Sunday, February 7, 2016

The Baltics and Antidisestablishmentarianism

I am changing my mind about U.S. defense spending.

Isolationism is appealing - let the rest of the world take care of itself while we trade and prosper inside fortress America.  The problem is that the U.S. will not stick with this strategy if the world changes in ways we don't like.  If the U.S. allows gradual adverse change, it is likely wake up one day, find the state of the world unacceptable, and intervene massively.  It might be better to recognize that we lack the discipline to allow the rest of the world to go its own way.  Constant deterrence might be cheaper in the long run than occasional world wars.

This week it was revealed that war games conducted by the RAND Corporation show that Russia could take over Estonia and Latvia within 36-60 hours. NATO, given current capabilities, could not stop them. 

Two years ago, before the Russian annexation of Crimea, such a scenario seemed extremely unlikely.  The cost of lowering the probability of events with already negligible likelihoods even further did not seem worth the cost.  After Crimea and eastern Ukraine, a Russian takeover of the Baltic countries does not seem so unlikely.  The U.S., however, has made absolute commitments to defend the Baltics.  Six months after the annexation of Crimea, in a speech given in Tallinn, President Obama said:
[W]e will defend our NATO Allies, and that means every Ally. . . . And we will defend the territorial integrity of every single Ally. . . . Because the defense of Tallinn and Riga and Vilnius is just as important as the defense of Berlin and Paris and London. . . . Article 5 is crystal clear: An attack on one is an attack on all. . . . We’ll be here for Estonia. We will be here for Latvia. We will be here for Lithuania. You lost your independence once before. With NATO, you will never lose it again.


Now we know that this was empty talk - Obama does not have the ability to prevent a loss of Estonia's independence.  It is the exact opposite of talking softly and carrying a big stick.

If Russia invaded the Baltic region, the U.S. would have a choice of hot or cold war.  Both would be very expensive.  Given the nature of the U.S., simply recognizing the change in power and conducting business as usual would not be an option.

The RAND Corporation argues that a one time expenditure of $13 billion plus $3 billion annually on armor, artillery, soldiers, logistics, and air and naval support would be sufficient to have a good chance of deterring a Russian invasion of the Baltics.  It seems like a reasonable investment given the risks and the huge costs of the alternatives.

The RAND Corporation is as "establishment" as anything can be.  The release of this study probably means that the establishmentarian candidates for president will move in this direction, while the disestablishmentarian candidates, Sanders, Trump, Paul (now out), and possibly Cruz, would not. 

On this issue, I am afraid I am convinced by RAND, and a supporter of antidisestablishmentarianism.

Wednesday, February 3, 2016

Iowa Caucus Report

Because our household is mixed, I can report on both the Democrat and Republican caucuses.

Iowa City was Sanders territory.  The young and male felt the Bern, while the old and female clustered in gymnasium corners for Hillary.  It was sensible middle-aged women versus angry young men.  Moms versus sons, with dads going both ways.

Republican turnout was larger than I had ever seen.  Most of the same old regulars, but also a lot of young people.  More than 5% of the group was black, which surprised me.  A black man gave a speech for Trump, an earnest college boy spoke for Rand Paul, and a wild-eyed Cruz supporter who railed against Islam was chastised by a Kasich man.

Too many speeches were read from campaign websites, but I still had a strong sense that I was in the Norman Rockwell painting of a town meeting.



Rubio won our caucus because he was seen as both conservative and electable.  As always, the only thing 95% of the attendees cared about was the horse race, leaving a few party regulars to select delegates, supposedly the real purpose of the caucus.

There are a lot of possibilities, but if I had to, I would bet on Rubio beating Clinton this fall.

Saturday, January 30, 2016

Italian Immigration

At a conference this month I heard a prominent terrorism expert answer a question about immigration.  He cautioned against limiting immigration, posing what he saw as an absurd hypothetical question: "What if we had banned Italian immigration in the 1920s because some of them were in the mafia?"

What this expert apparently didn't realize is that the U.S. did end mass immigration from Italy in the 1920s!  The immigration act of 1924 cut immigration from Italy by 98% from peak levels.  Quotas were put on many different countries limiting annual immigration to 2% of the number of people born in that country present in the U.S. in 1890.  These quotas remained until new immigration legislation was passed in 1965.

Most arguments for mass immigration claim that immigration produces economic growth.  My calculation of real per capita GDP growth from 1924-1965 is 2.4% per year, while the rate from 1966-2015 is 1.8%.  During the 40 years before 1924 the rate was 1.4%.  Of course, this is a very simple-minded test of immigration policy, and many other factors were at play during these periods, but the period of immigration restrictions does not at first glance appear to have been badly affected by the quotas.

Americans wanted to curtail Italian immigration for many of the same reasons that some want to curtail immigration today.  Most Italian immigrants made positive contributions to the U.S. economy, but a small minority were anarchists, terrorists, and criminals.  Because terrorists and criminals damage the overall economy, they can easily outweigh the positive contributions made by the majority.  While I accept that the Italian Mafia made some positive contributions to American culture and the American economy, there were also large costs, particularly from the monopolization of certain industries.  Cutting the rate of Italian immigration from 1924-1965 might have been a great help in the eventual dismantling of the Mafia. 

If mass immigration from southern and eastern Europe had continued, the balance of political power would have shifted.  Immigrants might have allowed Democrats to keep control of congress in 1946, and might have convinced President Truman to run again in 1952.  I think that having a Republican president during the 1950s moderated the excesses of the New Deal, and was an overall benefit, although of course others would see Democratic Party dominance as a positive.

Mass immigration from low-income countries would also have increased income inequality much sooner, and the level of inequality today might be much higher than it is.  Greater income inequality might have pushed American politics even further to the left.

At first glance, I do not see large costs associated with the immigration quotas imposed from 1924-1965, and I don't think that those calling for quotas now are as crazy as they are being portrayed.

Sunday, January 24, 2016

Chinese Highways

I have been on the road all month, and all over Jamaica on business for the past few days.  I was struck by a gigantic infrastructure project here that is almost finished - a modern, divided, four to six lane highway system connecting Kingston, Montego Bay and Ocho Rios called Highway 2000. A few sections are done, and we drove on them and on the old roads - the new highways are very impressive, and a major improvement over the old potholed, twisting roads.

The project was originally going to be built by a French contractor, but they ran into technical problems with Jamaica's rugged geography and apparently paid a Chinese company to take over.  The entire project is now being funded by the China Harbour Engineering Company, a subsidiary of the China Communications Construction Company, which is owned by the State-owned Assets Supervision and Administration Commission, which is a special commission of the State Council, which is the government of China.  The total cost of the project is around three quarters of a billion US dollars.

It is difficult to tell from press reports and talking with locals, but it seems likely to me that the French ran into problems with earthquake risk that they were unwilling to take responsibility for, and so the Chinese jumped in.  The roads will cut travel time between major Jamaican cities in half.  I can attest to the fact that the new road will also dramatically reduce vehicle repair costs and increase road safety.  The old roads are lined with vendors, but a local assured me that they will not lose much business, because the tolls on the new roads will be too high for most Jamaicans, who will keep using the old roads.

While the French financed their work with bonds to be repaid with toll revenue, the Chinese are paying cash and receiving grants of land along the new highways.  They will construct luxury resorts on the land. 

The project illustrates two important trends; the rise of China, and the increase in income inequality.  When the transcontinental railroad was built in the U.S. in the 1860s, it was financed in a similar way - the construction companies were given grants of land along the railroad, and they made money by selling and developing the land, in addition to what they made directly from passengers and freight.  Back then, China provided manual labor.  Today they are providing capital, and they are out-competing Western companies.  They might be doing it by ignoring environmental and earthquake safety issues, but they are doing a better job of winning customers than Western companies.  By contrast, the West is losing popularity here by providing loans through the IMF with unpopular conditions attached, such as reducing
subsidies for staples, raising taxes and reducing government spending.  The Chinese are seen as offering a much better deal.

The U.S. transcontinental railroad was built for all social and economic classes.  Poor immigrants used it to go west, middle-class Americans used it to travel for business and leisure, while the wealthy paid first-class fares to do the same things.  The U.S. interstate highway system is also a democratic project, with free or very low-cost access to the entire country.

The Jamaican Highway 2000 project, however, will price most Jamaicans off of the road.  It is designed for wealthy tourists to travel to gated, all inclusive resorts, and for large businesses to reduce their operating costs in Jamaica.   Income inequality is a natural result of differing talents and inclinations between people, and it varies from time to time as new technologies randomly favor different skills.  It is augmented or attenuated, however, by government policies such as protection of monopolies, insurance against failure, and subsidies of infrastructure used primarily by certain classes of people.  Protected monopolies can be those of laborers, barbers, bankers or industrialists.  Insurance can be against old age, disability, or the failure of large businesses.  Governments can subsidize the infrastructure of poor or rich neighborhoods. 

Highway 2000 is an interesting case.  Taxpayers in China are financing the construction of highways in Jamaica that will be used by wealthy people and businesses.  They hope to recoup their investment by owning luxury resorts adjacent to the highways.  These resorts will employ many low-income Jamaicans, and they will enrich their owners.  The highways will facilitate business, but mostly big business.  The overall effect on growth and equality is difficult to predict, but it seems less likely to promote a middle-class society than the transcontinental railroad and the interstate highway system did in the U.S.

Monday, January 18, 2016

Corrupt Cities

I just saw a presentation of an academic paper titled The Geography of Financial Corruption, by Sheridan Titman.  He finds that cities vary in the amount of financial misconduct that is observed, and that it is correlated with other measures of non-financial corruption.

The least corrupt cities in the U.S. are Indianapolis, Seattle, and Minneapolis.  The most corrupt are Dallas, St. Louis, and Miami.  Firms in corrupt cities apparently have more difficulty accessing capital, presumably because national lenders are wary of firms in these cities.  There must be compensating advantages for firms that decide to locate in freewheeling environments.

I am traveling in Florida this week, and the combination of the paper result about Miami and the tremendous wealth that is on display here reminded me of the phrase from Balzac;  "Behind every great fortune is a great crime."

At the conference we discussed the idea of "optimal corruption," and whether some cities might be wealthier because they are somewhat corrupt.  Theodore Dalrymple discussed the idea 15 years ago comparing the economic development of Italy and Great Britain.  If regulations or mores are overly restrictive, then violations of them might be welfare-enhancing.  On the other hand, economic transactions are more efficiently evaluated when there is trust between the counterparties, and strong rules and a culture of respecting them produce more trust.  It would be interesting to try to test whether corruption is associated with higher or lower city economic growth after controlling for other factors, and whether the relationship is non-linear - in other words, whether or not there is an optimal level of corruption that is not zero or 100%.

Saturday, January 9, 2016

ASSA Meetings

A few takeaways from the annual meeting of economists that was held in San Francisco this past week:

1. Influential people continue to be very interested in the possibility of eliminating physical cash.

2. Economists overestimate the value of new infrastructure investment.  (I will write more on this later)

3. Important people are taking Robert Gordon seriously, thinking that rapid economic growth might be over for the U.S.

4. Canadian median income now exceeds U.S. median income.

5. Syrian refugees are displacing native Turkish workers at far lower pay.

6. The right wants to end occupational licensing for low-income occupations, the left wants to end it for high-income occupations.

7. On crime, economists mostly agree that:

   a. Prisons reduce crime
   b. Police and police equipment reduce crime
   c. Guns increase crime
   d. The U.S. death penalty does not deter crime
   e. Abortion availability reduces crime (with an 18 year lag)
   f. Leaded gasoline caused crime
   g. Crime is very costly

Friday, January 1, 2016

Political Predictions

A new year is a good time to make predictions, and the beginning of an election year brings politics to mind.  Where are American politics heading?

The structure of U.S. elections and congressional representation makes a two party system inevitable, but the basic coalitions that make up the two parties changes periodically.  During much of the 20th century, for example, the Democratic Party was composed of Southern segregationists and liberal Northerners.  The contradictions of that coalition eventually broke the party apart, and the two parties realigned into new coalitions.

The modern Republican Party is an alliance of economic and social conservatives.  These parts of the party are as incompatible as segregationists and liberals were in the Democratic Party of the 1950s, but they have been held together for decades.  Donald Trump is testing the ability of the party in its current configuration to survive. 

My guess is that we are witnessing the emergence of a middle-class party and an ends-against-the-middle party, which will retain the old names of Republicans and Democrats.  The Republican platform would be as follows:
  • Strong support for Social Security and Medicare
  • Employment-based, subsidized medical coverage
  • Higher taxes on the wealthy
  • Reduced immigration
  • Moderate social conservatism
  • Non-intervention in foreign affairs
  • Break up big banks and monopolies
  • Trade protectionism
  • End of affirmative action
  • More employee protection, less environmental protection
The Democratic platform will be:
  • High taxes on the middle class, loopholes for the wealthy
  • Generous welfare for the poor
  • Cuts to Social Security and Medicare
  • Aggressive intervention in foreign affairs
  • Free trade
  • Increased immigration
  • Strong environmental protection (but defend private jets against Republican initiatives)
  • Affirmative action for increasing variety of minority groups
The Republican Party will dominate the white working and middle classes, while the Democratic Party will have overwhelming support from minorities, the wealthy, and the intellectual elite.  Marginal voters that the parties will compete for will include minority union members and upper-middle-class whites.

Even if Trump crashes and burns, some political entrepreneur with more polish but the same positions might eventually take over the Republican Party, jettison its rich establishment and make it the party of the white middle.  Of course, this won't be the end of the story, since the new Democratic coalition will also be unstable in the long-run.  Eventually minorities will resent wealthy whites pulling their strings.  If racial tensions have cooled, then members of these minorities might join the Republicans, and upper-middle class Republicans might join the Democrats, recreating the rich/poor distinction between the parties, but with the labels reversed.

This sort of label reversal has happened before.  Liberal used to mean a free market capitalist, but now in the U.S. it means a supporter of bigger government.