I have not posted here lately, but this is only because I have been posting over at Moon of Alabama (usually with cross posts over at Kos. I am also contributing to Le Speakeasy and invite to check all of these fine sites out.
Behind the discussions about the future of Social Security, the situation of the Trust Fund, the requirement for personal retirement accounts and other such financial instruments, you have some basic reality-based facts that are sometimes forgotten.
Below (the fold) is a simplified description of the social security problems that we face and how not to solve them - in non-financial terms.
Imagine the USA as a big family; with no interaction with the outside world (we'll get to that part later): you have 1 senior citizen, 4 working age people, and 1 kid.
The working age citizens provide all the goods and services needed by everybody:
- 1 provides the basic stuff - food, housing, etc ; let's call him/her the construction sector
- 1 takes care of Senior and Junior; let's call him/her the nurse/teacher
- 2 crank out TVs for everybody's leisure and entertainement; let's call them the TV guys and let's say that they produce 3 TVs each (one per person)
The first important thing to note in this model is that at all times, this group is self-sustaining: all the work needed at any time is done at that moment by someone within the group, and all work done is consumed by someone.
The other important thing to note is that 4 people work to provide for the needs of 6 people. In effect, one third of their work is taken from them at any time to provide for the needs of the non-workers, i.e. Junior and Senior.
In the real world, the same thing happens on a larger scale, and these transfers can take 3 main forms:
- intra-family transfers: you feed your kids, pay for their education, your parents live with you, etc...
- government: you pay taxes and the government either spends it (schools) or redistributes it (social security)
- financial instruments: people can save, or spend their savings (via bonds and shares). Saving means that you store your work for future use. In practice, bonds and shares are a "tax" on your current work: a portion of your work is used to pay off debt or to pay dividends to shareholders. This is still you working and someone else (Senior, usually) enjoying the fruits of that work. "Dividends" sound better, but they still are really a tax on your work.
In any case, whatever form the transfers take, they should not hide that basic fact: 4 people work and 6 people live off that work.
Now take our family 50 years from now. It is now composed of 7 people: 2 seniors, 4 working age people, and 1 kid. 4 people working, 3 not, but all still with needs.
What happens now?
The construction guy still does that. With a little bit of effort, he is still able to make all that's needed for 7 people instead of 6
1 and a half workers are now needed to take care of junior and the 2 seniors (there is little room for productivity improvements there) which leaves:
1 and a half workers to crank out TVs. If there has been no improvement, that's only 4.5 TVs for 7 people. In order to have 1 TV per person, you would need each worker to be able to make 4.66 TVs instead of 3. Over 50 years, that does not sound impossible.
So, if you forget about productivity improvements, this is why you have the cries about social security crisis: either you have fewer TVs, or you find a better way to make more, or you will take less good care of seniors and junior. What should be done?
- the simplest (and pretty realistic) solution is to say that TV production has made such progress that 1,5 workers crank out as much (or more) stuff than 2 guys used to, so there are enough TVs for everybody and there is NO crisis. A larger portion of work goes into caring for the dependents (42% now instead of 33%), but that only reflects changing needs;
- if productivity increases are not enough, you can either take less good care of the dependents (only 1 worker to take care of the 3) and keep on cranking out TVs as you used to (2 workers), or you can decide to take care of your family and reduce your consumption of TVs. A slight variation is to say that you save up one TV today, mothball it and use it in 2050. in that case, you have 5 TVs for 6 people now and 5.5 for 7 in 2050 which might after all be sufficient in both cases.
To get back to the social security debate, the first item is hoping the growth will be strong enough to solve the funding requirements of social security, while the second item amounts to solving the problem by either reducing SS payouts or increasing payroll taxes.
It does not change the fact that 4 people are working to fulfill the needs of 7 people. If you expect to give only one third of your work for the non-workers, they will live less well, relatively. If you give 42%, they will live as they expected to, but you will be relatively worse off. This is the unavoidable reality of an aging population - if less people work, either they are taken care of by those that do, who then have less for themselves, or they are not taken care of (or any combination in between, of course)
Now bring in the outside world into our little model. There are two easy ways the outside world can help improve the situation:
- one is immigration. Bring in one more person of working age into the community, and presto, you can crank out again as many TVs in 2050 as you used to without any increase in productivity AND take care of everybody (including the newbie);
- the other is inter-temporal trade through international investment. You give today one of your TVs to foreigners (you have 5 for 6 people) in exchange for 1.5 TVs in 2050. With no increase in productivity, you can take care ofthe dependents as you'd like (1.5 workers) and with your own production (1.5 workers making 4.5 TVs) you end up with 6 TVs for 7 people, close to what you would get now. You make a small reduction in your living standards now to improve your lot later.
As other countries are at earlier stages of development (and have faster growing population), it makes sense to think that they will be able to crank out 1.5 TVs in the future and give them to you as a fair price for having given them 1 TV a while before. in a more realistic sense, you don't actually give TVs today - you take time to go to other countries to build factories there or to teach them to do it, and get a portion of future production for you as a payment
To keep on consuming as much as you want in the future, you either need to get more workers in the future, or you must save now and invest in a place with more workers. (Getting productivity increase would basically mean that you need to invest in new, smarter ways to build TVs yourself, which means spending some effort now to do that, which will reduce you current TV production in the expectation of increasing your future one - it's still saving to invest).
As you can see, there are two issues: one is the size of the pie, and the other is the sharing of the pie. The size of the pie depends on productivity growth, which in turn, depends on investment, which in turn depends on saving. Saving means working now and storing up that work for future use. Mothballing a TV is the dumb kind of savings; producing fewer TVs but taking the time to invent new, better ways to make TVs (or teaching others to do it for you) is the smart kind of savings.
The claims of the SS privatisers is that they will make the pie grow faster by unleashing market forces that will be able to make those smart investments. But is this true?
First of all, note that private accounts do not provide additional savings if they come instead of the existing public saving so they will not provide MORE investment. Will it be smarter? Smart will come from the people making investment decisions. If you accept the hypothesis that private investments are smarter than government investments, then you should reduce government spending, not reduce government funding.
As I wrote last week about the falling dollar, the current problem of the USA is that they consume too much and rely on foreign lending for their investments. If the solution is to save more now (especially to invest in other countries in order to have the returns when needed, in a few decades' time), this government is worsening the problem rather than helping to solve it, by spending like a drunk sailor and increasing the country's external debt at a time when it should be accumulating foreign assets for future needs.
To get back to our "family" - half the TVs are already being provided by the outside world, and the only reason they are doing it is because the 2 two US "TV workers" are busy - one making guns and shooting them off at or near others, and the other writing IOUs as fast as his hands can do so. Is this sustainable?
(Foreigners might actually welcome SS privatisation, because it will mean that the TV workers will target their guns at their Seniors to get them to work a bit more instead of at them...)
you can now read daily articles such as The China price about the threat to the US's manufacturing capacity from China's ability to be 30-50% cheaper.
Meanwhile, articles such as this NYT piece (A Field Guide to the Falling Dollar) are becoming daily occurences, all warning about the dollar's likely decline and basically saying that the only uncertainty is whether this decline will be rapid (bad) or slow (better).
These issues are inextricably linked and I'd like to provide my view on the subject. It's a bit long, but I hope you will find it worthwhile.
What these two things have in common is that they are the simple reflection of the real underlying cause of all the current unbalances in the world economy - the USA consume more than they produce, and they rely on the rest of the world to provide the difference.
The USA have the amazing privilege of having their currency serve as the main currency of international trade and reserve - which means that others are willing to hold dollars even if they do not intend to use them to buy things from the US (which is usually the main reason for buying someone else's currency). This reflects America's economic pre-eminence, as well (and this is often forgotten) as a general trust in the US institutions which means that foreigners expect their dollars to keep their value. This has allowed Americans to borrow money from abroad in pretty much unlimited amounts and at really good terms. This has in turn, mechanically fueled imports (if you have more money than you can spend locally, you spend it elsewhere).
So two first items to remember:
the USA get a really good deal from the rest of the world
US industry is not necessarily uncompetitive; it is structurally too small to fulfill all US needs
The rest of the world has been happy with this deal for various reasons:
for a good part of the world, wracked by inflation, nasty regimes and poor financial institutions, it is simply more convenient, safer and a better deal to keep your savings in dollars than locally;
for everybody, it is really helpful to have a common currency to set prices and trade internationally, knowing that everybody else also accepts it. This has been compounded by the growing use of (mostly US-created) financial instruments backing commercial transactions that all require a common currency to provide liquidity.
The problem is that the USA have abused the system, and the sheer scale of the unbalances are now threatening to bring down the whole thing.
one myth is that foreigners get better returns in the US than elsewhere, thus ensuring that they do want to invest there. This is simply false. The US actually generate more income from their foreign investments than foreigners from their US investments, despite these now being significantly larger. Foreigners now own a growing proportion of T-Bills, which pay little, whereas US investors own good productive assets outside the US (which quite often provide for US demand). These low returns on US purchases are not a problem in normal times, but they do not provide an "objective" reason for further investment in the US economy;
another myth is that it's Europe's "fault" if there are such unbalances, because Europe's economies are too sclerotic, Soviet, rigid, obsolete, etc and thus cannot grow and cannot "pull their weight" (i.e. importing more and "sharing the burden" with the US). Europe is barely a net exporter, but not very far from balance; Europeans live within their means and there is no rational reason to behave differently, so salvation will not come from here. (btw, it's quite a (framing) trick to have managed to call imports a burden, when it really means that others work and you enjoy their labor);
meanwhile, the Asian economies, having built their prosperity on piggybacking the US economy, and developping their economic base by providing for the US needs and imports, are now stuck in the same vicious circle as the US - as they have a mercantilist approach, they keep their currencies pegged to the US dollar to stay competitive, and the way to do that when you have a large surplus of dollars is to either invest in the US or stock them. Obviously, the Asians do not seem to be interested in investing in the US (being busy investing at home - or in China - as quickly as they can), and they recycle these dollars in low-remuneration T-Bonds (rather than cash). With the current deficits, the pile of T-Bonds they own is becoming precariously high;
In any other country in the world, such a situation would have triggered a currency run and a default, Argentine-style, with the IMF and other such institutions coming to the rescue... The only reason this has not happened (other than the main foreign investors almost everywhere are Americans, and they are obviously not going to treat their own country the same as some godless foreign land) is that the Dollar retains its role as a trading currency, and the US has accumulated such a capital of trust in its currency that it can spend a lot of it before it has spent too much.
The difference now is that, for the first time, there is a credible alternative currency for both international trade and reserve: the Euro. It is backed by an economy and trading partner just as big as the US, and by institutions, despite all the criticism and nitpicking from the business press, that are fundamentally sound (rule of law, sound banking regulation, hawkish central bank, balanced trade, reasonable debt position).
At the same time, the US has gone on an amazing spending binge, fuelled by the dot-com bubble, then the real estate bubble and the Bush deficits. The binge has been made possible by Greespan's astonishingly loose monetary policy (and everybody's joyful embrace of debt) and a lot of it has been wasted in military spending which does not profit many and is certainly not recycled into the economy (the economic equivalent of armies and weapons building is to have the people involved dig holes in the sand and refill them - it does not create any value and it ties up a lot of people that could do better things. Up to a point, you can argue of its value as an insurance policy against trouble from the outside, but it is fair to say that the US are far beyond that point).
So there you have it
longstanding overconsumption, a good chunk of it unproductive;
a credible alternative
and you have the result: 4 dollars bought 5 euros in 2001; now they buy 3 euros only.
The ONLY way to solve this crisis is for the US to stop consuming more than it produces. This can come in many ways, of which the falling dollar is only a very indirect one.
A falling dollar, when the US imports twice as much as it exports (yes, double) has initially the following consequences:
increase the cost of imports, expressed in dollars and decrease the cost, in other currencies of exports for foreigners (which is obvious), which leads to an increased trade deficit as the monetary impact is immediate, as imports are immediately more expensive, but cannot be immediately replaced (and in some cases, like oil or many products not manufactured in the US, cannot be replaced at all). And any change in the value of imports has double the impact of a change in exports, as they are twice as big to start with;
create potential losses for foreigners holding assets expressed in dollars. If these assets are productive (US factories or companies) this may not be so important, but if these are paper, liquid, assets (stocks and bonds, especially T-bonds), the investors will start worrying about the return on their investment. If they expect a continuing drop in the value of the US dollars, they may sell to cut their losses, thus creating a self-fulfilling peophecy (remember, you don't just need foreigners to hold on to their T-Bonds, you currently need them to buy an extra 2-billion-dollars worth of them EVERY DAY). A devaluation of the dollar is a default by stealth - you take away a portion of the value for all non-US based investors. A default, even if by stealth, is not trust-inducing, and we have seen that trust is the last thing holding the dollar now;
the likely way to avoid a full scale run on the dollar is then to significantly increase interest rates in the US. This has several effects: (i) it compensates foreigners for the additional risk (from their perspective) of the falling dollar value, (ii) it dampens domestic consumption by making debt more expensive, thus limiting imports and the deficit, thus possibly recreating trust that the US is taking a more sustainable financial path, but (iii) it will have an immediate impact on the real estate market, by making variable-interest mortgages more expensive thus strangling some borrowers (more sellers, including distressed ones) and at the same time reducing the price people are able to pay for houses (less buyers). Real estate being the main source of wealth for most US households, this will have a direct impact on all - no refinancing of your credit card debt by drawing house equity, reduced consumption, more bankruptcies, etc... It will not be pretty.
And when that takes place, the positive effect of a weaker currency will not have had time to kick in, because it takes time to build capacity for export or import substitution, especially if such capacity does not exist at all.
Meanwhile, your weaker currency has the following long term effects:
oil producers, who currently get paid in dollars, are not happy with the continued erosion of the purchasing power of the dollars they get. They spend most of them in Europe, and thus need Euros. They thus expect their oil to at least keep its purchasing power in euros, which means that, if expressed in dollars, the price must go up as the dollar falls. The Europeans don't really care, because the price for them will stay constant in euros. Americans, who have big gas-guzzlers and do not have heavy taxes that could cushion these movements, will feel the increase very directly at the pump; as an absolutely non substitutable import, this will only increase the deficit with no chance of a reduction other than serious reduction in consumption, which will be a consequence of economic hardship rather than going for substitutes (public transport), which are totally unavailable for most Americans.
holders of T-Bonds will need to be convinced to hold on to them - and to keep on buying more of them. The thing is that they are so little diversified tday that any move to change the balance of their reserves (inevitably towards the euro) has an immediate impact for the dollar, as we currently see - and for the interest rates required to keep them happy. Asian central banks may want to hold on longer than others, as they have the incentive of protecting their exports, but others (especially the oil producers of the Middle East and Russia) have growing incentives to bolt out before it gets worse. And Asians may decide on day that enough is enough, and you could have a real meltdown.
To avoid such meltdown, they will want to see the following:
- a commitment by the US to live within their means (this needs not mean zero deficit, but at least shrinking ones). This applies both to the government (the federal budget deficit - which need to be cut seriously) and to consumers (an orderly slowdown in consumption - which requires increased interest rates, again). This is purely domestic stuff - foreigners can do nothing to change that.
This gets me back to outsourcing and offshoring. Offshoring is just a new way to import more - except that it's imports of services instead of imports of goods. It was inevitable that the USA's insatiable demand - a growing portion of which is services - would require foreign input. Tradeable services naturally come into this mix (as opposed to non tradeable ones, such as getting a haircut or cleaning your pool). This movement is not a sign that US workers are uncompetitive as a whole, it simply means - again - that they consume more than they produce. Of course, some sectors may see real job destruction and upheaval due to foreign competition, but others are growing and hiring - tradeable services (banking, insurance, IT) is actually one of the few areas where the US has a trade surplus.
A falling dollar will not "solve" outsourcing if it does not lead to a rebalancing of domestic demand/production, and that will come only through massive changes in domestic consumption patterns.
So, the US can go on blaming foreigners all it wants, it's useless and counter productive. Foreigners have fed the massive overconsumption of the Americans over the past years; the smartest of them have managed to use that fact to build their economies, but they have not created it and they have certainly not repaed as many benefits as the Americans have. America has abused the privileges granted by the status of the dollar as the lone world currency beyond all reasonable repair; now it's time to pay back.
Europe will only marginally suffer, as they have balanced trade, limited exposure to the US market relative to their overall size, and a specialisation in high-quality goods that are not so price-sensitive (German exports worldwide increased by 14% this year despite the falling dollar).
non-China Asia will benefit from the increasing size of the Chinese economy (to which they are a massive net exporter) and will hopefully learn to develop more their domestic markets;
China is the most interesting case; they are likely to bear the brunt of falling US imports; on the other hand, a slowdown is probably eaxactly what they need after the overheating of the past few years; It may relieve the tensions on commodity markets that have seen stupendous increases in Chinese demand in a short time - and the corresponding price increases. The balance may not be so easy to find, but one must not forget that Chinese trade is pretty much balanced (exports to the Us being compensated by massive imports from the rest of Asia) and the country itself is not on an unsustainable export-only growth path as it busily develops its internal market and demand.
Again, the adjustment will fall mostly where it has to - US consumers. And again, this says nothing about the competitivity of US workers - only that when consumption is the priority, production cannot be - but this may well change soon...
- 1500 dead Iraqi civilians in 5 days - 300 per day - the equivalent of a 9/11 EVERY DAY
- 500 wounded US soldiers - 100 a day. See the recent stories (and below) which refer to the evacuations to Germany, which fit with that number.
- how many Iraqis now hate America with their life?
- how long befroe the draft if you lose 3% of your soldiers every month (and who knows what the proportion is for frontline soldiers)??
Battle casualties received by doctors at an American military hospital in Germany have more than doubled since the Falluja operation in Iraq began, the facility's commander told reporters Sunday. "Normally, we average 32 patients a day. In the last week, we've had an average of 70," Col. Rhonda Cornum said.
I'd like to point out something completely new in today's world, which is likely to bring new dynamics to all the "empire" discussions - the fact that today's Western world is highly leveraged . Our economies do not work on brute force, brute labor, smple gestures - it's instead a highly choreographed, extremely organised, perpetually going forward exercise in balance. It's like at the circus, when you see a 5-person high column of gymnasts and you marvel at the little boy or girl at the very top standing on one leg while juggling 3 balls - and you forget about the efforts of the 4 gymnasts below. It's very spectacular, genuinely better (as a show) that one guy juggling, and it's a real "win-win" situation: the whole groups is seen as marvelous, even if the competence of the bottom guys is only to be strong, and of the middle ones only to be steady. There still is only one juggler, but through cooperation and a common purpose, the whole group is at a higher state of performance.
This higher "performance", in our world, has been made possible ONLY because we have abandoned "might is right" as a functioning principle and decided to used better tools, such as predictable rules, consistently and evenly applied, specialisation and the trust that totally unknown people will follow the same rules of behavior as you do which such specialisation requires, curiosity, openness, a willingness to accept failure and learn from our mistakes. Of course, this is an idealised description, but it still basically fits our world.
Think about it. Do you worry about how to feed yourself, how to repair your car, about the reality of your wealth although it is only dots of ink on pieces of paper or blinking lights on a screen? This is leverage. This is our world.
One aspect of this world of ours is that we have become responsible, in a strange way, for the situation of "non-leveraged" people around the world. Their "nonleveragedness" is an obstacle to our own "leveragedness" (they don't care about the things we do, they have nothing much to lose in the monetary terms we use and are thus less afraid to break things that have monetary value as we are - they don't care about being efficient, they don't care about joining the rat race - and yet our world is accessible to them and thus susceptible to be acted upon by them) and we must thus change them. In simpler terms, to get richer, we have to make them richer (whether they want it or not) because being so poor they are a danger to us (and this is not incompatible with us having exploited and still exploiting them in many ways - we don't have to make them rich - only richer).
This gets us back to the discussion about our current empire - to maintain our way of life, this neverending quest for efficiency and monetarily measurable wealth, we need to get them to adopt our ways as well, if necessary by force. This use of force is totally at odds with the internal mechanics of the system; leverage requires trust, conviction, openness. Force negates these.
This contradiction is hard to square. The "smart" way to make leverage move forward is to convince people yet out of it that it is worth joining the rat race - this is essentially the European Union's approach - it offers the temptation of economic prosperity to lure countries to what is effectively a corset of institutions, rules, bureaucracy that makes the rat race/wealth creation possible. It also used to be the American approach. The new US attitude to the world (we only care about us - we don't need you in our system - if you are too stupid not to see how great it is, you deserve whatever you will get from us for being in our way) is very dangerous because it forgets that a highly leveraged system is VERY vulnerable to guerilla tactics, terrorism and in general any kind of win-lose or even lose-lose tactic - one side has so much more to lose.
Anyway, I don't know if this all makes sense, but my point is basically that when you're hanging on top of 5 guys juggling, you should not try to start throwing your balls to the tomato-holding guy in the crowd who has just booed you...
I've been meaning to write about wind for a long time and today's NYT gives me a good excuse. You can go read their article on the Nantucket sound offshore project; it gives a good summary of the kind of silly behavior we see around energy production and outlines many of the (real) issues surrounding project development of any kind nowadays.
The immediate reason for the article is that the US Army Corps of engineers produced a detailed assessment (which can be found here ) and which is basically favorable to the project. The coalition against the project (apparently - I have not checked this myself in detail in this case, but it sounds VERY likely from my experience elsewhere - Bostoners or New-Yorkers unhappy with the potential change in their sea view) has seized on this document with various arguments:
- the promoter paid for the study (of course, this is compulsory and a way to avoid the taxpayer to pay for it...) and it thus not impartial;
- the study grants "free" use of a federal resource (the sea bed) which is an unfair advantage;
- the study does not comment on the fact that the project requires subsidies (via the PTC mechanism) to be economic and is thus incomplete.
Now, all these arguments, on the face of it, have a legitimate basis and raise real questions:
- who should pay for (independent) impact assessment studies?
- what is the price for "public" goods and what should be the procedure to allocate and use them?
- what subsidies can be seen as legitimate?
This raises other questions in turn:
- why does it seem that such questions are asked with more intensity for the best projects and seem to be less important for other, more harmful projects?
On the one side, the wind industry, which was started when it was not fully industrialised nor competitive, by idealists who viewed it a a genuinely better source of energy, and were willing to be absolutely transparent about all visible and invisible costs, is still operating under that mindset - and is willing to submit itself to that process because it feels that it can genuinely convince doubters. On the other side, the opponents are most often the secondary-home-owners from the cities, easily lawyered up and procedure-wise, who raise everything they can to oppose projects that might disturb whatever notion of their holiday place they have.
- if we do not to give up our energy consumption (in this case, electricity), a political choice, we have to produce that electricity - and someone has to live with the production units. Who chooses WHAT sources of energy are used, in what proportion? Who decides how the inevitable nuisances are valued? And who chooses who is to carry that burden for others, as these nuisances will not all be borne by all consumers?
Definitely not an easy question. But it easily leads to point the contradictions of those that oppose projects on more or less valid grounds - without opposing energy use itself, it also points to the hypocrisy of those who do not support any of the consequences of their consumption choices, it underlines how easy it is to ignore or discount the not-easily-quantifiable nuisances (air or water pollution, noise, security of supply, security vs terrorism), and it also reminds us that it is easier to make the nuisances fall on those that are less able to defend themselves - the poor, the less educated, etc.
So who decides "impartially"? This should be the topic of a separate thread between the different traditions of France (a strong government, which is able to hire the best minds of its generation, provide them with interesting jobs, and provide strong and highly credible assessments in the name of the "public good") and of anglo-saxons (for lack of a better word - independent studies are provided by hired experts, usually paid by the investor, and whose independence is only guaranteed by their credibility and their track record - whether in the accountancy, technical expertise, legal, etc fields, and who have to manage conflicts of interest with their paymasters (balancing their reputation with their desire to please their clients). The anglo-saxon method is increasingly dominant, both as a result of the worlwide spread of US business methods and the relentless ideological disparaging of government as a wasteful and incompetent entity, but we have seen recently that it is not immune to its own crises... as I said, aonther thread is probably required.
The wind industry has taken a difficult route in that they have decided to face frankly all obstacles from the start, and provide as truthful an accounting of its costs as possible from the start, which sometimes imposes on it costs that are imposed on no other industry (For instance, in France, wind mills are the only type of industrial buildings that are required to pay for their dismantling costs upfront - not provision over the years, but actually pay in cash upfront! They also are the only energy source required to submit to the "Commissions des paysages" (landscape commission - yes, we have that in France) for an impact assessment).
And yet, they are incredibly successful. Most projects have very strong local support (from the farmers - they get nice fees to give up only a few square meters of land - from local authorities - they get taxes, jobs, quite often more tourism, and from the local population, which often end up being very proud of "their" project - modern, "clean", making them nominally self-sufficent, etc...
This works only if you have a sophisticated enough environmentalist movement, not easily hijacked by minority interests or pressure groups. Logically, Germany, where the debate between the "realos" and the "fundis" within the Green party took place many years ago - and where, thankfully, the realos won - is the most developed market for wind in the world. Denmark is similar (I can't comment on the politics of the green movement there, but I imagine it is similarly mature) and both countries have a strong first-mover advantage (and they get most of the jobs in the industry, now several tens of thousands).
Spain, the third largest market is an interesting example of an "enlightened" industrial policy, with strong government regulation which was not fought by the industry as they found ways to profit from it by investing in the sector themselves rather than fighting a rear guard action against the new entrants.
Now that "big industry" is investing in the sector big time (GE and now Siemens on the manufacturing side, Shell, Total, BP and most utilities in Europe and many in the US on the generation and development side, most big banks in the energy finance business) it will be intersting to see how the dynamic evolves.
Wind is a really interesting sector in that
- it encourages total cost accounting ;
- it is already almost competitive with other energy sources even when these do not do that total cost accounting;
- regulation is moving its way (with Kyoto and many other Europe-specific rules);
- big business now believes in the sector - even while applying that total cost accounting
Expect to hear more about it, and not just from rich lawyers complaining about their spoilt view...
For me, as I've written before, the biggest problem with religion in public life (it's not a problem in private life, quite the contrary) is that it brings into the debate absolutes, whether the concept of God (all powerful), ot good-vs-evil, Heaven vs Hell, etc. This is not helpful. Bring in absolutes, and you INEVITABLY bring along " the end (absolute) justifies the means", "with-us-or-without-us", etc... which are so dangerous as political tools and as ways to run society in general. Religion - but this is also true of any strong ideology, as communism as shown - is a very potent political tool to channel energies you way by showing the ultimate prize at the "end", and thus enrolling everybody towards that goal.
So I am vehemently hostile to any role for religion in politics. Religion - or similar absolutist ideologies, while a force for cohesion in many societies, has been the cause of the greatest massacres in human history.
Now, as a private matter, I have no problem with religion. It is a (usually) coherent ensemble of moral values, it provides an acceptable answer to the metaphysical questions we all have and it can provide peace and serenity to those that have the faith. In a way, I am envious of people that find their inner peace that way - I cannot (too many unanswered questions for me, too many doubts), but I respect the fact that they do - so long as they do not try to impose their faith on me. Values and morality are for me a question of personal - individual - responsibility. If you get there via religion, that's great - as long as you get there, you are coherent in your acts and your beliefs, and don't impose these values on others.
This was published under a pseudonym on JRL here (the link may not work yet as documents are not published immediately on the site, but it is the correct link). I don't fully agree with the conclusions about Putin, but the description of corruption in Russia is vivid, pretty typical, and damning. As the author writes, it is hard to imagine a system where corruption is not a problem nibbling at a fundamentaly healthy system, but the heart of the system.
[I am very grateful to David Johnson for agreeing to include this in JRL under a pseudonym. The reason for concealing my identity is not to protect myself from any criticism over what I say, but because I make some allegations about certain officials. I am not too concerned about the officials referred to in the cases of “Miss X” and “Miss Y”, as one has been retired for several years and the other emigrated. However, “Z” still holds the same position and revealing my identity would greatly facilitate identifying “Z”. For now, I need to protect the guilty. Nonetheless, I am well aware that in polemical exchanges one needs to know who one is opposed to, quite apart from forming a judgment on that person’s own credibility. Accordingly, I am more than happy to say who I am to any reader who has a bona fide wish to know and sends an email to David, who will forward it to me. I simply don’t want my name used in a public forum. David, of course, does know who I am.]
In recent weeks both Transparency International and the World Economic Forum have published reports yet again ranking Russia as one of the most corrupt countries in the world. It is significant, given Russia’s habitual rejection of criticism by outside bodies, that President Putin has said much the same thing. Indeed, he has stated publicly that it is one of the worst dangers to Russia’s stability and territorial integrity, especially in the aftermath of the horror of Beslan in the first week of September. As more and more information becomes available about that disaster from official Russian sources, not just journalists and eyewitnesses showing that the terrorists effortlessly passed through numerous roadblocks and checkpoints in order to get themselves and their munitions to their destination, one can see what he means. Such freedom of movement is inconceivable to anybody who has endured the ceaseless “checks” by traffic police in cities like Moscow and St Petersburg, let alone in places on a war-footing such as the Caucasus, unless, and only unless, bribery played the critical role, at every single checkpoint. (Actually, though we don’t know yet for sure what happened during that dreadful period, it is possible that telefonnoye pravo (telephone orders) were employed. In this ‘system’ a senior official calls all the checkpoints ordering the people manning them to let through, unchecked, vehicles with such-and-such registration plates. This is used, for instance, by military and security personnel transporting stolen building materials to build their luxury homes).
This is reinforced by the revelation that corruption and bribery played vital roles in enabling the alleged suicide bombers get tickets, and evade detection of their explosives, on the two internal flights that were blown up the previous week, killing 90 people. Indeed, corruption on the part of members of the security and law enforcement agencies appears to have been an essential ingredient in just about every terrorism disaster that has befallen Russia in recent years. Chechen terrorists themselves have said as much.
In what must be one of the most surreal comments on the Beslan horror, former head of the KGB (and participant in the failed coup against Gorbachev in 1991), Vladimir Kryuchkov, recently stated that a nation-wide system of informers throughout the civilian population should be rebuilt, as was the case in the Soviet Union: "It is a simple, but significant fact that three trucks filled with people carrying heavy arms managed to drive through the streets of Beslan, and nobody in the town reported it. This type of thing has to be reported … We need to revive the model of the community as assisting the work of the special forces.” (Ilona Vinogradova, “The Return of the Snitch: A Despised Soviet-Era Custom Enjoys a New Vogue After Beslan”, Russia Profile, November 3, 2004, see JRL 8349). Kryuchkov appears to be unaware of his own hideous sense of irony. To whom exactly should the careless citizens of Beslan have reported their suspicions the very law-enforcement agencies that were taking money or had been ordered to direct the terrorists on to their target? He also seems to have overlooked the fact that most of the able-bodied citizens of that town were taking their children to school, such as the 1,300 or so who were at the doomed School Number 1. There probably weren’t many people out on the streets looking for suspicious vehicles.
This recognition of the cancer of corruption within the body politic by President Putin is something that has been overlooked by many of his critics, including the 115 distinguished Western politicians, academics, and others, who recently signed an open letter to the heads of NATO and EU states condemning Putin’s proposals to reform the Russian electoral processes in favour of direct appointments of regional leaders and Duma representation on the basis of party lists. True, on the surface, these steps look like reverses for the Russian democratization process, but I do not believe this is a balanced and comprehensive assessment.
Corruption, and its handmaidens, incompetence and cynicism, are crucial elements in Russian public life and failure to appreciate what this means leads to woefully mistaken expectations, to say nothing of totally inappropriate advice from even well-meaning foreign pundits and politicians. In most developed societies and economies in the West, corruption is a deplorable fact of life to greater or lesser extent, but the core system of governance and administration is, nonetheless, based on rules and procedures that are sound, that work, and are accepted by society as a whole. Corruption in the West is something that attacks a basically healthy system, somewhat as bugs attack healthy organisms. In Russia this is not the case. The system itself is a Potemkin façade, resembling superficially, and based upon lip-service to, internationally standard principles but, in practice, utterly removed from them. The system itself is corrupt and its underlying principles are those of corruption. It is not just a few hundred or thousand policemen and security agency personnel who are corrupt. This disease is everywhere.
A revealing episode that is relevant to this is included in Strobe Talbot’s The Russia Hand, his account of the Clinton-Yeltsin relationship. Talbot tells how he was with then Russian Foreign Minister Igor Ivanov the night Russian troops made their dash to seize the airport at Pristina in Kosovo, thereby triggering the most dangerous confrontation between NATO and the USSR/Russia since the Cuban missile crisis some forty years earlier. Down the corridor from Ivanov’s office, Talbot writes, they could hear the sounds of drunken generals shouting and smashing vodka glasses. It was at that chilling moment, he says, that the American side realized that the Russian Government had lost control of the military. It may not be immediately obvious how this is related to the issue of corruption in public administration. (Further, it is true that this episode took place during Yeltsin’s chaotic period in office, though the determined resistance to Putin’s demands for military reform suggests that little effective control has been re-established since those days). But there is a connection. The military is notoriously corrupt, with well-documented cases of hazing of first-year conscripts by their second-year elders, often resulting in death, suicide and desertion, to say nothing of severe physical and psychological trauma, all made possible by the indifference and abnegation of responsibility by demoralized, underpaid and poorly housed officers. Further, senior officers use conscripts, together with stolen materials, to build themselves large dachas and other facilities. At its worst, it is widely alleged that Russian military personnel sell weapons to, among others, Chechen terrorists, a totally extraordinary and evil practice, if only because this directly leads to the deaths of the traffickers’ own troops. Most people might also call this treasonable behaviour. In such an unchecked corrupt institution, it is therefore not difficult to see why the military leadership should make its own decisions on such matters as taking Pristina airport it is not accountable, and has never been made accountable, to civilian political authority, a crucial characteristic of public sector corruption generally.
But it is not just in such high-profile matters (anti-terrorism, military operations, etc) that corruption flourishes. It is everywhere. I have spent the last nine years living in Russia, mostly employed as a consultant working on a number of projects supported by Tacis, the EU’s technical assistance program for Russia and the so-called Newly Independent States of the FSU. My counterpart organizations the local bodies who were supposed to benefit from the inputs of Russian and EU advisers, like me were various departments within the regional administration of one of Russia’s 89 regions and, later, a section within a federal ministry in Moscow.
During my regional experiences, the then governor of the region was known to be utterly corrupt, in terms of using his position solely for the accumulation of huge personal wealth, was publicly a foul-mouthed drunkard, and was credibly accused of (but never charged with) having ordered the murders and attempted murders of opponents and critics, including regional parliamentary deputies and journalists. Two of his senior deputy governors were arrested by Russian law enforcement agencies for serious financial crimes (theft, embezzlement, smuggling, etc) involving many millions of dollars. Both of them were released and one of them is now in hiding abroad, on Interpol’s wanted list. More recently, under a different governor, another deputy governor was arrested after being secretly filmed accepting a $250,000 bribe to issue a licence to import cars. Reportedly, his initial defence was to claim that he would be getting “only” $50,000 the rest, he said, was intended for his boss.
The use of high public office for personal gain is widespread throughout Russia in municipal, regional and federal bodies of administration. This is why large sums of money change hands to ensure that so-and-so is appointed (or “elected”) to such-and-such a position, where the payback or return on investment - is enormous. Consequently, it is not surprising that middle-level and junior public servants are frequently inept and unqualified for their posts being, rather, part of the overall food chain, protecting their superiors from exposure and being rewarded with a share of the spoils. Nepotism is rampant, as one would expect in a culture where family and personal loyalties have always been valued very highly and certainly more than merit, especially where corrupt and criminal behaviour is the norm. Two examples: When hiring Russian staff for one project team, I wanted to recruit an agricultural specialist. My counterpart helpfully proposed a Miss X as being “ideal”. Miss X turned out to be the official’s daughter who was just graduating from school and whose knowledge of agriculture, as far as I could ascertain, was confined to assisting her granny pickle tomatoes grown at the dacha. The counterpart would not speak to me for two months (thus stopping any possibility of project progress) when I turned down her application.
Later, another official proposed that I take on Miss Y as an interpreter for my EU consultants. I said we already had two, thank you very much, but the official insisted that the entire project would be in danger of being cancelled if I did not comply with this “reasonable” request. When I discovered that Miss Y spoke only Russian I asked how she was supposed to be an interpreter. “You will pay for her to have lessons,” was the answer. Miss Y was, of course, another family connection. On this particular poker hand, I saw that my counterpart was not bluffing, so I compromised. I offered to pay her half the normal minimum rate, saying untruthfully that it was the maximum possible (my lie was fortunately undiscovered) on condition I never saw the woman anywhere near our office. The deal was accepted.
Throughout three years on this particular project, during which time my Russian and foreign colleagues produced over thirty detailed sets of recommendations covering such issues as how to set up an export promotion agency, how to develop international aviation services, how to develop telecommunications infrastructure and services, how to carry out regional legislative reform to improve the investment climate and much, much more, we were treated largely with indifference bordering and often crossing over into contempt and, on several occasions, open abuse. The reason for this was simple. Despite the high standard of our work and we used very experienced practitioners to advise on how to achieve change (including a former government minister, an ex-chief executive of successful airline start-ups, professional development bankers, active businessmen and so forth) nobody in the administration was the slightest bit interested as there was no direct pay-off to the officials. Our reports were ignored and almost certainly never read (yes, they were written in Russian) as the key people were always sick, on leave, traveling on business or just too busy to meet and discuss the issues. However, they were not too busy to demand that we provide computers (highly mobile and saleable items) or, in one case, buy 100 subscriptions to a propaganda newspaper produced by the regional administration, showing what a wonderful chap the then governor was. When I pointed out that there were less than ten of us in my project team and that, anyway, this rag was available free from every kiosk in the region, I was told that my failure to comply with this request would be considered a hostile act. I refused and it was.
In Moscow, working with a part of a major ministry it was a bit more subtle. It was formally disallowed for my colleagues and I to meet any of the decision-makers (deputy ministers upwards) and we were therefore compelled to “work” with a middle-level public servant, whom I shall call “Z”. We were trying to advise the counterpart on a number of key strategic issues relevant to Russia’s overall reform program. We made numerous written proposals on these serious and complex issues. Our counterpart never read or even acknowledged receipt of our proposals and was always too busy to meet us to discuss them (or sick, or on leave, or traveling on business the standard excuses to avoid meetings). In part this was due to the ever more apparent fact that “Z” did not have the technical skills to understand the issues we were addressing and in part because “Z” was not in a position of authority sufficient to voice opinions (hence our frustration at being denied access to those who would understand and who could make decisions).
However, this did not stop “Z” from ordering an assistant to call us (but not to write to us) suggesting that “Z” had moved into a new office and, therefore, it would be appropriate if we would buy a new television as a form of congratulation, or pay for a New Year’s party for “Z’s” staff (at a cost of $3,700), or make other demands of a similar nature. When my EU colleague and I refused to do this and demanded that we had meetings to discuss the matters that we were actually employed to deal with, our counterpart complained to the European Commission that there had been a complete “breakdown of trust” between us and insisted that we be “replaced”. The Commission immediately agreed and so my EU colleague and I were unceremoniously dumped from our project. (Interestingly, this was completely legal, as I have just lost a case for unfair dismissal which I brought to the European Ombudsman’s Office). We were not, however, replaced as our ex-counterpart objected to subsequent EU candidates proposed for our posts. The role of “EU Adviser” is now filled by a Ukrainian, which must be an encouraging sign to the EU-hopefuls in Kiev. Our erstwhile Russian colleagues now work as effective subordinates to “Z”, funded by the Commission, instead of acting as independent experts advising the Government on policy and related issues. They do the work that the counterpart’s civil servants are self-confessedly unable to do themselves, that is, mostly pushing paper around and completely abandoning any strategic and policy analysis. This had been explicitly forbidden in our original terms of reference, drawn up by the Commission and formally agreed by the counterpart, but appears now to have been tacitly accepted as the price for continuing “cooperation”.
There are hundreds and thousands of foreign (and Russian) consultants and experts, funded by Tacis and other bodies, who can tell similar or worse stories. Why does this nonsense and waste of money continue? There are two reasons. One is political: it is better to have the appearance of cooperating with Russia, even though the results are far below expectation, than to say openly that Russia is incapable of absorbing cooperation and assistance effectively. Upper Volta with nuclear weapons (plus oil, gas, timber, consumer markets, etc) is important. Upper Volta without them can safely be reprimanded and sanctioned, if appropriate. The second reason is that it would be an appalling loss of face to admit that billions of dollars of assistance have largely achieved nothing (the purpose of Tacis is to support the transition to democracy and a market economy. In Russia, after more than ten years, there is not much sign of success in either area, at least, not much that can be directly attributed to foreign assistance). So everyone plays the modern variant of the old Soviet game “you pretend to work and we will pretend to pay you.” In the new variant, we work and we get paid, but nothing happens.
Becoming a public servant is a licence to extract large sums of money from the populace and business community. In other words, public service is not a vocation or a well-respected career offering an acceptable material reward (let alone ‘job satisfaction’) in exchange for fulfilling the public sector’s social contract with the citizenry. Rather, it is an opportunity to join a cynical kleptocracy that preys on society. Such opportunities command entrance fees. And, by the way, let us not underestimate the direct, formal rewards to public servants. They do, indeed, earn low salaries, even by Russian standards, but there are many perks end-of-year cash bonuses allocated on a seniority and loyalty basis, apartments, dachas, cars, holidays, foreign travel and much more. In other words, spare no tears for the allegedly underpaid Russian civil servant. He or she as long as appropriate support for the boss is maintained does okay. Paying public servants higher wages will not eradicate corruption. The system is too diseased. (However, it is interesting to note that public servants’ salaries have, in the last few months, been increased by a multiple of up to five times during the same period when benefits for disadvantaged members of society, including war veterans, victims of Chernobyl, pensioners, etc, are having their free transport, medical and other benefits replaced by cash payments, widely considered to be worth a great deal less than the implicit value of the benefits).
All this breeds and sustains an atmosphere of utter cynicism towards, in particular, the population, which is why, in return, the Russian population has no trust whatsoever in the system of Russian public administration. And since competence in a particular discipline within the public service is not required (extracting money and keeping superiors happy are the key survival skills) no wonder that so many Russian public servants have no idea about the issues they are formally responsible for. This is also why nothing works properly, be it security, economic development or whatever.
I believe that President Putin is well aware of the fact that this virus of corruption is endemic throughout the entire country and that public administration is utterly and profoundly incapable of dealing with its real responsibilities. Thus, his proposal to appoint governors, who will be directly and continuously answerable to him (instead of letting drunken gangsters, or the puppets of powerful regional business/criminal cliques, buy election once every four years and spend the interim period looting their regions), and trying to develop a party system, instead of enabling rich individuals to buy their way into the Duma (where they can and do accept or give bribes to ensure appropriate legislation is enacted or blocked in favour of their corporate backers’ interests), may well be a practical move towards cleaning Russia up. Haranguing, harassing and humiliating President Putin for rolling back democracy is missing the point. There is no real democracy in Russia for him to trample on and hasn’t been since Yeltsin ordered tanks to fire on the democratically elected Duma in 1993, an act which the West applauded, or at least tolerated, in a post-Cold War variant of the “better dead than red” school of applied democratic theory.
Putin’s course of action is not without dreadful risk, of course (what if he was succeeded and his powers inherited - by someone like Zhirinovsky, say?), and it is also true that his actions do indeed represent a further tightening of the noose, on top of his other authoritarian moves against the media, NGOs and so forth. Nonetheless, given his background in the Soviet-era KGB and then as head of the successor FSB, it is hardly surprising that his training and experience tells him to resort to increased authoritarianism rather than the anarchic Yeltsin approach. It is not as if Russian history offers alternative and better models of behaviour.
Is there anything the West can do to help? I am not sure that there is, since western countries have not within living memory had to root out endemic corruption on the scale that Putin has to face. We simply don’t know how to do it (and anybody who thinks that measures like increasing public servants’ pay, or ensuring that the law is enforced effectively, will do the trick is living in cloud-cuckoo land). Furthermore, there are, of course, many fine, talented and dedicated public servants (both officials and elected politicians). But every barrel seems to contain a number of very rotten apples and the good guys are sidelined, neutralized or, in more extreme cases, fired or killed. They are unable to fight the virus, so what can we, the generally unwelcome outsiders, do?
Putin’s greatest fear, as he has often stated publicly, is the disintegration of the Russian Federation. He saw how easy it was for the USSR to disappear almost overnight and knows that present-day Russia is equally if not more vulnerable. Such a scenario would be extremely dangerous for the rest of the world, whatever about the consequences for Russia and its people. And the greatest weakness of Russia, and hence threat to its future survival, is the rottenness of the state apparatus built on corruption. Even if there is not much we can do actively to assist, there is, perhaps, one thing we could refrain from. When Putin introduces more authoritarian measures, we are entitled to express our concerns about the possible consequences. But we should stop the knee-jerk instantaneous condemnations that make no effort to understand where he is coming from and what he is trying to achieve. We should call off the attacks on the one Russian leader in the last eighty years who is trying to put an end to this potentially fatal disease, because in this fight, as in the greater war against terror, we should all be on the same side.