The Power and the Money

Don’t export energy!

The United States should not export hydrocarbons. Right now, there is a big wedge between the U.S. price of gas and the world price. That is a great thing for American consumers, especially industrial consumers, and it insures that the coal industry will die even more quickly than it would otherwise. The price is lower export revenues, but the benefit from those exports will be almost entirely captured by the producers of the hydrocarbons. Why not transfer that bounty to the American people? As an added bonus, without exports the U.S. market will remain disengaged from the world market, insulating us from foreign demand and supply shocks.

I have been saying this for a while. And now T. Boone Pickens agrees with me! And when North America achieves independence in crude oil, we should prevent exports of that too.

Bernard Guerrero asks the question: can we prevent exports? The answer: ¡Sí, se puede! And yes, it is constitutional.

At least four different statutes give the President the authority to restrict hydrocarbon exports. The first is the  Energy Policy and Conservation Act of 1975, which just flat-out says that the President may restrict exports of all hydrocarbons “under such conditions as he determines to be appropriate and necessary.”

The Export Administration Act of 1979 adds some details. (Ah, for the days when Congress gave laws nice simple titles.) Section 3, Article 2, of the Export Administration Act declares that the U.S. can “restrict the export of goods where necessary to protect the domestic economy from the excessive drain of scarce materials.”

Section 7 gives the details of how the power in Section 3 would be implemented. It gives the President the power to requireexport licenses within 15 days of the publication of the restrictions in the Federal Register by the Commerce Secretary. The President is required to “allocate a portion of export licenses on the basis of factors other than a prior history of exportation,” and is allowed to impose license fees. (I suspect that the Supreme Court would strike down the license fee bit, but even if they did, it would not affect the power to require the licenses and limit them to, well, zero.)

The Export Administration Act also automatically bans the export of oil and gas from Alaska without a presidential waiver, unless it goes to Canada or Mexico to be refined in exchange for an equal amount of their crude. (The Act does allow the U.S. to export an additional 50,000 bpd to Canada for its own consumption.) 

The Outer Continental Shelf Lands Act of 1978 bans the export of offshore oil and gas unless the President grants a waiver.

Finally, FERC has to approve all export terminals.

Add it up, and all the United States needs to do to keep natural gas prices low is make the decision that we want to do it.

Now, this is all for natural gas. Oil is different. In part that is because an oil export terminal is a lot easier to build ... but that does not matter. Not only do the above laws apply to oil, but the long-forgotten but-not-repealed Mineral Leasing Act of 1920 effectively bans oil exports without a presidential finding, as long as such oil passes through an interstate pipeline. (Strangely, oil moved by rail cars is not subject to the Act, although the President can of course use the Export Administration Act to restrict its exports.)

What is the problem with oil? Well, one word: Canada. Another post forthcoming.

There is a form for everything

Hat tip: Will Baird.

And for only $1.98 billion! Anyone want to send it back up?

The end of progress? Probably not.

Robert Gordon just published a paper that is very pessimistic about long-term economic growth. It essentially argues that the big wave of innovation from IT is over. Infotech may radically reorder our lives in the coming decades, but it won’t allow us to make more stuff. Moreover, the big important inventions have been made. His example: would you rather give up all the electronic and IT stuff invented after 1975, or keep all that but have to abandon indoor plumbing?

As a metaphor for the state of play, that nails it. If it doesn’t for you, that is because you have never had to live without indoor plumbing. At night. In the rain.

There are three ripostes to this thesis. The first is that Moore’s Law ain’t over yet. (More to the point, Koomey’s Law ain’t over yet: it states that the energy efficiency of computers doubles every 18 months.) If Moore and Koomey hold for another decade or two, then there is the possibility that AI will emerge seemingly out of nowhere, sometime in the 2030s. Economic growth will surge, but prepare yourself for the robot riots. (I will be joining the rioters, and training my young son to lead them.)

There are reasons to think this will not happen, possibly ever. (I can hope!)

The second riposte, then, is that even without singularian magic, better computers will improve productivity the old-fashioned way. Consider construction robots. My co-blogger and I went back-and-forth on this with our friends Will Baird and Carlos Yu. We concluded that construction is a super-conservative fragmented industry, so there will be no revolution (or robot riots) ... but there will be a slow trickle out of construction (and vehicle operation) just as there was out of agricultural labor, elevator operation, and telegraph delivery. That could keep growth going for a while yet. (Matt Yglesias points out some other sectors ripe for growth here.)

But there is an even more convincing riposte than the above two. It comes from Carlos Yu, and it is based on work by Alexander Field, an economic historian who has pointed out that the Depression-wracked 1930s were likely the most technologically-productive decade of the past century.

What then is the third riposte?

SHORT VERSION: Stop focusing on the damn computers!

LONGER VERSION: “After reading Alexander Field’s book, I distrust the simple correlation in timing between technological improvements and productivity growth. In any case, Gordon is over-focused on the immediate implications of information technology, and he’s missed the one under his nose: biotechnology.

“The Green Revolution doesn’t show up much in American productivity statistics, since our crops had already been improved through a hundred-plus years of scientific selective breeding, but it does show up in global productivity. (Though biotechnology is probably keeping our crop yields high in the biological arms race against disease and pests, but that’s hard to quantify with typical productivity measurements.)

“Cheap effective medicines is another. For many health issues, we can actually buy a few more years of life — or more than a few — at prices far below the break-even point. If we take his question about toilets versus computers and switch it to toilets versus postwar improvements in the applied biological sciences, I think we’d be carrying our chamberpots to the outhouse.

“And now we’re entering the second wave of improvements in biotechnology, ones based on the information technology revolution. It might be a dud. I strongly suspect not.”

The beer test

Lots of pundits say that people vote for candidates with whom they identify. They vote by tribal markers, in other words.

That is wrong. If it were right, I would support Chris Christie. Because, hey, the accent, the attitude, the body language, I love that guy. I don’t want him anywhere near public office, but I love that guy. He is bad for New Jersey, but still. I don’t have to vote for the dude.

Tribal. Even if he is from Jersey. And says weird stuff about polls. I mean, you can dislike President Obama for all sorts of reasons, but the man doesn’t suffer from tacking too close to the polls. 

Then again, Christie sometimes pronounces “all” in some sort of weird generic not-Jersey way, so maybe I don’t love him as much as I thought. Ni modo. Make up your mind, Chris! Oll or awl?

You lie!

I am ignoring the electioneering. Icky jokes from the Romster, wild accusations from El Reid. Same old, whatever.

Now, I have to add that this is not 1996. There are issues at stake, we know what they are. And even if it were a 1996-like election, well, I thought 2000 was a 1996-like election, and didn’t that turn out to be stupid!

Still, it is quite feasible to ignore all the electioneering while still paying attention to the election.

But ... it is a little jarring to hear Rick Santorum just straight up lie when he says that President Obama has waived the work requirement for TANF. You can find the executive order in question here. Condensed:

“HHS is issuing this information memorandum to notify states of the Secretary’s willingness to exercise her waiver authority under section 1115 of the Social Security Act to allow states to test alternative and innovative strategies, policies, and procedures that are designed to improve employment outcomes for needy families. ...

“States must develop evaluation plans that are sufficient to evaluate the effect of the proposed approach in furthering a TANF purpose as well as interim targets the state commits to achieve. States that fail to meet interim outcome targets will be required to develop an improvement plan and can face termination of the waiver project. ...

“As described below, however, HHS will only consider approving waivers relating to the work participation requirements that make changes intended to lead to more effective means of meeting the work goals of TANF.”

I find this kind of thing quite annoying. The big thing that the states might do is cut the number of hours of work down from 30. It also would keep states that fail to place 50% of recipient families in work.

I should add that I grew up on AFDC, with a mother who railed against the program because she had to work off the books. She even had to study off the books. Switching to TANF was a great thing. Handing flexibility to governors does not repeal the work requirements.

(Oh gosh. Now Nikki Haley is making stuff up about immigration policy. But she is right that the Administration blocked photo ID requirements to vote and interfered with Boeing’s attempt to move production to South Carolina. I am not sure that she understands the definition of “mack-daddy,” though. I mean, what does it mean for an airplane to be a mack daddy? Does the phrase have a different meaning in South Carolina than it does in South Florida?)

OK, back to my real work.

Burying the lede

The New York Times had a story today about the changing geographic location of U.S. oil imports. We’re importing more oil from Saudi Arabia.

The problem with the story is that it began with an argument that makes no sense at all. “This reversal is driven in part by the battle over Iran’s nuclear program. The United States tightened sanctions that hampered Iran’s ability to sell crude, the lifeline of its troubled economy, and Saudi Arabia agreed to increase production to help guarantee that the price did not skyrocket.”

Huh? The U.S. didn’t buy Iranian oil. So having Saudi make up for a boycott of Iranian oil shouldn’t increase U.S. imports from Saudi Arabia. That is just a seriously dumb pair of sentences.

Later on there is another nonsensical statement: “Domestic oil production has been surging the last three years and is up 10 percent this year. But most of the new production is coming from shale oil fields in North Dakota and Texas that produce high-quality sweet grades. Many of the refineries on the Gulf of Mexico coast are designed to refine the heavier oils that the United States has traditionally imported from Venezuela, Mexico and Canada.”

Uh ... nothing in that paragraph is false, but Saudi oil isn’t heavy either. Why then would refineries prefer Saudi crude over American? Surging production in the United States is not going to suddenly cause refineries to import oil from Saudi Arabia. That is another weird statement.

So if it isn’t the Iranian situation, and it isn’t surging U.S. production, why are we importing more Saudi oil? Well, the answer is buried down in the story: Mexican and Venezuelan exports are dropping, and the pipelines don’t exist to move U.S. and Canadian crude to the Gulf refineries. “Mexican and Venezuelan production has been sliding the last few years, and much of that oil has been replaced by Canadian oil from oil sands. While Canadian production has been increasing rapidly in recent years, there is not enough pipeline capacity.” (They didn’t mention U.S. crude, it’s true, but the point still holds.)

In fact, when you look at the numbers (which the article in fact does), it is entirely driven by a fall in imports from Mexico. Refineries are buying Saudi crude (over U.S. production in faraway North Dakota) to make up for Mexican shortfalls.

I am not sure that there is a big national security impact from this, given that as long as North America is a net importer, there is not a whole lot that will protect us from price fluctuations. But it does highlight Mexico’s problem.

Reforms are afoot ... but it is unclear if they will work. More on that eventually. The point for this post is that the Times buried the main part of the story in a fog of words.

The rogue state of Canada?

Who’s the bad boy of international arbitration? Well, the Argentine Republic, of course. And then the Bolivarian Republic. Followed to nobody’s surprise by Ecuador. But the country formerly known as Dominion is in the running: number six most sued according to the United Nations. That is deucedly odd, when you think about it.

What the hell? Canada? Well, Canada is a member of NAFTA, and Chapter 11 of NAFTA protects property rights. So when any level of government in Canada does something that an American or Mexican investor can credibly claim is tantamount to expropriation, they become vulnerable to arbitration.

Now Canada is about to ratify the Washington Convention, which would open up ICSID to its companies. In the way of Canada’s hyperfederalism, the hold-up is with provincial ratification. (In many ways, Canada is the European Union with elections and an army.) Given the country’s experience with NAFTA, there is some worry about the possibility that ICSID will overrule the country’s sovereignty.

These worries are overblown. The Washington Convention does not automatically open the way for foreign investors to go to arbitration. That requires either domestic enabling legislation or an investment treaty. What ICSID does do, is allow companies to enforce their judgments against third countries in Canadian courts. That is something that Canada’s myriad mining and petroleum companies will embrace.

Now, it also means that NAFTA arbitration decisions can be enforced around the globe ... but the fact of the matter is that Canada is a small country right next to the United States, and NAFTA decisions could already be enforced there. Giving French courts the same privilege is not going to change a whole lot. It also removes the ability of national courts to review arbitration decisions, but as a practical matter NAFTA had already removed that. Note that the Ontario Court of Appeal’s recent decision had to do with a case against Mexico.

In short, for those of you who worry about this sort of thing, Canada is already in deep with the big legal web of international property rights protection. (I like to call it the Empire, because it is cool and ironic.) Joining ICSID won’t change anything.

Counting chickens, jumping guns

So I think my first bet on the Assad regime is looking pretty safe. For those of you coming late, a year ago I bet that Syrian dictator Bashir Assad would still be in power one year later — that is, at 5:00pm EST on August 31, 2012. John Quiggin of Crooked Timber took the other side. The loser will pay $50 to a charity of the winner’s choice.

A quick glance at the calendar will show that I haven’t won this yet. In theory, the rebels could storm the presidential palace tomorrow. Or Assad could get on a flight to Moscow next Tuesday bound for a long quiet retirement in a beachside villa outside of Uglegorsk. But I don’t think it’s very likely. Assad has some problems! But he’s probably not going to fall in the next 18 days.

Close followers of this blog may recall that back in April, I challenged John to a second bet: viz., that Assad would continue in office for another six months beyond August 31. He accepted. So it’s entirely possible that I could win this bet, but lose the second one. These things happen; let’s see how it goes.

Meanwhile, two things. First, you may recall that this bet arose out of a more general discussion on the topic of dictators and their place in the world of the early 21st century. I’m mulling over a “one year later” post on this topic. Comments and suggestions are welcome! Second, I have to think about what charity I’d like John to pay his $50 towards. Suggestions on this are most definitely welcome. (No, I’m not going to ask him to contribute $50 to the Scaife Foundation. Play nice.)

In which I fail the cricket test

The cricket test was proof of two things. (1) The U.K. deserved to lose its empire; and (2) the country was going to have trouble with immigration. Basically, it said that if you were an immigrant and you rooted for your country-of-origin in a cricket match, then your loyalties were suspect.

That is as stupid as it sounds. I could understand a “Sign up if the Germans attack” test, or a “Don’t cheat on your taxes” test, but a cricket test? Come on, man. Tens of thousands of Americans have died for this country even though they would fail that. Not in cricket, we don’t play that in America. But other real sports.

Me, I just failed it. I am rooting for Laura Sánchez. You have a problem with that?

Queens, and a basketball question

I just got back to civilization. I was in Queens. And I was in Queens without the Internet! OK, I occasionally checked email, but that was it. I suspect that such a vacation will be impossible within not too many years. (Click the link for knowledge about the horrifying future to which information technology is inevitably bringing us.)

But this post is not about Queens. It is about sports. I spent much of today watching some awesome Olympic soccer matches. Mexico-Senegal had me biting my nails ... and almost (but not quite) feeling sorry for the way Senegal botched it up in overtime. Then there was that foul-fest between Brazil and Honduras. I am still sad that the little Hondureño underdog lost. And the tight U.K.-ROK game: I admit it, I was rooting for the home team. In between all that, I hoped to see  Lithuania beat the U.S. of A. in basketball.

I am currently watching the Czechs defeat poor Brazil in beach volleyball. That is a great sport. One of the people below is of Brazilian descent: my heart goes out to you. The Czechs stole it.

What is it about international basketball? In every other sport, I root for the U.S. of A. above all. But there are exceptions: at the World Baseball Classic, I root for the crazy underdog teams: Australia and the Netherlands and the like. In basketball, the United States is not merely dominant; it is ridiculously dominant. Ludicrously dominant. Stupidly dominant. Yeah, there is 2004 and FIBA, but in both cases we didn’t send our best players. So I get happy when somebody gives the U.S. a run for its money. (I am not a hypocrite: we dominate beach volleyball too, but that is all about Kerri and Misty.)

Which, finally, brings us to the Knicks. I always used to say that the minute the Nets move to Brooklyn, then I switch loyalties. And I am still tempted! But ... well, “Brooklyn” no longer means what it used to mean. I no longer feel it. I mean, dude, if you had proposed Atlantic Yards in 1985 nobody but nobody woulda opposed it! I feel much more at home in Queens, which outside a few parts of LIC and Astoria is still not cool. Although Sunnyside is becoming suspiciously nice.

So I am thinking that I will stay with the Knicks. But I am unsure. After all, there is that wide swath of Kings County, from Bay Ridge to Canarsie to East New York, that is AFAICT pretty much ungentrified and uphip and old-school.

And, well, even the annoying full-of-hipsters and morons-who-hate-new-buildings part of Brooklyn has its charms. Although it would be more charming if there was a 40-story tower on top.

And since the Nets arena is smack in the middle of Atlantic Yards, then rooting for the Nets would be sticking it to the people who don’t like tall  buildings! Or it would, if I had the same sorts of emotions that motivated Sarah Palin supporters. Which I just might, at least where Brooklyn is concerned.

Plus, the Knicks let Lin go to Houston. I mean, WTF?

So, Nets or Knicks? Advice wanted.

Olympic soccer, the Canadian part of America, and the fact that most inhabitants of this continent are not of Italian descent

I recently quit Facebook. I received two types of responses. First, “I will miss your sports updates!” Second, “Thank God you won’t be sports-posting anymore.”

Anyway, since baseball is no longer an Olympic sport, the only thing you had to fear was soccer. So I would like to extend my congratulations to the Canadian team. I love you all for defeating our former imperial overlords today. And I love you for being the part of America that doesn’t pay taxes to Washington. But you will go down on Monday.

Tancredi is a great player. I have to say that I am proud to have somebody with such a good American name is doing so well for America. Sorry, I mean Canada. You know, that really well-run well-organized beautiful wonderful not-united state up north of the Vermont border. I know, intellectually, that Tancredi is not an American name. But when I moved to California at age 18, I was stunned to discover that Italian-Americans did not make up 30% of the U.S. population. That is true, ask Dev Patnaik, a fellow New Yorker from Poughkeepsie. In late 1988, in California, he gently took aside this downstate boy and explained that most of America was not, in fact, Italian.

While I am here talking about nothing (and posting from a public terminal in an undisclosed location, before returning to the world tomorrow) does anyone know why the American team played in white shorts instead of navy-blue ones?

France number two! France number two!

I know. Most people who watch the Olympics focus on track and field. All else is particular. In my case, I follow track and field when one of my family members is running. That happened in 2008, but sadly not in 2012.

Which means that the Olympics for me is all women’s basketball and women’s soccer. (And men’s basketball, but only when Team America is doing badly. Otherwise, it ain’t that interesting.) In soccer, U-S-A! U-S-A!

But in women’s basketball, I’m all about the France. Sorry, Australia.

The French won in Algeria, and that is why Assad will lose in Syria

A few posts ago, I noted that the French won the Algerian War militarily. My co-blogger has scolded me for being deliberately misleading. He is correct. The discussions with Lebanese army officers that produced the post were actually discussions about why the French experience illustrates why Assad is going to lose.

The French Army had three key advantages that Assad does not have. Moreover, at least one of the reasons why De Gaulle decided to abandon that military victory also apply. First, what advantages did the French have that Assad does not? First, French troop levels (proportional to the Algerian population) were four times the levels that Assad can muster. In theory, Assad can call up reservists and increase draft calls. In practice, that will not work.

Second,the French Army could draw on the resources of the Hexagon. In effect, it was financed by a large industrial power. Assad has ... nothing, except in Michael Ignatieff’s fever dreams.

Finally, troops could not and would not defect during the Algerian War. No matter how far morale declined (and it actually did not decline all that far) defection was simply not in their opportunity set. That is not true of Assad.

There are two more differences, but they are actually an epiphenomena of the above three French advantages. The French could credibly commit to remaining in control indefinitely. That commitment reduced the willingness to fight among the Algerian population. (That commitment turned out to be wrong, of course ... but in 1958 it seemed much more likely that France would be sovereign in Algeria in 1968 that it does that the Baath Party will still rule Syria in 2022.) In addition, the French army had the resources to engage large-scale population resettlements ... something far beyond Assad’s reach.

In other words, the reasons why France won in Algeria show why Assad is going to lose.

The problem is that he is going to lose slowly. He can easily fight on for another few months, although the correlation of forces has turned against him. De Gaulle abandoned the victory because of international pressure and because there were no real advantages (other than access to oil, which the Evian Agreements let France keep) to hanging on. The first applies to Assad. The second not so much.

What could change that timeline? Large-scale support for the rebels, which still does not seem to be happening, or a coup.

I see no signs of a coup, but I am not a Syria expert.

Don’t count on the end of Mexican emigration

A month back, we argued that the job and wage data in Mexico implied that when U.S. job growth picks back up, so will immigration from Mexico. Jobs are plentiful in Mexico these days, but wages are low: the reason for low emigration, in that view, is the lack of American demand rather a lack of Mexican supply.

It appears as though survey results from Pew are consistent with that view.

Keystone and U.S. oil markets

One new thing in oil markets is the persistant breach between the price of West Texas Intermediate (WTI) and Brent, ranging between $8 and $27. At the same time, the differential between Louisiana Light Sweet and Brent has remained under $3.

Why is that? Well, the answer is that American production has boomed in places like North Dakota. The price of WTI is actually set in Oklahoma (just to confuse you) and it is hard to get oil in large quantity from Oklahoma to the coast for export.Louisiana crude, on the other hand, is right there on the coast. As a result, the shale oil boom in the Dakotas (and to a lesser extent booming oil sand production from Alberta) causes crude to pile up in the Midwest, depressing prices relative to the coasts.

So who benefits? If the lower prices of Midwestern crude are passed on to Midwestern consumers, then they should oppose the Keystone pipeline. After all, Keystone will only make it easier to export oil to the coasts, where prices are higher. On the other hand, if the benefits of cheaper crude are not passed on, then consumers in the Midwest have few direct self-interested reasons to oppose it, at least in the short run. (They may, of course, have other valid reasons not to like the pipeline.)

Severin Borenstein of the Haas School of Business and Ryan Kellogg of the University of Michigan decided to take a look at this question. What did they find? Simply put: Midwestern refineries are running at capacity and can’t satisfy Midwestern demand. As a result, gasoline needs to be imported from the East Coast ... where crude is more expensive. Wholesale refined product prices, therefore, are not any cheaper in the Midwest.

There are three implications to this. The first is that in the short run, building Keystone will not drive up the prices faced by Midwestern consumers.

The second is that Midwestern refineries are significantly more profitable than refineries on the coasts.

The third is that if Keystone is not built, then refining capacity in the Midwest will rise, and eventually the Midwest will in fact enjoy cheaper gasoline than the rest of the country.

There are second-order implications about the desirability of whether U.S. oil exports should be allowed at all, but those will only be relevant when the U.S. achieves net crude oil balance. That is still some ways away, although it is now possible to imagine it happening with two decades ... perhaps much less.

Remember, France won the Algerian War

Really. It did. Militarily, the French army destroyed the FLN by the end of 1958.

Had France not possessed a democratic government, Algeria would have remained a part of France for a very long time. This has bearing on the Syrian civil war. Hopefully, Doug and I will have time to explain why in the near future. For now, we leave it as an exercise for the reader.

The rebels’ big problem is the lack of a unified chain of command. As a result, they screw up operationally what they win tactically. The regime’s big problem is a lack of manpower. Roughly 200,000 loyalist troops are trying to defeat 40,000 insurgents.

Consider the difficulties. It needs to stop the fighting from spreading further around Aleppo. (Rebels entered the city today.) It also needs to take on and reoccupy the rebel strongholds around Homs. Finally, it needs to prevent the rebels from operating freely around Idlib and Hama. That is a tall order.

The problem is that Assad is on course to defeat, but not quickly, and not against a unified force. There is no FLN ready to take over. There are only two ways to end it quickly, neither likely. One, outsiders can pick a rebel force and back it. Two, the Russians (or somebody) can give the Syrian army the resources it needs to massively expand the draft and go on the offensive without risking the areas it currently holds. (It is now trying to substitute capital for labor, by using artillery and helicopter gunships.)

I bet that Assad will make it to the end of the calendar year, just not really in power.

Another good reason Michael Ignatieff is not Prime Minister of Canada

He has a rather odd understanding of foreign affairs. This essay reads like a fever dream from a disillusioned neocon. Oh, wait ...

No, seriously, go read it. It is very odd. In its world, an allied Russia and China are backing the Syrian regime against the United States. You would get the impression that Bashir Assad is Ho Chi Minh. You wouldn’t learn that Russian “support” for Assad consists of, well, nothing. Sure, the Russian Federation has sold the Syrian Arab Republic a lot of weapons in the recent past, but that’s not the same thing as conducting “a proxy war between the Great Powers.”

Seriously, three attack helicopters is nothing compared to the massive amounts of materiel that went through Haiphong or over the Chinese border. Here is a CIA estimate of around 2,000 Soviet air defense personnel in North Vietnam circa 1965. There is also a frustratingly vague CIA estimate of Soviet military aid at the beginning of the war, but it gives some sense of the scale, and it dwarfs anything going to Syria. More information is in this 1968 CIA report about Sino-Soviet conflicts regarding military aid to the DRV. The discussion is over trainloads, for months, and massive airlifts, and shipments through Haiphong ... including potential Soviet military responses to a U.S. blockade.

And then the money document from 1968: go down to the last two pages. 2,230 artillery pieces in 1967! 70,000 tons of ammunition! 3,810 surface-to-air missiles! 123 armored vehicles! 700 vehicles from China, another 24,000 tons of ammunition, and 61 MiG fighter jets!

(By the way, did you know the U.S. operated unmanned drones in Vietnam? Page 2.)

Dude, that was a proxy war. This is Russia and China being annoying.

If you want some more serious intel about the Syrian civil war, this report is a good place to start. You also might want to check out this report about the Russian equipment used by the Syrian government. But Ignatieff’s essay is just completely goofy. Good thing he didn’t become Prime Minister. At least Canada doesn’t have the capability to act on the ahistorical bizarro-world musings of its head of government.

Greenpeace and parody

I have a checkered history with Greenpeace activists, as does my wife. I have surprised signature-collectors by calling them out on their crazy shut-down-the-Navy-sonars position. My wife has done the same, taking them to task for their opinions on nuclear power. And, of course, they have done some ridiculous acts of literal tree-hugging. But still, at the end of the day, I figured they served a useful purpose. In an age of human-caused global warming, somebody needs to keep the Overton Window from shifting too far against environmental protection, right?

Well, yesterday I get an email about Shell’s Arctic Ready campaign. So I looked at the site. Pretty obviously a parody. I mean, dude, it starts with “For hundreds of years, explorers have battled the Arctic. Today, we’re finally winning.” That is funny! And then there is the viral video, which is not only silly, but poorly acted. I am told people were fooled anyway, but Greenpeace came clean.

Abi Sutherland is upset with this. “Greenpeace lied to us. This wasn’t a nod-and-a-wink parody; this was a dedicated effort to deceive. They played the public for patsies and herded them like sheep. That kind of contempt for the people whose support (financial and otherwise) they need is inexcusable … Now, I know that our common discourse is already thoroughly befouled. But that does not mean it’s OK to add yet another dose of rainbow-shining toxic sludge to the mix, not even in the cause of righteousness. Indeed, especially not in the cause of righteousness.”

I see where he’s coming from, but I don’t agree, despite the fact that I hang out with oilmen. A parody is a parody, and this one was less-than-subtle. It was totally “nod-and-a-wink”! And Greenpeace didn’t let it go on for long. And there are lots of reasons to be skeptical about Arctic drilling.

So, no, I am not a fan of Greenpeace. But I also don’t think this parody did anything wrong. Am I being too generous?

A hidden blow for the workers of the world

Doug Muir pointed out to me that something interesting happened in 2009, to the attention of pretty much nobody. That something got the World Bank to change how it reports on countries’ labor regulations ... and by so-doing, remove a long-standing anti-labor bias at the Bank.

The World Bank has a set of indicators called the “Doing Business.”  It measures how easy it is to do things like start a business, get a loan, etc. One of the indicators used to be “Employing Workers.”  The index penalizes countries that establish minimum wages above a quarter of average wages, set maximum weekly hours below 66, require any advance notice for dismissal or specific procedures for job termination.

The index is problematic. First, when you dig down into the data, you can find some odd judgment calls: the United States, we’re told, has no restrictions on night work and no mandatory notice period for dismissal ... which I suppose is true in some states, but not most. Saudi Arabia gets a perfect score despite regulations that ban women from particular professions.

Second, labor unions have protested that the index assumes, without much empirical backing, that labor market regulations are all cost and no benefit. The unions are correct on this point: the empirical evidence is very much lacking that the Bank’s indicator has any consistent effect on employment levels or growth. 

But nobody cares about unions, and so nothing happened until 2009, when somebody introduced this paragraph into a supplemental spending bill in the U.S. House of Representatives:

SEC. 1626. REFORM OF THE ‘DOING BUSINESS’ REPORT OF THE WORLD BANK.

(a) The Secretary of the Treasury shall instruct the United States Executive Directors at the International Bank for Reconstruction and Development, the International Development Association, and the International Finance Corporation of the following United States policy goals, and to use the voice and vote of the United States to actively promote and work to achieve these goals:

1. Suspension of the use of the “Employing Workers” Indicator for the purpose of ranking or scoring country performance in the annual Doing Business Report of the World Bank until a set of indicators can be devised that fairly represent the value of internationally recognized workers' rights, including core labor standards, in creating a stable and favorable environment for attracting private investment. The indicators shall bring to bear the experiences of the member governments in dealing with the economic, social and political complexity of labor market issues. The indicators should be developed through collaborative discussions with and between the World Bank, the International Finance Corporation, the International Labor Organization, private firms, and global unions.
2. Elimination of the “Labor Tax and Social Contributions” Subindicator from the annual Doing Business Report of the World Bank.
3. Removal of the “Employing Workers” Indicator as a “guidepost” for calculating the annual Country Policy and Institutional Assessment score for each recipient country.

(b) Within 60 days after the date of the enactment of this section, the Secretary of the Treasury shall provide an instruction to the United States Executive Directors referred to in subsection (a) to take appropriate actions with respect to implementing the policy goals of the United States set forth in subsection (a), and such instruction shall be posted on the website of the Department of the Treasury.

Within 90 days, the Bank dropped the indicator. It’s still being tracked, but it’s no longer included in the international rankings, which means nobody cares.

There is a mystery here. Somebody inserted that provision, but it was done very quietly and even development professionals didn’t pick up on it at the time. Oh, they noticed that the indicator was dropped, but not that it was in response to a legislative threat from the United States. It was a very discreet threat, buried 1600 paragraphs down in a supplemental appropriations bill. Obviously this was only a meaningful threat in the context of the last Congress — today the Bank would be able to ignore this, confident that the Republicans would strip it out. But in the summer of 2009 someone was able to push back against the Bank and force it to abandon, in Doug’s words, “a pretty aggressive anti-labor position which was already having noticeable effects across the developing world.” The Bank would say it was anti-regulation rather than anti-labor, which is not completely unfair, but ignore that for the moment.

Who was the responsible party? Some staffer? A senator? President Obama? I would like to know.

Partitioning Syria

We haven’t talked much about Syria lately. Here follows some speculation.

Assume for argument’s sake that Assad can’t defeat the rebels, but neither can they ovethrow him. Say a year passes, and the rebels get better armed and organized, and maybe they gain actual control over large chunks of land — but the Alawites stand firm around Assad, Russia and Iran continue their support, and no foreign military power is willing to actually intervene with troops on the ground or air strikes. What happens then?

Could Assad gives up much of Syria in order to consolidate his people into a new, Alawite-dominated state along the coast? It’s largely forgotten today outside of Syria, but exactly such a state existed under the French Mandate, from 1922 to 1936. The French did it in order to break up and weaken Syrian nationalism, of course, but older Alawites remember that their parents and grandparents were perfectly content under L’Etat des Alouites.

How to make this work? Well, there are three possible scenarios. Let’s game them out.

Scenario #1: The Lion’s Share. So you’re Assad, and you’ve decided to split the country in two. You want to get rid of as many treacherous, disloyal Sunni Arabs as possible, but you also want to keep as much territory as you possibly can. In this scenario, you make territory a priority.

Starting in the north, you try to hang on to Aleppo if possible. Yeah, a lot of Sunnis there. You’ll have to either placate, pacify or expel them. But Aleppo is the country’s biggest city, strategically important in all kinds of ways, and the center of its industrial base. So, keep Aleppo. Now draw a line just east of the Homs-Aleppo rail line. The bone in the throat here is Hamah — large city, conservative, Sunni, traditionally hostile to the regime. So evacuate the few friendlies — mostly the few local Christians — then bomb and shell it to rubble, then drive everyone out. (Did I mention that this scenario involves some vigorous ethnic cleansing? Because it does. Very vigorous. But when it comes right down to it that’s what you have an Alawite-dominated army for.)

You want to swing south to include greater Damascus: more industry, plus legitimacy. (We hold the capital!) As with Aleppo, you’ll have to do a lot of cleansing: omelettes, eggs. Some Sunnis will stay, if not loyal, at least neutral. If they’re economically useful, keep them. Draw your border sharply south of Damascus, because honestly you don’t really care about the Golan — let the other guys take up that quarrel with Israel.

You can’t get everyone inside the tent, so don’t go crazy trying. Let the Kurds in the northwest go hang; you never liked them anyway. You may or may not try to rescue the scattered Christian communities around the country — they’ve been junior partners in Alawite rule for 50 years now, and will be understandably nervous of coming under a Sunni-majority regime that’s likely to be Islamist. If they’re loyal, grab as many as you can. In general, you really need as many as possible of the non-Sunni Arab groups — the Christians, Druze, Circassians and other odds and ends — on side to make this work, so outreach to them should be an integral part of your strategy.

Natural resources: You’re giving up all the oil and natural gas in the east, alas. But you’ve got the coast — if you’ve played this right, you should have all the coast — and the pipeline terminal. You’re giving up ~80% of the country’s area, but a lot of that is lightly populated scrubland or desert. And you’re keeping most of the good stuff — the ports, the biggest cities, most of the industry, most of the water. And your new country is still respectably large: say eight or nine million people in an area of maybe 30,000 square kilometers, about the size of Belgium. In round-ish numbers, it’s maybe 30% Alawite, 40% Christians-Druze-Turkoman-Circassian-whoever — basically, all the ethnic and religious minorities you could convince — and maybe 30% Sunni Arabs. Your ruling ideology will be firmly secular and probably kinda fascistic.

Does this work? — Well, honestly, probably not. One, Syrian nationalism is a real and potent force, so dividing the country won’t be easy. Two, there isn’t really a natural borderline — “a few kilometers east of the M1 highway” doesn’t really do it. You’re kind of trying to pull a Chiang Kai-Shek without the advantage of being on an island. Three, you’ll have to expel a lot of people — millions of people — to make sure your new state is properly Alawite-dominated. I’m honestly not sure the Syrian military and security forces have the capacity to carry this out. Moreover, attempts to do so would invite large-scale external intervention.

Okay, so let’s try Scenario #2: Road to Damascus. This is the same as above, but with this difference: you give up Aleppo. In fact, you give up everything north of Hama. (You can still bomb and shell it, of course.) Basically, you’re just trying to keep Greater Damascus, the ethnically mixed (and relatively regime-loyal) mountains and coastal strip, and a corridor between them.

The good news is, this scenario gives you a more Alawite-dominated rump Syria; Alawites are now around 40% of the population and are the largest single ethnic group. The bad news ... well, there’s a lot of bad news. The Sunnis now have over 80% of the land, most of the population, a fair chunk of the industry, and long land borders with Turkey and Iraq. This is a recipe for protracted civil war, and it’s a civil war you’ll have trouble winning. The major strategic problem is that Damascus is 250 km away from your Alawite homeland, and there’s no good road or rail connection between them. You’re trying to hang on to a long, broken-backed slice of territory that doesn’t make any sort of strategic sense. Perhaps this scenario could happen as the result of long war followed by a peace of exhaustion, but it’s not anything you’d actually try to make happen.

That leaves us with Scenario #3: The Alawite Redoubt. In this one, you pull back to the Alawite homelands — basically the coastal strip and the mountains behind it. As before, you bring in as many Christians and other friendly minorities as possible. Your new state will be majority Alawite, and it will make strategic sense and will be relatively dependable.

Unfortunately, it will also be small. Very small. Probably too small to be viable, given a hostile Sunni rest-of-Syria. Giving up Damascus means giving up international legitimacy — even the Chinese are probably going to switch sides once the rebels control the capital and 90% of the country. Your enemies will outnumber you four or five to one, and who will have most of the country’s resources and industry. NATO can blockade you until your enemies gather enough force to come over the mountains from the east and crush you once and for all. This could be the last phase of a civil war but, again, it’s not anything you should be actively trying for.

So, in summary, there are no good choices. Option #1 is perhaps the least bad, but it’s probably not within your reach.

What then should Assad do? Well, that’s a question for another post.

Was the Mexican election stolen?

 

Was fraud decisive in the Mexican presidential election? Well, in the sense of fraudulent vote-counting, no. But what about vote-buying? The PRI stands accused of bribing people to vote for them. Moreover, cellphones have provided a new way of circumventing the secret ballot: to get the bribe, the voter needs to zap a picture of his or her ballot. Pretty nifty stuff! More prosaically, the PRI-Green coalition hired children to watch the voting and report back.

Still, at the end of the day, Peña won by a margin of 3.2 million votes. My friend Alberto Simpser calculates that there it would have been expensive for the PRI to have bought enough votes to swing it. Here’s his calculation (modified slightly by yours truly to account for an apparent arithmetic mistake):

First, the PRI needs to swing a minimum of 1.6 million votes from the PRD to win. Second, reports show bribes between 100 and 1,800 pesos per voter. (Note the final “r”!) Youtube indicates that 100 pesos was small enough to backfire. Alberto goes with ₱700, which is consistent with data from the 2000 election (after adjusting for inflation) of a cost of ~₱500. Finally, bribing a voter is not the same as getting his or her vote. Data from a 2004 survey of Argentines implies a vote-buying efficacy of around 16%. So ... the minimum cost of buying the election is: ₱700 × 1.6 million ÷ 16% = ₱7 billion, or US$560 million.

That is a significant chunk of change. Of course, if you assume that the PRI is better at targeting its vote-buying than Argentine parties (which is not unreasonable) the cost goes down.

At 33% efficiency, the minimum cost of buying the election drops to $272 million. Even at an impossible 100%, the coalition would still need $90 million. That is a significant chunk of change: legal spending by the PRI-Green coalition came to only $111 million. Alberto concludes that although the PRI could have raised such sums, they should be detectable. For what it’s worth, the PRD claims to have evidence that the PRI-Green coalition spent $320 million.

To recap: Alberto is not arguing that the amount needed to buy the election is too large to carry out! He is arguing that the amount is too large to hide.

When evaluating the morality of the situation, as opposed to the legality, readers should keep in mind what exactly the PRI stands accused of. It matters whether voters were offered store coupons or offered rides to the polls, both being illegal under Mexican law. Consider the list of illegal behavior on election day reported by the Alianza Cívica, with the percentages reporting the activity:

1. Someone came to your door to insure that you voted (5.6%);
2. You were offered breakfast (2.3%);
3. You were called by phone (2.1%);
4. You received a gift (1.7%);
5. Someone tried to take your voter ID (1.0%);
6. Someone offered to take your voter ID to the polls (0.3%);
7. Someone gave you a pamphlet (0.3%);
8. Someone offered you a ride to the polls (0.8%).

Well, I worked heavily in North Carolina in 2008 and in Florida in 2004. (I also worked on New York local elections in 1988 and 1989.) The GOP in New York and the Democrats in Florida and N.C. all engaged in nos. (1), (2), (3), (7), and (8) quite legally. They also did a little bit of (4), not so legally. (Google “walking-around money.”) 

I find it hard to be outraged about (1), (2), (3), (7), and (8). After all, not all that is legal is moral, and not all that is illegal is immoral. That said, an argument can be made that political parties need to be held to a higher standard: they should avoid all illegal behavior (regardless of morality) and a pretty good chunk of legal behavior as well. My point is only that 1988 this is not, but I can be convinced that I should be more outraged than I am.

Prescient, or coincidence? Well, obviously the latter, but I’ll post anyway

What do you know? I post a picture of the HSBC building in Mexico City to illustrate a post about money-laundering, and suddenly a Senate committee accuses HSBC of money laundering!

But as Gancho warns, be careful about the significance of these reports. The fact the HSBC was lax does not translate into all of its business consisting of money-laundering. This is not exonerate HSBC. Nor is it to say that we should not combat money-laundering. It is simply to say that we have to be careful when estimating the size of illicit flows. Jumping to conclusions is just another way of making the cartels seem like unbeatable superorganizations, when they are not.

The internets are freedom-neutral

Not unexpectedly, the protests over the recent Mexican election (which will go nowhere) have led to bloviations about Twitter and Facebook and the blogosphere yadda yadda. My skepticism about the political effect of the Internet is well-known. Here I pointed out that the Egyptian government readily shut it down during the rebellion. Here I mentioned that revolutionary activity spread further and just as fast in the mid-nineteenth century. And here I presented evidence that most revolutionary mobilization in Egypt took place via ... printed leaflets.

So I was gratified when Mex Files (which you should all read regularly) published photographic evidence that angry young Mexicans agree with me.

“If I had known that you would be a cowardly Mexican, then I would’ve stuck to taking care of my cows. I didn’t have the Internet or Facebook, and I made a revolution. You, you’re too lazy to march for your rights. But hey, ‘Viva México,’ right?”

Right. I actually don’t think the recent Mexican election was fraudulent, and I still say right. The internet has made political mobilization easier — but only for those who were going to mobilize without it.

Money-laundering 101: Wachovia and the casas de cambio

Mónica in comments is gobsmacked by the amount of money that Wachovia handled in wire transfers from Mexico without “applying the proper anti-laundering strictures.” $373.6 billion over three years, reported the Guardian last April. What does that number mean?

Well, as Mónica surmised, it means less than one might think. What happens when somebody in Mexico goes to a casa de cambio and gives it a dollar to wire to the United States? The casa de cambio acquires the dollar bill. The casa de cambio has an asset: the dollar. Double-entry accounting means that it creates a corresponding liability: it owes $1 to whomever gave it that dollar to send. 

Now it wires the dollar to Wachovia. It gets an asset: a $1 deposit at Wachovia. It also gets a liability: Wachovia will at some point want that dollar bill, or some corresponding dollar-denominated liability. (The deposit at Wachovia then cancels the $1 owed to the customer, since the customer receives the deposit account. But the other asset and liability generated by the transaction remain.) In other words, that $373.6 billion is a gross flow: the change in the casas’ liabilities generated by wire transfers to the U.S.

Is that gross flow big or small? Clearly a lot of money sloshes back and forth between the U.S. and Mexico. But even more money sloshes around within Mexico. For example, in the first quarter of 2012 the Mexican payments system processed about $193 billion in checks and $1.2 trillion in other transactions. Over three years, that would be almost $15 trillion. (Wow!) Given that baseline, the cross-border figures do not seem out of line. Rather, what is surprising is the implication that Wachovia (and its 22 correspondents in Mexico) appear to have captured so much of the business. Even so, there is an explanation for that: the DOJ indictment against Wachovia mentions that other banks were getting out of dealings with the casas de cambio precisely to avoid problems with illicit transfers.

The indictment also says that these transfers occured on behalf of the customers of the casas de cambio, but I suspect that much the flow consisted of the casas’ own accounts. After all, they probably wanted to earn interest on their dollar balances, and this was a way to do it.

What was the net flow, then? After all, whenever the casas needed dollars the process would go into reverse. Fortunately for us, Wachovia offered two services to the casas de cambio to help them net things out when the time came for them to make good on the claims against their dollars. First, it helped them physically move dollar bills to the U.S. That came to $4.7 billion over the period. (See page 5 of the indictment.) Second, it allowed the casas to accept checks, travellers checks, and other dollar-denominated liabilities, digitize them, and use the digitized documents to effect settlement in the United States. Those transfers came to $47 billion.

In other words, the net flows were a lot smaller. $52 billion over three years is still a lot of money, but remember that is only a net flows from the point of view of the casas de cambio. From the point of view of Mexico as a whole, they are still gross flows. The Department of Justice, in fact, found that only $110 million of the flows were clearly crime-related. (The link goes to the settlement agreement.) Wachovia failed to monitor its activity, but the bank retroactively analyzed its transaction: little suspiscious was found.

The amount Wachovia processed is staggering. And the bank did a lousy job of real-time checking. But the amounts are not out of line for two adjacent countries with economies as large as the U.S. and Mexico. And neither the amount nor the malfeasance implies that most, or even 99.9% of it, is illicit or criminal. After all, how much money to you think Mexican drug cartels want to transfer into the United States?

Pointing out the obvious

 OK, I don’t comment a lot about American politics these days, but I just want to point out that Condoleeza Rice is not going to be the next vice-president of the United States, no matter who wins in November.

Oliver stoned

 In a recent interview on “Piers Morgan Tonight,” Stone used a series of unfounded statistical assertions to justify his opposition to the war on drugs, the theme of his movie “Savages” which opened in the U.S. earlier this month. Among his comments, as compiled by the Los Angeles Times:

The Mexican economy would die without [drugs] because they need the money. It goes into their legitimate economy. It’s bigger than tourism. It’s bigger than oil. It’s bigger than remissions from their Mexican emigrants back to their country ... Fifty percent of our prison system is victimless crimes. People who’ve never hurt anybody, they’re in for marijuana and it has nothing to do with punishment. It’s a medical issue, and I think we have to move to decriminalization and legalization.

Stone is right to point out that the mass incarceration of drug offenders is demonstrably inefficient and in many senses immoral, but his facts are incorrect. Drug offenders do not constitute 50 percent of the US prison system’s inmates, but just over 20 percent. There are certainly more effective and humane ways to deal with the issue than tossing these people behind bars, but the opponents of the largely mindless approach to drug policy that has dominated in the last 40 years only hurt their case by casually tossing out falsehoods.

The problem continues with Stone’s statement that flows of drug money in Mexico are larger than those from tourism, oil, or remittances. Estimates for the value of the Mexican drug trade are all over the map, but the most rigorous analyses have concluded that export revenue from the drug trade is far lower than Stone suggests. Alejandro Hope, for instance, places the figure somewhere between $4.7 to $8.1 billion, while the RAND Corporation estimates that Mexican traffickers earn roughly $6.6 billion per year from sending drugs to the US.

In contrast, remittances sent by Mexicans living abroad in 2011 amounted to $22.7 billion. Mexico’s tourist trade, notwithstanding the nation’s unfortunate image in the international press, still managed to generate $11.9 billion in 2010. Stone’s claim is even further from the mark with regard to oil: the revenues for Pemex, the national oil company, amounted to $125 billion in 2011.

Consequently, Stone’s statement that the Mexican economy “would die” without drug money drifts into the terrain of the indefensible. Unfortunately, Stone is not alone in this exaggerated view of drug money’s role in the Mexican economy. One story, put forward by authors like Richard Grant and Charles Bowden, holds that a 2001 study by CISEN, Mexico’s intelligence agency, found that an end to the drug trade would result in a 63 percent contraction of the Mexican economy.

The study is not public — citing a story from El Diario de Juarez, Bowden wrote that it was leaked to the media in 2001, though InSight Crime’s online search for the original study turned up nothing. It is difficult to know, therefore, if its authors were perhaps making a more nuanced point that was lost in subsequent references to it. However, the scenario posited by Grant and Bowden, and the implicit idea that the Mexican economy would “die” without drug money, is simply absurd. [Note: Alejandro Hope and Jaime López-Aranda do not believe that the study exists.]

The most obvious flaw is the very idea that drug trafficking could disappear entirely. Though the size and composition of proceeds from the illicit trade may vary, longstanding industries, especially those that feed upon deep-seated human desires, don’t simply disappear from one year to the next.

Moreover, as demonstrated above, the total revenue generated by the drug trade is relatively small. Even using a methodologically suspect high-end estimate, such as the $39 billion cited by the US National Drug Intelligence Center, the figure amounts to less than 4 percent of total Mexican output. Using the more rigorous calculations of the industry’s size, drug trafficking probably accounts for roughly 0.5 percent of the nation’s economy. Eliminating the proceeds of drug smuggling would certainly have a significant impact on the GDP, but such an event, aside from being virtually impossible, would be nothing like the economic apocalypse posited by Stone.

Beyond simply being incorrect, Stone’s comments fuel a dystopian narrative of Mexico that has done the nation a great disservice over the past few years. They also help feed a belief that Mexico’s criminals are invincible supermen, against whom capitulation is the only solution. This is wrong, just like Stone’s facts.

Esther Gordillo wins Congress! Mexico, though, loses.

 Who is Esther Gordillo and how did she win Congress, you ask? Give me a moment for that issue. First, we have some quasi-official Congressional results. The preliminary estimates appear to have been remarkably inaccurate. (Diego Valle, can you explain that?)

In the Senate, the PRI-Green alliance has picked up 48 senators directly and 13 seats via P.R., for a total of 61, four short of a majority. In the House, the PRI-Green alliance has taken 157 districts plus 83 party-list seats. That is eleven seats shy of a majority. (It is also a full twenty districts less than the preliminary post-election count.)

The New Alliance Party (aka “Panal”) won another ten P.R. seats. If the PRI can convince the Panal to support them, that would provide 250 votes.

Now 250 votes aren’t quite enough for a majority. The Mexican constitution contains no tie-breaking provisions. Article 142 of the House internal rules states only that in the event of a tie, the House will immediately vote again.

If still tied, they vote again the next day, at which point that’s it. (Unless the matter is really pressing, in which case they will hope for a miracle, or something. Really! Go read the rules at the above link.) So the PRI will need 251 votes to pass legislation through the lower house. With the Panal plus one independent or PAN defector, they will have it.

Which brings us to Elba Esther Gordillo and the Panal. Gordillo heads the national teachers union (SNTE). Now, I am aware that Republicans like to prattle on about the power of the teachers unions in the United States. That is because Republicans do not know what a real union looks like. Gordillo is immensely powerful, and immensely corrupt. Frex, on an official salary of $26,910 a year she somehow bought a house in San Diego for $1.7 million, in the same neighborhood as Mitt Romney.

The SNTE was part of the PRI machine, but split in 2006 to support the PAN. As part of that split, the union created its own political party, the Panal. Lest there be some confusion, Patrick Corcoran reminds us that the top two positions in the Panal bureaucracy went respectively to Gordillo’s daughter and Gordillo’s personal secretary. Gordillo could have just thrown her votes to the PAN directly, but creating a party gave her more flexibility ... and access to federal election subsidies. Panal did not run a presidential candidate in ‘06, but it did picked up nine seats in the House and elected one senator.

This year, Panal ran its own candidate for president, the hapless and vaguely hipster-looking Gabriel Quadri. The reason was to leave Gordillo’s options open for post-election negotiations. The SNTE has 1.2 million members and managed to pull in about that many votes for Quadri, plus 1.7 million votes for the Panal’s congressional slate, enough for ten deputies and a senator.  

Now, my prediction is that given its internal splits, the PAN will not resort to a Republican-style strategy of unified opposition. That will reduce Gordillo’s leverage. That said, she will be the PRI’s easiest route to a working majority in the lower house, giving her something close to a veto. In other words, it is probably the best possible result from La Maestra’s point of view.

But it is a bad result for Mexico. Not the worst, but bad. For those who still wonder why (the $1.7 million house wasn’t enough?) read this article from the Economist.

Ms. Gordillo is not the sort of person you want in a position of power, and this election gives her more power.

Election update: PRI loses Senate, and recounts afoot!

OK, we now have better results ... and I’m now reading them correctly. (The previous post used the wrong numbers.)

In the Senate, the PRI-Green coalition won 18 states, 36 seats. They came in second in 10 more, for 46 seats in total. In the P.R. vote, though, the PRI will only pick up 10 seats, and its Green allies another two. That’s 58 seats, seven shy of the 65 needed for a majority. The

House still might be PRI. 174 districts for the PRI-Green coalition, plus 80 P.R. seats, for a bare majority of 254.

Large-scale recounts are underway. To be honest, I do not understand why they don’t just change the law and make a full recount automatic.

Ray Kurzweil never went to business school

I gotta be honest: this makes the future less scary.

God bless the lawyers.

I am trying to not say something that I will regret about Joe Walsh ... donate to Tammy Duckworth!

I cannot announce my real feelings, because I will say them in New Yorkese, circa 1980, and that level of profanity is not appropriate. But I will say that nobody should vote for that chickenhawk, Joe Walsh. (Click the link to see what he said. Or watch the below video. Did people really chuckle at his remarks?)

Contribute to Tammy Duckworth, a wounded American veteran who is still in the reserves, when lesser people (I raise my hand here) got out over opposition to the same war she also opposed. If Walsh wins, then America is a lesser place.

(By the way, bring back the draft before the robots make it moot. And ... since I am happily off Facebook, somebody please post this to Garri Hendell’s wall, and tell Garri to get in contact with me about how we are going to defeat that ... no, I will not use the Brooklyn term ... unpleasant fellow.)

Postelection roundup: Polls blow it, PRI likely takes Congress, and AMLO calls fraud

 I hope those of you with interest in the race were turning to Diego Valle. He took on the challenge with aplomb, and his blog became the go-to data-driven place for election news.

The polls substantially overstated Peña’s lead in the run-up to the election. My initial thought was that the undecideds broke for AMLO, but Diego’s evidence is that the polls had a systematic bias. Considering the prevalent use of face-to-face polling, and that the polls were more accurate in 2006, that’s surprising, but the information should lead to better polling in the future. (And good job offers for Mr. Valle, I hope.)

The results are still not in, but it looks like the PRI will take Congress. So far the PRI (or the hard-to-explain PRI-Green coalition) has won 187 out of the 300 first-past-the-post districts. They also appear to have gotten 58% of the congressional vote (tossing the Greens running alone, who did not make the 2% threshold) which (I think! It gets complicated) will give them more-or-less 116 of the PR seats. That is rather more than 250, and thus they should have a majority in the House.

The Senate is less clear. The PRI won 18 states outright, which gives them 36 out of 128 senators. They appear to have come in second in 13 more states, upping their total to 49. Then the two received about 56% of the vote, which will give them (once again, more-or-less, it’s complicated) another 17 seats for a total of 66 ... a 2-vote majority. Recounts and the complications of the PR process could lose them that edge.

Finally, it looks like AMLO is calling fraud. It is indubitably true that the election was far from perfect: see some evidence on Mex Files, and note that the early reporting system clearly broke down for a while. But that, of course, is far from saying that the election was fraudulent. This stuff from Anonymous is entertaining, but not credible, and the anecdotal evidence is, well, anecdotal; only PRI-favoring errors have been reported.

After 2006, I get worried about these sorts of claims. A legal challenge is one thing, once again going to the streets or occupying Congress is quite another. Richard Grabman predicts more such events; I can only hope that he is wrong. Considering that the margins in most districts are quite substantial (and the overall presidential margin ain’t nada) I suspect that he is.

But I do not know. I worry, at least a little. But let’s stay optimistic!

A bad person did something bad and bragged about it in the New York Times

 Imagine the following. You are sitting at the Port Authority Bus Terminal in Manhattan. While you are there, you see someone get punched in the face a few feet away. The victim staggers and collapses, bleeding, in front of you. Do you:

1. Take a good look at the perpetrator, move away quickly (for fear of a weapon), and immediately call the police;
2. Run to the victim (realizing that he is concussed and may not recover) and make sure that he is still breathing and responsive;
3. Run in front of the perpetrator and yell “Basta!” or something along those lines, while blocking him with your body.

All three reactions would be honorable. A fourth would be a completely understandable variant on (1): move away and call 911 on your cellphone (within seconds, obviously) without memorizing any identifiable characteristics of the perpetrator.

What you do not do is what Christine Quinter and her father did, and then bragged about doing in a letter to the New York Times Metropolitan Diary column. I reproduce the letter for you below.

Dear Diary:

My father and I recently spent a lovely day in Manhattan. We saw a matinee performance by the New York City Ballet and met good friends for an early dinner on the Upper West Side.

While passing the time before our bus came in the Port Authority’s Deli Plus, we witnessed a fight. One of the young men was punched in the face and collapsed on the floor just a few feet away from us.

I think my father and I handled the situation like true New Yorkers. We didn’t panic or run for safety. We merely moved our $22 bag of cupcakes from the Magnolia Bakery out of the way to avoid having it splattered with blood and went on with our conversation.

Christine Quinter

Sweet Mary mother of God. Somebody please tell me that this letter is fake, or otherwise lacking in context, because the above is just unforgiveable.

Victory! For Spain ... and (we hope) for Mexico

 We know the result in the European Cup! Great game, and a most unexpected blowout. Poor Balotelli.

We won’t know the results of the Mexican election for a few hours yet. Absent a truly earth-shattering surprise, though, the details are for the Congressional vote: did the PRI win a majority or not?

In the meantime, here is some food for thought. Four things. First, Mexican face-to-face polling may be the future, as Americans give up land lines. (And, as importantly, become less eager to answer the calls that do come in.) Second, the Economist argues for political reform, but I encourage you to doubt whether the reforms being mooted will make any noticeable difference to Mexican governance. (If there is interest, I will explain my doubts.) Third, consider that the biggest damn difference that any Mexican government can make regarding any damn issue facing the country is to raise more public revenue. The PRI has floated the idea of higher taxes, and there are reforms afoot that might (might! maybe!) reverse the decline in Mexican oil output.

Finally, though, remember at the end of the day that politics exists for two reasons. First, to give us a way to decide on public issues that don’t involve violence. Second, to make the society a better place for its weakest members. And with that, I give you this picture of a little girl in Iztapalapa, D.F., in front of her home ... a home where the family puts out tarpaulins to capture rainwater, where the streets regularly flood, where wages are tiny, where crime is high, and where this brilliantly smart little girl will attend schools that are barely able to teach her any more than her heroic parents already have. None of that is fair, not by my lights.

It might be cheesy, but f--k that. It’s people like this family that make you remember why all this matters.

Uncertainty and certainty, European soccer v. Mexican politics

 Uncertainty involves the game that starts today at 2:45pm EST. My wife pointed out to me that my mother is probably spinning in her grave right now, considering her lack of attachment to the madre patria. (In a European competition, she would be have been more likely to root for the Netherlands than the land of our ancestors.) Me, on the other hand, I revel in the victories won by our distant cousins!

Of course, everyone in America who doesn’t think I’m Puerto Rican thinks I’m Italian-American. (Which, to be brutally frank, I am, if we abstract away from such technicalities as my ancestry.) And how could I not like the pair of Balotelli and Buffon? But I think the furia roja is equipped to keep Pirlo in a box ... and we have Llorente (from Navarra, where my grandfather was born!) and Soldado. Plus, Casillas is an awesome goalie, and Iniesta an awesome striker. (Yes, I know he plays midfield.)

It’ll be a great game no matter what, unless the two sides resort to a defensive fallback like Spain’s last game or that miserable Italy-England soccer Stalingrad. I want the furia roja to win, but it matters not.

Today’s election in Mexico, unlike the soccer match, involves almost no uncertainty at all about the result. Enrique Peña Nieto is going to win. The polls are unanimous on that point. On the other hand, there is a great deal of uncertainty about whether it matters. From looking at campaign ads, it all seems pretty inane.

But it is not inane. How much is at stake hinges on three known unknowns:

1. What does Peña Nieto want?
2. What power will he have to accomplish (1) above?
3. What will be the consequences of the subset of (1) and (2)?

Gabriel Aguilera summed up well the dilemma of question (1): does Peña Nieto want to be a great Mexican president, or does he want to be a great Priísta? That is, does he want to leave his country in better shape regardless of the consequences to his party, or does he want to leave his party more powerful regardless of the consequences to his country?

Of course, it isn’t really a dilemma but a continuum ... and sometimes, as it took the Obama administration way too damn long to learn, good policy is good politics. But that aside, the above really is the first question.

Here is a good essay on just how bad it could be if Peña wants to be a great Priísta. Jeffrey Weldon thinks that is his aim. The Economist does not. The writer of this graffiti disagrees with the Economist.

 And then there is question (2). The Mexican president, unlike his or her Argentine counterpart, really is a weak figure. Now, that is not true when seen from the North: they have two advantages over their U.S. counterparts and one advantage over their Democratic U.S. counterparts. First, only one two executive positions requires congressional approval: the attorney-general and the treasury secretary. Second, the Senate of Mexico has no filibuster and no holds and none of the other insanity that has accumulated around the Senate of America. In addition, the entire Mexican senate is elected at the same time as the President, which makes it more likely for the President to have a majority, as does the presence of the electoral list senators. Finally, Mexican parties are generally more disciplined than the Democratic Party, although not as disciplined as the Republicans.

(For a description of the Mexican Senate, see here. For those bothered by my use of “America” to mean the United States, go away.)

That said, the Mexican president is nonetheless weak as American presidents go. (For those bothered by the above use of “America” to mean the entire Western Hemisphere, go away. Consistency, hobgoblins, all that.) He or she has no true decree power, and cannot introduce bills into the legislature nor command the legislative agenda. On the margin the Mexican presidency is slightly more powerful than the president of the U.S. of A., but rather less so than most other presidents in this hemisphere. Therefore ...

... It will matter a lot whether the PRI has a congressional majority.

The wrinkle is that the PRI has lost a lot of its national discipline: the Priístas I spoke to over the past week have told me that the party has evolved into a series of state-level fiefdoms, where the governor effectively chooses the congressional candidates, and machines are perpetuated by having the governor switch offices with senators and deputies and then switch back. That means that the congressional PRI will want President Peña to be a great Priísta, and not necessarily a great President. In such a world it might be better for President Peña to lack a PRI majority.

As long as the PAN and PRD decide that they will not be served by a GOP-like strategy of automatic opposition (and I suspect that they will not be so served), a Peña who wants to serve his country could build cross-party majorities. Remember, Mexico has no filibuster; its Senate (unlike ours) functions as an ordinary legislature. In short, it will be good if the PRI does well in Congress, but not quite well enough to secure a majority in both houses.

Finally, there is question (3). The problem with it is that there is no way to tell until we have the answer to questions (1) and (2). In the field of security policy, I am with Patrick Corcoran (see part one and part two): there is unlikely to be much change. But in economic policy, there could be; ditto in political reform.

I will discuss more later about what I think the answers are to the above questions. Right now, I just want to say that every Mexican needs to answer (1), (2), and (3) for themselves, and then go out and vote. After which, root for the madre patria!

UPDATE: I was incorrectly informed that Article 71 of the Mexican constitution had been reformed to remove the Presidential power to introduce bill directly into Congress. That is incorrect. The President of Mexico, unlike his or her American equivalent, can send legislative proposals directly to committee. He or she cannot, however, force them to the top of the agenda in the manner of most other Latin American presidents.

Mexico is gaining jobs, not wages

In 2009, in the wake of rapid inflation, Chinese unit labor costs were 72% of Mexico’s. (See page 19 at the link.) By early 2010, Chinese unit labor costs had risen to 86% of the Mexican level, and Mexico started to export cars to China. For some goods, landed costs (i.e., the cost of manufacturing and moving to the mainland U.S.) are much cheaper in Mexico than in China.

If you only look at the Chinese side, there seems little prospect of these trends turning around. China is experiencing bad labor shortages. Moreover, China has an inflation problem (the strategies described in this post seem to be hitting their limit) and its low inflation of 3% is not much lower than Mexico’s higher-than-expected 3.9%. Meanwhile, the peso is falling, while the yuan is likely to head nowhere but up. (If that turns out to be wrong, expect bad political consequences.)

On the other hand, if you look at the Mexican side, the reason Mexico is gaining competitiveness is that wages are flat. And flat at a low level. The good news is that Mexico is seeing rapid employment growth (see chart below) but Mexico no longer has endless millions of peasants to pull into the cities. Job growth is a good thing, of course, but it can go only go on for so long. (Mexico rebased its employment measures in 2010; thus the two indices.)

Translation: this is good news for Mexico, but it is a one-time thing. Without productivity growth, either within industries or by shifting into new products, Mexico wll remain relatively poor.

Implication: if the U.S. economy ever picks up again, so will emigration.

Omission: the effect of violence and extortion. The jury is out.

El perro que no ladra

 One strange thing about the upcoming Mexican election is how little the economy seems to matter. I don’t mean questions of long-term growth or distribution; those are very much an issue. I mean short-term business cycle stuff. Manufacturing output is up. The peso is down, but the central bank seems relaxed. Judging from the results on inflation-linked bonds, so are the markets. Consumer confidence has followed suit. Nobody is running a campaign like the ones in the United States or Europe. Growth since the 2008 shock is slow, but steady, as the below chart of GDP (in millions of 2003 pesos) shows.

To be frank, I was worried three years ago. But the bad economy dog did not bark. Why not?

Well, I was worried that Mexico was going the austerity route. But it didn’t! Mexico was no paragon of countercyclical fiscal policy, but it avoided anything that could be called austerity. I wrote the above entry in the third quarter of 2009 ... during which government spending was essentially flat, much less than the programmed 0.7% drop. (See below chart, which shows growth in GDP expenditures between government purchases of goods and services and everything else.) In short, my fear didn’t materialize because the PAN government never followed through with its own austerity rhetoric.

Still, simply not being stupid isn’t really enough to explain Mexico’s quick recovery. Lots of countries failed to implement sufficiently large stimulus packages and suffered for it. To explain Mexico we need to turn to two other Mexican strengths and a bit of good luck.

The first strength is, paradoxically, also a weakness: Mexico had a terrible terrible financial system going into the Lesser Depression. But from the point of view of protection from the effects of a worldwide financial freezeup, it was a great thing to go in with banks that did not lend and firms that did not borrow. (I do not recommend this as a long-term growth strategy.)

That meant that the Lesser Depression hit Mexico as a good old-fashioned trade shock. The below graph measures quarterly percentage changes in the final demand for Mexican production. (It is not the same as GDP, since GDP nets out imports.) You can watch exports plummet in the last quarter of 2008. Net exports barely budged (in fact, they grew) but all those unemployed export workers dragged down private consumption and all those hurting export manufacturers stopped investing. Thus the vertiginous decline in GDP in the first quarter of 2009 that you can see in the above two charts. (Demand continued to fall in the second quarter of 2009, but manifested as a drop in imports, leaving GDP flat.)

But this brings us to Mexico’s second strength: a flexible exchange rate. The peso plunged from a little under a dime to a low of 7¢ before recovering. (In point of fact, the Banco de México intervened to stop the fall, too soon in my opinion.) By the third quarter of 2009, exports had started growing again. By the second quarter of 2010, they surpassed their previous peak. In point of fact, Mexico became even more export oriented than before: exports grew from 26% in the middle of 2008 of GDP to 35% by the middle of 2012.

And that brings us to the good luck. Any guesses before I post? It seems to have been in the news lately.

Guest post: My problem with AMLO

 This is Patrick Corcoran, from Ganchoblog.

In general, I don’t find the arguments that Andrés Manuel López Obrador (aka AMLO) is a grave economic risk to Mexico to be very convincing. His program isn’t particularly extreme. Rogelio Ramírez de la O (his proposed finance minster) is sharp, experienced, and within the economic mainstream. And most importantly, between its business community, central bank autonomy, and NAFTA, there’s something of a policy straightjacket in Mexico. I don’t think anyone should expect a Kirchner a la mexicana should AMLO pull off the upset, and if I were a fund manager or a currency speculator, his election alone wouldn’t do all that much to change my opinion of Mexico’s prospects.

The problem is this: AMLO’s democratic commitment has wavered time and again. This is something that he has demonstrated repeatedly over the past six years. The reaction to the 2006 loss was a big part of that, but it’s not the only example. The takeovers of Congress were shameful. The shenanigans in Ixtapalapa treated the democratic process in an area of almost 2 million residents as though it existed only to serve him. And there’s no reason to think that this would change. When asked if he would accept the results of the election in July, a question where the only acceptable answer is an unqualified “Yes,” he waffled. His moderation during the campaign has been laudable, but when faced with a narrow defeat of an agenda item he holds precious, I don’t believe that he’ll just take his lumps and move on. Unfortunately, taking your lumps and moving on is a basic element of democracy.

The counterargument to this is that AMLO has been justified in his more extreme actions — that is, the election was a fraud, and the oil reform proposals being tossed around were a vital threat to Mexico’s well-being. Clearly AMLO seems to believe that; he couches his reaction in 2006 as a defense of democracy, notwithstanding his sending the institutions to the diablo. Given the fraud in the 1994 Tabasco race and President Fox’s 2005 push to deprive him of his legal immunity when he was mayor of Mexico City, I can understand him assuming any opposition to him is illegitimate. But while this bias is understandable on a personal level, that doesn’t make it any less worrying or damaging. Over the past six years, there isn’t much to support his belief that he was acting in democracy’s defense: the case for outright fraud in 2006 is extremely weak and has been contradicted by numerous people on the left, and his opinions regarding Pemex are just that — opinions — and have no more inherent value than those who would privatize the company tomorrow (which is certainly not what I’m advocating). The “desperate times, et cetera” explanation for AMLO’s unorthodox actions over the past six years just doesn’t hold up, and if your bar for the barbarians being lined up at the gates is set so low, well, then, what crushing political loss doesn’t justify an assault on the system?

That’s not to imply that his opponents would necessarily make better leaders. There’s also a pretty good argument to be made that the (potential) insidious erosion of democracy from within under Peña Nieto would far more harmful than AMLO’s frontal assault, which has typically been conducted in plain view of the public. If Peña Nieto turns out to be as bad as many assume he will — that is, if he is an old-school PRI dinosaur in a pricey suit — the damage could well be much worse than what is at risk in an AMLO presidency. Even if that doesn’t happen, by all indications Peña Nieto is the lightest of lightweights, and the campaign doesn’t seem to have put much weight on his bones. And the defects of Vázquez Mota are so obvious and damning that they hardly bear mentioning. From my point of view, there is no right candidate, and this is the worst slate of candidates of any Mexican election that I am more than passingly familiar with (basically, from 1988 onward).

But now that AMLO has emerged as the optimistic, anti-Peña Nieto candidate, it’s important to be clear about what his drawbacks are. Support for AMLO carries risks that go well beyond ideology. Electing AMLO would mean entrusting the system to someone who doesn’t wholly believe in it.

Argentina beats ICSID! Seriously, Argentina beats ICSID. Regularly.

In April, I had the honor to attend a conference on international investor-state arbitration held at the London School of Economics. (Below is a picture of me on the roof of the LSE after the conference. Yes, the weather was as bad as it looks.)

There I had the good luck to meet a law professor from William and Mary named Susan Franck. Susan has done a lot of excellent work, but what struck me the most was the time and effort she’s put into verifying all the “stylized facts” that people believe about investor-state arbitration. A stylized fact is a fact assumed to be true for the purposes of argument. Economists love ‘em. So do politicians. (Frex, the sylized fact that most U.S. federal spending fits the normal conversional definitions of wasteful.) But stylized facts aren’t always actual facts.

One big stylized fact about investor-state arbitration is that governments always lose. It isn’t hard to see where that comes from. By most reasonable standards, international investment law is an ass. Companies can freely renegotiate contracts with governments, but governments cannot renegotiate with companies. There are few outs for contingencies short of foreign invasion, and maybe not even then. On the other side, it isn’t hard to believe that most of the time the governments are wrong (like, you know, these guys) and deserve to lose.

Only they don’t lose most of the time. Susan found that governments won 58% of cases. Investors won 38%, and the remainder were settled. (She also found that the average claim was for $343 million, whereas the average award came to only $10.4 million. Go figure.)

So how’s Argentina doing? Well, not too badly. Of its post-2001 cases, 33 have been decided. Argentina won eight, or 24%. Of those eight, it won five in arbitration. Two were annulled and one was overturned by a U.S. district court. It lost nine (27%) ... but annulment hearings are pending in five of those nine. If you put those five into the net-yet-decided category, Argentina’s win percentage goes up to 32%, against a lose percentage of 16%.

Of course, 32% + 16% = 48%. Argentina settled a remarkable 52% of its post-2001 cases! Of these 16 settlements, five (31%) were in electricity, three (20%) in natural gas production and distribution, two (13%) in water and sewer systems, and an additional two (13%) in telecoms. The final one was the Unisys contract mentioned in an earlier post.

The settlements aren’t public,  but we do know a little, thanks to Wikileaks. AES owned several power plants, and dropped its suit once the Argentine federal Congress and the Buenos Aires provincial legislature ratified new rate agreements. Pan-American Energy (a subsidiary of BP) sued at ICSID over the pesification of domestic hydrocarbon contracts and the imposition of an oil-export tax. It dropped its claim after Chubut province agreed to renegotiate its E&D concession, presumably by enough to compensate it for the federal takings. If I may take the risk of presenting my own stylized fact, the other settlements were likely similar: rate hikes or other informal compensation, in exchange for a suspension of the international suits.

The bottom line is that Argentina has not done too badly at ICSID and other arbitrations. Its wins outnumber losses two-to-one, and it settles half its cases, as far as we know without direct compensation. What this implies about the unwillingness of the Fernández administration to pay up in its five unequivocal losses, including one pre-2001 case (for a total liability of $427 million) is left as an exercise for the readers.

Internal devaluation does not work very well

So I read in the New York Times that Greek private sector salaries fell a punishing 22.5% in 2011 in real terms.  That stunned me. So I went to Eurostat. Their figures for nominal labor costs were slightly less impressive, but still shocking. (2008 = 100.)

Internal devaluation at work! Sure, Greece is still working off earlier excessive wage gains, but that should presage an export boom, right? Cheaper workers, cheaper vacations for foreigners, more tourism, more exports.

Except ... well, according to OECD data, output is declining along with wages. (See below; 2005 = 100.) Unit labor costs are down, but not when seasonally adjusted, and really not relative to Germany or the rest of the Eurozone. Maybe that’s not relevant. After all, as long as output per worker in potential export sectors isn’t falling, then economy-wide unit labor costs should not matter ... but only for those industries. They will matter a lot in other industries, which are seeing demand (foreign and domestic, as proxied by the value of output) drop as fast as their wage bill.

Add to that (1) rising debt burdens for Greek workers, since debts aren’t indexed to wages; (2) rising taxes on Greek workers; (3) people’s desire to save in euros (outside Greece or in cash) in the face of a possible Grexit; and (4) the awful awful feeling that comes with people as they watch their nominal incomes plummet.

Put it together, and it isn’t clear to me that the rather surprising unstickiness of Greek wages is going to produce much of a quick recovery even if wages fall substantially more. (There have been a lot of reforms to Greek labor law in the last few years.) Of course, the Argentine experience implies that a Grexit won’t be better ... Argentine GDP plunged 15% in the year after the devaluation, and recovery took place in the context of strong external demand.

I am not optimistic.

Postscript: see “Is Increased Price Flexibility Destabilizing?” by Brad Delong and Larry Summers. (Also found here.) See also “The Barber of Buenos Aires.”

It is not unreasonable to cry for Argentina in most of its cases at ICSID

Bernard Guerrero asks: “You mentioned in an earlier post that Argentina had justice on its side with regards to the various ICSID cases. How so?”

An excellent question! Short answer: most of Argentina’s cases are a direct result of the 2001 devaluation. The Argentine government acted prudently and responsibly in the aftermath of that economic collapse. In the face of 1.2 million job losses, and riots in the streets, it was entirely reasonable to freeze rates, cancel contracts, default on debt, and pesify dollar-denominated bank accounts. (The scale of the turn-of-the-century Argentine depression is immense.) Such actions were legal under Argentine law, and would have been legal in the United States. (FDR confiscated gold back in the day.) Unfortunately, the Washington Convention and associated bilateral investment treaties are more restrictive, which gave foreign companies operating in Argentina the right to sue for damages from the price freezes.

In other words, until Repsol, none of the Argentine cases at ICSID involved straight-up opportunistic property seizures without fair compensation. Rather, they involved emergency measures taken in the midst of a Depression-scale crisis. The companies could not have possibly expected the real value of their tariffs to quadruple in the middle of a 20% crash in GDP and 10% plunge in employment, which is what sticking to the original contracts would have meant. Argentine law sees things that way. American law sees things that way. European Union law sees things that way. But international law, as codified in the Washington Convention of 1965, does not. That is unjust.

Longer answer: Of Argentina’s 46 post-2001 arbitration cases, 32 are a direct result of the 2001 devaluation. If you add in the three cases brought by bondholders, that number rises to 35. Most of the remainder are contract disputes, which also come out of the turn-of-the-century Argentine depression: frex, a cancelled contract with Unisys to modernize the judiciary’s IT systems, or an abandoned project with Impregilo S.p.A. to build a highway. 

It is not hard to find the texts (or at least decent summaries) of the ICSID decisions. Latin Arbitration Law is a good source. UNCTAD also maintains a good database. The Investment Treaty Arbitration site has a list of cases, with all intermediate and annulment decisions. Finally, an easy-to-use list with summaries of the outcome can be found at the IIAPP website. I also recommend the Kluwer Arbitration Blog and (if you can get access) the Investment Arbitration Reporter.

All of the Argentine cases reject expropriation claims, but provide compensation for lost revenues due to contract violations. You can see the frustration by the Argentine lawyers when they argue that expropriation law should not apply in these cases. In fact, most of the arbitral decisions have a very sympathetic tone towards the Argentine arguments. But the law is the law, or at least what the arbitrators say that the law is, and that is that.

To be fair, Argentina has not done badly at ICSID. (If there is interest, I will put up another post with some data about that.) But it is understandable that the government feels that most of the post-2001 cases should not have been brought at all. This is not to support the YPF nationalization, or to claim that Argentina is run by a saintly government interested only in the public good. (To give one egregious example, Argentina settled the Unisys claim for $8 million in April 2007 ... but made no move to actually pay.)

It is to say that there is something wrong with the international system. It was designed to protect natural resource investors against predatory states without the need to call on their home governments. It is becoming a system of unlimited liability which essentially locks governments in to the letter of their initial contracts in a rigid way with no parallel in any domestic legal system on the planet.

In fact, the standards have been getting stricter, to the point where governments are required to grant a “guarantee of stability in a secure environment, both physical, commercial and legal” that may, for some countries, be impossible ... and is certainly more protection than that granted to domestic investors.

Practical upshot? Hard to say ... but the illegitimacy of most of the claims against Argentina will make life much harder for companies with a decent case in a straight-up expropriation. (You can guess which firm I might be talking about.) That is not, I think, a good thing ... but I may be wrong.

Maybe the game isn’t on after all, plus health policy!

Well. There may not yet be an equivalent of Fivethirtyeight for the Mexican election, but the poll of polls doesn’t look good for AMLO. You gotta stare really hard to see any sign of movement. Enrique Peña Nieto (EPN) is still cruising towards victory with a plurality of the vote. (Mexico, I have to add, does not have a French-style runoff system nor an Australian-style transferable vote. This is a bad thing.) 

It seems odd — but not surprising! — that the biggest issues in the election are the least discussed. Oh, they both get mentioned in short ads (see below) but not much in concrete terms. I am referring, of course, to crime and health policy. The latter should be a big issue. While Mexico has made great strides in public health over the past 18 years, it is still far from universal coverage. So what do the two main candidates propose? (My apologies, Josefina.)

Well, both AMLO and EPN think it ridiculous that Mexico has a multiplicity of public health systems: one for formal sector workers, one for government employees (both run like the U.K. National Health Service) and a bare-bones People’s Insurance program for the poor. So it will be no surprise that both are calling for universal coverage. AMLO, however, wants change to be incremental. He wants to allow patients to receive services in the installations of any of the public health programs, a de facto conversion of the federal government’s role to something more like a single-payer system. The problem, of course, is a combination of complexity and vested interests. Peña Nieto is more direct: he wants a new Universal Social Security System, which he claims would cut overhead expenses from 9.5% to 3% and de jure move Mexico to Canadian-style Medicare. He also wants to provide more free medicines via a voucher system, with no word on how to pay for it.

So who would you trust? EPN has a better, more-concrete plan. AMLO is more serious about these things, and incremental change is generally easier. At the end of the day, AMLO is more honest about the inevitability of the need to throw more money at the problem ... but at the end of the day, a President AMLO is also more likely to be hamstrung by Congress.

Edge: AMLO. Not that it matters.

Game on, México!

 Wow. Oh wow. Big news in the Mexican presidential race.

Courtesy of Ganchoblog, it seems that the Mexican presidential blowout that we all expected for Enrique Peña Nieto may not actually happen. The Reforma newspaper runs reputable polls, and they show a sudden collapse in PRI presidential support from 42% to 38%, with AMLO rising from 27% to 34%. Now, I remember drinking pulque (horrible stuff, by the way) with some friends in Melchor Ocampo (awful town, I should add, although worth visiting) and being told that the polls meant nothing, AMLO could pull it out. I scoffed. Distant relatives in Huixquilucan (a very much not-awful town, at least if you like bad science fiction movies from the 1970s, but really not worth visiting unless you know somebody who lives there) said the same. But they were PRD partisans, and so I scoffed some more.

But they were all correct! If this poll holds, then the electoral game is on. We will have a real race on our hands, and not a PRI blowout. Both Melchor Ocampo and Huixquilucan are in Mexico State and under the Peña governorship. I think that gave my friends tacit knowledge about the fragility of his support that nerdy old gringo me could not appreciate. I think Mr. Hootsen, who also lives in Mexico State, would concur.

Were I voting in the election, a poll like this would pose a dilemma. I despise AMLO for his actions after the 2006 election. But I suspect, for reasons I find distressingly hard to verbalize, that he would be less damaging to Mexico than a President Peña. Which means that strategically speaking, if AMLO had a chance, I would want to cast a strategic vote for him. Except ... his behavior and statements in 2006. The questions raised by the commentators here are becoming much more valid. Assuming that the poll holds and we really do have a race, for whom should a concerned Mexican citizen vote?

I would like to end with a call for someone to start a blog like Fivethirtyeight, aimed at the Mexican elections. So far, the Reforma poll is an outlier. We have no way of judging its accuracy or predicting the result. Mexico could use a Fivethirtyeight. I nominate Diego Valle to start it.

Observatorio argentino 16: The plot thickens, as does the oil

 This will be a quick post. I’m running on fumes, and will be for at least another month. (Then a brief respite, with serious fume-running to follow after August. But for excellent reasons!) That said, there are two things happening in the Argentine gas fields, which are related to the YPF expropriation saga and time-sensitive. So read on!

First, you can expect the Argentine government to announce in the next few days about $20.3 billion dollars in new shale gas investments in the Vaca Muerta fields. Eleven different companies — Chevron, ConocoPhillips, Ecopetrol, EOG, ExxonMobil, Shell, Sinopec, Statoil, Talisman, Vale do Río Doce, and Venoco — are supposed to drill more than 12,000 wells in an area covering 2,400 square miles. For reasons unknown to me, the traditional comparison seems to be Rhode Island: that’s an area twice the size of said state. (It’s also roughly eight New York Cities.) The biggest investors are ConocoPhillips and Talisman, who will jointly put in about $4.3 billion. Together, the projects are expected to produce 11 mcf per day, which is roughly what Argentina currently imports.

The companies are negotiating the deals with the government. YPF, the newly nationalized company, owns roughly 40% of the 12,000 square miles covered by Vaca Muerta. It will be a majority partner in the new fields. So, negotiations with provincial governments, the federal government, and the federally-owned YPF. But ... the companies are also negotiating with Repsol. Directly. Even though Repsol now is only a tiny minority partner in YPF. Which brings us to development #2.

Second, Repsol is suing Argentina in New York. It has now declared that it is looking for punitive damages. On one hand, this makes little sense. American judges will have little reason to bring action against the country unless and until there is an adverse ICSID judgment. But when you look at through the eyes of some unnamed French oil executives, who are willing to explain why they would have done the same thing, the strategy becomes clear.

Their explanation? The lawsuits aren’t aimed at YPF or the Argentine government. They are aimed at anyone who might want to do business with YPF or the Argentine government ... because they will be wandering into a legal minefield. And if they (including even Sinopec) do business in the United States, that is something that they would seriously want to avoid.

Thus ... negotiations with a company that technically no longer controls its Argentine assets, and owns only a 5% stake.

Yes, it is legal terrorism. It is fighting dirty. But heck, it makes for fun watching.

ADDENDUM: The lawsuit will also make it almost impossible for the nationalized YPF to raise funds in the United States. Considering the mess that Argentina is in regarding foreign exchange, that is going to be a serious problem. The Argentine government may not need foreign financing to fund its activities, but the businesses and people resident in Argentina increasingly do. Thus, capital controls ... and a headache for YPF if it cannot borrow in hard currency.

Positive campaigning is not all that it’s cracked up to be

 The 2006 presidential campaign in Mexico was especially nasty, with television ads claiming that AMLO was the second coming of Hugo Chávez and would destroy the country if elected. Mexico, however, lacks an equivalent of the First and Fourteenth amendments and, more importantly, the U.S. Supreme Court’s interpretation of both. (Article 6 of the Mexican constitution guarantees freedom of speech, “unless it offends good morals, infringes the rights of others, incites to crime, or disturbs the public order.” Article 7 unconditionally guarantees the right to write and publish, but that is more specific than speech in general.)

The result of the election, then, was a 2007 law that prohibited negative campaigning. (Mr. López Obrador’s subsequent behavior, and whether that retroactively justified otherwise scurrilous ads, is not relevant to this discussion.) The result is an oddly anodyne bunch of ads. TV ads emphasize personality, as do the print ads from the three major parties. The PRI candidate, Enrique Peña Nieto, is also running on the Green Party ticket, however, and is using that platform to run a bunch of rather interesting issue statements:

My favorite is “Life sentences for kidnappers,” but I didn’t get a picture. Above you have a subway ad proclaiming “Pensions for all adult over age 65” and “Your place guaranteed in high school.” The latter is pretty much already true, and the former will be interesting without new tax revenue.

Below you have “No to fees in the public schools,” with a picture of an angry white man scolding a woman who only wants the best for her child:

And a related billboard proclaiming “No more fees in public schools: Truly free education.”

The end result is oddly populist to an American, but honestly no worse than the populist positive ads run by Republicans all the time. So what’s the problem? Two things.

First, the internet is unregulated. This is, I think, less of an issue than it sounds. In general, the internet is not a push medium, except for paid adverts, which are (or will be) regulated. Whispering campaigns are of course terrible, but I would need evidence to be persuaded that they are worse in the age of the internet: e.g., that they convince anyone who wasn’t already basically on-board.

 Second, negative ads can convey real information. Patrick Corcoran argues this here. It makes sense that the truly scurrilous stuff will not convince a sophisticated electorate regardless of how it is disseminated, while real bad information may find it harder to be known. That said, I am not sure how this shakes out.

What I am sure of, however, is that the Green Party has no reason to exist other than as a subsidy-collecting machine, and is very far from Green. But that is a different issue.

We been saying this for a while now

 Hey, my blog is a nothing and that is how I like it. So it’s a good thing that Matt Yglesias is pointing out that if Spain suffers lots of capital flight (or otherwise sees its money supply collapse) then the worst effect of ditching the euro will already have happened and there won’t be many reasons to stay in.

Just saying that Doug and I have already made that exact point. More than once. As have, of course, many others.

Presumably the German government will now decide that the E.U. needs a unified system of banking regulation and deposit insurance plus some mutualization of existing debt, wedded to a stability pact and new labor legislation. Obvious!

Or not.

The 2012 election in Mexico, early musings

 On Saturday there was a massive student march against the candidacy of Enrique Peña Nieto, the PRI candidate for the presidency of Mexico.

I have been asked more times than I can remember (by friends, family, and complete strangers, including taxi drivers and bartenders who are well-aware that I am a gringo) who I would vote for in the Mexican election. As with the United States, the answer is easy. I cannot vote for Andrés Manuel López Obrador for the simple reason of his reaction after the 2006 election.

So you cannot vote for the PRD in this election. If Ebrard were the candidate, things would be different, but he is not. AMLO, no f---ing way.

Then there is Mr. Peña Nieto. Uh. Erm. Uh-huh. Next post will discuss his campaign, which is actually somewhat amusing. I will even discuss the various positions on health policy. The problem is that I do not believe that he is not corrupt. Moreover, he is a member of a party that has not abandoned corruption. This is one of the few cases where my academic research and my heart push in the same direction: institutions matter more than policies, and regardless of policies, Enrique Peña Nieto and his party will not be good for the institutions.

Which leaves us with Josefina Vázquez Mota. Were I voting in the Mexican election, she would have my vote. With little enthusiasm, sadly. But she would have it. Am I wrong? I have PRD relatives, but they are not talking to me about the election. (Baseball yes, U.S. politics yes, Mexico no.) So help me out! Am I wrong? Who should an informed Mexican vote for? 

Do U.S. agents really drive black Suburbans in northern Mexico?

 When I last tooled around the violent areas of northern Mexico, I did so in a green Infiniti. Before that, a bright red 2002 Ford Focus SVT. Why those cars? Well, they were the ones we had on hand ... but we could also be pretty sure that nobody would be gunning for us, even with Texas and California plates.

So I read this post with some incredulity. Not the story. I completely believe that the Zetas would apologetically release USDA officials that they had accidentally detained on suspiscion of being narcos. What I do not believe is that the U.S. government would actually be dumb enough to put its officials in black suburbans. Caray.

This is not to say that it is impossible to travel incognito through cartel territory. It is not hard to project the impression that you are not involved in organized crime. In fact, it is rather easy. The secret, as you can see above, is to not try to hide ... while avoiding the obvious markets of a sicario or cartel honcho. Dress like a gringo sartorially aware Argentine or Spaniard normal person and you will likely be fine.

Divorce in Mexico

 My time living in Mexico wasn’t the only time that I found myself arguing with incredulous observers that Mexican society was changing at blinding speed. When we were writing Mexico Since 1980, I got into some epic battles with one of my co-authors over the chapter on social policy in Mexico. He turned in a draft that made it seem as if the only change in Mexican families since 1950 was the decline in fertility. The quote: “Yet despite the magnitude of these changes, Mexico remains a surprisingly stable society in terms of such fundamental institutions as the family and religion.”

I argued that we couldn’t publish that. Marriages were less stable, and with almost half of all births occuring in “free unions,” abandonment was rife. It was so clearly and blatantly untrue that Mexico was a “surprisingly stable society” that we would look out-of-touch, almost crazy. The image of Mexico as stable and conservative would have been true in 1990, maybe even 1995 — it was not true in 2008.

The final version read as follows:

There has also been a substantial rise over time in family instability. One measure of this phenomenon is the growth in female-headed households, which as a proportion of all households increased from 12 percent in 1960 to 13.5 percent in 1976, 15.3 percent in 1990, 20.6 percent in 2000, and 23.1 percent in 2005. The increase in the number of female-headed families mainly reflects higher rates of divorce and abandonment. Indeed, although still low by European and U.S. standards, the proportion of marriages ending in divorce in Mexico rose from 4.4 percent in 1980 to 7.4 percent in 2000, and to 11.3 percent by 2004. In addition, since the 1990s growing numbers of men have abandoned their families (possibly temporarily) to seek work in the United States.

A skeptical reader might argue that the rising rate of family dissolution in Mexico is a side effect of the aging of the population. The logic behind this position is that the longer people live, the more likely their marriages are to end in divorce rather than death, and so the divorce rate is increasing in line with Mexican life spans. The data, however, do not support this hypothesis. Indeed, dissolution rates have risen fastest among new families. In married and cohabitating couples that formed before 1967, there was only a 7.4 percent chance of dissolution before 10 years had passed, whereas a couple that formed in 1987 (the last year for which data are available) had a 14 percent chance of breaking up before ten years had passed.

An even more skeptical reader might argue that an increase in the proportion of “extended families” (households in which uncles, aunts, cousins, brothers and sisters, and elderly grandparents live with a nuclear family composed of parents and their children) among Mexican households indicates that the Mexican family is as strong as ever. Between 1990 and 2000 the proportion of all family households defined as “extended” rose from 20.7 percent to 26.3 percent. It is equally likely, however, that this increase was an artifact of the interaction between economic distress and rising rates of single-parenthood and couple dissolution. Indeed, in the year 2000 some 60 percent of single mothers and 28 percent of female divorcees with children lived in “extended families” (that is, with their parents).

Now comes the irreplaceable Diego Valle with data on the current state of divorce in Mexico. (Hat tip: Gancho.) The short version? Divorce is rapidly increasing, but Mexico’s divorce rate is still at around the same level as the United States in the 1950s. The catch is that with half of all birth occuring out of wedlock, the true rate of family dissolution is higher. The long version? Very worth reading.

But there’s more! Here Diego digs into the divorce figures for the Federal District (aka, Mexico City) which adopted no-fault divorce in October 2008. In a brilliant analysis, he shows that the entire increase in divorce rates is driven by couples who married outside the D.F. In fact, divorces fell for people who married in Mexico City ... the implication being that the inexorable rise in Mexican divorce rates might not be so inexorable. (Read it!)

Of course, that begs the question of why D.F. divorces fell with no-fault. Diego hypothesizes (probably correctly) that the reason was the legalization of early abortion in April 2007. “Perhaps pregnancies that previously resulted in shotgun marriages now end in abortions. And it was precisely these marriages that were more likely to end in divorce. When looking at the age specific marriage totals, the younger the bride the bigger the percentage decrease in marriages compared to previous years. But this theory doesn't explain the fall in divorces among those marriages more than a few years old.”

For those of you who don’t know, Mexico City also legalized same-sex marriage in December 2009. (Coahuila has civil unions ... but more importantly, same-sex marriages performed in the D.F. are recognized by both the federal government and other states.) Abortion, no-fault divorce, same-sex marriage ... you have no idea how happy I am that we didn’t publish that early version of the chapter.

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.