Category: Current Affairs
Why a U.S.-China trade deal won’t change much
That is the topic of my latest Bloomberg column, here are some bits:
The trade talks are chaotic because a trade deal would be chaotic. By which I mean, it would be difficult to interpret and enforce, not unlike the present situation…
The basic problem is easy enough to state, though it is all but impossible to solve. Many of the U.S. objections to Chinese trade practices, regardless of their merits, are fundamental objections to how the Chinese economy is organized. They are more than mere complaints about easily monitored variables such as tariff rates.
…If a trade agreement is concluded, then, it is likely to have two parts: the parts that are easy to enforce, and the parts that aren’t. To the extent that the U.S. insists on greater Chinese compliance on the easier parts, a self-interested China will respond by shifting more trade onto the difficult-to-enforce parts of the agreement.
The tug of war will never cease. Trump will continue to tweet and move markets. The Chinese will continue to organize their economy to maximize state control. And maybe, over time, we will all recognize the broader truth: In a highly legalistic world, vague and hard-to define-strategies offer a competitive advantage.
Here is a new Reuters piece on how China already had started walking back many of its earlier commitments.
Americans trust their government more than you are being told
That is the topic of my latest Bloomberg column, here is the opening:
Americans’ trust in their government is abysmally low, according to both survey data and a more subjective reading of opinions about President Donald Trump and Congress. I hold a contrarian view: Trust in the actual operations of government is pretty high, and the real growing mistrust is of each other.
Consider first that the Trump administration’s record spending and deficits don’t seem all that unpopular, even among those who detest Trump or might favor different spending priorities. No major candidate is campaigning on a platform of fiscal responsibility and restraint, and that is a sign of high trust in government.
I go through the major government programs, and show they are (mostly) pretty well trusted by the American people. Here is another consideration:
Finally, interest rates on government debt have been remarkably low for years, probably the single best measure of trust in a government; less trusted countries such as Argentina and Turkey have to pay very high interest rates to borrow. The recent rise in U.S. rates is due more to an economic expansion than to rising fears of default.
Here is the basic model:
In reality, as people get older, they rely on government for more and more. While that is indeed a form of trust, it also increases anxiety about those in charge, and their values and priorities. The higher level of anxiety exists precisely because there is, for better or worse, greater dependence. Don’t confuse the resulting nervousness with a lack of trust.
Our leaders aside, we trust the actual operation of government on the ground, so to speak. These days, what we do not trust is each other:
Many Democrats and Republicans do not want their children to marry into the other political party, for instance, and these preferences are growing stronger. So when one branch of the government is affiliated with one of the parties, as it inevitably is, members of the other party will voice a low level of trust. But their complaint may be about the supporters of that branch of the government as much as the government itself.
Recommended.
John Lukacs has passed away at age 95
Here is a Washington Post obituary. Yes, he did write a bestselling tribute to Churchill, but more importantly he was one of the last representatives of a particular central European notion of history and culture. I much prefer the Times of Israel obituary. Here is Wikipedia. The Last European War and Budapest 1900: A Historical Portrait of a City and its Culture are two of my favorite books by him.
Algiers fact of the day
There has not been a single property transaction in the Casbah in 40 years, said Mr. Ben Meriem, the head of the Paris institute. “No buyers, no sellers — for 30 percent of the buildings, we don’t even know who the owners are.”
Among the disused buildings, said Mr. Mebtouche, “eighty percent are owners who have abandoned their properties,” unable to pay for renovations.
Here is the longer NYT story by Adam Nossiter. An excellent piece, though I would like to know more about the underlying regulations and incentives.
What is China’s Belt and Road?
Another form of domestic politics? Here is Andrew Batson on his blog:
The Belt and Road is really the expansion of a specific part of China’s domestic political economy to the rest of the world. That is the nexus between state-owned contractors and state-owned banks, which formed in the domestic infrastructure building spree construction that began after the 2008 global financial crisis (and has not yet ended).
Local governments discovered they could borrow basically without limit to fund infrastructure projects, and despite many predictions of doom, those debts have not yet collapsed. The lesson China has learned is that debt is free and that Western criticisms of excessive infrastructure investment are nonsense, so there is never any downside to borrowing to build more infrastructure. China’s infrastructure-building complex, facing diminishing returns domestically, is now applying that lesson to the whole world.
In Belt and Road projects, foreign countries simply take the place of Chinese local governments in this model (those who detect a neo-imperial vibe around the Belt and Road are, in this sense, onto something). Even the players are the same. In the 1990s, China Development Bank helped invent the local-government financing vehicle structure that underpinned the massive domestic infrastructure. Now, China Development Bank is one of the biggest lenders for overseas construction projects.
Those who defend the Belt and Road against the charge of debt-trap diplomacy are technically correct. But those same defenders also tend to portray the lack of competitive tenders and over-reliance on Chinese construction companies in Belt and Road projects as “problems” that detract from the initiative’s promise. They miss the central role of the SOE infrastructure-complex interest group in driving the Belt and Road. Structures that funnel projects funded by state banks to Chinese SOEs aren’t “problems” from China’s perspective–they are the whole point.
The fact that this model was dubbed the “Belt and Road Initiative” and turned into a national grand strategy by Xi Jinping effectively gave the SOE infrastructure complex carte blanche to pursue whatever projects they can get away with. These projects were no longer just money-makers for SOEs, but became a way to advance China’s national grand strategy–thereby immunizing them from criticism and scrutiny.
And Andrew is always worth reading on music and jazz.
What is the chance we are being visited by space aliens?
That is the driving question behind my latest Bloomberg column, perhaps some of you can be talked up to one in a thousand. Here is the opening bit:
For the last several years, the U.S. military has observed an increase in what it calls “unexplained aerial phenomena.” The rest of us may know them by their more common name — unidentified flying objects — and we should all strive, as the Navy is doing, to take these reports more seriously.
Sometimes, according to the Washington Post, well-trained military pilots “claimed to observe small spherical objects flying in formation. Others say they’ve seen white, Tic Tac-shaped vehicles. Aside from drones, all engines rely on burning fuel to generate power, but these vehicles all had no air intake, no wind and no exhaust.” They also appear to exceed all known aircraft in speed and have been described by a former deputy assistant secretary of defense as embodying a “truly radical technology.”
Meanwhile, Avi Loeb, chair of the Harvard astronomy department, recently suggested that a passing object in space, named Oumuamua, might be a lightsail from an advanced alien civilization, as evidenced by its apparently strange movements.
And this:
Also keep in mind the history of the New World before the European arrival and conquest. There were legends of fair-skinned visitors from abroad, perhaps stemming from the Vikings and their explorations, but one day this “alien contact” turned out to be very real indeed — through Columbus, Cortés and others. To be oblivious of another civilization for a long time, and then suddenly encounter it, is a common theme in human history. Perhaps this has not happened for the last time.
There is much more at the link.
Why Twitter Isn’t Good for Coups
Here is Naunihal Singh interviewed by FP on the uprising in Venezuela–very much in the tradition of Tullock’s classic on Autocracy which argued that so-called popular uprisings almost always mask internal coups and Chwe’s work on the importance of common knowledge for coordinating action.
Naunihal Singh: Here’s the thing: At the heart of every coup, there is a dilemma for the people in the military. And it goes like this: You need to figure out which side you’re going to support, and in doing so, your primary consideration is to avoid a civil war or a fratricidal conflict.
If done correctly, a coup-maker will get up there and make the case that they have the support of everybody in the military, and therefore any resistance is minor and futile and that everyone should, either actively or passively, support the coup. And if you can convince people that’s the case, it becomes the case.
But in order to do this, you need to convince everyone not only that you’re going to succeed, but that everyone else thinks that you’re going to succeed. And in order to do that, you need to use some sort of public broadcast.
What is important here is the simultaneity of it. It’s the fact that you know that everybody else has heard the same thing as you have. And social media—Twitter—doesn’t do that.
FP: And can you tell us why Twitter isn’t really going to cut it?
NS: What broadcasts do is they create collective belief in collective action. Coup-making is about manipulating people’s beliefs and expectations about each other.
If I’m commanding one unit, even if I see Juan Guaidó’s official Tweet, I’m not going to even know how many other people within the military have seen it. What’s more, I would have good reason to believe that the penetration of this tweet within the military will be pretty slight. I have no idea what internet access is like inside the Venezuelan military right now. But I imagine that most military people don’t follow Juan Guaidó’s feed, because doing so would expose them to sanctions from military intelligence, and in that context, it would very clearly mark them as a traitor. But the other thing is this—what we think of as viral tweets operate on a far slower time scale than a broadcast. And coups happen in hours.
…FP: Guaidó delivered his message to Venezuela this morning standing in front of men in green fatigues with helmets on, and armored vehicles in the background. Tell me about how Guaidó is drawing on familiar visual strategies of coups. What did he get right and wrong about the optics?
NS: It’s a dawn video, which is very classic. But there’s a problem: Guaidó does have military people there, but in order to be more credible he would have had a high-ranking military figure standing side by side with him. He can’t make it appear like there’s a military takeover. He also has to make it clear that this is a civilian action and that it’s within the constitution. As a result, he’s standing at the front and he’s got some soldiers in the back, but because they are low-ranking soldiers, it doesn’t mean very much, and it doesn’t carry very much weight.
Public Choice Outreach!
Get your applications in asap for the public choice outreach conference, a crash course in public choice for students from all fields. A great chance to hear from Tyler, Robin Hanson, Shruti Rajagopolan and many others.
Sentences to ponder
She also said Ms. Gardner had ranked reporters in job interviews according to how negative they were regarding tech companies, viewing that as a favorable trait, and had urged Ms. Angwin to run headlines on future stories like ‘Facebook is a dumpster fire.’ Ms. Angwin said her objections had led Ms. Gardner to seek her removal as editor in chief.
Here is the source (NYT), via Tom.
Chinese chieftain of the day
In a bid to enhance interaction and business with the Chinese in Kano State, the Emir of Kano, Emir Muhammadu Sanusi II has approved the appointment and instalment of a Chinese man, Mr Mike Zhang, as a chief and leader of the growing Chinese community in the northern Nigerian state.
Mr Mike Zhang, a Chinese trader in Kano will be referred to as “Wakilin Yan China” after his turbaning on April 25 at the Emir’s palace in Kano. He will be responsible for the proper management of the Chinese community and he would act as their representative in the Kano royalty in times of need.
There are photos at the link, via Tammy.
China fact of the day
China’s major commercial banks have a funding issue outside Beijing’s control: They’re running low on the U.S. dollars they need for activities both at home and abroad.
The combined dollar liabilities at the big four commercial banks exceeded their dollar assets at the end of 2018, their annual results show—a sharp reversal from just a few years ago. Back in 2013, the four together had around $125 billion more dollar assets than liabilities, but now they owe more dollars to creditors and customers than are owed to them.
Bank of China BACHY -0.66% is by far the greatest contributor to the shift. Once the holder of more net assets in dollars than any other Chinese lender, it ended 2018 owing about $70 billion more in dollar liabilities than it booked in dollar assets. The other three lenders actually finished the year with more dollar assets than liabilities, though Industrial & Commercial Bank of China IDCBY -0.33% had a deficit at the end of 2017.
In its annual report, Bank of China says that its asset-liability imbalance is more than addressed by dollar funding that doesn’t sit on its balance sheet. Instruments like currency swaps and forwards are accounted for elsewhere.
But such off-balance-sheet lending can be flighty. As the Bank for International Settlements notes, the vast majority of currency derivatives mature in under one year, meaning they are up for constant renewal and could evaporate during times of pressure.
Here is the full WSJ piece, via Christopher Balding.
Who should Trump pick for the Fed Board of Governors?
That is the topic of my latest Bloomberg column, here is the opener:
First, we should not forget that the Federal Reserve system is actually a private corporation of sorts, albeit one with a unique government-backed charter. So if you are on the board of the Fed, you are not just a figurehead — you are responsible for parts of the company. You could be in charge of the Fed’s pension and benefit plans, for instance, or its payments system.
To be sure, running monetary policy for the entire nation, and to some extent the entire world, is more important than the smooth internal workings of the Fed. Still, those managerial responsibilities will impinge on a board member on a regular basis. If he or she screws them up, it will be harder to have high status within the Fed, and harder to keep one’s confidence and emotional equilibrium. Alternatively, a governor might become completely dependent on aides to perform those internal practical functions. That is not conducive toward broader autonomy on monetary policy front, either.
The bottom line is this: A good candidate for the Fed should have at least some practical managerial experience. You don’t have to be the next Bill Gates or Steve Jobs, but you should be just competent enough to forestall internal crises of bad management and to avoid losing face. For a lot of potential candidates, that is actually a pretty tall order, especially if they come from academia or have unorthodox backgrounds unrelated to finance.
And:
Of course the next board member will also be expected to have well-informed views, however you might define them, on monetary policy and regulation. But it would be a mistake to start with a set of agreeable or required views, and then use it to build a short list of advocates. It bears repeating: For a board member to be effective, political and bureaucratic skills are paramount. Without them, a board member may well end up as counterproductive, even when correct.
Recommended.
Solve for the (tri-state) equilibrium
New York recently approved congestion pricing, a plan to make it more expensive to drive into the heart of Manhattan. Officials in New Jersey are enraged and have griped, half-jokingly, that it will cost less to travel to California than to cross the Hudson River.
And they are vowing revenge.
The mayor of Jersey City suggested that New Jerseyans should toll New Yorkers entering their state.
The ferry subsidy culture that is New York City
One of the new routes Mr. de Blasio announced this year — between Coney Island and Wall Street — is projected to require a subsidy from the city of $24.75 for every passenger, according to a report from the Citizens Budget Commission, a nonpartisan, nonprofit civic organization.
The commission said that the average subsidy for each passenger in the system’s first year of operation was $10.73, far more than the $6.60 subsidy the de Blasio administration originally estimated.
…Although it would cost $27.50 per person to ride the ferry from Coney Island to Wall Street, according to the Citizens Budget Commission’s report, the estimated 1,100 commuters will only pay $2.75.
Those are some high costs for a boat that sits on the water…here is the full story by Patrick McGeehan (NYT).
Will China capture the main benefits from Belt and Road?
Maybe not, that is the topic of my latest Bloomberg column. Here is one excerpt:
I was struck by a recent deal between China and Montenegro that gave China the right to access land in Montenegro as collateral, in case Montenegro does not repay certain loans. This has upset people in Montenegro, and it makes China seem like an imperialist country with territorial designs. But there’s also a more benign interpretation: China is demanding land as collateral because it knows Montenegro is not creditworthy. The loan sent Montenegro’s ratio of debt to gross domestic product to almost 80 percent, from 63 percent in 2012.
To put that in context, let’s say you heard of a loan shark who threatened to break the fingers of borrowers who did not repay. You would sooner infer that was a risky, so-so investment rather than a sure winner.
In essence, China is playing the role of loan shark, and that is not obviously the way to get ahead in today’s world. If China did claim some land in Montenegro as recompense for a bad loan, it might find holding the asset to be more trouble than it’s worth, much as Amazon decided to depart from a deal with New York because of hostility in parts of the city and state governments. If China tried to sell the land, a potential new buyer could never be sure of having enforceable title to the property.
Another problem with Belt and Road, at least from a Chinese point of view, is that China is dealing with many countries that are much smaller in terms of their GDP. There’s a tendency for small countries to renege on deals in hopes that big creditors won’t bother to make an example of them. You might think that smaller countries are easier for China to push around, and there is some truth to that. At the same time, both China and the small countries know that the small countries are not entirely masters of their fates, and so punishment strategies can be counterproductive or occasion more resentment than it is worth. Has the U.S. found it so easy to induce Honduras and Guatemala to stem the flow of migrants toward the border?
And this:
China has proven remarkably poor at supplementing Belt and Road with soft power persuasive techniques using diplomatic and cultural influence. This is no accident, nor does it reflect some kind of stubborn unwillingness of the Chinese to learn to wield soft power tools. Rather, the problem is structural. Since the Chinese government does not derive legitimacy through normal democratic channels, much of its diplomacy and foreign policy have to be channeled to please domestic audiences, whether the citizens or coalitions within the Communist Party. The necessary internal presentation shapes incentives for Chinese foreign policy, and that in turn alienate the other countries China is dealing with.
There is much more at the link.