously expensive–you ain’t seen nothing yet!

Speaking of AOC, thinking of her reminded me of Mark Twain: “First, suppose you are an idiot; now suppose you are a member of Congress. But I repeat myself.” I think even Twain would be gobsmacked by the stupidity of Ocasio-Cortez. It’s beyond disturbing that such a moron promoting such a malign program is taken seriously, and has indeed bamboozled virtually every Democratic presidential candidate into endorsing her program.

But maybe that’s the good news. I think that it is highly likely that as enthusiastically as the coastal elites have embraced GND, it will prove toxic at the ballot box. Trump’s full-throated attacks on socialism certainly indicate that he believes so. And he has an innate sense for these things, as the very fact that he is president demonstrates.

One last thing. If you think I was scathing about the GND, I had nothing on Richard Epstein. He about jumps out of your computer in this podcast from a few weeks back. Worth a listen–especially as an antidote to the leftist bromides of Rhiana Gunn-Wright. Right?

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February 23, 2019

Race Hoaxers Like Jussie Smollett Deserve a Special Place in Hell

Filed under: Politics — cpirrong @ 7:06 pm

There is a particularly nasty place reserved in hell for the likes of Jussie Smollett. Given the fraught state of race relations in the United States, people of good will attempt to pour oil on troubled waters: evil people throw the oil on the flames. Smollett is definitely an incendiary of the first order.

For the most venal of reasons–getting a pay raise–Smollett paid two Nigerian brothers to stage an assault on him. Smollett then told police that he had been jumped at 2AM on a Streeterville (Chicago) corner by two white men in MAGA hats, who beat him, spewed racist and anti-gay epithets, put a noose around his neck, and doused him with bleach.

The story immediately went viral, and became a cause celebre, even although the details of the story were wildly implausible, to put it mildly. The men supposedly yelled “You are in MAGA country.” Chicago? Really?

In point of fact, a Trump supporter is more likely to be assaulted in Chicago than a Trump supporter is likely to assault anyone there. (What? You hadn’t heard those stories repeated 24/7? Go figure!)

Further, two racists are wandering the streets at 2AM, on a freezing cold night, and just happen to have a rope and bleach handy, and just happen to cross paths with a black, gay B-list actor? Whom they recognize? Every racist trope personified just happens to be walking the streets of Chicago in the bitter cold when the city is otherwise deserted, and just happens to intersect with a two-fer in the victim class stakes?

Occam’s Razor much? The lurid details that excited frenzy were in fact what should have cast the most extreme doubts about the story.

Yet despite the sheer improbability (and arguably impossibility) of this, Smollett’s story became accepted fact. And Smollett’s space in hell will be spacious, because those who echoed and amplified his tale are just as evil as he.

And this includes virtually every major Democratic Party figure, most notably the entire throng of presidential candidates (notably Harris, Booker, and Warren), Nancy Pelosi, and the poster girl for the airhead left, AOC. It also includes most of the mainstream media, most prominently CNN and MSNBC.

These arsonists are in many ways worse than Smollett, because they repeatedly asserted that the attack was symptomatic of endemic and epidemic racism in the US, and that any Trump supporter–or any non-Trump-hater–was an accessory, and perfectly capable of carrying out a similar attack. It was blood libel on a grand scale.

Official Chicago largely went along with the Smollett story–just read the Chicago PD’s official spokesman’s timeline on Twitter if you doubt this. But some rank and file cops were apparently furious, and leaked the truth to various local Chicago reporters–who were themselves furious set upon for their heresies, and other “journalists” were well-represented in the mob that went after them.

But inevitably, the truth eventually came out. Smollett had hired two Nigerian brothers to stage the assault. When they were threatened with charges for assault and battery, they rolled on Jussie. They were caught on video buying the rope and hats–they purchased the rope at a hardware store hilariously named “The Crafty Beaver.” The most sickly amusing part of the story was that the brothers could not even find real MAGA hats: they had to settle for generic red hats. So yeah, Chicago is such hardcore MAGA country you can’t even find a MAGA hat for sale there.

Upon revelation of the truth, the responses of the Smollett story enablers and amplifiers ranged from the craven to the mendacious. The craven ones deleted their tweets, or remained silent, or dodged questions about their previous remarks. The mendacious ones doubled down or denied that what we saw with our own eyes–the MSM’s hyping of the story–had occurred. You will search in vain for genuine apologies, or even an acknowledgement along the lines of “I was wrong about the story.”

Unsurprisingly, CNN is the most mendacious of all. Fat tub of goo (especially between the ears) Brian Stelter claimed that only entertainment journalists had hyped the story, but that mainstream outlets–CNN most notably–had reserved judgment. Or consider this from Chris Cillizza:

And so, Democratic 2020 candidates were very quick to believe Smollett’s version of events. And now Republicans — especially those aligned with the Trump White House — are just as quick to seize on the idea this was all an elaborate hoax. Both sides are simply exhibiting confirmation bias. Because we reward that sort of thing in our politics now.

Them damn Republicans. Always seizing on one damned thing or ‘nother. So many seizures. Maybe they have epilepsy.

The fact is, Clownzillia, that one side’s suspicions were confirmed by the facts, and the other side’s assertions proved utterly false. One side was right: it was an elaborate hoax. The other side was horribly, horribly wrong. This assertion of equivalence between wrong and right is disgusting, and earns you a spot right next to Smollett.

I’m old enough to remember when “rush to judgment” was a bad thing. But now it is the default setting, especially on the left, and especially especially when the judgment can be used to attack Trump, or far worse, vast swathes of innocent Americans who commit the mortal sin of holding non-leftist political views.

And their motives for rushing to judgment are even more damning. They want stories like Smollett to be true because it validates their twisted view of America. And worse yet, because they believe that they can use these stories to enhance their power, bludgeon their political and social enemies, and advance their political and social agenda. And worst of all, rather than attempting to tamp down racial animosity, they feed the flames because they believe that it redounds to their political gain.

There would perhaps be room for optimism if those who had flogged the story originally were to acknowledge error, and pledge to do better next time. But this has not happened, meaning that these events can only feed deep pessimism about the prospects for American civil society.

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February 20, 2019

Maybe We Should Have Bombed Them More

Filed under: History,Military,Politics — cpirrong @ 8:07 pm

Poor widdle Angela Merkel is apparently flustered that the Bad Orange Man is such a meanie to her. She’s “ruffled” by the prospect of more meanie-ness. And indeed, after meeting with Trump, Austrian president Sebastian Kurz said Trump “seems to have it in for German in particular.”

Well boo frickin’ hoo.

What? You have a problem with that? Not me! Merkel’s Germany is truly loathsome, and hardly an American ally. Furthermore, their hypocrisy–on issues like Nato, Russia, and Iran–is off the charts.

Who do you think is the bigger threat to Nato? Trump, who insists that Nato members make contributions commensurate with those of the US, and the sizes of their economies? Or Germany, whose pathetic military–to quote Patton–“couldn’t fight its way out of a piss-soaked paper bag“?

Germany military expenditure is about half of the minimal level of 2 pct of GDP it pledged to Nato, so spare me the lectures on how the US under Trump is undermining the alliance. And even that is exaggerated by including spending on the autobahn. And as the linked Politico article shows, what money they do spend is absolutely wasted because it provides precisely zero combat power.

Who is a bigger patsy for Russia? Trump, who has imposed sanctions, increased military spending, green-lighted military aid to Ukraine, repeatedly sent destroyers into the Black Sea, etc.? Or Germany, which has jammed NordStream II down the throats of the rest of Europe, thereby selling out not just the Ukranians, but the Poles and other eastern European members of the EU?

Who are the real antisemites? Trump, whose daughter converted to Judaism (hence making his grandchildren Jewish), and who has done more for Israel than any president in American history (perhaps only Truman excepted), including greatly ramping up pressure on Israel’s sworn enemy Iran? Or Germany, which cringingly sucks up to the Mullahs in Tehran?

Case in point. The execrable German Foreign Minister, Frank-Walter Steinmeier, slobbered all over Iran on the occasion of the 40th anniversary of its Islamic Revolution:

Germany’s largest paper Bild reported on Wednesday “On the 40th anniversary of that day, friendly greetings from Berlin arrived in Tehran by telegram: the President of Germany, Frank-Walter Steinmeier (63), sends ‘Congratulations’ on the occasion of the national holiday, ‘also in the name of my compatriots.”‘

“Friendly greetings” to a nation dedicated to completing what Germans started, but failed to finish: the annihilation of Jews.

How nice of him. And his “compatriots.” I think I understand the true roots of his friendliness.

Truth be told, German antisemitism has been sublimated, not eliminated. Opposition to Israel and support of Iran is objectively antisemitic, but can be portrayed as subjectively humanitarian (e.g., portrayed as supporting oppressed Palestinians).

So Trump is perfectly justified if he “has it in for Germany.” They’ve earned it. Maybe we just didn’t bomb them enough, so they need a supplemental dose of corrective measures.

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February 19, 2019

Whoops, They Did It Again

Filed under: Economics,Politics,Russia — cpirrong @ 7:27 pm

An American investor, Michael Calvey of Baring Vostok, has been arrested for fraud in Russia. It has been some time since something like this has happened, a fact that has been attributed to Putin’s direction that business disputes should not result in the imprisonment of any of the disputants. But when it comes to westerners, it just may be the case that there aren’t many of them around to be arrested.

The FT article reports a stunning statistic that speaks to this point. Foreign direct investment, which totaled $79 billion before Putin’s glorious triumph in Crimea, had fallen to $27 billion by 2017 . . . and a pathetic $1.9 billion in 2018. Less FDI, fewer foreign direct investors–and hence fewer to arrest.

Between sanctions, and the stultified (and risky–financially and personally) economic environment in Russia, foreigners have finally wised up. Once upon a time, the returns looked very appealing, and many were willing to take the plunge. Well, the returns were high for a reason–they were compensation for risk of expropriation, sometimes facilitated by, er “legal” means. And evidently, most have decided that the rewards don’t justify the risk.

I have some sympathy for Calvey, but not a great deal. He assumed a known risk, presumably thinking he would be able to manage it–or perhaps foolisly assuming that Putin really cared about trying to create a more hospitable investment environment. Further, no doubt that anyone who swam in those waters for as long as he did had more than a little shark in him.

The FT article is titled “Calvey’s arrest sends chills through Russia’s foreign investors.” To which I say: what foreign investors? The article includes this quote:

A person close to the Vostochny dispute said: “This is transformative. This kills FDI stone dead forever . . . This sends the message, can you use the security services against your business rivals over a few million dollars? Yes, you can.”

But (see above) FDI is already as dead as Monty Python’s parrot, and there was virtually no prospect for resurrection. As for sending a message: uhm, if you hadn’t gotten this message by now, you are a little slow on the uptake. A decade plus slow.

And that’s likely why Putin has said and done nothing about this. Kudrin may think this is “an emergency for the economy,” but Putin almost certainly recognizes that Kudrin is living in the past, and that the parrot is indeed dead.

Moreover, the last thing he would do now is take any action that would give the impression that he is kowtowing to the West. His political persona is now heavily invested in the image of a strong Russian leader standing up against a West–and an America in particular–that desires to subjugate Russia. He’s particularly unlikely to abase himself (in his eyes) before the US/West when he realizes that the payoff for doing so is negligible.

Michael Calvey was a fool who rushed in where angels fear to tread, and his arrest is more of an echo of the past, than a harbinger of the future. Certainly as long as Putin is around Russia will be largely isolated from the West, and will stagnate accordingly.

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February 16, 2019

The Idiotic Freak Out Over Putin’s Middle East Diplomacy

Filed under: China,History,Military,Politics,Russia — cpirrong @ 8:59 pm

There has been a steady chorus of wailing about how the US “retreat” from the Middle East (which is at present limited to an announced intention to draw down in Syria) is empowering Russia, and that Putin is exploiting the “vacuum” left by Trump.* This WSJ oped is representative of the genre. Which is to say it is incoherent to the point of idiocy.

For one thing, this piece, and the entire genre, mirrors one of Putin’s most glaring intellectual failings: zero sum thinking. If Russia gains, the US must lose, right?

Wrong. The US has global interests, and does not have unlimited means to pursue them. Strategic prioritization–most notably, focusing on China–and redeploying resources to focus on the new priorities is vital and beneficial and advances US interests. Perhaps Russia gains in some ways from this, but those gains do not come anywhere near erasing the benefits accruing to the US of downplaying peripheral theaters and focusing on more important ones. Further, any local gains Russia may achieve in, say, Syria are almost certainly to be more than offset by the disadvantages of competing with a United States that has its strategic priorities straight. Putin–and other American adversaries/enemies, notably Iran–have exploited US misadventures in the Middle East. Focusing efforts and husbanding resources makes the US stronger, not weaker, both absolutely and relative to would be competitors–including Russia.

I have yet to see anyone make a remotely plausible case of why an enduring US role in Syria makes any strategic sense. As I’ve said from the very day that Putin put troops there–if he wants the shithole, let him have it. It has no strategic importance to the US, especially in its utterly wrecked current condition. We have far more important issues to deal with, China foremost among them.

The WSJ piece also provides room for considerable doubt about Putin’s prospects. Specifically, it inadvertently demonstrates the inherent contradictions in Putin’s policy. The author, Angela Stent, spends much of the piece fretting about the warming relationship between Russia and Israel. She also frets about the cooperation between Iran and Russia. Well, those policies are utterly incompatible, given that Israel and Iran view each other as existential enemies. The rapprochement between Russia and Saudi Arabia is similarly incompatible with a strong cooperative relationship between Russia and Iran. Something has to give.

I also fail to see why having Russia and Israel on good terms is a bad thing, especially in light of the fact that the Soviet Union was Israel’s arch-enemy (except for a brief, historically miraculous moment in which Stalin thought supporting Israel–and arming it–advanced Soviet interests), and armed its enemies (including Syria) throughout the Cold War. This was a major reason why the US had to take substantial risks to defend Israel in the Cold War–and why some said this risk wasn’t worth it, and that the US should jettison its support for Israel. Indeed, Soviet support for Arab states waging war on Israel brought the USSR and the US to the nuclear brink in 1973. A Russia that values its relationship with Israel is more likely to put a brake on Israel’s enemies with whom it has influence (notably Iran and Syria). That reduces the likelihood of conflict in the Middle East, and reduces a source of friction between the US and Russia.

Tell me why this is a bad thing.

And don’t forget–it takes two to canoodle. Here Putin is canoodling with Benjamin Netanyahu, who is (a) extremely hawkish, and (b) recognizes that Israel’s security depends crucially on the US. If Netanyahu believes there are gains to trade to be realized from dealing with with Putin, it is likely that the US is a gainer too.

Having Russia on friendly terms with Israel enhances the Jewish state’s security, and thereby advances American interests. And if in the end Russia chooses Iran and Syria over Israel, the pearl clutching about a budding Russian friendship with Israel will look rather foolish, no?

The friendliness between Russia and KSA can be analyzed similarly. The contrast with the Cold War again deserves comment. The inflection point in US involvement in the Middle East generally, and KSA in particular–the Carter Doctrine–was a response to the perceived Soviet threat to seize the Arabian Peninsula. Although the military threat ebbed with the collapse of the USSR, a KSA with fewer enemies and threats requires less US protection.

Here it should be added that the main reason for KSA and Russia to cooperate now is oil. But this in many respects is a confession of weakness, not strength. The resurgence of US as a major oil producer has undercut the market power of the Saudis and Russia, and their cooperation is largely defensive, rather than offensive.

Those who are paying attention, moreover, realize that there is considerable disagreement within Russia about the desirability of cooperating with OPEC (which, in effect, means with KSA) on oil output. In particular, my old buddy Igor Sechin is lobbying hard against continued cooperation, claiming it is a strategic threat to Russia:

“The participants of the OPEC+ agreement have actually created a preferential advantage for the USA – that sees raising its own market share and the seizure of target markets as its primary task – which has become a strategic threat to Russia’s oil industry development,” the letter [from Sechin to Putin] seen by Reuters says.

“The key strategic challenge which the domestic oil industry is faced with today is the further decline in Russia’s market share, despite the availability of quality recoverable oil reserves, necessary infrastructure and personnel,” it said.

Here Sechin is actually expressing some economic reality. Given its market share, Russia’s–and Rosneft’s–demand elasticity is substantially greater than one, and restricting its output reduces its revenues/income. Russia/Rosneft would likely be better off with a lower price and higher output–which is precisely why for years it abstained from cooperating with OPEC.

This internal discontent among extremely powerful players–and Sechin is arguably the most powerful player in Russia after Putin–sharply limits the potential for enduring cooperation between Russia and the KSA. Again, the fears are vastly overblown.

In sum, freaking out over greater Russian diplomatic efforts in the Middle East is totally unjustified. Russia’s gains are not America’s losses–the world is not zero sum. There are inherent contradictions in Russian efforts that will inevitably force them to make choices that limit their influence. And some Russian initiatives could actually serve to reduce the likelihood of major conflicts that would harm US interests.

I can’t write about this subject without mentioning today’s remarks by the most annoying leader in the world today. And no, I don’t mean Putin–I mean Angela Merkel. At the annual security conference in Munich, Frau Merkel chastised the United States for its plans to draw down in Syria and Afghanistan:

German Chancellor Angela Merkel has warned that a hasty U.S. pullout from Syria runs the risk of strengthening the roles of Russia and Iran in the Middle East.
Speaking at the Munich Security Conference on February 16, Merkel questioned whether the planned U.S. withdrawal was “a good idea.”
“Will it once more strengthen the capacity of Iran and Russia to exert their influence?” she asked.
She also cautioned against a premature U.S. withdrawal of forces from Afghanistan, saying that NATO’s Resolute Support mission in that country was dependent on the U.S. military’s commitment.

Well, for starters, lady, if you are so convinced of the need for military engagement in Syria and Afghanistan, why don’t you order your pathetic military to pick up its broomsticks and take the lead in the fights there? Oh. I forgot. You are the leader of the biggest free rider in Nato, who constantly lectures everybody else about global responsibilities, but who never puts her money–or the lives of German soldiers (assuming they still have any) where her fat mouth is. Until you do, you can kindly STFU.

The outrageousness of Merkel’s bloviation is even more remarkable given that in the very same speech called Russia a “partner” and “made a robust defense of Germany’s foreign trade relations and ties with Russia during her speech.”

Why, some might call that collusion!

So which is it? Russian influence is something to be contested, or embraced?

Merkel has also been a robust defender of the nuclear deal with Iran, and critical of the Trump administration’s withdrawal from it. German has led efforts to circumvent US sanctions on Iran–which are intended precisely to limit Iranian influence. But then she tells us we have to garrison Syria to fight Iranian influence.

Square that circle for me.

Angela cannot go away soon enough. But alas, no doubt she will be replaced by someone equally annoying. Germany is not America’s friend. But it is probably too much to expect that those who are demented by Trump hatred will understand that, just as it is too much to expect that said demented people will recognize that some modest Russian diplomatic achievements in the Middle East do little harm to the US, and indeed, may actually redound to our benefit.

*The whole idea of a US “retreat” in the Middle East is so completely unmoored from reality that anyone who uses this term, or similar expressions, should be ignored and mocked. The US is still in Iraq. It has actually increased its involvement in the Persian Gulf, most notably in its confrontation in Iran. It supports the Saudi’s fiasco in Yemen. It periodically bombs Libya. Support for Israel is at unprecedented levels. Egypt’s military government is getting military and political assistance from the US. If this is retreat, I’d hate to see an advance. Reducing involvement in what is arguably the least important country in the region–Syria–when its whole reason for being there (the presence of ISIS as a territorial entity) is strategic rationality, not a retreat.

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February 13, 2019

Brave Green World

Filed under: Climate Change,Economics,Politics,Regulation — cpirrong @ 11:21 am

I was considering not commenting on the Green New Deal, given the largely negative–and often incredulous and scathing–response that its release evoked. Including from mainstream Democratic politicians, notably Nancy Pelosi. But most of the cast of thousands currently seeking the Democratic presidential nomination have embraced it to some degree or another, and the criticism has spurred a counterattack from many media precincts. The plan will therefore not be consigned immediately to oblivion, so I will weigh in.

In a nutshell (emphasis on the “nut”), the proposal aims at making the US “carbon neutral” in a mere decade by eliminating the internal combustion engine, retrofitting every existing building in the US, largely eliminating air travel and replacing it with high speed rail, and reducing, er, flatulence from cows by sharply reducing our consumption of meat. No biggie, right?

I find it somewhat ironic that hard on the heels of the announcement of the basics of the GND, the hard left governor of California, Gavin Newsome, said it was necessary to “get real” and recognize that the state’s high speed rail project was a disaster, and to eliminate most of the route.

But “getting real” is not on the GND agenda.

If implemented, the GND would effectively destroy a vast amount of the existing US capital stock, or require its replacement with less productive capital. This will make Americans poorer, in terms of consumption of goods and services.

The proponents of the GND commit the fundamental economic fallacy of arguing that this destruction of productive resources will bolster the economy because of all the jobs that will be created to build a fossil-fuel free power system, electric autos, massive rail systems, etc. The reality (sorry, but I can’t help dealing in reality) is that jobs are a cost, as is the decline in consumption required to make massive investments in new capital to replace existing capital.

The point of producing–including through the use of labor which entails the cost of foregone leisure–is to consume. The GND will unambiguously reduce consumption of goods and services, and make us poorer. GND is crypto-Keynesianism at its worst.

Then there is the detail of paying for this. Here advocates of GND invoke MMT–Magical Monetary Theory. Sorry, MMT actually stands for “Modern Monetary Theory” but my description is far more accurate. MMT is free lunch economics writ large, mistakes accounting identities for economic substance, and commits errors that would be embarrassing for someone in their first session of Econ 101 at one of your more backward community colleges.

The Magical Monetary Theorists argue that an endeavor as massive as the GND can be paid for by printing money.

Really. Don’t believe me? Consider this (rather conclusory) tweet by a major MMT advocate, Stephanie Kelton:

Q: Can we afford a #
? A: Yes. The federal government can afford to buy whatever is for sale in its own currency.

What follows (as is usually the case with MMT arguments) is a verbal discussion of a game of financial Three Card Monte.

Read that again: ” The federal government can afford to buy whatever is for sale in its own currency.” But at what price, dear? At what price? Venezuela has been operating on this principle, and is on pace to achieve record inflation of more than a million percent per year.

All of which obscures the economic essence. Investment today requires people to reduce consumption of goods and services. They only do so in anticipation of consuming more in the future–the “more” is the interest/return on capital from the investment. In private capital markets, the interest rate/return on capital adjusts so that the additional consumption people demand to fund investment is just paid for by the additional production flowing from the assets invested in.

In GND, as noted above, the massive investment will not result in a greater flow of goods and services in the future that will make people willingly reduce their consumption today. Indeed, future consumption in goods and services will decline. The private rate of return will be negative.

And indeed, GND implicitly acknowledges this. Its entire rationale is to reduce carbon emissions, under the theory that these are a “bad.” That is, the payoff from the massive investment (the sacrifice of private consumption) is a lower level of bad carbon emissions.

But to the extent that the reduction of this particular bad is a good, it is a public good. Everyone benefits from a decline in this putative pollutant, regardless of their contribution in paying for the reduction. Meaning that it cannot be financed voluntarily via private capital market transactions, but must be compelled, and paid for through massive taxation.

Printing money only changes the form and/or the timing of the taxation. Inflation is a tax. Moreover, if you borrow/print to pay for investment today, the investment cost not covered by the inflation tax must be paid for by higher taxes in the future. Like the old oil filter commercial: you can pay me now, or you can pay me later. But you must pay.

This is not hard. But reality is not magical.

Furthermore, given that it will be the most massive government program in history, it will entail all of the rent seeking and waste inherent in such programs.

I should also note that it will entail massive redistribution, most notably from rural, exurban, and suburban areas to urban ones as it will dramatically raise the costs of transportation and mobility which are borne disproportionately by those living outside cities. If a few Euro cents/liter fuel tax in France sparked massive protest in non-metropolitan France, just think of what would be in store in the far more sprawling US in response to taxes orders of magnitude larger than those imposed by Manny Macron.

These costs could be justified if the cost of carbon is sufficiently high, in which case the social rate of return could be substantially higher than the private rate of return, and the cost of capital. But even if one believes the most alarmist estimates of the cost of carbon, the adoption of GND by the US would have a modest–and arguably trivial–impact on emissions and temperatures, given the level and growth of emissions elsewhere, especially in China and India. Thus, the social rate of return is almost certainly far below the cost of capital.

The advocates of GND argue that the US needs a grandiose mission. The analogies that they draw are to NASA’s moon landings, or–get this–World War II and the defeat of the Nazis.

But neither Apollo nor even WWII envisioned the radical transformation of society–which is an explicit goal of GND. Apollo was a focused, and by comparison with GND, a relatively moderate expenditure financed in the ordinary course of government business and intended primarily as a campaign in the Cold War, undertaken at a time when the Johnson administration waged another Cold War campaign–Vietnam–with the specific objective of minimizing disruption to US society and the economy. World War II definitely altered every aspect of American life, but these disruptions were also viewed as temporary sacrifices necessary to win the war, to be reversed at its conclusion. Which happened in the event: the US demobilized rapidly, and most wartime expedients (e.g., rationing, the massive employment of women in manufacturing) were scrapped precipitously at its conclusion. As happened in WWI as well: Harding’s 1920 campaign slogan was “return to normalcy” after the extraordinary measures adopted during the war. But GND proposes to be the new normalcy, deliberately destroying the old normalcy.

The original New Deal as implemented was also not intended to be as transformative as its latter day green version (though the more Bolshi elements of the Roosevelt administration did harbor such ambitions).

What are the politics here? This is being pushed by the urban progressive left, epitomized by Alexandria Ocasio-Cortez, D-Brooklyn. (Sorry, Tatyana!) The ubiquitous AOC is the face and voice of the movement, though frankly I doubt it would get the same attention if her face looked like, say, Debbie Wasserman-Schultz, and I wonder whether her Munchkin voice will eventually grate on even her fellow travelers, not to mention the rest of us.

But the main political effect here is to cause deep fissures in the Democratic party. Mainstream elements are in a state of near panic, which they are attempting to conceal, with little success.

And this will redound to the benefit of Donald Trump. Opposition insanity is the greatest gift an incumbent can receive. And methinks this is a gift that will keep on giving, through November 2020.

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January 22, 2019

Regulating Carbon Emissions: Efficiency vs. Redistribution

Filed under: Climate Change,Economics,Energy,Politics,Regulation — cpirrong @ 8:01 pm

Bloomberg reports that New York state’s plan to eliminate its few remaining coal power plants has caused power prices for delivery in 2020, 2021, and 2022 to increase. Eyeballing the chart, the impact of the proposed regulation is on the order of $7/MWh, or about 25 percent of the 2019 price.

Coal represents a dwindling fraction of New York’s generation. The EIA reports 0 electricity from coal in October, 2018. As of 2014, the last full year for which I could find data on the EIA website, coal accounted for 4.6 million MWh, out of a total of 137 MWh of generation.

The efficiency impact of this depends on (a) the estimated social cost of carbon, (b) the kind of generation that will replace the shuttered coal plants, and (c) the non-energy costs that this replacement generation creates.

If you believe that the cost of carbon is $40/ton, if coal is replaced by zero emissions generation, the move is efficiency enhancing. A coal plant with a heat rate of a little more than 10 implies a carbon cost per MWh of $40. This is well above the price increase of around $7.

If coal is replaced by natural gas, with a carbon cost of about $20/MWh, the call is closer, but still comfortably in favor of eliminating coal.

Lower social costs of carbon of course affect the math. The other thing to keep in mind, though, is that the price is for energy only. Changing the generation mix also affects the need for ancillary services to maintain grid stability. In particular, substituting diffuse and intermittent renewables for coal increases the non-energy costs of supplying electricity. These costs can be appreciable, though again it’s difficult to see them being so large as to overcome the approximate $160 million in carbon cost savings from eliminating coal, based on a $40/MWh CO2 cost, ~4 MWh of coal fired generation, and replacement of coal by zero carbon emissions generation sources.

What’s truly startling about the numbers, though, is the redistributive impact. Price is driven by marginal cost, and the price impact suggests that the cost of the marginal megawatt hour from coal replacement generation is about $7/MWh above that of the eliminated coal units. Note: that $7/MWh price increase benefits every single MWh generated by inframarginal units (e.g., combined cycle NG). Coal represents (as noted before) ~3 pct of NY generation, but the remaining 97 percent will see a big increase in margins.

This is a crude calculation, but roughly speaking the regulation will result in a transfer of about $1 billion/year from consumers to owners of generation (~140 million MWh x $7/MWh). The vast bulk of this $1 billion will be a quasi rent for inframarginal generating assets. (About $28 million–4 mm MWh/year x $7/MWh–will cover the cost of the more expensive generation that replaces coal plants.)

As is often the case with regulation, the wealth transfers swamp the efficiency effects (which total at most $130 million=~4 MM MWh x $33/MWh in social cost savings). (Since coal generation has probably dropped from the 4 million in 2014, and the price impact reflects the elimination of the remaining coal generation, the total efficiency effects now are probably substantially smaller than $130 million.)

Thus, although this regulation is sold as one benefitting the environment, I strongly suspect that the political coalition that has given it birth is strongly supported by incumbent generation operators selling into the New York market. That is, it smacks of the typical special interest regulation that benefits a small concentrated group at the expense of a large diffuse one (i.e., the consumers in New York), all dressed up in pretty green (environmental green camouflaging Benjamins green, as it were).

Yes, in this instance perhaps–depending on one’s assumptions about the cost of carbon and the incremental uplift costs created by the regulation–this bargain has produced an efficient outcome. But the redistributive nature of this regulation, and those like it, creates a great risk that such regulations will be introduced even when they are inefficient.

Those harmed include ordinary New Yorkers lighting their homes, and commercial and especially manufacturing firms (and their employees) who pay higher power costs. (Employees will pay in lost employment and lower wages, due to a decline in derived demand for labor driven by higher costs of other inputs.) In France, a seemingly small imposition on a similar group sparked widespread social unrest. It hasn’t happened in the US yet (or in places like Germany, where consumers and employers are paying steeply higher electricity costs due to anti-carbon regulations), but US states should be aware that such policies could trigger resistance here as well–especially if and when the hoi polloi realize that the biggest winner from these policies is not the environment, but companies that are pretty unpopular to begin with.

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