Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts

Wednesday, May 13, 2020

An Ode to Brad W. Setser

Brad W. Setser has become my favorite USA economist. Richard Posner's prose is turgid; Mohamed El-Erian tends to be vague in order to be safe; Joseph Stiglitz is an academic's dream and a practical person's nightmare; Robert J. Shiller is excellent but not inspirational; Paul Krugman mistakes his intelligence in one specific area for intelligence in all areas; Richard Thaler's Nobel Prize speech was so boring, I couldn't finish it; Jeffrey D. Sach's scholarship is deficient; and Michael Lewis is more journalist than economistWhich leaves us with Dr. Setser. 

Setser's tweets are by far the most educational of any account, not just economics. More importantly, his prose is crisp and clear, something one just doesn't see after the letters "P," "h" and "D" are added to an economist's résumé. In his May 12, 2020 newsletter, Setser manages to summarize 25 years of economics in a single paragraph. See below. 



Any other economist would have included double Irish with a Dutch sandwich; inflation; positive demand shock; services vs. goods; and inequality. In doing so, they would have destroyed any real understanding or become clichéd. Meanwhile, everyone understands "positive shock," "exports," and "low tax jurisdictions," but you don't see such clarity in economics unless a true genius is at work. As Charles Baudelaire once said, "Always be a poet, even in prose." Dr. Setser is the economics world's poet. May he enjoy a long, fulfilling career. 

© Matthew Mehdi Rafat (2020) 

Bonus: I'm also a fan of N. Gregory Mankiw. 

Bonus: Like most economists who've worked for the federal government, Setser has blind spots relating to USA foreign policy. He's not perfect

Monday, April 27, 2020

Capitalists of the World, Unite!

It should surprise more people that idealists are attracted to socialism rather than capitalism. Part of the problem is the economists don't know history, the historians don't know law, and the lawyers don't know economics. Put simply, capitalism seeks to synchronize ever-changing supply and demand for labor and resources, whereas socialism focuses on the inevitability of owners exploiting dispersed workers. When condensed in such a way, one immediately sees the need for regulation; and yet, since people have never agreed on the perfect type and amounts of regulation, it may be useful to analyze the topic differently. 

Globalization needs regulation, but everyone is reluctant to demand it for fear that it may discriminate against them. --  Misha Glenny, McMafia (2008) 

1. Economic Systems Should Not Be Discussed without Historical Context

Countries with strong militaries tend to use their navies to steal not just resources, but human labor from weaker countries. The United States, a slave-owning, capitalist country from inception, used slaves to maximize output from cotton, sugar, and tobacco fields in the 1700s and 1800s. 

America was founded on the double standard. That's our history. We were founded on a very basic double standard: slaveowners who wanted to be free. -- George Carlin

Even aside from anecdotal evidence, we know slavery in the West was handled differently than slavery and indentured servitude elsewhere in the world because few African or Muslim-majority countries have anyone who resembles Shaquille O'Neal or wrestler Mijaín López--indicating some slaveowners selected or bred people for certain traits while others didn't. Given that the Arabs had armies in the Middle East and Africa, were savvy traders, and the Prophet Muhammad's first wife was an affluent businesswoman, was capitalism or religion the difference in the way workers were treated? 

The natural state of human beings according to the Quran is freedom, and all believers are equal in the eyes of God. The Quran repeatedly urges believers to treat their slaves [indentured servants] humanely; to feed, clothe, and educate them; and to free them... Children of a free man are born free, and... the mother of a free man's child becomes an um walid, who cannot be sold. -- Martin Klein, Historical Dictionary of Slavery and Abolition (2014), pp. 307

If we say the former, the Europeans--who invented the first international debt trading markets in Venice and Belgium and the first publicly traded corporation (The Dutch East India Company) in the Netherlands--were as capitalistic as the Americans. So why has Europe become more "socialist" than the United States? Any reasonable answer must include the French Revolution (led by military commander Napoleon) and/or post-WWII agreements, whereby the United States drove global economic growth through military alliances and investment, allowing other countries to spend higher percentages of their budgets on social programs. Was Europe's acceptance of higher social spending the outcome of a non-European country's military victory or a specific economic structure? Whatever your answer, you must admit history, both distant and near, deserves a role in the discussion. 

2. History Shows Military Strength Trumped All Other Considerations, including Economics

At the same time, since many voyages capturing slaves and other resources were funded by companies issuing shares in joint stock companies in exchange for profits (minus royalty's cut), one could argue widespread inequality--both racial and economic--caused by European and American slavery would not have been possible without capitalism. After all, the more people who profit from immorality, the easier it becomes to mistreat labor. Indeed, at one point, the British East India Company had a larger military than the Queen of England's, which is consistent with the Exchequer's funding through imports of (stolen) gold and silver, plus fees on other items, rendering homeland defense subservient to military adventurism. (Defense is a cost most countries try to minimize unless they are empires, in which case they maximize it in hopes of being the first empire in history to avoid certain collapse.) 


If we continue pursuing the "capitalism equals inequality" argument or "more government equals more equality," we may agree America's pernicious treatment of slaves stemmed from a desire to maximize the profit motive; however, we must also admit the country's lack of morality would have allowed its military to go to Africa and coerce or mislead local leaders into selling their human capital under any economic system. Such conversations, with or without government approval, must have involved false promises of work and wealth or threats of genocide, followed by shiny gifts to helpless leaders to give the appearance of congeniality, then a transfer of resources. Remember: there were no videocameras or journalists to document human rights abuses, and almost all English-speaking philosophers and academics of the day believed in the inherent inferiority of non-whites. 

Why should they ask me to put on a uniform and go 10,000 miles from home and drop bombs and bullets on brown people in Vietnam while so-called Negro people in Louisville [Kentucky] are treated like dogs and denied simple human rights? No, I am not going 10,000 miles from home to help murder and burn another poor nation simply to continue the domination of white slavemasters of the darker people the world over. -- USA boxer and conscientious objector Muhammad Ali 

So was it capitalism, racism, Christianity, immorality, and/or military power that most contributed to the lack of fair wages for Africans in the United States? A clue to the best answer involves answering another question: had an arms-length transaction and voluntary departures occurred between white naval officers, African tribal leaders, and individual Africans, would we consider such transactions acceptable even if workers were exploited? Persons convinced they would answer a certain way may want to examine the skin color or guess the immigration status of the next worker they see in the back of a restaurant or agricultural field. 

3. Why Trade at All When You Can Steal? 

By now, Machiavellian types must be wondering why anyone bothers signing trade agreements. If you have the stronger military, why not steal what you need? In fact, this is exactly what has happened for most of human history, which explains our current cultural malaise--and misplaced economic priorities. 

The reason Canada is called Canada is because the Quebecois beat back American invaders. Cuba is socialist and not capitalist because a Spaniard from noble lineage succeeded in repelling American-sponsored troops. The reason the Ottoman Empire is now called Turkey is because it fought on the wrong side of WWI. You think socialist Sweden was really neutral in WWII? The so-called "neutral" Swedes allowed the Nazis to use their rail systems to transport troops and materiel. Too often, economic experts fail to realize a country's success hinges on which side of the most recent war they chose and geographic accident rather than particular economic preferences. It's as if experts think WWI ended one thousand years ago instead of approximately one hundred years ago. 

In fact, by 1932, borrowing by military allies had left the United States with over 40% of the world's gold reserves plus billions of dollars in outstanding European loans. Please read the last sentence again. The allies--the side that won, which also happened to be called the Allies--ended up owing billions of dollars, giving them incentives to maximize the losers' reparations/debt. 

Look closely, and everywhere you look, military and political leaders have erred on the side of expansion or compromise at any cost. Under such historical precedent, economic systems, whether socialist-leaning or capitalist-leaning, have logically prioritized military spending and R&D. 

The Malaysians are observing the agreements they have signed without trying to retaliate in other directions, such as water... which will lead to war. -- Singaporean founder LEE Kuan Yew (July 26, 2013) 

4. Diplomacy Has Failed, but We're Talking about Capitalism

Quick, name three genocides or civilian massacres the United Nations averted. You can probably cite a conflict the U.N. shortened. You might even be able to name peace agreements the U.N. negotiated post-war or post-bombings. Overall, however, diplomatic efforts have been oddly ineffective in reducing weapons sales and military spending.

We find it repulsive that the Western countries that more loudly make rhetorical speeches about human rights are the ones that manufacture most weapons that have killed more than 20 million people in the developing world since WWII. -- Nobel Peace Prize laureate José Ramos-Horta (1996) 

Today, no one talks seriously about nuclear disarmament because the only weapon preventing a larger power from invading a smaller power is a nuclear one. Such is the result of a world where economic futures are subordinate to threats of foreign invasion, coups d'état, sanctions, and/or onerous tariffs. And still, when 
people argue capitalism is the problem, they don't seem to realize diplomacy has failed. 

In some of these situations, the UN is almost absent, for instance in the South China Sea dispute, because China doesn’t want to internationalize the tension by allowing the UN special envoys to be present there... The UN can be present and can act only if the parties involved seek help, otherwise it cannot force itself into those situations. Another issue, Kashmir, is on the UN agenda since Day One but the UN has mostly a residual and symbolic presence, hence it is tolerated by India. There is not much more that the UN can do, at least at this stage. India is far too powerful, and they reject UN involvement to avoid internationalizing the issue and India is not keen to allow the UN to take part in any discussion regarding the status of Kashmir. -- José Ramos-Horta, Nobel Peace Prize Laureate, 2019 interview 

Conclusion

As Western voters divide themselves politically over increasingly meaningless economic terms, the really interesting developments are technological. In some countries, governments have maintained relevance by providing education, healthcare, social services, and public transportation, only to be challenged by less costly private actors, including religious entities responsible for large voter turnout. These governments are in disarray because they have privatized technological development or delegated to allies exempt from domestic regulation to such an extent, private corporations now host military and other confidential data, a similar situation as Britain's outsourcing of important affairs to the British East India Company--which it had to eventually dissolve and bail out. Meanwhile, governments elsewhere have maintained power by controlling or approving technological advances, especially in security, but have not invested adequately in creative enterprises or social services, thereby neglecting social cohesion.

Allow me a prediction: the future will not be about capitalism or socialism, but who controls the technology and under what terms. That's the discussion we ought to be having, and sadly, it's a discussion most voters are totally unqualified to have--which explains why people prefer to discuss the "isms" du jour


© Matthew Rafat (April 2020)


Bonus I: I didn't properly explain the link between slavery, immigration, and capitalism, so let me try again. If USA was not trying to maximize profit and output from its cotton and tobacco fields in the 1800s, it would not have needed to import labor. The importation of slaves is immigration in a sense, and in this case, immoral not because of capitalism--i.e., the desire to maximize profits--but because of the way the labor was treated and paid. 

Note that capitalist USA in the 1900s was able to attract immigrants voluntarily, even though labor conditions were similarly exploitative, because immigrants believed their first and second generations would be better off. Such progression was a function of automatic citizenship rather than a specific kind of economic system, but the demand for immigrants would not have been as high had companies not been able to maximize output under a globalized system of trade. In short, suboptimal diversity is often a function of the lack of investment and need for excess labor (immigration), which is the result of the absence of conditions favorable to the maximization and expectation of profit. 

Bonus II: After I wrote this article, I began to wonder: why didn't USA manufacturing and plantation owners in the 1700s and 1800s hire more laborers from Mexico rather than enslaving Africans? I suspect the French, who had set up shop in Mexico, would have stopped them; and conditions in Mexico must have been pleasant enough not to drive residents to uproot themselves. If my guesses are correct, I would be interested in knowing the relative value of Mexican currency (Spanish dollar and Mexican centavo/peso) to the US dollar in the 1700s and 1800s, though such an analysis might be impossible because the US dollar only came into existence as an agreed-upon monetary unit between 1785-1792.

Bonus III: Why bother with cross-continent trade? Well,  Indonesian cinnamon tastes better than cinnamon grown elsewhere; Iranian dates are juicier than Tunisian dates; and apparently cocaine from the Colombian jungle is the most potent. Why? Growing conditions in some places are more favorable to certain crops than others. Without investors and globalized trade, either fewer people would be exposed to the same variety of items and experiences, or such exposure would be limited based on the whims of not-always competent governments. 

Similarly, talent, like growing conditions, is not equally distributed. For example, MIT is considered to have the world's best technical minds (Harvey Mudd College and Caltech may disagree, but I digress). According to MIT in 2011, "over 40% of our graduate students, over 70% of our postdocs, and about 40% of our faculty were born outside the U.S." How can the United States steal so many talented people? Why aren't these great minds working at universities back home? Part of the answer is the inequality of the US dollar, which has been stronger than other currencies, making it easier to buy products and immigrants from overseas. Economists use the term "attract" rather than "buy" when discussing immigrant labor, but if you want to be hard-nosed, there's really no difference. In other words, the same currency that allows a country to exploit others in trade negotiations also allows it to steal their talent voluntarily--increasing opportunities, innovation, and quality of life for immigrants as well as everyone else. Equality may be a laudable goal, but most people go where they are treated or exposed to better--i.e., unequal--circumstances. Thus, if you are pro-diversity and pro-immigration, you want more inequality, not less--in your favor. 

Finally, trade begets trade. A container ship returning only gold and silver will not be able to utilize space--or afford shipping fees--as well as another ship also transporting spices, clothing, handmade jewelry, and other products. If there is a complaint, the complaint once again involves inequitable treatment of workers, not globalized trade.

Bonus IV: I originally wanted to end this article with the following exchange from a Hollywood movie, but I ran out of patience. Perhaps the dialogue below will stand on its own. From Sabrina (1954): 

Linus Larrabee: What’s money got to do with it? If making money were all there were to business, it'd hardly be worthwhile going to the office. Money is a by-product. 

David: What’s the main objective? Power? [Capitalism?] 

Linus: Agh! That’s become a dirty word. 

Davis: Well then, what’s the urge? You’re going into plastics now. What will that prove?

Linus: Prove? Nothing much. A new product has been found, something of use to the world. So, a new industry moves into an undeveloped area. Factories go up, machines are brought in, a harbor is dug and you’re in business. It’s purely coincidental of course that people who've never seen a dime before suddenly have a dollar. And barefooted kids wear shoes and have their teeth fixed and their faces washed. What’s wrong with a kind of an urge that gives people libraries, hospitals, baseball diamonds and movies on a Saturday night?


Saturday, April 18, 2020

A Building Divided against Itself Cannot Stand

Sabine Weyand, EU director-general for trade:

[Economic] Self-sufficiency is not an option for any country. It's not an option even for any continent.


Bloomberg, "Supply Lines," April 13, 2020: 

Regarding "ventilators, the breathing-assistance machines in short supply across the world [because of COVID-19]... Depending on the model, they can contain as many as 900 pieces sourced from all over the world."
 

We can argue manufacturing interdependence is unconscionably risky, but we can also acknowledge it's sensible for lower wage countries to take a higher share of more routine work. Yet, regardless of your beliefs on international trade, you probably don't know the historical basis for globalization, or even that a globalized economy does not have to be similar to the status quo

To better understand our current post-globalization era, think of the worldwide economy as two landlords in charge of two growing buildings. Until 1945, there were many landlords but most of them were inefficient or corrupt because they lacked a central office and/or the knowhow to attract and develop talent. Most landlords also had difficulty borrowing money and attracting investors on their own, hurting their chances of not only expansion but also basic maintenance. After 1945, only two landlords--the ones with the most sturdy manufacturing designs and access to oil--were able and willing to lease space to interested parties. All other landlords preferred local tenants, were bankrupted, or were indebted to one of the two remaining landlords.

As a duopoly, the two landlords initially agreed not to compete with each other. One landlord--ASU Corp--indirectly created non-competes within its own building by assigning its partners to lead production. As the most knowledgeable entity within the building, ASU used office leases as a launchpad for mutually beneficial long-term relationships. To minimize conflicts, ASU tenants would specialize in certain services and not compete with each other directly--at least not until tenants were able to master the basics of production and consumption. Under ASU's watchful eye, all tenants, as much as possible, would do business only with the landlord and with each other--and only under the landlord's protection, funding, legal principles, and guidance. 

The other landlord-- RSSU Cooperative--showed its strength by designing the most useful structures and facilities possible. It required its tenants to focus on farming/agriculture and infrastructure. In addition, each tenant had to sign a lease allowing the landlord an easement for technological/scientific testing. Like the other landlord, everyone would trade only with each other, but all the transactions in this building would be handled by the landlord, who would station one employee in each tenant's office to monitor trade and also to help facilitate transport and security. 

Over time, ASU's willingness to provide debt allowed its tenants to take more risks and to expand their own businesses--as long as they stayed current on interest and rent payments to ASU each month. ASU's status as creditor to its tenants meant it could dictate not just business strategy, but financial terms. Under ASU's leadership and advertising, transactions substantially increased between all tenants and also with the landlord. ASU's generous debt terms meant each transaction in its building benefitted from a multiplier effect, where the more tenants traded with each other, the better the chances that debts would be paid and values and prices would increase--for everyone. ASU aimed to master production and consumption, not just production.

RSSU, on the other hand, envisioned each tenant providing each other--as well as itself--with tangible and necessary items. It did not trust each tenant to set prices fairly or sustainably. As a result, while its consumers could satisfy all of their basic needs--except for food when harvests failed--each tenant lacked incentives to cater to consumers or to innovate in ways different from the landlord's expressly stated needs. 


I could continue, but you get the point. The multiplier effect of debt allowed one country to expand its influence at the expense of the other while also stealing much of the other's talent. Such economic expansion required continual fine-tuning of products, advertising, and supply chains so allies would not compete excessively with each other and would maximize the velocity of money. This system gave a single country the power to issue trillions of dollars of debt and to use its financial system--backed by tangible oil and intangible digital technology--as the backbone of the world's economy. Over time, as the United States ran deficits to sustain control over an economic system where it could make the rules, it began to lose influence because some savvy tenants were not in its building or refused to play by its rules. (Note: wherever there is a rule, someone subject to it is determining how to circumvent it in order to gain an advantage.)

Using the prior example, 
if a new landlord appears--we'll call this third landlord "ANIC"--and sells similar products cheaper than ASU's tenants, at some point conflicts are inevitable if ASU's deficits and its allies' debts assume ever-increasing values and prices. Moreover, the idea of agreed-upon specialization--whether in software, semiconductors, oil, or gas--looks naive if supply chains can be disrupted by a single tenant. (The USA's Middle Eastern military adventurism after 1973's OPEC embargo attempted to resolve this gap.) To summarize, if 900 pieces are needed to make a ventilator, a wise and trusted negotiator can create 900 friends and allies; however, if the primary negotiator's financial or security skills are deemed unreliable or capricious, opportunities to inspire 900 direct competitors becomes more likely. 

Once we realize trustworthiness is the true underlying foundation of a world economy spread out over multiple and distant countries, we know why the United States succeeded spectacularly from 1945 to 2001. In 1945, General George Marshall and General Dwight Eisenhower represented the best of the United States and used their strength to promote compassion, resolve, honor, and fairness. We need not cite any of their personal statements to prove the latter because the two countries they helped rebuild--Germany and Japan--are two of the most successful countries in the world today, with Tokyo the world's most advanced city in terms of infrastructure. In other words, while the Soviet Union--with its flag's hammer--desired the title of infrastructure expert, it was the United States under Eisenhower and Marshall that actually deserved it. Under these men, the world benefited from America converting its wartime manufacturing capacity to facilitate trade and movement within nations and between them. None of this trade, a version of sharing resources with debt tethering everyone together, would have been possible without trust. 

Fast-forward to 2020. Today's America, after the debacle of the Vietnam war, represents the visions of George Bush Sr., former CIA director, and Donald Trump, real estate developer. These two men view illegal tactics as necessary costs to weaken competitors while creating preferences for their own multi-national ambitions: malls, media, and majestic buildings plus a military designed to maintain currency stability by controlling the world's oil supply. We don't need a crystal ball to see that America in 2020 and in the near future is less likely to attract tenants/allies than America in 1945. 

In the meantime, more "tenants" will move to China's "building," though most will try to lease space with both China and the United States. Others, such as the EU, will try to become Landlord #3. Best case, this straddling will generate bridges between the "ANIC" and "ASU" buildings using a new industry of go-betweens; worst case, currency and legal complications (e.g., money laundering) will force tenants to choose a single lease. 

A "single lease" scenario would lead to a new 1945, where China and the U.S. carve out economic zones similar to the post-WWII East-West divide. (Think Checkpoint Charlie, but with tariffs, laws, and sanctions limiting movement rather than physical walls.)
The straightforwardness of the "single lease" scenario is appealing but would render the future dependent on the integrity and reasonableness of Chinese and American leadership. (Though I wonder: if we get a do-over, why does it feel like the U.S. is the old Soviet Union, and Iraq/Yemen its Afghanistan?) 

I predict most countries will improve domestic supply chains to ensure supplies of essential items, with adequate capacity judged based on emergency needs. Wise politicians will see food and water security as equally important as nuclear and digital technology. How such internal reliance will mesh with existing trade agreements is anyone's guess, but one thing is certain: the post-WWII framework of economic and financial interdependence as the foundations of peace is finished--at least until we see another Eisenhower and Marshall. 

© Matthew Mehdi Rafat (2020) 

Monday, September 23, 2019

There Are No Experts in Politics, Economics, or Justice

Once you realize laws are often drafted by lobbies who care mainly about their own aggrandizement, you realize the legal system--tied to the political system--inefficiently distributes justice and is designed to promote the stability of entrenched interests. 

It is at this point many former progressives become disenchanted with broad legislation, focusing instead on tax revenues. Progressive stalwart Ralph Nader did just that when he convinced USGSA to improve safety nationwide by requiring government fleets to buy cars with airbags, using the government's power of the purse to set a higher standard for all. 

If democratic ideals are to be protected in an age of increasingly frustrated voters, we must train ourselves to look past distractions and optics. Most reform can be effectuated best at local levels, but not if local budgets become co-dependent on state and federal grants.

An example of this co-dependency is California's practice of sending local revenues, including sales taxes, to the state legislature, which then returns the revenue to municipalities based on complex negotiations. Now your police department isn't funded by locals, but by the state, corrupting community ties.

Incredibly, it gets worse. To compete with the private sector and improve employee loyalty and retention, governments began approving benefits with long-tail consequences. Pensions are the obvious example, but so are privatized toll roads, which became private when governments decided to sell future revenue streams. 

We forget governments have not always been granted infinite duration status for purposes of borrowing money, which allows them to commoditize expected taxpayer revenues. In many places, including Mexico, the government had to borrow from the Catholic Church. Only after the Mexican government discovered--or reclaimed from Catholic Spain--gold and silver mines did it have a more independent funding mechanism. Yet, even today, the most expensive building in many Mexican cities is owned by the Catholic Church. 

With respect to good governance, few experts exist, and the ones who consider themselves experts are often elevated based on single country breakthroughs. If any statement ought to inspire optimism, it's the idea that anyone, anywhere, has as good a chance to invent new practices on par with society's thought leaders--as long as they rely on comprehensively attained personal knowledge. Invention and implementation are separate functions, of course, but that explains the schism we see today: the optimists focus on new ideas, while the pessimists remind them of unintended consequences. One day, perhaps these two groups will realize they need each other and collaborate constantly to maintain a sustainable balance. 
Afghanistan War Memorial, seen in NurSultan, Kazakhstan

© Matthew Mehdi Rafat (2019) 

"A society that has more justice is a society that needs less charity." -- Ralph Nader 

"Justice is the end of government. It is the end of civil society." -- Alexander Hamilton

"I think the first duty of society is justice." -- Wendell Phillips (1861) 

Monday, June 24, 2019

Modern History: Ports, Finance, Power, and Free Trade (1919-2019)

I've discussed modern history before, but I see no harm in trying again. Summarizing any time period is bound to exclude important events and people, and assigning exact percentages of influence is impossible. (For example, Elon Musk is better known than Martin Eberhard, but the latter founded Tesla Inc., and Eberhard surely benefited from GM's EV1 research in the 1990s.) With these two caveats in mind, let's continue. 
"Europeans... are the conflicted inheritors of a long military tradition." -- Justin Vaïsse
In 1919, WWI's devastation forced Germany (aka the Weimar Republic) to accept the Treaty of Versailles' onerous terms, which did not contemplate re-establishing Germany as an equal member among world nations. In 1920, the League of Nations, the precursor to the modern United Nations, was convened, but its difficulty enforcing terms contrary to Britain and France's wishes meant true diplomacy was limited from the start. Indeed, in 1922, after Germany claimed it couldn't make its scheduled reparations payment, France and Belgium invaded the Ruhr in 1923 and occupied Germany until 1925 to ensure deliveries of coal, iron, steel, and timber. 

Inflation, high unemployment, and Germany's lack of a stable currency made it hard to administer the German economy in mutually beneficial ways. In 1924, the Dawes Plan, for which Charles G. Dawes and Austen Chamberlain received the Nobel Peace Prize, injected American capital into Germany, shifting much of the burden of German reparations onto American bondholders, creating a more probable repayment scenario and convincing French and Belgian occupiers to leave the following year. 

The United States's credibility in international relations derived in part from its large post-WWI gold reserves, some of which were housed at Fort Knox (built in 1918). Although the U.S. dollar ceased to be backed by gold reserves in 1919, Britain in 1925 returned to a gold bullion standard, likely causing potential investments to leave European neighbors and the United States and enter Britain--around the same time American bondholders had taken risks in stabilizing Europe. Britain's action assisted it in repaying its own debt to the United States as well as signaling an answer to declining wages and inflation across Europe, but had the unintentional effect of France devaluing its own currency to undermine Britain's desired status as superior trade exporter. In choosing the gold standard, Winston Churchill wanted Britain to be both a financial and trading center during a time when America was reeling from the Teapot Dome scandal and President Calvin Coolidge was preoccupied with Latin American affairs: 

I believe that the establishment of this great area of common arrangement [aka the gold standard] will facilitate the revival of international trade and of inter-Imperial trade. Such a revival and such a foundation is important to all countries and to no country is it more important than to this island, whose population is larger than its agriculture or its industry can sustain which is the centre of a wide Empire, and which, in spite of all its burdens, has still retained, if not the primacy, at any rate the central position, in the financial systems of the world. (Churchill, 1925, to Britain's House of Commons)

Although the initial effects of a strong pound/sterling attracted investment, Britain was unable to stimulate demand, leading to sustained unemployment. Meanwhile, in America, taxes were slashed, consumer credit extended, and wartime manufacturing capacity transitioned into peacetime production. Such success led to increased borrowing generally and speculation in America's stock market. 

By 1929, greater complexity in currency obligations, international trade, and wage stability prompted the creation of the Young Plan (promoted by America's J.P. Morgan, Jr. and finalized on August 31, 1929) to supplant the Dawes Plan in 1930, but it was too late. In Germany, the National Socialists (aka Nazis) sought a "Liberty Law" (aka Law against the Enslavement of the German People) to disavow all reparations, which was overwhelmingly voted down on October 16, 1929. Even so, on October 24, 1929, America's stock market crashed, perhaps anticipating global instability and large losses in its German-linked bonds. The German government's rejection of the "Liberty Law" increased Adolf Hitler's and the National Socialists' visibility when they took the proposal directly to the German people on December 22, 1929. On January 30, 1933, Adolf Hitler was appointed Chancellor of Germany. In 1938, Hitler invaded Austria, setting in motion WWII from 1939 to 1945. 

Britain would abandon the gold standard in September 1931, about two years after America's October 1929 stock market crash. By 1933, almost two-thirds of world trade had vanished. That same year, President Franklin Delano Roosevelt banned private ownership of gold bullion, gold certificates, and gold coins, intending to remove impediments to the devaluation of the U.S. dollar in 1934. 

(Bonus: Germany did not pay off the interest owed on its reparations debt until 2010. As of June 2019, Germany has the strongest economy in Europe, and one of its banks has loaned billions of dollars to the current president of the United States, a man sometimes compared to a former German Chancellor. With "Brexit," Britain continues to vacillate between maintaining preferential American relations or becoming a full member of a new Europe, where it will compete with non-English-speaking France, non-EU Norway, and Germany.) 

In July 1944, forty-four Allied countries attended the Bretton Woods Conference in New Hampshire, where they, anticipating Germany's defeat, looked ahead to a new international paradigm led by the United States. In 1945, Congress ratified the Bretton Woods agreement, establishing a new gold exchange standard promoting currency convertibility, the International Monetary Fund (IMF), and the World Bank. The USSR (aka the Soviet Union), one of the primary reasons for Germany's defeat in WWII, did not ratify the Bretton Woods agreement and did not join the IMF or the World Bank. With respect to the gold standard, America, anticipating greater spending and involvement in the Vietnam War, once again forbade private ownership of gold in 1961, then de-linked the dollar with gold in 1971, four years before its defeat in Vietnam. 

(Bonus: from Allison J. Truitt's Dreaming of Money in Ho Chi Minh City (2013): "The United States' massive military expenditures in Southeast Asia led to the collapse of its ability to maintain the dollar's fixed value relative to gold. When the US government put an end to the dollar's convertibility in 1971, it ushered in a new era of more flexible and more volatile exchange rates.")

After 1945, naval power plus nuclear and satellite-related technology plus natural resources (e.g., oil) determined which countries would set the rules of the world. America could set many of these rules because its two neighboring oceans had afforded it the protection to enter WWII late, minimizing its human and materiel losses. Having the advantage of only needing to rebuild a single state (Hawaii) rather than numerous cities, America was willing to assist other players through a mutually beneficial system in which it distributed power--and favor--through ports, loans, and trade agreements. 

Countering America's power were the Soviet Union--equally determined to spread its economic system--as well as a China comfortable in being isolationist in the short term. The task of rebuilding infrastructure required not just the possession and transport of raw materials but implicit assurances of reliability. Hence, shipbuilding, ship repairing, refueling stations, and port efficiency became prized skills, and strategically-located countries like Singapore, Hong Kong, and Taiwan (aka Chinese Taipei) became valuable allies. 

To diminish the West's military strategy of choosing a small country along a strategic shipping (e.g., Singapore, Eritrea, Falkland Islands) or geographical (e.g., Poland) point, then shepherding that country into an alliance at the expense of its relations with its neighbors, the East attempted to use the same strategy with Cuba and other countries, primarily Vietnam and Mongolia. The East's mimicking of the West in this regard failed, in large part because its comparatively underdeveloped banking, legal, and insurance sectors could not generate similar investment returns, leading to slower income growth (though less inequality) and personal dissatisfaction in Eastern countries. By the 1980s, the resource-rich Soviet Union was borrowing money from Western banks because its ruble was not freely convertible to other currencies, foreshadowing its 1991 dissolution. 

While both the Soviet Union and China pursued a strategy of self-sufficiency, America demurred, using its naval power and satellite countries (Singapore, Taiwan, South Korea, Saudi Arabia, Israel, South Africa, United Kingdom) to increase its share of worldwide foreign trade. By 1962, America's Trade Expansion Act allowed President Kennedy to reduce tariffs by up to 80%, increasing foreign trade and therefore the influence and strength of the U.S. dollar. 

The Soviet Union's failure to create multinational banks--resulting from the assumption its vast natural resources and military strength were enough to maintain empire--meant its economy and ability to project power depended wholly on oil prices. The Soviet Union's lack of economic diversification also exacerbated competition, most pitched during WWII, between the East and West for control of oil supplies. 
Such competition had the effect of requiring large military expenditures to deter others from seeking similar control, rendering empire and power contingent on military and industrial cooperation. As oil, naval efficiency, and multinational banks became more important to an increasingly globalized and interdependent economy, military spending began driving economic growth. To protect investments and jobs, large financial outlays were channeled through an increasingly smaller elite, often associated with banks, insurers, and military on national levels; educators, natural resource producers, and unions on state levels; and real estate development and police on local levels. All aforementioned players would have access to financial terms and conditions unavailable to most people outside their spheres, allowing debt to inflate their influence at the expense of perhaps more innovative competitors. Most troubling, the projection of external power backed by foreign currency into a developing nation disfavored minorities and dissidents within such nations, sometimes with violently tragic consequences. 

As the West's international influence grew through debt and trade agreements, so did domestic vested interests, making substantive change increasingly difficult. For example, though the 2007-2009 financial crisis was caused by excessive debt and lax financial regulation, by 2019, overall debt had increased beyond its 2007 threshold. Such debt was deemed necessary to project influence or gain access to lucrative markets, though wise politicians found a balance between foreign trade and domestic infrastructure spending. As competition increased between major powers--designated by access to the most advanced nuclear, AI, cyber-warfare, surveillance, and satellite technology--risks continued to multiply in the interlinked worldwide economy. A rising EU, China, and Russia meant post-WWII alliances such as U.S.-led NATO no longer yielded the same positive economic or humanitarian results. [From UNHCR (2019): "the number of people who are forcibly displaced globally is indeed at an all-time high since the end of World War Two."] 

With technological advances outpacing cultural understanding (e.g., seamless and accurate language translations), negotiation and cooperation within the same geographical spheres became unwieldy and ROI uncertain, causing politicians to use tariffs and other measures to favor their own technological platforms, currency, and media content. In addition, the desire for consistent debt repayments made monopolies more acceptable and free trade's premise of fair competition less benign. 

Part of the problem was that overlapping and trans-continental trade agreements were based, at their root, on economist David Ricardo's ideas of tangible trade between just two nations: Portuguese wine for English cloth. In short, the global trading system assumed a paradigm of clear laws, finite trading partners, mutually beneficial cooperation, and tangible products. In reality, countries favoring fair play had to contend with greater unpredictability in consumer demand, tax revenues, informal economic actors, and domestic resource needs, making them more dependent on debt. As such, "free trade," especially within the context of intellectual property rights, favored developed over developing nations, and corporations over individuals, with developing nations often pledging fealty to one particular developed country over another to gain access to capital. 

Despite perennially low (and sometimes even negative) interest rates, the economic stability promised through open markets and respect for domestic producers had not come to fruition, reducing esteem for moderate Western politicians and existing practices. Smaller or less developed countries began to better utilize trade associations such as ASEAN or to develop new ones like the African Continental Free Trade Agreement (AfCFTA), realizing their local consumer populations were sufficient to improve living conditions without excessive interference by developed countries. The more developing countries began to wean themselves from post-WWII economic rules, the more the future of capital and labor became unpredictable, causing a rise in extremism. As governments, mostly in the West, realized they had sanctioned a technologically-driven economy without any firsthand technological expertise, they enacted flaccid countermeasures which further damaged their credibility. In 2019, tech corporations, often run by executives not subject to removal due to supermajority voting shares, began exploring plans to issue their own currencies

[W]e believe that the right to coin money and issue money is a function of government... We believe it is a part of sovereignty and can no more with safety be delegated to private individuals than can the power to make penal statutes or levy laws for taxation... I [say] that the issue of money is a function of the government and the banks should go out of the governing business. 

-- William Jennings Bryan, American, anti-imperialist politician, in 1896 

By summer of 2019, the first stanza of W.B Yeats' 1919 poem, "The Second Coming," written after WWI, seemed tailor-made for the present: 

"Turning and turning in the widening gyre 
The falcon cannot hear the falconer; 
Things fall apart; the centre cannot hold; 
Mere anarchy is loosed upon the world, 
The blood-dimmed tide is loosed, and everywhere 
The ceremony of innocence is drowned; 
The best lack all conviction, while the worst 
Are full of passionate intensity."

So it goes

© Matthew Mehdi Rafat (2019) 

Friday, June 14, 2019

Lessons in Counterintuition

1. A popular survey question purports to expose our innate irrationality. It goes like this: you can have 100,000 USD if your enemy or your ex-spouse gets 1 million USD. Apparently, most respondents declined the offer. 

But all one has to do is add more nuance to the scenario to get a different overall response, thereby exposing the original question as meaningless. Try this: you have non-dischargeable debt of 50,000 USD. You can have 55,000 USD if your enemy receives 550,000 USD. Answers to the second question will be more varied, indicating short-answer surveys don't offer enough nuance to justify their cost or relevance. 

When such deficient "research" is passed off as newsworthy, serious journalism has died in America, but I'm also worried about inattention to the sociology field. Medical advances, especially in neuroscience, are leading governments and academics to focus on psychology and pharmacology departments without the involvement of independent entities capable of institutional knowledge. Absent relevant and reliable anecdotal evidence, scientific researchers may spend taxpayer and other funds chasing chimeras. 

2. Speaking of a failure to appreciate nuance, people are worried about AI's ability to increase unemployment. 
One person believes AI may wipe out 47% of existing jobs in America,
an astoundingly specific number.
Yet, the AI problem may be even bigger than unemployment if the world's technological AI race gives existing leaders--not necessarily in power by merit--the potential to cement their advantage over others, snuffing out change from local sources. 
Roberto Unger's Free Trade Reimagined (2007).
Imagine a robot that can scan all local residents for weapons as well as criminal records. No longer would a rural recruit dropped in a foreign land need be in a position to kill unarmed civilians. No longer would a wary security guard at a private establishment need assume every patron a potential threat. 

But let's fast-forward to the future. The aforementioned technology has made it easier to invade and occupy different lands if only to prevent another competitor from doing the same. Thus, while such technology would make the weak and unarmed safer in the short-term, the long-term picture is unclear. Nevertheless, if modern history is any indication, one can imagine this technology leading to more occupation, then removal of armed resistance to foreign culture, and finally the supplanting of local culture, beliefs, and methods. In one fell swoop, the same AI technology that protected the weak and unarmed has now extinguished the capacity for the same residents to achieve Roberto M. Unger's "diversity" component--leading to perpetual dependency on a foreign power. 
From Unger's Free Trade Reimagined (2007). 
Unger discusses diversity in ways unlike any other economist or political thinker. In order for workers not to be left out as innovation and creative destruction are financed by larger players, he argues it is imperative that 1) local entities are able to innovate in their own ways, unconstrained by centralized norms (another way of saying local culture ought to be supported through "collective experimentation" rather than subservience to centralized market forces); and 2) all entities are able to disregard prior norms if doing so would improve conditions for both capital and labor. 
From Roberto Unger's Free Trade Reimagined (2007)
Unger's "economic diversity" is the characteristic most under threat with advanced AI--despite not a single politician articulating this potential problem apart from anti-trust concerns. 

3. More lessons in counter-intuition: Country A has an 80% poverty rate. Country B has a 50% poverty rate and a democratic political system. Without knowing more, which country has the better chance of avoiding societal cohesion problems in the next 50 years? 

You'd think it would be the country with less poverty, but America in 2019 proves that when at least half of a country is able to structure the tax code, government funding, and housing inflation in ways that benefit existing interest groups, anyone outside those groups is left behind not just relatively but absolutely. (For the economics wonks: I use these two terms informally, but Unger uses David Ricardo's comparative advantage vs. Adam Smith's absolute advantage as an overall framework, at the same time casting doubt on Ricardo's ideas due to their limited scope, i.e., trade between just two countries using just two popular products.) 

Where economic theory typically fails is its inability to properly incorporate the social costs of underinvestment, meaning over time, absent some mechanism--such as widespread and cost-effective public transportation, genuinely merit-based and affordable colleges, etc.--segregation occurs, cementing physical and abstract (e.g., communication) gaps and reducing opportunities for reconciliation. Worse, as existing winners gain more affluence, they begin to see others outside their increasingly closed-loop system as morally deficient, eventually rejecting public institutions as the costs of reconciliation increase exponentially every year effective solutions are not implemented. (American acceptance of exorbitantly expensive private K-12 schooling is one example of such a breakdown--as if even one K-12 school not properly educating future voters in a democratic system providing equal votes to each citizen is acceptable. As I've written before, "Generally, long-term costs of exclusion, even if unintentional, far exceed the costs of inclusion on the front end.")  

In contrast, a country with an 80% poverty rate cannot easily segregate the country excessively or irreversibly. Any national public works program must consider more rather than fewer residents by demographic default. Moreover, the cost of essential items such as housing cannot be inflated beyond a point of no return even with the assistance of the banking sector unless wages also rise among a greater percentage of the population. To sum up, it is better for individuals to be rich than to be poor, but not necessarily for countries. 

© Matthew Rafat (2019)

Bonus I: "Free trade will flourish when the rules of the world trading system are designed to reconcile openness and diversity, not to suppress diversity in the name of openness." -- Roberto M. Unger 

Bonus II: "Humanity can become more unified only by seeking to develop in different directions... [so as] to establish a machine for the creation of collective difference [that supports] alternatives by making the world safer for them." -- Roberto M. Unger 

Bonus III: continuing the third example above, one can see developing countries' biggest problem is not technological access, but corruption. Why? Because developed countries' need for more consumers, including ones willing to spend beyond their means, will lubricate technological transfers so as to establish platforms. A governor or president who chooses the wrong transportation company contract or who builds asphalt roads instead of Tokyo-style trains is a developing country's greatest threat to long-term success. 

Even if a developing country chooses well, only half of the battle has been decided--for example, if a train is chosen but goes over estimated costs, not only will the government lose taxpayers' money while further mortgaging its citizens' futures to foreign banks, it will also lose credibility, weakening its ability to govern and to regulate.