The Power and the Money

On the cost of financial crises

  In theory, it is very possible to be sanguine about the cost of financial collapses, whether triggered by irresponsible private risk-taking or irresponsible public borrowing.  A smart reader points out why:  “Fiscal problems are basically problems of social organization … putting the last point another way, bankruptcy does not destroy actual physical assets, land or human capital. It does damage trust, as the part of the social fabric embodied in the debts so vacated is shredded. But it leaves the existing productive assets intact, and trust can return quite quickly.”

This is a sensible theoretical prediction.  The problem is that there is evidence from the IMF that strongly suggest that the prediction is incorrect.  Recessions associated with financial collapses appear to permanently lower the trend rate of growth; the lost output is not regained even ten years later.  Samuel Brittan has more.

Since nothing is blown up in a recession, the suggestion is that the psychological effects can be long-lasting.  Economies don't invest more once the recession is over to make up for lost time. 

Of course, there are counterexamples:  Mexico in 1994, and Argentina returned to rapid growth after 2002.  In addition, the economy could probably do fine with a long-term inflation rate around 4 percent, which could do a lot to reduce past debt burdens as long as future borrowing stayed under control.  So perhaps the United States need not worry about our long-term fiscal problems.

Never predict, especially about the future.

¿Sufragio efectivo?

  Democracy and central banks.  Can they be reconciled?  I argued yes, but it is possible that the Banco de México has a different opinion.

It seems as though somebody at the central bank somehow screwed up quite possibly the most famous saying in Mexican history.  “Sufragio efectivo, no reelección” somehow became “Sufragio electivo y no reelección.”

I am very curious as to what non-elective suffrage would in fact be.

Of course, Porfirio Díaz, who used the slogan in his 1876 campaign, went on to be “re-elected” in 1884, 1888, 1892, 1896, 1900, 1904, and 1910.  Apparently he misplaced the comma the first time around.

Anyway, central banks aren't the only perplexing institution puzzling modern democracies:  the same can be said for investor-state arbitration.  NAFTA has an entire chapter devoted to investor protection, with ultimate enforcement relying on trade sanctions.   Pretty tough stuff!  “Sufragio electivo y no expropriación,” you might say.

Problem is, of course, in defining expropriation.  Mexican tax law currently allows different companies with the same owner to consolidate results.  In other words, losses at one subsidiary can be used to offset profits at a second.  Congress plans to change that, as part of a broader tax hike.  (Yes, Mexico needs to raise taxes.  No, it doesn't need to do so in the middle of a recession.  Don't get me started about Hooverism south of the border.) 

The catch?  Well, the tax hike might be called expropriation under NAFTA.  Now, generally for a case to be made under NAFTA or ICSID rules, creeping expropriation requires both evidence of discrimination and more than one action.  So I doubt that there would be much of a case here. 

Yet ... arbitration law is bizarre.  I must say that the judicialization of investor-state disputes has been a great thing for world peace.  Consider the risks that the Brazilian government has taken in defending its investors abroad!  But it remains confusing and (unlike independent central banks) not-entirely-legitimate in the eyes of the relevant electorates.  At some point, the world will need to find a better way, or the system will collapse under its own weight.

In this case, however, I don't think that a straw will be added to weight bringing down the world's current imperially non-imperial means of dealing with investor-state disputes.  But we shall see.  Any lawyers in the house?

Brazil annexes Venezuela

 OK, not quite.  But our friend Chávez just did something that will put meat on the bones of his somewhat jokey promise not to expropriate Brazilian investments in his country.  What did he do?  He agreed to plonk around $4 billion into a refinery located in the Brazilian state of Pernambuco. 

Refineries are notoriously hard to liquidate.  The market is thin; prices for similar installations in the United States have jumped around by a factor of ten.  This is part of the reason why the big international oil companies continue to operate them, despite low margins and big liabilities.  It's also why PDVSA has been unable to unload Citgo for a reasonable price, despite the fact that President Chávez would clearly like to do so.  Add in the fact that PDVSA will be a minority shareholder with Petrobras, and there's no way it's going to get out of this investment easily.

Which means that the Bolivarian Republic just gave the Brazilians a big fat $4 billion hostage.  More so since (1) the only other reasonable outlet for Venezuelan crude is in the United States; (2) civil law, unlike common law, allows Brazilian companies to sign contracts that spell out a predesignated list of damages to be paid should the government take certain actions; and (3) Brazil is basically independent of foreign oil, and therefore well-positioned to exercise a threat to embargo Venezuela.  Viva the not-empire!

It is quite brilliant.  I stand in awe.  How did he sucker Hugo in that one?  Is the prize of Mercosur really enough?  Then again, our Bolivarian friend seems to have just signed a contract paying a Spanish company a ridiculous amount of money to build a CCGT plant, so who knows?

We have seen the future, and it is California

  I can’t really claim to having said it first, but it looks as though Richard Yeselson, Ezra Klein, and Kevin Drum all agree with me.  Political polarization plus a stupidly-designed legislature have broken the American government.  We have seen the future, and it is California.

I mean, when someone as patently irrational as Joe Lieberman controls a veto point, we have a problem.  Maybe not a failure mode, but a clear problem. 

As they say, “Destruction leads to a very rough road, but it also breeds creation.”  Problem is, it isn’t clear that we're headed towards destruction, per se, just a slow decline as the health system collapses, the fiscal pressures ratchet up, and the climate goes kablooie on us.  Eventually, we hit the end state, or whatever 2030’s version looks like.

Counterarguments?

Honduran crisis over?

 It seems as though we may have an agreement to allow Zelaya back into office until the election.  Emphasis on “may.”  Congress and the Supreme Court need to approve it, and we still don’t know what limits it will place on Zelaya’s executive authority.  That said, the crisis may be over.

Once the Brazilians signed on to the Secretary General’s declaration that the clock won’t run out with the November 29th presidential election, some sort of resolution became imperative.  Yesterday the U.S. declared that it backed the Brazilian position, and a resolution become inevitable. 

One of the most striking things about the entire imbroglio has been the utter political incompetence of Roberto Micheletti.  Maybe he wasn’t responsible for the idiot decision to put Zelaya on an airplane out of the country instead of placing him under house arrest, but every dumb move after that lands on his desk.  He tried to justify the ouster with a fake letter of resignation from Zelaya.  He imposed and removed and imposed and removed restrictions of civil liberties that he had to know would neither stick nor intimidate the opposition.  He went head-to-head with Brazil for God’s sake, with an empty threat to storm their embassy. 

Honduran politics ain’t beanbag.  How did such a political incompetent ever get anywhere?  I mean, one usually expects politicians to be good at politics, right?

Not that the OAS (or even Brazil) showed itself to be particularly slick.  We’ll know more details later.  Still, I understand why the Brazilian government chose not to be slick.  The OAS, well, I have less sympathy for Insulza. 

Anyway, it does look as though the United States may have brought this mess to an end.  Of course, some idiots seem to think that we should have angrily backed Micheletti, regardless of the whole plane-packing  and opposition-from-rest-of-hemisphere issues.  Thank God that didn’t happen. 

Social progress in Mexico

  Once upon a time, like 15 years ago, other Latin Americans talked about Mexico as though it was a world apart, old-fashioned, stuck in the stone age.  That is no longer true.  Why is unclear. 

Gancho tells us something important about Mexico's current attitudes towards social change.  It is true, it is surprising, and it is something that we do not understand.  Yet I get the feeling that we have seen this pattern before.  Only maybe we haven't.  A fundamentally conservative society deciding that they don't give a damn what people do under the law, while still remaining fundamentally conservative?  Randy?  Curious minds suggest you should hop a plane to Torreón.  Your perspective may tell us more about Mexico and the future than, say, Gancho's or mine.

Russia explained!

  So, there seems to be some evidence of disagreements between the President and the Prime Minister of the Russian Federation.  It shows up in trade policy, with Prime Minister Putin wanting to first cement the customs union with Belarus and Kazakhstan, and President Medvedev wanting to get the R.F. into the WTO ASAP.  It is hard to tell who's winning.  Other subtler signs of division have also emerged.  Who is in control? 

Well, Gancho tells us the answer.  It is all in this photograph. 

Hey Vladimir, what say we cut rugs at the discotheque tonight? Eh? A little dancing and some girls for the former president?

Shut up, pawn, or I bury you with fish in this water. Go away, you block my sun.

I say the Prime Minister is still in charge.  What say you?

Failure modes of the United States, part 1d

  I am superwhelmed at the moment, and so the backlog of posts (oil sands, other failure modes) piles up.  But I wanted to point out to readers that Brad Delong has cogently summed up the challenges facing the United States about which we've done nothing over the past two decades.  To paraphrase:

1. Medicare is gonna eat us alive, and we’ve known that for 20 years;
2. Private medical costs are gonna eat us alive, and avoidably kill a lot of people along the way, and we’ve known that for 20 years;
3. Congestion, global warming, and the need to play imperial policeman in the Arabian Gulf are gonna eat us alive, so we should start taxing coal and oil, and we’ve known that for 20 years;
4. As our relative power declines, other countries will eventually eat us alive, unless we do something to build an imperial exit strategy that leaves us secure, and we’ve known that for 20 years;
5. The deregulated financial system almost just ate us alive (and would’ve in fact eaten us alive without a willingness to throw money at the economy), and so needs to be re-regulated in a sensible way, and we’ve known that for about 20 months.

So here’s the question.  How much of the inaction is because the problems are hard to solve, and how much of the inaction is because the U.S. has a veto-filled political system?  Put another way, if the United States circa 1989 had somehow found itself with Canada’s constitution but the same distribution of political ideologies and interests that it actually has, would we have gotten more of a handle on these problems, or would we be punting just as much?

Explained!

  That Nobel Peace Prize for the President was a little perplexing.  My father, however, just emailed me the explanation.  It all makes sense now.

I am opposed to an air raid on Iran, but ...

  ... Matt Yglesias writes, catchingly, that “Give Up Your Nuclear Weapons Program Or Else We’ll Damage Your Nuclear Weapons Program!” sounds pretty ridiculous.  Which it does.  But he then goes on to argue:

Suppose I wanted Herf to give me $10. I figured maybe I could offer him various incentives in exchange for the $10. But it turns out that Herf is irrational or whatever and hell-bent on holding on to his $10. Reaching into his pocket and stealing $7 might have some merit as a response. But threatening to steal $7 in hopes of persuading him to give me $10 would be ridiculous.

The problem is that Herf doesn't have $10.  What Herf has is an uncertain plan to make $10 in the future.  Depending on how far in the future and the risk of failure, threatening to take $7 from him right now could be a powerful deterrent indeed. 

Me, I think that this particular Herf is unlikely to be deterred by taking away his $7.  Besides which, we don't know whether we'll get $7 from him, or just fifty cents.  So I'm not in favor of this particular pre-emptive pickpocketing.  But sadly for us doves, the general principle seems sound.

Back to Angola

  The Portuguese empire collapsed in Africa under the worst possible conditions.  After 15 years of bloody conflict, a military coup in Lisbon replaced the existing government with one that wanted to get the hell out of Africa yesterday.  The result was a chaotic flight of a half-million Portuguese settlers back to the metropole.  Over the subsequent decades, Portugal attracted some immigration from its former colonies, but other the Cape Verde (a country that almost certainly would have preferred to remain united with the metropole) it was never great.  As of 2007, only 33,000 Angolans lived in Portugal.  The reasons were simple.  First, it cost a whole lot of money to get to Portugal from Angola, and most Angolans were poor and getting poorer.  Second, Portugal shut the door to the citizens of its former colonies.  Third, Portugal itself wasn’t exactly a glowing destination for immigrants. 

But now it looks like the Portuguese are headed to Angola.  And not in small numbers, either.  Something like 17,000 people moved to Angola in 2006, followed by 24,000 in both 2007 and 2008.  So far this year they’re moving at an annual rate of 31,000.  Of course, 31,000 people is only 0.3% of Portugal’s population and 0.2½% of Angola’s, but still.   

The question is whether they’ll stay.  I tend to doubt it.  First, while Angola’s economy is exploding, it is pretty much all due to oil.  Most of the growth pulling in Portuguese expats (and Portuguese capital) is construction-driven and paid for out of government revenues.  To be frank, I would bet that the boom will last for a while, but the challenge for Angola is making the growth permanent.  Not that Gabon is a terrible outcome, but turning into Gabon is something that happens once, after which the foreigners who came in to help build stuff turn around and go home. 

Second, some of the movement is driven by a crappy economy in Portugal.  That could also turn around.

Finally, it isn’t all clear that Angola will be that welcoming.  Expats from the developed world go to all sorts of places.  Relatively few of them settle down and raise families outside their home, and even then mostly in other developed countries.  (Right, Doug?)  The French in Gabon, for example, are clearly an expat community and not part of the local fabric.  In Côte d’Ivoire they’ve mostly gone home.

So while this is a neat story, I’ll bet that it won't have much lasting effect on Angola.  I would like to be wrong.  Thoughts?

21st century something

  Now this is pretty cool.  It starts off as just a bunch of hardware rolling by.  Tanks, trucks, missile launchers ... although the blue digital camoflague on the missile launchers is a little odd.  What will they be defending, exactly?  Mongo?   Anyway, whatever.

And then comes minute 1:20. 

After which nothing is the same.  Watch it yourself.  But you want to put on your own soundtrack.  Rhythm-wise, “Tha Shiznit” is spot-on. 

China's 60th Anniversary national day - timelapse and slow motion - 7D and 5DmkII from Dan Chung on Vimeo.

I am speechless.  And highly entertained.  And sort of embarrassed for some of the participants.  What the hell was that with the hardhats and mirrors at minute 2:51? 

You can tell I had some trouble with the category tags here. 

Yglesias oversimplifies on the euro

  Matt Yglesias writes, “If anything euro membership seems harmful in the present circumstances. A fully independent small open economy like Ireland would have seen a swift and massive devaluation of its currency which would have reduced the need for a rise in unemployment.”

 
Unpack that statement.  What would have happened to a country like Ireland last year on a floating exchange rate?  A massive plunge in the currency.  What would that do?

1. Wreck the balance sheet of anyone who had borrowed in a foreign currency.
2. Caused large-scale bank failures.  (See #1 above.)
3. Fed inflationary fires.  Not always a bad thing, of course, but disruptive, and worse the smaller the economy.
4. Reduced real wages.  (See #3 above.)

Those things are not good.  What would be good?  More competitive exports.  Problem is, the recent crisis occured in the context of a worldwide recession and a worldwide crash in the demand for manufactured goods.  Sure, a large-scale depreciation would affect the demand for Irish exports on the margin, but there is not a whole lot of reason to believe that said increase would be large.  In fact, given as Irish firms aimed at the domestic market use lots of imported inputs, it isn't clear that the negative effect on those firms might outweigh the positive effect on more export-oriented ones.   

This is not to claim that I know whether the euro was good or bad for Ireland.  Nor is it to claim that joining a larger monetary union is everywhere a good thing for peripheral small economies.  It is to  claim that Matt really doesn't have any grounds to make the strong statement in the converse.

Too bad Edward Hugh can't be bothered to come around here ... hint hint.