The Power and the Money

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. 

Energía solar en la madre patria

Spain, you might have heard, is a sunny place.

Strangely, the designers of Spain’s early renewable policies did not realize this. They established a feed-in tariff, in which utilities have to buy all generated renewable electricity at a fixed price. They set the price based on German policy. But Spain, remember, is sunnier. And the cost of solar power was plummeting. The cost to utilities grew all out of control.

The Socialists pulled off the first walk-back in 2010, when they limited the feed-in tariff to the first quarter-century of a plant’s life and tossed in a  €0.55 per megawatt-hour grid access charge. They were sued, but the investment tribunals found for Madrid.

Then Rajoy gets elected. Rajoy’s gotta Rajoy, and subsidies had hit €3.5 billion, so in December 2012 he reformed the system again. He repealed the feed-in tariff, but made the repeal retroactive. Combine that with a 7% electricity tax, and he managed to push a bunch of solar producers into the red. Spain got sued again, but this time the investment tribunals forced the government to cough up damages. 

Lest you think that the People’s Party would relent, they went yet one better in 2015 and slapped a tax on anyone who installed solar panels. OK, not technically a tax, technically a grid access fee. But effectively a tax. In addition, the law banned anyone with solar panels over 100 kW from selling electricity at all. 

But now Rajoy is out and Pedro Sánchez is prime minister. Moreover, solar power costs less than one-sixth of what it did when Spain began subsidizing it. Noises are being made about repealing the sun tax. At the very least, the sunny country might let market forces rip. Solar costs are down 41% since 2013. (See left: the dotted line is 20¢ U.S. per kilowatt-hour.)

Still, low costs can be a problem for solar producers, especially in Spain, where most renewable producers need to sell on the spot market. When the sun is shining, solar installations can bid the cost down to zero if there are enough of them. They can even drive it negative, if conventional producers are willing to pay customers to take their electricity in order to avoid spinning down their plants. 

So market forces will not be enough without a market redesign making it easier for solar producers to sign long-term contracts with off-takers. It is not merely a matter of removing the burdens the People’s Party placed on the industry. I have no idea how much thought the Socialists have put into this problem or whether their rickety surprise coalition is prepared to enact reforms.

We can hope. 

National officials do not like to feel like imperial proconsuls

When we left the Catalan secession crisis last October, the secessionists had backed down. They decided that setting up a parallel state would come at too high a cost. But we warned:  “There is the possibility that the crisis will flare up again. Possibly of its own accord. ... Right now Madrid should let people calm down and vote against the nationalists in the next election.”

That did not happen. Parties in favor of an independence referendum won a majority. The party that organized the unconstitutional referendum nominated Quim Torra to be the new premier; two weeks ago he finally cobbled together a 66-65 majority in the legislature. Torra included indicted politicians in his cabinet, and so (then) Prime Minister Rajoy continued to exercise direct control over the territory via Article 155 of the Constitution.

Madrid finally lifted direct control yesterday and the new Catalan cabinet contains nobody under indictment. But the central government continues to control the purse strings in order to insure that Barcelona spends no money on secessionist activities. 

So far, so nothing. So why a blog post? Well, a Catalan political scientist pointed out a disturbing undercurrent: Spanish bureaucrats no longer want to serve in Catalonia. A full 40% of Treasury officials working in the province have requested a transfer out. (Only 13% have succeeded.) Of the last 200 national officials assigned to Catalonia, fully 86% had to be ordered to go. Judges are also requesting transfers, including from Catalonia’s superior court. I am told that all of this is new.

Two quotes, for whatever they are worth: “Catalonia was a cosmopolitan society, open, plural and respectful. People now live in an atmosphere of confrontation. It will be hard for us to make this attractive.” And, “The tension is obvious. Agents’ children are picked out if their parents don’t go to certain demonstrations called by the schools.” 

It is a bad sign if national bureaucrats feel alienated from the place where they work, more like imperial proconsuls than public servants. Obviously, I do not want to exaggerate these reports, and I do not have the sort of time series data that would let us know how seriously to take them. But as someone (newly) bothered by nationalism and (for a long time) opposed to secession from democratic states, it is brightly flashing yellow light on the dashboard. 

Mexico’s real election is for Congress

It has been an exciting week in European politics. I’m in Spain, where a corruption scandal just brought down Mariano Rajoy. Spain is near Italy, where the President just refused to ratify a ministerial appointment and then agreed to a face-saving compromise that moved the offender to a less-prominent post. (Ask European steelmakers how that is working out them; Peter Navarro is not Commerce Secretary but seems to be winning the day anyway.) 

So I am going to talk about a place where politics looks pretty boring at the moment: Mexico. AMLO is running away with the presidential race. Miracles never cease, but right now absent divine intervention the presidential race is sown up.

What is left is control of Congress. Moreover, what matters is the ability to cobble together a two-thirds majority in Congress, since so much of Mexican legislation requires constitutional changes. How close is AMLO to clearing that hurdle?

TL,DR: Close! But probably not close enough.

A bit more detail: Mitofsky has polled congressional voting intentions. According to their models, AMLO’s coalition has a 50% chance of winning between 236 and 298 seats in the lower house, with 251 needed for a majority and 334 needed for a supermajority. They are similarly tipped to win between 51 and 73 senators, with 65 needed for a majority and 86 for a supermajority. 

Here you can see the estimated probability distributions for number of seats for AMLO’s coalition. The dotted line shows a majority. 

The AMLO three-party alliance will almost certainly win the house and has a one-third chance of winning the Senate. But it is exceedingly unlikely to win a supermajority.

Does that mean that we can forget about left-wing control of Congress?

No, because AMLO can win support from outside his formal coalition. 

Mexican party alliances are purely transactional. Consider AMLO’s alliance. It includes the Social Encounter Party, a reactionary beast opposed to abortion and marriage equality. These are not AMLO’s positions, although he can be squishy. But Social Encounter is happy to turn left on economics because it will win more seats as part of the coalition. AMLO, in turn, will win low-information voters who might have otherwise voted PAN. In other words, the coalition is transactional, not ideological. 

The main opposition alliance is equally transactional, marrying the conservative PAN to the social democratic PRD and Citizen’s Movement. Once AMLO wins, there is nothing stopping PRD and Citizen’s Movement legislators from voting for AMLO’s legislation should they so choose.

Will AMLO be able to cobble together a supermajority with support from the other left parties?

The modal projection for the PRD is 31 deputies and seven senators. For the Citizen’s Movement it is 29 deputies and four senators. These projections are not independent and should not be combined, because a better PRD result implies a worse result for AMLO’s coalition. Moreover, the methodology is supremely inaccurate; it does not rely on a large enough sample to make true constituency projections.

That said, there will certainly be a working left-wing majority in Congress but likely not a supermajority. The modal result is that AMLO gets 50% of the Senate, plus 8% from the two social democratic parties. He also gets 54% in the House, plus 12% from the social democrats. Still not quite over the top unless there are some big vote swings before the election.

So can we stop now? Not quite.  

The Green Party, you see, is made up of a bunch of mercenary SOB’s who would sell their parents for lunch money. Personally, I do not think that AMLO will offer sufficient lunch money. But even if he did, Green support would not put him over the top in the Senate. 

And now we can stop. It is remotely possible that AMLO will be able to put together a working supermajority, but that is not the way to bet. He will need the cooperation of the PRI or PAN to change the constitution ... and that is before we consider the state legislatures.

I leave whether that is good or bad for Mexico as an exercise for the reader. Thoughts?

Why not just let the Argentine peso fall?

I wrote this almost a week ago, but forgot to hit “post.” With today’s further fall in the peso to 25 per dollar, it sadly remains relevant. So ...

Why is Argentina going to the IMF at all? Why not just let the peso fall?

Answer: currency mismatch. Argentina seems to be shot through with foreign borrowings. Some of these borrowings are hard to understand.

Other foreign borrowings are not as hard to understand. Consider the gross data on Argentine financing through international capital markets. When President Macri took office, the country regained access to foreign lending. It then proceeded to take full advantage of that new access to raise needed capital. Together the federal government, provinces, and the state-owned oil company (YPF) have borrowed about $48 billion (gross) under the Macri administration through the end of 2017. (There are credible reports that these figures may be understated by a factor of two.)

Now, I’m not saying that borrowing caused the run on the peso. Nor am I saying that it’s a huge amount for a ~$545 billion economy. But it would be rough if the capital suddenly stopped flowing, which is what would happen if the authorities just threw up their hands and let the peso plummet. Budget deficits would still need to be plugged and expiring debts would still need to be rolled over, only at much greater cost in peso terms. 

But wait it gets worse! Argentina’s financial system is heavily dollarized. That means people and businesses denominate their debts in dollars, not pesos. Why they do this is not clear: there are plenty of other countries with as checkered a monetary history, yet debts and contracts are made in the local currency. Nonetheless, many Argentine businesses write their debt contracts in dollars, even though most of them make sales in pesos. 

How serious is this problem? Well, I once again turn to the Argentine central bank. In 2016, 39% of manufacturing industry debts were in dollars, along with 37% of farm debts and 32% of service businesses. Only commerce (17%) and construction (12%) had less dollar debt … but even those numbers are pretty high. Twelve percent of construction business liabilities, the nontradable par excellence, are in foreign currencies?

Should the peso crash, those debts would become overwhelming. In fact, according to the Institute for International Finance, the situation has become a lot worse in the last two years: they report that a whopping 64% of Argentina’s combined government and corporate debt is denominated in dollars. Imagine if the value of 64% of your debts doubled over the course of a few days.

It follows that Argentine banks are exposed to depreciation. As of September 2017, 9% of bank loans were denominated in dollars, against 15% of their liabilities. The weight of those liabilities could soar if the peso crashed. Moreover, considering as most of those loans are probably to Argentine entities who earn in pesos, those dollars loans would start looking shakier as well.

In short, jacking up interest rates and going to the IMF is bad. But letting the peso just fall as far and as fast as the market will take it is also bad. It might even be worse. In other words, cry for Macri, Argentina: it is a terrible and unavoidable choice. 

The incredible power of the Argentine president

Back in February, I noted that the Argentine president has too much power, which might be a cause of Argentina’s bad governance.

It turns out that I noted the same thing back in 2008. Cristina had just lost a Congressional vote on raising the soybean export tax from 35% to 44%. (Page 16.) I noted that this was a double-sign of political weakness, since her intention had been to bypass Congress altogether and impose the tax using the necessity and urgency clause in Article 99. Street protests forced her to go back to the legislature, where she lost 37-36 in the Senate. 

I interpreted the loss as a sign of her political weakness. I was wrong about that. Despite the export tax mess, and the pension nationalization mess, she managed to win re-election in 2011. Her administration would not collapse under its own weight until the 2015 election. But she would careen from self-inflicted disaster to self-inflicted disaster without the guardrails that keep American presidents from doing likewise, no matter how incompetent or mercurial they may be. (Mostly. In domestic policy, at least.)

But I was right about the danger of Argentine presidential power. I still fear for Argentina, especially in the current economic headwinds. 

Mexico’s amendable constitution

That’s “amendable,” not “amenable.”  

Too many observers have recently declared that Mexico’s energy reform is safe, because it was enshrined in the Mexican constitution as an amendment. And why would they be wrong? Amendments certainly look difficult to change. It takes a 2/3rds majority of both houses of Congress and a majority of the state legislatures to pass one. That certainly looks like a high bar!

Except that if the bar were really high, the Constitution of 1917 wouldn’t have been amended 232 times in 101 years. Or 64 times in the past dozen. That’s right, Mexico has been amending its constitution once every ten weeks.

For whatever reason, an amendment process that is on paper equivalent to the United States is in practice much much easier. How did that happen?

Let’s start by saying what did not happen. Many analysts, yours truly included, thought the high amendment rate of the Mexican constitution was a epiphenomenon. The phenomenon was that Mexico was a one-party state in which the written Constitution did not matter. Since the constitution did not matter and the ruling party controlled all branches of government, amendments could be passed for propaganda reasons and without consideration of their effects.

Sounds good, right? The problem with the above hypothesis is its converse corollary: If the Mexican constitution was amended all the time because the country was a one-party dictatorship, then the amendment rate should fall when it becomes a multiparty democracy.

Well, sometime around 1997 the country became a multiparty democracy. But the rate of amendment rose from 1.6 amendments per year to more than five. So much for that idea, then.

So what is the reason?

The first thing to keep in mind is that Mexican political parties are much more centralized than their American equivalents. When the party bosses say “jump,” (most of) the legislators ask “How high?” For example, once energy reform made it out of the Congress, it took only 83 hours for a majority of the state legislatures to ratify. Imagine that happening in the United States.

Second, the President can introduce amendments under his or her power to introduce legislation. Until 2012, they could introduce them straight to the relevant committee. In practice, that means that a Mexican president can almost always get their preferred amendments to the floor for a vote.

Third, Mexican parties are more transactional than ideological. The PRI can turn its positions on a dime for electoral (or other) advantage. The Green Party, despite its, name, is not particularly concerned about the environment. Rather, it is a family enterprise, winning seats in order to collect federal subsidies which it uses to maintain its seats, parceling out votes to the highest bidder.  The PAN and PRD are a little more ideological, but the PAN in particular has a long and successful history of logrolling and the PRD has split. 

Finally, Mexican politicians have no choice but to amend the constitution if they want to govern. Too many policies are enshrined in the Mexican constitution. The bloody thing is now 61,765 words long, up from 27,122 back in 1917. If Mexican politicians suddenly developed stronger norms about amendments, then the country would become ungovernable.

To put this in context, Mexico isn’t the only Latin American country with a flexible and overly-detailed constitution. The difference is that the other countries have amendment process that look easy. Colombia’s 1991 constitution runs 47,383 words and has been amended at almost as high a rate. But with a few exceptions, Colombia’s constitution can be amended by two consecutive majority votes of both houses. That is barely a bar at all.

The Brazilian  constitution is only a little bit harder to amend: you need 60% of both houses to vote twice. The Peruvian constitution (which is a paragon of brevity at 18,341 words) allows for amendments with either a majority vote plus referendum or a two-thirds vote of Congress twice. It’s no surprise that those countries alter their constitutions with regularity. What makes Mexico unique is that it has an amendment process that looks fairly onerous … but isn’t.

In other words, Mexico suffers from many many ills, but legislative gridlock is not one of them. That is a good thing, but it means that supporters of the energy reform shouldn’t get too complacent. It wouldn’t take the second coming of Lyndon Baines Johnson to undo the amendments. It would just take some political skill. Of which there is no short supply in Mexico right now.

Now, that is not to say that I think reform is about to be completely undone ...

Criticism of the Trump letter to Panama is missing the point

The Trump Organization recently sent a letter to the president of Panama in regards to a legal dispute over a Trump-branded property. The letter listed some putative irregularities in the legal proceedings and asked the President of Panama to intervene lest his government be held responsible for denying justice to the Trump Organization. The threat, made quite explicit, is that the Trump Organization would then haul Panama up in front of a panel at the International Center for the Settlement of Investment Disputes (ICSID).

Vox wrote the following:  “Even if Varela decides to do nothing about this specific dispute, he could now feel obligated to curry favor with Trump in other ways to make up for the issue and keep US-Panamanian relations stable. That could lead to his government approving specific policies to placate Trump or perhaps covertly acting to ensure that the Trump Organization secures favorable business deals in Panama in the future.”

In other words, Vox and others fear that President Trump’s personal connection to a private venture means that American foreign policy is being perverted to produce private gain. 

So is that what is happening? Is this a case of the Trump Organization using the fact that its principal is also President of the United States to muscle a small country for private gain? Well, to know that you need to answer three questions:

1. Would the Trump Organization have sent the letter if Donald Trump weren’t President of the United States?
2. Will the Panamanian executive react differently to the letter than it would have if Donald Trump weren’t President of the United States?
3. Will the United States government take actions against Panama that it would not have taken had Donald Trump not been President of the United States?

The answer to the first question is “yes.” As a colleague of mine at Brookings wrote:

Details of the case a bit unclear, but foreign investors complaining they've been mistreated in local courts (and that this reflects poorly on investment climate) is pretty common... More generally, aggrieved investors will complain to anyone who will listen

— geoffrey gertz (@geoffreygertz) April 9, 2018

The answer to the second question so far is, “We don’t know yet.” But probably not. President Varela does not have a lot of power to intervene and the Trump Organization does not have a particularly good case to bring to ICSID. 

Which brings us to the third question. Will the Trump administration use the vasty power of the United States to twist Panama’s arms? To which the right answer is: probably, but what else is new? I wrote an entire book about the rather egregious ways American administrations of all ideological stripes twisted the arms of small countries in fights with American investors. The Obama Administration did that to Argentina when its government tried to ignore an ICSID decision. (Obama later went after Argentina on behalf of U.S. creditors.) And Geoffrey Gertz has found that American investors still rely on official U.S. support to get their way with foreign governments. If the administration leans on Panama to aid the Trump Organization it would be following a long-standing American tradition.

To be honest, the Trump Administration is more likely to fail at getting its way than earlier administrations. First, the current President speaks so loudly and is so unpopular that it would be hard for any foreign government to easily acquiesce. Second, the current President is unpopular at home and actions that might have slid under the radar will get much play. 

So stop worrying that Trump corruption will pervert American foreign policy or create some sort of American empire run for the benefit of an investing class. That ship sailed in the 1890s.

What you should worry about is not Trump leaning on foreigners to benefit his private businesses. You should worry about foreigners favoring Trump’s private businesses to benefit their interests. There is evidence that the Philippine government is doing exactly that and we all know about the Russians.

I doubt that President Varela will do much in this particular case (not least because he can’t do much) but others in other countries will. The tail will wag the dog.

Dictatorship rising

In 2011, John Quiggin hypothesized that we were on the verge of eliminating old fashioned tyranny, “in the historical sense of absolute rule by an individual who has seized power, rather than acquiring it by inheritance or election.” 

I can understand his optimism. In the below photo, I am standing atop an abandoned monument to the absolute dictatorship of Enver Hoxha in Albania. There are a lot of former dictatorships in the world.  

But ...

In 2011, in response to a post by John Quiggin, Doug Muir pointed out that there were still quite a few dictatorships left. We defined dictators as (1) a solitary leader, who (2) wields tremendous personal power, and (3) rules in a generally illiberal manner, and (4) will not leave office or surrender power unless compelled by force majeure, and (5) is not a traditional monarch. So we do not include Arab monarchies (like Saudi Arabia), collective one-party states (like Vietnam), illiberal democracies (like Hungary), elected governments formally limited by unelected bodies (like Iran), or military juntas (of which there seem to be none at this moment.) 

Still, back in 2011, you could see a pattern. The New World was free of dictators outside Cuba. Every other dictatorship other than Syria was either in post-colonial Africa or the post-imperial Soviet space. And the Syrian dictatorship, many thought, was not going to be with us for much longer. 

Another but ...

Today that pattern no long exists. Dictatorship is everywhere. Consider the countries that were dictatorships in 2011 and are still dictatorships in 2018: Angola, Azerbaijan, Belarus, Cambodia, Cameroon, Chad, Congo Republic, D.R. Congo, Cuba, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Kazakhstan, North Korea, Rwanda, Sudan, Syria, Tajikistan, Turkmenistan, Uganda, and Uzbekistan.

The only two three countries to leave are Gambia, Zimbabwe and South Sudan ... the latter by dint of falling into prolonged civil war. (In comments, J.H. pointed out that Gambia is no longer a dictatorship.)

What about newcomers? Well, we have Fiji, Maldives, Nicaragua and Tanzania, and Togo ... plus Egypt, Russia, Turkey and Venezuela. It seems as though China has joined them and Honduras is making a play after the incumbent got the Supreme Court to nonsensically overrule the constitution and then blatantly stole an election. 

In total we have six small newcomers and five major ones. Only two are in sub-Saharan Africa. Two have nuclear weapons.

The world is still more peaceful than ever before. But inasmuch as you believe that said peace is due to the spread of democracy, we may have some frightening years ahead.

I would like to be wrong. Please tell me that I am wrong.

Observatorio argentino 38: Who needs checks and balances?

It is astounding to realize just how much power the President of the Argentine Republic possesses. 

This came home to me while I was checking over how President Macri recently tightened the immigration laws. Context: Argentina has a rather liberal immigration regime. (I am surprised even more Venezuelans have not shown up. I guess the limiting factor is that they need a job offer to get a work visa, although there are no limits on such offers.)

Last year, the Macri administration wanted to tighten the law. (See Observatorio Argentino 32.)  The changes were small, but they involved specific clauses in the legislation itself. You can find the original 2004 text here. So they could not be made via simple executive order.

In other presidential republics, the only option would be to go through Congress. Get the law changed. How hard that is depends on the country. 

An American president needs to be a hella politician. They need to convince a legislator to introduce the legislation; they then need to cajole the Speaker and Majority Leader to bring it to a vote. Even then, under the new 21st Century norms, they need at least 60 senators to vote yes. 

A Mexican president is a little more powerful, but only a little. Under the original wording of Article 71 of the constitution, they could introduce bills straight to the relevant committee. But by itself that gave them only a little more power than an American president. In 2012, however, a constitutional amendment changed Article 71 to give the president the ability to introduce two bills every session that go straight to the floor. Each house then gets 30 days to vote on them; if they don’t hold a vote, then the bill becomes the first item on the agenda in the next session. So congressional leaders can still delay things; and note that if they delay both initiatives the President cannot introduce any in the next session. So even with the additional post-2012 powers, they need to be good legislative politicians if they want to get anything done. 

A Colombian president is more powerful still. She or he can introduce bills and demand that Congress vote on them within 30 days, with no limits. But Colombian presidents are not legislators. They have no direct control over the amendment process. And, of course, Congress can just say no. 

But Argentina? Sweet Mary. Under a 1994 amendment to Article 99 of the constitution, the President can decree pretty much anything. The article is nuts. Read section 3 for yourself:

The Executive Power shall in no event issue provisions of legislative nature, in which case they shall be absolutely and irreparably null and void. Only when due to exceptional circumstances the ordinary procedures foreseen by this Constitution for the enactment of laws are impossible to be followed, and when rules do not refer to criminal issues, taxation, electoral matters, or the system of political parties, he shall issue decrees on grounds of necessity and urgency, which shall be decided by a general agreement of ministers who shall countersign them together with the Chief of Cabinet.

Within the term of ten days, the Chief of Cabinet shall personally submit the decision to the consideration of the Joint Standing Committee of Congress, which shall be composed according to the proportion of the political representation of the parties in each House. Within the term of ten days, this committee shall submit its report to the plenary meeting of each House for its specific consideration and it shall be immediately discussed by both Houses. A special law enacted with the absolute majority of all the members of each House shall regulate the procedure and scope of Congress’s participation.

Yes, that is as crazy as it sounds. Exceptional circumstances are not defined, and every president since 1994 has interpreted the clause to mean that they can make legislative changes to anything they want whenever they want. In theory, the joint standing committee has ten days to vote and then Congress can reject the decree. In practice, the committee often stonewalls or deadlocks and then the decree just goes ahead and becomes law, poof, just like that. 

How the hell did that happen? The 1853 drafters of the constitution did not set out to create an elected dictatorship. But they got an unelected dictatorship in 1930, when the military seized control. The Supreme Court remained in session, though, and it validated the decrees handed down by the junta. In 1947, the Court tried to block a presidential decree ... at which point President Juan Perón impeached all but one of the justices. You won’t be shocked to find that the restaffed Court ruled in Ziella v. Smiriglio:

The decree-laws issued by the de facto government are valued by reason of their origin and since they have the force of law they continue in force even though they have not been ratified by Congress as long as they are not repealed in the only manner in which they may be so, that it is to say, by other laws.

Still, only 15 decrees were issued between 1930 and 1982. When democracy returned for good in 1982, the new civilian presidents were loth to give up the power. Raúl Alfonsín used the power ten more times, mostly for small-bore stuff; his big decree replaced the peso with the austral. 

But Alfonsín was succeeded by Carlos Menem, a Trump before Trump, a Berlusconi before Berlusconi. Menem liked executive power. He started by increasing the size of the Supreme Court from five to nine. He then issued a decree that seized most bank accounts and replaced them with government bonds. People sued. 

But the packed court ruled that President Menem was entirely within his rights as long as Congress did not explicitly repeal the decree with another law. American legal scholars will be amused to know that the Argentine justices cited Home Bldg. & Loan Association v. Blaisdell (1934) as justification for a decision ratifying exactly the sort of thing that Hughes, Cardozo and Brandeis were trying to prevent.

The 1994 constitutional amendment creating the new Article 99 was an attempt to limit the decree power. As such it failed. Menem would go on to issue over 300 decrees. (Note again that before Menem there had been only 25 presidential decrees in the history of the Republic.) Congress would not even bother to create the joint standing committee until 2006. And it remains toothless. 

Consider the immigration reform that started this discussion. What happened after President Macri issued it? Well, the joint standing committee has only 16 members but it could not get everyone to attend. It voted 6-5 to support the decree on February 22, 2017 ... but because there was no majority its recommendation was never reported out. The decree continued as law. In October, a federal judge ruled that it was in fact law even though the whole Congress had never voted. (In this he had ample precedent, although Argentine judges are not formally bound by precedent the way they are in the Anglosphere.) He also ruled that the deportation of criminals was somehow not a criminal matter and thus the reform was kosher under Article 99. 

No matter how you slice it, it is unbelievable that a democratic president has the power to make law unless Congress actively says no. Giving Donald Trump the power of a Mexican or Colombian president would change little; GOP initiatives are hard to pass because they are unpopular. Allowing the President to force votes on them would not help. But giving Donald Trump the power of an Argentine president? Well, that is scary.

And that may be one of the prosaic reasons why Argentina is not particularly well governed. They really ought to do something about that Article 99, I think. 

Environmental disasters are hard to stop, even in the Netherlands

The rash of earthquakes afflicting Oklahoma is old news. The cause appears to be backwash from fracking operations being pumped into old abandoned oil and gas wells. Lubricated rocks slip, and thus earthquakes where none were before. 

But now Groningen, in the Netherlands, is suffering from quakes! I am kind of embarrassed to learn about this now, since I was only recently in Groningen. (Disclosure: I am a Dutch citizen, passport and everything. Yes, I am also a U.S.A. veteran and short and olive-skinned and Spanish-speaking. ¿Tienes algún problema con eso? Daar heb ik geen moeite mee.) 

For those on the wrong side of the paywall: these quakes appear to be due to the rapid depletion of the Groningen gasfield to the east of the city. A 3.6 earthquake in 2012 wrecked thousands of homes (as you might imagine, Dutch houses are not built for tremors); on January 8th of this year another 3.4 did likewise. From the Financial Times:

Gert-Jan Veldink was at home when a 3.4-magnitude earthquake struck the northern tip of the Netherlands last month. First came the tremors, then the chimney broke and floor-to-ceiling cracks appeared in the hallway. Later, an engineer confirmed his 200-year-old farmhouse was filled with carbon monoxide from a damaged gas pipe. “The quake hit our house with all its force,” says Mr Veldink, an academic from the small town of Kiel-Windeweer, near Groningen, the regional capital. “If there’s another earthquake the same as before then the roof will collapse.”

Labor Party politicians estimate the number of houses that need rebuilding at around 90,000. The fields are operated by NAM, a 50-50 joint venture between Royal Dutch Shell and ExxonMobil. NAM has paid out about 80,000 claims, although their value is unknown.

The field has been in operation since 1959, but number of quakes started rising around the turn of the century. For an amazing visualization, click here.

Since 2013, production has fallen precipitously, but the number and intensity of the quakes has remained steady. The implication is that the ground has already been weakened; the number of quakes will fall slowly even if production stops immediately. Of course, if production doesn’t stop, then the quakes will get worse ...

Why does the government let production continue? The industry is highly taxed, with the Dutch state taking 80% of revenues. But that amounts to only 0.8% of total public revenue, down from 5% in 2013. In addition, the Dutch state is highly centralized and subsoil resources are not owned by the surface title-holder, so there is not much of a local lobby pushing for more production the way there would be in most of the United States. 

Which leaves three reasons to keep production going, albeit at a capped level. First, there are legitimate worries that lowering production caps would lead to big variations in monthly production, since NAM would want to sell more in the winter when prices are high. That could lead pressure to fluctuate, making earthquakes worse.

Of course, a total shutdown would solve that problem, but that brings us to the other two problems: 

1. The Netherlands still relies on natural gas for heat and light. Shutting Groningen, at least in the short term, means more imports from Russia. Nobody likes Russia. In fact, Dutch politicians dislike Russia so much that they see votes in lying about their knowledge of Russian “plans to expand the country’s borders and create a ‘Great Russia’ that would include Belarus, Ukraine, the Baltic countries and possibly Kazakhstan.”
2. Lobbying and legal issues. Even with the high government take, NAM makes a lot of money from the gas fields. They will not take it lying down.

So there you have it. Conventional gas production is causing earthquakes in the Netherlands. But even as wind power gets cheaper and more reliable, nobody can quite figure out how to shut it down.

Colombian peso update, part 2

In 2015, I predicted that Colombia would not chop three zeros off the peso until the May 2018 presidential election. The last time around, Congress balked at the cost of replacing the bills. In 2016, though, the Colombian central bank issued new bills that replaced the three zeros with the word “mil.” On February 5th, the head of the central bank, Juan José Echavarría, pronounced himself in favor of redenominating the currency since the new bill design would make it cheap: just let new bills without the word “mil” circulate alongside old bills that have it. 

Congress took up the discussion on February 8th. 

So why bother? Well, first, redenomination is now free. (Although the private sector will have to pay some cost for new software.) That is a big reduction from the $123 million it would have cost to recall and reprint or remint everything. Second, the finance minister, Mauricio Cárdenas, wants Colombia to have a currency close in value to the prestigious hard monies in the world. This is supposed to have good psychological effects; hey, we have a serious currency now! Finally, getting rid of some zeros just makes things easier. No need to write down long strings of numbers or talk about “millones de millones.” 

Of course, introducing the new redenominated bills piecemeal takes away the benefit of forcing people to turn in unregistered stashes of cash. It isn’t that doing so would uncover nefarious doings and bring crimelords to justice; they use dollars. Rather, forcing people to exchange old bills for new would provide useful data as to the size of the underground economy.

But that looks to be off the table. What is left amounts to prestige. 

Nothing wrong with prestige! I would vote to redenominate were I a Colombian congressperson. But still bet Congress does nothing unless the new president takes the up mantle of giving Colombia a currency that can beat anyone else in Latin America. Absent that, why burn the political capital? 

Economic history is hard

Lyman Stone has a post up about population growth in the Caribbean. It’s interesting stuff; worth reading. But it suffers from a historical mistake.

I am hesitant to point out this mistake because Lyman has recently been beaten up by a bunch of rather rude people who appear to be deliberately distorting his argument about the recent American (and French!) fertility decline. So I will endeavor to be neither rude nor deliberately distorting. 

As part of a broader discussion of Caribbean population trends, Lyman uses British migration restrictions to test the effect of migration controls on West Indian population growth rates. He identifies two points where migration was restricted: the date of independence and the Nationality Act of 1981.*

The problem is that neither independence nor the 1981 act had any effect on the ability of West Indians to migrate to Great Britain. 

The U.K. first imposed migration restrictions on the West Indies in 1962. The Commonwealth Immigrants Act said that only U.K. citizens with passports issued in Great Britain or Ireland could freely enter the U.K. If you were a “Citizen of the United Kingdom and Colonies” but your passport had been issued by a Commonwealth government, even one still part of the British Empire, you were subject to restrictions. And those restrictions were pretty draconian: you needed either a work permit or the ability to show that you could support yourself without working.

The U.K. migration data is a mess, but taking the Home Office statistics for annual net migration (in thousands) at face value (page 10) indicates that it was pretty effective. The below chart puts a vertical line at 1962. Net migration from the West Indies surged in ‘61, as people rushed to beat the new law. It then collapsed in ‘62 and ‘63 and remained low thereafter.

Moreover, the Nationality Act of 1981 had no effect on the ability of West Indians to migrate to the United Kingdom! That freedom had been removed in 1962. Rather, all the 1981 act did was take the class of U.K. citizens who were not allowed to live in the U.K. and rename them British Dependent Territories citizens. They could not freely move to the U.K. before and they could not freely move after. (In 2002, the Blair government finally granted all Dependent Territories citizens full British citizenship.)

If you really want to see if migration restrictions affected population growth rates, then you want to use 1962 for your test, not independence or 1981. 

Raising barriers to pay for a wall: we anticipate Trumpian logic!

Back in March of 2016, we suggested that a Trump administration could repeal NAFTA and claim that Mexico was paying for the wall via higher tariffs. A static back-of-envelope calculation implied that the U.S. would receive about $2 billion a year in additional revenue. Cutting that in half to account for falling trade volumes would give you about a billion. Thirty-year treasuries are currently yielding about 2.875%, so that billion-dollar revenue stream could plausibly be said to allow for $19.9 billion in borrowing to finance the wall, currently estimated to cost about $18 billion.

In reality, repealing NAFTA would not pay for the wall for two reasons. First, the economic dislocations would almost certainly reduce other tax revenues. Second, much (most?) of those tariffs would fall on American consumers more than Mexican producers. Third, inasmuch as Mexican producers will pay, many of those producers are American owned. Add that up, and repealing NAFTA will cost rather more than the additional tariff revenue.

But you could, in a static sense, claim that repealing NAFTA would pay for the wall. 

And now, in a fairly incoherent interview for the Wall Street Journal, the President has now jumped on the “logic” we laid out last March. “[Mexico] can pay for [the wall] indirectly through NAFTA. We make a good deal on NAFTA, and, say, I’m going to take a small percentage of that money and it’s going toward the wall. Guess what? Mexico’s paying.” 

The obvious read is that he intends to bring back tariffs on U.S.-Mexico trade (the small percentage) and will use that revenue to pay for the wall. If there was any consistency to this White House at all, I would take that as the death knell for the trade agreement.

But who knows what the President meant? Does he even know what he meant?

Puerto Rico is not following the Tennessee Plan, but it may work regardless

In 1790, North Carolina ceded its western territories to the federal government in payment for the federal assumption of its revolutionary debts. In March 1796, the Southwest Territory unilaterally declared that it was now a state. The legislature elected two senators and organized a popular vote for two representatives. The delegation showed up in Washington and demanded to be seated. After a few months of confusion, Congress passed a joint resolution admitting the Southwest Territory as the State of Tennessee. Congress seated the two senators, who had been constitutionally selected by the legislature, but insisted on a new election for the House of Representatives. 

That was before the 17th Amendment, however. But in 1959, the Alaska Territory tried the same thing. The state organized elections for two senators and a representative, who went to Washington and asked to take their seats. Congress agreed to seat the representatives in 1959, as part of a deal that also admitted (then Republican) Hawaii. 

But such a plan is not a sure shot at success. Did you know that  the District of Columbia has been electing shadow senators since 1990? I discovered this fact on March 13, 2016.

I was stuck at a red light on an exit ramp from Rock Creek Parkway onto Massachusetts Avenue, when I saw that the Chrysler 300M ahead of me had the strangest license plates. They were D.C. plates, but instead of a number there were the words “US SENATOR” in an unusually small font. 

So I took a photo.

To my surprise, the Chrysler dropped behind me and started to tail my car. This went on for about two miles. Annoyed, I pulled onto a side street, stopped the car, and walked over to car now tailing me. I knocked on his window. “You’re following me.” It wasn’t a question. 

The driver, a bearded white man, responded with no hostility in his voice. (That will be hard to believe when you read the words, but it is true.) “You took a picture. Was there something you didn’t like about the car?” 

My voice likely showed some irritation. “I’ve never seen a license plate like that. I took a picture. Are you a Senator I don’t recognize?”

He didn’t answer my question. Instead he said, “I’m sorry, there’ve been incidents.”

“What incidents?” I responded. “What senator do you work for?” But he drove off. 

And that was how I discovered that he was Paul Strauss, one of D.C.’s shadow senators, elected by the people of the District to lobby Congress for statehood. So far, Strauss and his colleague, Mike Brown, have accomplished precisely nothing.

Puerto Rico is now trying what it claims to be the same strategy. Appoint shadow senators and representatives and lobby Congress to have them seated. But:

1. Problem #1 with the plan is that the would-be congresspeople haven’t been elected. So poof, none of the legitimacy that the representatives from Tennessee (and later Alaska) brought to the table. 
2. Problem #2 is that Puerto Rico will be highly Democratic. Despite impressions, that was not true as of September 20, 2016 2017. But now, after the Trump administration decided that it did not care about the island, whatever conservative leanings the electorate might have had have been destroyed. Republican strategists know this. But the Puerto Rican delegation has no plan (a la the paired admission of Alaska and Hawaii) to counterbalance.
3. And problem #3 is that D.C. has been trying the serious version of the strategy for 27 years, to no avail. 

Which means that I should be here saying that this strategy has a snowball’s chance in Hell of succeeding. But I actually think the reverse. In fact, I would bet on statehood happening very fast the next time that Democrats win both houses of Congress and the presidency.

Once upon a time admitting two states (D.C. and P.R.) on a party-line vote would have been seen as a sort of unconscionable gerrymandering. But that time is passing. The norms of American political life have been going out the window for some time, maybe since Robert Bork, certainly since Texas decided to carry out its intercensal redistricting in 2003. (The redistricting violated political norms, but despite all the liberal outrage, it actually made Texas politics fairer and more democratic. Really.)

I do not see the political penalty for the Democrats from shoving through statehood for both jurisdictions at the next chance they get. Plus side: four extra senators. Minus side: some loss of control over the District on the part of Democratic representatives from Maryland.

Which leaves only one reason not to admit either or both the District and Puerto Rico: fear of a voter backlash at the following election.

Is that likely? 

Attack of the drones, updated

 New information emerged fast regarding that drone attack in Syria. From the Washington Post:

1. Nobody seems to know who was responsible. Yesterday we noted that the Islamic State controlled no more territory; experts suspect a different rebel group was responsible;
2. The Russians claim the attack involved 13 drones, 7 shot down and 6 disrupted by electronic countermeasures;
3. The drones appear to have traveled at least 50 kilometers.

In terms of the Syrian Civil War, this is a nothingburger. It does not represent a rebel resurgence. Nor is does it mean anything for the Russian presence, which was already being drawn down in the wake of Putin’s declaration of victory.

But in terms of the future of war, it’s a harbinger. I want to know more about those electronic countermeasures.