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WTO ruling: ‘free trade’ and ‘state capitalism’ needs broader discussion

A recent ruling on countervailing duties and anti-dumping duties by the World Trade Organization:
(bolding is mine)

Senior Economist Ian Fletcher for the Coalition for a Prosperous America offers one point of view:

The American position is that we are entitled to apply what are called “countervailing duties” against products that are subsidized by foreign governments. And on top of that, we are also entitled to apply duties designed to counteract the practice of dumping, or selling a product below cost in order to destroy foreign competitors.
Both these responses on our part have long histories of being accepted as legitimate, both under international trade law and in economics. (This is why the WTO had originally accepted our position; the new ruling is actually the result of an appeal by China.)

In terms of international law, one can trace the legitimacy of our policies at least as far back as the founding of the General Agreement on Tariffs and Trade, the WTO’s predecessor, in 1947.
In terms of economics, their justifying logic is very simple.
In the case of subsidies, free trade only makes sense if it really is free, which means that a thumb on the scale at one end of the transaction justifies a tariff, or counter-subsidy, at the other end.
In the case of dumping, free trade is not justified if one side sells below cost in order to wipe out the other and thus eventually grab the market (or most of it) for itself. Even if the attempt fails, the damage done to our industries will be real, and by then it will be too late.
There’s no serious question about whether China engages in subsidies and dumping. That’s why, in this case, we imposed duties of up to 200 percent to offset their subsidies, plus up to 265 percent to counteract their dumping.
Enter state capitalism. The flashpoint of the current dispute centers on the vexed question of what price constitutes dumping in a non-free-market economy.
In a free-market economy like our own, dumping is considered to occur when a product is sold abroad for either less than its production cost, or less than what it is sold for domestically. Unfortunately, in an economy like China’s, which is so tightly controlled by the government that many prices are essentially whatever the government says they are, this logic doesn’t work. There are no normal prices to observe in order to figure out how big the subsidy is. So the U.S. Government has been using various statistical techniques to calculate the relevant prices.
The WTO has ruled that our techniques are not legit. Bottom line? We’re supposed to overlook the vast panoply of subsidies—ranging from free land to cheap loans and a million different tax credits—because state capitalism makes them tricky to calculate.

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Growing Productivity, Stagnating Compensation

Crossposted at The Street Light.

Yesterday Ezra Klein had a chart (from a paper by Larry Mishel and Heidi Shierholz at EPI) showing that both private sector and public sector wages have been stagnating for the past several years, and have certainly not kept up with productivity growth. I think it’s useful to look at the relationship between productivity and compensation over a longer time horizon.

The following chart shows labor productivity and real hourly compensation since 1950. (Data from the BLS.) Two things strike me particularly about this graph. The first is how closely the two series track each other between 1950 and 1980. During those 30 years labor productivity in the nonfarm business sector of the US economy rose by 92%; real hourly compensation paid to workers rose by a nearly identical 87%. Classical economic theory says that is exactly what we would expect – as workers become more valuable to firms by producing more output with every hour of labor, firms should compete with each other to employ them, driving up wages by an equal amount.

The second striking feature of this picture is, of course, how much the two series have diverged since the early 1980s. Output per hour of work in 2010 was 87% higher than in 1980, while real hourly compensation was only 38% higher.

The table below shows changes in labor productivity and hourly compensation by decade. Again, let me draw your attention to two features. First, this data confirms that the “great productivity slowdown” of the 1970s and 80s seems to have been vanquished; over the past 15 to 20 years US businesses have been improving productivity at rates as high as during the 1950s and 60s. Yet more evidence that Tyler Cowen’s “Great Stagnation” is not a productivity story.

The second remarkable feature of this table is that the vast majority of the gap between productivity and hourly compensation comes from the 1980s and 2000s, while during the 1990s workers shared in productivity gains nearly as fully as they did in the 1960s. And that, of course, leads us directly to the $64,000 question: what was it about the 1980s and 2000s that made it so difficult for workers to reap the fruits of their more productive labor?

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Japan May Have Reached Point 7

I give up. It was perfectly obvious what was happening at Fukushima on Saturday afternoon, when I posted bullet points at Skippy: there was going to be a major cleanup cost and the live reactors were not salvageable, but nothing fatal to many was loose in the atmosphere yet.

Which is why I followed up here on Sunday with “use saltwater as the best option.” Once you accept that you’re doing damage control, do it efficiently and don’t worry about the sunk cost.

But evacuation and problems with all three plants that were offline at the time of the earthquake moves to stage seven, which was summarized by Pink Floyd:

Though even that may be pessimistic; Al Jazzera English (via their Twitter feed) reports that the heroes of this entire episode—the unnamed workers who are trying to avert serious leakage into the environment—are back at work after having temporarily been evacuated to a bunker.

Medicins Sans Frontiers (Doctors without Borders)


Global Giving

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Take a break …planning for efficiency

Yves Smith at Naked Capitalism points us to exploring how the pursuit of “efficiency”, for example in supply chains, without assessing what other risks are involved and planning ahead can result in major problems:

It isn’t all that hard to understand that stressing efficiency at all cost comes at the expense of safety. Engineers will tell you that efforts that are pro-safety involve various forms of buffers and redundancy and are thus costly. During the early days of the crisis, commentators often discussed the implications of Richard Bookstaber’s book A Demon of Our Own Design, in which he argued that systems that lacked breaks between various processes were tightly coupled, which meant that a failure at one point in the process would propagate through the entire system, as if one transformer failing would bring down an entire electrical grid.

Anyone who has been on the periphery of manufacturing can see that all its fads can easily have pushed too many companies into failure-prone systems. Just in time inventory was a reversal of the historical propensity of manufactures to carry a lot of inventory to make life easier for managers. That practice in isolation might not be a bad thing. But over the years, many manufacturers have also concentrated on limiting the number of vendors to give them more bargaining leverage with them and squeeze them on costs. That increases dependence on suppliers while also increasing the riskiness of their operations. It has finally become fashionable to work with vendors or offshored factories in countries with low labor costs like China, Bangladesh, and Vietnam. Long transit times also increases business risk.

Now of course, like traders, top manager have every reason not to be terribly worried about long term risks. The prototype of the profitable but risky trading strategies that Nicholas Nassim Taleb likes to deride is that they work just fine on a day to day basis but blow up catastrophically periodically. And those blowups are predictable. But as long as they aren’t likely to happen every year or every other year, decision-makers have huge incentives that increase risk as long as the blow-up risk is not all that imminent (I am waiting for a quant to devise an optimal blow up metric as a covert trading strategy tool). So we should also regard the fact that business managers have acted exactly like reckless traders to be an expected outcome.

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Audit rates for the rich increasing–about time

by Linda Beale Audit rates for the rich increasing–about time

crossposted with Ataxingmatter

Note to readers:  sorry for the long absence again–personal circumstances prevented my blogging for the last several weeks.  I hope that I can again resume regular blogging now, but do apologize for the absence.

The IRS recently released its 2010 Data Book, which describes the agency’s activities for the 2010 FY ending September 30, 2010.

One important part of the data revealed is a much-needed focus on the compliance of wealthy taxpayers.  IRS Commission Doug Shulman admitted in late 2009 that the agency needed to shift its focus to pay more attention to high-net-worth individuals–at least in part to reassure ordinary Americans that the rich weren’t able to avoid compliance (i.e., the idea that they might be able to avoid paying taxes simply because they had lots of money and could seek out tax shelters unavailable to the rest of us).  The IRS created a group within the agency focused on “global high wealth” individuals–those with $10 million or more.  Plans for the group required increased audits as a way to call attention to the problems and for the agency to teach itself more about the ways that these high-wealth individuals maintain their wealth and receive their income.  The Data Book shows that the IRS audited 18.4% of those high-income taxpayers in FY 2010, up considerably from the rate of 10.6% the prior fiscal year.

The release describing the databooks highlights the following information–including the fact that tax revenues are down compared to prior years.

During fiscal year 2010, the IRS collected $2.3 trillion in revenue, and processed 230 million returns. More than 116 million returns, including almost 70 percent of individual income tax returns, were filed electronically. More than 119 million individual income tax return filers received a tax refund, totaling $358 billion. In fiscal year 2010, IRS spent an average of 53 cents to collect each $100 of tax revenue.

The IRS examined more than 1.5 million individual income tax returns and nearly 30,000 returns filed by corporations, excluding S corporations. The IRS provided taxpayer assistance through 305 million visits to and assisted more than 78 million taxpayers through its telephone helpline or at walk-in sites.

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King of California

David Zetland at Aguanomics offers this review of a topic that gets little national attention – the use of water between watershed areas, water rights, and how we value water to date at least in this area of the country. Use of water and policy on water use tends to be regionally and locally based, making a one size fits all answer to the problems of water use less than useful.

King of California — The Review

In this book, Mark Arax and Rick Wartzman illustrate the fascinating details behind a family that combined hard work, farming wisdom and political maneuvering to turn “lake-bottom land” into a farming empire, with help from government workers who may have ignored the Public interest and badly-written and ill-enforced government laws.
The book (subtitle: “JG Boswell and the Making of a Secret American Empire”) traces the story of the Boswell family, which left Georgia’s cotton lands for California. The Boswell began marketing cotton in Los Angeles and then moved into production, turning land, abundant water, and very sharp management into one of the largest farming operations in the US and world. I won’t summarize the fascinating, well-written story, but here are some notes I took on the way:

  • During a conflict over flows from the Kings river in the 1880s, Mr. Church raised his dam on the river, reducing water available to downriver farmers. This action — more akin to “possession is ownership” than riparian rights or prior appropriation — invoked a similar response: the farmers downstream blew up the dam and got “their” water. See this post on irrigation in the West 100 years ago, including how the government has to subsidize projects too risky and unprofitable for private companies.
  • Huge land grants from the Spanish and Mexican eras were mostly along the coast of California, not in the Central Valley. The Mexicans allocated huge tracts in the Valley just before California was annexed by the US in 1850. These tracts were reaffirmed by the US Land Commission for California. In 1871, 516 men owned 9 million acres of California land. Those who later abused the Reclamation Act of 1902 — including Southern Pacific — had lots of practice.
  • Miller & Lux, two German migrants based in San Francisco, owned 1.3 million acres in the Central and Santa Clara Valleys. Some of their land was irrigated by the San Joaquin River, but farmers upstream were taking enough water by prior appropriation (“first in time, first in right”) to reduce flows next to M&L properties with riparian rights (“take what you want as long as you do not damage your neighbors”). In resulting disputes, California “found a way to blend both riparian and prior appropriation rights under a formula of `beneficial and reasonable’ uses. What this meant on the ground was that the water generally went to those with the most creative lawyers and engineers.” [p. 80]
  • The abuses of the Federal laws took place when individuals/families/corporations acquired multiple 80- or 160-acre parcels from programs dedicated to assisting small farmers and assembled them into illegally-large parcels. Abuses of water-related programs occurred when farmers with large farms took water that was supposed to go to small farms or paid subsidized prices for that water. Subsidies were (and still are) huge: Farmers only paid a portion of the cost of delivering water, without paying the capital costs of the projects that constructed them, the interest on those costs, and so on.
    The worst part of these abuses was not that the Federal Agencies (Bureau of Reclamation or US Army Corps of Engineers) willingly helped big farmers abuse and avoid the rules. It wasn’t that politicians exempted abuses via special amendments in unrelated laws. It was that these very talented and rich farmers took the subsidized land and water instead of paying the market rate. That’s like Bill Gates paying $0.85 for his $2.00 Big Mac.
    Of course, this kind of corruption, of the rich and powerful working with government to become more rich and powerful, has a long and infamous role in US policies, including the recent financial crisis that bailed out Wall Street and left taxpayers with the tab.
    So these were crony capitalists, not free marketeers. (There’s one point in the book where Boswell says he “sent back” his cotton subsidy check. Yes, he did that once, but cashed the other ones.)
  • Harry Chandler (1864-1944) ran the Los Angeles Times for “what is good for real estate” [p. 214]. That’s because he owned large tracts in the San Fernando Valley (his maneuvers to add water to them are portrayed in the movie Chinatown), Tejon Ranch, and other places. He was perhaps a central character in the story that I traced in my dissertation, and more directly in “The end of abundance: How water bureaucrats created and destroyed the southern California oasis
  • In the late 1970s, the government looked set to break up Boswell’s empire, based on its use of water reserved for 160 acre holdings. Boswell and Salyer (another big land holder) spent big money to “get access” to politicians and staffers, to present their views. In the end, they won an exemption from the limit, based on the idea that their private water rights were not affected by laws dictating that access to infrastructure and water was reserved for smallholders. Boswell et al. stayed in the business of collecting subsidies. (The weirdest case [p. 379] was when they got money for flood damage on land that they claimed was going to be used for wheat but were paid (in-kind) to not plant in wheat. When the government ran out of wheat for “payment in kind” for fallowed land, it bought wheat from Boswell’s other operations, to give it to Boswell, who sold it again. Without any of these programs, the land would have been flooded. With them, Boswell’s triple was worth millions of dollars.)
  • We know that big farms are good for individual farmers who can make more money from their management expertise. But small farms allow more people to make a living off of farming. Is that more productive? Maybe. Is it more profitable? Maybe (especially if subsidies are removed; they tend to go to bigger farms*).
    But are small farms better than big farms for the community? In a 1946 study that compared the company town of Arvin (dominated by the DiGiorgo family) to Dinuba, a similar-sized town in the area with many small farms, social scientist Walter Goldschmidt found Dinuba to be better in every way.** This result indicated that the logic behind the Reclamation Act was sound, even as it pointed out how Reclamation (and most other subsidy programs for farmers) had undermined the existence of towns like Dinuba.
    I’m not worried so much about reducing the number of people working in farming (currently less than one percent of workers) as much as the jobs those people have: 85 percent of them are hourly laborers making $8/hour. Why does that bother me? Because it’s the result of government subsidies, not free market dynamics.
  • Arax and Wartzman ask an important question near the end of their book: big farmers like Boswell used federal subsidies to build huge farms on the bottom of a lake. They got rich and their crops were part of a vast system chasing yield. What were the costs? The Tulare Lake — the largest lake west of the Mississippi — was turned into farm land with troublesome runoff and little environmental value. Taxpayers sent huge checks to “welfare farmers.” Their workers were more like wage slaves than farmers. Communities (as Lloyd Carter has documented) were weak and troubled.

I will soon post more on government failure in agricultural policy (Westlands).
Bottom Line: I give this book FIVE STARS as a fascinating history of a family that was good at farming and even better at working with bureaucrats and politicians to destroy the environment, local communities and small farmers for the sake of more subsidies, cheaper land, and free water.

* According to the USDA  [pdf], production and subsidies are shifting to larger farms that are run by wealthier people — and that’s only between 1989 and 2003!
** There is some debate over whether Goldschmidt was right to conclude that “similar” areas ended up having such big differences in farm size and quality of life. Hayes and Olmstead review them in this paper [pdf] with useful notes on the size of oil revenues and cost of water pumping on farm size and crop mix. They claim that small farms would pay almost double the cost of water in Arvin without considering shared pumping facilities. But even without such quibbled, they also agree that the larger farms — however they got there — were not contributing to community life. (In other words, Las Vegas differs from San Francisco for many reasons, but do you want government programs to encourage more cities like Las Vegas?)

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Health Care thoughts: Defining an ACO

Health Care: Defining an ACO
Having recently plowed through about hundreds of pages on Accountable Care Organizations (ACOs) and Integrated Delivery Systems (IDSs), I should know how to define an ACO.
But I don’t know, not exactly. Using an old Supreme Court standard, I know one when I see it, I think, because of certain characteristics.
This is critical because the Obama administration expects to garner huge savings from providers working through ACOs, beginning for Medicare in 2012 (building such systems in less than 9 months is going to be a Herculean task)..
The best formal definition I have seen to date, and it is very general, is the CMS definition for Medicare ACOs, and I quote:
Q: What is an “accountable care organization.”
A: An Accountable Care Organization, also called an “ACO” for short, is an organization of health care providers that agrees to be accountable for the quality, cost and overall care of [Medicare] beneficiaries who are enrolled in the traditional fee-for-service program who are assigned to it (ACO).
It is a start, barely. The ACOs are supposed to be in place 1/1/2012. Administrative regulations were issued in November 2010 and the public comment period ended recently.
In a recent speech DHHS Sec. Berwick offered these “flag and apple pie” characteristics, still very general:

  • the patient and family will be at the center;
  • teamwork will now become “paramount;”
  • respect resources and reduce waste;
  • reinvest where investment counts;
  • measure and manage outcomes partially through electronic health records; and
  • establish a solid health care workforce foundation

Tom aka Rusty Rustbelt

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PJ Crowley Resigns After Remarks Bashing Bradley Manning’s Detention

The Guardian via Alternet offers this note on the Bradley Manning pre-trial treatment:

PJ Crowley Resigns After Remarks Bashing Bradley Manning’s Detention

PJ Crowley, the official spokesman at the state department, has fallen on his sword after calling the treatment of Bradley Manning, the alleged source of the WikiLeaks files, “counterproductive and stupid”.

The resignation followed Crowley’s remarks to an MIT seminar last week about Manning’s treatment in military prison.

Crowley had said: “What is being done to Bradley Manning is ridiculous and counterproductive and stupid on the part of the department of defence.”

The remarks forced President Obama to address for the first time the issue of Manning’s handling at Quantico marine base in Virginia. Obama defended the way Manning is being treated, saying he had been reassured by the Pentagon that his confinement was appropriate.

In a resignation letter, Crowley said he took full responsibility for his remarks. Though he attacked the leaking of classified information, which he called “a serious crime under US law”, he stood by his earlier criticism of the Pentagon.

In words that could cause further difficulty for Obama, Crowley said his comments “were intended to highlight the broader, even strategic impact of discreet actions undertaken by national security agencies every day and their impact on our global standing and leadership. The exercise of power in today’s challenging times and relentless media environment must be prudent and consistent with our laws and values.”

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On budget, off budget

op-ed by Dale Coberly
Is It or Isn’t It
(And what is a “budget” anyway)

There have been a number of comments and counter-comments on the subject of the definition of “on budget.”

I may have contributed to this “debate” by referring to Social Security as “off budget.” I knew what I meant, and I thought I was using the words the way I had seen them used by “experts.” Then CoRev and MG found “definitions” that seemed to contradict my usage. It has seemed to me that these commenters didn’t really understand the definitions they were citing, but I think we both have been guilty of a kind of laziness and stubbornness that make it impossible to resolve the dispute.

I do not offer the following out of any claim to authority, but as an appeal to common sense.

(Dan here…Spirited debate warning…feint of heart need not enter. OTOH, stay on topic and try not to be repetitious.)

Words don’t “mean” anything. They point the way to shared ideas. Just as a picture of a horse is not a horse, nevertheless the picture can remind anyone who sees it of their own experiences with real horses, or movie horses, or story horses. Words are the same way, they point us to experiences we might, or might not, share with the person we are trying to communicate with. But sometimes the experiences are not so well shared as we thought.

There are two concepts here that need clarifying. “Social Security” and “budget.”

The first is the legal, historical, practical, and moral status of Social Security.
Even before looking at that, it needs to be understood that Congress can change the legal status of anything at any time. [Subject only to the Constitution. But the Supreme Court can change the Constitutional Status of anything at any time subject only to what it thinks the people will put up with before they lose faith that the law means anything at all — other than the whim of the current resident.]

We know that. We do not argue that Social Security IS, and always will be, X. We argue that it was created as X, has always operated as X, and we think it should continue to operate as X. X in this case is that Social Security is funded by a special tax dedicated to pay for the retirement and insurance benefits of the taxpayer himself according to a formula based on his own direct contributions.

“Tax” is another word we need to be careful about: The SS tax is actually an insurance contribution. It is also a tax in that it is a non voluntary payment collected by a government, but it doesn’t act like a tax. It acts like an enforced savings “deposit,” which is dedicated to a fund which will be used to provide the taxpayer with essentially his own money (plus interest) back under certain well defined and all but certain conditions. Social Security taxes are legally separate from those taxes which are collected for the usual purposes of government, and they are accounted for separately. They may be LENT to the government, quite formally, with an obligation of the government to repay the loan with interest. But they are not “fungible” or so mixed with government funds that they lose their identity. They always carry a “tag” telling everyone where they came from and where they must return to.

“Budget” is the other term we need to clarify. We ought to have learned from ENRON and Arthur Anderson that accounting can be used to conceal facts as well as to provide an honest record of where money comes from, and how it is owed, and to whom. A budget is created by an entity for its own purposes and does not necessarily reflect a larger reality. Thus, if you are operating an agency of the government, and you have always been able to count on money borrowed from Social Security to pay for part of your activities, you might just enter that money on your books as revenue. And if you have no expectation, or responsibility, to repay it, you might leave it at that.

But if you do have a responsibility to repay it, and you don’t properly account for that, a time will come when you are ‘surprised’ to learn that there is a call on the money you have spent and you are unprepared to repay. There may be an honest reason to keep books this way, or prepare a “budget” this way, but unless your purpose is dishonest… you wish to deceive or confuse your creditors, or auditors, you really need to enter the borrowed money on your books as borrowed money. that is, as a debt that you owe.

This is the case with Social Security. The government knows and legally acts as if it owes TO Social Security the money it has borrowed FROM Social Security. Whether or not it always notes that on any given “budget” does not change the legal… and moral… obligation.

My own feeling is that the decision to keep Social Security debt “off the books,” and to write the various “briefs” that we have seen quoted by CoRev and MG was a decision made more for the purpose of confusing the public… and the press… than for any good or honest reason… even that of convenience.

Sometimes they give themselves away, as when the author of a certain CBO “brief” attempted to convince us that Social Security was no different from any other tax because the money went into the Treasury just like other taxes. This would be like a bank telling you that your money was no different from Joe Smith’s because the same Teller took it in… and therefore the Bank can give it to Joe Smith if it wants, instead of to you.

Honest people can resolve these semantic confusions in a few minutes. When it’s harder than that you can suspect that at least one of the parties is not being honest. Try to look behind the word at the reality it is pointing at.

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