The Power and the Money

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 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.

Attack of the drones

 One day we have to continue our fisking of Ghost Fleet. I don’t like panning anything, but the book was full of howlers. Fine for fiction, but it was dispiriting to see so many people take it so seriously.

But one thing the book got right was the use of drones in future conflict, including a good scene during the Chinese invasion of Hawaii (page 69).

It now seems that life is catching up with fiction, right on schedule.

The Islamic State used drones regularly as weapons. Sometimes they placed bombs on the drones themselves; other times they would drop mortar shells from the UAVs. Now, however, the remnants of the Islamic State appear to have upped their game and attacked Russian forces en masse. They claim to have destroyed an S-400 missile launcher.

Unsurprisingly, the Russians claim something rather different.

A more neutral take supports the Russian claim that their Pantsir S-2 anti-aircraft cannon was successful in shredding the attack by a small fleet of commercial quadcopters.

All this said, the Islamic State no longer controls meaningful territory and couldn’t be expected to mount much of an attack. But what happens as the drones get better? Like, say, by mounting a small kerosene jet engine on ‘em? Or, more frighteningly, by going the other way and making ‘em smaller and smaller and ever harder to detect?

I’m relatively sanguine about this development. It won’t bring down civilization. But it may revolutionize ground combat. I’m not sure what the defenses against slaughterbots will look like, but I am sure that we’re going to see some dramatic changes in military tactics over the next decade.

Thoughts?

The roots of Argentine street violence

The pension reform passed the lower house yesterday on a vote of 127-117. The legislative process has been fine, notwithstanding the near-fistfight on the floor and a lot of disingenuous rhetoric from the government. In those terms, and those terms alone, Argentine representative democracy looks to be in better shape than American representative democracy.

But the street response has been nothing less than shocking.

Why? Well, there are two hypotheses.

The first hypothesis is that the mobs were organized by the Peronist opposition to discredit the Macri’s Cambiemos coalition. In this view, the pension reform is only a convenient excuse for an opposition facing an existential struggle against its ideological opponents.

The second hypothesis is that the Macri administration miscalculated the meaning of its recent electoral victory. It failed to realize was how little trust it enjoyed. In this view, the violence is an inevitable product of the government’s attempt to offload adjustment onto the middle class in a society even more polarized than the United States.

Which view is correct? Likely both.

There is certainly a history of Argentine political actors orchestrating street violence for political ends. Consider Javier Auyero’s (U.T.-Austin) magisterial study of the 2001 riots. In his words: “Three mechanisms [operated] during the episodes: 1. the creation of opportunities by party brokers and police agents, 2. the validation of looting by state elites, and 3. the signalling spiral carried out by party brokers.” Similarly, soccer fan clubs have employed violence to help politicians. Politicized soccer violence emerged during General Jorge Videla’s dictatorship (1976-83). Videla organized fans to pressure potential opponents; the “barras bravas” also became a convenient venue to channel payoffs to regime supporters. After democracy returned in 1983, the barrabravas began to sell their “services” to various politicians. In short, there is a history of party politicians inciting and using violence; it would be more surprising if nobody abetted the recent riots. The President certainly thinks that somebody did.

But the Macri administration has ] given working or middle class Argentines little reason to trust it. He has made no moves to apply scratchy hairshirts to the richest: the (unavoidable) austerity is going to fall squarely on the middle class. The pension reform came in the wake of a  punishing series of electricity rate hikes with no commensurate increase in service.* It also comes in the wake of Macri’s post-election declaration that he wants to cut taxes on business and investors; no sign of a progressive tax reform here, a la Chile or Uruguay. (More on Uruguay here.) Pain always goes down better when it’s shared.

It is true that some sort of pension reform will be necessary and it is true that the opposition has both the means and the desire to foment street violence. But it’s the reluctance to spread the pain of austerity up the income ladder that lies, I think, at the heart of the problem.

* Electricity reliability is measured via two indices. SAIDI measures the average annual outage time per customer. In the United States, the median utility has a SAIDI around 1.5 hours (NYC is 0.3); in Argentina, it’s 4.5. SAIFI measures the average annual number of outages per customer. In the U.S., it’s about 1.1 (with NYC having 0.1). In Argentina, it’s 16.2. Mexico, for further comparison, is 0.8 and 1.0 in Mexico City and 0.5 and 0.6 in Monterrey. (The World Bank tracks these numbers.) To be fair, one wouldn’t expect electricity provision to improve in a day after a decade of Peronist mismanagement, but that is a reason for Macri to tread lightly.

Observatorio argentino 37: A long hot summer of pension reform

It is summer in Buenos Aires. And it is proving to be a hot one. 

Political violence right before Christmas is a recent Argentine regularity. In December 1999, a protest by workers owed back salaries in Corrientes province grew out of hand and resulted in two deaths. In December 2001, the forced conversion of people’s dollar bank deposits into pesos worth a third as much provoked riots that killed 39 people. In November 2005, I was in Mar de Plata for the riots around a visit by President Bush. In December 2010, thousands of Paraguayan and Bolivian immigrants occupied a park in the southwestern reaches of the city. As you can imagine, the locals did not react well: Mayor Mauricio Macri called in the police and four people died before the federal Gendarmerie and naval special forces broke it up and cleared the area. In December 2013 the police themselves went on strike; in Córdoba, the result was looting, the arrival of the Gendarmerie, and at least one death. 

And now there is December 2017. Nobody has died, so far, but at last count 81 people were in the hospital ... 48 of whom are cops. A general strike is on, shutting the airports and the subway. That is today; on Thursday there was an earlier wave of rioting resulting in busted windows and burning cars. 

What is it all about? Short answer: pension reform. On November 29, the Senate voted 43-23 to advance an administration proposal to rejigger the formula for state pensions.  Rejigger how, exactly? Well, that has been giving me a headache but I think I have got it. 

The current pension formula adjust pensions as follows. Every six months, the pension fund averages the wage index (the higher of the Ripte or Indec indexes) and the nominal growth in total social security tax receipts. The resulting number (plus a top-off that I still do not understand) gives the percentage hike in pensions. The law has a floor: nominal pensions cannot fall even if nominal salaries and nominal tax collections decrease. (To be frank, in an inflationary economy like Argentina, a nominal fall in anything is unlikely in the extreme.) 

On paper, this does not seem like a bad system. It links changes in outflows to changes in inflows. Pension spending might be too high given the level of tax collection, but they should not grow out of control, at least not because of the formula.

But ... the formula does make pensions volatile. For example, in 2015 pensions grew by 4% in real terms, but they fell 6% in 2016, only to recover 3% this year. In other words, there is a case for pension reform beyond the vague “pensions are too expensive” that you usually hear. 

Of course, that case would be more persuasive if, well, pensioners were the ones pushing the reform.

The real issue is that the pension system has been underfunded ever since President Kirchner granted state pensions to slightly more than 2 million elderly who had never worked in the formal sector. It does not matter if the current indexing formula is a fine one if the system is paying out more than it takes in. Something needs to be done and this is something. 

The proposed change (text here) switches the index to the following: 70% inflation and 30% wage increases, plus a top-up for GDP growth that I do not understand. The adjustments will be switched from every six months to every three months. The reform implies that the pension administrator will miss a top-up during the changeover to the new system, so it proposes an extra one-time adjustment, aka “the splice.” Weirdly, however, the adjustments will still be delayed six months: the end-of-March increase, for example, will reflect inflation in October-December, not January-March.

Does your head hurt yet? Mine certainly did. I found a nice chart at Infobae that runs down the difference between the old and new systems. Short version: most pensioners will come out behind under the new scheme compared to the old one. It might save around $4 billion in the short term, perhaps. In the long term, who knows? But it is likely to reduce expenditures relative to the old formula.

The vote sailed through the Senate based on a deal President Macri struck with the state governors. As part of that deal, he got the governors to agree to let him transfer quite a lot of money to Governor María Eugenia Vidal of Buenos Aires province. Vidal is a member of Macri’s political party, the Republican Proposal (PRO); he needs her to succeed. So it is hard to get past the idea that President Macri is using pension reform to finance Governor Vidal. 

The lower house had to cut off debate when it looked like it was about to devolve into a fistfight.

So there you have it. The reform is basically a cut in pensions. Most of the short-term savings will go to the provincial governments in return for their agreement to drop a lawsuit claiming funds from the federal government. The big winner if it passes will be B.A. province, where a PRO governor recently took it back from the Peronists for the first time in 30 years. But the formula change is tinkering around the edges of a massively underfunded pension system; very little economic gain for a lot of political pain.

That said, by current American standards the whole debate seems refreshingly honest, wholesome, fair and open. And no, that is not something I thought I would have written a year ago.

Brexit is over?

There is nothing really new in the piece. I am just laying out my thoughts, because I am a little confused. Which I suppose is standard for anyone trying to think about Brexit.

Specifically, I am confused as to why commentators continue to discuss the future form of Anglo-European trade relations. As far as I can tell, the U.K. just agreed to remain part of the single market and customs union for trade in goods. 

This would be rather more integration than Norway or Turkey currently enjoy. 

Norway is in the single market but not the customs union. It follows European regulations and trades tariff-free with the E.U., but there are customs checks on the borders because Norway imposes its own tariffs on goods from third countries. Turkey is in the customs union but not the single market. It imposes the same tariffs as the E.U. on imports from third countries but it does not follow European regulations. So there are customs checks on its borders to insure that only goods that conform to European law are allowed to enter the E.U.

But the U.K. cannot have customs checks on the Irish border. So unless Northern Ireland agrees to leave the British Customs Area, the U.K. needs to stay in (at least for goods) both the single market and the customs union. And that is what the recent declaration says. The U.K. “will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”

So no customs checks because the U.K. will follow every European rule on every single physical tangible thing that anyone might want to bring into the country. Which also means accepting the decisions of the European Court of Justice about the interpretations of those rules.  

This represents an unprecedented level of economic integration for a non-E.U. country. Heck, I am not sure if there is anywhere in the world that integrated absent some sort of political union. 

London will still in theory be able to stop Europeans from being able to legally work in the U.K. in return for giving up access to the European market for British service exports. But no more “global Britain” signing trade agreements with countries around the world. 

I am surprised that the political reaction in Britain has not been stronger. Where are the Brexiteers? Or have they been yelling and I am just missing it on this side of the Atlantic?

The roots of making America in Argentina

Last post presented evidence that upward mobility was quite widespread in late 19th-century Argentina. The question is why? What made it so easy for immigrants to make America? Leticia Abad (Middlebury) and Blanca Sánchez-Alonso (UCEU) give one plausible answer.

But first, Prof. Abad shoeing me her childhood home in Buenos Aires. When she was growing up, the neighborhood was downright slummy. Now it is merely somewhat run down. I give it another ten years before the first yoga studios open up and she learns the exquisite pain I feel visiting Prospect Heights or Windsor Terrace.

And now, the reasons why immigrants to Argentina made America so successfully. In 1895, native-born Argentines still earned more on average than Spanish and Italian immigrants. Italians, though, managed to outperform Spaniards despite being rather less literate (78% versus 88%) and mostly farmers (69% versus 41%) when they got off the boat. Not to mention the language barrier; it is easy for an Italian speaker to learn Spanish, and you can hold simple conversations across the line, but the two languages are not identical. I have held conversations with people across the Spanish-Italian barrier, the first time on a crowded train from Glasgow to London in 1990. I could nonetheless not possibly hold a professional conversation in Italian. 

Yet despite these disadvantages  somehow Italians sorted into higher-paying occupations. How?

The authors’ explanation is that the Italians established deeper and better networks. Basically, once Italians got a foothold in high paying occupations, it became more likely that later arrivals would follow in their footsteps and sort into those occupations. These networks raised both groups’ wages, but the Italians were better at it. (The below map shows the concentration of Italians in Buenos Aires neighborhoods in 1895.) 

So there you have it! The immigrants were able to make America so successfully because they stuck together and helped their countrymen, even after multiple generations in the New World. We don’t know if these ethnic networks were stronger or lasted longer in the Argentine Republic than they did in the United States, but it is certainly possible. Half a cheer for assimilation, then! Sometimes it’s a good thing if the melting pot doesn’t quite melt completely.

But there is another, slightly more depressing, explanation for the why the immigrants made America in the Río de la Plata. One that might also possibly explain some of Argentina’s (and indeed, the whole Cono Sur’s) relative failure. 

Hacerse la América en Argentina

Argentina, it is probably unnecessary to say on this blog, is a country of immigrants. Moreover, it is a country of immigrants from almost the same places as Brooklyn got immigrants back in the day, as this photograph shows. 

Argentines had an awesome expression to mean that you were doing well in the New World: “Hacerse la América.” It translates to “making América.” Not “making it in América” but “making América,” as in “making partner” or “making tenure.” How awesome is that?

But how many people really did make América? Sure, unskilled laborers could earn higher wages in Argentina just by getting off the boat from Italy or Spain or Syria or Russia ... but that’s not making América. Making América is doing better the longer you’re in the New World and seeing your children do better still. How common was that?

Well, two new papers can now tell us. The first is by Santiago Pérez (U.C. Davis); the second by Leticia Arroyo Abad (Middlebury) and Blanca Sánchez-Alonso (UCEU). Today I will talk about the first.

Pérez matched individual immigrants and their children across the 1869 and 1895 censuses. He also matched immigrants from arrival data collected in 1882-84 to the 1895 census. And what did he find?

Immigrants moved up the occupational ladder faster and farther than native-born Argentines. That is, if you were an unskilled laborer in 1869 and you were an immigrant, you had a 23% chance of making it to a white-collar profession by 1895. For the native born, that same chance was only 8%. Immigrants also showed significantly higher wage growth than natives. Except, for some reason, the Swiss. That country appears to have sent a bunch of slackers to the Southern Cone.

As for the people who arrived in 1882-84, fully 75% of them upgraded their occupations by 1895, a rate considerably faster than in the United States. And unlike the United States, there was remarkably little immigrant downgrading, the 19th-Century equivalent of having the former Russian brain surgeon driving a cab in Houston.

What about the children? If you were the native-born son of an unskilled worker, you had only a 10% chance of making into the ranks of the white-collar class. But if you were the son of an immigrant unskilled worker, well, then you had a 36% chance of moving on up, to the top, to a deluxe apartment in the sky. And that result holds controlling for parental literacy, earnings, and access to property.

Better opportunity than in the United States! There are two potential explanations, though, which I may get to in another post. One of which is based on the immigrants ... the other on how Argentina differed from the U.S. and Canada at a deep structural level, and not in a good way.

What if America had been unpopulated in 1492?

The long Twitter debate between Pseudoerasmus and Gabe Mathy was triggered by an essay in Jacobin by my friend and colleague Suresh Naidu. He wrote a piece about what North America would have been like had the native population avoided decimation from infectious disease.

As a piece of counterfactual history, the essay has problems. The first is that we really do not know the pre-contact population of North America. Using his assumption of 0.5% population growth thereafter, we get a range of 26 million to 234 million native Americans today. Needless to say, those are radically different scenarios. The second is that the presence of large-settled native populations would have changed the dynamics of later immigration; would as many Europeans have arrived if North America had 45 million people in it around 1800? Finally, it seems likely that a large native population would have derailed the development of the institutions that sustained rapid North American economic growth. 

But as a polemic, the essay is quite successful. The latter two arguments unambiguously strengthen Suresh’s overall point, which is that there was nothing inherent in English culture that insured that its settler colonies would become rich and democratic places. The presence of an exploitable settled population would have permanently derailed the American experiment. Pseudoerasmus and Mathy were debating whether the English would have created an apartheid scenario (Mathy) or something more like Mexico (Pseudoerasmus). Neither seemed to doubt that the resulting society would be more oppressive and less democratic than what really emerged in the northern United States and Canada. Nor does Randy McDonald in his discussion of the piece. 

The essay raises an interesting question, however. If larger native American populations would have prompted the creation of a more extractive and generally nastier North American state, potentially with multiple rounds of civil war, what would have happened if there had been no native Americans when the Europeans first arrived in 1492? What would have been different?

It turns out that James Axtell was there in 1987.

First and foremost, Spanish colonization changes completely. Without the great civilizations in the highlands of Mexico and Peru, the Spaniards take much longer to move inland. Without the Taíno in the Caribbean, it is entirely plausible (albeit unlikely) that the Spaniards give up on the whole enterprise. Still, somebody would eventually set up Caribbean and Brazilian plantations based on African slavery but Mexico and Peru will remain backwaters. Nobody settles in the Río de la Plata until the 19th century. (And I suspect that it will be British settlers who land there, claiming it from a moribund Spanish empire.) With no silver fleets there is no Sir Walter Raleigh and his tropical adventures. So no British Guyana, just a vague area where Venezuela meets Brazil. Ditto, there is no French empire in Canada. No fur trade, no New France. 

Second, when the British finally do settle the eastern seaboard, later than in our world, their expansion is slower and messier. There are no American domesticated food crops. There are no native American agricultural techniques to learn. And with no seasonal burning by the native Americans, the forests are that much harder to clear. There is no native American medicine. No snowshoes. No toboggans. No longhouses. No canoes. And idiotic English hunters crashing around in bright colors and scaring off the game. In short, the colonists will have to invent a lot of wheels for themselves that in our world they got from the Native Americans and that is going to slow initial settlement by a lot, decades at the very least, possibly a century.

New York and Pennsylvania in particular will develop more slowly; without the profits from the Indian trade, it will be much harder to raise capital for settlement. North America will be even more skewed to the slave south.

Third, no independence until well after 1776. Once the eastern settlements are finally established, expansion is going to rocket westwards with no Indians, French, or Spanish to slow it down. Slaves will get sucked into the south even faster, but there will also be more escaped slaves lighting out to form colonies in the interior. Axtell postulates, plausibly but without a whole lot of solid evidence, that absent the Indian threat American society would be a lot less religious and lose its “garrison mentality.” In his words:  “The jeremiads of New England would certainly have been less shrill in the absence of the Pequot War and King Philip’s War, when the hostile natives seemed to be ‘scourges’ sent by God to punish a sinful people. Without the military and psychological threat of Indians within and without New England’s borders, the colonial fear of limitless and unpredictable social behavior would have been reduced.”

With much more evidence, he also postulates that with no wars, there is no need for Britain to raise colonial revenues. Nor is there any reason for Britain to restrict westward expansion. That is probably enough to head off the Revolution. And if later revolts should occur, the colonists will have two huge problems. First, they will be more separated from any martial habits. No militias, no real combat experience, just a vasty totalitarian infrastructure of slave catchers. Second, they will have no Indian opponents from which to learn guerrilla tactics. 

So by 1850 you have a British slave empire that sprawls over the entire continent, well into northern Mexico. (Who knows? Maybe it will British Americans heading south who discover the mines in Zacatecas and exploit them with slave labor.) The northern reaches will not have slavery, for the same reasons as in our world, but they may be less religious and less moralistic, more crassly commercial and more dominated by large landowners. 

You have a Caribbean and a Brazil that do not look entirely unlike our own ... but which have less European settlement. (With no natives to conquer and no native women to marry, Iberian migration will be slowed.) You have growing slave populations around the Mexican lowlands, parts of Central America, and possibly parts of the Peruvian coast ... but I would venture not much in the latter. There is no Panama Real or Camino de Cruces across Panama; those routes, primitive as they were, were constructed by native American slaves captured from Nicaragua.

American silver was less important to sustaining Spanish imperialism in Europe than many realize, but there will be no Price Revolution or Columbian Exchange ... and that will change Europe in unpredictable ways. 

But in America, well, things look ugly. If a Revolution does come, it looks likely to take the form of a Treasonous Slaveowner’s Rebellion against the Crown, but that assumes that a British government unexposed to the shock of the American Revolution will be as open to the movement of public opinion as our own. This British crown might not take any serious moves against the horror, and thus provoke no rebellion. The strain of New England moralism that produced abolitionism in our world might be weaker, or not there at all. 

Observatorio Argentino 36: What happened to the Afro-Argentines?

Today Argentina is not known for having a large black population.  

Being a country of Europeans is a deep part of Argentina’s national identity. The census stopped recording race in 1869. A bit more than 80 years later, when Josephine Baker visited, she was surprised at the absence of black people. So she asked Ramón Carilio, the dark-skinned minister of public health, where the black population lived. Carilio felt free to joke, “There are only two — you and I.”

When Era Bell Thompson visited Argentina in 1973 to report on the black population there, she recorded one Argentine’s ironic complaint about the United States: “Argentines are lumped in with all the rest of the Spanish-speaking peoples, even though we are white.” She had no problem finding black people, but she described them as “Not a viable, but a vanishing black people: relatively few in numbers, relatively free of racial discrimination and relatively content.”

Even now, some Argentines still joke — admittedly with some accuracy — that an Argentine is an Italian who speaks Spanish and wants to be British. This view of Argentines is not only in Argentina: in 2001, when María Lamadrid visited Panama in 2001, immigration officials refused to believe that a black woman could actually be Argentine.

But  we know that colonial Argentina was heavily African! A census of Buenos Aires held in 1778 revealed a black population of 35%. (See Luis Wainer, La Ciudad de Buenos Aires en los Censos de 1778 y 1810.) As late as 1855, local B.A. surveys recorded race. George Andrews (page 41) estimated the total African population of Argentina in 1800 to be 69,000, roughly 22% of a total population around 310,000. 

So what happened to all the black Argentines? In comments, Luciano suggests that Argentine governments may have engaged in genocide, conscripting blacks to disproportionately fight in the War of the Triple Alliance and live in disease-ridden neighborhoods. 

The genetic ancestry data cited in the last post, however, shows only about a 4% presence of African genetic markers. That is a lot less than 22%! Does that provide evidence of some great genocide or expulsion in 19th-century Argentina?

Possibly not.

The Argentine-born population of Argentina grew by about 2.0% per year between 1800 and the first national census in 1869. (The link goes to the census; the data on the Argentine population is on page 686.) That is only slightly lower than the 2.2% rate of natural increase in the United States between 1800 and 1870, as estimated by Michael Haines. (See Table 1.) We know that the rate of natural increase in Argentina was 1.3% per year in 1869-95 and 1.6% per year in 1895-1947, so 2.0% for 1800-69 is likely on the high end. (We have no direct observations of the 1800 population; the 310,000 is an educated guess.)

If you assume that the Afro-Argentine population should have grown at the same rate of natural increase as the overall population, then you would have expected about 1.1 million Afro-Argentines by 1947, roughly 7% of the total population of 15.9 million. Intermarriage would not change the expected prevalence of African genetic markers: it does not matter if 7% of the population is of purely African descent or if the entire population has 7% of their ancestors from Africa. In other words, the mass immigration from Europe and the Levant can explain 15 percentage points of our estimated 18 point drop in the proportion of African ancestry. 

That still leaves a mystery, because 4% is lower than 7%. But it is a much smaller mystery. One possibility, of course, is that Afro-Argentines suffered differentially high mortality due to actions by the Argentine state.

But there are other possibilities that should first be eliminated before we conclude that President Domingo Sarmiento presided over a great crime. It may be that the 4% estimate of the proportion of African ancestry in the Argentine population is too low. More likely, our estimate of the 1800 population may be too low: if there were actually 450,000 people in the country in 1800, then the expected proportion of African ancestry would be 4% today. 

There is a lot of room for more scholarship. But the mystery is smaller than the headline figures would indicate ... and there may well be no mystery at all. 

How is Argentina like Puerto Rico?

Mostly, it isn’t.

But there is a sign of a disturbing history deep in the genetic heritage of most Puerto Ricans. And contrary to the popular belief, there may be some trace of the same history in Argentina. 

Some background. Over on Twitter, the great Pseudoerasmus and the great Gabriel Mathy began a debate over why North America saw relatively little intermarriage between Europeans and Native Americans compared to elsewhere. Pseudoerasmus argued that it was all about initial conditions. The Iberians migrated in smaller numbers to areas with bigger indigenous populations and in a heavily male-heavy environment. Gabe, conversely, argued that it was all about cultural norms. The English did not intermarry in significant numbers even in places with high numbers of indigenous and skewed sex ratios. 

It was an interesting discussion which I hope is put into a blog post. I participated for a bit but dropped out; Pseudoerasmus and I get along brilliantly, but in the heat of tweeting innocent responses can come across as more than slightly hostile. Moreover, the long threads are impossible to follow, quite unlike comment threads on a blog or the old newsgroups. (or ... gulp ... Reddit.) These are two of the reasons why I think Twitter is useless (at least for me) and am leaning towards quitting the platform, but I digress. If you must, try here and here. 

What does any of this have to do with Puerto Rico? Well, early DNA studies, from back when such things were new and neat, showed something a bit creepy. Mitochondrial DNA (mtDNA), which is passed down through the female line, skewed Native American. But Y-chromosomes were entirely European and African. The implication is that something awful happened to the entire male Taino population; they were either killed or denied the possibility of procreation. Likely both.

Later studies upheld the results. Here is one from 2014, which sampled 326 people and found mtDNA that was 60% indigenous, 25% African, and 15% European, whereas the male Y-chromosomes were 85% European and 15% African.

Argentina is typically thought of as a European settler offshoot, and with good reason. In 1895, 25% of the population was foreign-born, overwhelmingly from Europe and the Levant. By 1914, that figure was up to 30%. Gross immigration between 1857 and 1914 came to 4.6 million people; net immigration ran about 3.0 million. (Pages 201-02 of the 1914 census.) All this with a population of only 7.9 million in 1914! Add in the Argentine-born children of those 3.0 million post-1857 immigrants, and you have a veritable transformation of the population. You might reasonably expect Argentines to have a similar genetic makeup to, say, white people in the northeastern United States or Ontario.

But there is some evidence that you would be wrong. 

A 2010 study found that 54% of Argentine mtDNA came from indigenous sources while 94% of Y-chromosomes traved to Europe. These results are strikingly close to Puerto Rico (minus the large African admixture on the island) ... shockingly so for a country which received mass immigration from Europe in relatively recent times.

So what explains the result?

Well, first, maybe it is wrong. It is one study of 246 individuals and sampling issues are not small. I suspect that the prevalence of indigenous mtDNA it is more-or-less correct; the result has been corroborated in multiple studies. The Y-chromosome part is dicier.

Second, another study added a wrinkle: half of the indigenous South American DNA appears to have originated outside the modern borders of Argentina. That opens up the possibility that at least half of the result may be driven by migration from Paraguay, Bolivia, and Peru. As the authors write, “We did not collect bio-geographic information for most of the donors of our samples, and this is information was not available for most of the data collected from the literature; therefore, some donors could be in reality Native American immigrants (or descents form parents) from neighboring countries.”

Finally, European immigration to Argentina skewed male. (See page 271; it goes to CICRED 1974.) In 1869-1914, 1.7 males arrived for every female. That could explain some of the disproportionate prevalence of European Y-chromosomes compared to mtDNA without the specter of a Puerto Rican style past holocaust.

Nonetheless, the prevalence of native American ancestry in Argentina — and its apparent concentration in maternal ancestral lines — is a bit of surprise! There is a lot we do not know about the Argentine past ...

What is the cost of an independent Canada?

In the last post, I discussed Canada’s mysterious productivity gap with the United States. It appears to have been rather long-lasting. The current explanation is that the gap derives the fact that Canada is a smaller market and firms therefore have trouble reaching the optimal size and specialization. The implication is that had Canada been part of the United States, it would be more productive today. 

But does the gap really exist? Might the whole post be based on a misconception?

Vincent Geloso suggested that the gap may be driven by Quebec, but that does not match the data. The income gap with the U.S. holds for Ontario back to the 1870s. Moreover, we have detailed firm-level data for 1871 which shows that Ontarian firms were about 3-5% less productive than their Michigan equivalents. That is not to say that Quebec wasn’t a laggard! It is to say that the gap, inasmuch as it exists, is not due to backwardness in Quebec or the Maritimes. 

Randy McDonald, however, suggested that we might be asking the wrong question. Maybe the question shouldn’t be “Why are Canadian firms less productive than American firms?” but rather “Are Ontarian firms less productive than firms in the Great Lakes states?”

After all, were Canada part of the United States, then modern Ontario would be the State of West Canada with a northern border somewhere between Lake Nipissing and the Albany River. West Canada would be just another Great Lakes state. If real genuine Ontario has been consistently less productive than the Great Lakes states, then we can conclude that there is some Canadian factor holding firms back. But if it is not, then we might want to doubt the entire premise.  

It is easy enough to get regional GDP per capita for 1997-2016. Now, GDP per capita is a highly imperfect proxy for productivity. It does not account for differences in age structure, labor force participation, or work hours. But it is what I have. The data for the U.S. comes from the BLS. The Ontarian data is converted to U.S. dollars using the OECD PPP exchange rate. 

And so:

Wow! Ontario was ahead of the Great Lakes states in the late 1990s, falling behind only after 2003. It fell behind Michigan only in 2010. This makes me wish for a longer time series. Is 1997 or 2016 the aberration? Has Ontario basically looked like a Great Lakes state since 1871? There is a paper for an enterprising graduate student here. 

In fact, there are two different axes upon which to compare real Ontario with counterfactual West Canada. The intensive axis is productivity. Would workers and firms be more productive in Ontario had they enjoyed the same access to the American market as firms in the Great Lakes states? Did the value of being American, if any, change over time? The question is interesting in-and-of itself, but it also might shed light on the putative benefits of European union.

But there is an extensive axis as well! Before 1879, the problem with being Canadian was that the United States imposed high tariffs on Canadian exports. After 1879, however, the National Policy also imposed very high tariffs on American and British exports to Canada. Canadian firms still lacked access to American markets but they no longer had to worry about American (or British) competition.

If the policy worked, then firms would be created in Canada that otherwise might not have existed. Those firms would require workers. Where would those workers come from? They could come from farms, but the Canadian farm sector was still growing fast. They could come from existing firms, but that would raise wages. In an age of open immigration, high wages should have attracted more immigrants. As the industrial heart of Canada, Ontario should have had more firms and more people than it would have had it been West Canada, just another Great Lakes state. (If I had to guess, I would imagine that Wisconsin might be the best parallel for counterfactual West Canada, despite its closer proximity to Michigan.) 

But did the National Policy work as advertised? And if so, how much bigger is Canada’s population? And what were its costs and benefits relative to (1) the reality of American and Canadian protection; (2) a counterfactual of American protection and Canadian openness (i.e., no National Policy); (3) a counterfactual of American and Canadian openness (i.e., annexation or a North American customs union); and (4) a counterfactual of American protectionism but Canadian openness only to Britain (i.e., some sort imperial federation)?

If anyone knows of a literature, please point me to it! And if there is not a literature, then somebody should get on it! Economic history, like most things, needs more Canadian content.

Three worthwhile Canadian puzzles

So, to continue with my recent interest in Canadiana, impelled by, well, being in Canada!

There is an interesting puzzle about Canadian economic development. Well, there are many many interesting puzzles, but what particularly grabs my attention at this moment is why Canadian productivity has persistently lagged the United States.

Below I show Canadian total factor productivity (TFP) as a percentage of American TFP between 1950 and 2014. Save for a few halcyon years in 1973-80, Canada has consistently lagged the United States. Moreover, the gap turned into a chasm in the 1980s and grew even larger after the Great Recession. 

The productivity gap predates WW2. After World War 2, Canada lagged the United States in total factor productivity. That is to say, a Canadian worker in the same industry with the same skills and working on the same machinery produced less than her American equivalent. In the early 20th century, the superficial gap was just as large: the average Canadian worker added only 81% as much value per hour as his counterpart south of the border.* (Table 6 on page 25.**) Canadian workers, however, used rather less machinery than their American counterparts, so TFP closed to about 94% of the U.S. level ... remarkably similar to the gap in 1950-67.

In fact, the gap widens if you go further back. In 1900, GDP per capita (the crudest measure) in Canada ranked only 80% of the United States. In 1870, it was 70%. Canada appears to have had more-or-less that income gap with the United States back to 1820. 

Heck, the gap goes back to even before the existence of either the United States or Canada! Vincent Geloso (Texas Tech) has a paper comparing 18th-century Quebec with New England and finds that living standards were about 31% lower in what eventually became Canada. (Remember, there was no settled European population in modern Ontario back then.) 

So what caused the gap? A seminal 1964 paper by H.E. English pinned the gap on American protectionism: Canadian businesses operated at too a small scale and tried to produce too wide a variety of products. In other words, Canada wasn’t big enough. (You can find a 1980 study making the same argument here.)

This seems plausible. And as theories go, it has the advantage of explaining why the United States has enjoyed such a lead for so long over so many places. Everywhere else is too small! There are just too many damn countries in the world. Those of you who have read my opinions about  secessionism will know that I would find this a very gratifying conclusion.  

But the scale explanation does not seem to fit with the big widening of the gap since free trade.

Or does it? It is true that trade costs between the U.S. and Canada are still pretty high. And it is true that interprovincial trade barriers place even bigger obstacles on Canadian firms than American protectionism.  And it is true that the returns to scale in Canadian businesses are pretty high. (Page 130 of the 2009 World Development Report.) Canada has lots of small firms compared to America (consistent with the scale economy argument) and those small firms tend to be less productive than their American counterparts (sort of maybe could-be consistent with the scale economy argument). 

Statistics Canada ran an interesting thought experiment to test the hypothesis. They found that if you altered the size mix of Canadian firms to look like American ones you would close the productivity gap by 5 percentage points while if you made Canadian small firms as productive as American ones you would close it by nine. (Table 6, counterfactuals one and two.) Fixing both effects would close two-thirds of the gap, call it 16 points.

But that is not the entire gap. In fact, it leaves an unexplained gap bigger than the total gap in the 1950s.

Or the 1870s, for that matter. Kris Inwood (University of Guelph) and Ian Keay (Queen's University) conducted a similar exercise for Canada in 1870. They could get Canadian TFP to rise from 93% of the U.S. level to 97%, which cuts most of the gap. (You can find an outline of their paper here; the main one is paywalled.) Strangely, they downplay their finding, which seems like a very Canadian thing to do. The punchline is not that a gap remained, the punchline is that they explained more than half of it!

So the fact that Canada had a protected small market explains a little more than half the 19th century gap and about two-thirds of the modern one. But that still leaves two puzzles. First, what explains the rest of the gap in both periods? And second, why has the gap grown so much larger recently, despite NAFTA and all the ways modern communications should make service exports easier?

It is a great pair of questions.

But I mentioned three in the title, no? What’s the third puzzle?

I will post on that later, but it’s even weirder than the productivity gap ... it’s that median incomes in Canada may have finally pulled even with the United States. That is to say, for the first time ever it matters not to most Canadians that they live in a fundamentally less-efficient economy than their southern neighbors. And that’s the biggest puzzle of all.  

* The gender shift is deliberate.

** John Baldwin and Alan Green, “The Productivity Differential Between the Canadian and U.S. Manufacturing Sectors: A Perspective Drawn from the Early 20th Century,” The Canadian Productivity Review (Statistics Canada: December 2008).

How Canada stopped being British

Montreal is a fascinating place. And so, in honor of being here, a few random Canadian posts.

You may be aware of the recent Australian citizenship kerfuffle. Basically, the Australian constitution prevents anyone with double-citizenship from holding public office. The exact phrase is, “Is under any acknowledgement of allegiance, obedience, or adherence to a foreign power, or is a subject or a citizen or entitled to the rights or privileges of a subject or citizen of a foreign power.”

That is a little weird. As is the fact that the Australian high court held that it was enough to be eligible for foreign citizenship. Weirder still is that people appear to have only recently realized that this clause exists, and so a number of politicians have had to resign.

But what really struck me was the identity of three of the four “foreign powers” causing the trouble: New Zealand, Canada, and Britain. (Plus Italy.) None of these were foreign in 1901, when the Australian constitution was written. Anyone born in Canada, Australia, New Zealand, South Africa, or Newfoundland was a natural-born British subject. (The link goes to the British Nationality Act of 1914, versions of which also passed in all the Dominions.)

Today, though, Australian law treats all the former dominions (including Ireland, which was grandfathered in at independence) as completely foreign countries. Since 1984, Commonwealth citizens have had no benefits in Australia, although they are still allowed to vote if they arrived before that year. In Canada, Commonwealth citizenship also confers no benefits of which I am aware. In the U.K. itself, there are a few.

So, in honor of the fact that I am in Montreal, when did Canadians stop being British? Well, the short answer is 1946, when Canada passed the Citizenship Act. Except that is not quite right! The separation started earlier and took longer to complete.

The Canadian government first limited the right of Britons to settle in Canada in 1910, under the Canadian Immigration Act of 1910. The act allowed the government to deport immigrants who were “unsuited to the climate or requirements of Canada” or who had traveled courtesy of a charitable organization. The first requirement was laser-aimed at black Americans; the second at poor Britons. The act introduced the phrase  “Canadian citizen” which included “a British subject who has Canadian domicile” but which also made it clear that such domicile was not automatic. 

Ironically, the Canadian attempt to discourage Britons from emigrating flipped to encouragement after WW1, when the Empire Settlement Act of 1922 authorized Parliament to spend up to £3 million per year, the equivalent of roughly C$167 million today. Canada wanted Britons, you see, but only the right sort of Briton. 

In 1921, the Canadian Nationals Act defined Canadian nationals as British subjects who were born in Canada or who legally resided in Canada for more than five years. Weirdly, anyone naturalized in Canada would become British subject able to freely move to Britain, but being a British subject did not mean that you automatically had the right to move to Canada. 

So there was a de facto Canadian citizenship in place well before 1946.

Moreover, the special place of British subjects did not disappear after 1946. British subjects could still vote in Canadian elections after only one year of legal residency. In fact, British subjects Commonwealth citizens didn’t lose the right to vote in federal elections until the Canada Elections Act of 1970; even then, they could vote in provincial elections in B.C. and Ontario until 1985, New Brunswick until 1999, and Nova Scotia until 2006. (See pages 12-13.*) 

The slow distancing of Canada from the United Kingdom seems to have been an entirely unplanned thing. I would have thought that Québécois opinion had a lot to do with that, but I would be wrong. London just kept handing off autonomy to its North American colonies bit by bit. Each bit of devolution became harder to reverse. Moreover, London refused to graft any institutional meat onto the rotting bones of its Empire, forestalling any chance that the Commonwealth might turn itself into something like NATO or the E.U. or even a glorified free trade zone.

My current hypothesis is that the key decision was to grant the Dominions the right to set trade policy. Once they had that, they had interest groups that would refuse to reverse integration in that key sector. Add to that a very understandable reluctance to get the colonies to contribute towards their own defense and you had nothing but straight decline into irrelevance. In other words, socialist beer destroyed the British Empire.

Still, it is sort of amazing just how weak the links have become between the U.K. and its settler colonies, the ones that didn’t fight a war of independence.

* Willem Maas, “Access to Electoral Rights Canada,” Access to Electoral Rights Report RSCAS/EUDO-CIT-ER 2015/9 (July 2015). 

¿Aburrimiento en la madre patria?

Well, so far it looks like Rajoy’s bet is paying off. Catalan officials are obeying orders; Catalan ministers are leaving their posts. Puigdemont is in Brussels when he could be in Barcelona leading a revolt. Crisis over!

Except ... no.

This was a dumb game for Rajoy to play. As I said in comments three days ago, there are only three ways to rationalize his decision:

1. He did not realize that a strategy of restraint before the referendum would succeed. That, however, would also require him to be stupid, and the Prime Minister is most certainly not stupid;
2. Rajoy is playing an entirely different game;
3. Rajoy believes that the Catalan resistance will fold with probability 1 ... and he believes that his actions will lessen rather than increase the probability of future secessionist action in the future.

I can see why he would believe (3), but he is incorrect on both counts. Which isn't to say that the probability of the Catalans folding is zero! It ain't. It's high. But it ain't one.

His brinksmanship was stupid from the point of view of Spanish unity. Rajoy could have undercut the secessionists by playing it cool, leaving them looking silly. Instead he sacrificed certain success in the short-term in order to have a lower probability of success in the long-term. That is not a typo! The crisis could come roaring back. We are one crisis or stupid political stunt away from its return. 

Put that way, his decision is still a bit inexplicable. Even if the gamble pays off, why do it? Andrei Gomberg suggests that the answer is (2): Rajoy is looking to cement his position in Madrid by playing the patriotism card. It is not a bad card to play. 

But there is the possibility that the crisis will flare up again. Possibly of its own accord. But my real fear is that some overzealous Spanish judge will start arresting Catalan politicians. That would be exciting. But excitement is precisely what needs to be avoided. Thankfully Puigdemont has blinked twice now. Right now Madrid should let people calm down and vote against the nationalists in the next election. Boring. 

Catalonia: What is the game?

I have been trying to figure out the game Rajoy is playing. It is not immediately obvious. Backwards induction led Puigdemont to back down from declaring independence. Backwards induction should then have led Rajoy to accept Puigdemont’s “suspension.” Rajoy should have said, “Thank you for not declaring independence, note that doing so would be illegal, much obliged.” End of crisis, at least for a while, start of talks on constitutional revision.

But that is not what Rajoy did. Instead Rajoy refused to accept the out Puigdemont offered him. He pushed Puigdemont into a corner. Never push anyone into a corner.

Even after that, Puigdemont behaved rationally. (I must note that this has been a marked departure from Puigdemont’s behavior up until this point.) The Financial Times reported that Puigdemont tried to find a last-minute out but Madrid rebuffed him. 

So now we have a declaration of independence. Madrid will invoke Article 155 and take over the community. 

Why did Rajoy choose to go down this path?

There are three hypotheses.

1. “Never attribute to malice what can be attributed to stupidity.” There are governments to whom that adage applies. I do not think the Rajoy administration is one of them. Oh, they are incorrect, but I don’t think it’s because they are stupid.
2. Internal constraints. Rajoy may realize that he has been ineluctably creating a secession crisis, but he may also believe that a hard line is the only way to hold together his coalition. I do not believe this to be true, but it is a reasonable hypothesis.
3. Rajoy believes the Catalan opposition is unitary and rational. He has played down the game tree and backwards inducted. His (correct!) conclusion is that Catalonia is always screwed and screwed badly in the even of a contested divorce. He therefore assumes that his Catalan opponents will back down in the end. 

And therein lie his two errors. His first error is that he assumes that “less costly for Madrid” means “no cost for Madrid.” Accepting Puigdemont’s climb-down had no cost to Madrid. Engaging in economic warfare or (worse) fighting in the streets of Barcelona will be terribly costly for Madrid. The risk of either would have been zero had he reacted less strongly.

His second error is to assume that he is dealing with a unitary Catalan opposition. He is not. Puigdemont has already punted responsibility over to the Catalan legislature. Now it will be up to individual Catalans whether and how to resist. Catalan officials could choose to stay at their posts. Catalan police could refuse to obey orders from Madrid. There might be mass demonstrations, but that would be a sideshow to the real non-violent civic disobedience: bureaucrats continuing to stay at their posts but refusing orders from the Congress in Madrid. 

Here is what Rajoy should do, given where we are: show restraint. Fire recalcitrant bureaucrats but refrain from making arrests. Wear down the opposition. Take civil action, sue for breach of contract, insure that businesses keep paying their taxes. Essentially bore the Catalans into submission. Even if there is mass resistance from the bureaucrats, keep it civil. Reason being is that it is one thing to have mass walkouts by bureaucrats. It is quite another to have them actively set up a parallel state enforcing parallel laws and collecting parallel taxes. Once that happens, the jig is up, and the only responses Madrid will have on the table are (1) impose crushing sanctions or (2) break heads. 

Human nature being what it is, I do not think (1) or (2) will work, at least not at the level of pain that voters in Castilla and Andalucía and Aragón and Extremadura will be able to countenance. (I hope.) If we go there, then, Spain will disintegrate but with much human suffering along the way. So let us hope that Rajoy realizes that the only solution is boredom.

In space, you really do not want to have to use the motion sickness bag

Enough about Catalonia! What about point-to-point travel to anywhere on Earth in less than 45 minutes? That is the future Arthur C. Clarke promised me when I read Rendezvous with Rama as a boy ... and now that is the future Elon Musk is promising my son!

The idea is that SpaceX’s Big F--king Rocket (BFR) could be configured to propel a capsule containing 100 people to anywhere on Earth, where it would come in for a vertical landing. 

So I asked some friends, what could go wrong? And ... well.

We’ll start with the obvious one: these flights had better be damn well planned and pass only over friendly territory. We don’t want to be setting off nuclear strikes or losing the vessels to ABM fire. This is a serious problem, but a solvable one. After all, back in the 1940s people worried that nuclear weapons meant the end of international commercial aviation because of the threat of an atomic Pearl Harbor, but we managed to get over that one with only a few horrifying accidents. (KAL 007, Iran Air 655, and Malaysia Airlines 17, to name three.) 

I suspect that security will be just as strong as for current airplane flights, but I am not sure that it will need to be much stronger. These vehicles will not be hijackable, even if they have pilots, which I sort of doubt. 

But the next problem is insurance. In part that’s insurance against crashes and accidents. But that’s not the problem. The problem is insurance against catastrophic failures on the pad. Current launch insurance costs 10% of the vehicle cost. (Actually it’s 10% of the launch cost, but today rocket launchers are thrown away after a single use, save for a few SpaceX vehicles. Once the rockets are all reusable, the relevant metric will be 10% of the vehicle cost.) Moreover, insurance only kicks in once the rocket leaves the pad. Anything goes wrong before that and the rocket manufacturer is on the hook. And this is with spaceports located far away from population centers. Considering that the BFR lower stage could create a four-kiloton explosion should things really go wrong, we are not talking about a small issue.

Finally, there is another issue also identified by Sir Arthur Clarke: “It might not be unfair to say that in round-the-world satellite transportation, half the time the toilet is out of reach, and the other half of the time it is out of order.” In other words, these flights are not going to be comfortable. My first experience with zero-gee was on the old Freefall in New Jersey, in either 1987 or 1988. It was ... well. The second time was all right and the third time was fun, but the first time was unpleasant. I can say the same for getting thrown out of jumping out of an airplane over Georgia in 2004. Five times, hated each one. I am trying to imagine Very Important People capable of shelling out $10,000 for a ticket putting up with such adventure on a regular basis in lieu of a long trip in first class or holographic telecommuting. I am not succeeding. 

Anyway, it turns out the USDOT visited the issue back in 2010. They were not pessimistic, exactly, but optimistic neither. 

In short, this is super cool, the kind of thing I thought the future would hold, instead of the democracy-destroying social media and society-destroying artificial intelligence that we are getting. (Sure, portable videophones are neat.) Bad sadly I suspect that the cars will drive themselves well before we can fly rockets to Australia.

Demasiado largo, no lo leí: Catalonia needs Spain

Here is the TL;DR version of the last post.

Catalonia runs a budget deficit with the rest of Spain. That is disguised because Madrid kicks back a large chunk of Catalonia’s tax revenue in the form of soft loans. In other words, Catalonia has been taking debt owed private investors as it comes due and transforming it into debt owed to the central government. (This far to the tune of €52 billion.) That means that an independent Catalan state would need outside financing if it declared independence as its debt came due, to the tune of €4 billion per year; such financing would be impossible in a contested divorce. Even if Catalonia renounces its share of the national debt, Spain can lock it out of financial markets. The result will be crushing ... and that is before accounting from the trade shock that will come from Catalonia’s hard exit from the European Union.

(Note that tax revenues are lumpier than spending: even a state with a budget surplus needs access to short-term financing to make its payments. Losing access to finance will be crushing.)

Rough numbers for Spain:

Explanation: Spain in 2014 received a net transfer from Catalonia worth 0.8% of GDP. Losing the territory would cause an increase in spending of 0.3% of GDP, since the new smaller country would have to cover the same burden of fixed costs. (Defense, foreign affairs, regulatory authorities, public research, etcetera.) If Catalonia also renounced its share of the national debt, then the rest of Spain would also have to assume an addition 0.6% of GDP in interest costs. The total cost, then is either 1.1% of GDP or 1.7%, depending on what happens to the national debt. 

Rough numbers for Catalonia:

Explanation: with independence, the soft loans go away. Catalonia will be in deficit unless it renounces its share of the national debt or allows net taxes to rise substantially. Note, however, that Catalonia will still need access to short-term financing. Also note that these figures make no account for the inevitable trade shock that Catalexit from the E.U. will bring. That trade shock will depress revenues and raise spending, making access to capital even more critical. 

La economía de la secesión en la madre patria

We have moved down the game tree one step towards sensibility! Premier Puigdemont declared that Catalunya has the moral right to secede but will not declare independence. Relief!

Except, well, now the Spanish government needs to decide its response. The sensible thing, of course, is to do nothing. Either nothing nothing, or possibly a more active form of nothing where nobody speaks about secession but Catalan representatives in Parliament meet with other parties to see if they can hammer out an acceptable constitutional reform. Some politicians, like Socialist leader Pedro Sánchez, are doing just that. Prime Minister Rajoy, unfortunately, appears to be doing his best to push the Catalan leader into a corner by insisting that he loudly and unequivocally back down.

It is never a good idea to leave your opponent with no face-saving exit, especially when you have just won. I would bet on Puigdemont trying to give Madrid what it asked for without a full about-face.  (After all, Puigdemont has to keep his own hardliners onside.) 

Rajoy should accept the offer. 

But if he does not and we re-enter the conflict, it is worth discussing what is at stake. The answer: less downside than you might think for Spain, and rather more for Catalonia. 

First the figures for Spain. Catalonia is a net payer into the national budget. The reason that Catalonia is a net payer is that individual Catalans are richer than elsewhere.  

The baseline calculation is straightforward. Spain in 2014 ran a budget deficit of 3.5% of GDP. Excluding Catalonia , the Spanish state collected €305 billion and spent €345 billion, over a GDP of €840 billion. That implies a budget deficit of 4.8% without Catalonia .

Except, well, it seems plausible that Madrid would assume all of the fixed costs of the Spanish state: defense, foreign affairs, research and development, debt interest and the like. That would increase spending to €353 billion and the deficit to 5.7%. That is not comfortable, but it is far from an economic disaster.

So there you have it, a net cost of 2.2% of GDP ... with one more complication. Spain currently provides a fund to help the autonomous communities. The fund lends cheaply to the communities, as in at zero interest for three years and 0.834% thereafter. These expenditures do not count as part of the Spanish State’s budget deficit since they are technically loans: the central government increases its public debt in return for accounts payable given to the communities. That said, the account represents a flow of resources that somehow needs to be financed. Along with sundry other loans from the central government, Catalonia received €4.7 billion in such soft credits in 2014. If it seceded, Spain would no longer need to borrow that money. That said, this should probably not be counted as a benefit to Spanish taxpayers, considering as the costs are (in theory) borne by Catalan taxpayers. Of course, if you do not believe that the debt will ever really be paid back, then the calculation changes and losing Catalonia would cost only 1.6% of GDP.

What about the Catalan side? Total spending at all levels of government there currently comes to about €66.3 billion, while taxes amount to €70.4 billion. That would give the Republic of Catalonia an additional 2.1% of GDP. 

But it gets more complicated. The Spanish treasury assigns Catalonia a share of fixed costs and interest payments. Right now, that comes to about €2.6 billion in fixed costs and €5.0 billion in interest payments. 

The €2.6 billion share of fixed costs is about 1.3% of Catalonia’s GDP. That is less than the independent country would have to spend to set up its own army, foreign service, statistical agency, tax authority, additional courts, weather service, competition authority, securities regulator, and everything else now done by the central government. In the long-term, you are looking at a rise of about 0.2% of GDP (bringing it up to roughly what Spain spends). 

In the short-term, you are looking at much higher expenses as Catalonia ramps up, but I have no idea how to estimate that. So let’s run with a baseline saving of 1.9% of GDP. This is not small, but it is less than transformative. 

Except, well, those pesky financing operations from the central government. They give Catalonia about €4.7 billion every year. Even if you expect Catalonia to pay back the loans, they represent a liability that will need to be financed somehow. Which means independence would blow at least a temporary hole in the Catalan budget on the order of 2.4% of GDP. There go the cost savings!

So independence would cost 0.5% of GDP? Not exactly. What would actually be happening is that borrowing from the Spanish central government would need to be replaced by borrowing from other sources. In a mutual divorce, nothing would change save a small rise in the interest charged on the loans. 

But in a contested divorce, it would mean that Madrid has some substantial leverage. Rather more than the headline figures would indicate.

What about the national debt? If Catalonia assumes its share of the national debt, then Spanish expenditures rise to €348 billion: for an additional cost of 1.6% of GDP compared to the status quo. On other hand, if Catalonia dumps the entire current national debt onto Madrid, then (as calculated above) Spain’s fiscal burden will rise by 2.2% of GDP. 

Catalonia, on the other hand, would save €5.0 billion in interest payments. That is more than enough to cover the loss of financing from the central government. Hooray!

Except ... well ... this will get ugly. Spain can tie the new republic up in legal knots, made worse by the fact that the republic’s banks will have all moved their headquarters to Spain. Interrupted payments, attached accounts, you name it. The fiscal squeeze will be immense. 

The good thing, ironically, is that if its banks flee to Spain proper then they will still have access to ECB support. So that would slightly lower the pressure on Catalonia, since depositors will not have to fear an Argentine-style corralito. But they would still face corralónes: the Catalan government will likely limit withdrawals to prevent capital flight. And the new republic would also find itself unable to finance its current level of operations, and that would be horrendous.

Anything else for a Catalexit? Yes! Even assuming that Spain does not close the border, Catalonia will crash out of the E.U. with no WTO schedules and no trade agreements. In other words, Catalonia will suffer all of the effects that a hard Brexit would impose on the U.K., only with the added problems of having no independent currency and no way to access capital markets. Spain would also suffer a recession, of course, as trade fell with Catalonia ... but Spain will only have problems with Catalonia whereas Catalonia will have problems with everywhere. 

TL;DR: Both Spain and Catalonia will lose on the long-term fiscal side, even if independence is negotiated. But Catalonia borrows a lot more than people realize, and losing that in a unilateral secession will crush its national economy. The result will be a terrible financial crunch (even if the banks survive by relocating to Spain). Falling out of the European Union will add insult to injury. Spain will be battered, but as long as the ECB supports it the impact will be less than the 2008 crisis ... while Catalonia goes the way of Greece.

Does small-scale bribery matter? An empirical puzzle

Transparency International has released its new report on corruption in Latin America. One of the things that I like about the survey is that it asked whether respondents have personally had to pay a bribe. 

Let’s call it “retail corruption,” as opposed to “wholesale corruption” paid by businesses or stolen from public coffers. In theory, that strikes me as a more accurate measure than simply asking about overall perceptions.

The problem is that the survey gives some unexpected results. Is Trinidad really that clean? If it is — and it very well might be, asking people I know reports very low levels of retail corruption — does that imply that the retail corruption does not matter? After all, Trinidad suffers from very high rates of wholesale corruption. So does Brazil. Conversely, Chileans and Uruguayans report levels of retail corruption on a par with their Paraguayan and Argentine neighbors ... but corruption appears to play a much smaller role in economic life in the former two.

Consider Uruguay. 22% is a very high number of people needing to pay a bribe for public services! (Albeit not to use the courts or public utilities.) But in overall corruption perceptions it is between Japan and Estonia, slightly less corrupt than France. The country certainly does not feel particularly corrupt on the ground. Of course, it is consistent with the survey that Uruguay should feel much less corrupt than Mexico; but it also feels much less corrupt than Brazil! In a brief trip to Brazil, I came directly in contact with venal officials several times; equally brief trips to Uruguay have yielded nothing. 

Anecdotes are dangerous, of course. But the disjunct between the data and broader survey results, as well as personal experience, makes me wonder. Either the survey cross-section fails to capture actual differences or small-scale bribery is less damaging than I would have thought.  

So many questions, so little answers. I wish somebody would take the bribery survey and include the United States and Canada, to give us a baseline. 

¿Qué sigue en la madre patria?

The Catalan election descended into utterly predictable chaos. The secessionists won, on poor turnout. But the Spanish national police idiotically decided to wade in wearing full stormtrooper gear, and now nobody knows what will happen. The Catalan premier, Carles Puigdemont, has been coy about whether he will issue a unilateral declaration of independence (UDI, to use the abbreviation first used in 1965). 

So what will happen? Last night, in a bit of insomnia, I jotted down a game tree to help me think this through. I present it below. You can click to enlarge it. I have colored the boxes with the flag of the party making the decision to make things clear. (I am sorely tempted to write, “time for some game theory.”)

Right now the Catalans are deciding whether to declare independence. Their other option is to begin negotiations with Madrid on the precondition that secession will not be on the table. If they take that option, we can breathe a sign of relief: what follows will be contentious but not catastrophic.

But what if they declare independence? The ball goes into Madrid’s court. The Spanish government will have three options. The first would be to agree to negotiations. With a UDI in the background, that seems unlikely ... but if they agreed would could again breathe a sign of relief. 

The other options, however, are more likely. One is to do nothing, the bottom tree on the chart above. The other is to invoke Article 155 of the Constitution and suspend the Catalan government. What if Spain does nothing? Literally, just lets Catalonia go ahead and declare independence but takes absolutely no positive steps to remove Spanish authority. Well, that would give the Catalan authorities two choices:

1. Do nothing as well. That would leave Catalunya in a sort of limbo, with an autonomous  community exercising nothing more than its constitutional authority as part of Spain while claiming to be independent. Weirder things have happened. Life would go on, taxes would be collected, services would be delivered. Eventually they would talk.
2. Organize a parallel state. That would mean having Catalan bodies and bureaucrats take over functions currently carried out by the central government. Eventually, of course, there would be a conflict: a firm would refuse to pay Spanish taxes, two police forces would quarrel, a court order would be ignored, something. 

That would throw the ball back to Madrid. Assuming that voluntarily acquiescing to Catalan independence would not be an option, the Spanish government would have two choices:

1. Crack down with the full authority of the state. We got a taste of that yesterday.
2. Uncooperative withdrawal. Pull out without recognizing Catalan independence. 

Here is where backward induction is helpful. In both cases, the Catalans would have to deicde: give in to Spanish pressure or hold their ground. Problem is, by this point backing down would be political suicide. People would be angry. But resisting a crackdown means civil war. Not necessarily a repeat of 1936-39, but sustained political violence. 

And resisting an uncooperative withdrawal means complete economic collapse. First, the banks would fail as their headquarters pulled back operations; without ECB support euros would become scarce. Second, all contracts would be tied up in legal knots, dropping a paralyzing web of uncertainty. Third, all transfer payments from Madrid would stop; Catalunya would have to replace them ... only Catalunya would not have euros. So it would introduce a proto-currency, which would plummet in value, fueling a wave of defaults ... and so on, until you have something that looks like Greece, at best.

Except, well, backing down by the point would end the career of any politician who tried it, Thus, the big X’s through that option.

The lower tree does not look good. What about the upper one, where PM Rajoy invokes Article 155?

Well, that would give the Catalans a choice: acquiesce and fight it out inside the institutions of the Spanish State or organize mass civil disobedience. The first gets us into a nicely talking world. The second put Madrid in the position of deciding whether to negotiate in the face of mass resistance or resist Catalan demands. If they resist we are ... back on that lower game tree. (The upper and lower tree are the same after that point.)

The implication is that this is a no-win situation for the Catalans. Resistance ends in civil war or economic collapse. (Ironically, the European Union makes it easier to impose that economic collapse: the ECB cannot support Catalan banks if Catalunya is no longer a member.) The smartest thing is to do nothing. If there must be a UDI, then nobody should do anything. Nobody speak, nobody get choked!

Meaning that nobody should do anything, even if the other side does something. Nothing is the  best option. Do nothing at all. Nada. Nothing. 

I am hopeful that in this case that strategy will in fact dominate. But, well, game theory does not really a good record in these sorts of situations. If it did, the morons in Madrid would have never gotten us to this point. (In fact, I suspect that the Catalan nationalists are surprised at their own catastrophic success.) But here we are, so we can only hope that the politicos backwards induct correctly.

Unless ... gulp ... unless the game tree missed something, some option or payoff that makes the bad state good for someone. In which case we are jodi ... thoughts?

The hawks make their case to fight North Korea

 Steve Bannon made waves when he pointed out the conventional wisdom on a Second Korean War: a pyrrhic victory that would result in hundreds of thousands or millions of civilian deaths. Less noticed were some counter-comments by Trump administration officials, including Secretary Mattis and General McMaster. 

An old Army friend of mine has now suggested to me what they might be referring to. He heard the analysis in an unclassified setting, but one which reminded him a little bit of the run-up to the Second Gulf War. So here goes the scenario, stripped of any incriminating details. 

Seoul is within range of North Korean artillery. The North Koreans, however, have to defend their entire border. The DPRK has about 21,000 artillery pieces. The claim now circulating, however, is that only around 1,000 of those have the range to hit Seoul. Moreover, the bigger pieces have a relatively low rate of fire, and thus would be rapidly taken out of commission by U.S. forces. (This is true even of self-propelled artillery, which does not move that quickly and can be easily tracked from the air.) Multiple rocket launchers could fire much more rapidly, but their rounds are susceptible to anti-rocket defenses like the Israeli Iron Dome system.

In addition, goes the argument, the DPRK would want to target military installations and civilian infrastructure more than random apartment buildings. They know the literature on the inefficacy of terror bombing — no country has ever withdrawn from a war because the enemy was killing too many civilians — and are not about to repeat the same error the U.S. made against North Vietnam. 

Add that all up, and the civilian casualties drop to 30,000 if the North Koreans fire all their artillery at civilians and less than 3,000 if they target more intelligently. 

The report that birthed this analysis appears to be on-line here. The source is the Nautilus Institute, a reputable operation based in Berkeley. 

Of course, the analysis should not make me breathe any easier. First, who knows if the planners in Pyongyang have read the literature on the inefficacy of terror bombing? Maybe they would target civilians regardless. Second, the DPRK has lots of chemical weapons. Maybe they would use them only for operational purposes ... or maybe they would try to attack civilians. And finally there are those nuclear weapons. 

What worries me is not the analysis itself, it is that such analysis seems to be surfacing again right now as our current President continues to amp up his war of words with the DPRK. I do not think we are going to be at war with North Korea anytime soon, but the probability keeps rising ... and this information has caused me to ratchet my estimate up another few notches. 

Thoughts? 

The Jones Act is stupid, but not colonialism

The Merchant Marine Act of 1920 reserves shipping between American ports to American-built vessels with American crews. The reason was to protect the merchant marine from British, Norwegian and (especially) Japanese competition. After all, the U.S. wanted to be sure that it would have a merchant marine in wartime; that meant protecting the industry in peace. The same logic was later applied to airlines.

The problem? Well, the U.S. industry collapsed despite protection. Railroad dieselization and the interstate highways drove down the cost of land transport. The result was the collapse of the merchant marine despite the act. A tiny fleet of 93 Jones-Act-qualified ships schlumps on by having a high-priced lock on transport between the Lower 48 and Alaska, Hawaii, Puerto Rico, and the other insular territories.

This is perverse on multiple levels. First, it forces more U.S. domestic cargo onto the roads. The European Union has no Jones Act equivalent and moves 40% of its domestic freight via coastal shipping (page 22); the U.S. would likely move more considering how close our population centers are to the water. 

Second, it advantages foreign producers in the insular markets. It is cheaper to import from Europe than from the mainland United States.

Finally, it really does screw over exporters from the insular possessions. It is way easier to build up a supply chain when you are in the same country, but the Jones Act cripples Hawaiians and Puerto Rican firms that might want to plug themselves in. 

So we are in the worst of all worlds: high shipping costs but no serious domestic industry. (At least airline protectionism got us a lot of airliners.) Ironically, Malcolm McLean used Puerto Rico to test out containerization back in the day, but now there are no modern container vessels shipping between U.S. ports. One might claim that Puerto Rico is screwed because it is a territory instead of a state ... but Alaska and Hawaii are equally screwed, whereas the U.S. Virgin Islands has somehow wrangled a permanent exception.

So the Jones Act is stupid, but not, as Carlos Yu has pointed out, colonialism. Nor is it the biggest problem right now: supplies are reaching Puerto Rican ports but cannot be distributed due to lack of ground transport. 

What is stupid and colonialism is the refusal by the Trump administration to waive the act in the face of Hurricane Maria, despite such waivers being routine in other disasters. Such disasters include hurricanes which just hit Texas and Florida. Even if the Jones Act is only a marginal contribution to the suffering on the island, the different treatment is unconscionable.

Bad news in tragedy avoided: building codes and the Mexican earthquake

Four days ago, I worried that the smaller force of the recent quake meant that we could not be sure that better building standards were the reason fewer buildings collapsed. There was some pushback in comments, noting that the epicenter was much closer to Mexico City in 2017 than in 1985. There was also some pushback on Twitter making a similar point. The Twitter exchange ended with Leticia Arroyo-Abad presciently saying that we could tell nothing from the size the quake because “it would depend on how different frequencies affect different structures.”

And she is absolutely right. The New York Times now reports that the closer distance of the 2017 quake meant that the shaking was far less damaging to buildings above six stories in height. Moreover, a 2016 study showed that many new buildings did not meet the minimum requirements of the building code. 

This photograph was taken in the same neighborhood as the new high rise mentioned in the NYT article, the one which collapsed. (More details here.) We know people who live in new buildings in that neighborhood. They dodged a bullet. There should have been no bullet to dodge, even in a 7.1 quake. That makes me angry. 

 

The jury is still out, but evidence is piling up that repeat of the 1985 quake would have killed far more people than the one Mexico City just experienced. The heads of bureaucrats and politicians in CDMX need to roll. The Line 12 saga shows that Mexico can have such a reckoning ... and once we are over counting our blessings and celebrating the heroism of the citizenry, this reckoning should be big. 

For a small fee in America: Hurricane Maria and Puerto Rico’s debt burden

Hurricane Maria has devastated Puerto Rico. The worst part is the power system: as of right now, all generation assets are offline. All of them. The Puerto Rico Electric Power Authority (PREPA) says it is going to resume normal functioning on Monday, but nobody knows what that means. The (outdated and expensive) power plants appear to have survived the storm, but the main transmission cables are out. (You can get DOE updates here.) That is why power barges, while useful, won’t solve the problem until the transmission network is back up: the distribution network cannot move the power to the load centers. Besides which, there are not a lot of power barges sitting around ready to go.

Unless the Trump administration allocates an entirely-unexpected sum of money, Puerto Rico is going to need to borrow massive amounts for reconstruction. (In a past America, the GOP might think $10 billion in emergency aid enough to cement Republican control over the island for a generation. We no longer live in that America.) 

The hurricane is going to permanently damage Puerto Rico’s ability to repay. Work by Leah Boustan (Princeton), Matthew Kahn (USC), Paul Rhode (Michigan) and Maria Lucia Yangua (UCLA), using a century of data, shows that natural disasters increase out-migration and permanently raise poverty rates. The latter, of course, is because wealthier people are more likely to move out. Puerto Rico, according to their estimates, will lose around 4 percentage points more of its population over the next decade than it would have otherwise; roughly 140,000 people and the associated economic activity.

That said, the hurricane is also likely to reduce Puerto Rico’s current debt burden. Title III of the Oversight Act (aka “PROMESA”) created a bankruptcy-like procedure for Puerto Rico. Under that procedure, judges and the Oversight Board have a lot of leeway. They will take into account that the island now needs more money and has less ability to repay.

What really needs to happen now is a fast resolution so that Puerto Rico can go back to the capital markets. Investors have short memories; the island will be able to borrow the $10 billion it needs for full recovery. But the existing debt needs to be written down. My worry is not that the debt won’t be written down enough, it is that it won’t be written down fast enough to speed hurricane recovery. 

The hurricane has made it a little bit more likely that the courts will quickly write down debts. PREPA bond prices here; graphed below. They are falling. Puerto Rican general obligation bonds, which are much less likely to be restructured, are not falling; think of them as a control. 

Privatizing PREPA could speed recovery by opening access to the capital markets. But there are two problems. First, in order to unlock the full value from a sale ($3½ billion is credible), you need to restructure the debts first. Second, in order to insure that the new enterprise gets the system in shape fast, you need enforceable performance targets. Many governments have screwed up power privatizations on both counts, so color me skeptical, although in this case the hurricane has likely left no alternative save more time with the lights out. 

In short, the debt burden is going to slow Puerto Rico’s recovery from the hurricane and slow it a lot. But at the same time, the hurricane is also going to speed resolution of Puerto Rico’s debt crisis. Note that these things are not contradictory; better for everyone had the hurricane never happened. For a small fee, indeed.

Good news in tragedy

Mexico City seems to have come through this earthquake much better than it did in 1985. Earlier, I worried that the reason might be that the quake was far smaller on the Richter scale; Dwight Dyer, in comments, pointed out that the epicenter was also much closer to Mexico City and the shaking was likely comparable. 

Is there any way to know if the tightening of building codes helped make Mexico more resilient? After all, it is not like the country stopped suffering from corruption in ‘85. 

One good sign is that it seems that no public schools collapsed during the quake; only 16 experienced major damage. The horror in the southern suburb of Villa Coapa happened when a private school fell in; subject to the new codes but not under the direct control of the federal government. The reason that the performance of the public school matters is that they were all supposed to be retrofitted after the 1985 quake. Their relatively good performance does not mean that the new codes were properly implemented ... but any public school failures would have been a damning condemnation.

Mexico has a lot to be proud of in how it has responded to the disaster. It also may have much to be proud of in how it prepared.

You take hope where you find it.