The Power and the Money

Mexico has changed!

 When I lived in Mexico, during the late 1990s, I often found myself arguing with people over the rate of cultural change in that country. It was blinding, even in those days before the internets and all that. And the pace has not slowed.

Evidence of change is not that the woman in the white dress handed out the order in which the presidential candidates were to speak. Evidence of change is that it was extremely controversial and prompted an apology by the organizers.

That said, wags could not help but declare her the winner of the debate. And having watched it, I can understand why. Plus, Enrique Peña Nieto is so far ahead that it does not really matter. As long as he does not throw up on himself, or confess to killing his ex-wife, then he is going to win. (For more on the ex-wife rumors, see here, or for a hella show go to minute 5:30 to see a state legislator cause a giant fuss after making the accusation on the floor of the Mexico state congress.)

Gasoline is too damn high, but by less than you think

 In the most important sense, the title to this post is incorrect. Gasoline prices do not come close to covering all the social costs of driving. They underprice pollution, especially carbon emissions. They underprice the congestion imposed on other drivers. They underprice the damage done to roads and infrastructure: gasoline taxes are no longer sufficient to fund America’s transport needs. So no, gasoline is not too damn high.

In one sense, however, it is: oil is currently worth more than the marginal cost of getting it out of the ground. Brent is currently trading around $111. The marginal cost of getting a barrel out of the ground ran about $92 in 2011. That leaves a 20% spread: some room for prices to fall (even with current demand) but not a whole lot.

How do you calculate the marginal cost of getting a barrel out of the ground? Well, there are two ways to do it. The correct and complicated way has been done by Bernstein Research. They used the annual reports produced by the 50-largest oil companies for which there are data (sans Russian and Kazakh producers) in order to calculate the marginal cost of a barrel. That is the dashed line on the below chart. As you can see, it’s been rising incredibly fast over the past decade, even as world production has more-or-less stagnated.

There is a quick-and-dirty way to replicate their methodology. I’ll walk you through it. Start with the bottom line, which is the average cost per barrel of actually getting the stuff out of the ground. That has risen from $4 to $21 over the past decade, as more and more difficult oil has come onstream. Now add in depreciation, administrative expenses and marketing costs. That’s the second line from the bottom. (It includes direct taxes and royalties on oil production.) It has risen from $7 to $36 over the past decade.

Bernstein then calculated the amount of capex (including exploration costs) that the companies would need to undertake in order to keep their reserves constant. That is the greenish dashed line labeled “Unit costs + est. capex.” There is a quick-and-dirty way to replicate their results, which is simply to use what the companies actually spent on their capital expenditures. That is the greenish solid line labeled “Unit costs − DD&A + capex.” (It subtracts depreciation before adding back in actual expenditures, in order to avoid double-counting.) The result is more-or-less the same. That number, a simple estimate of marginal cost, has skyrocketed from $11 to $51 over the past decade.

Now here’s the rub: oil companies do not actually earn the Brent price unless they are, you know, selling Brent. In 2011, Brent averaged $111, but the average realized price earned by the 50-largest oil companies was only $66 per barrel. In order to calculate the Brent price at which the companies could cover their marginal costs, you need to add that “realization spread” to the basic marginal cost calculation. That is the dark green line that more-or-less parallels the correctly-calculated marginal cost.

	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
Lifting costs	$ 4	$ 4	$ 5	$ 6	$ 8	$ 9	$ 11	$ 17	$ 13	$ 17	$ 21
Unit costs	$ 7	$ 9	$ 10	$ 13	$ 15	$ 18	$ 21	$ 30	$ 26	$ 30	$ 36
Unit costs − DD&A + capex	$ 11	$ 15	$ 15	$ 19	$ 25	$ 31	$ 34	$ 45	$ 36	$ 47	$ 51
Above + realization spread	$ 21	$ 24	$ 24	$ 28	$ 41	$ 51	$ 57	$ 82	$ 57	$ 75	$ 97
Marginal cost	$ 25	$ 30	$ 36	$ 45	$ 58	$ 54	$ 64	$ 96	$ 68	$ 83	$ 92
Brent oil price	$ 24	$ 25	$ 29	$ 38	$ 55	$ 65	$ 73	$ 98	$ 62	$ 80	$ 111

What does this tell us about the world oil market? Well, the peak oil people seem to have been half-right. Technology has enabled the world to maintain oil production, and the truth is average production looks set to expand. But technology has not enabled the world to maintain production without using increasingly expensive techniques. I was at a dinner the other day with two hedge fund guys, and we calculated on a napkin (using an entirely different methodology) that it was barely worthwhile to drill in the Bakken at current oil prices. Given that the world seems to have an ending thirst for oil, prices may fall, but not by that much.

What does this imply about American energy security? Well, the U.S. may, if it is willing to carry out the right policies, be able to insulated itself from future price shocks that could take oil up to $200+ per barrel. But it will not be able to bring back the days of buck-a-gallon gas. Not even three-buck-a-gallon gas. Absent some sort of radical demand shift (and raising CAFE standards ain’t that) cheap oil is gone forever.

Delta Airlines provides perspective on the CNOOC-Unocal controversy

 In 2005, the China National Offshore Oil Corporation (CNOOC, pronounced “See-knock” by Americans) made an offer for Unocal. The political reaction at home was ferocious. The opposition came from three sources:

1. Fear of technology transfer. CNOOC might be able to acquire new techniques and abilities from its subsidiary. This is a reasonable fear in general, but not in the specific. Unocal was not really on the technical frontier ... and even had it been, all the evidence is that in the oil industry the benefits of propietary technology flow to the shareholders, not the citizenry. In that sense, then, China might have done the U.S. a favor by liberating whatever technical secrets Unocal might have possessed;
2. Fear of foreign control over American assets. This objection never made much sense, as Bernard Guerrero pointed out here. CNOOC assets in the United States fall under the jurisdiction of the American government, and should the U.S. and China ever go to war (even a cold one) the U.S. government can and will easily do to Chinese assets what it did to German ones during World War One;
3. Fear of foreign control over foreign assets. This was Paul Krugman’s objection to the deal. His worry was that the Chinese government might choose to keep oil from, say, Central Asia off the world market. That would drive a wedge between Chinese oil prices and world prices, damaging the rest of the world. The incorrect objection to this reasoning involved putting words in Krugman’s mouth, and assuming that he was discussing only military confrontations. The correct objection to this reasoning was simple: the Chinese government would incur a large opportunity cost from such a policy. Rather than sending cheap oil home, China could sell it overseas and pocket the difference. So absent the ignition of Cold War Two, what would be the point?

That last counterargument was very convincing. You can follow a microcosm of the debate at Crooked Timber. There is a wrinkle involving pipeline construction (short version: U.S. consumers have an interest in preventing China from building pipelines into Central Asia, just as we have an interest in preventing Canada from building them to the Pacific) but it is both minor and irrelevant to the CNOOC-Unocal controversy, simply because China was going to build those pipelines regardless.

End of argument? I would have thought so, but today I read that Delta Airlines was doing something interesting:

Delta Air Lines said on Monday that it had agreed to buy a refinery near Philadelphia from ConocoPhillips to offset the risk of higher jet fuel prices ... Richard H. Anderson, Delta’s chief executive, said the investment was a modest one, equivalent to the list price of a new wide-body plane like a Boeing 777. The company estimated that it would reduce its annual fuel expense by $300 million, once the refinery was refurbished and operating again. To achieve similar fuel savings, Delta would have to buy 60 new-generation narrow-body planes like the Boeing 737, a capital investment that would total $2.5 billion.

Huh! It looks like Delta Airlines has decided to do exactly what the economic theory predicted that China would not do. After all, there is an opportunity cost to locking up refined products: instead of selling them cheap to itself, Delta could sell it expensive to others. Moreover, it turns out that Delta isn’t alone. BP is also involved. The reason is simply that refineries cannot product only one product: you always wind up with other byproducts. So Delta will need to swap those other products for jet fuel. It could, of course, sell them and buy jet fuel on the open market, but that’s not what Delta has chosen to do:

Delta said it had also struck a three-year agreement with BP to supply crude oil to the refinery. As part of the deal, the details of which were not released, Delta said it would exchange gasoline, diesel and other petroleum products produced at the refinery for jet fuel from other sources like BP and Phillips 66. Combined with the jet fuel produced at Trainer, Delta said these deals would provide 80 percent of its fuel needs in the United States.

Delta has decided that it makes more sense for it to buy a refinery and sell fuel to itself at less than the market price than it does for it to buy a refinery and sell fuel to other people for the market price, pocketing the returns. Similarly, if the above description is accurate, then BP has also decided that it makes more sense for it to swap jet fuel for other products at less than the relative price it could receive from making that swap on the open market.

This is, it would seem, to be exactly the sort of behavior that people are worried that the Chinese government might engage in on a much larger scale. Two questions, then. First, is Delta making a fundamental mistake? (Many analysts think so.) Second, if it is in fact good for Delta, why wouldn’t it be good for China?

The 1940 census and the old neighborhood, no. 3

 I don’t think a whole lot about our time at East 71^st Street, even though it lasted through most of my high school years. There were three reasons for that. The first was that I hated the neighborhood. The building was great — I made lots of friends, not counting the Irish heroin addict from the sixth floor who burglarized our apartment and received a ... well, in these more enlightened times I shouldn’t say ... in return. But by the late 1980s the East Side south of 86th and east of Lexington was going on its third decade of what would today be called gentrification, and while I greatly appreciated the fact that I could space out on the walk from the subway station with no fear of getting mugged, I hated the neighborhood’s wealth with a deeply-burning passion impossible to describe. The second reason for my lack of nostalgia or good-feeling to the area was that most of my good friends lived elsewhere. I spent much more waking time in Stuyvesant Town and Loisaida and Washington Heights ... and I probably spent more nights at my friend Guy’s house in Queens — also the borough from which I drew most of my friends. (My wife is from there!) Which brings us the third reason. Life inside the apartment was not particularly salubrious. Not that I’m complaining! It just wasn’t a great time, so while I have heavy nostalgia for the late 1980s in Queens and Stuy Town and Washington Heights and Loisaida, not so much for East 71st Street.

I’ll digitize some photos at some point, but as of right now I don’t have any. Which says something about my feelings towards the address, despite the fact that the neighborhood was much nicer than 115, 93, 77, or anywhere in Brooklyn, Bayville, or North Miami Beach. So here I give you a picture from 1986, when I lived on East 71. Dinner for the first person to ID the 16-year-old me.  

Forty-four years earlier, the East Side was significantly different from 1985-88. 416 East 71st, however, was remarkably similar. The difference is that in 1940 the building was representative of the census tract, whereas by late 1980s it was an outlier. It still had plenty of children, the sons and daughters of older folk who remained due to rent control rather than moving to the suburbs. Their kids were not in elite schools, and it was not easy to earn their toleration. It helped that I joined next-door Sokol Hall for gymnastics and tae kwon do. In short, the building was a little retro pocket of old-line white ethnics, in an neighborhood that had turned into a suburban-like mush of affluence. At the time it was not enough to compensate for my extreme antipathy to the rest of the neighborhood ... and to be honest, it is not enough now 24 years later. Maybe by the time my son turns 18.

In 1940, the entire neighborhood was Czech and Slovak. It wasn’t quite as Slavic as East Harlem was Italian, but it came close. Co-blogger Doug Muir had family who lived six blocks north at the time, and reports something similar. 

The 1940 census counted 21 households at 416 East 71st Street. Of those, eleven had the head of household (or both, if a married couple) born in “Czechoslovakia,” “Slovakia,” or in one case, “Bohemia.” The twelfth reported that the head of household — a 66-year-old widower named Tilly Dran — had a birthplace in “Austria.” Tilly lived with a single daughter aged 39, a married daughter (age 48), her 52-year-old husband (Harry Ledak), and their 20-year-old granddaughter. The older daughter and Tilly’s son-in-law had also been born in “Austria.” It isn’t unreasonable to assume that “Austria” probably meant Czechoslovakia, considering as he had emigrated before 1901. 

In addition to those 12, the Viddetzk (sp) family was born in New York (Joseph in 1905, Anna in 1914, and daughter Dorothy in 1934) but was likely of Czechoslovak origin. Similarly, up on the upper floors, Edward Holut (born in New York in 1894) lived with his “Austrian” mother. Meanwhile John Panelka of Ohio (33-years-old) lived with his 31-year-old wife from “Austria-Hungary” … who had been born in 1909, when there really was such a place. (They had two children, Eleanor aged 4, and Alfred aged 1.) Having moved into the building 44 years later, I am having trouble believing that John’s wife wasn’t actually from what would today be the Czech Republic or Slovakia.

That’s 15 households with origins inside the 1918-93 boundaries of Czechoslovakia. But there’s more! Sam and Anna Graycon (born in 1885 and 1884 respectively; she was in fact a year older than he was) reported having been born in Hungary. In 1885, Hungary included modern Slovakia. (Their 22-year-old daughter was born in New York.) The Slawinskis (born in 1875 and 1887 respectively) listed their birthplace as Poland at a time when there was no Poland. It is likely that they were Polish, but I am also sure that they felt comfortable around their fellow Slavs. (They lived with their four children, aged between 16 and 23.) In addition, the Hrabie family was born in New York and lived with their two children … along with the father’s mother, who had been born in Czechoslovakia.

At that point you’ve got 18 out of 21 households being some sort of Slavic — you can dig into the most West Indian parts of Brooklyn and Queens today and find less homogeneity. Who was left? Walter Thiele had been born in Germany in 1895, and his wife Olympia had been born in Russia in 1904. It’s possible that they weren’t Jewish, but that isn’t how I would bet. They lived their children, 18-year-old Rita and 13-year-old Ralph, both in school, and a lodger, Edward Parfer, who worked in a hospital laundry for $1500 per year. The family paid $32 per month in rent; nothing was reported from Mr. Parfer. For what it is worth, Edward had been born in New York in 1890.

The Cuthberts, aged 46 and 37, had both been born in Scotland. Their six-year-old son Robert was born in Short Hills, New Jersey, where they had been living in 1935. Cuthbert pere was a porter at a bank for $1352 a year. Their previous address implies serious downward mobility.  

There was also Leo (age 37) and Georgette (age 33) Larkin and their 4-year-old son, John. Leo was from Pennsylvania and Georgette from New York. Leo was an unemployed dockworker who had earned $830 in the previous year; Georgette didn’t work. They paid $23 a month in rent: $276 per year. Admittedly, the area was crappy back then, but imagine somebody making $13,300 a year living there now. My mother did it … but that was (a) almost three decades ago; and (b) involved judicious use of the rent control laws and (c) a significant other. 

The building hangs on around high-rise redevelopment that has utterly changed the character of the neighborhood. That is a good thing. I have moved left on most things over the years, but when it comes to land-use planning and historic preservation, I am of the libertarian “tear it down and build bigger” school. (I can accept that owners should have a property right to sunlight. But that is it.) I will survive if the charming brownstones of the Upper West Side are ripped down and replaced with 50-story towers ... and America will be better off. No need to mention the crappy little tenements around Pleasant Avenue. More towers, please, just like the ones on 93rd Street..

Before we end, I want to mention the Novak family. The widowed head of the family, Anna, had been born in Czechoslovakia in 1882. She lived with her three New York-born children, Emily (age 27), George (age 26), and Gerald (age 24.) The three children had eighth-grade educations. Emily worked as a bookkeeper for $1040 per year, and George worked as a delivery man for $680. Gerald was unemployed, but had previously worked as a machinist for $916.

Why do I report this? Because I knew George Novak, the bow-legged old man who ruled the building. He gave me fatherly advice on more than one occasion during the not-very-nice years of 1984-88. He was in his seventies, he had fought in World War Two, and he was a very good man. He deserves props, and I hope he is remembered.

I believe that this story was because of him. It does, in fact, date back to 1987. God bless you, Mr. Novak.

The 1940 census and the old neighborhood, no. 2

 The Upper West Side of Manhattan, like East Harlem (and the upper reaches of what used to be called Yorkville) had become a slum by the 1970s. It never reached the abandoned gang-ridden depths of East Harlem, and parts remained nice … but in general it was crappy. The San Juan Hill area was cleared for Lincoln Center and the Amsterdam Houses. During the 1977 blackout, looting hit the entire area, but it was especially bad in Manhattan Valley and the side streets off Amsterdam Avenue in the eighties and nineties. Broadway in the seventies wasn’t burnt-out terrible, but it was far from today’s disneyground. Needle Park on 72nd Street was so named because of the used heroin needles that littered it, not its shape.

The area’s decline set in before World War Two, and that shows up in the census data. Two other things also show up. First, East Harlem’s fertility really was strange. Second, the rise of Adolf Hitler to power had a profound effect on this part of New York.

The first family listed at 317 West 77th are the Landers. Herman and Eve (49 and 35 years old) were both born in Russia. They both graduated high school. Herman’s profession is unclear — it’s listed as “propietor, furnished apartments,” with no wage income listed. He doesn’t own the building, though: the census has him down as a renter for $50 per month. (That’s $802 in 2011 dollars — half the market rate in the same building today, and for a place that was probably four times the size.) They lived with their daughters, Joy and Helene, 14 and 9 years old. They employed a live-in maid, Jennie Richardson, 20, a black woman born in New Jersey. Jennie had been living there for over five years, meaning that she worked for them as a teenager. Jennie didn’t graduate high school, but she is listed as having had three years. She earned $360 per year — $5,770 in 2011 dollars — for a 60-hour week. Room was probably worth another $420, judging from what lodgers in the building paid, but that’s still a remarkably low wage by modern standards.

The next family was a young couple, almost certainly refugees from the Nazis. Samuel and Mary Hirschaut were born in Germany and Russia, respectively, in 1914 and 1916. In 1935, Samuel lived in Germany and Mary was in Switzerland. Both graduated from high school; Samuel worked as a leather dealer on his own account — no wages were reported, but he is listed as having earned income from other sources. His wife modelled dresses for about $100 per year. Neither were working when the census was taken: Mary checked “yes” to seeking work, Samuel said “no” on account that he said “yes” to the question: “If not seeking work, did he have a job, business, etc.?”

The third couple are also German refugees: Solomon Frohwirth, aged 28, was born in Poland. His wife Lottie was born in Germany, and had the same age. Both had been living in Germany five years previously. Solomon was a fur dealer. Solomon had only a ninth-grade education, but his wife reported one year of college. Both the Frohwirths and the Hirschauts paid $35 a month in rent.

Next up were the Pustay brothers: Walter and Fred, aged 20 and 17, both from Connecticut by way of Hackensack, New Jersey. They worked as clerks, Walter for an oil company, Fred in “exporting,” for $910 and $256 per year. (In 2011 dollars, that’s a combined income of $18,700.) They supplemented their income by taking in three boarders. And by now the pattern in the building should be obvious: at least two of the boarders were refugees from Hitler. Max Weingarten, age 26, had one year of postgraduate education—it doesn’t say in what, but he worked as a motion picture importer. Max had been born in Poland ... but listed Austria as his place of residence in 1935. It isn’t hard to connect the dots. Ditto for the second housemate: Deron Wachenhum, a 48-year-old German man who had been living in France five years previously. He worked as a magazine reviewer for only $948 per year. (He was listed as having two years of college.) The odd-woman-out was Florence Black, a married 29-year-old Romanian woman who made hats for $1462 per year. She had been living in Manhattan in 1935, and so was not likely a refugee. There was no sign of her husband.

The Pustay brothers did pretty well off the lodging. Their rent was $45 per month, but each boarder paid $35 — a nice annual increment of $720. ($11,500 in 2011 dollars.) Plus ça change and all that.

Finally, we have the Gerschel family. Stanley (age 40) was from New Jersey and his wife Alice (age 31) came from Pennsylvania. Their monthly rent was $38. The couple had probably experienced recent downward-mobility: in 1935, they had lived in  Baldwin, Long Island. Baldwin had experienced explosive suburban growth in the 1920s, going from 5,000 to 12,000 over the decade. (That’s a lot: the town covers less than three square miles.) It seems likely that they had been a suburban couple in 1935, and lost their home in the 1937 recession. (Conversely, many families lost title during the 1929-33 collapse, but weren’t forced to leave for some time thereafter: the Gerschels might have also fallen into that category.) Stanley sold dresses for $2,000 per year. His wife was listed as a dental assistant and did not say that she was unemployed, but reported no income. I’m not sure what to make of that: volunteer work? (She had one year of college, and so some training.) Pride? They lived with their 8-year-old daughter, Patricia, and a lodger.

Nicholas Vasilieff was not a refugee from Hitler. (By this point, I was surprised to realize that.) He had been born in Russia in 1906, but listed San Francisco as his place of residence in 1935. He had been unemployed for 26 weeks as of the census (March 24-30), but listed his occupation as dancer and claimed to have worked for 30 weeks in the past year — the math does not quite add up — for $1200 in wages. The Gerschels charged him no rent, so I suspect that he was a family friend or a distant relative.

It turns out that Vasilieff actually was a dancer. He performed in Laugh, Town, Laugh! in 1942.  (Were dancers exempt from the draft?) He then moved back West to Portland, where he helped found first a dance school, and then in 1954 the Portland Ballet Society. He died in Portland in 1976. His son Nick Vasilieff currently lives in that city, as does his grandaughter Nikole.

When my father moved into 317 West 77th in 1982, it was divided into nine apartments: one on the first floor, and two on the four upper floors. In 1940 it only had five apartments: likely one on each floor. That would explain the boarders: the tiny one-bedrooms into which they been divided by 1982 could not have held five people in anything less than barracks-like conditions, which would not be consistent with charging $35 per month for the privilege, not given what you could rent for that money. (Rent control did not yet exist in New York City.)

The neighboring building to the east, 315 West 77th, had already been subdivided into 16 apartments. In some ways, it was more interesting than 317 West 77th. In fact, in some ways it seems like it could have been transported out of the 21st Century, except for the rents. The average rent was $28.16 — a astonishingly low $451 in today’s money, with none under $400 or over $584. (From here on, all figures will be in 2011 dollars — the 1940 number multiplied by 16.) The reason for the low rents, of course, was twofold: low incomes and few zoning restrictions.

First, it had no children in it. None at all. That shouldn’t be surprising. You wouldn’t be surprised at a Manhattan apartment building with no children in it today, when 18% of New York City’s population is under age 15. Well, in 1940 only 20% of the City’s population was under 15; not that different — and the birth rate today is higher.

Second, three units were occupied by divorced women. The first was Vada (sp?) Littlepage, a 35-year-old professional photographer from Forth Worth, Texas. The second was Ida Howe, a 48-year old nurse from England. The third unit was occupied by a mother-daughter team, both from Mexico, both divorced. The daughter worked as a manicurist for $260 per year — her mother was out of the labor force, but reported having nonlabor income. Mom was named Rebeca Sanders, while the daughter was named Amelia García, the implication being that mom had married an American, split from him, and then brought Amelia up when she split from her husband. Amelia, it should be noted, was 36, and both reported living in New York five years previously.

There were seven single never-married working women in the building. 25-year-old Geraldine Bordeaux, from Quebec (“Canada-French”), lived with her older brother Francino. Both were unemployed “artist models.” Dorothy Donnelly was from “Canada-English,” 26-years-old, and an unemployed saleswoman from a department store. 23-year-old Anne Allen was from New York (although she had been living in the apartment since she turned 18) and worked as a stenographer in a bank for $17,120 in today’s money. 26-year-old Evelyn Griffin from Illinois worked as a receptionist in a department store for $12,480. Nina Echeverría from Uruguay worked as a floorlady in a dress shop for $16,000 and 33-year-old Edna Dolan from Massachusetts — who reported living in Astoria, Queens, five years earlier — made $21,120 working in a key factory. 24-year-old Alice Maher, also from New York, earned $12,480 as a bakers’ assistant … but reported having dropped out of the labor force. I suspect that she had just gotten engaged, since the census-taker had written “M” under marital status before crossing it out and pencilling in “S.”

The four married couples consisted of a native New Yorker married to an Irishwoman (both age 36), two Irish immigrants (aged 41 and 38), a Spanish chef married to a Panamanian stenographer from Los Angeles (aged 37 and 31, and clearly married for less than five years, since they were in different states then), and a 30-year-old unemployed laborer from Massachusetts married to a 29-year woman from New Jersey.

Add in widowed Gertrude Weckler from Germany (a 66-year-old who fit corsets in a department store) and divorced George Pitscharer from Austria (a 50-old bartender) and you have the set of a modern sitcom.

A happier view of 1940 than the one from my building on 115th Street. Moreover, the view from 317 West 77th in 2005 was even more marvellous!

Next up ... well, I am not sure. Maybe the people who lived in the houses that were demolished to make way for 100 Ocean Parkway in Brooklyn?

The 1940 census and the old neighborhood, no. 1

 The United States recently released the 1940 census manuscripts. They are fascinating. I am sad and depressed to realize that right-wing craziness means that our grandchildren in 2080 will not see the like for 2010, where the census was pared down to ten incredibly-boring questions. Hopefully, that will change.

It isn’t that those people (or, God forbid, robots) won’t be able to call up information about their ancestors in 2010. I have no doubt that with a flick of the hand towards some sort of hyper-attuned artificial intelligence agent — or at least a verbal request delivered in natural English — they’ll be able to instantly recall all the information that exists about any one of us. No, it’s that they won’t be able to call up the same sort of information about the people who lived in same place they live in. Because, you see, we don’t record that stuff anymore. And it’s fascinating! Social change made real.

We moved around a lot when I was a kid, albeit always within the counties of New York, Kings, Nassau, and what is today called Miami-Dade. I don’t recall the exact address of the house in North Miami Beach or the one in Bayville or the apt on 93rd; and neither 1780 First Avenue nor 34 Vanderbilt Plaza nor 100 Ocean Parkway existed in 1940. But 414 East 115th Street, 317 West 77th Street, and 416 East 71st Street were there!

East Harlem is today becoming a Mexican neighborhood, filled with young children and struggling parents, with lots of green-white-and-red alongside Old Glory. In 1940, it looked about the same, just without the eagle.

414 East 115th Street then, like now, had five families in it. The first listed is the Squittieri clan. Dominick and Geneviene had been born in Italy in 1888 and 1890 respectively. Dominick ran a grocery store and worked a 60-hour week to earn $1300 per year — $20,800 in 2011 dollars. They rented for $35 a month, or $561 in 2011 dollars. Dominick was listed as having had two years of schooling; his wife had never been to school at all. They lived with their ten children: Carmine, 24; Alphonse, 23; James, 22; Helen, 20; Yolanda, 18; John, 17; Mary, 16; Domenick Jr., 15; Louise, 12; and Gilda, 10.

You can see the lingering effect of the Depression in the statistics. Carmine worked as a painter (a 48-hour work week) for $1190 a year — $19,100 in 2011 dollars. Alphonse was not in the labor force. It isn’t completely clear why: there is a squiggle that is probably an “H,” meaning he was doing “housework.” It could, however, be a “U,” which would indicate “unable,” meaning a disability. He was not a student. His sister, Helen, was also out of the labor force and clearly listed as doing “housework.”

James, Yolanda, and John were unemployed and looking for work. The enumerator put “new worker” as their profession. All three had been unemployed for over a year. Carmine, Alphonse, James, Helen and Yolanda had all dropped out of school in the eighth grade; John had finished one year of high school before dropping out. The four youngest children were all in school.

Of course, it was a different time. I do not know what happened to the Squittieri family, but I bet you they went on to economic success — something that a Mexican-American family with the same statistics today will probably not achieve. But I don’t know: in 2022, it might be possible to try to track them down in the 1950 census.

The Mango family looked a lot like the Squittieris. Anthony had been born in Italy in 1880. His wife Antonette, however, had been born in America in 1887. Still, being born in America hadn’t given her any more opportunities — like Geneviene Squittieri, she was listed as having no education. (Anthony had eight years of schooling.) Anthony worked as a pressman in a junk shop for $926 per year, no vacations, and a 54-hour work week. ($14,800 in today’s money.) They lived with their seven children: John, 27; Louie, 26; Theresa, 22; Josephine, 20; Mary, 18; Emily, 14; and James, 12. None of the adult males made it past the eighth grade; Josephine had one year of high school and Mary had two — Emily and James were in school.

The Mango children did a little better in the labor market. John worked as a “shearer,” which can’t mean what I think it means. (Where the hell would you find sheep in Manhattan?) He cleared $1480 ($23,700 today) working 35 weeks at 40 hours. Louie was a shipping clerk, earning $625 ($10,000 today) on a 40-hour week for a full year. Theresa did something I can’t make out—“Frlnger”?—also for $625 and the same terms. The total household income, therefore, was $58,500 in today’s dollars. Mary was unemployed and looking for work; Josephine was not, helping out around the house instead. They paid only $32 per month in rent, or $513 in today’s money. Still, remember, I lived in those apartments: they were about 600 square feet, plus change, and that rent is actually not that different in real terms from the 1970s and early 1980s. (Our toilet had a cable that you had to full down to flush, something I’m pretty sure had to have been installed before World War Two, so these families enjoyed private bathrooms along with central heat and electricity.)
  
The other families looked a little more modern. Angelina Lombardo was from Italy, eighty years old, and lived alone. Her rent was $7 per month. No wage income was listed, but average monthly social security benefits for widows in 1940 were $20.36, although the program had only just started and I do not know if she would have qualified. Hopefully, she had some savings or support from children.

The Caldarise family were New York-born, 33 and 32 years, old, with three children (Dorothy, Joseph, and Violet) aged 10, 8, and 6. They had started young, but appeared to have taken control of their fertility: Antonette Caldarise had not had any children since she was 27, as opposed to Antonette Mango, who had her last child at age 41 with no more than a four-year gap between them, let alone Geneviene Squittieri. Joseph Caldarise worked (I think) making chromium plates for $1352 ($21,700) per year and a reasonable 40-hour week. (No vacations, though.) They paid $19 ($305) per month in rent.

Finally, there are the Antonuccis. Michael Antonucci, New York born, was 44-years-old and unemployed. He had, however, only been unemployed for six weeks — he had previously worked as a “buyer” for $1040 per year. His wife was quite a bit younger: Millie Antonucci, also New York-born was only 28. Neither had more than an eighth-grade education. They had only one child, baby Virginia, aged nine months. Rent? Twenty dollars.

Now for something important: language. The census did not ask every person about the language spoken at home. Rather, each census manuscript page asked two randomly-selected people “Language spoken in home in earliest childhood.” On the two pages covered by 414 East 115th, all four people asked happened to have been born in America ... and three of them reported “Italian.” The only one to report English was little Violet Caldarise, who had two young New York-born parents.

For those of you who know the statistics, this is not surprising: Mexican-Americans are learning English (and losing Spanish) quite a bit more rapidly than their Italian predecessors. But it is, I think, worth repeating.

Next up: 317 West 77th Street.

A dissenting view on Argentine resource nationalism

 I am often quite left-wing, especially when it comes to resource nationalism. That said, it is probably clear to anyone who reads this that I think the Argentine seizure of YPF is silly. Justice? No sir, you sold it fair and square ... and for a price much higher than YPF’s most ridiculous claim. Revenue? There is that $1.2 billion per year, and you can raise taxes if that is the problem, and anyway the government says the reason for the expropriation was to increase investment. Investment? Argentina has an export policy that makes development unprofitable, even at sky-high prices ... and the reason YPF paid such high dividends was because of the deal with the Eskenazis forced on them by President Kirchner. And then there is the threat of sanctions. (To be fair, the latter threat is a small one, given the European Union’s fetishization of legal authority, something that, say, would concern much less the United States or People’s Republic.)

In short, nationalizing YPF was a dumb idea.

But here is a counterargument from Mark Weisbrot. I like Mr. Weisbrot, but it seems to me that he has recently become a bit knee-jerk in his defense of Latin American heterodoxy. Still, he might be right, and since this blog has implicitly assumed that the nationalization was a silly idea, we should present the opposing view. And here is another.

What say you?

Betting on Assad, again

 Back in August, I made a bet with John Quiggin of Crooked Timber. He thought the troubles in Syria meant that Bashir Assad was going down soon. I disagreed. So we bet on whether the Syrian President would make it through a year. The bet has about four months left to run, but I have to say it’s looking like Assad will cover the spread. If you’ve been paying a bit of attention to matters Syrian, you’ll know that there’s a UN ceasefire in place; if you’ve been paying closer attention, you’ll know that this is mostly gravy for Assad, since it gives him breathing space and provides the possibility of muddying the waters by waiting for the demonstrators (or a conveniently placed provocateur) to shoot first.

I could be wrong! I’d be happy to be wrong. Well, happy-ish, since I don’t think that whatever follows Assad is going to be all that pleasant either. But really, this is a bet I’d be perfectly content to lose.

John Quiggin and I exchanged e-mails recently, and he said that while August may be looking sketchy, he still thinks that Assad’s departure is “virtually certain” and is “confident that he will go sooner or later.” Well, perhaps. But, you know, in the long run we are all dead.

Anyway. We also agreed to add a new bet on top of the existing one. It has precisely the same terms — $50 to the charity of the winner’s choice, bet is annulled if Assad dies or is killed while still in office — except that it will begin on September 1 of this year, and run until COB February 28, 2013. Basically we’re betting on the six months after the first bet expires.

And why am I so confident that Assad will stay in power? Well, pretty much what I said back in December:

Assad is not likely to flee the country; he’ll stand or die. The military and security forces are still completely dominated by his fellow Alawites. The Alawites are about an eighth of the population, and they’re absolutely certain that the fall of the current regime will lead to a genocidal bloodbath against them. Even if it doesn’t, they’re sure to lose their current privileged position. So the Alawites are not giving in, either. The reason the regime has not been able to crush the opposition yet is because there aren’t enough Alawites; they dominate the security services and the officer corps of the military, but the actual army is a bunch of poorly trained young draftees whose reliability is uncertain. So simply crushing the rebellion by brute force — as Assad pere did in Hama back in 1982, when he flattened the city to rubble and killed an estimated 20,000 civilians — is not as easy as it looks. But on the other hand, those conscripts can’t easily lead a rebellion either. It’s a recipe for stalemate: the rebels can’t easily be crushed, but neither will the Army turn against the regime.

So, none of that has changed. Syria’s economy has tanked; that hasn’t actually done Assad much harm. Russia has backed off a bit since the Russian presidential election, but it obviously still considers Assad a client, and will probably continue to support him as long as it can be done on the cheap. Iran is still a firm and reliable ally. NATO is not going to do anything. Israel has no desire to replace the hostile but predictable Assad regime with chaos or a bunch of Islamists. Turkey is unhappy, but has reached the limits of what it’s willing to do, at least for now. Yadda yadda, und so weiter, bla bla bla. As I’ve said, I’ll be happy enough to be wrong.

A question for the readership

 How can the fact that Repsol was on the border of selling its stake to Sinopec be reconciled with the fact that it was contractually obligated to buy back the Eskenazi’s stake at $38 per share?

Oligarcas argentinas

 Now Bloomberg Businessweek reports that Repsol is obligated to buy back the Eskenazi shares in the event that it loses control of YPF. I have not gotten direct confirmation of this, but the lawyers interviewed by Bloomberg do not believe that it will be enforceable in the event of expropriation.

It also seems that the Eskenazis borrowed a lot more for their YPF shares than the initial reports indicated. They owe $560 million on a loan put together by Credit Suisse, Goldman Sachs, BNP Paribas and Itaú – worse yet, according to the Financial Times, the balance is due next month. They also owe $700 million to a syndicate of Itaú, Credit Suisse, Citibank, Standard Bank and BNP Paribas.

It is not clear how Enrique Eskenazi gained control of the Petersen Group. The story, perhaps apocryphal, is that he met the owner in a psychiatrist’s office, which would be a very Argentine way of receiving an opportunity. He told an interviewer that he somehow got from that meeting to become “an adviser, then a director and finally ending up with the company.” In Santa Cruz province, he met Governor Néstor Kirchner, who helped Eskenazi take control of the Banco de Santa Cruz and steered construction contracts his way. “Then came what must have seemed a wily business deal to move into YPF without having to stump up the cash.”

We still do not know why they have fallen out with Cristina, but according to Lucio di Matto, she became angry at Sebastián Eskenazi’s “salary and purchase of a $5m helicopter at a time when YPF was paying hefty dividends instead of ploughing profits back into boosting production.”

It can’t really be that petty, can it?

Play it again, Cristina!

 What will happen? Well, Setty pointed out that we have seen this movie before. In general, I think he is correct ... with a wrinkle. 

1. Nationalization;
2. Giant compensation claims from Repsol ... say, I dunno, $10.5 billion;
3. Long loud wait;
4. Long drawn-out arbitration;
5. Payment from Argentina ... well after Cristina’s term ends in 2016!

There is, however, a wrinkle. That wrinkle is that Argentina is the first country to try to stick it to ICSID. They have just said no. That has, shall we say, annoyed other countries. Consider that the Obama Administration has imposed sanctions on Argentina ... the first time that an American president has used the 1974 authority. The diplomatic reaction from Spain ... and Britain, and the European Union, and Mexico and Chile and (OMG!) Bolivia ... has been ferocious. This is looking much more like 1968 or 1938 than it is like more recent expropriation events.

It might play out quicker than we expect. The big if is the European Union. If it uses its muscle, regardless of legality, then Argentina is going to hurt. If it does not, then the Setty calendar will play itself out.

Either way, it will be a show.

Observatorio argentino 15: CFK throws the Eskenazis under the bus

 In our last installment, there were some questions about how badly the YPF expropriation would hit the Eskenazi family, old allies of the President’s late husband. Federico suggested that there had been a falling out. I responded that it really depended upon the details of the loan contract.

When in doubt, go to the source! The SEC is a marvellous organization (write your Congressman and tell ‘em that it needs more money!) and the 20-F is a marvellous form. From Item 7 in the appendix:

Pursuant to the share purchase agreement entered into by Petersen Energía and Repsol YPF in 2008, Petersen Energía purchased 58,603,606 ADSs, representing 14.9% of our outstanding capital stock, from Repsol YPF for a total purchase price of U.S.$2,235 million, or U.S.$38.13758 per ADS. Petersen Energía’s purchase of our securities was financed by the drawdown of U.S.$1,026 million under a senior secured term loan facility provided by certain financial institutions, borrowing of U.S.$1,015 million under a seller credit agreement entered into with Repsol YPF and equity provided by Petersen Energía’s shareholders. The seller credit agreement matures on February 21, 2018. Principal payments are required to be made at certain periodic intervals commencing in 2013 until the maturity date. The loan under the seller credit agreement bears interest at 8.12% per year until May 15, 2013, and thereafter at 7.0% per year, and contains other customary terms and provisions.

Securities purchased by Petersen Energía are pledged as collateral under the senior secured term loan facility and the seller credit agreement. The seller credit agreement is subordinated to the senior secured term loan facility.

The same applies to the loans made in 2011 to finance further purchases. OK, the Eskenazis are on the hook if they cannot pay. What about the buyback clauses? Page 126:

Lock-Ups and Transfer Restrictions

Petersen Energía has agreed not to sell any shares of our capital stock for a period of five years, subject to certain exceptions, including the condition that Repsol YPF continues to hold at least 35% of our outstanding capital stock. In addition, if our dividend payments are insufficient for Petersen Energía to meet its obligations under the senior secured term loan facility, or if Petersen Energía repays the senior secured term loan facility in full, Petersen Energía may sell shares of our capital stock ...

Repsol YPF has agreed to hold at least 50.01% of our capital stock for a period of at least five years, unless Petersen Energía repays the senior secured term loan facility in full.

In other words, there is no buyback clause: the contract just lets the Eskenazis dump their stock if dividends fall low enough to make the loan no-longer self-financing.

The Eskenazis would have been much better off if the Argentine government had expropriated them along with Repsol. Federico is right! Something is rotten in the state of Argentina, it seems. I wonder what they did to get President Fernández so angry at them?

Observatorio argentino 14: clientelismo político

 It seems that Argentina will be nationalizing only Repsol’s stake in YPF. The Eskenazi family won’t be directly affected. This was not what I expected.

Some facts: the Petersen Group, owned by the Eskenazis, owes Repsol $1.9 billion which it borrowed to purchase its stake in YPF. It owes an additional $680 million to various banks. Early reports stated that the debt contracts had conditional buyback clauses that made me think the Argentine government would want to take them off the Eskanazi’s hands. Now it seems that the loans were collateralized by YPF shares. At $38 per share, the purchase price reported by the Financial Times, that comes to 50 million shares, or 12.7% of YPF.

Under the terms of the Eskenazi deal, YPF is supposed to pay dividends equal to 90% of net income. The government wants to stop those payments, of course: the point of the exercise is to increase reinvestment. In that case, the expectation is that YPF will default ... and according to Reuters, Repsol will get the shares.

I am surprised because it means that the Eskenazi family will still have to deal with the banks while holding shares that will only have an option value. I thought the government would have wanted to bail out the Eskenazis via expropriation. Right now, they stand to lose. They own 24.55% right now, or 96.6 million shares. A default on the Repsol loans will probably knock that down to 46.6 million shares. They spent (at $38 per share) $1,769 million to acquire them. They borrowed $680 million and put up $1,089 billion of their own money. Those shares are currently worth $907 million at $19.50 per share. $907 million − $680 million < $1,089 million = a dilemma for the Fernández administration.

It seems to me, based on the limited information so far, that the government has decided that its easier to let the Eskenazis unwind half their stake via default and make the rest up to them in some other way ... that will be cheaper than paying them for their stake.

The other possibilities are (a) the Eskenazis paid less than $38 per share for their non-Repsol-financed stake, but since the price of YPF never went below $34.49 in 2011, that seems unlikely; or (b) they borrowed more than $680 million to somebody against whom they can easily default. But absent those things, the Fernández administration will either need to make them whole ... or risk alienating a very wealthy family that has been a strong supporter.

Perhaps Cristina has decided to cash in those chips. That seems unwise, but sometimes in politics it makes sense to screw over your old friends. Somebody more plugged into Argentine politics should weigh in here. Anyone?

UPDATE: If ... and this is a big if ... courts find in favor of the Eskenazis, then there is a way that this could sort itself out in their favor. The Repsol loans included a buyback clause, as noted above. If YPF cuts its dividend, then the Eskenazis could, in theory, activate that clause. Repsol, obviously, won’t follow through. If a court then declares the contract null but lets the Eskenazis keep the shares, then the family would hold 96.6 million shares worth $1,883 million dollars. Even after subtracting the value of their bank debts, they would avoid losses on the deal.

That, however, is a big if. It depends on the country whose law governs the contract. If it’s Argentina, then I can imagine the above scenario. If it’s the United States or somewhere in Europe, then President Fernández will still have a dilemma.

Observatorio argentino 13: hechos sobre la expropriación petrolera

 I did not expect my prediction to come true so fast! The Argentine government moved to nationalize 51% of YPF today. You can find the text of the expropriation decree here.

What are the key points? First, the decree creates a National Hydrocarbons Council. The Council will have representatives from the both the national government and the provinces, directly. This is less important than it may sound.

Second, the national government will take 51% of the state share of YPF (51% × 51% = 26% of total equity); the other 49% will be distributed among the provinces that currently produce oil and gas. This is also less important than it may sound.

Third, for the time being the federal goverment will run the show. (See Article 9.) In fact, it will run the show for 50 years. Ah.

Fourth, there will be no reprivatization without a 2/3rd vote of Congress. (Article 10.) Do not bet on the Argentine courts holding that constitutional. Future Argentine governments and congresses will do what they will do.

Fifth, compensation will be decided according to Article 10 of the National Expropriation Act, aka Act Nº 24,199. “Compensation will only consist of the property’s objective value and any damages that are a direct and immediate consequence of expropriation.” The National Appraisal Council makes the decision according to a set of published norms, which you can find here and (in more detail, and in English!) here. Key quote:

“In case of appraisals for expropriation, it will be appropriate to determine the property objective value, understood — according to the Act Nº 21,499 — as the sum of money which permits the party subject to expropriation to get compensation for the value of the affected property and for the damages which are a direct consequence of the expropriation, in equivalent conditions to those which were previous to the expropriation, without taking into account personal circumstances, emotional values, hypothetical profits or the greater value which the works to be carried out may confer. Therefore, the objective value can square with the market value when it may be determined or with the depreciated replacement cost (CRD) instead.”

It is easier to parse if you redact it, but I want to post the full text. The upshot is that the law says market value is the correct value. Market value, to answer Bernard’s second question, is “The net amount which reasonably could receive a seller for the sale of a property on the date of valuation.” Given that the book value of YPF’s fixed investment is $9.8 billion, and its total assets are worth $13.7 billion, it seems unlikely that the Argentine government will try to use replacement costs for a company that had a market value of only $8.6 billion on the eve of the decree. That said, it is conceivable that the Argentine government will argue that the company is worth only $4.6 billion, which is the book value of shareholders’ equity.

Under the Spain-Argentina BIT, the compensation standard is simply “adequate.” If the dispute goes to arbitration, it is very unlikely that the panel will use net worth as a standard, rather than market value as either an NPV calculation or, uh, actual market value.

The thing is, arbitration is sloooooow. Article 10 of the Investment Treaty gives the two governments six months to hash things out if Repsol asks for it. Then Repsol has to go through local courts for 18 more months. At that point an arbitration panel can be convened (either under ICSID or Unictral), but there is a three-more-month cooling off period. In other words, unless Argentina makes Repsol an offer it can accept, decisions won’t even start to be made until July 2014. Right in time for the World Cup!

My money is still on a settlement that give YPF shareholders at least the Friday, April 13, value of the company. (Yes, its value on Friday the Thirteenth.) Argentina has the money, and even if Spain isn’t about to park one of its aircraft carriers off the coast (that’s Britain’s job! Although some Argentines are mocking the “English” for lacking a carrier to send) it does have points of leverage. Plus, Argentina needs foreign investment, and lots of it. It is in everyone’s interest to settle.

My next post will go back to the cases that Argentina is currently fighting in ICSID. In those cases, justice is on Argentina’s side. Here, though, not so much ... not that it matters.

And now Venezuela annoys Russia!

 All right, so this story is neither unpredictable nor surprising. But it seems ironic. Hugo Chávez, you see, has made a deliberate policy of attracting investment from countries like Russia and China in order to displace the evil companies from the Empire. He would be free from the Empire without losing access to foreign capital and technology. The foreign companies, meanwhile, would get good deals from the Bolivarian Republic, and be protected by diplomatic ties.

How’s that working out? Um, not so great. On September 16, 2011, the government nationalized the gold industry. (The link goes to the text of the decree, for those who are interested in the gory details.) The decree was not, it seems, expected. On April 3rd, the Venezuelan government took over Rusoro, a Russian-owned (and Canadian-listed) gold mining company.

Rusoro says that it’s invested a billion dollars in its operations, and holds title to $3 billion in gold reserves. (In 2010, it had a book value of roughly $590 million.) The market does not agree. At the end of 2010 it was worth only $182 million. Moreover, it had to sell 60% of its output to the Banco Central de Venezuela at an exchange rate of 4.30 bolívares per dollar, at a time when the black market rate was around 8.3.

But Venezuela has gone ahead and nationalized it anyway, for reasons that are beyond me. The company currently has a market cap of $34 million and loses money. The Russian connection meant nothing. So now the owners have put a limit: come to an agreement by June 15th, or go to ICSID. I have no idea what they will get; I will bet it has an NPV above $34 million.

My money is on a settlement. I wish I understood why President Chávez wants to bother, though.

La madre patria contra la Argentina

 War in the River Plate! Spain attacks Argentina!

OK, not really. But Spain and Argentina are really going into it over threats that the latter might nationalize Repsol’s oil holdings. In fact, things are so bad that the Spanish foreign minister needed to specify that his country’s position “is not bellicose.” But the minister also said, “Whatever attack on Repsol that violates the prinicipal of legal security will be taken as an attack on Spain.” 

Minister José García-Margallo then added, “[Spain] will take the measures that it considers appropriate and ask for the support it considers necessary from its partners and allies.” The deputy prime minister, Soraya Sáenz, upped the ante. “Spain will defend its interests with all means available.” Now the prime minister himself has threatened a boycott of Argentine soya and beef. The European Union has announced its support for the Spanish government.

The threats may have worked. President Fernández of Argentina had been expected to announce the nationalization on Thursday, but instead limited herself to an anodyne statement that she was “ready to pay all the prices that must be paid” to keep the economy growing. Se then added some words about the triumph of Argentine-made chocolate. YPF shares soared. Repsol shares, not so much.

So what is going on? Putatively, President Fernández wants YPF to invest more. YPF is reluctant, because of Argentine price controls and export restraints. In 2011, YPF’s net income was $1.23 billion, down from $1.46 billion in 2010. So the fight is over $1.2 billion per year. The move has populist appeal.

Can Argentina get away with expropriation? I suspect that most of the talk about trade boycotts is bluster. Perhaps Spanish law allows for unilateral boycotts, but it would create a mess. Spain and Argentina signed a bilateral investment treaty in 1991. It calls for arbitration; sanctions without following the process laid out by the treaty would be illegal unless Argentina categorically states that will not pay compensation ever. Moreover, Spanish consumers do buy 31% of Argentina’s primary product exports to the European Union, but without an E.U. boycott the Spanish government cannot do anything without kissing the single market goodbye. If sanctions are going to be imposed, it won’t be quickly.

Spain’s problem is that ICSID won’t be that directly effective, since Buenos Aires wants the company to increase production aimed at the domestic market. Unless YPF exports its production, enforcement efforts will be even slower than the already slow arbitration process. (The Argentina-Spain BIT slows things even more, since it requires some attempt at local remedies before going to arbitration.) Thus, I suspect, the blizzard of diplomatic threats.

On the other hand, there are some threats that Madrid can credibly make. It can push Argentina to pay its debts to other governments. It can add its voice to the U.S. against Argentina in multilateral lending organizations. It can threaten to support the U.K. in the Falklands. And it can try to eject Argentina from the G20. These are the threats that probably made President Fernández think twice.

Economically, expropriation does not make a whole lot of sense. Argentine needs $250 billion or more to develop the shale fields: tying yourself up in legal knots and wrecking your reputation for $1.2 billion a year is not worth it. Moreover, YPF is currently worth only $8.6 billion. It seems like a big risk to take for the $4.3 billion it would take to get control of the enterprise. In fact, Argentina could get control for even less by sticking to its plan to expropriate the 25.46% of the company owned by the Eskenazi family, which is Argentine. Since the Eskenazis borrowed heavily to finance their stake (at the request of the Argentine government), an expropriation for them would be a bailout ... and cost little of nothing. Of course, Argentina would also assume the Eskenazi’s debts, but half of those are owed to ... Repsol. (Default!) Argentina would still need to get the additional 24.55% needed to gain control of the enterprise, but that would cost only $2.1 billion. The central bank has $47.3 billion in reserves, and there are very few institutional barriers keeping the government away from that money.

It is not as simple as that, of course. The government would need to do some leaning on the Eskenazi family, in order to get them to refrain from exercising their repurchase agreement with Repsol. (Basically, if Repsol looses control of YPF, it has to buy the Eskenazi’s stake at $38 per share ... implying a market cap for the company of $14.9 billion.) The current share price is depressed.

What will happen? Argentina is going to nationalize: it makes political sense. The nationalization will be with enought compensation to keep Spain from going to the mattresses with sanctions. (Or going to war! Not. And not.) It might even be enough to keep Repsol out of court. Considering how Argentine provinces have been yanking concessions, Repsol will likely prefer to settle.

Caveat? President Obama met with President Fernández today. We do not know what was said, although they said that nothing was said. That may have settled things, although I would still bet on expropriation with negotiated compensation. (Yes, I just bought some YPF stock.)

Greece steps closer to Eurozone exit

 I recommend the Sober Look blog. If you want something scary, go here. The short version is that the European Central Bank has completely lost control of the Greek money supply. It can print euros and buy loads of Greek assets, but all the liquidity drains right out of the country. Basically, nobody wants to hold deposits in Greece. On the flip side, nobody outside Greece wants to lend to a Greek company. In the words of a commentor, “The Greece analogy to a state in the U.S. no longer applies.”

A while ago, Doug Muir and I had a debate about Eurozone exit. We agreed that if the banking system collapsed and capital flight went out of control, then the costs of exit would no longer apply ... because the bad effects of exit would have already happened. The implication of a collapse in the Greek money supply is that absent more fiscal help from the rest of the Eurozone, there is no longer any reason for Greece to stay in.

Other than, of course, warm and charitable Greek feelings towards the rest of the Eurozone.

America has been at war for a long long time

 Rachel Maddow has a new book, Drift. I’ve skimmed it; it isn’t bad. In it, her contention is that for a variety of institutional reasons, it has since the 1980s become far too easy for America to go to war. 

The book started a debate between Kevin Drum and Jonathan Bernstein. Bernstein suggested, “U.S.-sponsored interventions of one form or another are hardly unusual, even before Maddow’s apparent jumping off point in the Reagan Administration. Perhaps the idea is that there was a golden age of sorts after Vietnam, but if so it lasted less than a decade. I’m not really sure it’s become easier to deploy troops for controversial missions or to begin interventions in other nations.”

Bernstein was supported by Armando at TalkLeft, who wrote, “That is not historically accurate in my view. The times getting into war was not easy was after wars that had been very costly and not particularly successful from the US point of view. Think World War I and Vietnam. Otherwise, going to war has been one of the great American pasttimes. I’m all for making going to war hard, but the history does not demonstrate that, except for isolated periods, that was ever really the case in the United States.”

Drum conceded the point, but suggested that there was still a difference between then and now: “So what’s different? I’d say this: it’s one thing to periodically wage brief, smallish military actions. The Dominican Republic occupation of 1965 falls into that category. So do Grenada and Panama ... the last couple of decades seem quite different. The Gulf War, followed by Somalia, followed by Haiti, followed by Kosovo, followed by Afghanistan, followed by Iraq, followed by Libya and Yemen, and all against a background of drone warfare that now seems all but perpetual, feels very different. It feels like we’re simply in a constant state of military action. In the last 20 years, there have only been three or four in which the U.S. military wasn’t at war.” Matt Yglesias supported Drum, adding that there might be an economic element: technology has made it cheaper and easier to project conventional military force, and therefore we do it more.

Bernstein is right. Everyone else, including Armando, is wrong. And none of it relevant to the argument in Drift.

In 1898, the United States went to war with Spain. Between 1898 and 1902, American troops battled Philippine insurgents. Peace came to Luzon in 1901-02, but fighting continued on Mindanao until 1912. In 1904, the U.S. navy bombarded rebel positions in the Dominican Republic; eventually U.S. Marines wound up (with the permission of the local government) occupying the customhouses. In 1906-09, we occupied Cuba, although there was (to be fair) not much fighting. In 1907 and 1911, we deployed to Honduras to halt Nicaraguan invasions. Between 1912 and 1925, U.S. Marines actively hunted insurgents (the original Sandinistas) in Nicaragua. In 1914, we once again bombarded Dominican rebels; we also occupied Veracruz to prevent arms from getting to the government. Between 1914 and 1934, we occupied Haiti: unlike Cuba in 1906-09, that one did involve quite a bit of fighting. We did the same on the other side of Hispaniola in 1916-24. In 1916-17, we invaded northern Mexico after Pancho Villa attacked Columbus.

Then there was World War 1. After which ... 

In 1917-19, U.S. troops again garrisoned Cuba. In 1919, we landed in Honduras to protect a neutral zone during a civil war. Between 1918 and 1920, American forces blundered pointlessly around Siberia doing something or other, and sustaining a lot of casualties. For a few days in Guatemala, Marines saw combat during a civil war in that country. In 1925, we invaded both Honduras and Panama during periods of unrest.  In 1933 and 1934, we waved gunboats around Cuba, but no war was necessary, since we succeeded in overthrowing the government by what would today be called covert action.

And then, peace until 1941.

Counting ... between 1898 and 1934, the United States was at peace for all of ... well, never, actually.

It is true that only the Philippine War rivalled the Iraq conflict in terms of intensity. (World War One, obviously, was hugely worse.) U.S. force levels rapidly grew from 12,000 in 1899 to 70,000 in 1900, by which point U.S. combat deaths approached two soldiers every day. By most metrics, the war (fought by a small all-volunteer army) was as intense as the Iraq War — proportional to the U.S. population, the peak force of 70,000 represented a per-capita commitment twice as large as the peak Iraq deployments in 2008. 

Because the Philippine War lasted 28 months, as opposed to the 102 months of the Iraq War, the total proportion of Americans who served in the conflict was about a third of the recent level. The 126,000 soldiers who served in  the Philippines over the entire course of combat operations amounted to 0.2% of the U.S. population, compared to the roughly 0.6% of the U.S. population who served at least one tour of duty in Iraq between March 20, 2003, and the official end of combat operations on August 31, 2010. The combat casualty rate, meanwhile (excluding deaths from disease) ran at 596 per 100,000 troops in 1900, almost exactly matching the 2004-07 rate of 608 in Iraq. (Iraq casualty rates per 100,000 ran at 718 in 2003, 650 in 2004, 588 in 2005, 583 in 2006, and 610 in 2007. They then plunged to 199 in 2008, 135 in 2009, and 121 in 2010.)

But ... that is fine. The Drum argument does not hinge on the big wars of the past decade; rather it hinges on the continual small wars since 1989. In that respect, 1989-2012 looks pretty much the same as 1898-34: lots of small wars punctuated by two big ones. Nor does Armando’s argument hold up. World War 1 had little effect on the American government’s propensity for military intervention. It is true that the U.S. avoided a potential big war during the Mexican Revolution, but that decision was made before we entered WW1; before, in fact, it was clear that we would.

The history is both worse and better for Matt Yglesias’s argument, depending on how you interpret it. In the Dominican Republic, for example, early insurgencies depended upon the seizure of customshouses to gain resources: naval bombardment, therefore, presented a cheap means of intervention. In general, I would venture to say that Yglesias’s hypothesis is correct: cheaper war probably means more war. (Someone should test that!) What the history does not support, however, is the rather specifc hypothesis that military intervention is cheaper today than it was in 1898-1934.

Let me add that this has little bearing on Rachel Maddow’s overall argument. She wants to explain why the post-Vietnam reforms designed to make intervention difficult failed. She does not claim that 1989-2012 (actually, 1983-2012 for her purposes) is unprecedented or novel. Other readers in the blogosphere have extended her argument, however, and I think it is probably worth adding a little historical corrective.

The empire strikes back, weakly, and after long delay

 “With regards to provisions in several FTAs that give foreign investors the right to sue governments directly in foreign tribunals, I will ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest.”

—Senator Barack Obama, on the campaign trail in 2008

The Argentine decision to avoid paying ICSID expropriation judgments is finally coming back to haunt it. A few weeks ago, the Obama administration announced that it would begin to vote against credits for Argentina from multilateral lending organizations. A few days ago, the administration announced that Argentina will no longer be eligible for duty-free access to the U.S. market under the Generalized System of Preferences (GSP).

Argentina exported $477 million to the U.S. under the GSP in 2011, mostly cheeses, candy, leather, strawberries, wine, and lithium. Removing GSP will cost Argentina $17 million per year, assuming, of course, that it continues to export the same amount.

The Presidential authority comes from the Trade Act of 1974, so named at a time when Congress did not give legislation stupidly cutesy names but called laws what they were. Subchapter V mandates that a country which “has nationalized, expropriated, or otherwise seized ownership or control of [American-owned] property” and “fails to act in good faith in recognizing as binding or in enforcing arbitral awards in favor of United States citizens or a corporation” will not qualify for the GSP unless ...

1. “Prompt, adequate, and effective compensation has been or is being made to the citizen, corporation, partnership, or association”;
2. “Good faith negotiations to provide prompt, adequate, and effective compensation under the applicable provisions of international law are in progress”;
3. “A dispute involving such citizen, corporation, partnership, or association over compensation for such a seizure has been submitted to arbitration under the provisions of the Convention for the Settlement of Investment Disputes, or in another mutually agreed upon forum.”

No country has ever been punished for expropriation under the Trade Act. That may be because no country before now has ignored ICSID rulings. In 2005, CMS Gas received $133.2 million. In 2006, Azurix received $165.2 million. (The awards will accrue interest as long as they are unpaid.) In September 2007, Argentina lost its petition to annul the award against CMS. In May 2008, CMS sold its claim to Bank of America. (More accurately, it sold the claim to a subsidiary of BofA called Blue Ridge Investments.) By then, the $133 million award had grown to $180 million, counting interest. (That is a lot of interest!)

We don’t know how much Blue Ridge paid , but the State Department estimated that it paid around $54 million for the claim and CMS’s 23% stake in the TGN pipeline company. Blue Ridge’s original plan was to flip the claim as quickly as possible. (The Wikileaks cable is fascinating in that regard: Blue Ridge wanted to threaten Argentina with the possibility of selling its claim to a vulture fund that would take them to court in the United States; Argentina apparently planned to use its control over pipeline rates to force Blue Ridge to sell its claim to a government crony.)

About 16 months later, the Azurix case reached the end of the line when an ICSID appeals panel refused to annul the judgment against Argentina. Soon after, in September 2009, Azurix filed a petition to suspend Argentina’s GSP preferences. Blue Ridge signed on. The petition then ground its way through the USTR bureaucracy ... and finally, now,  Argentina is facing sanctions.

There are two points to make about Argentina’s recalcitrance. First, the country has done remarkably well at ICSID. Several decisions have been annuled by ICSID review panels. In at least one case, against a British company, the D.C. Circuit Court ruled that since the contract specified that the company had to first exhaust all local remedies, their decision to go direct to arbitration vacated a $185 million award. Second, in terms of justice, pretty much all the companies going up against Argentina are in the wrong. But that’s a subject for a different post ... as is the question of whether President Obama is living up to the position stated in the epigraph of this post. (He is.)

Do the companies have options other than getting the U.S. government to go to bat for them? If they were natural resource exporters, then the legal remedies would be fairly powerful: ultimately, Argentina would lose the ability to sell production from the expropriated assets. These are service companies, however. It isn’t clear that the courts will rule their way, and it isn’t clear that Argentine has many assets that the courts can seize. (Short version: since the Argentine central bank was not using its New York funds for commercial purposes, creditors could not go after them. I am not a lawyer and cannot say if that would apply in an expropriation case, but I suspect that it would.) Getting the U.S. government involved in muscling Argentina may be their best way forward.

But it is a sign that the arbitration system may crack when used for cases other than natural resource companies. Back to the 1970s!

A map of violence

 This interactive map of the violence in Mexico is amazing and incredibly useful. You can even download the data! Thank you, Mr. Del Valle.

Now if only I can find the equivalent data for the decades before 1990. That would be something. I still find myself astounded that nobody in Mexico seems to have bothered to compile mortality data at the county level before then.

Here is a short and useful summary of what we know about the MOCOs, although its recommendations are so vague as to be nearly useless. The most important piece of information is that serious attempts to estimate the export revenues earned by the cartels in 2011 ranges between $4.7 and $8.1 billion. The U.S. government, on the other hand, makes estimates between $13.8 and $29 billion. The U.S. government appears to be wrong.

The left-wing success of a McCain administration?

 It is hard to see how John McCain could have won the 2008 election. Unlike 2000 or 2004, it was not a close-run event. But still, what if he had? (And with, say, Vice-president Pawlenty, not Palin.)

If the Supreme Court upholds Obamacare, then it is a no-brainer. Similarly, if you believe that President McCain would have let the auto industry go hang, then it is a no-brainer. But if the Supreme Court throws out the first and you do not believe (as I do not) that McCain would have done the second, then it is worth asking. Would a McCain administration have been better or worse?

The is one giant gain from a McCain administration: we would probably have a carbon ceiling and a carbon price. Assuming that the ACA does not survive, and that Detroit would have, what Obama administration accomplishments would have fallen by the wayside under a President McCain?

1. Passed the stimulus ... but McCain would have passed one as well. It would be more weighted towards tax cuts, but similar in size;
2. Passed Wall Street reform ... but some sort of bill was inevitable, what with a Democratic congress, and McCain was not a particular friend of Wall Street;
3. Killed Osama bin Laden ... but honestly, if the opportunity arose, a McCain administration would have handled that as well as President Obama. McCain was not George Bush;
4. Ended the war in Iraq ... thing is, I am not convinced that the Iraqis would not have kicked us out in 2011 anyway, given the political realities in Baghdad;
5. Abolished “Don't Ask, Don't Tell”;
6. Stopped torture ... oh, come on! Of course McCain would have done that;
7. Kicked the banks out of the federal student loans;
8. Boosted fuel efficiency standards ... but with a climate bill it would not matter that much. Plus, I think this is the kind of policy where the old pre-2004 McCain might have resurfaced, a safe way to be mavericky;
9. Passed mini stimuli in 2010 and 2011 ... they would have been bigger under McCain. The Democratic Party is structurally less-disciplined than the GOP, and I know that McCain’s advisors are foxhole Keynesians. Put his election at risk, and we get them;
10. Halted the construction of new coal plants ... but again, not necessary with a climate bill;
11. Signed the New START treaty.

Monetary policy would have been about the same. And both Souter and Stevens would still be on the Supreme Court. No difference there, at least as of early 2012.

So what have we got? No equal rights for gay Americans to serve their country; the vampire squid continuing to suck blood from federal student loans; and no START treaty. Plus some greater risk of a catastrophic economic mistake.

On the other side, a market for carbon! And, ironically enough, possibly more stimulus. But a market for carbon! A weak market, with big caps, and no permit auctions ... but a market.

The difference seems not huge once you take the ACA and auto bailout off the table. (I am assuming that Libya would have gone similarly and that when confronted with the military and diplomatic reality, President McCain would have stayed out of Syria.)

I must be missing something. Can somebody help me out and tell me what?

The market for stolen oil

 “In a reversal of the classic Western movie, Mexican criminals have sought refuge with their ill-gotten gains by crossing the Rio Grande to the North, where the Mexican government has no authority to follow.”

—Pemex, in a suit before the U.S. District Court for the Southern District of Texas

So, stolen oil from Pemex makes its way to the United States. How, you ask? It’s a reasonable question. Oil has a high value-to-weight ratio, but cocaine it isn’t. You can’t smuggle economically-viable quantities in jerrycans. Plus, if you’re moving crude oil or natural gas condensate, you can’t then flog it on a streetcorner. You need to sell it to a refinery.

The answer: give the refineries plausible deniability. Fake paperwork to get it over the border, then sell it to a reputable middleman. How did this work?

On May 29, 2011, we got the answer, when Pemex filed a federal lawsuit in the southern district of Texas against a group of American refineries for knowingly buying stolen natural gas condensate.

Here’s the value chain. The condensate is produced in Mexico’s Burgos gas field, located near the U.S. border across the northern stretch of Tamaulipas, Nuevo León, and a little bit of Coahuila. Pemex produces gas from 2,827 wells in the field. It then pumps the gas to 150 collection stations. Pipelines then transport the gas and condensate (the liquid byproduct from gas production, which can be used in oil refineries) from these 150 collection stations to 52 transfer and delivery systems, which are basically small pipeline networks. After collection at the transfer systems, Pemex transports the condensate by pipeline or tanker truck to a storage facility near Reynosa, Tamaulipas. From there, the condensate goes by pipeline to the Burgos gas processing center or tanker truck to a refinery in Cadereyta, Nuevo León.

The Zetas intercept the oil in one of three ways. The major one is to simply tap into the transfer and delivery systems. (To do this, the Zetas needed to build their own pipelines, a pretty impressive accomplishment.) The secondary one is to hold-up the tanker trucks on their way to Reynosa. The final one is to kidnap Pemex officials and force them to divert condensate.

Now, the Zetas can easily fence refined products inside Mexico, but they can’t sell condensate: Pemex operates the only refineries! So they have to move it to the U.S. According to the lawsuit, the stolen condensate was moved by tanker truck (think about that for a moment) to the border. Before crossing, however, the Zetas transferred the stuff to newer trucks that meet U.S. regulations. The drivers then presented forged export documents, sometimes mischaracterizing the condensate as naphtha. They would then sell the stuff to the U.S. defendants.

Big Star and F&M Transportation bought the oil from Ygriega Energy Corporation of Edinburg, Texas, whose owner, Arnaldo Maldonado, has already pled guilty to felony conspiracy to receive and sell stolen goods. F&M transported the condensate, in addition to buying it. Superior Crude also transported stolen condensate, and brokered sales of the stuff. (Pemex fingered Superior because a man named Donald Schroeder coordinated the shipments ... who has also pleaded guilty to felony conspiracy to receive and sell stolen property, specifically Mexican condensate, in his role as president of a company called Trammo Petroleum.) Finally, TransMontaigne operated the storage facilities in Brownsville which the stolen condensate passed through on its way to the final buyers. Finally, Western Refining bought condensate from companies like Continental Fuels, whose president confessed to trafficking in stolen goods.

In other words, according to Pemex, Big Star, Superior Crude and F&M “actively and knowingly participated in a conspiracy to import and market the stolen condensate in the United States.” TransMontaigne, meanwhile, stands accused of negligent participation, since Pemex claims that they should have realized that the goods passing through their hands were illegitimate. Western Refining is accused of no wrongdoing, but Pemex says that it is liable for all its transactions involving Mexican condensate. Recently the company has moved to add subsidiaries of ConocoPhillips and Shell to the lawsuit.

Now here’s the good news: on the U.S. side of the border, several people are going to jail and the rest of the companies involved in buying the stuff are facing a serious civil suit. In short, it is likely that the United States legal system will soon enough shut down the export of stolen Mexican crude and condensate.

But there’s also bad news: there is money to made in stealing refined products and selling them inside Mexico. Lots of money. In fact, as Patrick Corcoran has pointed out, the fact that pipeline-siphoning is shifting to Sinaloa (where the lines carry refined products) is a sign that other groups besides the Zetas are getting into the act. (In this case, likely El Chapo’s people.) The U.S. government can and will help. But it can’t change the fact that Mexico is now a lucrative market for its own petroleum production. Keeping organized crime from taking more of that market is something that Mexico will have to solve on its own.

David Shields got the solution to the problem of internal oil theft right when he wrote:

“It’s very easy to solve this. Total control over the tanker trucks. Total control over every liter of gasoline from the refinery to the gasoline station. That’s the way it was 15 years ago. You move the army in and take control over all the distributors by making sure they have a contract for every single movement of gasoline around the country.”

Where I would disagree with Mr. Shields is that the solution he proposes is far from easy.

Organized crime and oil in Mexico, some numbers

 Organized crime in Mexico is spreading beyond drugs. The cartels have a comparative advantage in transporting and smuggling high-value illicit product. So why not oil? Organized crime can threaten employees, knock over trucks, defend pipeline siphons, and move stolen goods across borders. Pemex is a hard organization to shake down, but a much easier one to steal from.

It turns out to be hard to get an idea of the scale of oil theft. According to Patrick Corcoran, Pemex lost about 3 million barrels of hydrocarbons last year, up 52 percent on 2011. This caused losses of roughly $500 million to the company. That number is large. It is not large relative to Pemex revenues north of $100 billion, but it is large relative to the estimated revenues earned by Mexican Organized Crime Organizations (yes, MOCOs), which is in the $7 billion per year range according to the Rand Corporation.

It is also quite possibly an underestimate. The Excelsior article that broke the story is vague on whether the figures are through Novemeber or from November. If the latter, then total losses could range as high as $3½ billion. Those numbers are possible. Last year the Wall Street Journal, citing Pemex’s CEO, estimated that criminal gangs stood to earn $750 million from oil thefts in 2011. Reuters reported $600 million in losses for the first half of 2011. David Shields estimated (although I am not sure on what basis) losses between $2 billion and $4 billion.

So what do we know? Page 172 of Pemex’s 2009 SEC filing estimated losses of 5.0 million barrels in 2008 and 3.1 million barrels in 2009. The breakdown between refined products and crude was not given. In its 2010 form 20-F, (on page 173 of a report filed in 2011) Pemex gave a little more detail. It estimated losses of 0.9 million barrels of diesel and gasoline in 2009, 1.4 million in 2010, and 1.4 million between January and May of 2011. It also reported losses of crude and condensates of 1.4 million barrels in 2009, 2.3 million barrels in 2010, and 2.0 million barrels between January and May of 2011. (For comparison, the amounts lost in Jan-May 2010 came to 0.3 million and 0.6 million respectively, so the increases are larger than they might seem.)

Using numbers on pages 4 and 5 of Pemex’s 2011 statistical yearbook, it is possible to calculate the gap between Mexico’s domestic supply (production + imports − exports) of refined products and its domestic sales of refined products. (Before 2006 the definitions were different, effectively overstating exports: for that reason, sales were consistently larger than supply.) The excess of supply over sales rose from 4.4 million barrels in 2007 to 9.5 in 2008, 10.6 in 2009, and 31.8 million in 2010. I would assume that most of that is stockpiling, non-theft losses, or refined products used as inputs in petrochemical production, but the trend is ominous.

Again, however, it should be emphasized that the reported losses are not large relative to Pemex production. In 2010, the  company produced 516 million barrels of refined products and 1.1 billion barrels of crude and condensate. That would make theft equal to about 0.3% of domestic production of refined products and 0.2% of crude and condensates. The scary thing is the trend, not the level.

What can be done? As Patrick Corcoran points out, a lot of the stolen oil is destined for the United States. And that raises a possibility for the next post, which involves some of the most entertaining legal documents that I have ever had the pleasure to read.

A linguistic history question about presidential politics

 I keep hearing Republicans referring to “this President” instead of “the President.” I don’t recall hearing that phrase in previous election cycles. Is there anyone out there with access to that fancy phrase-tracking software who can see if my memory is correct? Did Democrats refer to George Bush as “this President” in 2004?

To be honest, I don’t think they did. There does seem to be something extraordinary about the lack of respect shown President Obama. Not in the particulars, of course: I remember obnoxious people saying,  “He’s not my President!” in regards to President Bush. And, of course, there was the insane opposition that President Clinton attracted. But in the aggregate, I do not recall the same level of general disrespect in previous election cycles. I certainly do not recall it coming from the opposition candidates.

But perhaps my memory is faulty. Does anyone have any concrete information?

Monterrey is not an American city

 Alejandro Hope suggests that low population density may be a cause of police troubles in northern Mexico. Hope uses Monterrey as an example. I am here to say that said hypothesis is almost certainly incorrect, simply because Monterrey, Nuevo León, is rather densely populated. Monterrey is underpoliced, but the problem is not the city’s land area.

It is fairly common for both Mexicans and Americans to comment about the Americanness of the city of Monterrey. And in some ways, they’re correct. Until sometime in the 1990s Monterrey was more culturally American than the country’s other major cities. (The rest of the country liberalized, dramatically; Monterrey did not become more conservative.) It was also much more prosperous, and its infrastructure was rather better developed. It also had less violent crime, certainly less than Mexico City. Other than the crime and the culture — Monterrey is today much more violent and much more old-fashioned than Mexico City — these differences still hold, albeit rather less markedly.

That said, Monterrey is not in Texas. The the city sprawls much less than any American equivalent. This might not be immediately obvious to the casual visitor. Public transportation at the airport can be called inconvenient at best, and the suburbs of Apodaca sprawl, with big box stores and parking lots. Nonetheless, it is true. The houses are much smaller. The informal settlements are densely-packed. The freeway network is extremely sparse, and prone to congestion. Car ownership has risen dramatically, but is still low by American standards.  

In short, metropolitan Monterrey has a fairly high population density: 4,334 people per square kilometer, spread out over only 894 square kilometers. The 6,680 square-kilometer number used by Hope is based on county boundaries, not the actual built-up area. The same applies to Mexico City and Guadalajara, both of which are much more densely populated than county boundaries would suggest.

Of course, the same also applies to most American metro areas: by county boundary, Los Angeles stretches all the way to the Nevada border and is mostly empty desert. There is a lot of empty space out there.

When you rework Hope’s numbers, you get the following:

	Population	Area	Density	Police	Police per 1,000	Police per km
Monterrey	3,875,000	894	4,334	8,717	2.2	9.8
Mexico	19,460,000	2,020	9,634	141,261	7.3	69.9
Guadalajara	4,400,000	699	6,295	11,574	2.6	16.6
New York	8,175,133	783	10,441	36,000	4.4	46.0
Chicago	2,853,114	606	4,707	12,244	4.3	20.2
Boston	617,594	232	2,660	2,056	3.3	8.9
Los Angeles	3,792,621	1,302	2,913	9,925	2.6	7.6
San Antonio	1,327,407	1,067	1,244	2,000	1.5	1.9

(Note: the above chart does the same apples-to-oranges as Hope, by comparing Mexican built-up areas with American central cities. Since San Antonio and to-a-lesser-extent Los Angeles have large swathes of empty space within their municipal boundaries, the comparison makes them look less dense than they actually are.)

Monterrey still looks underpoliced compared to New York and Chicago, but not compared to most American cities. It has a per capita coverage somewhere between L.A. and San Antonio, and a geographic coverage in the same range as Boston. If one makes the assumption that what Monterrey needs is as many police per area as New York City, you would need to hire an additional 32,386 officers. That is a big number, but it is quite doable, and much less than the 307,280 implied by the county boundaries.

This all assumes, of course, that one thinks that more police officers is part of the solution to Mexico’s crime problem. I am not convinced, although I doubt that it would hurt ... but that it a much longer discussion.