Monday, March 28, 2011

Government Programs Are Like Crabgrass

Spring has sprung, and with it baseball, flirty dresses, and lawn care.  To prevent the scourge of crabgrass, spurge, oxalis, and other nasty weeds from taking over your lawn, it is necessary to apply crabgrass preventer in early Spring.  Late application or failure to apply crabgrass preventer will result in noxious weeds chocking off your Kentucky bluegrass.  Once crabgrass takes over, you will have to wave the white flag of surrender and accept defeat or face the costly task of planting a new lawn.

Government programs are the same.  They start out slowly but then spread like wildfire.  Eternal vigilance is necessary to control them.  Cabinet offices and regulatory agencies proliferate, with unaccountable czars and regulators intruding, quoth the raven “evermore,” into our private affairs.

To propose serious cuts in any program, much less termination, brings howls of protests and charges of heartlessness.  This is the Republican spring.  They can try to stop the crabgrass in its tracks, or pull out weeds one-by-one.  Fear of the political consequences of a government shutdown has thus far taken Republicans down the second road.  Not an auspicious start.

Friday, March 25, 2011

Confucius Analect of the Week, March 25, 2011

“Great Man is conscious only of justice; Petty Man, only of self-interest.”  (James R. Ware, Chapter IV, Verse 16)

This analect pretty much describes the political classes of elected officials, appointed officials, lobbyists (former officials) and their advisers.  I guess we get the government we deserve.  Where is George Washington when we need him?

Monday, March 21, 2011

China Breaches its “One Country, Two Systems” Policy for Macao

China resumed sovereignty over Hong Kong on July 1, 1997, and Macao on December 20, 1999.  They became respectively the HKSAR (Hong Kong Special Administrative Region) and MSAR.  Each was given a Basic Law, a mini-constitution, that sets forth the principles on which the two former colonies would be governed.  China promised a high degree of autonomy, stating that it would not impose its socialist system on the two capitalist entities for 50 years.  Guarantees included political, social, economic, cultural, and other rights.  This post deals with recent developments in Macao that erode an important article in its Basic Law.

Chapter V of Macao’s Basic Law deals with “Economy.”  Article 104 states that Macao “shall have independent finances,” and “shall use its revenues exclusively for its own purposes, and they shall not be handed over to the Central People’s Government.”  Moreover, “the Central People’s Government shall not levy taxes in the MSAR.”

Article 104 has now been breached.

First some background on Macao’s revenues.  Macao practices a conservative fiscal policy.  Rather than incurring annual deficits, Macao’s budgets typically produce annual surpluses.  The surplus in 2010 was Macao Patacas (MOP) 41.9 million.  (US$1=MOP 8.0)  Over the years Macao has built up large fiscal reserves, which stood at MOP 130.7 million on December 31, 2010.  Fiscal reserves equal 3.4 years of 2010 outlays.  Spending in the three prior years was much lower at MOP 18.9 million, MOP 25.9 million, and MOP 33.8 million respectively.

The principal source of public revenue in Macao is gaming tax.  Gaming tax constitutes between 85-90% of total tax revenues. In 2010, just under 25 million tourists came to Macao, of which 82.9% were from mainland China and Hong Kong.  Macao is the only region of China in which casino gambling is legal.  Macao’s taxes, and its accumulated fiscal reserves, have been largely paid by mainland China and Hong Kong gamblers.

On March 6, 2011, a Framework Agreement on Cooperation Between Guangdong and Macao was signed in Beijing, consisting of 38 articles in 8 chapters, totaling about 10,000 words..  It was accompanied by a lengthy interpretation document, a timetable for 2011, and an ongoing review of the work schedule.  The cooperation extends to creating a world class travel and leisure destination that brings together Macao, the neighboring Chinese city of Zhuhai, and all of Guangdong Province in one big tourism destination.  Other cooperative endeavors include development of renminbi business, upgrading of industry, the development of neighboring Hengqin Island (in which the new campus of the University of Macao will be located), and developing such sectors as Chinese medicine, education, and linkages between public services.

The agreement specifies that the Macao government shall provide scholarships for Guangdong students studying at tertiary institutions in Macao.  Other statements give Macao the lead responsibility in funding cooperative projects and activities.  I was unable to find any statements which specified that the Guangdong government shall provide financial support to Macao for any project or activity.  Should Guangdong banks lend money to Macao firms, it will be in the interests of the banks, not a requirement of the framework.

The word “shall” does not mean consider, think about, or discuss.  It means that Macao will pay for the activity, plain and simple.  The only issue is how many scholarships.

The chief executive of the MSAR is presumed to have signed the agreement on the basis of its mutual benefits for Macao and Guangdong Province.  However, it is difficult to imagine that he could have refused to sign.  Were he to refuse, it is likely that China, on behalf of the provincial government of Guangdong, would make Macao an offer it could not refuse.  China could, for example, restrict the number of monthly visits of mainland Chinese gamblers to Macao, as it has done in the past.

Even if the agreement rests on a mutual voluntary basis, the reality is that Chapter V, Article 104 of the Macao Basic Law has been abrogated.  Macao is required to spend tax revenue in support of Guangdong residents.  As the decade unfolds, it will be interesting to observe the extent to which Macao’s fiscal reserves bear a disproportionate share of the funds expended to achieve framework goals.

Neighboring Hong Kong holds fiscal reserves equal to two years current spending, but their value is far, far larger than Macao reserves.  Perhaps the Guangdong-Macao Cooperative Framework will be extended to Hong Kong in the not-too-distant future

Friday, March 18, 2011

Confucius Analect of the Week, March 18, 2011

"The end has indeed arrived.  I have yet to meet a man as fond of Excellence as he is of outward appearances."  (James R. Ware, Chapter XV, Verse 13)

Does this analect have the touch, sound, and feel of today's political class and its handlers?

Thursday, March 17, 2011

Autocrat vs. the Arab Street

“Oh what a tangled web we weave...”

The U.S. government was for the Street against the ruling autocrats in Tunisia and Egypt.  It has uttered strong statements in support of the Libyan rebels against Gaddafi, but offered no material support.  It has criticized the Sunni ruling family of Bahrain for forcibly suppressing a Shia uprising and the Saudis for sending troops into Bahrain in support of a fellow Sunni ruling family.

But the U.S. has taken no action against Bahrain or Saudi Arabia.  Indeed, to the contrary, Defense Secretary Robert Gates stopped in Bahrain for a photo-op with the ruling monarch during the uprising.  Perhaps this was necessary to protect the U.S. Fifth Fleet that is stationed in Bahrain.  As to the Saudis, it is vital that their oil keeps flowing freely.  Different strokes for difference folks.

Since the removal of Hosni Mubarak in Egypt, violence has broken out between Christians and Muslims in Egypt, precipitated by Muslims burning  a Christian church.  The Sunni suppression of Shiites in Bahrain will not sit well with Iraq’s large Shia majority, especially after the U.S. withdraws its remaining 47,000 troops by the end of 2011.

Evidently, overthrowing autocrats and seeking democracy is good for some Arabs, but not for others, at least for now.

Wednesday, March 16, 2011

Say Hello to More Greenhouse Gases

Japan’s nuclear crisis has unnerved many political leaders around the globe.  German Chancellor Angela Merkel has announced that Germany will close (temporarily, but with no promise of restarting) all seven reactors that began operation before 1980.  Merkel has said that Germany should take this opportunity to focus on such renewable sources of energy as solar and wind power.

Switzerland, which gets 40% of its electricity from five nuclear reactors, is also concerned about building new reactors.  The existing reactors are due to come off the power grid by the end of 1919, and a nationwide referendum on construction of new reactors, sometime during 2014-15, could well determine the fate of nuclear energy in Switzerland.

Malaysia and other countries are rethinking their development of nuclear power.  The future of nuclear powered electricity could depend on the success (or failure) of Japanese efforts to contain and resolve its current problems.

Meanwhile, to make up for the lost electricity, countries will have to burn more coal.  Radioactive contamination or greenhouse emissions?  Not a pretty choice?

Tuesday, March 15, 2011

Putting the Federal Budget Deficit in Perspective

Estimates of the cost of Japan’s earthquake-tsunami disaster keep rising (excluding lives and personal injuries).  The highest thus far is US$100 billion put out by Singapore’s DBS Bank.  The damage includes losses to infrastructure, residences, and output.   The insurance industry may have to pay $60 billion in damage claims.

So far, the $100 billion amounts to 2% of Japan’s GDP of about $5.47 trillion.  The $100 billion represents about 11% of Japan’s holdings of U.S. Treasury securities.

In February 2011, the U.S. federal budget deficit was a record $223 billion.  Estimates of the annual deficit have been put at $1.6 trillion.  This means that Japan’s economic losses from the recent natural disaster amount to about 45% of February’s budget deficit, and 6.3% of the current year’s projected deficit.

Does this give some indication of the magnitude of the federal deficit?

Friday, March 11, 2011

Confucius Analect of the Week, March 11, 2011

Chapter X, Verse 8.  Rules of Confucius about his food.  (James Legge translation)

“....He did not eat rice which had been injured by heat or damp and turned sour, nor fish or flesh which was gone. He did not eat what was discolored, or what was of a bad flavor, nor anything which was ill-cooked, or was not in season. He did not eat meat which was not cut properly, nor what was served without its proper sauce. Though there might be a large quantity of meat, he would not allow what he took to exceed the due proportion for the rice. It was only in wine that he laid down no limit for himself, but he did not allow himself to be confused by it...He did not eat much....” (editing mine).

Confucius defined the essence of Chinese cuisine 2500 years ago.  Freshness is a must.  Meat must be cut properly (not in large chucks as in Western cuisine).  The proper sauce must accompany meat.  (The use of chopsticks allows each morsel of meat to be coated with the proper sauce.  Too much and the extra runs off; too little and the meat is not properly coated.)  The meal must have a proper balance of meat and rice.  (James R. Ware translates phrase as a proper balance of meat and vegetables.)

Drink wine to satiation but not to befuddlement.  Don’t overeat.

Small wonder that Chinese cuisine is the world’s best (sorry to Francophiles).  Its principles were laid down several millennia ago, and have withstood the test of time.

Tuesday, March 8, 2011

Declining Enrolment in the Humanities

Humanities scholars at leading universities decry declining enrolment in the humanities.  To address this concern, Stanford’s Faculty Senate heard a panel discussion of six humanities professors on March 3, 2011, on the difficulties facing 11 humanities departments.

The premise on which the discussion was based is that humanities have been a key part of a liberal arts education, which is being challenged by declining enrolments.  The panelists did not blame reduced financial support.  Indeed, 42% of the faculty in the School of Humanities and Science teach in the 11 humanities departments, even though enrolment is only 18% of undergraduate majors.

Explanations and solutions?  Tuition-paying parents (full fare exceeds $200,000 for four years) and students fear that the humanities do not provide employable skills compared with degrees in science and mathematics.  Career concerns are crowding out humanities majors.

Panelists suggested several remedies (although none addressed the basic question of the merits or relevance of the liberal arts education model in the twenty-first century).  One suggested recruiting more East Coast students that seem inclined towards the humanities.  Others suggested courses blending humanities with science and engineering.  And so on.

Analysis of political party registration reveals that over 90% of humanities professors at Stanford are Democrats.  Some departments have no registered Republicans at all.  Yet none of the six panelists breathed a word about intellectual diversity in the humanities, that is, more balance in courses offered.  (To the extent that left-leaning professors claim that their views do not influence their teaching, the same is surely true of avowed conservatives.)

Perhaps the most important factor is the changing ethnic/racial composition of the student body.  Each year Stanford publishes its Common Data Set, which includes information on the ethnic/racial composition of the student body, the percentage majoring in each field, (but not further divided by ethnicity/race), financial aid, and other data.  (Ethnic/racial enrolment data from 30-40 years ago are not available.)

For 2010-11, excluding the 1,129 from race/ethnicity that are unknown or are of two or more races (16.4%), the data reveal that of all enrolled undergraduates 17.8% are Asian, 7.2% nonresident aliens (most from Asia), 16.4% Hispanic, 7.3% Black or African American (non-Hispanic), and 34.1%  White (non-Hispanic).  Some fraction of the two-race students are part Asian.  Forty years ago, when I first set foot on campus, Asians were a much smaller share of undergraduate enrolment.

Degrees conferred in 2009-10 totaled 37.6% in the sciences and mathematics, of which a clear majority was earned by Asians.  Forty years ago, there was no Silicon Valley as we know it today.  The market has clearly shifted in favor of high-tech jobs.  Racial/ethnic enrolment reflects Asian emphasis in high-tech.  Barring a quota on or reduction in Asian enrolment, raising enrolment in the humanities at Stanford faces overwhelming odds.

Monday, March 7, 2011

Three Cheers for U.S. Public Debt

An increasing number of economists, historians, pundits, and politicians are expressing concern about rising U.S. public debt.  Either it will be inflationary, depreciate the dollar (and our living standards), or lead to large tax hikes.  None is a pretty picture.

But there is a bright side to large public debt, as expressed on CNBC on March 8, 2011, by Chicago Fed President Charles Evans.  The U.S. has the deepest and most liquid Treasury debt markets, which makes U.S. Treasuries a good choice for foreign governments and sovereign wealth funds to park money.  Other smaller foreign debt markets are less attractive.  This means we (the U.S. Treasury) will be able to sell debt as needed to fund the government and sustain economic activity (at least for the immediate future).

Good thing we didn’t pay off all our national debt during the Clinton budget surplus years, and we should thank President Bush and the Republican Congress for rebuilding the debt that makes U.S. Treasuries so deep and liquid.

Friday, March 4, 2011

Confucius Analect of the Week, March 4, 2011

“It is hard to find a man who will study for three years without thinking of a post in government.”  (James R. Ware, Chapter VIII, Verse 12)

This should come as no surprise.  Who wouldn’t. given the compensation and benefits packages secured by unionized public sector workers?

Thursday, March 3, 2011

Aristotle Liveblogging the Arab Street, March 3, 2011

A wave of democratic euphoria is washing over North Africa and the Middle East.  Tyrants are being overthrown and corrupt governments are being replaced.  What does the long run hold?

Democratic reformers would do well to read Book III of my Politics:  Chapter 7 appears below.

“Having determined these points, we have next to consider how many forms of government there are, and what they are; and in the first place what are the true forms, for when they are determined the perversions of them will at once be apparent. The words constitution and government have the same meaning, and the government, which is the supreme authority in states, must be in the hands of one, or of a few, or of the many. The true forms of government, therefore, are those in which the one, or the few, or the many, govern with a view to the common interest; but governments which rule with a view to the private interest, whether of the one or of the few, or of the many, are perversions. For the members of a state, if they are truly citizens, ought to participate in its advantages. Of forms of government in which one rules, we call that which regards the common interests, kingship or royalty; that in which more than one, but not many, rule, aristocracy; and it is so called, either because the rulers are the best men, or because they have at heart the best interests of the state and of the citizens. But when the citizens at large administer the state for the common interest, the government is called by the generic name -- a constitution. And there is a reason for this use of language. One man or a few may excel in virtue; but as the number increases it becomes more difficult for them to attain perfection in every kind of virtue, though they may in military virtue, for this is found in the masses. Hence in a constitutional government the fighting-men have the supreme power, and those who possess arms are the citizens.

“Of the above-mentioned forms, the perversions are as follows: of royalty, tyranny; of aristocracy, oligarchy; of constitutional government, democracy. For tyranny is a kind of monarchy which has in view the interest of the monarch only; oligarchy has in view the interest of the wealthy; democracy, of the needy: none of them the common good of all.”

To summarize, constitutional government (limited government) serves the common interest.  Democracy, its perverse form, serves the needy, not the common good..

The Arab street may be ridding themselves of tyrants, but constitutional government has yet to prove itself in the Arab world.