Relevant and even prescient commentary on news, politics and the economy.

What quid did the president quo and when did he quo it?

What quid did the president quo and when did he quo it?

Aside from the headline news about a July 26 phone call, I learned four big things from the impeachment inquiry hearing this morning. First, the specific corruption surrounding Burisma Holidings had to do with self dealing by company founder Mykola Vladislavovich Zlochevsky — issuing oil and gas licences to his own company when he was Minister of Ecology and Natural Resources. In other words, Zlochevsky did exactly what Donald J. Trump attempted to do with his Doral Golf Club and the G7 summit.

The second thing I learned is that President Trump was nursing a grudge against Ukraine because some Ukrainian politicians said some nasty things about him after he made a comment about letting Russia have Crimea. That’s why he felt Ukraine “owed” him. The third thing is that the Ukraine shit made fanfall just about exactly the time that Trump was extemporizing about Hurricane Dorian hitting Alabama. Who knew Trump could multi-task?

The fourth thing I learned is the big one. There was not one quid pro quo but two. One involved Zelensky, the other Putin. That’s the significance of the timing of the Trump-Zelensky phone call — the day after Robert Mueller’s congressional testimony was a dud. Humiliating Zelensky by forcing him to make a public announcement of a politically-motivated investigation of Biden-Burisma-2016 would hand to Putin his reward — a weakened negotiating partner — for the favor of having helped put Trump in the White House. The art of the deal, indeed.

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“Are Robots Stealing Your Job?” is the Wrong Question

Andrew Yang says, “Yes, Robots Are Stealing Your Job” in an op-ed at the New York Times. Paul Krugman thinks they’re not and advises, “Democrats, Avoid the Robot Rabbit Hole.” This is, of course, a classic case of asking the wrong question.

The real question is: will robots burn down your house and kill your grandchildren? Let’s imagine that all those self-driving trucks and the computers needed to guide them will run on electricity generated by wind turbines and solar panels. Will the robots in the truck factories and the robots in the computer factories also run on wind and sunshine? How about the robots in the wind turbine factories and the solar panel factories and so one ad infinitum? I know an old lady who swallowed a fly…

Let’s assume that it is feasible to phase out all current fossil fuel consumption by 2050 and replace it with renewable, zero-carbon energy. Does that mean it is equally feasible to provide the additional energy needed to run all those job-stealing robots? Or to put the question in proper context, would it be feasible to do it without an uncorruptable, omniscient global central planning authority?

The hitch in all this robot speculation is a little paradox known as Jevons paradox conjoined at the hip, so to speak, with it’s counterpart, “Say’s Law.” The former paradox says that greater fuel efficiency leads to more fuel consumption, the latter paradox tells us that labor-saving machines create more jobs than they destroy. Here are two inseparable positive feedback loops that together generate an incongruous outcome. “Yes the planet got destroyed. But for a beautiful moment in time we created a lot of value for shareholders.” Or lots of jobs, jobs, jobs. Or a monthly $1,000 payment to every adult “so that we can build a trickle-up economy,” Choose your poison.

There is, they say, “a certain quantity of work to be done.” Who says that? Good question. In the beginning, it was the political economists — even proto political economists — who said it. But around 1870 economists realized that the maxim conflicted with other things they had in mind so instead of professing it they began to condemn it and to attribute the idea to others — to Luddites, Malthusians or Lump-of-Laborers. The idea that a people could always do more work was just too great a temptation. In principle, the amount of work that could be done is infinite! The robots will not replace us! The robots will not replace us!

What this job-stealing robot debate is really all about is an economics version of theodicy. “Why does evil exist if God, the creator, is omnipotent, omniscient and good?” This theological question is echoed in the puzzle about poverty in the midst of plenty and in Mandeville’s “Fable of the Bees,” where private vices promote public virtues. If it seems like robots are stealing your job, have faith, all is for some ultimate purpose in this best of all possible worlds, as Candide’s tutor Dr. Pangloss would assure him.

Taking the Panglossian philosophy into account, it becomes clear that both Andrew Yang and Paul Krugman are on the same page. They are just reading different paragraphs. Although they disagree on what the solution is, they agree that there is a solution and it doesn’t really require a fundamental change in the way we think about limits to the “certain quantity of work to be done.”

 

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Ukraine Corruption and Transfer Pricing

Ukraine Corruption and Transfer Pricing

As I listened to the testimony of Bill Taylor and George Kent, I was also reading up on some South African transfer pricing case involving iron ore:

Kumba Iron Ore will pay less than half of the tax bill it received from the SA Revenue Service (Sars) last year following audits of its export marketing practices during the commodities boom. The settlement of R2.5bn significantly overshot the R1.5bn Kumba had set aside as a contingent liability. It is, however, a fraction of the taxes, penalties and interest payments Sars was pursuing the country’s dominant iron ore producer for. The existence of a potential tax liability was first reported to shareholders in June 2014, but Kumba could only put a number on it early last year when it received a tax assessment of R5 billion for the years 2006 to 2010.

If this account sounds like a lot of accounting gibberish, one might check with other accounts including whatever BDO wrote but these other accounts were even less informative. To paraphrase one commercial “people who know” avoid BDO. I think what happened is that the South African tax authority objected to what it saw as a lowball transfer pricing paid to the South African mining affiliate by a tax haven marketing affiliate and decided to completely disallow any commission income for the tax haven affiliate. This account at least notes that Kumba Iron Ore eventually told its shareholders that there might be some transfer pricing risk and that the issue was eventually resolved with a more modest commission rate booked by the marketing affiliate. So what does this have to do with Ukraine?

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Real average and aggregate wages declined in October

Real average and aggregate wages declined in October

October’s consumer inflation reading came in at a surprisingly high +0.4%, which as shown in red in the graph below, was one of the 3 highest in the past two years. Meanwhile average hourly earnings increased less than +0.2% – the second lowest reading in the past two years, shown in blue:


As a result, real average hourly earnings decreased -0.2% last month, the worst reading since late 2017:

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How economists blew the analysis of the manufacturing jobs shock

How economists blew the analysis of the manufacturing jobs shock

I came across this article yesterday, posted by – to his credit – Brad DeLong, whose argument it eviscerates. Entitled “The Epic MIstake about Manufacturing That’s Cost Americans Millions of Jobs,” it deserves widespread attention. So I am summarizing it here. But by all means go and read the entire piece.

Just to give you the frame of reference, here is the historical graph of manufacturing jobs in the US for the past 50 years:

After peaking in 1979, the number more or less gradually declined in the 1980s, and then stabilized in the 1990s, before plummeting right after 2000.

 

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Scenes from the October employment report: full employment?

Scenes from the October employment report: full employment?

Last Friday the household jobs report – the one that tells us about unemployment, underemployment, and labor force participation – has been particularly strong in the past three months. This has driven some impressive gains in labor force participation and the unemployment rate.

To begin with, gains in employment as measured by the household survey (red in the graphs below), as opposed to the larger (and, yes, more reliable) payrolls survey (blue), have totaled 1,222,000 in the last three months:

One month ago this gave us the lowest unemployment rate in the past 50 years, and the U6 underemployment rate is also at its lowest level, save for one month, since the series began in 1994. Each ticked up by +0.1% in October. In the below graph, both metrics are normed to zero at their lowest levels:

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Has Tyler Cowen or John Cochrane Ever Heard of Monopsony Power?

Has Tyler Cowen or John Cochrane Ever Heard of Monopsony Power?

I’m going to replicate one portion of a long winded rant about alleged cognitive dissonance:

The argument for a minimum wage is that labor demand is inelastic — employers will hire the same number of workers. They will just absorb the higher wages or pass along the costs to customers. Workers get all the benefit. If labor demand is elastic, employers cut back on the number of employees.

Of course, labor economists would recognize that John Cochrane’s entire post assumes a perfectly competitive labor market. One has to wonder about economists who have never even considered monopsony power.

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Innovative bureaucrats?

by David Zetland    (Via One handed economist)

Innovative bureaucrats?

The Dutch are fond of subsidies for arts, sustainability and… innovation.

These subsidies arise when bureaucrats with “topical portfolios” award cash to winners of various “promise to stimulate [topic]” contests.

On the one hand, I am pleased to see the government providing public goods, i.e., stimulating efforts to help everyone.

On the other hand, these programs tend to find the least-productive incentives to advance the “topic”

(My one-handed view is that this structure is wrong… keep reading…)

So the irony is that the bureaucracy in charge of innovation…

  • …has permanent employment contracts and long vacations;
  • …gains nothing from success but loses nothing from failure;
  • …works in non-market areas where the lack of objective measures of performance leads to subjective choices of winners and losers; and
  • …happily spews a meaningless whirlpool of jargon borrowed from strategic plans, conference videos, and social media #buzzwords.

If I was in charge of these topics, I would follow the new development model of “pay for results” by specifying the criteria for success and then rewarding the most successful efforts to reach those goals with cash and publicity.

This system would have nothing to say about who did the work, what angle they took, or how fancy their method. It would pay for results.

My one-handed conclusion is that governments should stop chasing “creative,” “innovative,” “smart,” or “sustainable” and just reward results.

What’s your experience on this topic?

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Drain the Ukrainian Swamp

Drain the Ukrainian Swamp

Trump’s latest excuse for withholding arms for the Ukrainian government to defend itself against Putin’s invitations so he can extract dirt against the Bidens is what again? Oh yea – he wants to root out corruption. REALLY? OK – start with this:

KYIV, Ukraine (AP) — As Rudy Giuliani was pushing Ukrainian officials last spring to investigate one of Donald Trump’s main political rivals, a group of individuals with ties to the president and his personal lawyer were also active in the former Soviet republic. Their aims were profit, not politics. This circle of businessmen and Republican donors touted connections to Giuliani and Trump while trying to install new management at the top of Ukraine’s massive state gas company. Their plan was to then steer lucrative contracts to companies controlled by Trump allies, according to two people with knowledge of their plans.

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Elisabeth Warren Has a Plan for America First

I plan to vote for Warren in the primary and general election, but I am not thrilled by all aspects of her plan for economic patriotism. I also have doubts about medicare for all (good policy bad politics) and forgiving student debt (good politics bad policy).

Trying to be brief and actually get to the topic of this post, my problem with Medicare for All is that people fear change and, while a majority support a Medicare option, a minority supports just enrolling everyone in Medicare aotomatically. I am in that minority, but Medicare for All is bad politics and also will never actually be approved by the Senate. Student loan forgiveness is the opposite. Many people burdened by student debt will vote for a candidate who promises to forgive it. But they are not the people most in need. They are US college graduates and relatively wealthy (even if not as fortunate as older graduates who got degrees when tuition was much lower). I do support free (public) college. The difference is that not charging tuition encourages people to get bachelors degrees which reduces supply of people without bachelors degrees and increases their relative wages (see the huge accidental experiment of enrollment to avoid the draft during the Vietnam war and the dramatic decline in the college wage premium). Given to someone who has already made the decision does not have this effect. It is special interest politics with beneficiaries who know exactly who they are at the cost of other programs or lower taxes or who knows ? (well rich people know they will be hammered by Warren and will vote for her only if they are patriotic, but there aren’t many of them).

OK now the plan for economic patriotism. I am sure this is excellent politics. I support some of the proposals (more money for apprenticeships so not all of the subsidies for education go to fancy pants bachelor’s degrees). I object to some. I also disagree with some of the analysis (which is a critique of work by friends of mine and is provocative and very high quality for a candidates web site).

First the general focus is on helping US workers also against foreign workers. I know this is almost universally accepted as a goal, but I find myself in the tiny minority who are against that. The income of US blue collar workers is pretty high up the world income distribution. I reject nationalism and oppose the aspects of patriotism which overlap with nationalism. This is a question of values not analysis and I won’t type more about it.

Second, the web page argues that the problem for US manufacturing workers is trade not technology. This is actually engaging in the economics debate at a reasonably high level.

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