The Power and the Money

Oh, Miami, and an arrest in New York

You are probably aware that a woman in Miami named Filomena Tobias flipped off Joakim Noah after last night’s game against Chicago. Ah, Miami. You may not, however, be aware that ... oh, just click the link. It’s fun, trust me.

In other news, the NYPD arrested a man in Astoria, Queens, for firing a plastic pellet gun and then handing it off to his kids.

The law against realistic toy guns is a good one and it should be enforced. When I was a boy, we would shoot BB guns down by what  is now called Dumbo or across the bridge on Wards Island. We would also sometimes take them into buildings or on city streets in Brooklyn or, even more stupidly, Stanley Isaacs and 1199 Plaza in Manhattan. In 1994, that very game resulted in death when a police officer shot a boy holding a toy gun. 

I strongly support the law banning realistic toy guns.

And I double-support keeping BB guns out of parks: they can hurt people! This guy was letting his three year son and five-year-old daughter point a loaded pellet gun at other people. That is a recipe to blind somebody. (I have every intention of going target shooting with my boy and letting him learn all about firearms. I have no intention of letting him fire even low-velocity projectiles in crowded areas.) I am glad that other parents stopped this moron before anyone got hurt.

There is, however, something confusing. The story says that the other parents quickly realized that it was a toy. One went up to the guy and told him to stop. According to the news, he did so and left the park.

Why then did they call the police? Or did somebody else call the police?

Anyway, this guy was pretty damn stupid. I will cut 10-year-olds in 1980 some slack. A 54-year-old in 2013, not so much.

A self-refuting argument for intervention in Syria

The pressure is mounting on the United States to intervene in the Syrian civil war. Yesterday the New York Times ran an op-ed from Bill Keller proposing the following plan.

“President Obama articulates — as he has not done — how the disintegration of Syria represents a serious danger to America’s interests and ideals. The United States moves to assert control of the arming and training of rebels — funneling weapons through the rebel Supreme Military Council, cultivating insurgents who commit to negotiating an orderly transition to a nonsectarian Syria. We make clear to President Assad that if he does not cease his campaign of terror and enter negotiations on a new order, he will pay a heavy price. When he refuses, we send missiles against his military installations until he, or more likely those around him, calculate that they should sue for peace.”

To his credit, Keller recognizes that success is not guaranteed. “It might well be that the internal grievances are too deep and bitter to forestall a bloody period of reprisals. But that outcome is virtually inevitable if we stay out.”

In short: these terrible things will happen without American intervention. Thus we should intervene regardless of our ability to stop them from happening. That would seem to be a self-refuting argument.

I would prefer to be constructive. Keller’s plan leaves six unanswered questions.

1. What do we do if Assad does not negotiate? 
2. What do we do if Assad retreats into the Bekaa Valley under pressure from U.S. airpower?
3. With whom does he negotiate? 
4. Should the negotiations succeed, how do we keep the rebels from fighting among themselves?
5. How do we keep government supporters from continuing to fight even if Assad chooses to surrender?
6. How do we prevent ethnic cleansing in Alawite territories? 

These questions may have answers, although I fear that they will involve boots on the ground and a whole lot of money. I also fear that they may not have answers. Failure, we should remember, is an option.

Brazil imposes a tax on atomic energy to promote atomic energy

Brazil is about to place a 10% tax on the gross revenue generated by the sale of nuclear electricity.

This is a strange idea. As a revenue-raising device, it is improbable. Nuclear energy is not cheap: there are no ex ante rents to seize. Post hoc, it is possible to grab value from the financiers — capital expenditures are what drive up nuclear’s costs — but that would serve only to disincentivize reactor construction.

As a disincentive, however, a 10% revenue tax is a lousy one. First, most of the costs can be passed on to consumers: electricity demand is not very elastic. Second, regulators can prevent those costs from being passed on, but regulators can also stop nuclear power plants from being built. Heck, almost any policy uncertainty can stop a nuclear power plant from being built. In short, using a tax to disincentivize reactors is either ineffective or unnecessary.

So, why?

The key feature to note is that the revenue from the tax will go to local governments, not the federal authorities. It is actually a way to build local support for reactors.With the tax, localities will have some skin in the game.

In fact, that was how they did things in Japan.

In 1974, Japan created a special purpose tax on electricity. The government funneled most of the revenue into Electric Power Sites Account, which went to local governments that allowed power plants to be built in their jurisdictions. Most of those plants, not surprisingly, turned out to be nuclear. Between 1997 and 2007, 68.4% of Electric Power Sites Account grants went to nuclear power plants, against 27.3% for thermal power and 3.9% for hydroelectric.

To give an example, seven Tepco-owned nuclear re­ac­tors in Kashiwazaki City in Niigata Prefecture in western Honshu generated cumulative amounting to ¥113.3 billion from 1978 to 2009; the combination of central grants and sub­sidies (plus direct taxes on Tepco)], accounted for 34.5% of Kashiwazaki City’s revenue.

The Japanese designed the system to reduce local opposition to new plants. The government front-loaded the subsidies so that most of them went to the local government between the start of construction and five years after beginning operation. That gave localities strong incentives to approve new plants in order to prevent a decline in public revenue.

By 2011, parts of the Japanese business press were calling the subsidy system a “drug” for local governments and plant neighbors. Of course, that was the intent! It took the Fukushima disaster to change public opinion.

It remains to be seen if Brazil will be as successful in creating a constituency for nuclear power. There are a lot of differences between the two nations, not least of which that Brazil plans five new reactors over the next decade (at best!) while Japan rolled out 35 over the ten years following the 1974 law. But it could work. As long as regulators let utilities pass on the cost of the tax — not a certainty in Brazil — then a tax on nuclear power designed to promote nuclear will be an ingenious step in the never-ending battle against NIMBY.

Spain’s population is dropping … but not by very much

There has been a lot of news lately about Spanish emigration, especially since the country’s population shrank in 2012 for the first time since the Civil War.

The thing is, net emigration is almost entirely driven by returning migrants. Net emigration of Spanish nationals is tiny. In absolute numbers, we are talking about a net emigration of 20,484 Spaniards in 2011 and approximately 34,000 in 2012. (Net emigration of foreigners ran about 149,000 in 2012.) Even the gross emigration is small: 62,611 in 2011 and approximately 73,000 in 2012.

The below chart presents the components of monthly population change (at annualized rates). They sum together for total population change. (That is the black line.) I have no idea why births are so lumpy in 2011. Since that was a census year, I suspect it represents some sort of adjustment to bring the vital statistics data in line with the census, but that is just a guess.

Until 2012, the biggest component was natural increase. It ran at 124,000 in 2009, 97,000 in 2010,  103,000 in 2011, and will come to 102,000 in 2012 at current rates.

(Data from here.)

Of course, even a small emigration could have profound social effects, depending on who they are. But these numbers mean that you should take stories about the wave of Spanish immigrants descending on Latin America with a giant grain of salt. Outside the wait staff at a few chic restaurants and perhaps some specialized trades, the Spanish second conquista is not big enough to be noticeable anywhere in Latin America. Setty already noticed the dearth of Spaniards in his examination of the Chilean census, but it looks like a generalizable result. Maybe the dam will break, but it hasn’t yet.

Shots and sirens in Cambridge

Somebody robbed the 7-Eleven near our house last night. (Near as in only two small streets need to be crossed to get there.) Exciting, but not blogworthy ... except it turns out that the robbers were the perpetrators of the Marathon bombing.

Right now the subway and busses are shut down. We first got word with an automated phone call from the State Police to our house; that was followed by a flurry of texts and emails advising everyone to stay inside.

Sirens are continuous in the background. My boy is happily pulling himself into a standing position on chairs and bookshelves. My wife is talking to relatives on the pheone. We just got a redundant email announcing that Zipcar is shut down.

I note that the cell networks are still on; shutting them down would not help with the manhunt and would in fact remove some potentially useful tracking tools.

This is just a short personal update; there is no news available here at Franklin Street that you cannot get from the newspapers. I would, however, advise all of you to stick to reading the papers and cut it out with the rumor-mongering. They get things wrong and some are irresponsible (like the New York Post) but they are far far far better than the alternatives.

UPDATE: As of 8:12, the sirens have stopped.

The Bolivarian Revolution starts to consume itself

The Boston bombings  have understandably sucked the oxygen out of foreign news coverage. (The mother of one of the victims works at my university. A friend and colleague of mine finished the race shortly before the blasts, but was thankfully already headed home on the T when they happened.) To compensate, in my own small way, I will post a short update about the violent post-election confusion in Venezuela.

Violence broke out after the elections. I cannot say who was responsible, although government supporters seem to be responsible for much. President Maduro has withdrawn his offer to recount the votes; the Supreme Court has now ruled that out. Justice Luisa Morales stated, “In Venezuela the system is absolutely automatic, in such a way that manual recounts don’t exist.”

That is bizarre, since one of the great things about Venezuelan elections is that absolutely the system is set up to allow manual recounts.

Even more bizarrely, the government issued and then suspended arrest warrants for opposition leaders, including Henrique Capriles. In the face of government threats, Capriles wisely called off demonstrations. 

I do not think that Venezuela is headed towards civil unrest. I do think that the Maduro government is in the process of destroying its own legitimacy. This will not end explosively, thank the Lord, but it will not end well.

Why I would not want to be the next president of the Bolivarian Republic

Reader Shah8 asks about the problems is Venezuela’s economy. It’s a good question.What are the time bombs waiting to go off?

Before I start, let me present the case for the defense. The linked paper argues that Venezuela’s economic expansion is sustainable. The linked paper, however, is incorrect.

First, the authors sustain that payments on Venezuela’s foreign debts are manageble. They are correct. (Figures 3 and 4.) The problem is that the interest burden is not the problem. The problem is that government of the Bolivarian Republic requires capital inflows around $15 billion every year to stay in balance. If those inflows drop, then BLAM ... sudden stop.

(The authors are convinced that China would not allow Venezuela to collapse. I am unclear as to why they believe that.)

Second, the authors argue that the bolívar is not overvalued. They base this on a scatterplot of countries. On the Y-axis they put the ratio between the official (or market) exchange rate and the exchange rate at which a basket of goods and service would cost the same as in the United States. Venezuela is not out of the pack.

The problem is that this measure has a lousy track record of predicting currency movement.

There is better measure of the bolívar’s overvaluation: the difference between the official rate and the black market rate. (The black market rate is tracked, more or less, at this website.) The gap has now approached three-to-one. It hard to see how Venezuela can sustain that without worsening shortages of imported goods or a major devaluation.

The only other country in the hemisphere in a similar situation is Argentina. When I was in Argentina in May and June of 2012, I was very tempted to blog about the controls despite a lack of time. (I wish I had; perhaps I still will.) Pesos were pegged at 4.5 per dollar, but while I was there the “blue market” rate hit 6.15.  A Brazilian couple was arrested by dog-using police teams practically in front of me; they were carrying several thousand dollars. (The papers reported that they were acquitted.) That was legal, but the dollar-sniffing dogs were hunting black marketeers. The controls made (and make) life difficult for small manufacturers, which often find it difficult to buy the dollars they needed to import specialized goods.

But Venezuela’s exchange controls are in a whole different level from Argentina’s. The Argentine blue rate is around 60% above the official rate; the Venezuelan parallel rate is almost three times the official rate. Argentine controls hurt some importers who cannot get dollars, but they are not noticeable in the shops and streets. Venezuelan controls, on the other hand, cause cooking oil, margarine, and toothpaste to disappear. Venezuela has been plagued by periodic shortages for years, but they are now becoming pervasive.

That is not sustainable. Well, it is ... but at the cost of ever-worsening import shortages. Either Venezuela will develop an extensive set of import-substituting industries (a la Mexico circa 1980) or most Venezuelans will lose access to manufactured goods. There is no sign of the first thing happening.

Both these problems — a dependence on foreign borrowing and unsustainable capital controls — come together in the electricity crisis. I blogged about it in 2009: it is not getting better. Other countries have experienced temporary shortages (Ecuador in 2009) but none have suffered ever-more-erratic service for four years. (Ecuador has resolved its problems.) Installing thermal generators requires the government to borrow to get the dollars, and the refusal to charge market prices for energy drives up the budget deficit. Then, to make things worse, the exchange controls drive up construction costs. (I explain why that happens here.)

In other words, there are three ticking time bombs waiting to hit the next Venezuelan administration. First, capital inflows could slow; at some point they will slow. Venezuela is not in a position to handle that without a severe recession. Second, at some point either the shortages will become unsupportable or the bolívar will be devalued. Shortages will not be good for the party in power. A devaluation is equally problematic. With inflation already running north of 20%, it could (oh, heck, almost certainly will) cause large price spikes with all the ensuing damage to living standards. Third, the electricity crisis shows no sign of abating. Maduro blamed the blackouts on gringo sabotage; I do not think that is an effective political strategy.

There is a fourth time bomb: crime. Hugo Chávez was seemingly immune to criticism on the topic; the next administration will not be.

And there is a fifth: Chavista foreign policy. More on that in a future post.

I make no predictions about which will blow up first or how badly. But at least one of them almost certainly will. The next administration will have to fix the problems or deal with the aftermath ... but there are no painless fixes.

How Venezuelan voting operates

 

I said yesterday that Venezuela had an excellent voting system. I did not explain how or why. So here is Caracas Chronicles with a great explanation! From them:

1. You vote at an electronic machine;
2. The machine prints a voucher, which you drop in a ballot box;
3. The machines prints a tally of the votes at the end of the day;
4. The machine sends the tallies to Caracas;
5. 54% of tables are tallied on the spot, with hand-counts of the vouchers in front of witnesses.

You end with three tallies: the electronic record, the machine print-outs, and the vouchers. Hard to cheat, and easy to recount. (There are rumors of vouchers found dumped in the trash. We will see. I am skeptical.)

Voting is one thing that the Bolivarian Republic does very well, much better than its predecessors.

Florida should be so lucky.

Maduro wins in Venezuela by a razor-thin and doubtful margin ... but Capriles should accept it

Holy cow! I just fired up ye olde web browser, to discover that Nicolás Maduro was still the President of the Bolivarian Republic of Venezuela ... by a margin of 1.59%. He eked out a bare majority of 50.66% of the vote.

That’s not a good result. It may even be the second-worst possible result. (A narrow win by the opposition, under Henrique Capriles, would have been the worst possible result, albeit an extremely unlikely one.) Capriles as already fired a salvo: “We alert the country and the world of the intention to try and change the will expressed by the people.” (The tweet no longer seems to be up.)

The bad side is that the result will be challenged. Venezuela actually has a rather good voting system. The electronic machines record a paper ballot, which is saved, so manual recounts are possible. I get worried, however, when the president of the electoral commission declares a close result to be “irreversible.”

This second-worst result can be turned into the best possible result, however. All Capriles has to do is accept it and admit defeat.

Simply put, the Venezuelan economy is full of ticking time bombs. Why be in office as they start to go off? Let the Socialist Party take the responsibility for the mess they have caused.

Mexico is gaining jobs, not wages, part 2

Part 1 is here.

Part 2 is based on a stunning report from Bank of America: nominal dollar wages in Mexico are now lower than in China. (Hat tip: Beyond Brics. But note that we here at TPTM called it first!)

This is a great thing for China, obviously, and it has benefits for Mexico. It means that “nearshoring” will continue, as Mexico gains competitiveness against China. In fact, Mexico became competitive back in 2008, right after the big depreciation in the peso. The below chart shows Alix Partners’ decomposition of the landed costs (i.e., wholesale cost for U.S. sales) for five representative goods. In 2005, China was cheaper than Mexico; by 2008, that was no longer true.

But is it a good thing for Mexico? I am less certain. A boom based on nearshoring and continuing low wages ($2.50 an hour from BofA; $4.53 from the BLS) is a good thing for investors and the resulting employment boom is a good thing for Mexicans, but it does not presage much future growth. (In addition, the gains from the good news are already priced into the markets; ship-sailed if you’re looking for easy returns.)

Mexico is a solid middle-income democracy with a serious (but not existential) organized crime problem. It has made amazing strides in eliminating unnecessary volatility. The country works. But looking over the recent hype it’s attracting (see here and here and here.) I feel a little like Chris Rock. “You’re supposed to have a democracy! You’re supposed to have a middle class! You’re supposed to have factories! What do you want, a cookie?”

In other words, Mexico is performing just as you would expect a stable middle-income country with substantial long-term problems to perform. The expectations of super-returns and blather about Aztec Pumas (or whatever) is just hoping for a cookie.

P.S. Noah Smith expects rising demand for Mexican manufactures to raise wages. (You should all read his blog! It is a very good blog.) His error is simple: the demand for Mexican manufactures is extremely elastic, because Mexico is not the only country in the world.

P.P.S. No, I have not started to follow Twitter feeds. I hate that thing even more than Facebook.

Why Cyprus won’t leave the eurozone

If I were the president of Cyprus, knowing the little that I know right now, I would take the country out of the Eurozone. But that is not a no-brainer. There would be a lot of losers. Cyprus should leave the euro, but it won’t, because the losers outweigh the winners in the short run.

Who would be the losers from leaving the euro?

1. Savers with less than €100,000. Right now, their savings are untouched. True, they can’t move those savings off the island, but the chances are good that they will eventually. And the banks have reopened, even if cash withdrawals are limited.
2. Creditors. They would either be repaid in devalued Cypriot pounds or face the possibility of huge write-offs under a new super-lenient bankruptcy law.
3. The employed. “Say what?” you ask? Well, consider. My grandfather kept his job during the Great Depression. As a result, he made enough money to move from Crown Heights to the then suburban-paradise of Jamaica, Queens, plus a second house in Miami Beach. The reason was that deflation drove up the value of wages and assets for those who managed to hold on to them. I doubt that Cyprus is in for as punishing a deflation, but deflation it will be. Moreover, the Mexican and Argentine experience shows that one of the ways in which devaluation works its recovery magic is by falls in real wages. Argentine wages fell by almost a fifth in the two years after the devaluation. Cyprus imported 47% of its GDP in 2010, compared to only 12% in Argentina in 2000, the year before it left the American monetary union. It’s even higher than in Mexico, which imported 22% in 1994, before its big (and devastating) devaluation. Given the scale of imports, the fall in Cypriot real wages from devaluation is likely to be rather worse than in Argentina or Mexico.
4. Debtors to foreigners … possibly. There would be a legal nightmare if Cyprus reintroduced the pound. Locally-owed debts could be poundified, but foreign debts could not. Any attempt to do so would lead to a rash of lawsuits. I would not worry that reintroducing the pound would lead to Brussels throwing Cyprus out of the E.U. … but I would worry that forced poundification of foreign debts just might.

OK, so who wins?

1. The unemployed. Of course, the unemployed will have to grow to a rather large number for them to provide a big enough interest group to matter. There’s a reason Argentina didn’t devalue until 2001, despite three years of depression.
2. The soon-to-be-unemployed. OK … but the woman whose wages collapse and can no longer afford to send her daughter to the U.K. for university is not going to vote based on what would have happened. In a world like that, President Obama would have won re-election with LBJ-like margins. We do not live in that world.
3. Bankers. Yes, bankers! Both their debts and the liabilities will be poundified, at least if the Cypriots are a little bit smarter about it than the Argentines. (And even in Argentina, the courts plus politics eventually helped the banks out.) They will have a bigger problem with their non-deposit liabilities, but they are going to have that problem as the Cypriot economy collapses regardless. More importantly, the new Cypriot central bank will be able to print pounds in order to help the banks out.
4. The tourism industry. Cyprus has a population that’s barely twice that of Barbados; there’s no question that tourism could sustain a high-wage developed economy. The problem is that they would be betting on tourism in an environment in which the rest of Europe is either in or sliding into recession. The tourism boom could take rather longer to get going than the post-1994 manufacturing boom in Mexico or the post-2001 agricultural boom in Argentina.
5. Debtors to foreigners … possibly. If the Cypriot government is willing to protect them from creditors (all creditors, foreign and domestic, in order to remain in the E.U.) or bail them out via cheap pound loans, then they could do surprisingly well out of a situation that one would otherwise expect should be disastrous;
6. Other debtors: inflation is good for debtors.

How will this political logic look by the 2018 election? Well, I’m pretty sure that it will look like staying in the euro was a bad decision. In that sense, I would advise President Anastasiades to leave the euro now and bet on re-election on the wave of a giant economic boom by the time the next presidential election rolls around.

The problem is that it is not at all clear that such a move will look great by the time of the next legislative election in 2016. There are a lot of short-term losers, and they are politically powerful.

In fact, given the opposition, a new currency may be impossible. The president of Cyprus is powerful, but he cannot unilaterally introduce a new currency. There would have to be wide support for such a move. The problem is that most of the soon-to-be-unemployed won’t give it, the bankers are unlikely to act in their self-interest (this is oddly true of American bankers, I should add), and those who owe debts to foreigners can only be appeased by radical changes in Cypriot bankruptcy law. (It is currently very strict; e.g., creditor-friendly.)

While leaving the euro looks like a clear decision at first glance — two-thirds of Cypriots support it! — the politics rapidly gets blurry by the second and third look. Argentina left the American monetary union after a punishing depression had reduced the economy to barter; Mexico’s president could unilaterally devalue (and pretty much had no other option by that point). Leaving the euro would almost certainly lead to a richer and stabler Cyprus by 2018 … but the above analysis, superficial as it is, makes me think that you can’t get there from here.

Cyprus will have a long and grinding depression, but it will not (unlike Argentina) be reduced to barter because the ECB will provide just enough liquidity to insure that does not happen. Things will get awful, but probably never quite awful enough to get the government to take the logical step. It’s a tragedy for the Cypriot people, but an entirely understandable one.

“This old lady is worse than the one-eyed man”

That is what President José Mujica of Uruguay accidently said about President Cristina Fernández of Argentina when he didn’t know the mike was live. The one-eyed man, by the way, is her late husband and former President of Argentina.

“Esta vieja es peor que el tuerto.” In Mexico, in this context, the use of vieja would not necessarily be an aspersion against President Fernández’s age, meaning instead something like “The wife is worse than the one-eye.” I am told, however, that in the Southern Cone it translates to something more like “hag.”

Uruguay is not happy with Argentina. The tension goes back a long way (Canadians should appreciate the psychology) but the recent imbroglios began with this. Short version: Argentine activists blockaded a bridge between Uruguay and Argentina in anger over a big paper mill a Finnish company was building in Uruguay.

President Mujica’s predecessor, Tabaré Vázquez, considered going to war over the blockade, but quickly realized ... well, take a listen:

So much for sending the Uruguayan army over the bridge. (Plus, well, even a successful action would have worked out about as well for Uruguay as Pearl Harbor did for Japan: you don’t get a country to reopen its roads to your commerce by attacking them.)

Ex-President Vázquez is telling the truth about the seriousness of the conflict over the Botnia paper mill. In 2006, the Uruguayans told the American government that the Argentines were “fascists” and asked the U.S. for help. “A brother slapping another in the face needs a big uncle to put a stop to it,” said the Uruguayans, although they feared that Argentina would cut off gas imports. (The U.S. tacitly supported Uruguay.) In April 2007, in the face of Argentine threats, Uruguayan newspapers revealed military contingency plans should the plant be attacked, although the Uruguayan military attache in Buenos Aires later contradicted those reports.

In November 2007, Vázquez ordered the mill to start operations, with the blockade still underway. But the Uruguayans feared the Argentine response, so they secretly asked for closer military relations with the U.S. and stepped up security around the plant.

Uruguayan fears notwithstanding, war was not going to happen — the U.S. embassy in Buenos Aires wrote: “There is absolutely no indication that GOA [Government of Argentina] is considering a military ‘solution’ to this dispute, and the GOA’s own military operational capacity is very limited. Any suggestions of a military ‘solution’ here actually brings about expressions of humor or disbelief. At the recent Embassy-hosted Veterans Day event, a military contact only barely jokingly said that as a matter of fact, right now, the GOU [Government of Uruguay] probably has more active and usable aircraft and other military assets than does the GOA.”

That said, it is ridiculous that Buenos Aires let the situation get so out of hand. With the plant running (and causing little pollution) the crisis passed, but the reverberations continued to mess up relations between the two countries. Argentina blocked Mercosur from funding a second frequency converter on the Uruguay-Brazil border. The converter would have let Uruguay import more electricity from Brazil ... freeing it from Argentine pressure. (As well as occasional power shortfalls: Uruguay wanted it for economic as well as political reasons. Tenders finally went out in 2011, without Mercosur money.)

Then the Argentines blocked joint dredging operations to maintain the Martín García canal, under the treaty governing the Rio de la Plata. The problem has kept big ships out of the Uruguayan port of Nueva Palmira. It looks like the dredging might finally happen, maybe.

Buenos Aires proceeded to add insult to injury by imposing import licenses on 6 percent of Uruguayan exports to Argentina. It also went after Uruguay as a putative tax haven and denied its national airline landing rights in Chubut. Then Argentina stalled on attempts to build a regasification plant to allow for LNG imports. (President Mujica announced on April 2 that a plant will go ahead “with or without Argentina.”)

The most recent insult was not aimed at Uruguay specifically, but angered Montevideo nonetheless: Argentina limited the amount of money that Argentines can take out of the country ... sucker-punching Uruguay’s tourism industry.

Uruguay tried to shoot back by delaying Néstor Kirchner’s attempt to become the first Secretary-General of the Union of South American Nations, but they failed. Kirchner took over the organization shortly before his death in 2010.

It has become about as dysfunctional a relationship as one can imagine between two democratic and culturally-similar neighboring states. Argentina fruitlessly and pointlessly bullies Uruguay; Uruguay impotently pokes back. Things will certainly not get any worse, but they also show no sign of getting better.

The next time a Canadian complains about relations with the U.S., point to the Southern Cone. It could be much much worse.

Observatorio argentino 19: Poverty in Argentina

Argentina turns out to be a poorer country than we realized.

Argentina, like the United States, measure the poverty line against a basket of goods. The rate of absolute poverty is measured against the monthly cost of a minimum amount of food; the regular poverty rate is assessed against a broader basket which includes a bare amount of housing, energy and manufactured goods. According to the official agencies, in 2011 the monthly food basket cost ₱205 per person while the broader basket cost ₱449.

The Universidad Católica Argentina (UCA) used unofficial sources to revalue the official baskets. They found that the food basket cost ₱351 and the broader one ₱720.

As you might imagine, the mismeasurement of inflation has significant effects on the poverty figures. (The data is at the above link.) According to the Argentine statistical agency, absolute povery (“indigence”) afflicted 1.7% of the population in 2011, while 6.5% suffered regular poverty. The UCA conducted its own survery of urban areas, using the official poverty lines, and found slightly different numbers: a few more in poverty (7.8%), a few less in indigence (1.5%).

But when they used the actual cost of the basket, the numbers leaped: 21.9% in poverty and 3.3% in indigence, meaning that one in thirty urban Argentines did not earn enough to avoid malnutrition. (The survery did not include rural populations, so it is unlikely that the indigent had access to much non-market food.)

Let me be clear: the poorest Argentines are much better off than they were under the old regime. In 1998, right before the country began its grinding depression, almost a third of urban Argentines were poor and almost a tenth lived in households that did not earn enough to pay for their caloric needs. Even with the revised numbers, the situation has improved markedly.

But two things stand out. First, Argentina did not avoid the Great Recession. Well-being degenerated markedly in 2008 and 2009.

Second, the Argentine government probably played games with the indigence statistics in 2008 and 2009 (but not thereafter): the official numbers and the survey numbers diverge rather dramatically in those years, even without the inflation adjustment.

In a way, the numbers make the games the government has played with the statistics even more incomprehensible. The Kirchners have a great record on poverty: this is not the Bolivarian Republic. The uptick in 2008-09 is entirely understandable, given the Great Recession ... and I very much doubt that the families thrown into poverty were unaware of it.

Given that, what is the point of the obfuscation? 

I was wrong about the euro ... but that turns out to be a bad thing for Europe

I while back I wagered that the euro would not make it to May of this year. I am now conceding defeat. Why? Not because the clock ran out. No, because Cyprus is staying in.

Back then, I worried that things would get so bad that a country would have no reason not to ditch the euro. If the banks closed, I argued, then the costs of switching would no longer apply. At that point no rational government that wanted to win re-election would stay in; everything would be upside.

Well, Cyprus has reached that point. The banks are closed, capital controls are imposed, the and the debt-GDP ratio is set to explode since the Germans insisted, insanely, that the E.U. bailout be channeled through the island’s government. So there is no worry about bank runs and no worries about driving banks to insolvency. And there should not be a worry about sovereign default: Cyprus is now going to have to default or raise taxes to truly eye-popping levels.

Yet the Cypriot government shows no sign of abandoning the single currency.

OK, then. Past performance does not predict future results: should Spain reach that point their government might behave differently. But it might not. I am given pause by the sight of Cyprus happily plunging right into a depression with no promise of aid from the rest of Europe and a very easy out right there.

And so, I proclaim error ... but stand astounded that European governments are willing to sacrifice their people to an E.U. that seems so unwilling to do anything in return.

Japan’s methane hydrates should not be developed, and likely won’t be, huzzah

I am in Panama! It is an awesome place. (Including the traffic at 5pm on a Monday. And the lack of sidewalks.) So, of course, I will talk about Japan.

A Japanese drilling ship, the Chikyu, recently extracted methane from hydrates 1,000 feet down in the Eastern Nankai Trough. Methane hydrates, aka clathrates, are deposits of natural gas trapped in ice. (OK, it’s not really ice, but what else would you call it?) They are not easy to extract. A good primer is here at Wonkblog.

How not easy to extract? Seriously not easy to extract. This blog likes cost numbers, and fortunately the Japanese consortium running the process provided them in 2008:

	¥ per m3	$ per MCF
Present construction costs	¥ 92	$ 33.98
Assumed conditions	¥ 46	$ 16.99
Volume 25% lower than expected	¥ 174	$ 64.27

“Assumed conditions” means a threefold drop in construction costs. Worse yet, costs are extremely sensitive to volumes; produce less than expected, and profits go out the window. The low price of $16.99, meanwhile, is more than Japan currently pays for liquified natural gas (LNG).

Still, breakthroughs happen. Maybe Japanese engineers can move beyond proof-of-concept tests to cost-effective methane extraction. What then?

Well, do not worry about the amount of methane that can be extracted and burned. That is entirely a red herring. The world has plenty of cheap conventional natural gas to burn between now and 2100. Unless the hydrates drop in price way more than anyone expects — say, down below $6 per MCF — then commercial exploitation will not cause the world to burn natural gas any faster than it would have otherwise. I very much fear global warming, and once natural gas has killed coal dead then natural gas will become the problem, but the hydrates won’t make a damned bit of difference unless you believe that we will be burning methane for power into the 22nd and 23rd centuries.

OK, so no worries in burning methane from hydrates. (More specifically: no additional worries than we currently have.) But do worry! I have been talking about this with my friend Will Baird out in California. The problem is that not all of that methane will be burned. Maybe not even most. Maybe even catastrophically little.

The Department of Energy reports that the Nankai Trough has 16 to 27 trillion cubic meters of methane hydrates. Methane is approximately 21 times more potent as a green house gas as CO2. If you were to dump all of the Nakai Trough's hydrates into the air at once, it would the equivalent 20 years worth of U.S. methane emissions all at once.

The good thing is that methane falls out of the atmosphere quickly. The bad thing is in the middle sentence of the above paragraph. A catastrophic emission of the Nankai hydrates would cause a short painful spike in temperatures ... and given how close the Earth is to climatological tipping points, it could push us over.

That probably won’t happen, but you’d be crazy not to think about it. What most likely would happen is that commercial exploitation would destabilize the deposits. The Japanese want to remove ice from under sediment. In a geologically inactive zone, that is mildly annoying, but, well, Japan is not in a geologically inactive zone. Even without the effect of quakes, if the Japanese use warm(er) water to melt and separate the gas from the ice, then surrounding ice could be destabilized. A catastrophic release may be unlikely, but the probability of large-scale methane releases is too high for comfort.

And some degree of methane release is inevitable. So far, we do not know what the capture ratio will be ... and we probably won’t until there is a commercial test.

But let me finish with two pieces of good news. First, the process is not likely to be economically competitive; we will probably therefore never have to worry about the environmental effects. Second, this is a government-funded project, so even if it is competitive there will be fewer vested interests insisting on development.

In short, the hydrates are scary if you want to leave this world to your grandchildren ... but the obstacles to development are high enough that they will likely not be developed.

Is power really ending? A preview of Moisés Naím’s new book

Moisés Naím has an interesting new book coming out: The End of Power. Its argument that power (conventionally declined) is decaying is incontrovertible ... but I worry from this preview that the author is conflating too many different things to create a useful framework.  

1. The American problem is super-simple to understand. Combine parliamentary parties with the Constitution (written and unwritten: the filibuster and all that) and you have a recipe for paralysis; 
2. Ditto the European problem. The E.U. is riven with veto points and lacks a real demos, but it has a currency. So they cannot even figure out to create a common deposit insurance scheme, let alone a real transfer union. The diagnosis is not rocket science nor  is the problem unprecedented; 
3. Piracy and organized crime are frightening ... but sideshows and being dealt with. Moreover, neither affects serious states inside their borders. 

There is an argument to be made that the world is facing global problems without a global government. This “governance” thing is failing to compensate; the one international institution that resembles an actual federal government (the E.U.) is still much too weak. But that argument leaves out problem (1). To shoehorn current American political paralysis into his argument, Naím will need a theory to tie the rise of ideological disciplined parties to some greater global force.

Naím appears to be trying to create a theory about the decline of all kinds of centralized power ... but it is not clear that centralized power is declining. Take the examples in the linked-to essay. None of them are clear-cut. Corporate CEOs do churn more than ever before ... but CEOs and the owners of capital get an ever-higher share of income. The BP oil spill did hit the BP share price more than the Exxon Valdez spill hit Exxon ... but the Gulf spill was a far far far far bigger disaster. France did pull out of Afghanistan after a few green-on-blue attacks ... but was not an important part of the U.S. coalition and Paris went on to occupy northern Mali a few years later.

Let me be clear: I think that Naím is an important thinker who is on to something important. I do not think the world is the same as it was in, say, 1980. But from what I see in the precis, I worry that this book will not explain (or even properly define) the difference.

I have posted about the tendency among popular academics to lurch between the extremes of “We Have Seen It All Before” to “Everything is Different Now!” That post mentioned Stratfor as an example of how the former mindset can lead to some head-scratching conclusions. I am hopeful that the new book from Naím will avoid the latter, but the essay gives some reason to worry.

Can LNG solve Japan’s (or at least Tepco’s) energy troubles?

What are the implications of Japan’s infrastructure on the future? Let’s start with LNG. Can Tepco use LNG to replace its nuclear fleet?

Tepco certainly can build CCGT. It is true that CCGT plants can be built in 27 months. It is also true that CCGT plants are not expensive. (My students estimated a capital cost of $1.25 billion per GW.) And it is true that they do not need that much fuel: a gigawatt CCGT plant requires only 46 BCF of fuel per year — the additional 782 BCF needed to replace Tepco’s nuclear plants is well within the capacity of its existing import terminals.

The rub is that Japan has little ability to move natural gas within the country, so the new plants would have to be built near the terminals. The region is not exactly unpopulated. (See map.) Siting and building plants on the requisite scale is likely to take a lot longer than 27 months unless the country builds more remote terminals or a better high-pressure distribution network ... which will take a lot longer than 27 months. Catch-22.

The second problem is that LNG is an expensive fuel. In February, LNG in Japan went for about $16.66 per MMBTU. One of the reasons LNG is so expensive it that sellers prefer contracts linked to the price of oil. Japanese consumers, of course, would prefer contracts linked to the American wholesale price. The problem, of course, is that high transport costs segment the world market. An exporter in Qatar or Australia has little reason to accept a contract linked to the North American price.

But how much cheaper is North American gas? Cheniere Energy contracts price LNG (at the liquification plant) at Henry Hub × 1.15 + $3.00, or $7.19 at a Henry Hub price of $3.64. It costs maybe another $3 to ship it to Asia. (This report is invaluable.) Call it $10.20. Now, this blog has argued that natural gas prices are going to rise. Not immediately, but in the next few years. If they go back up to $5.50, then the price to Japan will be about $12.33. (The Development Bank of Japan believes prices in this range are possible if import prices are linked to Henry Hub.) That is less than $16.66, but hardly the millenium.

According to my students, CCGT in Japan is only marginally competitive when LNG goes for of $17 per MMBTU: 7.5¢ per kWh, against a nuclear cost in the 6¢-7¢ range. Rates therefore would have to rise. If the cost goes under $13, however, then CCGT electricity would go below 7¢. In short, replacing nuclear power with gas without price hikes depends on access to North American gas.

Thus, on February 22, 2013, Shinzo Abe asked Barack Obama to approve LNG exports to Japan. Tepco has already signed an agreement to purchase gas from the Cameron project, but it still needs U.S. export approval and might not happen. (If the Europeans are smart, they will make free trade in natural gas a plank of the U.S.-E.U. FTA.) A less controversal project is going ahead in Kitimat, British Columbia (this would be better for America, since the B.C. deposits are new and hard to move south and thus have no effect on U.S. prices) but Chevron is now a partner and Chevron insists that prices be linked to oil prices.

But ... you knew there was one ... even if gas exports happen, Cameron won’t be ready until 2018. Kitimat was supposed to open in 2017, but now will be later. In short, Japan will be at the mercy of oil-price-linked contracts for some time ... and even after that will face a substantial import bill.

Which is why there is so much interest in the methane hydrates. Japan has been the first to demonstrate that it is possible to extract natural gas from undersea hydrates. Game changer, they say.

Or not. In a future post, I will say why I do not think that methane hydrates will be developed soon. Or at least why I hope not, since they pose a catastrophic risk to the climate.

The frequency frontier in Japan

After the Fukushima nuclear disaster, the utility company Tepco faced a problem: how to keep the lights on with the reactors off? Four of my students (Dan Bodley, Andrew Boudreau, Allison Dee, and Nick Phoutrides) found the answer. It boils down to “they didn’t.” But why they didn’t turns out to be very interesting. Preview: it was not because the nation of Japan lacked the excess capacity to replace nuclear electricity.

Japan is divided into 10 different utility areas.Tepco enjoyed 65 GW of capacity (17 from nuclear) and imported up to 13 GW. Typical summer peak demand ran around 61 GW. The quake took 17 GW of nuclear off-line, leaving 48 GW of local capacity under the heroic assumption that the utility could run all its non-nuclear plants at peak capacity.

OK ... so just import! Problem solved, no blackouts, all good. And if you just looked at the headline numbers, that would have been feasible, even with the national reactor shut-down.

Except there were two problems. First, the quake bady hit Tohoku — which normally provided all of Tepco’s imports — even worse than Tepco.

The second problem was the “frequency frontier” that ran roughly along the border between the Tepco-Tohoku service areas and the Hokuriku-Chubu service areas. Back when Japan first electrified, in the 19th century, General Electric supplied the Osaka utilities whereas the precursors to Tepco bought from Allgemeine Elektricitäts-Gesellschaft. AEG ran its equipment at 50Hz, whereas G.E. used 60Hz. The end result was the “frequency frontier” that bisects the country. There were three converter stations on the frontier, but their combined capacity came to only 1.2 GW. The end result was that Tepco’s maximum available peak import capacity declined from 13GW before the quake to only 7.3GW ... and that 7.3GW number, remember, was a maximum.

In short, Tepco faced a peak shortfall of 5.4 GW. Here is how that worked out: 47.7GW non-nuclear supply + 7.3GW imports − 60.4GW peak demand = (5.4GW). Tepco filled the gap by “conservation.” Why the scare quotes? Well, we normally think of conservation as turning off the AC, keeping lights low, taking the stairs, that sort of thing. We do not think of rolling blackouts as conservation. But rolling blackouts are indeed how Tepco reduced demand. In fact, Tepco exported 1.4GW to Tohoku in August 2011.

Running the company’s thermal plants at full speed meant importing a lot of liquified natural gas (LNG): Tepco’s imports jumped from 959 BCF in 2010 to 1,127 BCF in 2011. Fortunately for Tepco, its LNG facilities had a capacity of 2,785 BCF.(Of that, Tepco wholly owned two terminals capable of producing 1,287 BCF, with another 1,377 BCF of capacity in two terminals co-owned with Tokyo Gas. Tokyo Gas is the sole owner of the fifth; the gas company imports about 560 BCF per year in total.)

2012 appears to have been little different from 2011. Demand peaked at 50.8GW; Tepco had a cushion of 3.8GW on imports peaking at 6.9GW. But demand was held to 50.8 only by dint of blackouts. LNG imports remained about the same, at 1,120 BCF.

And so there you have it. On paper, Japan could handle taking nuclear off-line almost as easily as Germany. In practice, not so much, because of decisions made a century ago about sourcing electrical equipment from Germany and the United States. Economic history, it is an awesome field.

Finally, the world notices that no Senate is good Senate

This blog has panned the the Canadian senate, along with the Argentine, Brazilian, and Philippine ones. And we have not spared the American one, either! We blasted the American senate not only because of it has godawful stupid internal rules but because it is fundamentally undemocratic. In fact, we went so far as to calculate what the U.S. Senate would look like if you retained the 100-person membership but allocated Senators the way we did Representatives. Short result: California gets 10 senators. New York and Texas get six. Florida gets five. Ohio, Pennsylvania and Illinois get four, and you can click the link for the rest.

Given that, it is nice to see the New York Times finally catching up! Read the article. The Senate is fundamentally undemocratic and perverts our politics. Abolishing or reforming it is long overdue.

Unfortunately, the Senate is the one thing that the Constitution of the United States says cannot ever be reformed. It’s right there in Article 5: “[Amendments become part of the Constitution after ratification by ¾ths of the state legislatures or special state conventions] provided ... that no state, without its consent, shall be deprived of its equal suffrage in the Senate.”

Oh well.

I have seen the future and it is ...

... the language of these top stories:

Marso 11, 2013 (Lunes)

1. Gobierno Lokal ya Llama Summit para Discuti Maga Mehoras para el Solusyon del Largo Ora Blackout na Ciudad! 
2. Power Sales Agreement....Ya Pirma ya el Zamcelco y SRPI!
3. Official del Zamcelco....Ya Asegura kay Zero Blackout ya na Momento Puede ya Cumpra Kuryente na SRPI!
4. PNP Chief.......Ya Man Warning Cun el Maga Pulis Quien ay Dale Suporta Cun el Standoff na Sabah!
5. Negosyanta.........Victima de Tiro na Ciudad.......Muerto!
6. Notorioso Riding in Tandem Snatcher...........Ya Aresta el Otoridad!
7. Residente de Sta. Catalina Quien ya Iscribi el Extortion Letter na Power Barge na  Isabela....Ta Man Hunting el Otoridad!
8. Un Miembro del Philippine Army.......Reciente Victima de Tiro na Isabela Basilan!

Hat tip: Carlos Yu. Source: the Radio Mindanao Network Zamboanga.

“I think a native monolingual Chavacano speaker would understand these headlines as one language with three sets of spelling rules,” explained Carlos.

I have seen the future, and the Real Academia should be very very afraid. The Philippines are awesome, and all your base are belong to us.