The Power and the Money

Renewables are not causing blackouts in Texas

Texas and northern Mexico are in the middle of an astonishing cold snap. Conditions are so bad that the bad weather pops out on a national map of traffic conditions:

The cold snap is also prompting blackouts across Texas and northern Mexico. And, of course, that means that politicians in both places are blaming renewables for the failure. In Texas, exhibit A for the prosecution consists of this figure:

Three things happen once the cold snap kicks in. First, wind generation falls up as turbines freeze. Second, natural gas generation spikes up. Finally, coal generation becomes steady as plants fire up to full capacity and stay there to cope with spiking demand. As a result, many observers are concluding that Texas would be just fine if only it hadn’t reoriented its energy mix around windpower.

That would be a correct conclusion if not for the fact that it’s all wrong.

Let’s take it in turn.

First, more coal would not have helped. Coal is lousy in cold weather. Back in 2014 — it seems so long ago, I know — six coal plants consisting of 1.8 megawatts of generation went down in a cold snap. (Here is the ERCOT after-action report for the ’14 cold snap.) The same thing happened during a freeze in February 2011, when ERCOT (the Texan grid operator) had to impose rolling blackouts. In 2014 (and in 2021) natural gas took up the slack, but in 2011 that didn’t work when power cuts hit compression stations.

Second, on paper Texas has more than enough generating capacity right now to handle demand. The state has 75 GW of natural gas capacity alone, to which you can add another 24 GW of coal. The problem is that the capacity is either down for maintenance, in the wrong place, or offline due to the cold, not that it doesn’t exist. In fact, you can see that Texas handled similar levels of demand this summer. The difference is that people expect summer heat waves in Texas. They don’t expect Minnesota-like weather to suddenly roll in from nowhere.

Finally, let’s put points (1) and (2) together and point out that right now the big problem in Texas is due to fossil fuel plants going offline from to the cold. Wells and pipelines are freezing. How much Texas thermal capacity is out, you ask? Well, I’ll tell you:

Thirty gigawatts.

Thirty gigawatts!

Getting the data isn’t easy, but it isn’t that hard either. Go here. Click on “Hourly Resource Outage Capacity.” You will see a long list of zipped CSV files. Open the top one. Look for the column called “TotalResourceMW.” (It’s the first one after the time.) That tells you how much power is out right now. If you read down in the spreadsheet you’ll see how quickly ERCOT expects that power to come on line. (This includes coal, natural gas, oil, and nuclear; as a practical matter, no nuclear is off-line in Texas.) “TotalIRRResourcesMW” is the amount of renewable power capacity that is not producing (for any reason) and “TotalNewEquipResourceMW” are resources that are being spun up but have not yet started to inject power into the grid. As of 4pm CST on February 15^th, 2021, 29.7 GW of thermal power is offline.

Now, it isn’t fair to say that all 29.7 GW are down because of the cold. Some power is always offline. I called up February 8^th, before temperatures started to drop. And as of 11am on February 8^th, some 13.1 GW of thermal was offline. Which means, as a first estimate, the cold knocked out about 17 gigawatts of thermal capacity, roughly ten nuclear reactors.

To be frank, I’m surprised it isn’t more. Coal operators in Texas right now are performing miracles. You’ve got to use anti-freeze on the coal supplies to stop them from icing up (particularly lignite coal, which is 35% water) and keep the fan blades on your cooling towers ice-free. You’ve also got to tightly pack your coal piles to keep water from seeping in and be prepared to smash ‘em with bulldozers in case that fails. (The only coal plants I’ve visited up-close-and-personal were in Colombia and they didn’t do any of these things, obviously.) The fact that coal generation is holding steady is quite the feat.

But the fact is that Texas is hitting problems because it ain’t ready for the cold. Renewables aren’t the problem. The state has a total capacity of 25.1 GW of wind and 3.8 GW of utility solar, so right now the ERCOT data that I cited above means that about 6.5 GW of renewables are hitting the grid. That is abovethe 6.1 GW that ERCOT expects in the winter.  

What can be done? Well, the simple answer is better planning. The more complicated one is better incentives. Texas should set up a capacity market that will give natural gas operators financial or contractual reasons to keep their plants on-line during cold weather. Ditto insuring that wind farms are prepared for the cold. A few more nuclear reactors (which would relegate more natural gas to peakload) wouldn’t hurt either, but isn’t going to happen.

Total decarbonization will not be easy until storage becomes extremely cheap. You will either need peak plants or massive battery banks to cope with the Great Blizzard of 2054. And the former will mean somehow maintaining the natural gas infrastructure despite an order-of-magnitude less demand. But these are all solvable problems which would exist even if we went hog-crazy for expensive and polluting coal plants.

TLDR: Texas would be in trouble even if it had never built a wind farm.  So think about that and stop pretending that you don’t care about your unborn grandchildren.

The 2020 Horserace (regressions)

Joint with Leticia Abad

The 2020 election was strange, and not just because the President denied he had lost, was believed by millions, and inspired a violent plot to use a mob to seize control of Congress and overturn the election.

No, it would have been strange even without all that. Georgia and Arizona went blue. Florida went red. Donald Trump picked up nonwhite votes — open bigotry notwithstanding — and upscale suburbanites voted for what may be the most left-wing Democratic platform since 1976. (Or maybe 1948.)

So what happened? Well, we have been gathering county-level electoral, Covid, and BLM-related data for another project. Numbers in hand, we decided to take a look at the 2020 election.

The first thing we did was to look at some simple correlations. What county-level characteristics were related to a bigger swing towards Donald Trump between 2016 and 2020?

Figure 1 Simple correlations with the 2020 swing towards the GOP, by county

The above figure shows our results. Negative numbers represent swings towards the Democratic candidate. Dark shading means that the correlation is tight and significant at the 95 percent level; moderate shading means it’s significant at 90%, and very light shading means that it is not significant. The ethnic markers refer to self-identified ethnicity and not foreign-origin; in other words, in all cases they represent mostly citizens (save for Central Americans).

These results, of course, don’t mean much. Several of those variables are highly correlated with each other. For example, did Mexican-American counties swing towards Trump because they are Mexican-American or because Mexican-Americans are relatively young? Moreover, they don’t all for geographic variation. Did Puerto Ricans move away from Trump because they are Puerto Rican or because lots of them live in New York and New Jersey? So all the above numbers should be taken with a grain of salt, both the ones that jibe with the conventional wisdom and the ones which don’t.

To start the long process of teasing out which variables mattered, we ran a simple OLS “horserace” regression. And here is where things get interesting!

Figure 2

Let’s take it from the top. The above figure shows the coefficient (i.e., the correlation controlling for other things) for various variables. It also shows the error bars. If the error bar crosses the zero line, then there is a good chance that the effect you see is really the product of random chance. Positive numbers mean a swing towards President Trump; negative numbers mean a swing towards Joe Biden relative to Hillary Clinton in 2016.

Conceptually, these regressions compare different counties within a state. That is, swings in one way or another that uniformly affect every county and voting group within a state are already accounted for. (In technobabble, we use state fixed effects and cluster standard errors at the state level.) These numbers capture the average swing for a group across the country relative to the statewide swing where they live. 

So what do we get? First, a pair of mysteries! One, Covid deaths do not seem to have had much effect. Two, BLM protests in a county are associated with a small (but statistically significant) swing towards the Democrats … and if anything, the swing was greater if the protests were violent. Admittedly, this result is neither surprising nor free from endogeneity.* But it is different from what Omar Wasow found when he analyzed the effect of the 1960s-era protests and riots.

The Latino swing towards the GOP shows up fairly clearly. The higher the share of Mexican-Americans, Cubans, or Dominicans in a county, the bigger the swing towards the GOP. Asian-Americans show the same pattern. On the other hand, Blacks and Puerto Ricans swung fairly clearly towards the Democrats: reports from the exit polls of Trumpian inroads among African-Americans do not appear to be borne out in these data.**

Finally, an unexpected result, which you can’t quite see in this data. A lot of ink has been spilled on the rural-urban divide in America. And it’s real! But it’s not really cultural. From our data, large central metro counties swung about three percentage points more Democratic in 2020 than the rest of their state, ceteris paribus. But everyone else — exurban counties, small metro areas, “micropolitan” counties, and rural places — was about the same. That is to say, when you account for demographic differences, there isn’t much of a rural/urban split in this country. There’s just a small giant-center-city/everyone-else split.

But there’s a problem with these results! The regressions treat every county equally. Alpine County, California, (population 1,129) is treated the same as Los Angeles (population 9,969,510). It could very well be that small shifts in tiny counties are driving our results. So we weighted our regressions by population, and report both results below.

Figure 3

So what changes? First, our coefficients on covid deaths, the share of college graduates, and BLM protests doesn’t change. Neither does the African-American swing towards the Democrats.

Second, the effect of unemployment goes away. That was driven by small counties. That effect disappears when you give the big cities their proper weight. (Yes, that is a little surprising.)

Third, the peculiarities of Mexican-Americans, Puerto Ricans, and Dominican-Americans also go away. It turns out that the Mexican and Dominican swings towards the GOP were driven by small tiny counties. (We identified a few counties with precisely one Dominican resident.) Same thing with the Puerto Rican swing towards the Democrats. When you give the populous counties their due weight, the effects all disappear. Only the Cuban swing holds up as a real thing that happened.

This isn’t to say that it’s a bad idea for Democrats to try to appeal to the Mexican-American voters in the Rio Grande Valley who broke hard for the Republican incumbent. It’s never a bad idea to try to appeal to any constituency! But they seem to have been a peculiar group and we’re not sure that the putative Latino swing to the GOP is really worth bothering about, since we’re not sure that it happened. (Cubans, that’s a different story. They really did swing towards Trump, but the reasons are not that mysterious. Even you did not expect the GOP’s demonization of socialism to work as well as it did — and we did not — it should not come a massive surprise that it did work.)

Finally, it does indeed look as though Asian-Americans in the big cities and suburbs swung back towards the GOP. We can try to break that out by ethnicity, and we will! But that’s the real swing in our data, the one that nobody seems to be talking much about, maybe because it’s more fun to blame things on Mexicans.

To end with a plea: any thoughts on research designs designed to tease out the reasons behind the counterintuitive results on Covid deaths and BLM-related unrest?

* Yes, yes, “endogeneity” is technobabble. Sue us.

** A problem with Central Americans is that most are not citizens. If you include a variable for the share of noncitizens in a county, then the coefficient on Central Americans disappears. Since non-citizens do not vote, it is possible then that the effect is actually that citizens in counties with lots of non-citizens tend to be related to those aforementioned non-citizens, and people with non-citizen relatives swung towards the Democrats. But because the share of non-citizens and the share of Central Americans tend to be correlated, it’s hard to disentangle what’s going on.

What’s the matter with Texas?

Nothing. Texas went purple … ish.  Joe Biden did better than previous Democrats, but still got beat by six points.  Texas is not quite red any more. Call it magenta, or rose. 

But why did it not not go purple, what with the massive turnout?

TLDR: the GOP got a boatload of new voters to turn out in the state’s big cities, suburbs, and exurbs. It wasn’t Mexican-Americans, it wasn’t rural voters.

Here are the basic numbers. Democrats turned out 5.2 million voters, up from 3.9 million in 2016. If Republican turnout had remained around the 4.5-4.7 million that it had been stuck at for most of the 21st century, then the state would have gone blue. Total turnout would have been around the 10.0 million that you would have expected from an exciting election like 2008 and the Democrats would have won. 

We here at TPTM did not expect a blue victory. We expected  the Democrats to up their turnout substantially, but the Republicans would nonetheless manage to get a few hundred thousand new votes and win the election with a bit over 5 million votes. 

But neither scenario is what happened. GOP votes came to 5.9 million. The Democrats turned out out 1.3 million new voters (net) but the GOP almost matched that with 1.2 million new voters. 

For the GOP to beat the super-high Democratic turnout they only needed 533,000 votes, not 1.2 million. They netted 356,000 new votes out of the central counties of Houston, Dallas, Fort Worth, San Antonio, and Austin.  The remainder came out of the northern exurbs of Dallas (100,000 in Collin and Denton counties), the exurbs of Houston (83,000 in Fort Bend and Montgomery), and the northern exurbs of Austin (34,000 in Williamson). Add in another 37,000 in other Houston exurbs and you’ve got more than enough to win the state. The 500,000 people that the GOP got out of smaller cities and rural areas was nice but it wasn’t what won it.

It wasn’t South Texas. There aren’t enough people! The GOP gained only 88,652 votes, against 8,175 for the Democrats.

And it wasn’t Mexican-Americans! The above-right chart graphs the Latino share of the country against the percentage swing towards the Republicans. Outside of South Texas, there wasn’t much of a correlation. This looks really different from Florida, by the way, where it really was Latinos what swung it, not just Cubans. But in Texas, the swingy Latino voter is a Río Grande Valley thing, not a Texan thing. 

I don’t know what the implications are for 2024. Turnout will swing back, but will it swing back more for Republicans or for Democrats? Is persuasion possible? Could Marco Rubio swing some blue voters or might Amy Klobuchar or Andrew Cuomo get some red ones? I have no idea. What I do know, though, is that the Trump campaign energized voters in the big cities and their exurbs. The GOP has to keep them turned out in 2024 and the Democrats have to keep them home.

But the Democratic Party of Texas should really not be tying itself in knots trying to figure out what happened in the Río Grande Valley. Please stop blaming the election outcome on Mexicans. There’s been enough of that going around the last five years. 

Make Canada Greater: What would change if New York joined Confederation?

I am reading “Divided We Fall” by David French. He may be the first thoroughly mainstream commentator to seriously posit that the American federation may break up under the weight of our political differences. Cheery reading for another happy election day, or not.

Even a mutual breakup of the United States would be a tragedy, but not because of American exceptionalism or any such thing. No, any collapse of a political union is a tragedy. It means that differing peoples could not share a fate or manage a common endeavor. It means shrinking horizons and cramped futures. Even when divorce is better than the realistic alternatives, it is still a tragedy. 

But there is one way that the American federation could break up and avoid such a tragedy! Instead of retreating into smaller polities, blue American states that wanted out (or were being thrown out) could replace one expansive continental dream with another. They could link their fate with their better-governed neighbors to the north!

Such a move would also be amazing validation of the Great White North—for Canadians to reject it would show a lack of confidence and a fear of dreaming big. Canadians should have confidence and dream big! (Yes, I thought Maximum Canada was a great read, why do you ask?)

One Canadian certainly has no fear of success: the Prime Minister invited American states to join as new provinces!

But enough with the blather. Let’s say something happened to crack the American federation. What would a switch entail in practical terms? In order to get my mind off the damn election (and grading exams) I decided to take a preposterous idea seriously. What would happen if New York State became the Province of New York?

The name

Well, first, NYS would not need to rename itself. Canadian law can handle a province that calls itself a “state” as easily as the U.S. constitution handles states that call themselves “commonwealths.” But let’s call the new jurisdiction “New York Province” anyway, just to make things easier.

Integrating the judicial systems

The biggest issue isn’t the one you’d think. (Although I’m getting there.) The biggest issue is that under current Canadian law, state criminal law will be replaced by the Canadian federal criminal code. The transition would be tough. State judicial elections would go out the window. I think you could continue to elect the Attorney General, but her authority would shrink considerably. You could probably continue to have elections for sheriff, but it would also be a departure from Canadian norms. The Canadians would also have to decide how much leeway to give New York in its civil codes. If they mandate that New York conform to the Canadian system, then civil courts will lose much of their power and many trials that were previously decided by juries will switch to judges.

Integrating the two systems would be a major headache for judges and lawyers. I have no idea how long it would take them to adapt. One year? Two? Ten? Canada would have to agree to long phase-in period during which the New York court system would be linked to Canada’s but not integrated into it. During this time every lawyer in New York State will have to effectively retrain. Law schools would also have to revamp their curricula.

Alternatively, the Canadians could work out an exception for the new province(s). Conceptually, such an exception would be relatively easy to implement and administer. (Australia and the United States do it and New York allows certain municipalities to create their own criminal offenses.) It would be a departure for Canada but it would not mean that the federal criminal code would cease to apply to New York. Rather, it would mean that New Yorkers were subject to two (or three) separate criminal codes, much as they are today.

Business ownership

In some industries, American companies operating in the state that weren’t locally owned would be required to pull out and sell their assets in that state to a Canadian company. (Canada would of course now include New York and any other states that made the switch.) These industries are pretty broad, including transportation, airlines, railways, shipping, publishing, financial services and telecommunications.

Telecoms and airways are pretty straightforward. U.S.-owned airlines would need to divest their operations for point-to-point flights between New York and other parts of Canada. Ditto, telecoms companies would need to sell or spin off their New York operations. Canada has been pretty liberal with allowing foreign ownership of transportation companies, so there shouldn’t be major problems for trucking or railroads. Some retail chains might want to spin off their New York operations, but that won’t be that difficult.

Some banks with equity of $8 billion or more and large demutualized insurance companies would need to be restructured. Canadian law requires that no person may own more than 20 percent of any class of voting shares or 30 percent of any class of non-voting shares. In addition, a majority of the board of directors and the CEO of every bank or federal insurance company would need to be Canadian residents.

Publishing is a weird one. Existing operations would only need to sell their operations to Canadian buyers if they intended to acquire an existing Canadian company. But it’s equally likely that you’d have big New York publishing houses would not qualify for Canadian subsidies or be able to acquire smaller Canadian competitors. It would probably get weird very quickly, but there shouldn’t be any constitutional problems. The Canadian government could continue to protect small Canadian operations against large New York-based Canadian operations. Of course, how long that would last once the New York representatives from the federal branch of the Working Families Party entered the Canadian parliament is a different question …

Unions

New York employers are going to be unpleasantly surprised. Most New Yorkers are going to love it. Of course, a lot depends on what the politicians in Albany do with their liberation from the strictures of American labor law.

Gun laws

There may be some disquiet in parts of upstate (as there is in rural Canada) but most New Yorkers are going to love this as well.

Fiscal federalism

Canada channels significantly fewer resources through its federal government than does the United States. Gross federal spending in New York (sans interest payments and direct purchases of goods and services) came to 13.2% of state GDP; the equivalent number for Ontario was only 10.9%. (The high level of direct purchases in Ontario is due to the fact that the federal government is based in Ottawa.)

Let’s take each category in turn. For retirement spending, the transition would be smooth. Canada could take over Social Security payments for existing retirees without much problem while transitioning younger workers into the Canada Pension Plan and Old Age Security.

For other transfers (not including medical care) the Canadian federation is about as generous as the United States, giving a bit more directly to individuals and a bit less to the governments of rich provinces like Ontario. (The whole thing is actually distorted by Alberta’s oil money, but let’s leave that for now.) On the margin, New York Province will receive a bit less non-health federal aid than New York State.

Federal spending and taxation as a % of jurisdictional GDP

	Retire-ment	Medical care	Revenue sharing	Individual transfers	Goods and services	Total spending	Gross federal taxation	Surplus to Feds
Ontario	5.1%	1.7%	1.8%	2.2%	4.0%	14.8%	(18.2%)	(3.4%)
NY State	4.6%	4.7%	2.5%	1.5%	1.4%	14.7%	(16.3%)	(1.6%)
NY Province	4.6%	1.1%	1.6%	2.2%	1.4%	10.9%	(18.2%)	(7.2%)

But health care … oh boy. A back-of-the-envelope calculation (using 2014 numbers, so at the beginning of Obamacare) shows that public and private entities in New York state spent about 8.4% of GDP on covered medical services. That’s more than most Canadian provinces, since health care is more expensive in the USA, but not prohibitively so: the Province of Ontario spent 7.1% of GDP in 2014.

New York is going to have a problem under the Canada Health Act. Medicare and Medicaid transfers from the U.S. federal government will dry up, and here (somewhat perversely) the United States is way more generous than the Canadian confederation. New York will lose Medicare and Medicaid money worth 4.7% of GDP. The Canadian Health Transfer (CHT) would come to only 1.1% under the current formula, blowing giant holes in the New York provincial budget. New York State currently spends about 2.0% on Medicaid, but adding the Canadian Health Transfer to that leaves a minimum budget hole of 5.3% of GDP (8.4% covered spending that will need to be made free – 2.0% existing spending – 1.1% CHT.)

And that figure of 5.3% is a minimum since Medicare and Medicaid are (again, perversely, I know) more generous than Canadian health care, even though they require co-pays. (More generous for the minority of people that they cover, that is.) You can’t tell seniors that they are going to be worse off now that they are Canadian, can you? That would be thoroughly un-Canadian!

New York Province could fill the hole with a VAT rate of 12% on top of existing sales taxes, or a tripling of state income taxes, or some combination thereof. That’s not an impossible thing. In this world where the U.S. peacefully divorces passing some version of Medicare-for-all should be popular. But it would be very expensive. Add to that the fact that the province would be passing upwards of 7% of GDP to Ottawa and becoming Canadian looks like a bad deal, even with all the benefits from being part of a big continental federation. 

Only there is here the outline of win-win deal for everyone involved, which is simply that New York Province is going to be a huge net payer into the Canadian federal budget.

The Canadian federal government could sign a Medicare Accession Grant Agreement (MAGA) with New York Province that would kick back, say, half the cost of establishing single-payer system. New York would get a federal tax point transfer worth 4.2% of GDP, and the Canadian taxpayers would still come out ahead with a net transfer of 3.0% of New York’s GDP. Win-win for everyone!

TLDR: Joining confederation would be a headache and New York would lose some fiscal revenue from the federal government. But if Ottawa is willing to be flexible it could be a win-win for everyone involved. 

I leave the effect on Canadian politics as an exercise for the readers ...

The Purple Rose of Texas is here

All eyes are on Texas.

I love Texas! And I have for a very long time. Maybe this dates back to a trip to Dallas to visit my stepfather back in 1986? Or maybe there’s just something about the state that I like? The food? West Texas? (Yes!) The Germans? (Hell, yes!) The Tejanos? (Double hell yes!) The state’s utterly insane history? The weird way Texans know about their state’s utterly insane history? I can’t say. I know that I’d be happy to live there, and that’s weird for a die-hard New Yorker like myself who only likes Washington because it has a subway system.

So it gives me more satisfaction to imagine Texas turning blue than it would for, say, Georgia. (Although MARTA, hey. And Atlanta does have the best BBQ in America.) It makes me want to believe that things like the below really are astonishing:

Something astonishing is happening in Texas. It's hard to know what it will actually mean for the result, but it's highly likely that the number of early votes will eclipse the *total* number of votes cast in 2016. The tally is already up to a whopping 91% of the total 2016 vote.

— Brian Klaas (@brianklaas) October 29, 2020

The turnout numbers do not yet mean that we have a revolution in the Lone Star State. The polls may mean that we’re seeing a Lone Star revolution, but not one big enough to put Biden over the edge without some luck. But not the turnout data, not yet anyway.

Start with the fact that registrations in Texas are only up from 78.2% of the voting age population in 2016 to 78.5% in 2020. If turnout rises back to 2008 levels (59.0%, versus 56.7% in 2016) then we will see the number of total votes cast rise from 9.0 million to 10.0 million. As of yesterday, the total number of early voters was 9,009,850 . That would be about 90% of our “expected” turnout. (Today is the last day for early voting.) That is way up from the 4,497,431 (or 52%) recorded in 2016. 

But ... we do not know is how many of those voters are new and how many have simply decided to vote early due to Covid fears or because early voting has expanded. It is quite plausible that all those early voters simply means that fewer people are going to show up on Tuesday. If we wind up with a turnout of 10 million voters, then Biden-Harris will need to snag basically all of the 1.0 million “new” voters. 

Is there any good news in the data, then?

Well, one solace is that the Democrats do not really need to snag all of the new voters. Lots of people have either passed away or moved out of the Lone Star State. The actual number of new voters will be larger than 1.0 million. A reasonable back-of-envelop calculation (which assumes that people who die or move out-of-state vote the same as all other Texans) would cut the share of new voters that the Democrats need to win to 70%.  

In other words, it is plausible (but not likely) for Democrats to win the state without a massive turnout surge. Consider the number of votes that major party candidates have attracted over the past 44 years. The number of Republican votes has been basically flat since 2004:

Let me note two weird things in the Texas data. The first is the jump in turnout from 1972 to 1976. First, why was turnout so incredibly low in 1972 and what caused it to spike in ’76? Federal action under the Voting Rights Act? The 26^th Amendment? It’s weird.

The second is the gyrations in the voting-age population (including non-citizens) as a share of the total population. It goes from 73% in 2008 to 69% in 2016 before shooting back up to 74% in 2020. For a state with more than 20 million people that seems like a lot of variation in birthrates or migration. 

TLDR: the turnout surge in Texas means less than you think it does. But even if Texas does not go blue, as is likely, purple Texas is already here. 

What would it take to get one billion Americans?

What would it take to get one billion Americans by 2100? Matt Yglesias does a good job of explaining why that would be a worthy cause in his book titled … well … One Billion Americans, but he doesn’t really say what it would take to get there. At best you can say that he proposes a bunch of policies that would be good in-and-of-themselves and will raise population growth on the margin. That’s pretty weak tea.

So what would it take? Well, here I’m going to focus on 2060 and 2100, since the Census Bureau projects out that far and I’m marginally likely to be alive, while my kids will be in their forties and (they better!) have kids of their own. According to the Census Bureau, the United States will have about 404 million people by 2060. The census projection then creeps upwards to 426 million by 2099 before starting to shrink.

The problem with that projection, as Lyman Stone will tell you, is that the Census is relying on outdated statistics. Both birthrates and net immigration have plummeted since they put together their estimates. I constructed a simple population model and plugged in actual Trump-era birthrates — i.e., 1.74 children per women instead of 1.89 and net migration of 0.6 million per year instead of 1.1 million. (I assumed the same improvement in mortality.) The result is a United States with only 362 million people in 2060. And that 2060 population will be falling, shrinking to 331 million by 2100 … a million fewer people than today.

So what could we do? Well, we could adopt Canada’s immigration policy. Using the net migration numbers for the “status quo” scenario put out by Canada’s Conference Board, American net immigration would rise to 2.7 million people by 2030. That’s about 4½ times the current number. Now, the current number has been pushed down by the Trump Administration, but immigration would still run about 2½ times the amount we averaged in 2000-16. (My calculations assume a ten-year phase-in period.)

But it would mean that the United States would accept a number close to all net migration into high income countries. According to the U.N., high income nations took in about 3.2 million people per year in 2015-20, down from a peak of 4.7 million per year in 2000-05. Now, I have no doubt that there is a lot of pent-up demand to emigrate held back by U.S. restrictions. But the United States is so big compared to Canada or Australia that it’s a real question whether we could attract this level of immigration over the next 80 years even if we wanted to. It is doubly unsure whether we could attract those numbers using the Canadian-style points system; we would almost certainly need to give bigger weight to other factors than Canada does or lower the cut-offs. 

And even that wouldn’t get us to 1 billion. Rather, the U.S. would hit 465 million in 2060 and 594 million in 2100. That’s a healthier population than you get under current policy, but it isn’t exactly the kind of dynamic growth that Yglesias (or I) would want to see.

To get to one billion by 2100 (or 570 million by 2060) you would also have to raise the total fertility rate (TFR) to 2.4 children per women. That is not a historically high number, but the only developed nation to maintain numbers that high is Israel. And even there, the number for secular Jews is only 2.2. At a TFR of 2.2, a Canadian immigration policy would get the USA to 534 million by 2060 and 851 million by 2100. A more realistic (but still hard!) TFR of 2.0 would get us 503 million by 2060 and 730 million by 2100.

But 730 million is not one billion.

I understand that hitting that target wasn’t Yglesias’s point. Rather, his point was twofold. (1) Here is a frame for a bunch of good policies! (2) Why the hell are most Americans afraid of aiming big anymore? For me, (2) is the salient point. We’re a technophilic nation, so it’s not that we’re afraid of change in general. What we’re afraid of is a certain kind of change, one involving big collective endeavors. We cower from building new cities, new roads, skyscrapers in our back yards, nuclear power plants, the Green New Deal. That’s a bad thing. We should stop. We will have a better future if we stop.

But sadly, absent some incredible rise in fertility or an unlikely drop in mortality, that better future won’t involve one billion Americans.

Trump’s executive orders are not unconstitutional but they are a sign that the Constitution is breaking

Did Donald Trump just repeal Article 1 of the constitution on Saturday? After looking at the details, I published a hot take on Twitter that seems to be standing up to the test of time. So my short answer: no.

Longer answer: No, but it’s worrying.

Longest answer:

The president’s executive order postpones payroll tax collection until next year under Section 7508A of the Internal Revenue Code, which allows for tax collections to be postponed for the victims of natural disasters. But since this is Trump, there are several problems. Section 3101 of the IRC puts payroll taxes on individuals, who get relief. But employers are still responsible for collecting the tax under Section 3102(b).

So why would businesses would want to stop collecting the tax? After all, there’s a big chance that they’ll be responsible for the uncollected sums come January 2021. And the uncollected funds will go to their employees, not to them. They’d have to claw back that money somehow, or take a double hit, paying out today’s payroll taxes to employees in the form of wages and then paying them again to the federal government.

In other words, it’s a mess! But it’s not an unconstitutional mess.

The unemployment insurance is a different wrinkle. What the President aims to do here is redirect $44 billion of the $70 billion in FEMA’s Disaster Relief Fund to the Federal Additional Unemployment Compensation Program. It’s not clear that he can do this, but I suspect that the courts will allow it. After all, a pandemic certainly qualifies as a natural disaster. Paying it through unemployment insurance is, well, unorthodox, but SCOTUS has been pretty lenient so far with this sort of thing.

That won’t last long. Here’s a back-of-the-envelope calculation. In June, the Feds spent $80.4 billion on unemployment insurance for roughly 17.6 million unemployed people. So, figuring that outlays go down by 33% 50% (from $600 to $400 $300, with the states picking up $100) and the number of unemployed falls another 10%, then the DRF will be exhausted on September 5th September 16th.

Of course, there’s another problem, which is that the states have to kick in roughly $15 billion in order to enable the feds to spend that $44 billion. The President is talking about waiving that, but there he really doesn’t seem to have any statutory authority, no matter how tenuous.

In other words, it’s a bad policy (why cut benefits at all?) that relies on a benign hurricane season (good luck with that) and dumps us right back into the soup next month. But it’s not clearly unconstitutional. This is not the John Yoo strategy, not yet.

Still, it’s worrisome. First, it’s worrisome that the executive felt no need to compromise with the legislature. Second, it’s worrisome that they’d break a bunch of norms to get leverage in negotiations. It adds more weight to Juan Linz’s argument about the dangers of a presidential system. (President Obama’s DACA and DAPA orders can be interpreted in the same light.) And third, it’s worrisome that Congress is looking increasingly unable to check the president.

The failure modes are piling up.

It is hard to get Manuel Bartlett to understand things when his paycheck depends on him not understanding it

Manuel Bartlett is the corrupt head of CFE, Mexico’s state electricity company. He hates renewables. So he’s trying to kill it with the support of Mexico’s president. From the man himself: “Wind and photovoltaic (plants) don’t pay the CFE for the backup. Do you think it’s fair for the CFE to subsidize these companies that don’t produce power all day? That’s not a free market, it’s theft!”

Do his arguments make sense?

Let’s unpack them. The first argument is that any firm feeding electricity into the grid should pay to transmit the electricity. The second argument is that renewables aren’t on all the time, so somebody has to have backup generators in place and that somebody should get paid. 

The first argument makes little sense. Cenace, the organization that runs the grid (owned by CFE) charges rates to feed in power. Maybe they should be higher for everyone, maybe not, but it isn’t a reason to discriminate.  

There is a technical argument that intermittent power sources raise transmission costs. That technical arguments have been solved. First, the more intermittents you have on the grid, the more predictable it is. Second, weather forecasts are pretty good these days. Third, getting “reactive power“ into the grid when needed is not particularly expensive or difficult. ERCOT, the Texas grid operator, found that you needed capacity about 0.1% of intermittent capacity to maintain grid stability. Internationally, there’s no relationship between the penetration of intermittent power sources and grid stability. Why? Well ... natural gas plants go offline all the time! California’s crisis in 2015 was caused by a leak at a gas storage facility in Aliso Canyon. 

So that’s a nothingburger. But what about the fact that somebody has to keep the lights on when the sun isn’t shining and the wind isn’t blowing? 

That could be a problem. Dispatchable power sources (i.e., ones you can turn on and off at will) suffer cycling costs, the same way that turning a lightbulb on and off every few minutes will raise power use and lower lightbulb life. It’s certainly a problem for CFE! The good news for CFE is that CCGT natural gas plants have relatively low cycling costs. The bad news is that you’ll run them less because solar and wind will eat their lunch during sunny and windy times. CFE will be able to charge a little more but that won’t make up for the loss of business and there will be some increase in cycling costs. 

In short, Bartlett’s argument comes down to the fact that cheap solar and wind isn’t just cheaper than burning hydrocarbons, it also raises the cost of burning hydrocarbons.

But so what? 

Imagine: A cheap airline comes in on a popular route. It steals away passengers from legacy airlines. The legacy airlines’ costs rise b/c they have stranded assets (unused planes) and high fixed costs. So prices on routes operated only by the legacy carriers rise a bit. Would you for that ban low-cost airlines? Or throw a tax on them? Or limit their landing slots? If your answer is no, then you think Bartlett is full of it. 

Yes, CFE has a mandate to keep the lights on. No, it’s not like they’d just turn off their power plants at night if that mandate didn’t exist. They want to make money. Prices will go up for baseload power and CFE will stay in business. It is remotely possible that Mexican electricity consumers will wind up paying so much for baseload power that net electricity prices will rise. Well, remotely possible other than the fact that it hasn’t happened anywhere else. (A decade ago Spain and Germany ran into problems with rising electricity costs because they oversubsidized solar power. But solar power was a lot more expensive back then.)  

The whole thing makes me sad, because I thought AMLO could have been a great president. Instead he’s bad for the Mexicans alive today and very bad for everyone who will be alive in the future. Future generations will revile him. The only reason he won’t be reviled around the world is because Mexico is small and George W. Bush and Donald Trump will outshine him as historical global warming villians.

Once upon a time, back in 2008, I sarcastically joked that (then citizen) AMLO’s terrible energy policy would be good for the world because it would lead Mexico to produce less hydrocarbons and that’s a good thing. What I never expected is that AMLO wouldn’t just want to hobble private hydrocarbon production, he’d also try to hobble anyone who wants to produce electricity without setting anything on fire. 

Anyway, there you have it. Bartlett’s argument has nothing to do with Mexican consumers, who will benefit from cheap solar and wind. Nor does it have to do with keeping the lights on, which is easy to do. It’s just about keeping out cheap competition to benefit CFE. 

The real question is why he feels so strongly about helping CFE and burning Mexican oil. Any answers to that would be greatly appreciated .... 

The Barber of Buenos Aires cuts again

Argentina is going to get a large haircut on its debt. That was a foregone conclusion. Now, though, Covid-19 has worsened the situation. Yet for some reason Argentina has made a very generous opening offer, about what I would have expected in a world without a pandemic. I don’t know why.

The country could not have paid before Covid-19 hit; it certainly can’t pay now. So President Fernández’s finance minister, Martín Guzmán, proposed a debt restructuring that was far more generous than most economists expected.

Of course, restructuring the debt is ultimately a political decision, and economists still aren’t too good at predicting political decisions. That said, economists do think the offer is pretty generous towards creditors.

First, how generous? I came up with a back-of-the-envelope calculation for at least a chunk of the outstanding private debt. We know the following:

• The face value of that debt is going to cut from $67 billion to $63 billion, or 5.4%;
• The total interest that will be paid on that debt before its retired (or rolled over) is going to be cut from $61 billion to $23 billion;
• Coupon payments will be suspended for three years, after which they will rise slowly from 0.5% in 2023 to a maximum of 4.5%.

If you assume that the coupon rate will rise by 0.5 percentage points per year, then it is possible to estimate a flow of payments and discount that back to year zero. You can do that for the original flow of payments and the restructured flow in order to estimate the “haircut” on the debt. Of course, in order to do that you need a discount rate. What to use? You could use the current yield on Argentine debt, which is in the vicinity of 40%, but that number reflects the fact that everyone knows that the country can’t possibly repay its current debt load. You could use the rate at which most of the debt was issued at, around 7%, but that reflects the optimism of the Macri years and does not reflect the country’s likely post-restructuring situation.  

At 40%, the haircut comes to 90%! That can’t be right. At 6.7%, the haircut comes to 49%, but that waves away the fact that Argentina is riskier now. There is a lot of chatter for a 12% rate, which sounds right. Using that, you get a haircut of 60%. Which is still less than Argentina got back in 2005.

Why be so generous?

The Trump administration is not joining OPEC and the deal will not last

The United States is not joining OPEC. The United States is not leading a cartel to raise oil prices. The United States is, to quote my 5-year-old daughter, “not doing nothing.” The President of the United States is posturing.

Right now, the Trump administration is doing absolutely nothing to jawbone U.S. producers into cutting. In fact, it’s made it clear that U.S. “cuts” will come from market forces. It is remotely possibly that the Texas Railroad Commission (RRC) will order production cuts in Texas, but right now only one of the three commissioners supports the move and hearings about the idea have been contentious, to say the least. Moreover, what would be the point? If a putative 9.7 million bpd cut didn’t move markets, why would anything Texas could do make a difference?

It seems to be true that Trump worked the phones to get the Saudis to accept an agreement. But OPEC has no enforcement power and all the low-cost producers have incentives to cheat. Moreover, the deal is almost a sham. Both Russia and Saudi cut from a baseline level of 11 million bpd (the link goes to the OPEC press release) … but Saudi has never hit that level. The supposed highs of 12 million bpd included sales of stored Saudi crude. Ultimately, Saudi production will be down only 1.2 million bpd.

So good luck with enforcing that deal. As with so much of the Trump administration, this is for show. He gets to show off much he’s in with the Saudis and the Russians, and he gets to tell his backers in the oil industry that he went to bat for them. Good for him, I suppose. But it isn’t much of a cartel and the U.S. government isn’t ordering any production cuts at all. With Covid-19 having destroyed oil demand, prices are not going to go up anytime soon, least because of this deal. 

Covid-19 and American oil production, in gory institutional detail

Oil prices are crashing due to Covid-19. So what happens to American output?

Market reactions first, then political ones.

Well, first the oldest building in Dallas, circa 2019:

Yes, my shoes are bright blue.

Now market reactions to the Covid oil price crash.

Market

The “shut-in prices” is the minimum wellhead price operators need to continue producing from a production well. It’s equal to the amount needed to cover ongoing O&M, including where-necessary pumping and artificial lift, as well as water, gas and steam flooding and other secondary recovery costs.

The first wells to shut down are “stripper wells” nearing the end of their useful life. In the U.S. there are about 400,000 of these wells producing about 720,000 barrels per day. (I said they were small.) They usually rely on pumps to get the stuff out of the ground, meaning those famous mechanical donkeys you can still see in parts of California.

Next to go are wells that depend on secondary recovery. For example, in the Golden State companies inject about 400 million barrels of steam every year to get 161 million barrels of oil. (Governor Newsom has banned new wells using this technique.) These wells are high cost, but when shut down they tend to fill up fast with water. Companies that shut them down risk losing the remaining shut-in oil forever. In addition, companies that shut down wells risk losing their land leases. As a result, these wells don’t close immediately once they start losing money.

After that some wells will start to decline quickly in the absence of new drilling. Tight oil wells in North Dakota decline 65% in the first year and 77% over the first two years. That’s the next to go. In their early phase, however, tight oil wells can be easily shut-in and restarted. So tight oil production will decline in two waves, first by natural decline as new drilling collapses and then again as companies shut wells down. Since you can restart unconventional wells in about a week companies won’t be as reticent to stop production … if not for the fact that most of them are highly indebted and desperate for any sort of cash flow to satisfy demanding creditors.

This chart for tight oil plays in the Eagle Ford region of Texas gives you some idea of just how fast this decline can happen. Without new drilling, production would decline by about 700,000 bpd within a year from this play alone:

But production will decline faster than that, because unconventional wells can be shut-in fairly easily during their first year. 

In other words, the current oil price crash will cause U.S. production to drop, and drop fast. That is, it will if it is sustained. That’s not a given: countries have already begun to reopen their economies. Oil demand will recover as a result, possibly to prices that might keep tight oil production alive and stop the shuttering of stripper wells.

Political

Of course, state governments can act via a process called “proration,” whereby they can order well-by-well output cuts. Back in the 1930s, Congress passed the Connally Act, which made it illegal to ship oil across state lines in violation of state output quotas. It also created the Interstate Oil Compact Commission (here is the law), which brought representatives together from oil-producing states to hammer out overall quotas, America’s own little mini-OPEC before OPEC. (For whatever reason, Illinois and California never passed proration laws, although the California government sanctioned a quasi-private commission that functioned outside the law.)

The IOCC still exists, but its powers have withered. It no longer makes decisions by majority vote. And it now includes 31 states, five Canadian provinces, two Canadian territories, plus Egypt (W?) and the other Georgia (WT??) and the Bolivarian Republic of Venezuela (WTF???). Plus, while Arkansas, Colorado, Michigan, New Mexico, Oklahoma, and Texas all passed proration laws, only Oklahoma and Texas still exercise the muscles. (The Rail Road Commission of Texas and the Oklahoma Corporation Commission still publish quotas, set above most wells’ maximum production.) Executive agencies function like muscles: use ‘em or lose ‘em. Those states would need to design regulations from scratch to impose quotas, and they would certainly be challenged in court.

Now, Texas is big enough on its own to mandate a production cut. And the Texan authorities are talking about it! But it’s all talk. And there’s no sign of the Trump administration trying to resuscitate the Depression-era laws that let it coordinate oil production cuts, or even coordinating talks among the IOCC states. But production is falling fast, so Trump could claim that he jawboned producers into it.

Hell, he could do that even if production wasn’t falling fast. That’s his M.O.

Conclusion

Which means that the ultimate question is whether OPEC wants to be fooled. If Saudi Arabia thinks that letting Mexico de facto defect while pretending to cooperate will not hurt their cartel agreement, then they’ll accept the bullshit. If they don’t, then they’ll reject the Trump-AMLO bamboozle.  

Some crude nonsense: Trump, AMLO, and OPEC

OPEC has been trying to negotiate production cuts in order to prop up oil prices. Mexico resisted making any cuts. AMLO then declared that he had asked the United States to make part of the requested cuts on Mexico’s behalf. Trump, in a press conference, announced that the U.S. would make the cuts but request “reimbursement at a later date.”

What does it all mean?

1. AMLO really loses his senses when oil is concerned. Right now, Mexico loses money on every barrel it points. Inasmuch as it is geologically possible for Pemex to cut production, Pemex should cut production. But AMLO refuses to accept that. It may be because he believes that he’s linked his reputation to increasing oil production and that failing to do so will hurt him politically. But he believes that then he is a terrible politician … and we have evidence that he is not a terrible politician. Which leaves us with the conclusion that he really like to dig hydrocarbons out of the ground and set them on fire because he likes to dig hydrocarbons out of the ground and set them on fire.
2. President Trump does not have the authority to cut U.S. oil production. Individual state governments do have that authority—the Texas Railroad Commission is famous for controlling production in that state—but there is no sign that the President intends to call in state regulators and ask them to order private producers to shut wells.
3. S. production is crashing anyway. Unconventional oil wells in the United States decline hyperbolically. That means that companies need to keep drilling just to keep up production. When prices are low, they stop drilling, and production falls. The EIA projects that U.S. production will fall by at least 500,000 barrels per day this calendar year and another 700,000 barrels in 2021. This isn’t a hard projection to make, considering as production is already down 600,000 bpd from last week.
4. AMLO is putting on a show for OPEC. He’s trying to get OPEC to pretend that a U.S. production fall that would have happened anyway is actually a deliberate action on the part of the United States to help out Mexico. OPEC knows this is bullshit, but will likely give AMLO the fig leaf he’s looking for.
5. Trump’s demand for compensation is meaningless, but not for the reasons you think. When I was a kid back in New York, we’d talk about the “favor bank.” (Often called the “Irish favor bank” for reasons I don’t understand at all.) You’d pay into the favor bank, you’d make withdrawals from the favor bank. Donald Trump has never played by the favor bank. If he wants something from you, he will do whatever he can to get it from you. If Donald Trump wants something from Mexico in the future then he will ask for it regardless of whatever “favors” he granted now. And he will threaten Mexico in order to get it. In that sense, AMLO’s request was costless.
6. OPEC wanted Mexico on board because reasons. This is the only part of the story that I don’t understand. Why couldn’t OPEC have just ignored Mexico’s posturing.

In other words, this is much ado about nothing.

In fact, if this is right, then it really was about nothing for nothing ...

 

Saudi Arabia plans to issue a statement blaming Mexico for not agreeing to cut its production (by the allocated amount of 400k) #OOTT

— Amena Bakr (@Amena__Bakr) April 10, 2020

The Chilean senate is no longer completely terrible but ...

In 2015, Chile reformed its horror of a Senate. (This blog is no fan of senates.)

Previously, Chile elected two senators from 19 constituencies. Eight of the constituencies conformed to Chilean regions, regardless of population. The remainder consisted of regions split in half. In every constituency, the party that won a plurality would get one senate seat. Then the runner-up would get the other seat, unless the winning party more than doubled its vote share over the runner-up. This is the binomial system Andrei mentioned in comments.

That system is now mostly gone, replaced with one where each Chilean region gets a number of Senators proportional to its population. Inside each constituency, Senators are selected by proportional representation. 

But it is still terrible. Consider the below chart. The horizontal axis is the number of senators from each constituency. The vertical access is the population of the constituency. Five of the smaller ones are stuck with the old binomial system. And the distribution of senate seats is lumpy and only vaguely related to population. 

Moreover, smaller regions are ridiculously over-represented and metropolitan Santiago is massively under-represented. Consider:

So the Chilean senate is still a mess. But the lower house is even worse!

There is actual is actual overlap, with smaller districts getting more deputies that larger ones. Malapportionment is terrible.

In other words, the 2015 amendments may have (mostly) abolished the binomial system, but they still left districting a mess. Multimember districts are a good thing, but this is a terrible way to do it. Chile needs constitutional reform.

Although I am still not clear why it needs a whole new constitution. Thoughts?

Why does Chile need a new constitution?

The Republic of Chile is set to replace its constitution. After the mass demonstrations, all the political parties signed on to writing a new Magna Carta. Amendments readily passed authorizing a constitutional convention if a national referendum gives the thumbs up.

But what is wrong with the current document? Nobody likes the fact that it was written by a dictatorship back in 1980. But the atrocious parts of that document have all been excised. It now includes the right to unionize, the right to social security, the right to education through age 18 and the right to a clean environment. It bans no social or economic policies short of outright Bolshevism. 

So is there anything concretely wrong that requires a new constitution? 

A few obvious problems: 

1. Senate districts remain severely malapportioned, as do lower house districts. In addition, the binomial system survives in some constituencies.
2. Many ordinary laws require supermajorities for no good reason. Article 66 requires 60% for any laws that “interpret constitutional precepts.” Meanwhile, constitutional organic laws require 57%. “Constitutional organic laws” are specified in the constitution as laws giving structure to constitutional mandates; in other words, they are just plain laws.
3. The president is too damn powerful. It’s great that the executive can unilaterally propose laws to Congress. (The U.S. constitution could use an amendment permitting this.) But it is ridiculous that Article 65 says that only the president can propose laws on taxation, public services, employment, borrowing, salaries and remunerations, social security or collective bargaining.
4. Amendments intended to strengthen judicial review may have gone too far. In Chile, you do not need standing in the Anglo sense in order to challenge constitutionality: Article 93 gives a long list of officials that can bring suit before the Constitutional Tribunal. 

This is not a very long list. What am I missing? Does Chile need a new magna carta for any reason other than the symbolic?

Who voted for Macri and why? We know the wrong answer, at least

Joint with Leticia Abad.

First things first: Macri won 90% of the Antarctican vote! Sure, that’s only 102 people, but hey, climate change. Just wait until the 2059 election. He also won everything in the Malvinas, getting zero of zero votes. Or did he lose big there? It’s not clear, but the newspapers are reporting it, so I am passing it on.

Second, last night’s result was only mildly surprising. Boz called it that Macri would outperform the polls but not go the distance, and that is what happened. Macristas are furious at Lavagna and Espert, but it’s unlikely that all of the votes for Lavagna would have gone to Macri. This was a clean win for Fernández, and a win is a win. In other words, “Lavagna cost it for Macri” is a wrong answer.

Larreta cleaned up the mayoral election in Buenos Aires City: who could have imagined that “Seven new subway stations in four years!” would have been a winning slogan?* Meanwhile, in Buenos Aires province, Axel Kiciloff won a massive victory. I have met Kiciloff in person. (As has my friend and colleague, Gónzalo Monroy.) Kiciloff is a smart fellow, but his understanding of markets is so weak that I have to wonder how he manages to go shopping.

I spent election day in San Isidro, a small bastion of anti-Peronism, so the traditional method of “Ask random people why they like Kiciloff” didn’t work. Election night was with Macristas in the city, so the method worked even less well.

A conventional wisdom is emerging here that Macri won where the farm sector is important. The only problem with answering “Farmers!” to “Who voted for Macri and why?” to that it is wrong. 

Map 1 shows per capita agricultural exports (including agro-industry). Map 2 shows Macri’s vote share. There is basically no correlation.

I don’t know why a band of provinces across the center of the country went for Macri, but it wasn’t because they voted out of fear of export taxes. An enterprising scholar should investigate this. Has Argentina seen an American-style “big sort”? Is there a cultural component to the anti-Peronista belt?

The same belt went overwhelmingly for Macri in 2015. In 2011, the Peronists won everywhere but San Luis, only with reduced margins. In 2007, the Peronists lost in Córdoba and San Luis. In 2003, there isn’t much of a pattern, but when you go back before that Córdoba and San Luis seem to be perennial bastions of anti-Peronista sentiment, something that has spread to a belt across the center of the country running from Mendoza in the west to Entre Rios in the east. 

Something interesting is happening; I just do not know what. 

* Other than, well, anyone.

Observatorio argentino 45: Maybe Argentines did not care as much about the election as they claimed

The excitement around the recent Argentine election felt unprecedented. Everyone was talking about how fired up people were. Both sides thought this was a critical election. Random people on the subway called it, “The end of the world.” News reports intimated record turnout; that night people feared violence.

Except, well, turnout was bog normal. Completely normal. As in, nothing-to-see-here normal. Turnout was about the same as in 2015 and lower than most postwar elections. See below.

Of course, most postwar elections came in an atmosphere where everyone knew that the military could and would overturn a result that they didn’t like, and where Juan Perón was an active living political force. So maybe the whole postwar period isn’t a fair comparison. But turnout is barely up on 2015 and only a little above 2011. It really only looks good against the astonishingly apathetic election of 2007, where Cristina Fernández first won election in her own right.

I should point out that voting is compulsory in Argentina, although the penalty is risible. Right now, the fine is 100 pesos (about a buck-fifty, more or less). In theory, you’re also banned from carrying out any sort of bureaucratic procedure for a year, which could be a PITA if you, say, plan to buy a house or sell a car or something like that. (Here is the registry of people who didn’t vote.) In practice, it is not clear to me that the disincentive is all that large.

The compulsory rule dates back to 1912. Weirdly, the evidence points to conservative parties favoring the reform as a away to insure that their supporters would get to the polls in the face of fired-up and enthusiastic socialists. (Article 84 of the Saenz-Peña Act of 1912 exempted illiterates and people who lived more than 20 kilometers from the polls from the fines; this was strategic.)

To sum up, the election certainly seemed historic! But the average Argentine voter didn’t really act like it was.

The problem with Chile

Even with the República Argentina on the verge of an historic election, the riots and subsequent demonstrations in Chile have attracted a lot of attention. Below is a much smaller sympathy demonstration getting started in Buenos Aires, organized by the Frente de Izquierda.

Argentines look upon their neighbor to the west with a mixture of contempt and envy. Contempt, because there is a strain of “Why is that place even a country?” You don’t quite get the spontaneous outbursts that Uruguay attracts — random people in restaurants and bars will tell you, unprompted, “That’s a province of Argentina, you know” if you mention having visited Uruguay — but Chile can ignite the same feeling in some Argentines. (They know who they are.) Envy, because that historical accident to the west has become richer than Argentina and a putative “developed” nation while Argentina remains in its malaise.

So there is schadenfreude in excess on this side of the Andes.

That said, it is worth noting that the problem with Chile is simple: taxes and spending. Chile has some nice statistics about this. The Chilean personal income tax system is moderately progressive, although note that the country collects more from the regressive VAT than from progressive income taxes. Still, the bottom 76% of tax units in 2016 earned an average income of US$3,875 and paid nothing.

But look at that household income number! It is not a misprint. It is substantially lower (in nominal terms) than in Mexico. The Chilean state is /much/ more powerful than the Mexican state. So the country appears orderly, even in small impoverished villages and the outskirts of large cities. That gives an impression of prosperity that even places like Monterrey don’t have.

But it is a false impression. In median terms (not average) Mexico is more prosperous. And not by a little, either.

Getting back to Chile, the top 0.43% of tax units in 2016 earned an average income of US$210,236 and paid an average rate of 28%. So what did the government do? Cut the marginal tax rate from 40% to 35%! And this was under President Bachelet, a socialist.

To be fair to Bachelet, the net impact of her reform was to reduce income inequality. The share of national income going to the top 1% dropped from 16.6% to 15.5%. (See page 7 at the above link, a World Bank report entitled “Efectos Distributivos de la Reforma Tributaria de 2014.”) But that was due to a change in corporate and business taxes. Dropping personal rates was a political compromise, but in the words of my friend Gónzalo Monroy, “In the short term, it is about sending the right signal to diffuse social tensions.”

In other words, the government should not have made that political compromise at all. Leave the top tax rate at 40% and raise business taxes. That sends the right signal to diffuse social tensions. In fact, the top rate should be raised to 50%. Raising the tax take on the top 0.43% by another ten points would net the government only US$854 million per year. But the income isn’t the point. Fairness is the point. These are people who have done very well by the Chilean Republic. They can shoulder more.

And considering Chile’s recent economic history, they damn well should shoulder more! Leticia Abad (CUNY) and Peter Lindert (UC-Davis) have tracked the net impact of fiscal transfers across Latin America. Below are their results from Chile between 1965 and 2013.

Look at the numbers! The dictatorship was astonishingly regressive. They rich not only captured most of the benefits from economic growth, they got the tax system to transfer to them even more. But even under democracy, the bottom quintile only became net recipients from the fiscal system in 2005.

And they have benefited little since, with the lion’s share of net transfers going to the upper middle class, those between the 60th percentile and 80th percentile of the income distribution. Chilean democracy is a system to transfer wealth from the rich to the upper middle class. 

Do I think that raising taxes on wealthy Chileans would solve the social problem? Not in the long run. As Leticia Abad says, spending matters.

But in the short run, well, yeah, I kinda do think that raising taxes would go a long way towards cooling social tensions.

Which begs the question of why smart Chilean politicians don’t have the same impression that I do? Either I’m missing something, or Chilean politicians are really bad at politics. Help?

Nots on the new Brexit deal

The new Brexit deal seemed like a weird animal.

The old Brexit deal kept the whole U.K. in a customs union with the E.U. since nobody wanted a customs border running down the Irish Sea. The new Brexit deal seems to run a customs border down the middle of the Irish Sea. Surely there is more than that? I thought to myself.

So I read the damn thing. And here is what it says:

1. Article 4 says that the U.K. may strike free trade agreements (FTAs) with third countries, “provided that those agreements do not prejudice the application of this Protocol.” Meaning that the protocol does not guarantee that foreign goods will enter N.I. tariff free. Rather, it guarantees that N.I. goods may be exported to other countries tariff free as long as the U.K. has an FTA with them.
2. Article 5 establishes that the only way you can move a good from the Rest of the United Kingdom (RUK) to N.I. is to prove that: (a) That good will not be processed in any way once in N.I.; and (b) That good is determined to be not-at-risk of entering the E.U. by the “Joint Committee.” There are no clauses about the makeup or procedures of the Joint Committee. At some point, then the U.K. will have to make this determination, either before the good leaves the RUK or when it enters N.I.
3. Article 6 establishes that protecting the U.K. against smuggling from the E.U. is entirely up to the U.K., as long as they do it in the North Sea or the RUK.
4. Article 7 creates a separate “Made in UK(NI)” tag for goods made in N.I.
5. Article 10 requires the U.K. to stick to E.U. rules on state aid for private companies.
6. Article 12 lets European officials monitor the way U.K. officials enforce European law in N.I. It also retains the authority of the European Court.

In short, yes, N.I. stays in the E.U. single market, unless both London and Brussels agree that a particular good can be shipped into N.I. without any problem. 

So this is not some sort of technowonder panacea. It is a deal that Europe offered the U.K. quite a while ago. Leo Varadkar must be pleased that London finally caved, although he can not say so. (Note the title of this post!) 

To be honest, I can see why this might be better from the point of view of a Brexiteer. The Brexiteers seem to have given up on keeping the United Kingdom together as a primary goal anyway. Given that, what is so bad about an internal customs boundary? Article 12 looks a bit squicky, true, but it only applies to Northern Ireland and the Joint Committee (however it is constituted) will give London a bigger say than it has now.  

On the other hand, it seems like a pretty radical plan, separating N.I. from the RUK. But so was Brexit. 

One of these things is not like the others, trade war edition

So, the Trump administration just announced tariffs on a swathe of European imports, and the Europeans announced they would retaliate. More Trumpian trumpety trump?

No. The WTO is working as it is supposed to work, regardless of the predilections of member governments.

A bit more detail: a WTO panel just ruled that the E.U. was illegally subsidizing Airbus and gave the U.S. the right to slap tariffs on $7.5 billion of European exports ... out of $488 billion last year. Now, as @geoffreygertz will tell you, trying to ID unfair trade practices in aerospace is a fool's errand. But that didn't stop the WTO panel, which ruled the way it ruled. So the Trump administration is acting just like any other in imposing the tariffs. (With one wrinkle and one threat, which we will get to at the end.)

But what about the European threats of retaliation? Isn't that a sign that we're in a whole new world?

Nope. The Europeans have actually threatened to retaliate WHEN and IF they win their own WTO case against the USA for illegal subsidies to (you guessed it!) aerospace. You then get two perfectly legal outcomes.

1. Both sides keep the subsidies and keep the new tariffs.
2. Both sides (or one) walk back both the subsidies and the tariffs. The WTO was /designed/ to make outcome (1) palatable, even if most politicos at the time expected (2) to be the common outcome.

The WTO does not prevent trade conflicts or outlaw protectionism. What the WTO does is keep trade spats within bounds. The E.U. and the U.S. punch each other. The WTO referee then decides if the blows were kosher or below-the-belt. If the latter, the WTO referee then gives the wronged party one-and-only-one chance to punch back. After that, we hope both fighters will kiss and make up, but even if they don’t, the point is that they then stop punching. 

The WTO stops endless retaliation. It does not prevent one or two rounds of tit-or-tat. Right now, therefore, the system is working as designed. And it will even if the Europeans win their case and impose tariffs on the USA. Of course, this is Trump World, and who the hell knows what might happen? But as of right now, nobody should think there's anything weird about these tariffs.

But there is a wrinkle. The U.S. is thinking of imposing rotating "carousel" tariffs on an ever-changing selection of European products. That would hurt the Europeans more (and increase uncertainty) but look okay under the rules.

Kinda violates the spirit, but hey. Even there, though, the wrinkle is not the Trump Administration: it is the Trade and Development Act of 2000, which allows the USTR to periodically revise the list of products subject to retaliation when another country fails to implement a WTO dispute decision. Mexico employed them against the U.S. last year.

Of course, with all the norm breaking going on, it is possible that Europe will break the rules. The French finance minister has implied that Europe should go to the mattresses and apply sanctions now.

That said, I doubt that Europe will throw out the WTO handbook unless the U.S. does so first. The German foreign minister, Heiko Maas, stated that Europe will follow the rules and wait until it wins (it assumes) its counter-case against U.S. subsidies. And the collective nature of European decision-making makes it unlikely that the E.U. will throw caution to the wind; there is no one official to damn the torpedos.

In short, while the Trump administration has broken many many rules and trashed the world trading system, this latest kerfuffle is an example of the system working precisely as intended. 

Constitutional hardball in Peru

So, yesterday the President of Peru dissolved Congress and called for new legislative elections. The Congress called that illegal, and deposed the President. What’s going on?

Constitutionally, we have a bit of a mess. The reason, however, isn’t really that the Constitution is unclear. (In fact, the Peruvian constitution is a very nice document.) It is that all sides are playing hardball, sticking to the letter of the rules but without any informal norms to keep things on the rails.

Short version: Peru has a mixed Presidential-Parliamentary system with a President and a Prime Minister. The President, however, retains executive authority. Think France, not Germany.

The Congress, controlled by the Fujimorista opposition, tried to pack the Peruvian supreme court. The President said this was against the rules, and told the Prime Minister to send a “confidence vote” against the move directly to the floor. (Article 133.)

The first problem: does the confidence vote take priority over all other matters? Article 133 doesn’t explicitly say that confidence votes should take priority, but that appears to have been the intention of the 1993 authors of the document. (Weirdly, no one is asking them.)  The Congressional leadership, in a chaotic session, decided to vote on court packing before the confidence vote. (Chaotic means chaotic: fistfights, shouting, physically stopping the Prime Minister from taking the floor by locking the door. )  

The President took Congress’s decision to postpone the confidence vote to be the equivalent of having his government lose a confidence vote. According to him, this was the second vote lost during the current presidential term, and so he dissolved Congress and called new elections under Article 134 of the Constitution.

But this brings us to the second problem. Article 134 gives the president the power to call new congressional elections should the administration lose two confidence votes. But has President Martín Vizcarra lost any confidence votes? In point of fact, he has not lost any confidence votes since assuming office. 

But Vizcarra claims that since he is only finishing disgraced ex-President Pedro Kuczynski’s term, a lost confidence vote on education policy during Kuczynski’s term should count as a loss for him. Add in Congress’s failure to hold the second confidence vote, and he has the two failed votes he needs to call new elections. 

Well, once Vizcarra declared Congress dissolved, Congress counter-declared that the President was breaking the law and suspended him from office for a year. Mercedes Araoz then became president. Article 114 allows Congress to declare the president “temporarily incapacitated.” Once again, though, that is supposed to be an equivalent of the 25th Amendment, something to be used when the president is, well, temporarily incapacitated. Article 117 concerns removing the president, by trial.

But back in the bad days of Alberto Fujimori, in 2001, Congress did remove him from office after he fled the country. Fujimori tried to resign, a la Nixon, but Congress insisted on holding the vote. I don’t think anyone intended to establish a precedent, but they did, so now Congress has suspended the President for a year and elevated his Vice-president in his place.

I should mention here that the opposition tried to remove Vizcarra permanently, but they didn’t have the votes. I don’t know if that was because legislators couldn’t stomach the outright unconstitutionality and preferred to have the fig leaf of Article 114 or if it was for some more Machiavellian reason.

Politically, my sympathies are with the President. It’s clear that the opposition has been playing constitutional hardball. They haven’t been breaking rules and nor has the government; Peru isn’t Bolivia or Honduras, let alone Nicaragua or Venezuela. But they have been playing to the letter of the law in an extremely destructive way.

I don’t suppose it matters. Right now you have Peru with two people claiming to be the legitimate president and no clear-cut constitutional case. Nonetheless, this was not how the framers of Peru’s constitution expected things to go. They did expect that the confidence vote would get priority and they did not expect the Congress to be able to remove the President with a simple vote, even temporarily.  

This won’t lead to civil war or a military coup (the military backs Vizcarra). But it is sobering and it is ugly. And closer to home, it should remind us of where constitutional hardball could lead here in the United States. I am glad that Mitch McConnell recognizes that if the house votes to impeach then the Senate has to hold a trial, but he could have gone the other way. He did in the Merrick Garland case. Republicans have elsewhere, and Democrats are tempted to follow suit.

And that will, as Peru shows, inevitably end in tears. The only question is how many tears.

Macri and motivated reasoning

Abad and Maurer here, with some thoughts on the next 50 days. 

President Macri has only one chance at re-election. That is to villify his opponent. The markets tanked when it looked like Fernández might win, he has to say. Fernández will turn us into Venezuela. Fernández is corrupt. And Fernández is a sock puppet for the other Fernández, Cristina, who plans to eventually turn the keys over to her idiot son. 

In other words, he has to go negative in a way that would make Donald Tr ... well, in a way that Donald Trump would be entirely comfortable with doing. 

Now, the polls show that Macri is underwater by a lot; it is that they show Fernández breaking the magic 45% you need to avoid a second round. One poll had it 55% to 33%. Another put it at 49% to 32%. You can see a whole bunch of similar results here from Clarín. Worse yet, most of the public blames Macri for the crisis. 

So villifying Fernández probably won’t work. But it might. There is private polling data (obtained by Leticia Abad) that indicates he could pull it out. And the election is 46 days away (as of September 11), which is a long time in politics. People engage in motivated reasoning all the time. Macri could easily convince himself that mudslinging will work, and even if it doesn’t, he has to try anyway to keep those evil Peronists out of the Casa Rosada.

The thing is, Macri has to avoid that temptation.

Argentina’s creditors won’t talk to Macri unless the next administration gives at least its tacit agreement. Moreover, Argentina would be well-served by having the lame duck president rip off the band-aid. That would not just make economic sense, it would make it much easier politically for Fernández to fight political pressures to make things worse. 

In other words, Macri should admit that he is a lame duck (at least in private) and get Fernández on board. Hell, in the long run it might even get him a good spot in the history books. 

All he needs to do is overcome basic human nature and hope his opponent can do the same.

More on that in our next post ... 

Argentina tries to stem the panic

Leticia Abad and Noel Maurer here again, reporting on some news that while not unexpected, has arrived unexpectedly prematurely. 

Imagine you are a banker in the mid-19^th century. All of a sudden, you observe more and more people demanding that your banknotes be converted to hard currency. After a couple of days, this is getting serious and you see your reserves plummeting: this is a bank run!

If the bank were in a weak position to start with, then this bank run could have been warranted. The banker will stop paying when she runs out of reserves. But sometimes bank runs are just panic for panic’s sake. Then, as a banker you could refuse to convert these notes to restore sanity, to calm people down.

Now, replace “ban”k with Argentina. The bank run is a peso run. Welcome to President’s Macri’s life.

Since the last post, our dear country has not managed to hold a steady course. The Central Bank keeps on hemorrhaging dollars and technically the country has defaulted, well, selectively, according to rating agencies.

Right now, the federal government is facing substantial payments on its dollar-denominated debt over the next few months. (See the below chart.) That means that the federal government will need to dive into the market to get dollars make the payments. (The Argentine federal government, not surprisingly, collects tax money in pesos.) That will lead to one of two things: (1) A further fall in the value of the peso against the dollar, which would be very bad; or (2) A big drain on the Central Bank reserves as the bank provides the government with the dollars it needs, which would also be very bad, since those reserves are falling fast. 

So what to do? 

Well, ask creditors to let you postpone the payments.

On August 28th, to hold on to its foreign currency reserves, the government tried short-term debt management. It unilaterally extended the payment of short-term bonds on August 28th. That lasted a day. Then the government came up with a plan for further extending repayment — or as they call it a“reprofiling.”  (Check #reperfilar for the corresponding memes).

My favorite: Reprofiling is the new “we need to talk.”

The renegotiation applies only to firms; individual creditors will receive payments as expected. This move should free up around $13.4 billions of reserves.

In other words, let’s kick the can down the road!

This strategy to ease the peso run failed quickly. The dollars kept on leaving the Central Bank’s vault.

To quell the panic, the Macri administration’s second move was the national equivalent of having the banks close their doors to depositors during a run. Capital controls ensued, first for foreign banks to repatriate profits. Then yesterday (on Sunday!) the government issued an emergency decree establishing good ol’ capital controls. All firms now require authorization to operate in foreign currency. Individuals have a cap of $10,000 per month on how much money they can change. Today will be the opposite of a banking holiday, withthe Central Bank extended banking hours until 5 pm (normally banks close at 3 pm).

President Macri decided that it’s better to adjust now when he has lots of reserves than adjust later. Will that stop the panic and make Argentine and foreign investors calm down?

It is clear that this is a last resort, as President Macri denounced capital controls during his presidential campaign. Since the primaries, he is facing an uphill battle to, at best, make it to a second election round. Hence, he is trapped between being a president and a candidate. From the quasi-populist policies announced two days after the elections to the imposition of capital controls binding for firms, he is trying to stabilize the country in hopes of attracting more votes. At the very least, he is trying to avoid to leave De-la-Rua-style — i.e., in a helicopter — before the end of his term.

All this, of course, has implications for the election and what the next president will do. Wait for the next post!

Academics need to stop believing that talking to rich people tells them anything

Back in September 2016, Ian Bremmer made a very silly post in an attempt to be contrarian. It boiled down to: “The CEOs I talk to say that they are not worried about Trump, therefore he won’t do anything radical.” 

I called him out then for making a very dumb statement. My decision seems to have withheld the test of time. That said ... 

I am not calling Bremmer out because I believe that he needs to own up to every wrong statement. (I have made enough of them! See the mark-to-market tag on the sidebar.)

I am calling him out because the methodology that lead him to make the argument is pervasive and INCREDIBLY stupid. (Albeit less so in France, in my experience)

And what is that methodology? Talking to rich people and thinking that you are learning something because they are rich. Anyone who knows rich people is going to be VERY tempted to believe that the tidbits they dole out are filled with wisdom.

Nope.

So, stop, please. 

Guest post: Gone with the PASO

Leticia Arroyo Abad here, our woman in the Southern Cone.

Argentines have been battling a recession, several mini-crises, and high inflation for a while now. The result was a resounding defeat for the incumbent administration in the recent primary elections.

The primary is called the PASO, for “Primarias Abiertas Simultáneas y Obligatorias.” In English, that’s the obligatory and open simultaneous primaries. Which means exactly what is says. All parties hold presidential primaries on the same day (simultaneous), in which any voter can pick any candidate for the nomination of any party (open), and in which all Argentine citizens are required to vote (obligatory).

Admittedly, the fine is only 50 pesos, which was about US$1.25 before the election, but we Argentines are public-spirited. Or possibly just angry at our politicians. Either way, turnout hit 75%. 

To the shock of precisely no one who was paying attention, unless you include all the people who are paid big money to pay attention, the defeat for the ruling party triggered a massive response in the markets. The following day, “Black Monday”, the peso plummeted to from 45 to 63 pesos per dollar before recovering to around 54. The MerVal index and government bonds suffered massive losses. And things would have been worse had the central bank not intervened promiscuously to prop up the peso. Here are central bank reserves over the past two months:

(Extra credit if you can spot the IMF loan poor President Macri accepted as the markets battered Argentina in mid-July.)

The panic also hit the banking sector. With the plunge of government bonds, a group of foreign banks demanded a buyback from Treasury (as part of an earlier repurchase agreement to boost reserves) that further depleted our national reserves. But hey, what was lost in reserves was more than won in public debt reduction. That is good news, right?

President Macri was not, shall we say, gracious in defeat. With evident anger (or bronca as we say it here), he blamed the electoral results on all Argentines. In a strange technical sense that is true, as in voters do indeed determine election outcomes, but it seemed like he was blaming the crash on the voters ... and that is not generally a good way to win votes. He did apologize for his unfortunate reaction later on.

Trying to get a the solid win over the opposition will be hard, maybe impossible at this point. Nevertheless, Macri is giving it a try. On Tuesday, the President announced a new economic plan. It includes slashing the value added tax on the consumer basket, increasing university grants for students, cutting taxes for small firms, and freezing gas prices, among other things.

The problem is that this administration doesn’t want to be populist. (Or maybe it doesn’t know how?) So the whole package just falls short. And the Argentine people know populism very well; a collection of short-term half-measures is unlikely to fool anyone. Moreover, the government is trying to please God and the devil at the same time. A spending spree, however temporary, will not meet IMF targets. 

Now, as of this past weekend, we have a brand new minister of finance, as the previous one was not happy with the new “populist” detour. Hernán Lacunza believes that the number one priority is to stabilize the peso using the Central Bank’s reserves as “that is what they are for.” 

One week after the shock, Argentina has a new minister of finance, a somewhat stabilized peso, looming IMF targets to meet, and half-baked populist policies to implement. This should keep the President busy but it is highly uncertain that it may buy him another term.

So what will the opposition bring? Well, we can talk about that in another post.

Buying Greenland

Back in 2009, I made the modest proposal that Iceland become an unincorporated territory of the United States. It wasn’t serious. 

But it looks like the Trump administration is serious about buying Greenland. Or, well, “serious,” because it is the Trump administration. To start with, they want to negotiate with the government of Denmark, when they should be negotiating with the government of Greenland. Constitutionally, Denmark does not have the authority to transfer the sovereignty of Greenland to anyone but the duly-elected government of Greenland.

But the government of Greenland, well, it can do whatever it wants.

So what the hell! I have seen some numbers out there and I think that I can do better. What price would make sense and make it hard for the Greenlanders to refuse?

The administration could offer every resident of Greenland a cool one million dollars, or $57 billion. It could also promise to take over the $535 million Danish annual transfer payment. In fact, the U.S. could do Denmark one better: in 2009, Denmark froze the transfer in nominal terms. (See Kevin McGwin, Denmark’s annual state of the kingdom report paints a rotten picture of Greenland’s economy, The Arctic Journal, April 20, 2017.) For some reason the number $750 million keeps getting thrown around, so let’s say we up our subsidy offer.

So would that be overpaying? Well, it turns out that in 2014 the Danes estimated that the mineral and oil rights under Greenland would bring in a cool $69.8 billion over the next 40 years. At the current U.S. 30-year-bond rate of 2.07%, that would have a net present value of about $47.9 billion. Subtract from that the $20.3 billion 40-year NPV of the subsidy, and you have a get that Greenland’s mineral rights are worth about $27.6 billion, or $485,000 per Greenlander. 

Is there a strategic value to Greenland? Yes, but we already have that! A 1951 Treaty gives the U.S. carte blanche to do pretty much whatever we think we need to do, subject to a potential Danish veto over the establishment of new military facilities. Is getting rid of that veto worth $27.6 billion? 

No, but come on. We all know that Trump wants to buy Greenland because it would be cool and awesome. That would be worth $27.6 billion. Or he could just offer each Greenlander $485,000 and see if they bite. 

Any Greenlanders out there? Could you get a majority to vote to become an unincorporated territory of the United States for somewhere between a half-mil and a mil for every woman, man, and child on the island?

Of course, getting concurrent majorities in the House and Senate or getting two-thirds of the Senate to approve the resulting agreement would be ... difficult. Still, somehow Jimmy Carter managed to get the supremely unpopular Panama Canal Treaty passed.

That said, Donald Trump has not exactly proven himself to be a master of the Senate. 

And that, of course, is why this boneheaded idea is not going to go anywhere. I suspect that President Trump could bribe the Greenlanders to switch metropoles. I do not for a minute believe that he can bribe Moscow Mitch (let alone Nancy Pelosi) to get them to agree to drop $27.6 billion (let alone $57 billion) on this vanity project.

I have to admit, though, that the sheer craziness of the fact that I am writing this as an analysis of a real proposal by the POTUS has me quite amused. And scared, but mostly, for the moment, amused.

Observatorio argentino 43: Así pasó

In a technical sense, today’s primary elections in Argentina mean nothing. They are, as indicated by the name, primaries in an election where both major candidates are running unopposed for their party’s nomination.

But ... voting is obligatory in Argentina and the voters can vote for any candidate. That means that the primaries are not going to be driven by dedicated partisans. Rather, they are a dry run for the main event on October 27. And the Fernández-Fernández ticket just won an astonishing 47% of the vote. That is a shocker, because the polls indicated a much closer election. 

In Buenos Aires province, Axel Kiciloff, the economic guru behind Cristina Fernández’s policies, won 50% in his race for governor. Admission: I like Kiciloff on a personal level. But investors do not like his record.

What does it mean? A few things. First, there is a real chance that the peso is going to sink. In general, the Fernández ticket has avoided making radical or irresponsible policy statements. But ... they have a track record from their last administration, and it is not a good one. It includes confiscating private pension accounts, generating shortages of imported goods, and lying about basic statistics. Plus, in this campaign there is the recent imbroglio over paying interest on bonds issued by the central bank. The suggestion is not a default. But the Argentine central bank sets interest rates by borrowing from the banks. Take away that tool and the central bank will have to change how it operates, to great disruption. 

Predictions that Fernández-Fernández will be bad for the economy will be self-fulfilling. On Friday the markets were predicting that Macri would do well. This did not happen. That opens the door to a painful reaction today. Such a reaction will deepen the recession. Moreover, as we all know, panics can take on momentum: maybe I do not think that a Fernández administration will be all that bad, but if I think that you think that it will be, then I want to sell my Argentine assets before you do. 

Is there any hope for Macri? Not really. The moderate third-party candidate got only 8% and he lost Buenos Aires province. In other words, CFK is back. 

Observatorio argentino 42: nobody is suggesting another default

I am in Argentina, my favorite country among all countries. Some of you may know that Argentina is in the middle of a presidential election campaign.

Background: The two main tickets are Macri-Pichetto and Fernández-Fernández. Mauricio Macri is the current president. He dumped his previous running mate in favor of a moderate Peronist, in order to (he hopes) siphon off some Peronista votes. Alberto Fernández was the chief of staff under the Peronist presidencies of Néstor Kirchner and Cristina Fernández de Kirchner (CFK). Everyone expected CFK to run for president, but she pulled a fast one and decided to run as Vice-President with Alberto (no relation) fronting the ticket. 

The controversy: Alberto Fernández declared that he was going to finance higher pensions by halting interest payments on “Leliq” bonds issued by the central bank. A firestorm ensued ... although not in the financial markets. They did not care. But the big agribusiness head convened at the La Rural exhibition to denounce default. Pichetto announced that it would cause a currency crisis. Everybody went running for cover.

Except ... well. Here is the thing. Leliqs are seven-day bonds issued by the central bank. Fernández proposed to stop paying interest on new ones. After all, they turn over every week. He did not propose defaulting on outstanding debt.

Now, all is not well with Fernández policy. After all, it is not clear how having the central bank stop interest payments on short-term notes is going to free up money for the federal government. In addition, the central bank conducts much of its monetary policy via the issuance of Leliqs, which it uses to mop up excess liquidity. That will not really work if they pay no interest. So the idea is kinda silly.

But nobody is proposing another default.

Yet.

Observatorio argentino 41b: Veníamos bien, pero pasaron cosas

I think I should use that quote from Macri for all my Argentine posts. 

So what explains the high electricity prices from the new generation tendered in 2017 and 2018? Short version: these were peaker plants intended to provide capacity when demand spiked. (Why demand spiked in the dead of winter, August is winter in Argentina, is another story. Pasaron cosas, I suppose.)

Consider. In the U.S., the capex per  MWh for a natural gas combustion plant is around $882,000. In August 2018, natural gas prices in Argentina spiked up to 5,931 pesos per thousand cubic meters. That is the equivalent of $7.25 per mmbtu, in American terms. If you assume that peaker plants run about 8% of the time, that gives you a cost per kilowatt-hour of 21.7¢!

Now, reading under Resolution 21/2016 makes it look like these guys intended to provide power for more than just peak demand. In fact, these plants provided 6% of Argentina’s power demand, which is twice what you’d expect peakers to provide. So let’s assume that they run 30% of time, which does happen. Costs would come to around 11.5¢. The chart to the right shows the calculations for coal and natural gas, using Argentine fuel prices in August 2018. (For nerds: I have not included cycling costs for a coal plant operating at 30% of capacity, so the real figures for an equivalent coal plant would be much worse. The $35/ton carbon tax does not exist, which is why it is transparent.) 

In short, the high prices are not a scandal; they are just the cost of peakload electricity in Argentina. 

Macri could have been more up front about this and he could have protected poorer Argentine consumers more. But he made a bet that the economy would do well and preferred to rip off the band aid. It is hard to blame him, but as he said, things do happen. 

It is going to be a tough election this year. 

Observatorio argentino 41a: Veníamos bien, pero pasaron cosas

Given that the name of this blog is “The Power and the Money,” I have to write the following post. 

I am sympathetic to President Macri, I really am. He got hit with a crisis not of his making. But in all seriousness, the fellow went into the crisis with far less goodwill than he should have. Here I am going to lay out one of the missteps Macri made; in the next post I will explain why the poor guy probably did not have another choice. In his own words: “Veníamos bien, pero pasaron cosas.”

Which is probably a good a way as any to sum up Argentine history, but I digress.  

One of the big problems Macri faced when he came into office were subsidized electricity prices combined with a growing power shortage. This needed to be fixed. So he raised prices. That angered people, but the only other choice would have been to let the Argentine grid go the way of Venezuela only without the big dams. One of the reforms consisted of Resolution 21/2016, which allowed the country’s independent system operator, CAMMESA , to contract for new capacity. (An alternative link to the resolution is here.) Basically, new generators were given long-term fixed-price contracts and a promise to buy a minimum amount of power. 

Still, you would think that the folks at CAMMESA would want to keep the price of electricity down as much as possible. Sure, it was an emergency, but if prices gotta rise it behooves you to make them rise as little as possible. So obviously one would expect the wholesale price of power from those sources to be in line with fossil fuel generators in other countries. It certainly should have been in line with the unsubsidized cost of fossil fuel electricity inside Argentina. Call it 4¢ per kilowatt-hour, maybe 9¢. (See Table 53.) 

Well, when power prices under Macri rose and kept on rising, the good people at Risk Event-Driven and Distressed Intelligence (REDD) got curious about how much CAMMESA was paying for these new sources of power. And what did they find? Costs of 18.6¢ in August 2018 and 9.3¢ in February 2019. That compares to 5.5¢ and 4.1¢ respectively for other thermal generators in Argentina in the same period. 

You got it. These new plants, with new technology, coming on-line in 2017 and 2018, cost two to three times what other plants cost. To be fair, they only provided about 6% of Argentina’s electricity demand. But, come on, President Macri! This kind of thing is not helping your case. It looks terrible!!

But wait. Might there be an innocent (or at least sensible) explanation? 

Stating the obvious about the tariffs on Mexico

I am union-bound to say this, I suppose. The Mexican tariffs are stupid.

First, they will not achieve their stated goal, which is to get Mexico to stop Central Americans from arriving at the U.S. border. Consider what the Mexican government is currently doing:

1. Inviting Central Americans to stay in Mexico. The problem there has been that the Trump administration does not believe that Central Americans will stay in Mexico. Rather, it believes that legalizing their presence in Mexico only makes it easier to get to the border. Under pressure, the Mexican government suspended its visa program after 13,000 applied. But Mexico has allowed Central Americans to apply for asylum from Mexico, as the Trump administration wanted. 
2. Arresting and repatriating Central Americans: 29,660 in the first two months of 2019, about the same as the 29,239 average for those months in 2016, 2017, and 2018. President Trump actually thanked AMLO for this just last month. Through May, Mexico has detained 72,410 migrants and deported 53,371. That is less than the 340,944 Central Americans the CBP detained so far this year, but it is a substantial number. It is far from clear that Mexico could do better given the limited resources available to the Mexican government. 

Second, if the administration sticks to the plan, it will be an own-goal for President Trump. The tariffs on China are bad enough, but companies can adapt and the economy is strong enough to withstand them. Moreover, they are politically popular. Tariffs on Mexico are a different story. These are tariffs that will mess with supply chains. Alonso de Gortari (Princeton) recently calculated that 30% of the headline value of Mexican manufacturing exports to the U.S. consists American exports to Mexico. So they not only hits American consumers, they punch American producers as well. Plus, President Trump can kiss goodbye any chance of ratifying the USMCA. There are cheaper ways to keep immigration on the front burner for 2020, which I presume to be the political goal. 

Third, the tariffs benefit China by taking Mexico off the table as a potential site. Manufacturing has been moving to Mexico from China for years now. The trade war would have accelerated that, at least a little. It is a good thing for America to have industry move next door. But now, well, not so much.

Finally, here is something that is not a problem for this administration: the loss of any credibility as a negotiating partner. Yes, China and Europe will take notice of how the U.S. told Mexico that all it had to do was renegotiate NAFTA but then turned around and screwed it anyway. But that is a feature, not a bug. The current administration intends to impose tariffs forever. Sure, the President will tack back and forth according to political pressures, temporary advantages, and his own strange ego. But the goal is clear, as we reported back in October 2018. Blowing up your credibility just makes it all that much easier to insure that you cannot win the trade wars that you start. 

I have to admit, however, that I think the administration is going to back down on this one. The logic of point (2) above is pretty clear. So put that down as a prediction ... albeit not one that I am particularly confident in. 

Fear and loathing in Mexico

What would I fear if I were an investor in Mexico? (Oh, wait, I am!)

It is plausible to say, “Not much.” For all the ups-and-downs of AMLO’s first six months, country risk remains low. In fact, it remains as a low as Brazil. Now, that may be a low bar, but wealthy investors love President Bolsonaro. I heard one hedge fund manager describe him as “my guy.” They would not describe AMLO as “their guy.” But they are not running away.

And it makes sense that they would not run away! The country is in great fiscal shape; it can afford the refinery stupidity (which won’t happen) and the Tren Maya nonsense (which might). It has been picking up manufacturing fleeing China for years (as we pointed out back in 2013); now it is poised to benefit even more from the great trade war. And if you are afraid of taxes, relax. AMLO’s party has called for tax hikes, but AMLO himself has been repeatedly clear that they will are not on the table: “Income taxes will not go up. We are going to keep the same tax rates in real terms, the same payments. New taxes will not be created.”

AMLO knows that he benefits from the credit that international markets give his country; if foreign investors treated Mexico the way that they treat Argentina, his plans would be ruined before they started. 

So what is not to like?

Well, I would worry about one thing: becoming a sacrificial lamb should AMLO need one. 

If (when) things go bad, even temporarily, he will need a monster to destroy. What better than a rich company? As long as his proxies can credibly claim in elite circle that it was a assault on an organization that specifically done did wrong and not an attack on the investor class, then he can have the best of both worlds. 

This is now happening.

Two days ago, the AMLO administration has moved against Altos Hornos de México (Ahmsa), freezing its accounts. The Mexican government has evidence that Ahmsa paid a $3.7 million bribe to a shell company owned by the infamous Odebrecht. Yesterday, Spanish authorities detailed Ahmsa’s CEO. Today, the Mexican government opened a corruption prosecution against Emilio Lozoya, the former Pemex CEO. 

To be clear, the prosecution is long overdue. It is astonishing that the Odebrecht scandal, which has toppled governments elsewhere, has been basically invisible in Mexico, despite Odebrecht testimony about bribes. There is fire behind the smoke. 

And while Ahmsa and Pemex are clearly in the wrong, the timing of the announcement and the decision to prosecute are clearly political. 

Meaning an investor’s primary fear should not be macroeconomic. Nor should it be contract enforcement. Rather, it should be that the government might choose to single them out in order to satisfy short-term political needs.

Fortunately, AMLO has more than enough strong domestic monsters to slay that he is unlikely to need to kill weak foreign ones. But for large investors, the danger is there ... especially if they did business with the previous PRI government with its spectacular levels of corruption. 

CFK is lucky she lost the 2015 election

Back when she was president, Cristina Fernández (CFK), her chief of staff, Aníbal Fernández, claimed that Argentina had less poverty than Germany. A popular Argentine joke is that he forgot to say “east.”

In 2015, it was obvious that Argentina was going to take a while to recover from the mess CFK  left behind. I predicted it back in 2015: “Another commodity-price boom does not look probable. Inflation will have to be contained or run up to Venezuelan levels. In short, the new president is likely to be less-than-popular when the 2019 election rolls around.”

And I suggested that the best thing for CFK was for her allies to lose the 2015 election and come back in 2019 by running against the inevitably painful adjustment. Which is what she is trying to do! 

I still suspect she will fail, but she has a decent shot. The good news is that Axel Kiciloff has been telling people that a new CFK administration will cooperate with the IMF, so there is a chance that she will govern more responsibly than in the past. But that is not how I would bet. 

Observatorio argentino 40: Election update, and a call that panic is not in order

Another Argentine election is upon us. Which means old friends from New Jersey asking me what I think! And so, after telling them, I go to a conference where other people reinforce my preconceived notions. And what better thing to do with your preconceived notions than write a blog post?

Okay, yes, I should tweet. But a blog post is more satisfying.

Currency markets reacted badly to the news that Governor Juan Schiaretti of Córdoba cruised to re-election with 54% of the vote. And it is true that the result bodes ill for President Macri’s re-election: Córdoba gave Macri his vote margin in the first round of the 2015 election (he won 53% in the province) and he went on to nail down 72% of the province’s vote in the second round. 

The currency markets are worrying too much. The results bode ill for President Macri; they do not bode well for Cristina Fernández de Kirchner, aka CFK. 

Governor Schiaretti is a card-carrying moderate. Yes, he is a Peronist, but Peronism is a broad church that cuts across various parties: he ran on the platform of the moderate Alternativa Federal and the Alternativa’s leaders called to congratulate him after his win. 

Moderate incumbents have won most recent provincial elections in Argentina:

• In Neuquén, home of the Vaca Muerta oil field, Governor Omar Gutiérrez easily won re-election. Gutiérrez stomped Macri’s candidate (who got only 17%), but he also stomped CFK’s proxy (25%). (Gutiérrez’s party, the People’s Movement, has ruled the province for 36 years; it ain’t radical.)
• Same result in Río Negro, where Arabela Carreras got 53%, crushing both the Macri-ally and the CFK-supporter. (Re-election provisions in the state constitution kicked the incumbent off the ballot.) 
• In the San Juan open primary, Governor Sergio Uñac net 56% of the vote. Uñac is a Peronist, but a CFK-foe, who has mooted the possibility of running for President or Vice-President as a moderate. 
• Governor Mariano Arcioni crushed the open primary in Chubut.
• In Entre Ríos, the Peronist incumbent steamrollered everyone. While not exactly a CFK enemy, however, Gustavo Bordet is not considered her ally either. 

In other words, there are a lot of moderates in the country. A moderate coalition for President would pull in Peronists, disillusioned Macri voters, the Socialist party (powerful in Santa Fe province) and political refugees from the  Radical Civic Union.

Keep your eye on June 22nd. That is the deadline to file for electoral coalitions. If a credible alternative emerges (maybe one behind Roberto Lavagna), then that will be good for the country. If multiple alternatives emerge, then that will be good for Macri, but will open the door to a CFK return.

Macri needs to gamble on a fragmented opposition and the scariest possible opponent. In that latter, his dilemma is a bit like Hillary Clinton’s. He can only win against a terrifying opponent ... but that terrifying opponent could win and that would be terrible for the country. 

That said, I would be optimistic (as much as anyone can be, it is Argentina after all) that a moderate alternative will emerge. Again, keep your eye on June 22nd. Other key dates are the open primary on August 11th, followed by the main election on October 27th and (if necessary) the run-off on November 24th. Buckle up, but don’t despair. 

International law and national constitutions

Many judicial conservatives decry the use of international law, treaties, and precedent to make decisions. They fear that allowing such inputs into decisions will weaken American constitutional norms.

I think they are almost certainly wrong, at least in the case of the United States. But the fear is not crazy.

Consider Bolivia, where Evo Morales is running for re-election in explicit contravention of the national constitution. How did that happen?

Well, in 2017 the SCOPNOB (Supreme Court Of the Pluri-National State Of Bolivia) declared that the constitutional article limiting president re-election is against the constitution. How did that happen? Well, the court decided that term limits contradicted article 23,24  and 29 of the Convención Americana sobre Derechos Humanos.

Relevant portions of the Convención:

Article 23:  Every citizen shall enjoy the following rights and opportunities:

a. to take part in the conduct of public affairs, directly or through freely chosen representatives;

b. to vote and to be elected in genuine periodic elections, which shall be by universal and equal suffrage and by secret ballot that guarantees the free expression of the will of the voters; and

c. to have access, under general conditions of equality, to the public service of his country.

The law may regulate the exercise of the rights and opportunities referred to in the preceding paragraph only on the basis of age, nationality, residence, language, education, civil and mental capacity, or sentencing by a competent court in criminal proceedings.

Article 29:  Restrictions Regarding Interpretation

No provision of this Convention shall be interpreted as permitting any State Party, group, or person to suppress the enjoyment or exercise of the rights and freedoms recognized in this Convention or to restrict them to a greater extent than is provided for herein.

In short, the Bolivian court ruled that term limits restricted President Evo Morales’s right to “to have access, under general conditions of equality, to the public service of his country.”

Now, the court also referred to Articles 26 and 28 of the Bolivian constitution, but those are pretty clearly written to allow for term limits. The real kickers were articles 23 and 29 of the American Convention, with article 24 (which parallels the equal protection clause of the 14th Amendment to the U.S. constitution) as a sweetener. 

Realistically, the Bolivian court probably would have ruled the way that it did regardless of the convention. The decision was a political one in a country with weak rule of law. 

But. But. There is a logic behind interpreting the clauses of the American Convention to obviate term limits. It helps that Article 13 of the Bolivian constitution explicitly say that “the rights and duties consecrated in this Constitution shall be interpreted in accordance with the International Human Rights Treaties ratified by Bolivia.” 

And that logic has resulted in the perfectly ridiculous spectacle of a Supreme Court declaring a procedural part of the constitution to be unconstitutional because everyone has a human right to become President. 

Lessons from day care for President Trump

Bloomberg reports that President Trump is moving towards making good on at least one of his campaign promises: making a profit off American overseas deployments. 

The story is that he plans to introduce “Cost plus 50” as the standard: i.e., basing costs plus 50%. Now, this won’t earn the United States a whole lot of money. Basing costs just aren’t very high. The U.S. could conceivably gross about $15 billion from our allies, including a $5 billion markup. We would net less than $15 billion, however, considering that Japan currently kicks in about $1.8 billion and South Korea and Germany add another $800 million each. (South Korea just agreed to up that last to $1 billion.) But hey, $11.4 billion is still $11.4 billion. 

The thing is, the administration also plans to reduce the charge for countries that align their foreign policies with the United States. In other words, the plan would give governments concrete incentives to follow American foreign policy.

Before you get too excised about that, note that the United States already does exactly this. In 1983, the U.S. passed a law requiring the State Department to report how closely countries voted with the U.S. in the U.N. General Assembly. Since then, study after study has turned up the same pattern: countries that vote with the U.S. get either more U.S. financial support or more support from U.S.-supported institutions, like the IMF. 

Wait, the IMF is a tool of American foreign policy? Who would have imagined? Besides everybody, that is. (Specifically: Barro and Lee (2005) found that IMF loans are associated with similarity to U.S. voting patterns in the UN and economic ties with the United States. Stone (2008) and Eichengreen et al. (2006) found that countries that receive substantial amounts of U.S. foreign aid are more likely to be eligible for IMF financing.)

And of course the U.S. trades favors in even subtler ways. Germany and France support the U.S. at times when they otherwise wouldn’t because they know that the U.S. will support them even especially if the Russians invade. 

So who cares if the Trump administration turns subtext into text? Or even supertext, a sort of neon-green megawatt Bat Signal of our intentions, with a specific price tag attached? Heck, economists always say that certainty is good and prices are good. Trump will certainly bring more of both. Maybe we will get a big bang for our $11.4 billion bucks. 

Or maybe not. Sometimes, you see, it is better for quos and quids to remain implicit.

Consider what happened when an Israeli day-care chain introduced late charges. The number of late parents went up. By a factor of two. And if you are wondering, this was a controlled study, in which only some centers introduced the charges. 

The lesson? Before the centers introduced fines parents tried hard to arrive on time because it was the right thing to do. After the fine was introduced, arriving late became simply another commodity that you could buy, even if that price was called a “fine.” Be late, pay the fine, cleanse your conscience, free of any worries that other parents will disapprove. 

In other words, right not countries cooperate with the U.S. in part because they consider it the right thing to do. The U.S. might reward them, but only as part of an unspoken system of mutual favors between friends.

But in a Trumpian world, well, now U.S. support becomes just another commodity with a price tag on it. If the cost is too high, then a foreign government may as well just pay the price. Keep U.S. bases on your soil but follow whatever bloody foreign policy suits you, plus a small check to Washington.

In short, for an additional $11.4 billion per year (or less) the Trump administration will likely get a whole lot less cooperation while preserving most of our overseas commitments. Nice job, I suppose.

Of course, we would bet that this will not ultimately happen, the same way we predicted that NAFTA would not be abolished.

Correction: Colombia does not have birthright citizenship and seems to be trying to avoid letting Venezuelans get it

 In the Western Hemisphere, birthright citizenship is close to universal. I thought that this included the Republic of Colombia, as did the author of this article in the Harvard Human Rights Journal. 

But it turns out that Colombia is an exception. But it is not clear-cut. Here is Article 96 of the 1991 Constitution:

Article 96. Colombian nationals are:

1. By birth: 

(a) Natural-born Colombians, under one of two conditions: that the father or mother were natural-born or nationalized Colombians or that, being children of foreigners, one of their parents were domiciled in the Republic at the moment of birth.

(2) The children of a Colombian father or mother who were born overseas and later domiciled in Colombian territory or registered in a consular office of the Republic.

So what is the definition of the word “domiciled”?

Colombian jurisprudence has held that “domiciled” does not mean “resident.” A 1993 law made it more specific: “Residence is understood as residence in Colombia accompanied with the intention to remain in the national territory according to the relevant stipulations of the civil code.”

Or, if that wasn’t clear: if you don’t have legal permission to reside in Colombia, then your Colombian-born children don’t automatically get Colombian citizenship.

Specifically, if you want your kids to be natural-born Colombians, then you need to have a type R resident visa; a type M work, marriage, partnership or business visa or a type TP3, TP4, TP5, TP7, TP9, TP10, or TP15 temporary visa. Now, in case you were wondering, it turns out that refugees qualify for a TP9 visa. (The link explains all the TP visa types.)

But here is the rub. Decree 1288 granted some sort of permanent status to 442,462 Venezuelan refugees, on top of the 380,000 who had already gotten legal status. Holders of the new status can work in Venezuela and access public services. 

The Venezuelans do not get TP-9 visas. Rather, according to Article 2 of the implementing regulation, they get a two-year renewable something “issued in order to authorize the stay of Venezuela nationals who find themselves in the national territory without the intent to settle permanently, which is why it is not equivalent to a visa.”

This strikes me as a bad idea. I understand why the Colombian authorities want to pretend that the Venezuelans will all go home soon. But that is a bad bet. It is hard to imagine that granting TP-9 visas instead of the temporary whatever-it-is would engender that big an outcry. But it would at least insure that you avoid creating an underclass should things not work out and the millions of Venezuelans wind up staying in your country.

Unless there is some legal requirement at work, Colombia really should change this policy. As insurance for their own future. Because some eggs cannot be unscrambled, and the great Venezuelan exodus is beginning to look like one of them. 

Why are so many fleeing Venezuela? Famine

The Venezuelan crisis is massive. Millions of people are fleeing the country. Brookings scholars project that a third of the population may leave before the end of next year. The outflow could surpass Syria’s.

But why? Yes, there is a hyperinflation. But the world has had a lot of hyperinflations without mass refugee flows. Yes, there is a huge fall in GDP. But the world has seen similar falls in GDP without generating mass refugee flows. Yes, there is political tyranny, but the world has seen lots of terrible tyrannies, and there isn’t a civil war.

Well, the root cause is simple. Famine. An accelerating famine. An honest-to-God 21st-century famine.

Venezuela doesn’t produce enough food to sustain its population. That means that it needs to import food. But with oil production in free-fall and foreign borrowing cut off, the country has no way to buy the food that it needs. The Confederation of Associations of Agricultural Producers of Venezuela (Fedeagro) estimates that the country produces less than a third of what it needs. The USDA reports on grain production make for thoroughly depressing reading. In short, the country cannot buy the amount of food it needs from abroad and does not grow enough at home to fill the gap. 

I am not sure if Venezuela could be self-sufficient in food. I suspect that it could, were oil not allowed to systematically distort the economy. 

But the problem is not that Venezuela is not self-sufficient in food.

The problem is that the Bolivarian Republic has systematically attacked its own farm sector, destroying its ability to buy inputs or operate without losses. For all the decline in food imports, they are still above the levels of the mid-1990s ... but the domestic production is  no longer there.

The below chart tracks food imports per capita (nominal data from here). In 2016, Venezuela imported about one billion dollars of food products. The IMF tracks the international price of food, so we can convert that to real imports per capita. In real terms, Venezuela in 2016 imported about as much food per capita as it did in 1997. Venezuela was not short of food in 1997. But in 2016 that same level of imports was not enough to prevent famine. 

What political advantage accrued from destroying domestic agriculture, even during the good years, is utterly beyond me. And that, yet again, is the tragedy of Venezuela. It isn’t the evil, it’s the incompetence. Raving, insane, pointless incompetence.

In order to understand the current Venezuelan crisis, we need to turn to the economic and political science literature on famine ... which is not something I ever expected to say about an American country in the early 21st century. 

Candidate Obama was right about health care back in 2008, mostly

Obamacare is back in the news because of this insane ruling by this judge in Texas. I am not going to talk about that. What I am going to talk about, however, is the argument between Obama and Clinton over health care back in 2008. Short version: once elected, President Obama decided that Candidate Obama was wrong and health care reform needed a mandate. But he was actually right back then, as shown by the fact that Congressional repeal of the mandate has not dented the law’s success.

The long version has to do with the putative results of a 1993 health insurance reform in New York. To the right is a picture of a great place to eat in New York, but given the kind of food they serve I would recommend having health insurance should you choose to eat there often.

Back during the 2008 campaign, Senator Obama claimed that you could use private insurance to provide universal coverage without a mandate.

Senator Clinton argued the opposite. Her plan to expand health care rested on three prongs: (1) community rating, so nobody faced higher premiums due to pre-existing conditions; (2) a mandate, so that healthy people would not refuse to buy health insurance; and (3) subsidies, so that everyone could afford to comply with the mandate. She argued that New York State had tried (1) without (2) and triggered a death spiral that killed the market for individual health insurance in the state. 

The logic was as follows: community rating meant that insurers could not charge people who were more to people who were more likely to use medical care. Everyone had to be charged the same. That meant, however, that healthy people had to pay more than they had before. So some healthy people decided to drop health insurance. That left more sick people in the pool, so insurers had to raise rates. But higher rates drove even more healthy people to drop insurance. So rates rose even more, in a death spiral. 

Candidate Obama argued that this was malarkey. People wanted health insurance. People will buy it if they can afford it even without a mandate. If you make insurance cheap enough, then there will be no death spiral. 

President Obama then changed his mind based on what his advisers thought that the CBO would say about it. Nothing wrong with that, of course. But it raises the question: was the CBO right? There were reasons to believe in 2009 that it was not. Back in 1999, Thomas Buchmueller and John Dinardo (both at U.C. Irvine) found that there was no evidence of a death spiral in New York.

A 2012 report called the “The Impact of Guaranteed Issue and Community Rating Reforms on State’s Individual Insurance Markets” concluded that Buchmueller and Dinardo were wrong and New York did in fact hit a death spiral ... only the report’s own figures show no such thing!! Here is the data from New York that they used to conclude that there was a death spiral:

It shows that the number of people under-65 who bought individual insurance in New York fell below the national average and stayed there. Now, they do not have pre-reform data, but the results is indicative, right? A death spiral!

Or maybe not. Unlike most New Yorkers, I have absolutely nothing against New Jersey. I like New Jersey. New Jersey is a fine place. So let’s look at the data from New Jersey:

New Jersey saw the same fall, even though it did not have a reform. And the above charts come from the report!! How the authors concluded the opposite is unclear to me.

In other words, there was no evidence that New York had experienced a death spiral back when the Democratic candidates were talking about this back in 2008, and there was no evidence that New York had experienced a death spiral when SCOTUS ruled on the mandate back in 2012. 

Now Congress has repealed the mandate and Obamacare is doing surprisingly fine. Candidate Obama was correct: make insurance affordable enough and healthy people will buy it. 

President Obama should have stuck to his guns. Would a no-mandate reform have attracted more GOP support? Sadly, I doubt it. But it is always nice to stick to your campaign promises.

Mexico’s democracy is already in bad shape

I am on record as being relatively unworried about the AMLO administration. That is not because I do not think that President López Obrador will make capricious and counterproductive decisions. Rather, it is because I do not think that he will do major damage to Mexico’s institutions. And the reason I do not believe that he will do damage is because Mexico’s governing institutions are already in rather bad shape. It is hard to wreck a car that is already totaled. 

Consider Hungary and Poland. The Hungarian prime minister has been assaulting democracy and the rule of law in his country for almost a decade now. The country’s liberal democracy rating (measured by the Varieties of Democracy project) has declined from around 0.7 (on a scale of 0-1) in 2010 to 0.5 today.

The Polish ruling party has been weakening its country’s institutions for rather less time but with similar success: its rating has crashed from 0.8 in 2015 to 0.6 today. 

But both countries still rank above Mexico, which has hovered around 0.5 since 2000. That is to say, despite a multi-year and sustained assault, the quality of democracy in Hungary and Poland is still no worse than in Mexico.

To make another comparison, in South America only Ecuador and Venezuela rank below Mexico. (Bolivia falls inside the error bars.) Peru, Paraguay, all the same or better.  

Now, that is not to say that democracy and the rule-of-law cannot get worse. They certainly can. But that will not happen because AMLO built a political machine or engaged in populist politics. To get worse than Mexico’s current level AMLO will have to openly assault democratic institutions, in the style of Turkey or Venezuela.

That could happen, but there is no evidence of it yet, not even with the fraudulent electoral consultations or the idiotic cut in top bureaucratic salaries. When it happens, if it happens, you will be able to see it happening ... because Mexico is already on the bottom edge of what you see in normal countries.

The method behind the madness of Trump’s trade policy

There is a recurring criticism of President Trump’s trade policy: it is badly designed to obtain its ostensible ends. The tariffs against China are supposed to pressure Beijing into changing its intellectual property policy. But the strategy is poorly designed for that end. Consider:

1. Instead of heavily taxing employment-heavy Chinese sectors, like toys and textiles, you moderately tax the intermediate and capital goods used by American industries;
2. Instead of building a coalition against China, you start trade conflicts with your allies ... once again over intermediate goods like steel and aluminum;
3. You further alienate our allies by threatening automobile tariffs* ... that won’t affect China;**
4. You don’t give the Chinese government any face-saving way out of the trade war. 

As a policy designed to change Chinese development policy, this is stupid. 

But as an exercise, my MBA and undergraduate students separately walked through this policy, and they came to a different conclusion: if you want to make sure that high tariffs on Chinese exports are hard to reverse, then the strategy makes sense. Hurting American industries and forcing them to rework their value chains is a feature, not a bug. Making it hard for the Chinese to back down is a feature, not a bug. And alienating the rest of the world, to further insure that the Chinese won’t compromise, is a feature, not a bug. 

It might not be the best way to insure that high tariffs stay around for the next few decades regardless of the electoral outcomes in 2018 and 2020, but it isn’t a terrible one either. Especially if causing collateral damage to American industries is the point.

In other words, there is method to the madness. High tariffs are not a tool, but the outcome. The trade war is not meant to be won, but to be continued forever.

* The new USMCA (oh God, do I have to change my NAFTA tag now?) is said to have a side agreement exempting Mexico and Canada from those potential tariffs. More on this when I have it. 

** Ford did announce that it was not going to start making cars in the People’s Republic, so it is not impossible to imagine that threatened auto tariffs might have some effect. But then you aim the car tariffs at China, not the world. 

A thought on a partisan Supreme Court

I am not as worried about the prospect of a conservative Supreme Court for the same reasons as most progressives.

Now, I think that lessening the protections of Roe v. Wade will be a disaster for poor women living in red states. I also think that decisions weakening worker rights and collective bargaining will be bad for people in the lower half of the income distribution. And I think that weakening the ability of regulatory agencies to do their jobs will worsen life for many while providing few benefits: the Administrative Procedures Act of 1946 plus the Regulatory Flexibility Act of 1980 and Congressional Review Act of 1996 provide plenty of checks on their power.

And a new conservative court is going to make it harder to get an abortion, harder to join a union, and harder to regulate the economy. 

That said, political action can cancel out adverse judicial decisions in all of the above. The only way a conservative SCOTUS could block a political counterreaction would be take us all the way back to Lochner v. New York. And that seems unlikely.

But it looks like a conservative SCOTUS will play hardball on gerrymandering and voting rights. They have already shown it. And they will play hardball on executive action. John Roberts will try to limit any outright partisan favoritism, but just wait until RBG leaves the court with a Republican president in office. 

A partisan Supreme Court willing to put its finger on the election scales, well, that is a threat. I am not sure that it is a threat the Founders ever considered, but there are a lot of political developments that they did not consider. Hell, they thought they had designed a system that would prevent political parties and then they themselves went right out and built the Federalists and Republicans. 

The “good” thing about the Kavanaugh hearings, I suppose, is that SCOTUS decisions will now be watched closely by the public. But I view a Court that is both biased towards property and against voting rights with trepidation. 

So, what changes to prevent a purely partisan SCOTUS? Well, there is a proposal for staggered terms. There are also some more off-the-wall reform proposals. Mine would stick with life terms, but with a Congressional supermajority requirement and a clause automatically appointing a caretaker Justice chosen by a professional panel of Congress cannot agree. But none are likely to happen with our clunky amendment procedure. I fear that they will not happen before we see a far more serious breakdown.

Federal regress

To repeat the obvious, Mexico is a big federal country. A gigantic federal country, in fact. Which does not make it an advertisement for federalism. Quite the opposite, actually. For while there are a few success stories about states and cities that have creatively taken on challenges, the general picture of Mexican subnational governments is ugly.

A long time ago, in the last century, I dated someone whose job was to audit the accounts of Mexican county governments and help them spend wisely. She soon adopted an attitude not unlike those you might find among E.R. doctors spending their time to limit the damage caused by human stupidity. Two decades later, the causes of her cynicism have not improved. 

Now, that is bad for Mexico, but it also helps explain why I am so sanguine about the arrival of the AMLO administration and the creation of a new national political machine. (Hat tip to Viridiana Ríos for the data, if not the interpretation.)

Consider first that between 2013 and 2017 the federal authorities reported that state governments “lost” about 4.5% of all federal transfers, coming to about $8.8 billion. Poof, lost, or in the words of the federal government, “unable to be accounted for or recovered.” Between you and me, that means stolen. 

Of course, not all states are created equal. Veracruz, Michoacán, and Chihuahua between them managed to steal lose more than 10% of the federal money handed to them in 2013-17, accounting for more than half the total theft losses. But it is a rotating field: in 2017 you had Coahuila, Tamaulipas, and Oaxaca leading the list.

One problem is that Mexican electoral law makes machine politics easy: you only need a plurality to win the governorship (or county executive) so a machine only needs to gather a minority of the vote.

But a bigger problem is that the feds only come after subnational governments if they are egregiously corrupt or  get into bed with the wrong “cartel,” (e.g., criminal syndicate). The voters may hate you but find it tough to dislodge you; the feds may be relatively honest but lack the resources to police local governments.

Now, the Mexican electorate is in a really anti-incumbent mood. Voters have become so anti-incumbent that even long-lasting bastions flipped to Morena. In Mexico State, for example, the voters abandoned the party en masse, including such bastions as Jilotepec and How much of a PRI bastion was Atlacomulco? Well, you can read the link to see how much the town benefited from its association with the party. Consider also that the faction controlling the state PRI is called the Grupo Atlacomulco. The Grupo Atlacomulco is controlled by members of the Del Mazo clan (which includes President Peña) which originally hails from Atlacomulco. Hell, members of the Del Mazo clan ran Atlacomulco during the Porfiriato. (See page 258, bottom right.) So if there was a town that was going to stick to the PRI, it was Atlacomulco. But it did not.

But does that mean that local machines are finished? Not so fast. Consider that Atlacomulco flipped in the 2018 federal election. In last year’s gubernatorial election the PRI hung on with a hair under 34% of the vote, installing (of course) Alfredo del Mazo as governor. 

In short, Mexico is dominated by corrupt machines, even excluding the places where criminal syndicates freely assassinate local officials. These machines are very hard to dislodge and cost the country greatly. They have no been able to lock up federal elections ... but federal elections have done little to reform these local machines. 

The implication for AMLO is that Morena may be able to get the support of many of these local machines, peeling them away from the PRI. But that does not mean that Morena will get them to work any better or that controlling these local machines will help it remain in power at the federal level if things do not get better by 2024.

That is not to say that I am fully sanguine about Morena in power. I worry about populism: literally decisions driven by their short-term popularity. And oh boy does the new AMLO administration have a bunch of dumb-but-popular moves ready to go before Congress ...

Observatorio argentino 39 and How to swear in Argentine 3: What I learned in the last 24 hours

First, everybody hates Carlos Menem. The Cronista ran a weird poll asking which Argentine administration since 1983 has been the most democratic. The answers make no sense, as befitting a question which makes no sense. But Carlos Memem managed to get only 5% of votes, followed by Fernando de la Rúa at 3%. And to be fair, De la Rúa was really stuck cleaning up Menem’s mess. 

Second, down in Neuquén City, native Mapuche demonstrators have occupied a national park and blocked roads. The reason is that the the national oil company, YPF, wants to drill on their land. The Mapuche asked for 3.8 million pesos per well ... about US$136,000, for wells that cost seven to fifteen million dollars.

The city government countered with ... zero. Actually, they outdid Michael Corleone: they offered the expropriation of Mapuche lands without any restitution. Now, these are not lands governed by vague traditional laws ... we are talking a 125 acre plot (about thirty New York City blocks) given to the Mapuche by the previous mayoral administration in the far off year of 2011. This did not stop Mayor Horacio “Pechi” Quiroga from saying, with great exasperation, “If the lands were theirs, they would have private titles!”

Third, Argentine Spanish has diverged from the rest of the world to the point of having their own conjugations. Consider the following from the Buenos Aires subway: “Registrá tu tarjeta.” Go ahead. Explain that conjugation to me. I dare you.

Finally, if an Argentine tells you that somebody is “saliendo con los tapones de punta,” it literally means that they are “leaving with their cleats in the ground.” Which makes no sense, even for a soccer player. But imagine that you are putting your cleats in the ground preparing to launch yourself at an opponent. Somebody who has “los tapones de punta” is ready to beat the shit out of you ... and if they are “saliendo con los tapones de punta” then they are “coming out swinging,” whether literally or figuratively. If literally, get your dukes up or run away you idiot, run away!!!! And if figuratively, gird yourself for battle however is appropriate.

Good night from Buenos Aires.

¿Una maquina Morena o una maquina morena?

There is no doubt that AMLO intends to construct a new political machine. The question is whether doing so will degrade the quality of Mexican democracy or Mexican governance. (These are correlated but not the same.) In a couple of different posts, I am going to make the case that AMLO’s machine is unlikely to make either situation much worse — because both Mexico’s democracy and its governance are already highly degraded. Things can always get worse, but AMLO is unlikely to make it so.

For this post, I want to park questions about Mexican democracy under AMLO and consider what might happen to the quality of Mexico’s governance.

Let’s ask, what does a democratic political machine do? It doesn’t blatantly steal elections: that’s a dictatorship. But democratic machine politics is different in kind from regular interest group politics. Interest group politics works by promising veterans higher benefits or auto companies a higher tariff; conversely, it works by cutting veterans benefits or increasing taxes on gasoline. Machine politics works by offering Josefina the Welder a job or Ford Motor Company a special break; conversely, it works by stopping Josefina from getting a mortgage or launching audits against Ford executives.

Successful machine politics does not require stolen elections, but it makes opposition harder to organize, increases the autonomy of machine leaders and weakens democracy’s ability to hold officials accountable or translate public desires into public policies.

The PRI under President Peña used machine politics to implement energy reform in 2013. In order to pass and implement the reform, the Peña administration needed the support of the national oil workers’ union. At the time of the reform the oil industry provided 4% of all public revenue and supported much of the economy in the states Veracruz and Tabasco. A crippling oil strike could sink the party’s position in the midterms or next presidential election.

How to get union support? First, threaten the union leader. Carlos Romero Deschamps happened to be a sitting PRI senator and “enjoyed” second-place on the Forbes list of the ten most corrupt Mexicans. On a monthly salary of US$1,864, Deschamps managed to accumulate a $1.5m “cottage” in Cancún, a son who drove a $2m Ferrari, and a daughter who liked to post Facebook images of her jet-setting her three English bulldogs around the world. In other words, a serious corruption investigation would toss him and his children into jail.

President Peña made it clear to Deschamps that he had no choice but to go along with the reform in the most obvious way: in February 2013 he took the powerful leader of the teacher’s union, Elba Esther Gordillo — number 1 on the Forbes list and head of the New Alliance Party — and had her arrested on anticorruption charges. Gordillo was fortunate enough to be over 70 years old and therefore be eligible for house arrest instead of prison — she owned a rather nice apartment in Polanco, Mexico City’s equivalent of the Upper East Side — but the message was clear. Deschamps brought the union on board with reform.

Alternative facts are not an American monopoly: in a rather startling 2014 declaration, union leader Carlos Deschamps declared that energy reform would bring no lay­offs. Even more startlingly, Deschamps denied that mass firings were taking place even after they began. According to him, only oil workers employed in private companies lost their jobs.

Source: Abad and Maurer (2018).

Unfortunately, the reality was otherwise. Reform let Pemex lay off almost 30,000 employees in a three-year period. (See above.) Layoffs hit unionized and non-unionized workers alike; in fact, the share of union workers declined slightly during the mass layoffs of 2015. But the machine kept that from triggering strikes by (1) concentrating the layoffs in places that were already voting against the PRI—i.e., Tabasco and Veracruz—where workers did protest but the protests could be controlled; and (2) making sure that wages went up dramatically for those workers who kept their heads down, kept their jobs, and accepted the reforms. (See below.)

Source: Abad and Maurer (2018).

Of course, you would be right that this particular exercise of machine politics removed most of the putative fiscal gains from allowing the layoffs. The chart to the right shows payroll costs as a percent of Pemex revenue: they did not fall. 

But that’s how machine politics works. Rents are generated and distributed on one end; individuals and individual group leaders are punished on the other.

Absent the subversion of democracy, it’s hard to see how AMLO could build a machine more effective than the PRI, circa 2012-18. (To reiterate, the PRI circa 1929-1997 was an institutionalized dictatorship masquerading as a political machine, not a genuine democratic political machine.) There is no obvious source of rents that the PRI did not already tap. There are places that have improved — say, competition policy — but where it would be hard for Morena to loosen the rules without pushback. Elsewhere, things are not good, as this OECD report on electricity procurement shows. In that sense, things cannot really get worse.

And a democratic machine, no matter how efficient, can’t stay in power if it really lets things go to hell. The PRI discovered that this year, losing even its heartland in the town of Atlacomulco, Mexico State. In other words, straight-up machine politics means more of the same in Mexico and is self-limiting if it delivers truly bad results — albeit less self-limiting than in democracies free of machine politics.

Morena will try to build a machine. But building a machine is hard and machines themselves do not guarantee that a bad government can remain in power.

The real worry, I think, is democratic backsliding. That is, machine politics plus institutional changes to make the vote less effective and hamstring the opposition. Without democratic backsliding, you might get a maquina Morena, but you won’t get a dark machine.

Thoughts?

Reposted without comment from March 2016: How much could President Trump win from our s̶a̶t̶r̶a̶p̶i̶e̶s̶ allies?

 So, Donald Trump wants to turn America’s hegemony into a protection racket. Okay, then. How would those negotiations go?

First thing to do is estimate how much the U.S. could save by pulling out of Germany, Japan, and South Korea.

First take: billions and billions! The link goes to a 2009 study by the Commonwealth Institute. They get a cost of $127.1 billion for fiscal 2010: $132.1 billion in cost minus tribute host payments of $5 billion. (Page 9.) But that estimate is dumb. It simply pro-rates the defense budget by the number of personnel stationed overseas. Now, maybe some president might save all that money by simply downsizing the military. (Well, the Army would be “downsized” in that scenario; the Navy would be gutted.) 

Since Trump has made it clear that he has no intention of shrinking the military, then those personnel will simply be redeployed back to the United States. 

Second take: In 2013, the U.S. Senate took a look at basing costs. It estimated costs around $10 billion, 70% in Germany, Japan, and South Korea. (Page 1.) These costs do not include personnel costs or overhead: rather, they are the direct costs of keeping up the bases in those countries. German bases cost $4 billion. South Korean bases cost $1.9 billion. (Page 18.) Japanese bases cost $2.5 billion. (Page 40.)

But South Korea and Japan, unlike Germany, pay pretty large portions of the U.S. cost! (Hold that thought on Germany; this is based entirely on the Senate report.) In South Korea, U.S. taxpayers foot only $1.1 billion of the cost; South Koreans make up for $800 million. (Page 21.) Japan, meanwhile, covers more than 70% of U.S. costs, to the tune of $1.8 billion per year. Until 2010, in fact, Japan covered all U.S. basing costs. (Page 41.) So President Trump might wrap up the American empire-by-invitation in Asia for savings of ... $1.8 billion. Get out of Germany at the same time and you save $5.8 billion per year. 

Only you don’t! Consider the cost of transferring 7,000 Marines from Okinawa to Guam: $19.3 billion. (Page 49.) Scale that up by the other 43,000 American forces in Japan and you get $119 billion to withdraw without demobilization. Add in the 29,000 forces in South Korea and you get $197 billion. Throw in the 36,000 troops planned to still be in Germany in 2017 and you get $296 billion. 

Now, that is a one-time cost, not an annual flow. And it is likely exaggerated, since most of the Naval and Air Force personnel overseas will not be as expensive to relocate as the Marines. So lets arbitrarily cut the cost by 60%. 30-year treasury bonds are currently yielding around 2.5%. Call it an annual expense of $5.8 billion between 2017 and 2047. 

$5.8 billion ≈ $5.8 billion. No savings. With interest rates at a near all-time low and shaving 60% off the topline estimate. Huh!

And now lets return to the German issue. Germany pays a share of American construction costs for our bases, but those costs are lumpy. In  2009, Rand estimated total German support to total $831 million. (Page 154.) If that number is accurate for other years, then the U.S. pays only $5.0 billion for our three main overseas presences. And $5.8 billion > $5.0 billion.

Third take: This big Rand report. It is long and complicated and does not cover the complete withdrawal option. But their minimum posture saves around $2.9 billion per year ... assuming that foreign contributions remained unchanged.

In other words, the American defense perimeter does not cost all that much. 

Now we need to figure out what these cost estimates imply for the negotiations.

President Trump, in this world, cannot simply threaten to walk away, because that would cost him. He needs to make one of two additional threats:

1. He is willing to incur costs to the United States if negotiations break down. That is, he tells his counterparts in Berlin, Tokyo and Seoul that he is willing to pay money to bug out unless our satraps allies fork over even more money. Good luck with that one.

2. He is willing to bug out and downsize the American military budget. Now those cuts do not have to be large for us to come out ahead — we are talking maybe 1% of the total defense budget — but they would need to be made. 

So, yeah, I suppose a cost-cutting President Trump could threaten to cut American military spending unless those foreigners pay us more. But unless he is willing to resort to an outright protection racket, he would net us 1% of the military budget on the threat of making a 1% cut in the military budget. 

Yeah, that makes sense. Totally worth it. After all, it isn’t like you could just, you know, cut the military budget without threatening our allies ... 

How to swear in Argentine 2: “Hacer boleta” o “ser boleta”

Literally, “hacer boleta” is just an odd way of saying “design a ballot” or “print out a ticket.” The other expression in the title, “ser boleta” makes no sense at all, unless you happen to be a ticket.

In Argentina, however, both expressions mean  “to be killed,” in the same colorful way that a New Yorker of a certain age might say “get your ticket punched.” 

I have no idea what is the origin of the American expression, but in Argentina nobody appears to have used it before 1969. That year, probably not coincidentally, saw the first violent reactions to the repression of Juan Carlos Onganía’s dictatorship. People started to receive threats “te van a hacer boleta” which morphed into “si no cumplís, sos boleta.” 

For what it is worth, “sos boleta” is now official. The Real Academia Española (pictured above) has recognized it as a legitimate Spanish expression! So use it in good conscience ... although you cannot really have a good conscience if you need to use it. 

The danger from AMLO

In comments, Andrei Gomberg writes that the biggest danger from the new AMLO government is the construction of an effective political machine and the slow subjugation of the independent parts of the Mexican state:

I think you miss the real source of additional congressional votes for the new government: the PRI. Admittedly, it will be a much smaller source this time — but it will be more important than the PRD or MC. The rump PRD (with well-known exceptions) already largely consists of those who hate him — why else were they not on board already?

On the other hand, big chunks of the PRI can be easily accommodated in the AMLO coalition. He is, really, an old priísta, and he has long shown to appeal to the PRI traditionalists (let´s call them “Bartletts”). Now that he is in power, he will have no problem attracting many of the rest of them.

One also does not need to look for any idées fixes to see what his primary objectives will be. We are dealing with the classic machine politician, who knows everything there is to know about building up power. His first and foremost task will be to rebuild the PRI machine of the olden days - but under himself. He is in position to rearm the old (and by now quite decayed) clientelistic networks — why else was he bringing old union leaders on board?

Of course, this time the machine will be rebuilt under the unitary leadership. There are few local caudillos within Morena, and AMLO has shown that he is very much willing to slap down the few there are (greetings, Sr. Monreal). It is hard to see where any independent force may grow within the governing coalition. Unlike old priísta presidents the new leader will be much less constrained from within the party. I mean, if anybody were to tell me 15 years ago that I might miss good old Fidel V. ....

Again, thinking along the lines of what you taught me about the way Mexican power functions. I would expect him to start as a good friend of “national” business. Any machinery needs oiling to run smoothly — he needs rents. Competition regulators will be an interesting area to look at.

The other area, of course, will be the electoral machinery. He does not trust it — and for a good reason: it is still independent. Unlike you I fully expect him to go for the 2021 “plebiscite”: it is his pre-electoral promise, and it is very much in character. What I expect him to do is to run it largely or fully outside the Instituto Nacional Electoral system (if he needs the excuse, it could be the lack of constitutional authority). The objective, of course, will be, precisely, to get the country used to the idea that the Instituto Nacional Electoral is not necessary for his version of “democracy.” Chances are, he would still be popular enough to get a resounding confirmation of that popularity in any properly organized vote — but he will not want that.

Once again, where I expect to see the most important changes is in gutting the strength of all sorts of independent institutions. That is where the things that will really change Mexico will happen. Everything else, at least in the first couple of years will be more of a show.

More thoughts to follow.

How to swear in Argentine 1: Irse a las piñas

I should and will write more about the Mexican elections and the future of Pemex. Especially given the food for thought Andrei Gomberg presented here! 

Instead, though, I want to write about swearing in Argentina. In my travels to and around that country I have often found myself utterly dumbfounded by what people are trying to tell me. I understand the words, but the sentences just don’t make any sense. So therefore we begin a new series: “How to swear in Argentine.”

We begin with “irse a las piñas,” which does not mean,  terrible Guardian translation notwithstanding, “go to the pineapples.” I don’t  mean that the translation is terrible because the expression is figurative; I mean simply that “piña” does not mean “pineapple” in Argentine. For some reason, the word for pineapple in Argentine is “ananá”; “piña” is “pinecone.”

Which makes more sense when you consider that “irse a las piñas” means “come to blows” or “have it out” or “step” or “throw down.” And since pinecones are not something that Argentines talk about particularly much (save Christmastime) other than in the context of “going to,” there is never going to be any confusion.

So if two people in a Pilar bar start whaling on each other, now you know how to describe it. 

Seven initial thoughts on the Mexican election

Wow. AMLO cleared an outright majority. That was impressive and a sign of just how fed-up Mexicans were with the status quo. I saw some signs of that last summer; now it is confirmed. 

Seven initial thoughts:

1. AMLO is not a left-wing version of Donald Trump. He is his own thing. His platform is frustratingly vague on most things, but he is a professional politician and a rather good one at that. And his idées fixes have to do with helping the downtrodden, not personal vendettas, foreign trade, or ethnic resentments.
2. AMLO is not a huge fan of the rule of law and he does not respect Mexico’s governing institutions. But neither did the outgoing PRI, which buried prosecutions and spied on its own population. Creeping dictatorship is unlikely and corruption will not get worse. That is sadly not saying very much. 
3. AMLO is not in a position to become Hugo Chávez, even if he wanted to. Chávez began by rewriting the constitution, faced down an old-fashioned military coup and rode a wave of oil money. That is not going to happen in Mexico.
4. AMLO is in a position to shepherd through substantial legislative changes. As we have said, he can pull off PRD and M.C. legislators. But he has another advantage, which is that federal legislators can now be re-elected. That makes them less beholden to their party leadership. Don’t expect radical change, but do expect him to pass what he wants to pass. 
5. The challenge is going to what it has been: can AMLO get a grip on violence and accelerate growth? I am skeptical but hope for the best. The real questions will come with events. AMLO will be tempted to respond to adversity with populist rage. That is my biggest worry. 
6. I do not expect AMLO to hold a referendum on his continuation in office in 2021. If he does, that would be a bad thing.  
7. The PRI is the cockroach of Mexican politics; I do not expect it to die.

I would be delighted to hear other reactions and predictions. 

In Mexico, like America, a Congressional majority is not enough to govern

Earlier we pointed out that Mexican presidents need an effective legislative majority of two-thirds to get much of anything done, since so much legislation requires constitutional amendments. Did AMLO’s coalition pass that threshold?

We won’t know for sure for a while, but the answer appears to be no. Preliminary data is here. Mexico elects its Senate by giving the plurality party two senators per state, the runner-up one senator, and allocating the rest by proportional representation in a national 32-senator district using the largest remainder method. That method gives AMLO’s coalition roughly 53% of the seats. 

In the lower house, the results look similar. Mexico elects 300 deputies in geographic winner-take-all (aka, FPTP) districts and allocates the remaining 200 via proportional representation. The calculation is more complicated than for the Senate, because the country is divided up into five 40-deputy districts for the purposes of allocating seats. There, my initial estimate is that AMLO’s coalition got about 63% of the seats.

AMLO’s coalition, of course, includes the crazy Social Encounter Party; I have no idea how many seats they will wind up with. It depends on the affliation of the senators and deputies who won under the coalition banner in the geographic districts. They may prove somewhat unreliable for the new President. So his actual majority will be a little less than the stated number.

That does not mean that President López won’t be able to govern! As mentioned, he can pick up votes from the two social democratic parties. The PRD and Citizen’s Movement won two senate seats each and picked up about 4% of the House; both parties will also get some seats from their weird left-right coalition with the PAN, up to a ceiling of 18 senate seats and another 8% of the House. If they meet the high-end of the above projection (which they won’t) then AMLO will have a governing majority. 

But he will still need their cooperation. And if the social democrats get less than 18 senate seats, then he will need the cooperation from other parties as well. (Like the Greens. Shudder.) 

Right now, attention should be moving to the state legislatures. In the Nuevo León congress, pictured below, the PRI-PAN coalition managed to hold on to about half the seats, down from 74% before the election. The result is that AMLO cannot count on N.L. to ratify constitutional changes despite his gains in the state. (In Nuevo León’s 42-seat congress, the PRI collapsed from 16 seats to three; the PAN seems to have gained, from 15 to 18 at last count. The AMLO coalition blew up, from two lone Labor Party state deputies before the election to 15.)

It is unlikely that AMLO won a majority of the state legislatures, since many are elected on off-years, but somebody should check what happened out in the provinces. 

None of this will leave us much wiser about what AMLO will try to do. But it does mean that whatever it turns out to be, it will have to be done judiciously and after political negotiations. Of course, there is a lot that the chief executive can do to wreck a country, even one with stronger institutions than Mexico.

But I would venture that most of that sort of wrecking has already occurred under President Peña. I am not particularly optimistic that President López  will do much to help that little girl in Iztapalapa that I mentioned back in 2012, but I also do not think that he can or will do much to weaken the country’s democratic and legal institutions, at least inasmuch as they have survived the last six years. 

Call it an extremely cautious optimism, if you must.