Fight Inequality With Improved Public Education

WASHINGTON – In the course of a popular national radio show, an important journalist declared that “the Big Issue” that Americans will have to contend with in 2016 is how to reduce “inequality” through public policy measures. The respected quarterly journal Foreign Affairs agrees, and it goes one step further. The cover story of its current issue is “Inequality“. And inside one can read several articles focusing on inequality from every possible angle: global, regional and domestic. 

Ideological parochialism

This is really amazing. This is the triumph of ideological parochialism over reality. The very term “inequality” assumes that there is a preordained, presumably mandatory level of equality that we are all supposed to comply with. Veering away from the golden middle is unjust, unethical, and immoral. In fact it should probably be illegal.

This is profoundly wrong and terribly misleading. There is no such thing as a “proper balance” between rich and poor, between the income of those at the top and those at the bottom of any society. There is no formula that can correctly assess when someone has “enough” and when enough gets to be “too much”, or “too little” for that matter. These are all political notions, based on personal ideological preferences and biases. There is no healthy “natural equilibrium” that we should all strive for and then comply with.

And, more to the point, “inequality” is not a problem to be solved. It is instead a symptom: the result of complex dynamics that go well beyond the simplistic notion of an unfair allocation of national wealth.

Real inequality 

Of course, we can talk ad nauseam about specific cases in which inequality was or is the direct result of a political set up. In the Soviet Union only party elites had access to education, good jobs and perks. In today’s China, notwithstanding a vibrant private sector, the Communist Party senior leaders enjoy immense advantages that cannot even be dreamed about by the average citizen. In apartheid South Africa only Whites could aspire to have anything. In other societies small elites by mixing force, intimidation and cunning (Cuba, Venezuela, Burma, Saudi Arabia are good examples) have managed to control almost everything, while the majority of the people is left with crumbs.

But these are extreme examples of politically or ideologically sanctioned inequality. This is not the rule in most Western countries, and certainly not in America. In the West laws apply to everybody, while discrimination is forbidden. We have open markets in which everybody can compete. Besides, there is accountability, transparency, an independent judiciary, and social mobility. Inequality does indeed exist; but in most cases not because someone gamed the system.

People feel squeezed

That said, I am not surprised that “inequality” is getting so much attention right now in America and in Europe. Most people in western countries are squeezed. While some segments of society, most of them made out of  people working in the financial or high-tech sectors, are doing extremely well, most of the others are not. This builds resentments and a great deal of conspiracy theories in which many villains are featured.

The illusion of “social justice” 

But here is the thing. While it is legitimate to question what value if any is added by people and companies who charge enormous fees for manipulating existing wealth without creating anything new, it is silly to believe that if their excessive wealth were taken away from them and redistributed through taxation, welfare programs, or other public policy mechanisms, we would all be better off. The fact is that this is a dangerous illusion. Redistribution is a social justice policy with temporary and very modest results. It is “feel good” stuff that will not even begin to attack the roots of inequality.

The point is that the growing inequality we are experiencing in America is largely the effect of other problems. It is the byproduct of systemic changes mostly beyond our control. Which is to say that it is wrong to believe that you are not doing so well only because someone else (more powerful and more influential) gamed the system and got all the goodies.

Millions of new Asian workers changed the global labor market dynamics

Here is the story. For the past 20 years, the American middle class (a broad definition that includes factory workers with generous union wages and other perks) has been hammered by the ill effects of globalization.

All of as sudden, (beginning circa 1990), an enormous addition to the global work force, mostly due to literally hundreds of millions of better educated Asians willing and able to perform many jobs at a fraction of what it costs in America, meant the loss of millions of manufacturing jobs in the US (we call this “outsourcing”) and the squeezing of wages for those lucky enough to retain their employment.

Technology eliminated jobs 

At the same time, rapid technological progress also hurt the old middle and lower middle class. Robots replaced and will keep replacing people in factories, while most routine white-collar office functions are and will be increasingly performed by intelligent machines.

Those who do well 

In very simple terms, this means that in this new world those who design, produce, manage and service the high-tech machines, the value chains and supply chains connected to them, and the software on which they run are doing well, while all the others are not. If you are a lead engineer at Boeing or Intel you are fine. You work for a market leader with state of the art technology and a global presence. If you work at the local small tool and die factory, you are on shaky ground. You do not make anything unique, and Chinese competitors are coming in with cheaper products. 

Disappearing jobs 

The grim reality is that if today you are working in any sector that is challenged by better robotics or new IT applications your job is in jeopardy. You are probably only one step away from unemployment. This being the case, you have no bargaining power with your employer. You are lucky to have a job. Forget about wage increases or additional benefits.

And so you, along with millions of others, have the sinking feeling to be stuck in a dead end job, or falling behind; while few people at the top of market leaders are doing very well.

Some are doing well 

Indeed, those who started or invested in high-tech companies that fuel this enormous technological and economic transformation make millions or even billions, while the shrinking old work force has only known jobs losses and wage stagnation for the past 20 or 30 years.

In addition, it is clear that only those who have a good or superior command of the new technologies and how they relate to the unfolding “knowledge economy” have an opportunity to do well, or very well. Their skills are in high demand.

At the opposite end, a factory floor worker is a small, fungible cog that can be replaced or eliminated at a moment’s notice. Same thing for an accountant who performs back office repetitive functions.

Negative global trends 

While this is not the entire story, it is clear that increased inequality in advanced western countries is mostly due to the negative effects of globalization and rapid technological change that resulted in automation. There is unfortunately an overabundance of “old-fashioned” semi skilled or skilled labor, while robots reduced the number of necessary factory jobs. Furthermore, those who do not have the education to climb up to the next skills level in this more complex environment are stuck or, much worse, they fall behind.

This being the case, politicians who point at inequality as the big issue to be resolved by taxing the rich a lot more are deceiving themselves and the voters. Inequality is mostly the result of these global trends that cannot be stopped, let alone reversed.

Well, then what can we do? How can we reverse the impoverishment of the working class and what used to be a large and thriving middle class? There is no easy answer.

Focus on quality public education 

Still, as a minimum, we must address the quality and focus of American public education. It is obvious that in a high-tech world only those who master the new technologies will thrive.

Leaving aside for the moment the adult population, let’s think of the next generation and its prospects. If you are an inner city minority kid attending today a mediocre or bad public school, your chances of “making it” in this ultra competitive economy are practically zero.

If you are not fully literate, let alone skilled in computers, and IT and therefore capable to manage sophisticated equipment, you cannot aspire to get any of the good jobs. You are condemned to compete –you and millions of others– for low skills, low pay jobs in basic services. Yes, you can become a janitor, a landscape worker, a store clerk, a bus boy or a waiter. But even assuming that you are lucky and get one of these jobs, there is no chance that they will become rungs on your upward mobility ladder. You have no ladder.

Since you have no higher education, no high-tech skills, and no chance to go to college in order to acquire engineering, business or management skills, you are stuck.

Better education, less inequality 

So, at the very minimum our society should seriously work to drastically improve the quality of public education. Sadly, in this ultra-competitive global economy in which only the well-educated have a chance the seeds of future, stubborn inequality are planted in bad schools serving poor children.

Demanding a mandatory higher minimum wage is a silly feel-good remedy. Uneducated people are paid little because they add little value. By creating politically mandated higher wages we improve their conditions only by a little, while hurting some low margin businesses that can survive only because of low labor costs.

New sectors? 

All right, is that all? No, for sure there is more. It is quite possible that new technologies will open up new sectors and possibly new employment opportunities. Which sectors? I have no idea. At some point politicians were talking about millions and millions of new jobs to be created by the green economy. Well, this has not happened, yet.

High-tech jobs only for skilled workers 

Still, whatever the new economic sectors that will be generated by scientific and technological progress, it is obvious that only those who have the appropriate math and science education and the additional high-tech skills that will enable them to manage complex machinery and programs will have a seat at the table.

Yes, these highly competent individuals will have jobs and promotion opportunities. And they will make a lot more money.

But all the others will not.

Not a conspiracy 

Politicians who argue today that growing inequality is a moral outrage and obviously the outcome of a rigged game are delusional. In truth, the game is occasionally rigged. Yes, some sectors of the economy get preferential treatment. Some corporations should not get subsidies and should pay more taxes.

But this global technological and workforce tsunami has not been concocted in Washington by a few clever lobbyists. This is the product of globalization and of the current direction of technological progress.

Give tools 

Instead of promising to fight inequality by taxing the rich, political leaders should work to give to as many people as possible, especially young people moving their first steps into society, the best intellectual tools to compete in this new world.

Good or excellent public education (including re-training for adults) will not provide a complete remedy against inequality. But for sure without it we shall make no progress. Uneducated people cannot compete. They will remain poor and marginalized.

 




In Japan Intellectual Property Rights Go To The Employers

WASHINGTON – It is a given that the new “knowledge economy” is driven by clever innovators who are in large part motivated by the hope of making a lot of money once their critical new chip, 3-D printing device, nanotechnology diagnostic system, or whatever else they may be working on is tried, tested, validated and finally patented.

Making money 

There is an obvious connection between the incentives to pursue new knowledge and a legally binding intellectual property (IP) protection system that rewards the successful innovator with a patent. The patent says: “I did this. You cannot copy it. If you want to make this, you have to pay me. Or, if the conditions are right, I may sell my patent to you”. 

No patents? 

Imagine a world in which innovations would not be protected by patents. You come up with something, and a major corporation simply steals the idea and runs with it. You made the effort, and you get nothing.

In such circumstances, what would be the financial incentive to keep experimenting? By the same token, why would venture capital firms bankroll budding innovators if their products could not enjoy patent protection?

In Japan it is different 

Well, in Japan, until recently there was a situation that to some extent resembles the above scenario. There is enforceable patent protection in Japan. Except that it benefits the inventor’s employer, and not the inventor himself. And do keep in mind that in Japan the appropriate set up is not to be self-employed. Most people, including innovators, are employed by a company.

Professor Nakamura and LED 

This is what we get from a The Financial Times profile of Shuji Nakamura, (Bright idea pioneer shining a light on innovation in Japan, December 29, 2015). Nakamura is the scientist who created blue LED lighting. He came up with his LED prototypes and subsequent refinements while employed by Nichia Corporation.

Well, given the way things were organized in the 1990s in Japan, Nichia got the credit and Nakamura got essentially nothing. Incredible but true. And apparently this is not an isolated case. In the still prevailing Japanese work place culture, the employee is devoted to his/her employer. Amazingly enough, this means that all what he/she produces while working for a given company becomes the property the company. Sure, there may be some recognition for outstanding contributions. But these are usually tokens.

Nakamura got an education about intellectual property rights, stock options, and more while visiting the US. Still, it took him a long time to appreciate the gigantic level of exploitation considered to be the norm in Japan.

Unprecedented lawsuit 

It took him additional time to sue his former employer to get compensation for his LED related inventions. Do keep in mind that this type of litigation was and is almost unheard of in Japan. Employees do not sue their bosses.

With his lawsuit, Nakamura broke all the rules and the unwritten loyalty code that places the interests of the company ahead of anything else.

Nakamura won his court case, even though the amount of the initial award ($ 200 million) was cut down very substantially (to only $ 8 million) after an appeal.

Well, Nakamura made his point. He should have benefited from his extremely important disruptive innovation, even though he produced it while employed by Nichia.

How can this unfair system work? 

In all this, what is truly extraordinary is that Japan managed to become a world class high-tech economy while everybody was following these medieval employee loyalty rules which provide almost no financial incentives for creative employees.

But the Nakamura case shows that now there are cracks in the system. Most likely there are many others just like him who resent being robbed of the fruits of their creativity.

Stagnation 

For sure there are many reasons behind Japan’s prolonged stagnation. But lack of clear financial incentives for innovators must be a factor. After all, just like Nakamura, many Japanese scientists now travel abroad, especially to America. They have a chance to learn about IP protection. They can see that in America making money is the primary driver for people who set up shop trying to come up with the next “Big Thing”.

Protecting the status quo

And yet, notwithstanding all this, according to the FT story, the Keidanren, the powerful Japanese business organization, is heavily lobbying the government to keep things pretty much as they are. From their standpoint the old system works just fine.

Well, it may work for them; but not for the innovators, and ultimately not for the country.




Argentina Recreated A Reliable Statistics Agency

WASHINGTON – Newly elected Argentine President Mauricio Macri wasted no time to create a new, pro-growth business climate. He immediately abolished foreign exchange controls, and took other measures to inspire confidence among business leaders. The era of price controls, exports controls, and other types of government mandated economic manipulation is over.

Produce reliable statistics

Obviously this is not enough to turn a battered Argentine economy around. But it is a start. At the very least, from now on business people will respond to real market incentives, and not to government orders and threatened sanctions.

Interestingly enough, one of the key early targets of Macri’s reform campaign is Indec, the national statistic agency. And why is that? Because under President Cristina Fernandez Indec had become an instrument of state power. Far from gathering and publishing real economic data, Indec was ordered to publish only sanitized figures that would show a prosperous economy, low inflation, and so on.

We know now that Indec managers who refused to publish false data were harassed, humiliated and fired. The others got the message and complied with government wishes.

Independent agency

Now President Macri stated the goal to recreate independence, professionalism and credibility at Indec. And for good reasons. In a modern, market driven capitalistic economy business people, workers and policy makers as a minimum have to be able to rely on real data. Real facts about economic trends will influence critical decisions about investments, hiring workers, buying and selling assets.

A bigger story 

That said, the Argentine example of exposed manipulation for political purposes tells us a bigger story. Certainly the former Peronist government is not an isolated case. We can rest assured that all dictatorship and authoritarian states, from China to Russia, publish doctored economic data. And they do this for exactly the same reasons that drove the Peronists in Argentina. They want “positive facts” that show how successful their enlightened policies really are.

Routine manipulation 

And even when negative trends cannot be hidden, (witness Russia and China today), at least the extent of a down turn can be minimized. For these reasons, we can rest assured that all statistics about GDP growth, per capita GDP, industrial output, unemployment, income growth, and more produced by authoritarian governments are false or at least distorted.

Passive Western media 

And yet Western media in most cases report official data released by these governments without any commentary, this way implicitly endorsing the truthfulness of these doctored figures.

For instance we constantly read that China’s slowdown has reduced GDP growth to 6.9% in 2015. Well, the calculations produced by most Western private economic forecasting companies indicate that real GDP growth is much lower: probably between 4% and 6%. This is a huge difference. And yet in most cases this discrepancy is not reported by Western media. They usually quote only the official figures.

Translation: because of their monopoly on official information gathering and distribution, the autocracies still win. Thanks to Western media passivity, their propaganda becomes reliable information.

The critical importance of real data

True capitalism needs a lot of things in order to succeed. But for sure those who operate in the market place as a minimum need to know what’s going on. If they are fed distorted or completely false data, they cannot make intelligent business decisions. The same applies to policy-makers.

Defend integrity, expose manipulation 

So, here are two lessons. Number one: in a true market-oriented democracy the independence and professionalism of all public entities that produce official economic statistics has to be upheld and protected. Number two: all official economic data produced by autocratic governments has to be openly dismissed by Western media as self-serving propaganda.

De facto dictatorships should not be allowed to get away with lies.

 




There Will Be No Real Palestinian State

WASHINGTON – A couple of recent interviews with two Israeli citizens, the first one a seasoned policy-maker with an impressive background in intelligence and national security, the other an inhabitant of a settlement in what is technically Palestinian territory, conveyed to me in a powerful way that Israel will never allow the creation of a real, sovereign Palestinian State. And I really mean never.

Official position

We know the official Israeli position on a Palestinian state. In principle, Israel would like to see a Palestinian state. The Israelis do not want to carry the burden of indefinite occupation. It is difficult, and it is costly.

Guarantees 

However, for this to happen, there would have to be solid guarantees. The Palestinians would have to openly and unequivocally recognize Israel as a Jewish state. They would have to unequivocally give up any claims to the territories that belong to Israel. No claims, no violence against Israel and no terrorism.

Palestinians will not deliver 

Well, we do know that this blanket, unequivocal, non revocable recognition of Israel is not coming. At least not in a form that would satisfy Israel. We do know that at least some Palestinians openly state that their goal is the elimination of Israel. We also know that many Palestinians assert their right to regain possession of land and homes they were forced to abandon after Israel was created.

From this vantage point, the Israeli government can easily proclaim that since the Palestinians are reluctant to fully acknowledge Israel’s right to exist, unfortunately Israel cannot take the chance to allow the establishment of a full-fledged Palestinian state next door. This position implicitly indicates that, should the Palestinians finally change their mind, then the road to an agreement leading to the “Two States Solution” will be open.

Quiet determination to carry on 

This is the official position. However, beyond the public pronouncements, I detected in the two interviews I watched on TV both an oblique conclusion that a deal with the Palestinians is impossible and an Israeli quiet determination to hold on to the status quo –essentially for ever. I assume that this determination is in part based on a healthy mistrust of the Palestinians and in part on a widespread implicit and at times open assumption whereby all of Biblical Palestine, including the West Bank, is and should be recognized as a part of Israel.

Limited sovereignty 

In political terms this position is conceptualized as an Israeli version of the old Soviet “limited sovereignty” doctrine that shaped relations between Moscow and the vassal countries of the Eastern Bloc. “You are semi-free, but only to the extent that you do not do anything that in our judgment undermines our interests”.

In a nutshell, the senior Israeli policy maker stated that it is acceptable to have a Palestinian Authority with some of the elements of a sovereign state, as long as Israel is still in overall control. It is alright for the Palestinians to have jurisdiction on most of their internal affairs, as long as they recognize that they will never be allowed to have a real army, and other attributes of a truly independent state.

Furthermore, the Palestinians should accept the consequences of their almost total economic dependence on Israel. Israel is a key supplier of basic goods to Palestine, and the employer of many Palestinians. Israel is in the lead and therefore it dictates the terms. The Palestinians should be wise enough to recognize all this, and what it means to them.

Bottom line: since the Palestinians cannot be fully trusted, the status quo will continue –for ever, if necessary. The Palestinians better get used to their status of permanent vassal territory.

But while all this makes some sense, these positions are reinforced by a belief widely held by many Israelis: the West Bank is in fact part of Israel.

Settlements are here to stay 

Indeed, switching to the long interview with the Israeli settler, it is patently obvious that he and tens of thousands of other feel perfectly comfortable where they are. He does not believe that his home is “illegal” since it has been built on occupied Palestinian territory. On the contrary, he believes that it is alright for himself and thousands of Israelis to build settlements in what used to be Palestinian land.

Clearly these settlements are not temporary. They are permanent. Through them and all the Israeli citizens who live there, little by little Israel is expanding its de facto borders.

Anyway, the combined meaning of the two interviews is that they convey a quiet determination to carry on with the status quo, without any final settlement, and without giving away an inch.

Palestinians cannot be trusted

May be with cause, the Israelis concluded that a “real deal” with the Palestinians is in fact impossible. They have concluded that no Palestinian state, no matter who is in charge, can be trusted to act as a peaceful good neighbor.

No Palestinian government can be trusted when it comes to pursuing terrorists or others who will continue to plot violent actions against Israel. Therefore, while endless occupation is not an ideal situation, letting go entirely would most likely have adverse consequences. Just think of what happened in Gaza after the unilateral Israeli withdrawal. It became a Hamas-dominated enclave, and a launching pad for terror attacks against Israel.

Change the borders 

At the same time, by creating settlements in the occupied territories, Israel is slowly modifying to its advantage a rather unfavorable territorial reality. Israel is a very small country surrounded by potentially hostile neighbors. Getting little pieces of Palestine by creating Jewish settlements in strategic locations will eventually diminish the disadvantage of such a small territory.

And if many settlers believe as they do that they are building homes in what is in fact Biblical Israel, the land of their forefathers, this is even better. Strengthened by this religious belief, they will have the determination to hold on to their homes and defend them with force, whenever necessary.

Given all of the above, my perception is that this –the endless continuation of the occupation– is what we are going to have. Whatever the official pronouncements, whatever the objectives of the next round of Israeli-Palestinian negotiations, Israel will not budge.

In fact Israel will continue to slowly modify in its favor the reality on the ground through its ongoing settlements policy which amounts to de facto annexation of slices of Palestinian territory.

The Palestinians have responsibilities

This may look terribly unfair to the poor Palestinians. But the Palestinians have their share of responsibilities. Many of them are wedded to unrealistic ideological positions. Many of them openly want Israel to disappear. At least some of them are terrorists, and many more support terrorism against Israel.

Therefore it is truly disingenuous on the part of the Palestinian leadership to assume that Israel will give up and allow the creation of a fully sovereign, but potentially hostile state a few kilometers away from its major cities.

Israel’s worst nightmare is to see the entire West Bank become another Gaza Strip controlled by fanatics. For all these reasons expect occupation to continue.

There will be no fully sovereign Palestinian state.




Saudi Monarchy Losing Control?

WASHINGTON – The very last page of  the latest TIME magazine double issue about what we can expect in the New Year is dedicated to quick predictions. One segment is focused on what might happen in world politics.

Predictions 

Some of these short forecasts are not long shots. For instance, as indicated in item “d”, it is possible that stagnant economies in Europe and a growing crisis caused by Middle Eastern refugees will create more support for xenophobic, racist parties in the Old Continent.

End of the Saudi Monarchy? 

But item “b” is far more intriguing. It says: “The House of Saud loses control of Saudi Arabia”. [Emphasis added]

What, a coup-d’etat in Saudi Arabia? A political revolution? Now, this would be a really big deal, given Saudi Arabia’s dominant role in shaping global energy prices, and therefore energy and economic policies across the globe.

The last absolute monarchy  

The problem with the Royal Family is that the House of Saud is the last absolute monarchy. This is not Norway or Great Britain. Its enormous, unchecked powers rest on its total control of the country’s vast oil wealth, and on its alliance with the conservative Wahabi, the self-appointed guardians of true Islamic orthodoxy.

So, all of a sudden, in 2016 something truly catastrophic will come about, and the Royal Family “loses control”? How could this happen? The short TIME magazine prediction provides no details.

While there are no obvious signs of dangerous political unrest in Saudi Arabia, there are dynamics under way that may lead to trouble.

The new oil prices policies is costing too much 

First of all there is the Saudi-driven policy of “all out oil production” that caused the collapse of global oil prices, (now below $ 40 per barrel). This policy, whose objectives are unclear, can be reversed, of course.

Fissures 

But the economic damage already brought about by it, beyond the financial bleeding caused by huge deficits, may have created dissent within the Royal Family. It stands to reason that many senior members may question the wisdom of a new course of action decreed or at least endorsed by King Salman that causes the government to drain its precious reserves to finance a huge fiscal imbalance caused by the oil revenue collapse. Add to these strains the cost of the Saudi military intervention in Yemen.

Still, probably these tensions can be handled.

Legitimacy 

The real long-term uncertainty is about the regime’s questionable legitimacy. By that I mean that it is not obvious that the Monarchy has and will have in the future the ability to keep Saudi society quiet, while retaining its anachronistic total power and all the priviliges that come with it.

Political vulnerabilities 

The Arab Spring proved that even established regimes are vulnerable. In the cases of Egypt, Tunisia, Libya and Syria there were economic grievances mixed with demands for freedom and accountability.

Saudi Arabia is a different case, in as much as the Royal Family for now at least can afford to distribute cash payments to millions of people in order to keep them happy.

An anomaly

Still, the Saudi regime is an anomaly. The idea that it will be there, essentially for ever, is a fantasy. May be nothing will happen in 2016; but something is bound to happen.

TIME magazine is probably right. May be not on the timing, but on the eventual outcome.




The Ayatollahs Have Given Up Indoctrination in Iran

WASHINGTONTIME magazine recently had an intriguing cover story about Iran, (Iran 2025, November 16, 2015). Assuming that TIME got it right, the picture that emerges is of a once theocratic regime that, while still pretty much in full control, gave up the massive effort to indoctrinate the younger generations. In different words, the old Khomeini theological fire is dead. 

The revolution is over 

What I got out of the story is that Iran now is mostly a police state. Even though the messianic language is still used here and there by the top religious leadership, there is no longer any serious effort to educate in a proper way a new generation of dedicated young revolutionaries.

No more hijab

The most interesting fact that supports this argument is that the once obsessively strict regime is no longer imposing its rules on how women should appear in public. The hijab (the head scarf) once was supposed to hide a woman’s hair –all of it.

Well, now it doesn’t anymore. Women still wear the hijab, but casually. Plenty of hair exposed all over the place. And no one is taking any action to enforce the old rules.

Well, this is no mere detail.

The religious zeal is gone

Given the high value attached at the beginning of the Islamic Revolution to strict adherence to all the rules regarding how women should appear in public, this means that the leaders have given up. This means that the regime gave up the project of creating a new society shaped by its true religious values.

Of course, the Ayatollahs did not give up power. They hold on to it. But they have given up their “Mission” –the religious source of their political legitimacy.

A police state

If the Ayatollahs and their supporters are no longer in power to advance a religious agenda, then it means that they are in power only because they control the police and the military.

In other words, the Iranian government is no longer the practical manifestation of a righteous religious movement. It is simply a police state.

Sure enough, the old religious rhetoric is still used in official occasions. But, just like in the latter days of the old Soviet Union nobody believed in Communism, most likely very few in Iran are still motivated by the old ideology that transformed the country back in 1979.

What is the point of all this? The point is that a police state relies on fear and intimidation alone. It has no genuine supporters.

And this makes it vulnerable.

New vulnerabilities 

Clearly the Iranian society, after the failed demonstrations of 2009 has no appetite to get into a fight against superior government forces.

But in the long run this regime will crack. Right now the people at the top are united only by their determination to stay in power and milk the system for as long as possible. But this is not a homogeneous political leadership united by its ideological fervor. These are elites who negotiate or fight  with one another about who’s getting what.

Rifts among factions

At some point there will be rifts, fights, factions against factions. Furthermore, it is almost certain that people who view power mostly as a tool to enrich themselves are not good stewards. Iran is probably poorly managed. And a long period of rock bottom oil prices will not help much. The extra cash from oil revenue that lubricated the system is gone, at least for a while.

So, can we say that ladies’ hair fully exposed in the streets of Tehran is an indication that the regime is about to fall? Well, I would not go that far.

A spent force

But I would argue that a religious regime that no longer has the zeal to impose its supposedly core values has lost its inner strength. And this is usually the beginning of a process leading to decay, and possibly collapse.

It would be good to keep an eye on how the Iranians perceive all this.

If the writers, the artists and other see more relaxed rules and therefore more open space, they’ll take it. If the regime will not react forcefully and brutally, then this will be further indication that it is a spent force.

A spent force with guns, and may be down the line nuclear weapons, but still a spent force.




Saudi Arabia’s Oil End Game

WASHINGTON – More than a year ago, when it became obvious that massive increases in US oil production (thanks to shale and fracking) had created a global glut, Saudi Arabia did not react in the usual manner. It did not work with its OPEC associates to cut the cartel’s production in order to diminish supply and support oil prices.

No more production cuts

No, Saudi Arabia stated instead that it would let the market determine a new balance. No supply cuts. From then on supply and prices would be determined by actual global demand.

At that time it was widely believed that the Saudis wanted to kill US shale production. The conventional wisdom was that relatively expensive fracking operations in the US could not survive with oil below $ 70 per barrel. They just could not. And, in truth, many US shale producers have been hurt badly by the precipitous price fall allowed by Saudi Arabia. Some had to fold.

US shale sector very resilient 

However, a significant segment of the US shale oil industry has proven to be remarkably resilient. It streamlined operations, and it has quickly become far more efficient. Some shale oil producers claim to be profitable with oil at $ 40 or even $ 30 per barrel.

In other words, the US shale oil industry has been badly wounded by the oil price collapse; but it is still very much alive. This is astonishing. Only a couple of years ago most industry analysts asserted that the shale sector could not survive with oil prices this low.

Did Saudi Arabia miscalculate? Did the Saudis wrongly assume that in just a few months they would have smothered the Americans? Or may be they have some other goal in mind?

Saudi Arabia needs high oil prices  

Be that as it may, whatever the Saudis are trying to accomplish, they need quick results. Indeed, the massive over supply they created with the intent to kill or weaken less competitive rivals did what it was intended to do. It caused a glut and an oil price collapse.

The problem is that rock bottom prices are beginning to hurt the Saudis.

It is no secret that beyond oil Saudi Arabia has no other sources of real revenue. And it is also well-known that the stability of the Kingdom is based almost entirely on the ability of the Saudi Royal Family to keep subsidizing directly or indirectly almost the entire country: that’s 29 million people. These subsidies, paid for with oil revenue, buy consensus, social peace and popular support for the Monarchy.

Sharply lower oil revenues, sustained over several years, will translate into growing public deficits, and therefore into a diminished ability to throw cash around as a way to keep the people happy.

Of course, for the moment Saudi Arabia can rely on its significant dollar reserves. But they are beginning to dwindle. The government has also started borrowing in order to finance its growing yearly deficit. At some point, its ability to subsidize the country will be impaired.

Unsustainable 

Let’s be clear. We are still far from an economic or fiscal emergency. But, assuming no policy changes regarding oil prices, at some point this course will become unsustainable. Soon enough, the Saudi government will need higher oil revenues.

As noted above, American energy producers are hurting. Some are gone, or will be gone pretty soon. Still, the news from America is that the shale oil sector is far more resilient and flexible that anybody thought.

At least some shale producers have become far more efficient. They can start and stop production without creating havoc. Of course, some shale oil plays cannot be profitable with crude below $ 40 or $ 30. But many are. If and when OPEC will decide to go back to its old ways –cutting production in order to support prices– expect the US shale sector to start ramping up production.

What is the game plan? 

Given all this, assuming that the Saudis must understand what is going on, one wonders what they have in mind. What do they plan to achieve by allowing oil prices to fall more and more? Whom are they trying to squeeze?

What is the game plan? I believe that the target is Iran. Saudi Arabia sees Iran as its only rival for regional influence, when it comes to politics, military assertiveness (Iraq, Syria, Yemen) and religious activism. Iran is Saudi Arabia’s existential threat.

Hit Iran where it hurts

For this reason the Saudis are trying to hit Iran where it can really hurt: oil revenue; this way hopefully undermining the legitimacy of the government run by the Ayatollahs.

It is clear that if Saudi Arabia needs high oil prices to keep its people happy, so does Iran. Who knows, may be Saudi intelligence has information we do not have about the fragility of the government in Tehran.

If protracted low oil prices end up undermining the Ayatollahs’ regime in Tehran, then this semi-suicidal, low oil price strategy pursued by Saudi Arabia all of sudden makes sense.




Will Donald Trump Be The Republican Nominee?

WASHINGTON – Will Donald Trump be the Republican presidential nominee? May be yes. Bizarre, but now distinctly possible.

Emotions in politics 

It is a given that politics is also (and sometimes mostly) about symbolism and emotions. And it is also a given that among people seeking public office those who are more adept at interpreting and expressing the prevailing emotions can get a lot of support. At least for a while; that is until most people get back to their senses. Right now, because of ISIL, the Islamic terror attacks in Paris and San Bernardino, the prevailing emotion is an outsized fear of terrorism. And this a Trump moment.

Trump understood this anxiety bordering on national hysteria. And he found a way to ride this wave. He struck a chord by declaring, (among other things), that he would impose a ban on all Muslim immigration. And he is going to be get really tough on ISIL. He will bomb them, and destroy them. Forget about civilian casualties and any collateral damage. After that, his numbers, already high, shot up beyond 40%.

We accept occasional lapses 

Manipulative leaders who exploit exaggerated fears are not good for any democracy. This is not good leadership. The well-being of democracies depends on reasonably well-informed citizens picking reasonably rational political leaders –especially in difficult times.

We accept occasional lapses into irrational emotions which include the hope to be “saved” by a Superman-President as something that can happen, every now and then. However, we believe that in the end all will be well, because normally these dangerous fantasies are limited in time and scope.

Rationality will prevail 

We reassure ourselves by stating that eventually rationality will prevail. Yes, when people are scared, frustrated or hopeless, they are likely to make poor political choices. They may go for populists like Donald Trump, or Ross Perot back in 1992. Would-be leaders who over promise, say grandiose things, and all that.

Indeed, we say that eventually sanity will have to prevail, because this is who we Americans are: fundamentally rational pragmatists who instinctively know what is best for the country. Yes, there will always be a fringe of emotional people who will make irrational choices when it comes to choosing leaders.

But the majority can be depended upon to be level-headed. Most Americans will see through the populists and they will correctly dismiss them as charlatans.

This has gone far enough

Yes, except that according to this play book Trump should have already flamed out. By now, people should have seen enough. They should have gone through the phases of curiosity and interest for the political novelty, followed by disappointment.

According to the play book Trump should have been discarded as a one-of-a-kind grandstanding publicity seeker whose love for the limelight comes along with an understanding that the public policy process is a gigantic game show that can be expertly manipulated by a smart TV host.

Aren’t we past the point of “Good-bye Mr. Trump?” “Yes, Mr. Trump, flirting with you was fun, for a little while. But now we are going to get hitched to a serious guy. You know, someone who actually knows something about government.”

This is not a fad 

Well, we are way past that point. And therefore we can only conclude that this is not a temporary fad. At least for a sizable core group of Trump supporters, this has become a real political choice.

It is now clear that a significant portion of adult Republican voters are willing to take a bet on a person who delivers clever lines, as opposed to policy positions, simply because they are totally fed up with all the establishment politicians, (Jeb Bush, Chris Christie, John Kasich, among others).

Good instincts 

Say what you want about Trump, but he has good political instincts. He naturally and intuitively “knows” what disoriented and now scared people need to hear. They want the clever punch line. They want tough language. They love his take-no-prisoners attitude.

Who knows, may be Trump’s vagueness about policies is deliberate. Indeed, why be specific when people are more than satisfied with a few tough words uttered by a tough looking man?

Look, may be all this will go away and Trump will not get the Republican nomination in the end. Or he may get it, and not get elected. May be sanity will return in America.

Fed up with the establishment 

Still, what we have seen thus far indicates that most Republicans are completely fed up with the traditional political process run by the professional politicians, those who have been around for decades and who are demonstrably unable to propose anything new. They are so fed up that they are willing to make irrational choices.

From this perspective Trump’s high ratings tell us two things. Number one, they indicate a yearning for a fresh approach to politics and policy. We have had more than a decade of stalemate in Washington. The “system” is frozen and does not work.

Number two, these high ratings indicate that millions of Americans who want change are willing to follow a natural show man, with zero public policy experience, simply because he promises to “Make America Great Again”. As a minimum, this is not wise. Can Trump really perform the miracles he promises in Washington? This is the critical issue that most of his supporters prefer not to think about.

The Republic is in danger

We can understand that children make silly choices. But when adults guided only by emotions make silly choices about who should lead them, then the Republic may be in danger. This whole American self-government experiment was and is predicated on having a majority of sane people as level-headed participants.

If most of us are prisoners of emotions –however sincerely felt– then the long experiment predicated on rationality, and therefore rational choices, may be in jeopardy.

 




Fed Unclear On Future Rate Increases

WASHINGTON – At last, the US Federal Reserve decided to put an end to the abnormally long period of zero interest rates, or ZIRP. On December 16 Fed Chairman Yellen announced a 1/4 percentage point increase.

More rate increases ahead 

In addition, the Fed indicated its intent to continue to “gradually” increase interest rates in 2016 and 2017. In so doing, the Fed signals its intention to bring monetary policy back to “normal”. The emergency mode that goes back to the 2008 recession is officially over.

The argument supporting a rate hike is that the US economy is growing at a steady pace, while unemployment at 5% is back to a physiological level.

Do they really mean it? 

However, after reading the modulated Fed statement and after listening to the careful words of Fed Chair Yellen during her press conference, we can also get a very different impression. The Fed did something now. But it is not at all clear that it will carry on with additional rate hikes at a steady pace next year, even though it says it wants to.

In fact, it may very well do nothing next year.

We want inflation 

Here is the thing. The Fed declared that additional rate hikes that will bring monetary policies back to “normal” are in large part contingent on the rate of inflation going back to 2%. Right now it is much lower, at 0.4%. Which is to say that if inflation fails to climb to the desired 2% level, the Fed may have to reconsider the pace and the extent of any additional interest rate hikes.

That said, it is quite plain that in a deflationary global economy, with collapsing commodities and energy prices, the chances of higher inflation in the US in 2016 are very slim. Therefore we can conclude that the Fed, while declaring a policy objective, also created an easy way out.

This is what we will do, or may be not 

In simple terms, the Fed announcement can be read this way: “Yes, it was about time for all of us in the Federal Open Market Committee, FOMC, to stop this ZIRP insanity. And so we did. We raised rates, even if just a little bit, to prove that we are serious about this. And, of course we would like to raise rates some more in 2016 and  2017. However, we really need inflation at or close to 2% to do this. If this does not happen next year we may have to reconsider any rates hike timetable”.

Got that? Let me say it again, just in case: “We would like to raise rates, but we may not, after all. It all depends on the rate of inflation. If inflation is too low we may pause or raise rates even more slowly than we announced today. Is our intent clear?”

The markets can choose to interpret this statement of intentions this way:

We have raised rates today. But this is only for show. And we have created a nice way out of additional interest rate hikes. Off the record, we all know that there is no way that inflation will go back to 2% in 2016. And we just told you that low inflation will give us an excuse to dilute or postpone any future action on rates”

Markets are fine with this 

Theoretically, any Fed policy move signaling a return to higher interest rates should have spooked the stock market. It is an open secret on Wall Street that stocks are overvalued because ZIRP, the zero per cent interest policy pursued by the Fed for so many years, made stock investing a lot more attractive. Bank deposits and other traditional forms of prudent investment yield nothing.

But the stock market reacted calmly. In fact, right after the Fed announcement, the Dow Jones moved higher.

How so? In my opinion, the markets concluded that the Fed does not intend to seriously tighten any time soon. May be later, but not in the immediate future.

Translation: the Wall Street party goes on.

A different signal would have elicited different market reactions

It would have been a completely different story had Yellen declared that this 0.25% increase is just the opening salvo, the first in a long series of staggered rate hikes that will take place —no matter what. This would have signaled a real policy shift.

Right now there is half a signal. “We would like to, but we are not sure that we will, because low inflation may not allow us to go forward”.

End ZIRP just as the economy peaked 

Well, why this muddled message? Very simple. The Fed is in a bind. At some point it had to end this ZIRP anomaly. But the Fed also knows that the US economy, while expanding at a modest 2% annual rate, is not doing so great. Capital expenditures are down. Movement of goods in and out of US ports is down. Major US exporters like Caterpillar are doing poorly because of lack of demand.

A global slow down 

Besides, the global economy is very anemic. Europe is not growing much. Japan is in bad shape. China is slowing down. Major commodities exporters, from Brazil to Chile and Australia, are in real trouble. All commodity prices have collapsed. Besides, oil is now at less than $ 40 a barrel, with negative consequences on a large part of the US economy that supports the energy sector.

And finally, all other major central banks, from the European Central Bank to the Bank of Japan, are moving exactly in the opposite direction. While the US begins tightening, they keep on relaxing their own monetary policies, this way devaluing their currencies. Higher rates in America will translate into an even higher US dollar. And this will hurt all US exporters.

This is not a scenario that indicates higher growth ahead for America, therefore providing the rationale to go back to “normal” monetary policies. In fact the global slowdown may even cause a recession in the US in 2016.

Given all this, why did the Fed decide to act now on rates?

A political rate hike

The December 16 rate hike is mostly symbolic. It is about  institutional credibility, and therefore mostly about politics, and not about setting a new monetary policy.

The fact is that a Fed rate increase has been openly discussed, anticipated, hinted and almost announced so many times that the FOMC decided that it had to do “something” before the end of 2015. But it did so in a clever way, leaving for itself plenty of wiggle room regarding future moves.

However, because of this deliberate ambiguity, it is hard to read any precise guidance regarding future monetary policies.

Will the stock market bubble continue? 

Eternal Wall Street bulls and plenty of speculators will probably conclude that the Fed moved today only for public relations reasons.

Most probably, it will increase rates in 2016 only a little bit, and may be not at all. Therefore investing in vastly overvalued stocks is still relatively safe. The small 0.25% rate hike, by itself, changes nothing.

In other words, to the extent that investors believe that the stock market is alive and well, even after today’s hike and announcements of likely future tightening, we are a long way from getting back to normal.

And this is bad news. At some point, with or without decisive Fed action on rates, the Wall Street party will end. When that happens, speculators and unsuspecting retail investors will be burnt very badly.

A word of advice: Pull out now, before the whole thing collapses.




How Much Unemployment in China?

WASHINGTON – The WSJ just had a front page story on China, focusing on factory closings, jobs losses, strikes and workers protests. However, it is very difficult to place all this context. Unfortunately, there is no reliable official Chinese data on unemployment, bankruptcies and industrial actions.  

Official statistics 

Indeed, Chinese official statistics indicate that the unemployment rate in China is always the same: between 4.1% and 4.3%. Of course, this is impossible.

But why would it be important to know more? Well, because growing unemployment, if this is indeed the case, combined with workers’ protests after factories closings, is the social –and potentially political– consequence of China’s economic slow down.

New jobs in services? 

If the slow down is moderate and gradual –this is the official line coming from the Beijing political leadership– and if it is indeed true that China is successfully shifting from manufacturing to services, then its vast labor market will have time to adjust. Laid off factory workers may be able to find good or even better employment opportunities elsewhere.

But if the contraction in manufacturing is fast and severe, then the labor market cannot adjust, and this may create new problems. Citing various studies, the WSJ indicates that between 2014 and 2015 the number of labor related protests and strikes has doubled in China. If true, this is a remarkable development.

For the moment, the issue of labor protests seems to be contained. There are no politically explosive situations. But if this trend continues, if there are more and more public protests related to plant closings and jobs losses, then it becomes more complicated. In other words, what may begin as an  economic issue will become a political problem.

Unlucky migrant workers 

The WSJ goes into some detail on Chinese joblessness by telling the stories of unlucky Chinese migrant workers who left a life of poverty in rural areas and got factory jobs in cities. This change was definitely and improvement for them and literally tens of millions of others just like them.

But now many factories have shut down. These migrant workers are jobless. They cannot go back to villages where there is no opportunity. They are poor and frustrated. On occasion they stage public demonstrations.

Again, how many factories have closed nationwide? We do not know, because there are no official statistics on this. (We know however that at least 1/3 of all the factories owned by Hong Kong companies in the adjacent Guangdong region in main land China have shut down).

How many jobless workers? 

So, here is the politically relevant question. How many migrant workers are jobless and potentially desperate? Are the protests staged here and there just local events of no real consequence? Or do they represent a trend?

In other words, what if China’s economic slow down is worse than we are told by Beijing? Will unemployment levels grow to a point in which this will become a political issue?

Unemployment trending up? 

We really do not know. While unofficial statistics indicate that the real unemployment rate in China is probably closer to 10%, (as opposed to the official 4% to 4.3%), this does not tell us much. What would be really important to know is how it is trending. Is it going higher, at a fast clip, or is it stable or going down?

We have no idea. But it is hard to believe that China will be able to maintain its present level of employment while the overall economy slows down, construction is down, manufacturing is down, and exports are down.

More protests ahead?