Coyote Blog

A while back Bernie Sanders proposed a plan for "government jobs for all" -- a guarantee that the government would hire you at $15 an hour plus benefits and medical care.  All a worker has to do is bother to show up each day to get paid.

The Saudis have done something similar for years.  And now that the program has been in place for a generation, no one in the country has the skills or motivation to do productive private work any more

Nobu’s challenge points to one of the biggest obstacles to Saudi Arabia’s grand economic makeover: How to put Saudis to work.

The architect of Saudi Arabia’s economic overhaul, Crown Prince Mohammed bin Salman, wants to rev up growth and create more opportunities for citizens. Companies, however, are struggling to meet the government’s demands to employ them.

For decades, expatriate workers from countries such as India and the Philippines helped sustain Saudi Arabia’s high living standards by doing jobs Saudis wouldn’t do in kitchens, at construction sites and behind store counters. The oil-rich monarchy endowed citizens with what were essentially jobs for life in the public sector, which means the labor force doesn’t always have the skills, and sometimes lacks the motivation, to fill private-sector jobs.

The pressure to meet the quotas has pushed companies to offer Saudis better salaries and shorter working hours. Some businesses, risking fines and visa troubles, hire Saudis who count on the registered workforce but just sit at home.  Abdulmohsen, an executive at a Saudi logistics company, estimated that half of the Saudis on his payroll are employees in name only.

Back on Inauguration Day I wrote:

Wow, it sure does seem useful to have a single figurehead into which the public can pour all the sorts of adulation and voyeurism that they seem to crave.  That way, the people get folks who can look great at parties and make heart-felt speeches and be charismatic and set fashion trends and sound empathetic and even scold us on minor things.  All without giving up an ounce of liberty.  The problem in the US is we use the Presidency today to fulfill this societal need, but in the process can't help but imbue the office with more and more arbitrary power.  Let's split the two roles.

Last week, Andrew Heaton made a similar proposal in the Federalist, but explained the logic better than I did:

We threw the baby out with the bathwater when we kicked the monarchy out of America, and we ought to bring it back. To be clear, I do not mean the sort of hereditary tyrants who rule North Korea, Saudi Arabia, or the New York Yankees. Rather, I’d like for us to get one of those cute, ornamental throne warmers the Europeans trot around to cut ribbons at events.

In America we’ve combined power and reverence in the office of the presidency, but legal authority and veneration compliment each other about as well as Scotch and back pain medication. It’s safer to ingest them separately....

In America our head of government and head of state both problematically reside in the president. We can see that unholy union in full force during the spasm of pageantry which is the State of the Union address. President Jefferson rightly viewed the whole affair as pompous and monarchical, and sent Congress a letter instead.

Unfortunately the nimbus of deference surrounding the presidency has swelled with time. In 1956 a political scientist named Clinton Rossiter published “The American Presidency,” a tome sopping wet with sycophantic notions about the Oval Office. He described the commander-in-chief as “a combination of scoutmaster, Delphic oracle, hero of the silver screen, and father of the multitudes.”

Gag me. The president is the top bureaucrat, and there’s nothing more American than despising bureaucrats. The government is basically a giant Human Resources Department with tanks, and the president is in charge of it.

My only response to this is to quote from just about every comment section on the internet:  "first!"

I am happy to see prominent members of Congress from both parties starting to question our support of the deeply flawed government in Saudi Arabia.  I don't want to make war on them (repeating the Lybia mistake) but I also have been leery for quite a while about supporting a country that funds so much terrorism and is frankly as socially backwards as any place in the world.

So here is my question:  Had it not been for the shale oil and gas revolution in this country, would the US Congress be willing to question this relationship today?

This article on Saudi Arabia, shale oil, and oil prices was interesting throughout

Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.

Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.

The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The 'fiscal break-even price' is $106.

Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.

He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up - entirely reliant on imported weapons - that will propel Saudi Arabia to fifth place in the world defence ranking.

The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. "Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon," said Jim Woolsey, the former head of the US Central Intelligence Agency.

Money began to leak out of Saudi Arabia after the Arab Spring, with net capital outflows reaching 8pc of GDP annually even before the oil price crash. The country has since been burning through its foreign reserves at a vertiginous pace.

The American Studies Association has voted to initiate an academic boycott of Israel ostensibly to protest its denial of civil rights to Palestinians in the occupied territories.   Forgetting for a moment Israel's unique security concerns (what would the US do if Mexico routinely lobbed rockets and artillery shells into US border towns), the implication is that the Palestinians in Israels have it worse than any other group in the world, since this is the first and only such boycott the ASA has ever entered into.  Is it really worse to be a Palestinian in Israel than, say, a woman anywhere in the Arab world** or about anyone in North Korea?  Do academics in Cuba have more ability to write honestly than they do in Israel?  I doubt it.

The only statement the ASA makes on the subject that I can find is in their FAQ on the boycott

7) Does the boycott resolution unfairly single out Israel? After all there are many unjust states in the world.

The boycott resolution responds to a request from the Palestinian people, including Palestinian academics and students, to act in solidarity. Because the U.S. contributes materially to the Israeli occupation, through significant financial and military aid - and, as such, is an important ally of the Israeli state - and because the occupation daily confiscates Palestinian land and devastates Palestinian lives, it is urgent to act now.

A couple of thoughts.  First, I am not sure why US material aid is relevant to choosing a boycott target.  I suppose the implication is that this boycott is aimed more at the US than at Israel itself.  But the question still stands as to why countries like Saudi Arabia, which receives a lot of US material aid as well, get a pass.  Second, the fact that Palestinian academics can seek international help tends to disprove that their situation is really the worst in the world.  I don't think the fact that the ASA is not hearing cries for help from liberal-minded academics in North Korea means that there is less of a problem in North Korea.  It means there is more of a problem.

I am not a student of anti-semitism, so I can't comment on how much it may explain this decision.  However, I think it is perfectly possible to explain the ASA's actions without resorting to anti-semitism as an explanation.  As background, remember that it is important for their social standing and prestige for liberal academics to take public positions to help the downtrodden in other countries.  This is fine -- not a bad incentive system to feel social pressure to speak out against injustice.  But the problem is that most sources of injustice are all either a) Leftish regimes the Left hesitates to criticize for ideological reasons or b) Islamic countries that the left hesitates to criticize because they have invested so much in calling conservatives Islamophobic.

So these leftish academics have a need to criticize, but feel constrained to only strongly criticizing center-right or right regimes.  The problem is that most of these are gone.  Allende, the Shah, Franco, South Africa -- all gone or changed.  All that's left is Israel (which is odd because it is actually fairly socialist but for some reason never treated as such by the Left).  So if we consider the universe of appropriate targets -- countries with civil rights and minority rights issues that are not leftish or socialist governments and not Islamic, then the ASA has been perfectly consistent, targeting every single country in that universe.

** To this day I am amazed how little heat the gender apartheid in the Arab world generates in the West in comparison to race apartheid in South Africa.  I am not an expert on either, but from what I have read I believe it is a true statement to say that blacks in apartheid South Africa had more freedom than women have today in Saudi Arabia.  Thoughts?

Update:  I twice emailed the ASA for a list of other countries or groups they have boycotted and twice got a blurb justifying why Israel was selected but with no direct answer to my question.  I guess I will take that as confirmation this is the first and only country they have ever targeted.  They did want to emphasize that the reason Israel was selected (I presume vs. other countries but they did not word it thus) had a lot to do with he fact that Israel was the number one recipient of US aid money (mostly military) and that it was this American connection given they represent American studies professors that made the difference.  Why Pakistan or Afghanistan, who treat their women far worse than Israel treats Palestinians, and which receive a lot of US aid, were not selected or considered or mentioned is not explained.  Basically, I would explain it thus:  "all the cool kids are doing it, and we determined that to remain among the cool kids we needed to do it too".  This is a prestige and signalling exercise, and it makes a lot more sense in that context, because then one can ask about the preferences of those to whom they are signalling, rather than try to figure out why Israel is somehow the worst human rights offender in the world.

By the way, by the ASA logic, it should be perfectly reasonable, even necessary, for European academic institutions to boycott US academic institutions because the US government gives aid to such a bad country like Israel.  This seems like it would be unfair to US academics who may even disagree with US policy, but no more unfair than to Israeli academics who are being punished for their government's policies.   I wonder how US academics would feel about being boycotted from European events and scholarship over US government policy?

From the Jerusalem Post via Radley Balko

When the severed head of a wolf wrapped in women's lingerie turned up near the city of Tabouk in northern Saudi Arabia this week, authorities knew they had another case of witchcraft on their hands, a capital offence in the ultra-conservative desert kingdom.

Agents of the country’s Anti-Witchcraft Unit were quickly dispatched and set about trying to break the spell that used the beast’s head.

Saudi Arabia takes witchcraft so seriously that it has banned the Harry Potter series by British writer J.K. Rowling, rife with tales of sorcery and magic. It set up the Anti-Witchcraft Unit in May 2009 and placed it under the Committee for the Promotion of Virtue and the Prevention of Vice (CPV), Saudi Arabia's religious police.

"In accordance with our Islamic tradition we believe that magic really exists," Abdullah Jaber, a political cartoonist at the Saudi daily Al-Jazirah, told The Media Line. "The fact that an official body, subordinate to the Saudi Ministry of Interior, has a unit to combat sorcery proves that the government recognizes this, like Muslims worldwide."

Actually, we have something similar here, we just call it "climate change" instead of witchcraft.

I am a bit late on this, but this is from Jonathon Turley in the USAToday:

Around the world, free speech is being sacrificed on the altar of religion. Whether defined as hate speech, discrimination or simple blasphemy, governments are declaring unlimited free speech as the enemy of freedom of religion. This growing movement has reached the United Nations, where religiously conservative countries received a boost in their campaign to pass an international blasphemy law. It came from the most unlikely of places: the United States.

While attracting surprisingly little attention, the Obama administration supported the effort of largely Muslim nations in the U.N. Human Rights Council to recognize exceptions to free speech for any "negative racial and religious stereotyping." The exception was made as part of a resolution supporting free speech that passed this month, but it is the exception, not the rule that worries civil libertarians. Though the resolution was passed unanimously, European and developing countries made it clear that they remain at odds on the issue of protecting religions from criticism. It is viewed as a transparent bid to appeal to the "Muslim street" and our Arab allies, with the administration seeking greater coexistence through the curtailment of objectionable speech. Though it has no direct enforcement (and is weaker than earlier versions), it is still viewed as a victory for those who sought to juxtapose and balance the rights of speech and religion.

I continue to be confused why the Left in this country is so absolutely hostile to Baptists in Alabama but are so deferential to Muslims in Saudi Arabia.  Is it simply because one group makes credible threats of violence while the other does not?

Like the rise and fall of empires, or the tendency of revolutions to overshoot into excess, there are recognizable patterns to history.  Along these lines, there seems to be a pattern emerging in 60's and 70's era advocacy groups.  First, Greenpeace co-founder Patrick Moore turned on the organization he founded, criticizing it for ignoring science and being anti-human.  Now Human Rights Watch founder Robert Bernstein is criticizing the organization he founded:

I must do something that I never anticipated: I must publicly join the group's critics"¦.

When I stepped aside in 1998, Human Rights Watch was active in 70 countries, most of them closed societies. Now the organization, with increasing frequency, casts aside its important distinction between open and closed societies.

Nowhere is this more evident than in its work in the Middle East. The region is populated by authoritarian regimes with appalling human rights records. Yet in recent years Human Rights Watch has written far more condemnations of Israel for violations of international law than of any other country in the region"¦.

Meanwhile, the Arab and Iranian regimes rule over some 350 million people, and most remain brutal, closed and autocratic, permitting little or no internal dissent. The plight of their citizens who would most benefit from the kind of attention a large and well-financed international human rights organization can provide is being ignored as Human Rights Watch's Middle East division prepares report after report on Israel.

Something I missed the other day, was this indicator of how far from its principles HRW has drifted:

A delegation from Human Rights Watch was recently in Saudi Arabia. To investigate the mistreatment of women under Saudi Law? To campaign for the rights of homosexuals, subject to the death penalty in Saudi Arabia? To protest the lack of religious freedom in the Saudi Kingdom? To issue a report on Saudi political prisoners?

No, no, no, and no. The delegation arrived to raise money from wealthy Saudis by highlighting HRW's demonization of Israel. An HRW spokesperson, Sarah Leah Whitson, highlighted HRW's battles with "pro-Israel pressure groups in the US, the European Union and the United Nations." (Was Ms. Whitson required to wear a burkha, or are exceptions made for visiting anti-Israel "human rights" activists"? Driving a car, no doubt, was out of the question.)

This reminds me of when the Innocence Project added Janet Reno to its board (though I still think they do good work).

I realize I did not comment on the Joe Romm oil price bet per se.  Here are two reasons I don't like the bet:

1.  Romm is making a catastrophic forecast (ie oil >$200) but wins his bet at $41, what one might consider a fairly normal current oil price.  This is very equivalent to Romm forecasting a 15F increase in world temperatures in the next century (which he has) but making a bet that he would win if temperatures go up by only 0.1F.  Clearly, a 0.1F increase over the next century would be considered by all a thorough repudiation of catastrophic anthropogenic global warming forecasts.  So why should he win the bet at this level?

2.  The bet, particularly in the next few years, has more to do with the current government's actions than Exxon's or Saudi Arabia's.  To bet that oil prices will stay low in nominal dollars, one must bet that Obama's deficits won't destroy the value of the dollar, that the Fed's expansionist monetary policy won't lead to inflation, that Congress won't pass some kind of legislative restrictions making oil production more expensive, and that the world won't sign a treaty to restrict carbon.  In short, Congress will have more effect in the near term on oil prices than flow rates in Saudi fields, and I am certainly not going to make a bet in favor of Congressional or Presidential restraint.

Postscript: Here is what you have to believe to accept Romm's 15F global warming forecast.   Here is how I opened that post.  It is interesting how similar the forecasting issues are:

For several years, there was an absolute spate of lawsuits charging sudden acceleration of a motor vehicle "” you probably saw such a story:  Some person claims they hardly touched the accelerator and the car leaped ahead at enormous speed and crashed into the house or the dog or telephone pole or whatever.  Many folks have been skeptical that cars were really subject to such positive feedback effects where small taps on the accelerator led to enormous speeds, particularly when almost all the plaintiffs in these cases turned out to be over 70 years old.  It seemed that a rational society might consider other causes than unexplained positive feedback, but there was too much money on the line to do so.

Many of you know that I consider questions around positive feedback in the climate system to be the key issue in global warming, the one that separates a nuisance from a catastrophe.  Is the Earth's climate similar to most other complex, long-term stable natural systems in that it is dominated by negative feedback effects that tend to damp perturbations?  Or is the Earth's climate an exception to most other physical processes, is it in fact dominated by positive feedback effects that, like the sudden acceleration in grandma's car, apparently rockets the car forward into the house with only the lightest tap of the accelerator?

Oh, those wacky guys on the UN "Human Rights" Council.  They are now looking to Saudi Arabia as a model for protection of individual rights:

The top U.N. rights body on Thursday passed a resolution proposed by
Islamic countries saying it is deeply concerned about the defamation of
religions and urging governments to prohibit it.

The European Union said the text was one-sided because it primarily focused on Islam.

The U.N. Human Rights Council, which is dominated by Arab and other
Muslim countries, adopted the resolution on a 21-10 vote over the
opposition of Europe and Canada....

The resolution "urges states to take actions to prohibit the
dissemination ... of racist and xenophobic ideas" and material that
would incite to religious hatred. It also urges states to adopt laws
that would protect against hatred and discrimination stemming from
religious defamation.

Saudi Arabia said, "Maybe Islam is one of the most obvious victims of aggressions under the pretext of freedom of expression."

"It is regrettable that there are false translations and
interpretations of the freedom of expression," the Saudi delegation
told the council, adding that no culture should incite to religious
hatred by attacking sacred teachings.

Hat tip:  Yet another Weird SF Fan

Update:  I am kind of amazed the irony is lost on some folks, so I guess I need to be more explicit:  I found it depressing that the UN Human Rights Council is calling for limits on speech.

I agree with Kevin Drum, this is the dumbest thing I have read today:

There is a solution to the rising cost of oil, but it is a painful
one. Let's say there is a lot of $20-a-barrel oil in the world "”
deep-sea oil, Canadian tar sands. But who would look for $20-a-barrel
oil if someone else (Saudi Arabia) has lots of $5-a-barrel oil? The
answer is: no one.

Basically, American taxpayers have to guarantee potential producers
that the price in the future will not fall below $20 a barrel and that
they will not lose their investments.

This is easy to do. The U.S. needs to guarantee that it will buy all
of its oil at $20 a barrel before buying anything from OPEC. This
forces the price of oil down to $20 a barrel, but it eliminates the
possibility that it will ever go back to $5 a barrel.

The implication that no one will add capacity if there is anyone at all to the left of them on the supply curve is just silly, and defies history in any number of industries, including oil.  By this argument, no one would be building super-deep water oil platforms today.  The reason there is not more oil exploration today in certain areas of North America is that there are formal and informal government restrictions that make it hard and/or impossible.  And to the extent that oil companies are treating current oil prices as a bubble that will inevitably fall, all I can say is, bring it on. 

I am on the road this week, and still do not have time to write the post I want to write about Obama demagoguing against oil companies.  Fortunately, I do not have to, because Q&O has this post.

Here is the short answer:  companies like ExxonMobil, even in the best of times (or most rapacious, as your perspective might be), makes 9-10% pre-tax profit on sales.  They make something like 5-6% when things are not so good.  This means that if gas prices are $3, when you take out the 45 cents or so of tax, Exxon is making between 13 and 25 cents a gallon profit.  Call it 20 cents on average.  So, wiping out profits completely with various ill-advised taxes or regulations would achieve the substantial goal of ... cutting about twenty cents off the price of gas, or about $2.50 off the price of a fill-up.  Of course, that is at the cost of eliminating all investment incentives in the world's most capital intensive resource extraction business.  Which in turn will mean that that price cut will last for about 2 years, and then be swamped by price increases from disappearing gas supplies  (exactly what happened in the late 1970s). 

Part of the problem is that most people do not understand the supply chain in crude oil.  It would seem logical that if the price of oil rises form $30 to $100, then all that $70 price increase is pure profit to Exxon.  That would have been true in 1905, but is not true today.  Exxon, even when it does the exploration and drilling, gets its oil via complicated agreements with state-owned corporations which in the main are structured so that the country in question, and not Exxon, gets windfall.  This means that if Obama wants to tax windfall profits, he needs to seek out Venezuela and China and Saudi Arabia.

The article covers all this and more.

Growing up, my dad was a corporate executive in an industry where family members were routinely kidnapped and held for ransom in various countries.  As a result, I had a no-travel list of countries I could not visit, which included unsurprising entries like certain third world nations but also included countries like Italy and Germany, which we forget were plagued with Red Brigade kidnappings in the 1970's.

Foreign executives may have to add the United States to their no-travel list, as the US steps up its campaign of arresting people for activities they engaged in outside our country and which were legal in their home countries:

The founders of the online payment service Neteller have apparently been arrested  at airports in New York and Los Angeles.

It's
not yet clear why they were arrested. But it's worth noting that
Neteller, which is based in the Isle of Man, is the only offshore
online payment service that decided to continue to allow its U.S.
customers to do business with online gambling sites after the new bill
banning such transactions passed at the end of the last Congress.

And of course, U.S. officials have made a habit of late  of arresting high-profile offshore gambling executives when they pass through the U.S. to switch planes.

If an American, changing planes in Saudi Arabia, was arrested for being gay, or not wearing a burka, we would be outraged.  Brits should similarly be outraged that their subjects are being thrown in US jails for activities that are perfectly legal in their home country.

I just don't know why conservatives are so afraid to let folks like Khatami speak in the US.  Sure, he is a lying dictatorial human-rights-suppressing scumbag, but so what?  Its good to let people like this speak as much as they want.  They always give themselves away.  There were counter-protests and lots of debate about Iran in the news and on the nets, and that is as it should be.

I suppose conservatives real fear is that the press will, as they sometimes do, throw away their usual skepticism and cynicism and report his remarks as if they were those of a statesman rather than a thug on a PR mission.  But that's a different problem, and not a good enough excuse to suspend free speech, even for a man who granted it to no one else in his own country.  (I have never bought into the "media bias" critique, either conservative or liberal, in the press, because this seems to imply some active conspiracy exists to manage the news to some end.  Rather, I think it is more fair to say that reporters tend to apply too little skepticism to stories with which they are sympathetic.  For example, many reporters think homelessness is a big problem, so they were willing to uncritically accept inflated and baseless numbers for the size of the homeless population, numbers they would have fact-checked the hell out of if they had come from, say, an oil company to whom they are unsympathetic or skeptical of.)

On the same topic, I don't know why conservatives are so worried about this story of an increase in students from Saudi Arabia.   It used to be that we had confidence that people from oppressive countries would have their eyes opened by living in the US.  We have always believed that intellectually, freedom was more compelling than dictatorial control, and would win over hearts and minds of immigrants.  Our foreign policy with China, for example, is counting on engagement to change China.  Have we given up on this?

Julian Sanchez revisits Smith vs. Maryland, the Supreme Court case currently used to justify letting the government take about any data they want on your life without a warrant.  Sanchez questions the logic of the case, particularly in light of sweeping technology changes since the early 70's:

Part of the problem here is that since the late '70s, we've gone a long way
toward a world in which a huge amount of our most private information is held by
third parties. A huge chunk of my e-mails from the last couple years are stored
on some server owned by Google, where ad-generating software sifts through my
private communications looking for keywords that will allow the company to
display personally-tailored advertisements for me. Now, maybe I'm naive to have
any expectation of privacy in the e-mails sitting on that server, but I do
pretty much expect that nobody at Google is actually looking through my
correspondence and passing it around to their friends. And I at least
didn't expect until recently that some government program would be
sifting through those e-mails to see whether I used the word "jihad" some
suspicious number of times in letters to people in Saudi Arabia.

I had similar concerns about Smith v. Marlyand here.  One of my arguments was:

This exact same logic [used in this case] seemingly applies to any piece of data submitted
to any private third party unless the data is specifically protected
(e.g. medical records).  Sorry, but this is wrong.  I should be able to
have commercial transactions with third parties without the expectation
that the government can take the records for its own use without any
kind of a warrant....

The implication is that by giving a company data for use in a
transaction, we are giving them an unwritten license to do whatever
they want with the data.  Do you believe you are granting this?  Is it
true that you "entertain no expectation of privacy" in such
transactions?  If you agree with this ability, then I assume you also
agree that the government should be able to see all your:

• Credit card bills
• Records of who you have emailed
• Records of which Internet sites you have visited
• Records of what searches you made in search engines

I also pointed out that since many people spend a lot of money to keep information private (e.g. anonymous surfing software), the market has demonstrated clearly that people, unlike the SCOTUS asserted,  do have an expectation of privacy with such data.

After you finish this post, I have an updated post on the same topic here.

Well, the US trade deficit is up again, and you can be sure the news was accompanied by a lot of moaning and groaning and soul-searching.  The main reason that all the media and the majority of Americans freak out over large trade deficit numbers is that they look at the American economy as a large bank vault with a fixed supply of money on the shelves.  They reason that if more money is going out of the vault to buy things than is going back in from sales, then eventually the vault will go empty and we will be bankrupt.  Either implicitly or explicitly, those who fear trade deficits perceive the trade imbalance to be red ink, something bleeding out of a fixed supply.

This view of the trade deficit as a being a growing and unsustainable debt is wrong.  I will try to explain in a couple of ways.

The micro view

Lets first look at it from the perspective on one individual.  Lets say Fred made $50,000 this year, and lives in a US where, before he makes his spending decisions, trade is exactly in balance with China.  Fred spends some of his income on rent, and invests some in some nice US equities.  And he takes $1000 of what he just made that he might have saved and buys himself a nice Chinese-made plasma TV so he can really enjoy the Superbowl next year.

So, where's the debt?  One can argue that net savings is lower (perhaps - we haven't gotten yet to where the Chinese are spending their extra US dollars), but Fred seems to have increased the trade deficit without incurring any debt.  In fact, Fred is actually better off, since in a free society no one engages in a transaction that doesn't return more value than one spends.  In this case, the plasma TV provides more than $1000 of value back to Fred, or else he would not have engaged in the transaction. 

Yes, many people are buying Chinese TV's with consumer debt, but these same people are buying much more American stuff with consumer debt as well.  To the extent that there is or is not a "problem" with people taking on too much consumer debt, this problem is absolutely unrelated to the country of origin of the goods they are buying.  You can max out your Visa card on American stuff just as easily as on Chinese stuff.

But wait, you say.  The reason the debt is not obvious is from the way I structured the problem.  I assumed the rest of the economy was static while Fred was making his decision.  But if Fred had bought American, somewhere in the US economy there must have been less debt.  So we will tackle this next.

The Economy is Not Zero Sum

Repeat please:  The economy is not zero-sum.  Never has it been so hard to convince people of a concept that should be so obvious.  I used up bushels of electrons explaining why the economy is not zero sum here, but the short proof is easy:  Look at the world in 1900.  Look at it today.  The world as a whole and most every individual is far richer.  The fact is that economies create wealth every day, and free economies create a LOT of wealth.

At the heart of every argument that the trade deficit is bad is the mercantilist notion that the US economy is a bank vault leaking funds.  But this analogy that seems to be in everyone's head is flawed.  The supply of money or wealth in the US, in the vault, is constantly growing.  If you really have to think of it as a vault, then think of what's inside as rabbits rather than gold bars.  Does anyone doubt that if you start with a hundred rabbits and every year sent a few to China that you might still have more rabbits than you started with in the vault?  A free economy is like a group of rabbits on Viagra.  Even if the Chinese took billions of dollars they got from selling goods to the US each year and burned the money in a big bonfire, the US still would be growing in wealth.

Of course, the vault analogy sucks for a larger reason, that the US economy is deeply integrated with that of the rest of the world.  In fact, much of the wealth creation comes from this very integration, providing a more robust division of labor and a deeper well of creativity and entrepreneurship than any one country could achieve on its own.  And the dollars we send overseas don't stay there, they come back.  But we will address this next.

So What do the Chinese do with Those Dollars?

OK, so we are all short-sitedly (at least according the the "progressive" intelligentsia) sending dollars to China to satisfy our consumerism.  So what do those Chinese do with those dollars?  They can't spend them domestically, because stores and vendors in China don't accept dollars any more than the Wal-mart down the street from me accepts Yuan.

Most all the dollars have to come back to the US, or the person in China holding them gets no value.  You could say, well that person can take them to the bank and exchange them for Yuan, and that is true.  But that bank would not accept the dollars for exchange unless it knew it could get them back to the US, or had another client that needed them to make a purchase in the US.  So, the dollars will have to come back to the US to purchase something.

Some of the dollars come back to purchase US goods and raw materials, but of course this is less than the total dollars the Chinese have to spend, or else there would be no trade deficit.  In fact, this all that the words "trade deficit" really means.  It means that of the dollars the Chinese receive from sales to the US, only a portion is used to buy American goods that are shipped back to China.  The rest goes to buy American .. something else.

What?

Well, some of it goes to purchase American goods that stay in the US.  Lets shamelessly steal an analogy from Don Beadreaux and Jack Wenders.  If Chinese companies buy American steel and lumber and ship it to China, it shows up in the trade balance.  If they buy the same products and build a factory in the US, it does not.  The Chinese use a lot of their dollars to invest in buildings, real estate, capital assets, factories, production facilities, etc. in the US.  And this is bad, how?  I know that since the Japanese investment boom of the eighties, there are lots of folks who call themselves "liberal" who suddenly got very upset about foreigners owning US-based assets.  It is impossible for me to see this concern as anything but xenophobia and racism, since hundreds of years of Dutch, Canadian, and British investment never worried a soul but Japanese and Chinese investment has everyone in a lather. 

By the way, if you worry about China as a security threat, wouldn't you rather see them invested in the US economy, and therefore have a strong interest in our continued prosperity?  One could easily wonder why Saudi Arabia does not use their power over oil reserves to screw with the US like they tried to do in the early 70's.  The reason is that all of their wealth is invested in dollar and euro-denomitated assets.   People worry about the power the Saudis may have to mess with our economy, but their reinvestment of dollars back in our economy has made this a game of mutual assured destruction.  The same thing is occuring with China.

The other thing the Chinese do with the money is invest in dollar-denominated financial assets, which in many ways is just an indirect way of investing in the same capital assets listed above.  They will invest dollars in equities and, yes, debt securities.  But the fact that the Chinese choose to spend their dollars on debt securities does not mean that the trade deficit is causing the debt.  If the Chinese had a predilection for debt securities, more so than say an American holder of dollars, one might argue that this predilection drives down interest rates a bit and therefore might increase total debt, but this is a fairly tenuous chain of causation and not, I think, what seems to be bothering folks who panic over the trade deficit.  In fact, one can argue that the causation runs more strongly the other direction, that the large US budget deficit keeps the dollar higher than it might otherwise be, increasing the trade deficit.

So when people lament that "we now consume much more than we produce", they are making a meaningless statement because the we in the first part are not the same as the we in the second part.  The US and the Chinese are sending equal amounts of money back and forth - its has to be, over the medium to long term, or exchange rates would crash.  All the trade deficit means is that there is a difference in WHERE Chinese and Americans consume the goods.  Americans consume Chinese goods in the US.  The Chinese consume some of the US goods it buys in China, and then consumes the rest in the US.  The trade deficit represents the net amount of American goods and services the Chinese buy in the US and choose not to haul back to China.  Instead, they take ownership of the American goods here, in the form of capital assets or financial securities that represent ownership or calls on the cash flow of these capital assets. 

Anyway, you can find more here at Cafe Hayek.

Postscript:  By the way, the US has run a trade deficit of a magnitude that panics people for over two decades.  If this is bad, surely we would be able to find the damage somewhere.  But the US over the last two decades has had the strongest economy in the world.  I suspect that a lot of people would answer "we have run up a huge debt".  But any increase in total debt in the US is not relevant to the trade deficit, or only tangentially related as discussed above.  The Federal debt is run up because the politicians are all spending whores who support their reelection with "good works" paid for with our money.  Consumer debt, which may or may not be "too high", is based on individual spending and saving choices, and is unaffected by whether a person buys an American or Chinese TV.

Everything old is new again.  Back in the late 70's, all the talk was about the world running out of oil.  Everywhere you looked, "experts" were predicting that we would run out of oil.  Many had us running out of oil in 1985, while the most optimistic didn't have us running out of oil until the turn of the century.  Prices at the time had spiked to about $65 a barrel (in 2004 dollars), about where they are today.  Of course, it turned out that the laws of supply and demand had not been repealed, and after Reagan removed oil price controls and goofy laws like the windfall profits tax, demand and supply came back in balance, and prices actually returned to their historical norms.

Today, as evidenced by the long article on "peak oil" in the NY Times Magazine this weekend, we are apparently once again headed for imminent disaster.  The Freakonomics blog has already chimed in with a partial rebuttal, but I wanted to share some of my own thoughts.

Are the Saudis hiding a reserve shortfall?  Much of the peak oil phenomena consists of Paul Ehrlich type doom-saying that takes pains to ignore the laws of supply and demand.  However, the question of Saudi behavior is an interesting one.  Lets for a moment hypothesize that the Saudis were indeed somehow running out of oil.  One thing the article misses is how bad a thing this would be for the Saudi leadership.  The author notes that the ruling family shouldn't care, since it is already rich, so declining oil revenues won't hurt it.  But that misses the point.  With a large percentage of the world's oil, the Saudis are a country that must be treated with respect and deference.  Without oil, Saudi Arabia becomes that Arab nation that virtually enslaves half its population (ie the females) and that funds much of the world's terrorism, including the 9/11 attacks.  Suddenly, without oil reserves, the Saudi's might find themselves moving up the Bush-Rumsfeld priority list for a little visit from the US military.  I have no way of knowing if the Saudis are hiding anything -- the fact that some Saudi fields are using secondary and tertiary recovery methods (as noted in the article) really does not mean much.  But if they were losing reserves, they sure would have the incentive to hide it.

Reserve accounting is a tricky thing.  The vagaries of reserve accounting are very difficult for outsiders to understand.  I am not an expert, but one thing I have come to understand is that reserve numbers are not like measuring the water level in a tank.  There is a lot more oil in the ground than can ever be recovered, and just what percentage can be recovered depends on how much you are willing to do (and spend) to get it out.  Some oil will come out under its own pressure.  The next bit has to be pumped out.  The next bit has to be forced out with water injection.  The next bit may come out with steam or CO2 flooding.  In other words, how much oil you think will be recoverable from a field, ie the reserves, depends on how much you are willing to invest, which in turn depends on prices.  Over time, you will find that certain fields will have very different reserves numbers at $70 barrel oil than at $25.

Trust supply and demand.  Supply and demand work to close resource gaps.  In fact, it has never not worked.  The Cassandras of the world have predicted over the centuries that we would run out of thousands of different things.  Everything from farmland to wood to tungsten have at one time or another been close to exhaustion.  And you know what, these soothsayers of doom are 0-for-4153 in their predictions.  Heck, they are about 0-for-five on oil alone:

Most experts do not share Simmons's concerns about the imminence of peak oil. One of the industry's most prominent consultants, Daniel Yergin, author of a Pulitzer Prize-winning book about petroleum, dismisses the doomsday visions. ''This is not the first time that the world has 'run out of oil,''' he wrote in a recent Washington Post opinion essay. ''It's more like the fifth. Cycles of shortage and surplus characterize the entire history of the oil industry.'' Yergin says that a number of oil projects that are under construction will increase the supply by 20 percent in five years and that technological advances will increase the amount of oil that can be recovered from existing reservoirs. (Typically, with today's technology, only about 40 percent of a reservoir's oil can be pumped to the surface.)

One of the problems with oil is that governments have a real problem with allowing supply and demand to operate.  I have wondered for a while why Chinese demand has kept growing so fast in the face of rising prices.  The reason is that the Chinese government still is selling gasoline way below market rates, shielding consumers from incentives to reduce consumption.  On the supply side, I also wondered when I was in Paris why gasoline prices as high as $6 per gallon were not creating incentives for new sources of supply.  It turns out that nearly $4 of the $6 are government taxes, so none of this higher price goes to producers or creates any supply-side incentives.  Instead, it goes to paying unemployment benefits, or whatever they do with taxes in France.

Even in the US, which is typically more comfortable with the operation of the laws of supply and demand than other nations, the government has been loathe to actually allow these laws to operate on oil.  During the 70's, the government maintained price controls that limited demand side incentives to conserve, thus creating gas lines like the ones we are seeing in China today for the same reason.  When these controls were finally removed, a "windfall profits tax" was put in place to make sure that producers would get none of the benefit of the price increases, and therefore would have no financial incentive to seek out new oil supplies or substitutes.  Within a few years of the repeal of these dumb laws, oil prices fell back to historical levels and stayed there for 20 years.

But meddling with prices is not the only way the government screws up the oil market.  I laugh when I see people with a straight face say that we have not opened up any big new fields in this country since Prudhoe Bay.  This is in large part because the three most promising oil field possibilities in this country -- ANWR, California coast, and the Florida coast -- have all been closed to exploration by the government.

In addition, the government has, through a series of energy bills that are each stupider than the last, managed to divert valuable energy investment capital into a range of politically correct black holes.  All we seem to get are unsightly windmills in Palm Springs that always seem to be broken and massive ethanol subsidies that actually increase oil consumption rather than decrease it.  It should come as no surprise that  despite government subsidies for a range of automotive technologies like fuel cells and all-electric cars, the winning technology to date has been hybrids, which weren't on the government subsidy plan at all.

Don't Ignore Substitutes.  All the oil doomsayers tend to define the problem as follows:  Oil production from current fields using current methods and technologies will peak soon.  Well, OK, but that sure defines the problem kind of narrowly.  The last time oil prices were at this level ($65 in 2004 dollars), most of the oil companies and any number of startups were gearing up to start production in a variety of new technologies.  I know that when I was working for Exxon in the early 80's, they had a huge project in the works for recovering oil from oil shales and sands.  Once prices when back in the tank, these projects were mothballed, but there is no reason why they won't get restarted if oil prices stay high.  At $65 a barrel, even nuclear starts looking good again, though we would have to come up with a more sane regulatory environment.  Look for venture capital to steer away from funding the next shoelace.com and start looking for energy investments.

Dueling Catastrophes.  As a final note, its funny seeing the New York Times crying "disaster" over the peak oil scenario.  Those who read this blog know that I am skeptical that the harm from man-made global warming is bad enough to justify large, immediate Kyoto-like reductions in hydrocarbon consumption.  However, the New York Times is on record as a big believer in and cheerleader for immediate cuts in hydrocarbon consumption to head off global warming.  So why is peak oil so bad?  Shouldn't they be celebrating an ongoing drop in oil availability, which would force the world to produce less CO2?  Along the same vain, it is funny seeing a publication that has decried over and over again our dependence on Saudi Arabian and other foreign oil at the same time lamenting the fact that Saudi Arabia is running out.  If that's true, won't Saudi reserve declines solve the whole dependence problem, one way or another?

Postscript:  The other day, I found one of Paul Ehrlich's doomsday books from the 70's in a used book store.  When I have a chance, I am going to post some of its predictions, which were treated with breathless respect by most of the media, including the NY Times.

In my earlier post, I lamented the fact that "progressives" who criticize Bush for being undemocratic, illiberal, overly dependent on the military, and theocratic are proposing alternatives that are much, much worse.  In that post, they were championing Hugo Chavez of Venezuela as their savior.  Now, they seem to be latching on to Muslim countries like Syria, Saudi Arabia, and Iran as their champions of liberal values. In this interview of George Galloway, recently feted by liberals and progressives on both sides of the Atlantic:

M.B.H.S.: You often call for uniting Muslim and progressive forces globally.

How far is it possible under current situation?

Galloway: Not only do I think it's possible but I think it is vitally necessary

and I think it is happening already. It is possible because the progressive

movement around the world and the Muslims have the same enemies.

*Their enemies are the Zionist occupation, American occupation, British

occupation of poor countries mainly Muslim countries. * * *

*They have the same interest in opposing savage capitalist globalization which

is intent upon homogenizing the entire world turning us basically into factory

chickens which can be forced fed the American diet of everything from food to

Coca-Cola to movies and TV culture*. And *whose only role in life is to consume

the things produced endlessly by the multinational corporations.* And the

progressive organizations & movements agree on that with the Muslims.

Otherwise we believe that we should all have to speak as Texan and eat McDonalds

and be ruled by Bush and Blair. So *on the very grave big issues of the

day-issues of war, occupation, justice, opposition to globalization-the Muslims

and the progressives are on the same side*.

By the way, this is the movement that calls itself "reality-based".

Can't someone today emerge as a rallying point for those of use who are classical liberals and libertarians?

Hat Tip LGF.

I love this from James Lileks:

Yay Condi Rice. I want her to go to Saudi Arabia, and I want her first words upon getting off the plane to be "I'll drive." As for the Department of Education, I'd like to see an experiment: let the position go unfilled for four years and see if it has any impact on the educational abilities of the nation's youth. I'm guessing no one would notice if we didn't have a Secretary of Education. Everyone just keep on doing what you're doing, and get back to us.

I would suggest the Department of Commerce for the same experiment.

The Duelfer Report has become sort of a political Rorschach test for both opponents and supporters of the war in Iraq. Opponents of the war (examples here and here) will point to the findings that Iraq, at the time of the invasion, did not have WMD's and probably got rid of them soon after sanctions began and that inspections seemed to be working. War supporters (examples here and here) will point to the findings that Saddam was carefully maintaining the capability to produce WMD's in anticipation of restarting the programs when sanctions lifted. Rather than read all these conflicting reports, go to the original - the executive summary of the report is clear and you can get the gist in a page or two.

The point of the post is really not about WMD's, but about other countries and their attitudes about US and the war. As quick background, I supported the war in Afghanistan, because they obviously harbored those who attacked us and I felt it was important to set the example of a strong response to a terrorist act (rather than the weak response to the USS Cole or the first WTC bombing). The fact that Afghanis are having their first election in millennia and tens of millions of people, particularly women, are freed from the shackles of totalitarianism is just gravy. I opposed the war in Iraq, mostly because I did not think it was our job as a country, or my job as a taxpayer, to help clean up the world. I am not dumb -- I get the argument about stopping Hitler in Czechoslovakia, but I was worried that success would be pushing on a balloon - we might push back terrorism and totalitarianism in Iraq, but what about Saudi Arabia, Syria, Egypt, Iran, etc?? Hitler was a one-headed monster - Islamic fascism unfortunately seems to be a many headed hydra. I know that President Bush would argue that a free and sortof democratic Iraq could be the seed around which moderation crystallizes in the Arab world. I would dearly love this to be true, but I fear that it is wishful thinking.

However, I will say that I have occasionally wavered in my opposition to the Iraq war. One reason is that I am thrilled to see Saddam gone and the Iraqi's trying to make a go of a free society. I wish them well. I cannot understand nor tolerate people who allow their opposition to the war and/or the president to cause them to root for failure as the Iraqi people try to make a go of it.

Second, as is sometimes the case as a libertarian, I have found myself, in my opposition to the war, uncomfortable with many of my bedfellows.

For example, many folks who oppose the war seem to feel that they actually have to go overboard and defend Saddam and pre-war Iraq. An extreme example is Michael Moore's ridiculous Fahrenheit 9/11, which tried to paint a happy picture of Saddam dominated Iraq. I find that position indefensible. Saddam sucked, and Iraq under Saddam sucked. The lighter version of this position is the Kerry campaign's position that we have substituted one bad thing (Saddam) for another (chaos and violence), with the implication that the Iraqi people are (or should be) unhappy with the trade. This is ridiculously disingenuous. Absolutely no one taking this position, that chaos is worse than dictatorship, would take this position for their own country. The proof? When faced with the choice of adopting a more statist security system in this country (Patriot Act, detentions, etc.) to avoid chaos and violence (e.g. future terrorist attacks) the anti-war crowd opposed these measures. And I promise, for all the talk of Bushitler, etc, these measures are trivial compared to what was done to keep "order" in Saddam's Iraq. So it strikes me as tremendously hypocritical to advocate for the Iraqi's a course no one would consider here in the US.

The other issue on which I disagree with my anti-war brethren is this notion of not building up a sufficient alliance or getting enough global approval. This is actually the point I have been trying to get to in this post. For months, I have suspected that this discussion was both naive and misdirected. Naive, because all along I was pretty sure that France and Russia were Saddam's allies, and no more likely to join a coalition against him than Mussolini was going to join the allies against Germany. Misdirected, because if we are going to wage a war with Islamo-fascists, help from countries like Turkey, Pakistan, Saudi Arabia, and Indonesia is probably far more important than getting a few hundred MP's from France or Germany. Recent reports, including the Duelfer report and investigations of the ongoing UN oil-for-food program scandal, have begun to put factual flesh on the bones of my suspicions.

Since this post is going long already, I will continue in part 2.

UPDATE #1

I had a couple of emails already on Iraq. Let me clarify. I do not outright oppose the use of the military, even unilaterally, as a foreign policy tool. Also, I am not one of those idiots that somehow want to believe that terrorists are only attacking us because they have some valid complaints, and if we would just peacefully resolve their valid complaints, they would go away. Most terrorists and the nations that support them are bullies that hate our entire way of life, and who respond to nothing other than force. I have no problem agreeing that fighting terrorism will require military action against sponsoring nations, not just police work.

However, the attack on Iraq and its timing never quite made sense to me. I think of Iraq, Syria, Saudi Arabia, et al as a bunch of teenage boys who have been raising hell in the neighborhood for over a decade. After years of ignoring their crimes or at worst giving them a stern talking to, we suddenly take one aside (and not necessarily even the one most culpable) and shoot him. This made some sense with Afghanistan, since we could draw a direct line of culpability between the Taliban and the 9/11 attacks. But was it time to shoot Iraq? And while there certainly were links between Iraq and terrorists, were they really worse than Syria's or Iran's or Saudi Arabia's. Certainly shooting Iraq got the group's attention, that we can hopefully mine diplomatically over the coming years, but shooting Afghanistan should have had a similar effect, and we never really tried to leverage that before we moved on to Iraq.

UPDATE #2

By the way, leaving now in Iraq and giving up and/or giving in would be a disaster. Reagan's retreat from Lebanon and Clinton's retreat from Somalia were disasters to US Foreign Policy. Our best weapon is to give the opposition no hope of victory. Once you demonstrate there is a point at which you back down, you will always be driven to that point by the opposition. I disagreed with the decision to invade Iraq, but now that we are there, there is no turning back the clock. Our presence is a fact and we must make it a success or it will really be a waste. . Relevant quote:

However, there is an element of truth in Roberts's remark. For a time, the humiliatingly rapid defeat of Iraq's military (with the tacit consent of many Iraqi soldiers, it's important to add) will cause angry young men in the Muslim world to enlist in greater numbers in the effort to wipe out that stain on Muslim honor.

But it is not an infinitely expanding cycle. There is not an endless supply of young Muslim men willing to kill -- or die -- to inflict painful but strategically meaningless attacks on a grimly determined America.

But if America is not grimly determined, then that changes everything. Instead of recognizing the futility of giving their lives to kill Americans, these Muslim young men will be filled with hope that their sacrifice might yield results.