Friday, February 25, 2011

Confucius Analect of the Week, February 25, 2011

“The Chis were richer than the Duke of Chou had ever been, yet Jan Ch’iu, by accumulating taxes for them, [further] increased their wealth.  Therefore, the Master declared, 'He is no pupil of mine!  Pupils, you have my permission to attack him with your drums rolling.'”  (James R. Ware, Chapter II, Verse 17)

Confucius demands a limit on taxes to those accumulated under the Duke of Chou, the most virtuous of rulers.  Any additional taxation merits a violent tax revolt

Thursday, February 24, 2011

Libya, Gaddafi, and Human Rights

Western leaders are rightly appalled at Libyan leader Colonel Gaddafi’s vicious crackdown on peaceful protesters.  U.S. Secretary of State Hillary Clinton has strongly condemned his actions, along with Britain’s David Cameron, France’s Nicholas Sarkozy, and others.

Funny.  That Gaddafi is killing his fellow Libyans countrymen.  After all, it was only eight years ago, in January 2003, that Libya’s ambassador to the United Nations was elected chairman of the UN Commission on Human Rights by a resounding vote of 33 in favor to 3 against, with 17 abstaining.

Apart from criticizing Libya’s chairmanship, the U.S. took no action against the UN.  It did not reduce its financial contribution.

Readers may wish to click on Google Images and search “Gaddafi meeting X, Y, Z.”  For X, Y, and Z insert the names of a U.S. president and several secretaries of state, a British prime minister, a French president, an Italian president, and other political luminaries.  From posing with Gaddafi to strongly condemning him a few years later is a remarkable turn of events.

Wednesday, February 23, 2011

Forecasting Political Events: Mao Zedong and the Middle East

The inland Chinese city of Chongqing will be selecting ten outstanding youth to serve as interns in the White House for five weeks.  This is the first year that mainland students will be able to participate along with students from Taiwan and Hong Kong.

In return, perhaps the U.S. government should select ten outstanding intelligence personnel from the State Department and U.S. embassies in the Middle East to serve as interns in the Chinese Communist Party Central School in Beijing.  There they might immerse themselves in the writings of Chairman Mao.

In March 1927 Mao wrote “Report on an Investigation of the Peasant Movement in Hunan.”  This was perhaps the seminal event in the Communist Party movement that incorporated peasants into Mao’s Revolutionary Movement.  Mao followed this essay in January 1930 with a defining essay that is especially appropriate for understanding the eruptions spreading throughout the Middle East:  “A Singe Spark can Start a Prairie Fire.”

It appears evident that the intelligence services in the State Department and its embassies, the Military, the CIA, FBI, and other services in the Department of Homeland Security missed the great uprising.  With total budgets in the tens of billions of dollars, how can this be?

Inability to see outside the box?  Holding to a conservative view of autocratic rule, especially on behalf of Sunni regimes, in anticipation of post-government employment as a lobbyist for Saudi Arabia?

Sunday, February 20, 2011

U.S. Overseas Military Deployments and Bases

Some 370,000 U.S. military forces are deployed in more than 150 countries around the globe.  Many deployments are minimal, below 100.  Two of three largest are 50,000 in Iraq and about 100,000 in combat operations in Afghanistan.  The 50,000 in Iraq are scheduled to depart by December 31, 2011.

Other substantial deployments are 57,000 in Germany, 32,500 in Japan, 28,500 in South Korea, 10,500 in Kuwait, just under almost 10,000 in both the United Kingdom and Italy, 8,000 in Qatar, and 3,500 in Djibouti, Africa.  About 78,000 are in Europe, and 61,000 in Asia.

(Key:  Light blue, more than 1000 troops.  Dark blue, more than 100 troops.  Purple, use of military facilities.)

By service, the Army has bases or servicing agreements in Bulgaria, Germany, Iraq, Israel, Italy, Japan, Kuwait, Kosovo, and South Korea; the Marine Corps in Afghanistan, Germany, and Japan; the Navy in Bahrain, British Overseas Ocean Territory, Brazil, Cuba, Spain, Japan, Guam, Italy, Israel, Greece, and South Korea; and, the Air Force in Afghanistan, Australia, Bulgaria, Germany, Greenland, Guam, Italy, Japan, Qatar, Saudi Arabia, Singapore, South Korea, Kyrgyzstan, Netherlands, Phillippines, Portugal, Spain, Turkey, and the U.K.

Many of these deployments are decades old.  Are all of them still needed at current staffing levels?  Is there opportunity for cost savings without substantially diminishing military capabilities around the globe?

Look at the deployments and bases from China’s viewpoint.  The ring of U.S. forces could be construed as threatening.  In marked contrast, China has only several refueling stations in South Asia and the Gulf, but no active overseas military bases in foreign countries.

Saturday, February 19, 2011

Tax Cuts for the Top 2%

Democrats claim that Republicans care most about giving tax cuts to the wealthy, for the top 2% of households.

If so, would someone please explain how Republicans ever win elections, much less the presidency and majority control of one or both chambers of Congress?

Friday, February 18, 2011

Confucius Analect of the Week, February 18, 2011

Confucius stressed order, stability, good government, respect for others, learning and teaching, and other virtues.

“It is indeed harmful to come under the sway of utterly new and strange doctrines.” (James R. Ware, Chapter II, Verse 17)

Think Robespierre, Lenin and Stalin, Mao Zedong, Islamic extremism, among others.

Thursday, February 17, 2011

Cash and Carry, Numbers for Fun

Constant chatter about the declining value of the U.S. dollar combined with talk of diversification into euros (€), Japanese yen (¥), Aussie (A$) dollars, Canadian (C$)dollars, Swiss francs (CHF), and Chinese yuan (RMB) suggest that it might be fun to look at the amount of currency in circulation in these countries.  (Paper money transactions are relatively small compared with checks, credit cards, debit cards, and electronic transfers.)

Switzerland is widely regarded as a cash-based society with few individuals having personal checking accounts.  Swiss paper money in circulation at the end of 2010 was CHF 47,136 million, the population 7.8 million, yielding CHF 6,043 per resident.  (CHF 1, A$1, and C$1 each roughly equal US$1.)

Australian currency in circulation was A$48,760 million, population 22 million, producing A$2,216 per resident.  Canadian currency in circulation was C$57,861 million, population, 34.3 million, amounting to C$1,687 per resident.  Chinese currency in circulation was RMB 4,865 trillion (US$739 billion), population 1.3 trillion, yielding US$551 per resident.

U.S. dollars and Euros are more problematic.  Seventeen European countries with a combined population of about 330 million use euros as their official currency.  In addition, euros circulate widely in other Central and Eastern European countries.  The printing of €500 bank notes makes them more attractive than dollars to carry in large amounts.  Thirty-four percent of outstanding currency consisted of €500 banknotes, with €50 notes amounting to 33%.

At the end of 2010, the European Central Bank reported that €840 billion in paper money was outstanding.  Adjusting up the 330 million persons living in eurozone countries by another 20 million or so that use euros in daily commerce, yields €2,400 per person.

U.S. currency outstanding in December 2010 was $916 billion.  Divided by 308 million U.S. residents yields $2,975 per person.  The Federal Reserve Board of St. Louis estimated that in 2005 about half of U.S. paper money was held overseas.  Assuming a similar ratio in 2010 reduces the amount held in the U.S. to about $1,490 per person.  Of the $916 billion, about 75% consists of $100 notes.  The next largest share is $20 bills, just under 14% of the value of outstanding notes.  The predominance of $20 bills is due to their dispensation from ATM machines.

Switzerland clearly stands as an outlier, which reflects the Swiss preference for paper money rather than other forms of transaction money which are traceable to specific account holders.  Almost 59% of the value of Swiss banknotes outstanding consists of CHF 1,000 notes (but don’t try to pay for a taxi ride with a CHF 1,000 bill).  China’s smaller number reflects its much lower income per person than any of the others, but the amount of currency in circulation is likely to rise with growth.  At some point it will become necessary to issue denominations in excess of RMB 100 (US$15.)

It’s interesting to see the preference for untraceable bearer notes in different national denominations. 

Tuesday, February 15, 2011

Fabricating a Budget

The Department of Labor releases numerous economic statistics.  Among these are the “Weekly Jobless Claims” every Thursday and the “Monthly Unemployment Rate” the first Friday of each month.  ADP releases a monthly “National Employment Report.”

Select at random a hundred forecasters from business, finance, government, and academia.  In any given month, at best only a few will forecast the correct numbers for all three reports.  It is most unlikely that anyone will forecast the correct numbers for two or three consecutive months.

Yet, the White House Budget, released this year on January 14, rests on economic assumptions that span 10 years (Table S-13). These include gross domestic product, changes in the consumer price index, the civilian unemployment rate, and the 91-day and 10-year Treasury bill and note interest rates (which dictate the cost of borrowing).  On these assumptions, the budget sets forth 10-year estimates of receipts, outlays, deficits, and public debt (Table S-1).

Can anyone believe the precision of these numbers when forecasters cannot accurately predict next month’s jobs reports?

Why would anyone in business, government, the media, or academia treat these numbers seriously?

What we know is that the federal government is spending a whole lot more money than it collects in taxes, and that debt and interest payments are piling up.  But those who claim that the president’s or the Republican’s budget proposals will reduce the deficit by a certain figure in 2015 and 2020 is comedy at its best.   Or worse, use the quarrel to avoid making substantial cuts while the debt burns our future prospects!

Sunday, February 13, 2011

Education is the Key to Competitiveness?

Competitiveness is the new watchword of economic policy.  Education is the foundation on which competitiveness will be achieved.  Federal, state, and local governments have to invest more in education to improve outcomes.  Reform must permeate every level of schooling.


Billions have been poured into education and millions into think tanks and university centers of education to address the problem of sub-standard performance, especially when compared with our global competitors.

How has this been working out?  A report released on February 10, 2011, revealed that of the students in Rochester, New York, who graduated in June 2009, who entered high school in the 2005-06 school year, only 5.1% were prepared for college or a career.  The graduation rate was 46.6% (failure to graduate rate was 53.4%).

Rochester is not alone.  Graduation rates in Buffalo and Syracuse were 60.7% and 49.5% respectively and successful preparation for college or a career rates were 15.6% and 15% respectively.

To summarize, three upstate New York cities had dreadful graduation rates, and of those who did graduate, most couldn’t meet college entrance requirements or entry-level job market skills.

On these results, the U.S. is gonna “win the future?”  Against China and India?  Really?

Friday, February 11, 2011

Confucius Analect of the Week, February 11, 2011

Confucius is obsessed with learning, which explains why Chinese parents emphasize education.  But he is no mamby-pamby, talking about median achievement or remedial education.

My favorite learning analect is in Chapter VII, Verse 8 (James R. Ware):

“I do not instruct the uninterested; I do not help those who fail to try.  If I mention one corner of a subject and the pupil does not deduce therefrom the other three, I drop him.”

Perhaps this is why the Shanghai students ranked number 1 in the last global achievement test.

Reinforcement appears in Chapter V, Verse 28:

“A hamlet of ten homes will surely contain someone as loyal and reliable as I, but none to equal my love of learning.”

Learning is such an important theme in the Analects that subsequent posts will return to the subject from time to time.

Thursday, February 10, 2011

Déjà Vu All Over Again

With my colleague Bob Hall, in 1981 I began to push the flat tax as an alternative to our current, complicated, multi-bracket income tax code.  From that date through 2000, I collected every article, magazine, legislative measure, and think-tank, government agency, or academic study on the flat tax.  I stored them chronologically in plastic containers on a long shelf in my home library.  The documents numbered in the high hundreds.

Goggle and Lexus-Nexis have rendered paper storage obsolete.  So I decided to spend much of the last few weekends, excluding Super Bowl Sunday, going through the files and discarding those items that could be obtained electronically, keeping a handful of items that were unique to paper.  I then delivered bags of paper to Stanford’s recycling center.

In the course of deciding which items to keep, I looked at the title of every document.  What became clear is that every point made in the current debate on tax reform has already been analyzed and disseminated.  Nothing new has been added save more rigorous statistics and hyper-partisanship.

I suppose this is true in a number of public policy areas such as education, urban renewal, agricultural subsidies, and so on.  Still, it was disheartening to see the same old issues hashed out again with little reference to the prior decades of analysis and discussion.

Wednesday, February 9, 2011

Why There is Strong Disagreement About The Causes of the Financial Crisis

Barry Ritholtz, author of  "The Big Picture," is among the most interesting and insightful econo-financial bloggers.   In 2009 he posted an article identifying 25 causal factors of the financial crisis culled from his book Bailout Nation.

Recently the Federal Crisis Inquiry Commission released its report, along with two dissenting reports.  Ritholtz compared its findings with his 25 causal factors, adding in eight more contained in the report.

Numerous distinguished economists have put forth their own explanations, placing emphasis or one, two, three, or some combination of factors.  In almost every case, multiple independent events and personalities are said to have brought about and intensified the crisis.  It is not possible to conduct any kind of rigorous statistical analysis of one event with up to 33 causes.  Moreover, comparisons with historical incidents might require more variables and still not have a sufficiently large number of observations to demonstrate statistical correlation (or causality).

Tuesday, February 8, 2011

David Cameron and Michael Savage Are Strange Bedfellows

On February 5, 2011, British Prime Minister David Cameron gave a speech at a Munich conference on terrorism which British media have labeled “Multiculturalism has Failed.”  Terrorist communities in the heart of Britain suggest necessary changes to incorporate Muslims into the mainstream of British life.  These include mastery of English and teaching of British history in secondary school.  Britain maintains separate entrance requirements apart from the continental Europe Schengen Agreement free movement of people.

Michael Savage, a conservative radio talk-show host, has repeatedly stressed three themes: borders, language, and culture.  These are synonymous with Cameron’s Munich manifesto.  The irony is that Prime Minister Tony Blair’s government  placed Savage on the “do not enter” list when he was invited to debate his point of view at Oxford University.  Savage was said to be a right-wing hate-monger.  Will Cameron’s government lift the ban?  We’ll see.

Monday, February 7, 2011

“We Gotta Get the Deficit Down”

Try as I may, I could not find a video of former Senator Jim Sasser repeating, with his wonderful accent, “We gotta get the deficit down.”

The new Republican House intends to reduce the deficit.  Budget Chairman Paul Ryan released his draft budget that cuts $58 billion from President Obama’s spending baseline.  This sum is prorated for the rest of the current fiscal year, which falls short of the $100 billion pledge.  The cut would be followed by another $45 billion in the 2011-12 budget.

Some Republicans want Ryan to go further in the balance of the 2010-11 fiscal year and cut $100 billion by September 30, 2011.

Democrats warn that $100 billion in lower government spending could endanger the recovery.  Meaningful deficit reduction, they argue, should wait until the economy has fully recovered and the unemployment rate has come much further down.

Contrast the hullabaloo of $100 billion in cuts with the January federal deficit of $106 billion.  This year's deficit is projected to exceed $1 trillion.  Cuts of $100 billion represent some 8% of this year’s deficit and about 4% of total federal spending.

If it will be so difficult to cut $100 billion or even $58 billion in the balance of the current fiscal year, imagine how difficult it will be to make any significant cuts until after the November 2012 elections?  And beyond that? Good luck to Congressman Ryan, but don’t hold your breath.

Saturday, February 5, 2011

U. S. Aid to Egypt

In the midst of the turmoil in the Middle East, it is estimated that the Egyptian economy is losing $310 million a day, more than $3 billion and counting since the demonstrations began. 

The media make much ado about the $1.5-2 billion in U.S. annual aid to Egypt.  Should it continue or cease?  How much leverage does it give the U.S. government over President Mubarak of Egypt and the Egyptian military?

Putting U.S. aid in perspective, the current fiscal year’s aid allocation has been more than wiped out by the partial shutdown of the Egyptian economy.

Perhaps a better comparison is that $2 billion amounts to less than 2% of January’s U.S. budget deficit of $105.8 billion, or a mere 14 hours of deficit spending.

Wouldn’t it be nice if the media devoted as much attention to the U.S. deficit as it does to aid to Egypt? 

Thursday, February 3, 2011

Confucius Analect of the Week, February 4, 2011

One Chinese historical figure above all, the Duke of Chou, embodied the virtues that Confucius expounds in the Analects.  Confucius bemoans his own shortcoming when he declares “How I have fallen.  For some time now I haven’t seen the Duke of Chou in my dreams.”  (James R. Ware, Chapter VII, Verse 5) Practicing good governance requires one to commune with the Duke through dreams.

James K. Legge’s translation and interpretation is similar.  The Master said, “Extreme is my decay. For a long time, I have not dreamed, as I was wont to do, that I saw the duke of Chau.”

Communist rule pushed aside the classics for decades.  Only recently has there been a Confucian revival.  Perchance to dream of the Duke of Chou, and gain virtue.

Happy New Year in the Year of the Rabbit!

Wednesday, February 2, 2011

Social Science Fails to Meet the Intra-ocular Impact Test

Apart from a handful of now prominent personalities, most economists, finance professors, investment firms, and economic journalists missed the financial crisis.  Now there is a raging debate on what the “science” of macroeconomics can and cannot explain and predict, and how macroeconomics must be rethought and taught.  This debate will go on for years.

Ditto for political science.  Political science (government in some universities) has steadily moved away from historical and descriptive modes of research of the early twentieth century to increasingly formal (mathematical) and quantitative methods in the past four-five decades.  Yet few, if any, political scientists openly predicted the January 2011 uprisings in Tunisia, Egypt, and Jordan.

Doubtless some will claim that they warned of unrest in their books and articles.  But it is relatively easy to issue general undated forecasts or describe the conditions under which uprisings are likely to occur.  It is quite another to point to a specific forecast that accurately predicted the event.  Now there is likely to be a renewed debate in political science contrasting the historical, descriptive, area studies, and culture-specific studies against models and statistics.

Stay tuned.

Tuesday, February 1, 2011

Fiscal Sanity vs. Fiscal Insanity

As of February 1, 2011, U.S. public debt stood at $14.056 trillion.  Of this, $9.413 trillion is tradeable debt held by the public, both domestic and foreign.  The remaining $4.644 trillion is held by federal trust funds and other government entities.

The population of the U.S. is about 308 million.  Per capita U.S. debt amounts to almost $46,000 per capita.  If we exclude intragovernmental holdings, per capita debt falls to a still staggering $30,500 per person.  Moreover, we continue to pile up debt in excess of one trillion dollars a year, another $3,250 per person.

Contrast the U.S. with Hong Kong, whose government rarely incurs a budget deficit.  As of December 31, 2010, accumulated surpluses, the government’s financial reserves, amounted to US$75 billion.  With a population of about 7 million, financial surpluses come to about US$10,700 per person.  Total fiscal reserves almost amount to two years of government spending.  Investment returns on the reserves help keep taxes low.

Food for thought.