The Power and the Money

For real, Economist, for real??

  First reaction to this:  Whoa whoa whoa whoa!  Is the Economist really castigating Catherine Ashton for belonging to the Campaign for Nuclear Disarmament in the 1980s?

Second reaction:  Are they really castigating her because, and I quote: 

“The Kremlin found CND and other ‘peace movements’ useful ways of undermining the unity of NATO, weakening the West’s defence posture and stoking anti-Americanism ... The ex-dissident Vladimir Bukovsky, an expert in Soviet penetration of the West, says, ‘the worldwide disarmament campaign in the early 1980s was covertly orchestrated from Moscow. To a substantial extent it was also funded by the Soviet bloc.’”

Third reaction:  Well, it didn’t appear in their print edition, but in a web-only column called Europe.view, so it doesn’t count.

Fourth reaction:  I’m not that old.  It counts.  Red baiting?  In 2009?  Really?

Fifth reaction:  Damn, the other columns in Europe.view are almost as crazy. 

Sixth reaction:  I’m still sick, but how often do you get to hear real funk music these days?  So I have other things to do, even though I will regret it. 

I leave you with a question:  has the rot from Lexington spread, or is this column just a one-off bit of teh crazy? 

The clock, unbeaten

  President Arias of Costa Rica just announced that his government will recognize the results of the Honduran election.  President Obama has been saying the same since the half-collapse of the U.S. attempt to broker a compromise, but now that someone of Arias's stature has signed on, it is pretty much over for Zelaya.  The clock will run out. 

 
The U.S. has handled things as well as could be expected.  For all my expressed (and ironic, for those of you who didn't pick that up) frustration at the lack of American power in Honduras, the truth is that Washington could have been much more muscly and forebearing.  It is a good thing (for the United States) that we were not. 

Brazil, not so much.  When it comes to the politics of energy, investment, and cross-border crime, the Brazilian administration has been very good at speaking softly and carrying a big stick.  When it came to a coup outside the country's normal sphere of influence, reverse it.  It wasn't bad until the declaration that they wouldn't recognize the elections, at which point it became pretty clear that Brasilia did not have much of a plan.  Moral stances are well-and-good, but absolute moral stances can do harm to the position that they are meant to support. 

Add the strange decision to invite the Iranian president for a visit to the Honduran imbroglio, and one has to wonder if Lula really knows how to play this game at the level his country has found itself at.  To be fair, he's been very good when his country's interests have really been at stake, so maybe I should stop complaining. 

Above the clouds, or Venezuela’s electricity crisis

   No, it’s pretty clearly the flu.  I’m completely laid up.  Ugh.  Misery, compounded by the Broncos piling up 16-0 lead.  Yes, I’m a Patriots fan, in my one sporting concession to my new home town.  But I retain a little bit of love of for the Giants and Jets.  Not being returned so far.  Still, hearing that series of curses from the Bronco’s coach was awesome.

But Stephen Rogers wants to know about Venezuelan electricity, so I dig around to find out about Venezuelan electricity.  Why is an energy-rich country experiencing periodic blackouts?  I mean, there are a lot of things about the Bolivarian Republic which are in cloud-cuckoo land, not least the place where I was in the above photo.  But generating power should not be one of them, should it?

The immediate reason for the shortages is:  a really bad drought this year.  Venezuela, sensibly, does not burn exportable hydrocarbons for electricity.  The country has been slow in exploiting its natural gas resources, but given its immense hydro capacity, that is far from a disaster.  (Venezuela’s natural gas reserves are “associated,” which means that they require larger up-front investments to extract.)  In fact, the country has ramped up an almost-astounding amount of hydropower in recent years. 

Unfortunately, this year the rains have almost dried up.  (Ecuador has also been hit.)  This has caused hydro production to dip on the national level ... but Guayana, the big industrial province, only has one 15 megawatt diesel generator at Puerto Ayacucho as a backup. 

 

(Data comes from Venezuela's system operator, called Opsis.) 

That’s a problem, but it wouldn’t be a huge problem if it weren’t for the fact that Venezuela's grid is in worse shape than America’s.  In 2006, Venezuelan transmission and distribution losses ran 22%, against 7% in the United States.  That’s a crappy grid.  With a crappy grid, it is not easy to get electricity from where it is to where it is needed when the baseload capacity declines.  Blackouts result.  In October, Opsis carried out 48 planned outages and suffered 66 unplanned ones, even with all the diesel and gas peakers run way above their normal capacity. 

In fact, there is a second constraint on the grid.  Venezuela has managed to produce a lot more thermal electricity by running its thermal peakers at their maximum for more time ... but what it cannot do is get them to produce more power than their rated maximum at any given moment.  According to Opsis, peak demand is running 7.0% higher this year than in 2008, which was up 5.1% on 2007.  Overall load factors are down, but on those days when power spikes, there is nothing to be done.  Especially in Guayana.

Of course, one has to ask:  if Venezuela has succeeded in its heroic efforts to increase hydro capacity, why did demand outstrip supply this year?  Well, that’s easy to answer ... the government froze electricity rates in 2002.  Given the awesome scale of economic growth since then, and the even more awesome scale of consumption growth, and galloping inflation, what would you expect to happen?  Exactly. 

A lot of very poor people bought lamps and satellite dishes, a lot of slightly less poor people bought refridgerators and air conditioners, a lot of not-really-poor people got dishwashers and giant plasma screens, and a lot of not-poor-at-all people stopped caring and began to run their air conditioners with the balcony doors open.  If you aren’t going to ration by price, you've got to ration by other means, blackouts being one.  After all, in 2006, Chile was hit by a perfect storm when Argentina cut off the gas, a drought shellacked the dams, and oil prices spiked.  Was a lousy year for consumers and a lousier year for energy-company shareholders, but there were no blackouts. 

In short:

(1) Investment in generation has been just short of heroic.  ¡Viva la revolución Bolivariana!

(2) Investment in the not-as-sexy business of getting the stuff from where it’s generated to where it’s consumed has not been quite as heroic.  In fact, it’s been bloody awful.  ¡Malditos chavistas!

(3) Demand has quite deliberately been allowed, nay encouraged, to explode. 

Problems (2) and (3) were eventually going to outrun advantage (1).  This happened to be the year.

The government faces three long-term choices.  First, direct more-and-more-and-more investment into generation, first hydropower, then CCGT, maybe even nuclear.  Of course, that means burning associated gas instead of exporting it to (say) Trinidad’s industrial sector.  It also means diverting limited resources away from other things that might have much larger economic or political payoffs.  And it would force the government to have to show a level of execution that it hasn’t quite demonstrated, massive investment notwithstanding.

Second, cut demand.  Which means raising rates.  Won’t that be popular!

Third, get used to blackouts.  Hey, the Philippines lived with ‘em for a very long time, so have many other countries.  In fact, if Corpoelec can get good enough at directing where the power will go out, selective outages could be a win-win for the Socialist Party. 

Stephen, that answer your question?

De base en beis

  Apologies for the lack of posting. I’ve been hit hard by something that isn’t quite the flu, and certainly isn’t H1N1, but is one of the worst colds that I’ve had in a very long time.  Not as bad as that thing that hit me in Columbus, Georgia, back in 2002, but bad. 

Anyway, before I get down to business, let me talk about recreation. You can’t visit Caracas and not go to baseball game, especially if the Magallanes are in town.  Leones’ fans hate the Magallanes, which means that there was no way that I was gonna say no when Francisco Sanánez, the head of Venezuela’s IESA business school, invited me to the game.

It’s a surprisingly small stadium, maybe 16,000 seats.  In fact, it’s a university ballpark, rather than a true professional stadium.   Nothing like the Foro Sol in Mexico, not even as big as the old Seguro Social.  That said, the streets around the park manage to be so badly designed that resulting traffic jams make you feel like you’re headed to a much larger forum. The wandering mobs wearing Leones and Magallanes colors add to that feeling.

I couldn’t bring myself to tell my hosts that the raucous atmosphere inside the ballpark really wasn’t all that out-of-line with what you’d find in Yankee Stadium.  The cops ejected somebody from the bleachers, but that happens in the Bronx with some regularity.  The outside was lined with more and less-formal food and clothing stands than you’d find in the States (or even, as may surprise you, Mexico City) but still, nothing to write home about. 

This is not to say that the atmosphere is the same as at home.  Oh no.  This is Venezuela, my friends.  First sign of that happens before the game, where these pneumatic women in very tight jeans stand around flanking home plate.  They’re the Magallanes cheerleaders, who won’t cheer; their job is simply to intimidate the opposition fans.  And they do that quite well.

Of course, the home team also has its cheerleaders, who come out about three times over the course of the game.  Does anyone remember the XFL?  They’re like that.  Mexican professional ball games also feature cheerleaders, but they’re wholesome in comparison.  These, well, could probably get you arrested in some states, although I’m told from that the scenes in those cheerleading movies that I will never ever admit to having seen are about as risqué. 

Madrugada roja

  Venezuela.  What a country!  In the name of cheese, I hope that the producers of Red Dawn manage to work in some sympathetic Bolivarians.  Outside government offices in Chacao, the Socialist Party has put up these red posters of revolutionary heroes.  It kinda sorta looks like something outta the last post, no?

 
They also, of course, warn against the empire.  The below mural reads, “The Empire’s new toy:  easy to use, totally manipulable.” Made me proud to be an American!

More revolutionary art below the fold.

Red Dawn

  It is coming.

 
It is gonna be great.  Even if it's terrible, it's gonna be great.

 
They are here to help.  Between this and 2012, I'm all set.  Eat your heart out, William Baird!

End it, don’t MEND it

  So it appears as though the Nigerian government may have finally negotiated an end to the MEND rebellion.  MEND stands for Movement for the Emancipation of the Niger river Delta, and it has caused both the Nigerian government and the world oil industry major headaches over the past decade.  This success produced a lot of breathless hyperventilating about the unstoppable postimperial chaos overtaking the world ... only a matter of time before they blow up the Lincoln Tunnel!  Or something. 

 
The Yorkshire Ranter (who sometimes comments as Alex on this blog) summed it up pretty well.  MEND was not an amorphous group interested only in chaos, a sort of budget version of SPECTRE.  John Robb runs a website called Global Guerrillas, which postulates that the future lies with such unstoppable nihilists, who will use what he calls systempunkts to bring down our complicated economic systems.  (Calling Ashton Kutcher!)  Posts like this one assumed that MEND’s main goal, like SPECTRE, is chaos.(His math, I’ll add, is pretty fuzzy.  1.4 billion barrels disrupted?  Huh?  The increase in the oil price engendered by MEND attacks was a loss?  Wha?  The money was, what, burnt?)   

Rather, MEND in fact had specific goals that it wanted to accomplish and a specific set of tools to accomplish them.  Once the Nigerian government realized this, and got its act together sufficiently to deploy a rational set of carrots and sticks, the rebellion ended.  Now, the Nigerian government needs to follow through on its promises ... but MEND and the like seem to be standard guerrillas.  Inasmuch as they slid into criminality, they were standard criminals. 

Maybe I’m too much of a small-c conservative, or maybe I’ve just seen the movie before with good old General Manuel Peláez, who wrote the playbook later followed by Jomo Gbomo et al.  (God, that Wikipedia article is terrible.  Ni modo.)  But the Yorkshire Ranter is neither, and he saw through it. 

Which bring me to a question.  Why the resonance of all the “chaos is upon is!” mongering, when that is pretty clearly not the case?  Brazilian drug gangs notwithstanding.

Uranium supply elasticity

  A long time ago, a commentator asked for figures on the supply elasticity of uranium.  He had read that a doubling of the price of uranium would lead to an increase in usuable supplies (of, say, yellowcake) large enough to support a millenium of consumption.   

Is that true?  Well, I now have the supply elasticity figures, courtesy of page 15 of the Uranium 2005:  Resources, production, and demand report put out by the OECD and IAEA.

World supply (millions of tons)	World price (U.S. dollars)
1,947	$ 40
2,643	$ 80
3,297	$ 130

Annual production ran about 104 million tons in 2006.  Consumption ran about 160 million tons, the difference met by a combination of reprocessed civilian nuclear fuel, old Russian warheads (which now provide about 10 percent of America’s electricity consumption), and the running-down of massive Cold War uranium stockpiles.  In other words, an increase in prices from the $40 actually prevailing in 2005 (more or less) to the $135 they peaked at in 2007 (more or less) would increase the commercially-available supply of uranium from 19 years of production to 32.

Of course, the numbers are meaningless.  By 2007, the same source (also known as the OECD Red Book) estimated the size of world’s economically-extractable reserves given a price of $130 to be 5,469 million tons, a substantial jump on the 2005 figure.  The reason?  Huge new discoveries in Australia (which accounted for 23% of the growth in world reserves), Russia (19%), Kazakhstan (14%), South Africa (8%), and Brazil (6%).  Roughly equal-sized discoveries in Niger, Namibia, and Canada made up two-thirds of the rest.   

In fact, considering as there is no spot market for uranium, the price number is almost as meaningless as the quantity.  Different consumers can pay radically different prices for the input, depending on their location and the contracts they have with their supplies.  In the U.S., for example, the average price agreed to under short-term contracts was $94 in 2007, whereas the average price paid under long-term contracts that same year was only $25.  In fact, given all the contingency clauses in the short-term contracts, the actual price paid for delivered uranium was only $51.* 

It is a very strange market.  The bottom line is even though the supply is nowhere near as elastic as has been claimed, the world is unlikely to run out of uranium any time soon. 

P.S.  The nuclear material portrayed in the photograph is fake.  The big black blob on the right is supposed to represent vitrified high-grade nuclear waste.  If I was actually standing that near to the stuff, I’d’ve received a fatal dose in about 15 minutes.

*All figures come from p. 6 of Areva and the Nuclear Renaissance, by yours truly and Forest Reinhardt.

The fall of the Soviet empire

   Kevin Drum repeats a claim that I’ve heard elsewhere:

“By 1989, the Soviet Union was so far in hock to western banks that they basically had Gorbachev by the balls.  He couldn't afford a repeat of 1956 or 1968, and when that became clear the jig was up.  Hungary went first, Berlin followed, and within a few months the Iron Curtain was on the ash heap of history.  In the end, it was hard currency, not ICBMs, that brought down the empire.”

 
I don’t understand this claim.  There are two premises behind it which do not make sense to me.  The first is that Western creditors would care if the Soviet Union cracked down in eastern Europe.  Why would they?  The only reason that I can think of would be if they believed that a crackdown made it more likely that Warsaw Pact regimes would default on their debts.  But why would a Soviet crackdown make default more likely? 

In fact, there seems to be some circular reasoning involved regarding Soviet debt.  The USSR had a reasonable debt burden until April 1989, when perestroika allowed Soviet enterprises to borrow in hard currency.  As a result, debt exploded.  But Moscow stopped taking Budapest’s calls in March!  The timing is off.

In 1990, the collapse of Comecon led to a collapse of Soviet trade with eastern Europe, worsening the problem.  Except ... if the tanks had rolled, then Comecon would not have collapsed.  See here and here for contemporary discussions of the debt problem. 

Nor do I buy the possibility that creditors would have moral qualms.  They didn’t care about Georgia last year; would they really have cared about Hungary in 1989? 

But let us grant that creditors might have been upset at a crackdown.  Violence in Eastern Europe might have been unsettling, I can imagine that.  Only that brings us to the second premise of the “bankers killed Communism” argument, which is that western creditors held some sort of special leverage over the Soviet Union. 

Considering the frequency of sovereign default, and the willingness to restart lending afterwards, I have trouble understanding what exactly that leverage would be.  Say the Warsaw Pact countries defaulted in 1990.  Why would regimes capable of using tanks against their own people have found the consequences so unpalatable?  Perhaps they would fear economic sanctions ... but that gets us to a version of an argument in which Western governments killed Communism by their implied economic threats, not one in which bankers did it.

Truth be told, I tend to think that neither creditors nor Western governments had all that much to do with the fall of the Wall.  (I did not always believe the latter, as some readers of this blog can attest.)  But I could easily be wrong.  I have, after all, heard the “bankers did it” story elsewhere. Is there a more sophisticated version that addresses my concerns?

Health care reform, House version

  What’s in the health care reform bill?  It isn’t easy to get a concise version.  But my brother wants one.  So I spent my morning trying to put one together.  Here it is.  I am not 100% sure that all of this is correct, so I promise to update the body of the post should anyone bring any mistakes to my attention.

Subsidies:

The bill increases the limit for Medicaid to 150% of poverty, or $33,075 for a family of four. Right now the limit is at the poverty line (with some exceptions) or $22,050 for a family of four.

Families earning up to 400% of poverty ($88,200) will have their premiums and out-of-pocket expenses capped.  The cap starts at 3% of income for non-Medicaid-eligible families and rises to 10% for families earning between $77,175 and $88,200. 

Medicare will cover all prescriptions, eliminating the “donut hole.”  Currently annual drug expenses are covered up to $2,700, and coverage kicks in again at $6,100, but Medicare recipients are responsible for expenses in-between. Medicare will be allowed to negotiate prescription drug costs. 

Mandates:

Employers must offer insurance or pay a fee equal to a percentage of their payroll.  Businesses with less than $500,000 in payroll are exempt. The fee will start at 2% of marginal payroll and rise to 8% for firms with more than $1.5 million in wages. 

The penalty for failing to purchase insurance is set at 2.5% of income, up to a $750 per-person cap, or $3,000 for a family of four. 

Insurance reform:

Insurers will be prohibited from discriminating on the basis of pre-existing conditions.  Annual out-of-pocket costs will be capped on and lifetime benefit limits will be banned.  Age-related premium increases will be capped at 200%. 

All plans will have to meet a minimum “essential benefits” package.

A national Health Insurance Exchange will be created, which will provide a centralized market in which businesses with less than 100 employees and individuals can purchase coverage.  No plans traded on the exchange will be allowed to cover abortion.  Only legal residents of the United States will be allowed to purchase plans on the exchange.

The anti-trust exemption for insurance companies is eliminated.

A non-profit public plan will be available to anyone unable to purchase insurance on the exchanges or through their employer.

Revenue and cost reduction:

A 5.4% surtax will be imposed on incomes over $500,000 for single taxpayers, and $1 million for married couples. The fees mentioned under “mandates” will also generate revenue. 

The government currently reimburses private plans that supplement Medicare (called Medicare advantage) by about 14% (or $1,100 per recipient) compared to what it costs to insure the same services directly.  That difference will be eliminated. 

The plan is expected to generate a surplus through 2023.  (The annual surplus does not decline over time; rather, CBO projections end.)

Editorializing below the fold.

Regulation

  Doug Muir has occasionally discussed various conversational markers that indicate whether the person you are talking to is serious.  If he is up for it, I’d love to compile them and post a list.  He has suggested, among other things, the use of the word “socialism” to describe public policies that don’t actually involve nationalizing private companies and the placement of the phrase “international community” inside scare quotes. 

One vague marker of unseriousness is the claim that regulation is useless, because all regulations can be avoided.  As a specific warning, it is useful to keep in mind that regulations can be subverted.  As a general principle, it is deeply unserious.  I recently had a conversation in Baltimore, for example, in which somebody claimed that the only way one could regulate modern financial markets was a ban computers.  This showed ... well, I’m not sure what it showed.  But it wasn’t serious. 

(To be fair, the person who said it did not show the expected hypocrisy that normally flows from those who make such a claim, in which regulations seem to be simultaneously useless and destructive.)

That said, modern regulations often produce ironic effects.  As sympathetic as I am to what the government was attempting to do, this story actually made me chuckle.  Of course, a grump might say that the purpose of the regulations was not to limit bankers’ pay but to better align incentives, and such a grump would be correct.  An even grumpier grump might say that paying bankers’ in equity doesn't solve the underlying moral hazard, and such a grumpier grump would also be correct.  Finally, the most grumpy of grumps might say that if you’re gonna limit bankers’ pay, then you might as well go ahead and limit bankers’ pay and stop all this futzling around with compensation schemes.  And that grump would also be correct.

But still.  Even for a lib’rul, the story is pretty funny.  No?

The limits of empire

 The world really needs a good game-theoretic model of informal empire.  I suppose Bruce Bueno de Mesquita already has one, but I’d like to see something more specific. 

What’s informal empire?  Well, if “empire” happens whenever one sovereign state exerts its authority over an area previously under a different sovereignty (or none at all) then that empire is “formal” when the imperial state exerts its authority through a bureaucratic chain-of-command that runs from the imperial executive through the local government and down to the person in the street in the new territory.   (Similarly, an empire has formal characteristics if judicial decisions can be appealed upwards to courts in the center, or if the imperial legislature can pass laws for the subordinate territory.) 

Since 1898, the United States has generally eschewed formal empire.  The exceptions are Haiti in 1915-34, the Dominican in 1916-24, Japan in 1945-52, Germany in 1945-55, Okinawa in 1945-72, and Iraq in 2003-04.  (The European Union exercises formal authority over parts of the governments of Bosnia and Kosovo.)  The U.S. has relied on a combination of treaty arrangements, sanction mechanisms, and moral suasion to get its satraps to do what the government of day wants them to do.  The famous SOFAs kinda sorta sometimes formalize quasi-imperial arrangements by giving U.S. troops special privileges inside host countries, including sometimes the right to shoot people, but that is not the same thing as giving the American government the right to give local bureaucrats direct orders under the threat of unemployment or imprisonment.

Sometime informality works and sometimes it doesn’t.  Right now, informal empire has hit its limits in Afghanistan and Honduras.  The U.S. can’t make President Karzai crack down on corruption, form a coalition with Abdullah, or negotiate with the Taliban.  Considering both the number of troops we’ve got running around the country and the number of dollars we pour into its government budget, the lack of influence (let along control) is pretty depressing.  What kind of an empire is that?

In Honduras, the recent agreement between Micheletti and Zelaya appears to have collapsed.  The Honduran legislature has not voted to reinstate Zelaya, and Micheletti is continuing his modus operandi of “what the hell?” by picking a fight over who will lead the interim cabinet until Congress votes.  Washington may be able to pick something up out of this mess, but U.S. leverage is limited.  Aid is suspended and visas were as well until recently; stronger sanctions, meanwhile, will just sock it to a lot of very poor people.  We could give up and run out the clock, which would be the best option if the rest of the hemisphere agreed.  They don’t, so something had to be done, and a few days ago it looked as though the Secretary of State had done it, by brokering a solution.

Only now Micheletti keeps going off the reservation, and there seems to be no quiet easy way to keep him on it.  There is still something a little ridiculous about the lack of American leverage.  What kind of an empire is this?

Not much of one, actually.  To be honest, I suspect that the U.S. will be able to knock some sense into Micheletti.  If pushed, I’d bet on the agreement coming back to life.  But still, the limits of informality are clear.  Even in Afghanistan, let alone Honduras, local political actors are autonomous, and the threats that the U.S. could use to sanction them are not credible. 

Running an informal empire is complicated, and running a formal one is often impossible.  The implications are left as an exercise for the reader. 

27 and a good cigar

  It wasn’t against the Dodgers, so I didn’t spend the bank to get to the Bronx.  Instead, I watched the games at the Thirsty Scholar in Somerville, which appears to have (as I’ve mentioned before) become an unofficial Yankees bar.  I showed up with my high school buddy Carlo Cerruti; other friends drifted in as the night progressed.  Ultimately, there were six of us; but we were there with around fifteen other fans who’d independently discovered that you were unlikely to be assaulted in Yankees regalia at this place.  I speak as someone who has been told by one Boston bartender that his cheering was “inappropriate” and by another “I’m going to have to ask you to tone it down, if you’re going to root for them.”  And those were in yuppie upscale places that I’d scouted in the Harvard Square area because I thought they’d be more Yankees-friendly. Polite yes, friendly no.

The other good thing about the Scholar is that you can smoke outside in full view of several large vidscreens.

No blow-by-blow of the game.  I mean, it was a bar!  Nothing interesting, the way there woulda been at an actual game, that you can’t get from the sports pages.  There were three Phillies fans in the place, all dressed up with Victorino jerseys and all, but they left in the seventh.  What??  The game was by no means over at that point.  If they hadn’t dressed for the occasion, okay, but they had.  Why put in all that prep work and go to a Yankees-friendly place just to give up and leave before the fat lady has sung? 

There was also a bartender from Terry Francona’s favorite bar.  He bites his tongue about his true allegiance when on the job.  You also had the brother-and-sister team from the Big Apple.  I know, the great thing about New York is that nobody looks like they’re from New York.  But to this native New Yorker, this pair just looked like they should be from New York.   (They were.  The Bronx, in fact.) 

Bartender gave us victory shots.  On top of at least four pints of brown ale and three cigars that proved to be a serious mistake. 

 
Anyway, the Series took my mind off the frightening amount of work I have to do and the depressing sight of the U.S. Senate doing whatever it is that the Senate does.  And it brought a ring back to where it belongs.  Now all we need to do is repeat the feat in 2010.

Alexander Hamilton, O.G.

   I'm sure many of you have seen this, but if not, enjoy.  I present to you the early life of the greatest Treasury Secretary in the history of the United States.  Word. 

I still think Madison was right about the soldiers and farmers, though.  Hamilton was too hard sometimes, you feel me?

Is the madre patria scamming the Républica Bolivariana? Probably not.

  Over at Caracas Chronicles, they’re perplexed by a deal just signed to build a combined-cycle gas turbine power plant in Cumaná, Venezuela.  The Spanish contractors, Iberdrola and Elecnor, want to charge €1.45 billion to build two 500-MW plants.  The cronologistas caraqueños have done some digging, and found that €1,450 per megawatt is a lot to charge for a CCGT installation.  The closest was a €1,225/megawatt project in Algeria.  The highest that I knew of before they started investigating was a UAE project that came in around €890. 

They conclude corruption.  Are they correct?

Well … maybe.  But to be fair, I suspect not.

Venezuela, you see, maintains exchange controls.  Official transactions need to be made at the approved exchange rate.  On the one hand, this shouldn’t bother the contractors all that much:  they’re getting paid in euros, and the price of imported equipment is the price of imported equipment regardless of the denomination.  The problem, however, is that the relative price of all of their domestically-sourced inputs will be much higher.

Think of it this way.  Imagine you imported €1000 worth of machinery to Venezuela in 2004, after paying Venezuelan tariffs (around 20 percent) and taxes.  In that same year, a manufacturing worker cost €7,388 to employ for a year at the official exchange rate.  You could buy a worker-year for 7 units of machinery.  By the middle of 2009, after several years of high inflation in Venezuela, that same worker cost €12,720 to employ — a worker-year now cost you the equivalent of 13 units of machinery.  Unless you figured out a way to use half as much labor as you did in 2004, your labor costs (in euros) have just doubled.  (All data comes from the Banco Central de Venezuela.)

In fact, the same problem applies for all domestic inputs.  According to the Venezuela central bank, the bolívar cost of construction materials (including taxes) rose 230% between 2004 and the middle of 2009, while the official exchange rate remained the same.  That’s going to further drive up your costs.  

If it turns out that the Bolivarian Republic has agreed to let the contractors use the parallel exchange rate to purchase bolívares, then this analysis goes out the window.  But if the contractors have to use the same exchange rate as everyone else when buying local inputs, then the price that they are charging for the plant seems entirely reasonable ... even without taking into account the political and economic risk.  (Will PDVSA pay everything up-front?  Will inflation in Venezuela accelerate?  Will there be labor trouble?)   

In other words, unless the contract exempts the Spanish companies from exchange controls, then I doubt that there is much corruption to be seen in this case.  Bad economic management yes, corruption no.   

Does anyone have more details about the contracts?

Halloween is ...

 ... a great time to be a Yankees fan in Roslindale, Massachusetts.  You can tell people that you're only dressed like a Yankees fan when they take issue with your shirt.

It didn't work.  Having the other much better-looking Yankees fan with me did.

Looking forward to tonight.  Off to get some beer, gonna watch this one at home.  But for those of you who live in Boston and are looking for right-minded folk to see the next game(s) with, the Thirsty Scholar in Somerville is becoming an unofficial Yankees bar.  Don't tell the propietors.