Europe’s Dreams

By Paolo von Schirach –

WASHINGTON – We heard from Ursula von der Leyen, the new President of the European Commission, that she will lead a “geopolitical” Commission. So, we are led to believe that, under her leadership, there will be deep thinking and strategizing about how to effectively combine the significant European economic, business, investments and military assets so that the EU will play a leading role on the world stage. From climate change to global development, international stability and cyber warfare, expect a cohesive, proactive Europe to be assertive and forceful when it will be necessary to foster stability and sustainability.

Big numbers hide structural weakness

Nice plan. Except that it is a total fantasy. The EU does not have and will not have the tools to become a dynamic force in world affairs. Sure, on the surface some EU numbers look very impressive. the EU total population is 512 million, much larger that America. If we put together the GDP of all its 27 members (UK on its way out) we get to about $ 19 trillion, almost the same as the US. If we combine defense spending of all EU Members we have the second largest defense budget in the world. And the EU is the largest foreign aid donor. Not to mention the clout of the EU in determining competition policy standards around the world, and a lot more.

So, a global force to be reckoned with? No, not really. The sad story about the EU is that these aggregate numbers are almost meaningless, simply because the EU, as conceived and currently structured, is unable to effectively combine the resources of all its members in order to obtain real synergies. And do not expect major institutional changes any time soon.

Dreams of a Federal Europe

Sadly, s strong Europe is destined to remain an unrealized dream. Right after WWII, there were a few fervent believers in a truly integrated new Europe that would have helped to eliminate the old intra-European rivalries, while redirecting the enormous potential of various European countries towards the goal of creating a new European Federal State. The European Federalist Movement led by Altiero Spinelli, and later on the Union of European Federalists, are the manifestations of this vision. However, these organizations never gained any real traction. They were and are essentially irrelevant.

EU is not a Federation

There is a European Union, of course; but it is not a Federal State, and it will never become one. Born out of the European Coal and Steel Community created in 1952 as a French olive branch to defeated Germany, the actual European project, (officially created in 1957, with the Treaties of Rome), went through many phases. It began as a European Common Market, then it developed into the European Community, and finally into the European Union. These name changes suggest an incremental integration process. And , in truth, there is more integration.

But Europe remains at its core an inter-governmental arrangement among sovereign states. Sure enough, a number of institutions have been created and nurtured, and all the EU Members agree to enforce EU norms and regulations on a large number of issues.

However, the qualitative step of merging all the Members States with the goal of creating a vibrant, unified European Federation was never taken, and I doubt that it will ever be taken. As a result, we have a hybrid. Certainly much more than a Free Trade Area, but a lot less than a real unified state.

A set of complex structures, laws and regulations

Over time, the EU created an extremely complex set of laws, rules and regulations enforced by a bureaucracy managed by Brussels based EU governing bodies. There is also a European Parliament that looks like a legislative body, however without the full sovereign powers of national parliaments. Some key EU states gave life to the Euro, the very successful European currency. And, of course, at the top of the pyramid, there is the EU executive body, the Commission, now presided over by Ms. von der Leyen. But the Commission President is not the elected Leader of Europe. She was nominated.

The Commission is led by a functionary

Therefore Ms. von der Leyen is not an elected political leader. She is a functionary. A very important functionary, with significant prerogatives, but still a functionary. The EU Commission enforces policy. Except for clearly designated areas, the EU carries out policy. It has no real, autonomous powers to make policy for Europe without the prior consent of the Member States.

No EU armed forces, no effective foreign policy

And this is only half the story. In order to affect global geopolitics, Europe should have credible tools. A critical one is a European foreign policy supported by real European armed forces.

Well, the EU has neither. Yes, it created the embryo of a foreign policy making body with a high official, (another appointed functionary), running it. But its discretionary powers are very limited. The EU can act in world affairs as one only if and when all the key Members agree on something. And this is very difficult, to put it mildly.

And when it comes to creating the backbone –that is real European armed forces– forget about it. There is nothing; and there will be nothing, except for high level commissions, studies and debates. And this is the case for various reasons. For a true European military force to be created, you would need as a foundation a robust political agreement among all EU Members on the size, purpose and command structure of such a force. And then Members would have to agree on an appropriate level of spending and how to pay for it.

Let NATO defend Europe

Politically, this is just too complicated. Besides, most EU Members are also NATO Members. Admittedly these days NATO’s purposes, force structure and capabilities are debatable. Still, NATO has the advantage of having been around since 1949. Whatever its shortcomings, it exists; while most European countries continue to believe that they are safe under what they would like to think is a still credible US security blanket.

Dreams and wishful thinking

So, here is the picture. In Europe dreams and fantasies abound, when it comes to a new, assertive EU role in the global arena. But there are no tools and therefore no real substance when it comes to the ability to play a credible, major role in world affairs. Ms. von der Leyen may talk about geopolitical goals for her Commission; but this is another instance of wishful thinking.




Cyber War Happening Now – We Are Not Ready

By Paolo von Schirach –

WASHINGTON – We are at war. Aggression which one day can take devastating dimensions is targeting America on a daily basis. I am talking about cyber warfare. Unfortunately, it is very hard to label cyber war as “war”, simply because it is vastly different from the “conventional war” we are used to study, discuss and prepare for.

Intellectual obstacles

Sadly, our ability to think intelligently and proactively about this potentially fatal form of aggression is seriously hampered by our old-fashioned categories. Much to our disadvantage, when it comes to warfare, we are still prisoners of largely obsolete concepts, scenarios, international law definitions, strategies and tactics that do not allow us to fully comprehend the extent of unconventional warfare, in particular cyber war.

The UN Charter allows self-defense

All students of international law know that Article 51 of the UN Charter clearly affirms the right of self-defense that can be exercised by any UN Member, irrespective of any action that may or may not be taken by the UN Security Council to deal with that specific breach to international peace. It sounds right. Self-defense is an inherent right of all sovereign nations. Except that Article 51 specifies that self-defense is justified “if an armed attack occurs”.

Armed attacks

And here –in this narrow and quite frankly obsolete definition– is our problem. This classic definition indicates that an illegitimate war of aggression has occurred if and when there is an “armed attack”. And we know what that is. This is Pearl Harbour. This is Nazi Germany moving into Poland on September 1, 1939. We picture armies shooting their way across internationally recognized, sovereign boundaries. We know a war of aggression when we see one.

Deliberate obfuscation in semi-conventional conflicts

But today we are confronted with a vastly different universe when it comes to warfare. Even when we are dealing with quasi-conventional conflicts, in recent years the lines have been deliberately blurred by bad actors who do their best to muddy the waters, with the goal of denying responsibility for their actions.

Indeed, Crimea was taken over in 2014 not by the Russian Army but by “Green Men” whose uniforms did not have any insignia. Likewise, officially no Russian forces are taking part in the bloody conflict in the Donbas region in eastern Ukraine. The Iranians have proxy forces in Iraq and Syria, trained and armed by them. But they are not technically part of the Iranian Army. And we could go on and on.

When there is no armed attack

While it is not that complicated to see through these disguises in semi-conventional conflicts, when it comes to cyber operations, cyber attacks, and cyber terror, we are in uncharted waters. To start with, it is often hard to determine that there was an attack, let alone who the attacker is. Whatever they are, these actions are not “armed attacks” as defined by Article 51 of the UN Charter, and as most practitioners think about acts of aggression.

We do not recognize cyber war as war

And here is our main problem. Our weakness as a society, and I suspect this includes key policy-makers, is that we have a psychological resistance in recognizing that cyber attacks are pure “acts of war”, simply because they do not look like the conventional aggressive military operations we are used to.

Furthermore, since cyber war is relatively new, we still do not have the intellectual and technical tools to fully comprehend the extent of this threat, and how devastating large scale cyber attacks could be. Are we talking about a few cyber probes here and there? Are we talking about discreet actions of cyber theft or cyber espionage? We know about all of them. But is this really war? Yes, it is.

Prepare for the worst scenario

And it will get worse. Count on it. There will be new, stealthy and deadly tools. It would be foolish, if not criminally negligent, not to think about all this and try to prepare for the absolute worst. I mean well coordinated cyber attacks that could cripple our country, (for instance, attacks that would completely and permanently disable our national power grid), without a single shot being fired by enemy forces.

Our problem

And here is our problem. Right now we are at the very beginning of a very dangerous new era in which cyber tools are used as weapons. To date, aggressive cyber capabilities are probably still relatively modest. But they will inevitably grow, along with the growth of cyber science and the numerous new applications that will be created. And the temptation to do bad things is very strong. Hostile forces can always hope to hide behind anonymity.

We sort of know all this. But in a rather nebulous way. Most of all, there is no real sense of urgency, most likely because these acts of aggression take place in this intangible cyber space, whose dimensions and relevance are generally unknown to most of us and that would include policy-makers who do not have the sophisticated technical background that would allow them to immediately grasp the dimensions of this ominous threat.

The challenge

So, here is our challenge. How do we mobilize all relevant policy and scientific resources against a war we are already involved in that does not look at all like the wars we are used to? How do we mobilize and sustain national efforts aimed at countering invisible cyber attacks that may soon be replaced by much bigger, perhaps fatal attacks?




When The Coal Mine Closed Down

By Paolo von Schirach

WASHINGTON – Not long ago, I read a vivid account of a small town in West Virginia facing the demise of a coal mine, the major employer in the area. It is a real tragedy. Many people in the small town worked there. Their families depended on their salaries; while the entire local economy thrived because of the money coming directly or indirectly from the mining operation. No mine, no nothing. Only semi-desperate unemployed miners, empty stores, empty restaurants. You get the idea.

Gas is cheaper and cleaner

And why did the mine close down? Mostly because of the competition created by cheaper, super abundant, (and much cleaner), natural gas as the new fuel of choice for electric power generation plants. Considering lower prices and lower emissions, utilities across America have been switching to natural gas.

Hence the slow demise of coal. Quite frankly, from a most elementary economic stand point, this switch from coal to natural gas makes perfect sense. Having a choice, utilities go for the fuel that costs less and pollutes less.

Indeed, as a nation, we should be extremely grateful to the entrepreneurs who a couple of decades ago unleashed this incredible “fracking revolution” and created this almost unthinkable natural gas bonanza. Once gas poor, America has now so much natural gas that it is exporting it, with obvious advantages for our balance of trade.

No reason to be happy

However, if you grew up and live now in that West Virginia community, you have no reason to be happy. The coal mine was all they had; and now it is gone. How are the people going to create, out of nothing, a new local economy that will provide income and a decent standard of living for all? The reality is that this is almost impossible.

Creative destruction

Capitalism is a process of “creative destruction”. Unfortunately the “creation” and thedestruction” components are not nicely harmonized. There is no “system” that will guarantee that when jobs are lost because a new technology has made the old one obsolete, (or as in this case a better fuel becomes available this way replacing the old one), enough new, well-paying jobs will be created, just when they are needed.

In the end, if one looks at the big picture, if an innovative economy works, eventually the entire society will be better off. New technologies mean new and better products or services. New investments mean higher productivity and higher salaries. Yes, this is true…eventually.

What about the victims?

In the meantime, what will be the fate of this West Virginia rural community now that their main source of income has disappeared, victim of the “destruction” component of “creative destruction”? Unfortunately, as a society we have not managed to create the necessary shock absorbers, the transition tools that could eliminate or at least alleviate the frictions caused by painful economic change affecting people with no defenses.

Sure enough, in America we have retraining programs, vocational schools, Community Colleges, and more. But these resources are scattered. They are not well organized. Most tragically, usually they are not available when and where they are needed the most.

A future smart society will provide tools

A future smart society should have this reassuring message for all workers: “Do not worry. If you lose your current job, and this is quite possible given the rapid pace of change in this hyper competitive global economy, we have many resources for you. You will quickly learn new skills. You will become employable in new sectors where there is a strong demand for qualified workers. You will be OK. Your family will be OK.”

Sadly, we do not have anything like this in place today in America. Yes, there is unemployment compensation, food stamps, Medicaid, and other state or federal subsidies. But these are just bandaids. These are no long term solutions.

May God help those poor people in that West Virginia small community. Without the coal mine they are lost.




Bad Human Behavior Is The New Killer Disease

By Paolo von Schirach –

WASHINGTON – When it comes to taking care of our health, we Americans are really going backwards –in a most spectacular way! We are now well into an era in which by far the main enemy of our health and therefore of the opportunity to live a mostly disease free, long life, are no longer untreatable viruses or bacteria. NO, IT IS US.

We are killing ourselves

Yes, we are slowly killing ourselves. And the silent killers are the terrible dietary habits millions of Americans have mindlessly embraced over the last few decades, (eating and drinking way too much bad stuff), and zero exercise. The manifestation of these truly bad habits are well known. I am talking about our gigantic –and worsening– obesity epidemic, the consequent explosion of type two diabetes and the various ailments caused by this debilitating, chronic disease.

In a nutshell, we are killing ourselves because –as a Nation– we have adopted a horrible diet and no exercise as our norms. The cumulative effect of these terrible habits practiced by millions over many decades is deteriorating health, (more cardiovascular afflictions, more hypertension), for tens of millions of Americans. Of course, these chronic conditions get worse as we age. And If you add to the mix the serious crisis caused by various addictions, (drugs, smoking, alcohol), America –a rich, well resourced country– is getting close to a basket case.

We spend a fortune on health care

And all this is happening notwithstanding the stupendous amount of money the US spends on health care. Indeed, America has the odd record of spending double what other rich countries spend on health, (about 18% of GDP, a staggering amount), with truly mediocre if not bad health statistics when it comes to incidence of chronic diseases and declining life expectancy. (At a little above 79 years, US life expectancy is very close to Cuba, Portugal and Albania).

Science defeated many diseases

As I said, when it comes to our health as a society, we are really going backwards. Think about it. The 19th and the beginning of the 20th Century were all about understanding and then successfully fighting deadly bacteria and viruses that were at the source of often incurable maladies. Finally, cures and vaccines were discovered that could successfully fight back smallpox, tuberculosis, sifilis, pneumonia, and polio.

Public health standards

Closer to our times it became routine, first in developed countries and then progressively elsewhere, to have massive immunization programs, so that infants and children would be protected from many potentially lethal infectious diseases. Furthermore, basic norms of cleanliness were identified and and then taught, such as frequent hand washing with soap, refrigerating perishable food items, and rinsing fresh fruits and vegetables before eating them.

At the same time, authorities understood the importance of public hygiene. They started providing treated, clean water to households. They built modern sewage treatment plants, along with modern trash removal services, so that urban waste would not become the breeding ground for bacteria and vermin (such as rats) that could carry and spread disease.

Major victories

These are major victories. Vaccinations, immunizations, the availability of antibiotics, combined with vastly improved standards aimed at safeguarding public health, cut down infant mortality and allowed millions of adults to live longer, healthier lives.

If we fast forward to today, for sure thousands of dedicated scientists keep working on major medical issues, such as various forms of cancer, dementia, Alzheimer, and a plethora of genetic ailments. And this is good. Much, much more needs to be discovered and understood.

US health is declining

That said, if we look at broad US health statistics, we see an enormous paradox. As I said, we conquered major diseases a long time ago. And America spends literally a fortune on various forms of health care delivery, almost double the average of what is devoted to health in other affluent societies. And yet the overall health conditions of the American populace are actually declining on account of the epidemic proportions of ailments such as obesity and type two diabetes caused not by mysterious germs but only by our bad personal habits.

In other words, our declining health is totally self-inflicted.

We know the problem

The sad fact is that everybody with a modicum of education knows exactly why we are dealing with these epidemics. It is all about over eating bad stuff, (mostly processed food, sodas, and too many fatty, sugary snacks), combined with too much alcohol, and lack of even a modicum of physical exercise in our daily routines. And if you add to this already toxic mix millions of Americans addicted to alcohol, cigarettes, and a large variety of drugs, you have the paradoxical picture of a wealthy, reasonably well educated society that is also very sick. This is the really bad news.

It is all rooted in bad habits

But the good news is that this catastrophic deterioration of the overall health conditions of millions of Americans is not about bad luck. It is rooted in our freely adopted BAD HABITS. Habits are not genetic. We learn them, and then we adopt them. And this means that given proper guidance and education, once we realize how toxic these habits are, we can ditch them and embrace new, healthy ones.

Yes, it really is as simple as that. We became accustomed to unhealthy processed foods. We drink rivers of sugary sodas. We eat too much junk food which is mostly fat, sugar and salt. Most of us do not exercise at all. I am not sure how these habits came to be embraced. But is is time to get rid of them. And it is quite possible, even though doing so will require an extensive, focused public education campaign, starting with children, and quite a bit of self-discipline.

Yes, ditching bad habits is a major challenge

I fully recognize that changing the entrenched bad habits of millions of Americans looks too big a task, in fact an impossibility.

And yet it is doable.

We can all learn what a healthy diet is, and then embrace it as our new habit. There is nothing magic or mysterious about it. Fruits and vegetables are good for you. Snack food is not. Plain water is good for you. Green tea is good for you. Sugary sodas are not. Furthermore, once we understand the horrible long-term consequences of a sedentary life, we can all engage in some form of exercise, (walking just 30 minutes a day can be a life changing new habit for mostly sedentary people).

As I said, unless we ditch our truly bad habits, we are slowly killing ourselves, while we waste billions of dollars every year treating mostly preventable diseases that we inflicted on ourselves.

Are you telling me that we cannot do better than that?




Boris Johnson’s Gamble Will Fail

by Paolo von Schirach – 

WASHINGTON – Boris Johnson won the UK political elections –in a most spectacular way. Indeed, it seems that his new version of British Conservatism cum Populism upended British politics. Old Labour Party bastions located primarily in the North of England fell, this way transforming the British political map. Congratulations on this splendid and unanticipated performance. This is the good news.

The bad news

And now, for the bad news. Johnson won by shamelessly over promising almost everything to everybody. There will be Brexit, of course, and this was baked in the cake anyway. But Brexit, according to Johnson, will not cause any pain or discomfort to the UK –a country that does most of its business with the European Union. On the contrary, we are told that Brexit will be a salutary tonic. It will unleash the long dormant British creative spirit. It will trigger a new wave of innovation and entrepreneurship, this way unleashing unprecedented prosperity for the British people. This fantasy land proposition is credible only if you believe in miracles.

Well, the truth is that this uplifting vision is not just uncertain, it is in fact a most improbable dream, simply because Britain today (in case you missed this) is no longer the mythologized Great Britain that pioneered the industrial revolution. Today’s Britain is a sleepy country where not much happens, except for a few islands of innovation. So, please forget about creating –almost overnight– Singapore-on-the-Thames, once the ties with the EU have been cut.

Delivering growth to the North

But the real problem for Johnson will be delivering a tangible level of new, top-down development and attendant prosperity to the Labor bastions in the semi-impoverished North of England that decided to give him a chance by switching sides and dumping the Labor Party, at least for now. In order to lure them to his re-engineered Conservative-Populist camp, Johnson deliberately promised all sorts of goodies: better health care, better public education, better transportation systems, and more money for all sorts of services.

So, there you have it. Johnson promises a smooth and painless exit from the EU, robust growth caused by new investments in productive enterprises, (this is absolutely necessary in order to get the extra revenue to pay for at least some of the infrastructure and social services he promised), and new prosperity and security for the neglected British working class. And all of this between now and the next elections in five years!

It will not happen

Without getting into too many details, it is clear that this is not going to happen, at least not between now and the next elections. Common sense and the long record of mixed results –at best– for welfare policies and top-down government-led investments indicate that profligate spending, after the initial sugar high, does not change any of the pre-existing negative fundamentals. Indeed, the only measurable change will be widening budget deficits. And this will create pressure down the line to increase interest rates in order to attract buyers for the growing national debt.

Jump-starting a sleepy economy?

As for the otherwise noble goal of restarting the economy and aspiring to remake Great Britain into a dynamic global hub of innovation and enterprise, the only thing I can say is: “Good Luck”. Mountains of evidence indicate that genuine entrepreneurship, (as opposed to subsidized half-baked efforts), cannot be willed into place by well-meaning governments relying mostly on cheap credit, tax holidays, incubators, or other gimmicks.

Create a business friendly eco-system

The best that a government can do to stimulate innovation is to create and sustain a credible business friendly ecosystem: reasonably low taxes, good education institutions, including at least some top notch research universities, robust IP protection, easy to understand laws, reliable dispute resolution mechanisms, healthy financial markets, well-funded venture capital firms, and reliable state of the art infrastructure. And these –mind you– are just preconditions. Indispensable preconditions, but only preconditions. Indeed, while absolutely necessary, having them in place and functioning gives you a chance to compete; but they are by no means a guarantee of success.

I wish that Johnson’s optimism could be truly contagious. I wish he could inspire would-be innovators to innovate and –most critically– bring to market commercially viable new products and services. I just do not think this will happen, at least not between now and the next elections, and on the scale that would be necessary to transform in a meaningful way this aged developed country that lost its spirit of discovery and adventure a long time ago.

Big programs will cost real money

That said, while future growth is aspirational, the promises made to the new former Labour and now Conservative voters are real. If Johnson wants to consolidate his newly broadened electoral base, he will have to deliver. And this will cost real –not hypothetical– money. Extra money that the British Treasury does not have. And this inevitably means higher deficits and more debt.

Of course, for many “progressive” economists (strange adjective indeed!),  all this –higher deficits and a swelling national debt—seems perfectly alright. Indeed, looking at the rest of Europe, the US and Japan, it is clear that these days more spending and bigger government programs benefiting retirees or other deserving constituencies, all of them financed with more borrowing, are the norm.

Most Western governments –and the UK is no exception– are now defying gravity, or so it seems. They keep borrowing in order to finance bigger entitlements, while the monetary authorities keep interest rates at zero, this way making it easier to finance larger deficits, while –so far at least– there is practically no inflation. These policies once were called lunacy inevitably leading to fiscal disaster. Today, they are main stream. Well, truth be told, so far no catastrophe ensued. Or at least this is what appears.

Atrophy is here

My contention is that whatever else may happen down the line (in the UK and elsewhere) when the debt burden will become unsustainable, a real (albeit silent) catastrophe has already happened: and it is called atrophy.

This is not about the apocalypse, about countries going down in flames convulsed by the pain and despair of bankruptcy. This is about becoming comfortable with the new normal of anemic growth, or no growth at all, as long as the government keeps doling out some subsidies relying on borrowed money to all deserving constituencies.

This is about redirecting increasing percentages of static tax revenue away from productive investments and on to more public services and debt service. As this process continues, eventually there will be zero money to invest in future growth. In a word, this is about secular stagnation. However, since this most insidious phenomenon manifests itself only slowly and incrementally, it is easy to explain it away, or ignore it altogether.

I wish Prime Minister Boris Johnson best of luck. Still, I am quite skeptical about his ability to deliver innovation, growth, prosperity, and more entitlements –and all of it within the next 5 years.




Good Values at the Root of Utah’s Success

By Paolo von Schirach

WASHINGTON – A recent article pointed out how, year after year, Utah is on top of the national list of the best states to do business in America, not to mention that the state gets very high marks on good governance; while in Utah there is very low unemployment, lower than the historically low national average of 3.5%. And in Utah kids attending public schools on average do rather well compared to the rest of the U.S., notwithstanding the fact that in Utah spending per pupil is quite below the national average. Well, what is the secret of this success?

Nothing special about Utah

There is absolutely nothing special about this Western landlocked state. Sure, there are mountains, and parks and a great deal of pristine nature. But this natural beauty is not at the foundation of Utah’s growth, and therefore it cannot explain sustained prosperity. And yet, year after year, Utah stays on top of many significant national rankings dealing with easiness to do business, governance, quality of life, and more.

The secret is the people and their values

Well, here is the reason: the people of Utah. Yes, the people of Utah and their values. We know that most people in Utah are Mormons, (62%). Whatever your opinion about this rather mysterious religion, we know that this faith strongly promotes values of thrift, frugality, sobriety, honesty and charitable giving. Could this –deeply held values that promote best practices in education, business and government– be the ingredients of Utah’s secret sauce? I think so. The spiritual values held by many Utah’s citizens do indeed have a beneficial impact on the society they built.

So, there you have it. Sustained economic growth and good governance reinforce each other, and both of them are the byproduct of good values sincerely embraced by the people.

No proprietary economic development strategies

Utah’s, “economic miracle” is not the outcome of following sophisticated, complex investment and economic development strategies, or proprietary computer generated models developed by a team of management super gurus.

The truth is disarmingly simple. Values that hold in high regard a good education, entrepreneurship, honesty, hard work, frugality and lean but effective government inspire productive, honest behavior and good public administration. And all this eventually translates into prosperity.

“You mean, that’s it?”

Yes, that’s it.




The Fake Aramco IPO

By Paolo von Schirach

WASHINGTON – There were great expectations about the Aramco IPO. It was announced long ago by Saudi authorities, and then postponed several times. Well, now we know why it took so long, and why in the end the IPO did not take place in New York or London. Indeed, the Saudi government, the sole owner of this energy giant, could not be sure about the response of savvy international investors. Would they really buy shares at a price that implies an overall $ 2 trillion valuation for Aramco? May be not. And so the Saudis decided to play it safe. They would do this at home, in an environment and with investors they could control. And so they used the Riyadh Tadawul stock exchange (where less than 200 stocks are traded) as the venue for this “historic” IPO.

Home made IPO

And, sure enough, the compliant, super wealthy Saudi elites bought the Aramco shares at the set price and bid up the stock so that Aramco would reach the $ 2 trillion valuation This choice of venue and how all this was arranged tells us that this is is no genuine IPO.

This is a (forced?) purchase, at a preset, dubious valuation of a very small number of Aramco shares by a few wealthy Saudis and some Saudi companies. Prince Mohammad Bin Sultan, MBS, the de facto ruler of Saudi Arabia, wanted the valuation of Aramco –no doubt the world’s largest energy conglomerate– to be at or close to $ 2 trillion. And so the shares had to be priced accordingly, and the compliant buyers –all of them Saudis– had to pay and sustain that price.

Not the real thing

Anyway, because of all this maneuvering, it is clear that this is not a genuine IPO in which the market eventually sets the value of the newly offered company based on available, scrutinized financial data and on their interpretation of market trends.

This IPO is a Saudi government gimmick aimed at getting essentially free cash in exchange for a tiny sliver of Aramco for which several compliant Saudi buyers paid a preset political (and therefore most likely inflated) price.

The risks involved in a real IPO

If Saudi Arabia had wanted to attract serious international buyers, it would have had to disclose a lot more, and then let the market decide what the value of Aramco really is. But this orthodox approach carried the risk of a lower overall valuation for Aramco after the IPO, had investors decided that the company, however enormous and certainly very valuable, is not worth $ 2 trillion. And this would have hurt the prestige of the Saudi Kingdom. For Saudi Arabia, Aramco is “it”. There is not much else in the Kingdom beyond oil and oil products.

Cognizant of these risks, MBS opted for a safe IPO. The offering took place at home, in Saudi Arabia, using the tiny Saudi stock exchange. The Saudi elites were persuaded (forced?) to buy the Aramco shares, so that the government could prove to the world that Aramco is the most valuable company on earth. In other words, this is about propaganda, and therefore the IPO is not serious.

What is Aramco’s true market value?

There is no doubt that Aramco is an energy giant. In fact, “the” energy giant. But, based on all we know about the company and most importantly about the future of global oil demand and oil prices in this new era of electric vehicles and carbon taxes, what is a fair valuation for Aramco? Is it close to to $ 2 trillion as the “local buyers only” IPO would suggest? Or is it less, perhaps half of that, as many analysts indicated? We did not know for sure before this IPO, and we still do not know today.

Clearly, executing a proper IPO in an internationally recognized exchange would have exposed the Saudi government to the scrutiny of international investors, and therefore a possible embarrassment, had investors decided that the shares were too expensive and consequently the touted $ 2 trillion pre IPO valuation excessive. In order to guarantee a “success” MBS engineered this “friends and family only” IPO.

Big questions about the Saudi reform agenda

That said, one thing is clear. If the manner in which this long delayed IPO took place is illustrative of the seriousness of MBS’ ambitious economic reform agenda for Saudi Arabia, I am not impressed; and consequently not very optimistic about the future success of MBS’ plans to diversify and grow the non-oil Saudi economy.




No Action on Failing US Public Schools

by Paolo von Schirach –

WASHINGTON – For many years we have been debating the sorry state of US public education: too many drop outs, large percentages of high school graduates who cannot read or count, and how education could and should be improved. Alas, there has been and there is much talk –and very little remedial action.

No accountability

Nationwide, the public schools sector seems to belong to a different universe, a universe in which professionalism, the pursuit of academic excellence, merit-based pay and promotions for teachers, accountability, and cost-effectiveness are unknown concepts.  

Awful record in Colorado

Below, you can look at yet another illustration of this catastrophic failure that essentially condemns students educated in bad schools to a life of under achievement. (Letters to the Editor, The Wall Street Journal, August 21, 2019)

In Colorado, not a poor under resourced state, most high school students perform well below grade. Many of them cannot pass a simple test that would allow them to join the Army. This is simply outrageous. But you do not hear any public outcry.

The children of the elites are taken care of

Here is my theory about this general indifference on the part of all American elites regarding this colossal societal failure when it comes to educating so many of our kids –and these are mostly poor kids.

The truth is that the children of key policy-makers, at all levels, in most cases do have access to quality education. As they normally live in good areas, they can enroll in higher quality public schools. If these are not available, they can always go to charter schools or private schools. In other words, their parents are reassured that their kids will get a good or even superior high school education, itself the ticket to a good university and eventually a rewarding, well remunerated career. The children of the American elites are taken care of.

And what about all the others? The others, oh well the others will go to the regular (bad to failing) public schools. They will graduate (those who do) with minimal skills and knowledge, while they will often be functionally illiterate, as the Letter to the Editor reproduced below illustrates.  

From: Letters to the Editor, The Wall Street Journal, August 21, 2019

“Regarding Baker A. Miller’s “The
Smear Campaign Against Charters” (op-ed, Aug. 14): Last week our state test
results were released here in Colorado:
Only 45.8% of our students read at grade level, and only 34.7% can do math at
grade level.”
[Bold
added]

“These results have changed little
over the last 20 years. This is noteworthy because our current governor, Jared
Polis, worked to pass an amendment to the state constitution in 2000 that
required education spending to increase at the rate of inflation plus 1% every
year. This should put to rest the notion that more money is the answer. No
doubt we will hear the usual calls for increased funding of public education,
but even if we gave the system a billion dollars tomorrow, it wouldn’t know
what to do with the money.”

“I own a remedial-education business
and have lost count of the number of students I’ve taught who hold high-school
diplomas from the Denver and Aurora Public Schools systems but are functionally
illiterate and innumerate. Many want to join the military but can’t pass the
entrance exam (the ASVAB). It’s official—the academic standards required to
join the Army are higher than those needed to earn a Colorado high-school
diploma.”

“Isn’t it high time we moved this
incompetence from the realm of the merely scandalous to the specifically
criminal? What’s to stop U.S. attorneys around the country from filing RICO
[The Racketeer Influenced and Corrupt
Organizations Act] charges against school
boards, superintendents and union officials? If there’s a bigger racket than
public education in the U.S., I’m unaware of it.”

(Signed) Nate Braden, Denver www.wsj.com

Criminal conspiracy?

The author of this sad letter suggests that all the players involved in this public education drama are in fact members of a criminal conspiracy. Of course, this should not be taken literally. However, the enduring gap between education standards and disastrous outcomes at the very least indicates irresponsibility and neglect.

America is now a two tier society

And this neglect has and will have horrible consequences for our country. Because of this public education disaster, America’s leaders, wittingly or unwittingly, are creating a two tier society. The top tier belongs to the well educated and affluent who have the means and the opportunity to educate their children, so that they will earn good degrees leading to great careers and well rewarded employment.

The bottom tier is for everybody else. The children of the poor and lower middle classes cannot afford private education. Higher quality charter schools may not be available in their areas. And so they are stuck with bad or failing schools where they will learn little or nothing.

Birth is destiny

And we should all be clear as to the implications of all this. In this super charged, hyper competitive knowledge economy, there is no chance to land a good job without a good or superior education.

Sadly, all this means that in America now “birth is destiny” –just like in many poor countries, with rigid barriers that prevent upper mobility. Indeed, in today’s America –the exceptional country once upon a time known as The Land of Opportunity— if you were born poor and live in a bad area, your chances of getting a good education –the essential tool to move up in life– are practically zero.

This being the case, you will spend your life in the bottom tier. Hard work alone will not allow you to climb the socio-economic ladder. Now, and even more so in the future, in order to make it, young people need increasingly sophisticated knowledge. If they do not acquire it while in school, the chances of getting it later on through other means are slim.




Type Two Diabetes Is Preventable, But Nobody Says It

by Paolo von Schirach –

WASHINGTON – I recently read a very well researched article on the growing cost of treating millions of diabetics in the United States. It appeared in a major national newspaper and it was written by a well-known public policy scholar. The writer  provided up to date data on the alarmingly large dimension of this disease and how much it costs to the affected individuals, insures and the US Government. The scholar in the end provided his thoughtful policy recommendations.

It is a preventable disease

All in all, a good, balanced piece. Except for one thing. In his article, the author started from the implicit premise that type two diabetes “just happened” in America. It seems that for some (unexplored and unexplained) reasons it came about and has now reached incredibly large proportions. Millions of Americans, including young people, are now its victims.  Now, according to the author, our problem as a society is how to pay for the monstrous and increasing costs of caring for millions of patients. Not a word –repeat, not a word– about the genesis of this explosion, even though it is well known.

Well, this approach to this US health care crisis is totally wrong. I repeat: totally wrong; because it fails to mention how type two diabetes came about and –most fundamentally—that type two diabetes is a preventable disease. Yes, preventable, and this means avoidable. Which is to say that the analysis included in the article is fatally flawed, because it starts from the false premise that this health care crisis just “happened”. The implicit assumption is that, as a nation, we have to accept this reality, and now going forward our job as a society is to figure out how to pay for its immense cost.

The author says: “We have an explosion of a disease that cost billions. Let’s discuss the best way to apportion the cost”. Wrong! A good analyst would ask a very different question:

“Why is it that we are doing nothing to prevent a preventable disease that has now gained monstrous dimensions, this way causing misery to millions of Americans, while burdening the health care systems with billions of dollars in therapies that could be completely avoided”?

Let me clarify.  The ballooning of diabetes in recent years is mostly about type two diabetes. (Type one diabetes is a different story. It has some genetic roots that make certain individuals more susceptible. But the explosion of diabetes in recent years in America is overwhelmingly about type two which has no genetic roots).

Unlike other health care scourges, this is not a conventional epidemic. Type two diabetes is not genetic, and it is not a communicable malady, carried by a virus or bacteria. You do not get type two diabetes because you have been in the proximity of someone who has it.

A consequence of bad life style

Type two diabetes is a pretty horrible chronic disease that manifests itself as a consequence of years of bad eating habits (too much sugar, too many carbohydrates), and bad lifestyle (no exercise).

Which is to say that if most Americans would embrace and sustain a healthy life style, (eat mostly lean proteins including fish, vegetables, fruits, salads, go to the gym 3 or 4 times a week, and keep a normal weight), the chances of developing type two diabetes are practically zero.

Just like that? Yes, just like that.

Again, type two diabetes is not genetic, and it is not an epidemic. This is a bad life style disease. The fact that millions of Americans get it and collectively end up spending billions of dollars to treat it does not change any of these facts. It simply means that millions of Americans, regrettably, embraced bad personal habits that caused them to develop type two diabetes while piling up skyrocketing medical costs.

That said, amazingly, almost no one (including the author mentioned above) points that this is a preventable disease while discussing the consequences of the massive increase of type two diabetes cases. And yet, these are well-known facts.

You realize what this means. If people had a chance to be properly educated about the critical importance of a good diet and exercise and consequently changed their eating and exercise habits in order to stay healthy, type two diabetes would practically disappear –with enormous health care cost savings, and immense quality of life gains for millions of diseased people.

It is preventable!

At least
some tell you the real story. The Harvard School of Public Health website explains
that:

“The good news is that prediabetes
and type two diabetes are largely preventable. About 9 in 10 cases in the U.S.
can be avoided by making lifestyle changes. These same changes can also lower
the chances of developing heart disease and some cancers. The key to prevention
can be boiled down to five words: Stay lean and stay active.”

Got that? At least 9 out of 10 cases are preventable. The secret? Five words: “Stay lean and stay active”. Yes, that’s all there is to it.

And it is also reversible!

And this is not the whole story. Type two diabetes is actually reversible. Not always. But in many, if not most cases you can get rid of it.

Here is what US News recently reported:

“It’s not impossible at all to
reverse diabetes,” says Dr. Peter Arvan, chief of the division of
metabolism, endocrinology and diabetes at the University of Michigan.
Certainly, though, experts are quick to point out that often what it takes to
do so, such as wholesale changes to completely alter the way one eats and
shifting one’s schedule to prioritize exercise, can be challenging to say the
least.”

“Sometimes diabetes remission is
achieved following bariatric weight loss surgery. But for the majority, it’s
intensive changes to a diet, such as consuming lots of fruits and veggies and
complex carbs and little sugar, and accompanying weight loss that seems to be a
core driver in lowering blood-sugar.”

“Of course there are a lot of
patients who have difficulty complying with those lifestyle changes,”
Arvan says. “It is not the case that reversing their diabetes is the one
and only thing that’s on that person’s mind all day long.” So the same
struggles people may have in properly controlling diabetes can dog even loftier
goals of achieving remission.”

It is imperative to change lifestyle

So, according to this eminent physician, the main obstacle to getting rid of this nasty disease is the willingness on the part of the patients to completely change their lifestyle. Difficult, perhaps. But not an impossible task, if the affected individuals are properly guided and counseled by nutritionists and doctors.

So, given the fact that we can both prevent and reverse this nasty disease, why is it that we do not have well-crafted public education campaigns aimed at explaining the critical value of good nutrition and regular exercise? Why are we not teaching “wellness” in America?

As a nation we certainly have the skills and the resources to do this. We did launch massive education campaigns when it came to raising awareness about the horrible health consequences of smoking.

No interest in promoting wellness

If we are into conspiracy theories, we could argue that not creating prevention programs focusing on wellness education aimed at the general public is in fact deliberate. Indeed, it is very much in the financial interest of the health care industry, (pharmaceutical companies, hospitals, and doctors), not to teach anybody about how to adopt a healthy nutrition program, while engaging in moderate physical activities.

How so? Well, if you think about it, this type two diabetes explosion is really a big money bonanza for the health care sector. If you are a pharmaceutical company that makes and sells insulin, (the medication prescribed to all diabetics), or if you are a physician who regularly monitors affected patients, type two diabetes is a veritable gold mine. For medical practitioners who are paid based on the number of treatments, there is nothing better than millions of chronically ill patients who need life time treatment. Which is to say that the entire US health care industry benefits financially from the bad habits of millions of sick Americans.

Save money, improve lives

Needless to say, drastically curtailing the incidence of type two diabetes cases through targeted wellness education campaigns would save America billions of dollars every year, while improving the quality of life for millions of chronically ill patients. But you do not see the headlines explaining any of this. in the absence of wellness programs, diabetics keep doing what they are told. They have to keep monitoring their blood sugar levels (yes, sell more of those monitoring devices!) and take more insulin.




US Fiscal Irresponsibility Will Lead to Bankruptcy

WASHINGTON – The Democrats in Congress and Republican President Donald Trump agree practically on nothing. Therefore, it is impossible to think of any major piece of legislation that can be passed between now and November 2020, when Americans will go the polls to pick a new President and a new Congress and new political majorities may be formed.

Sharply divided government

Since the Democratic control the House of Representatives, while the Republicans control the Senate and the White House, and considering the increasingly toxic political climate that makes compromise impossible, we have not just a divided government. We have a sharply divided government. So, do not hold your breath. No significant legislative actions between now and the next presidential and congressional elections in November 2020.

The spending deal

That said, there is a huge exception –and a very shameful one—in this political stalemate. And that is federal spending. Very recently, and very quietly, Republicans and Democrats hammered a major spending deal. There was no fight. No public posturing to defend this plan and attack the other side spending priorities. No grandstanding.

Very quietly
the two arch enemies came rather quickly to a spending agreement. How so?
Because they decided to increase spending across the board. Essentially, the Republicans
got some more money for Defense. The Democrats got a bit of this and that in
other areas of non-defense discretionary spending.

Larger deficits

In case you
were wondering, these increases will not be offset by spending cuts in other
areas. This means that a large and growing US Federal Budget deficit, for
decades now a structural feature of our public finances, will become much bigger
much sooner than expected. Think of a $ 1 trillion billion deficit, (that is 1
thousand billion), year after year, unless something rather drastic is done.

This is a
colossal figure. In simple language, this means that Uncle Sam every year
spends more money –a lot more– than it takes in via tax revenues. In principle,
overspending could be justifiable; but only when the government goes into
overdrive with extraordinary fiscal stimulus in order to counter a major
recession, like the most dreadful one we had beginning in 2008. Borrowing money
could also make sense if the funds are to be invested in important capital
projects, (new highways, ports or airports, for instance), that would improve our
national infrastructure networks this way benefiting the economy. But we are
not doing any of this. Indeed, this is not money borrowed for stimulus or for
financing needed infrastructure. This is mostly money to be used to finance
current spending. In other words, as a nation, we are living beyond our means, while
we obviously think that we can keep our lifestyle by borrowing the difference –indefinitely.

Everybody knows

By the way,
everybody in Washington who is even remotely familiar with federal spending
trends knows this. But the fact is that nobody seems to care. The sad and
worrisome conclusion is that chronic overspending is now accepted by most Washington
policy makers –both left and right– as the normal way to run the government of
America, a major modern country which used to be run according to established
principles of fiscal balance. Namely: in the long run you should not spend more
money than you can raise through taxation. By the same token, if you have
accumulated a large public debt, you must change tax and spending patterns in
order to return to a healthy balance.

The roots of the US deficit and debt

Now, as to
the actual roots of this systemic overspending, obviously they are not in the
deal just struck by the two political parties. This recent deal just made a bad
situation a lot worse.

The roots of
US overspending are in the incremental but steady growth of large entitlement
program that cannot possibly be funded as they are currently structured, unless
taxes will be substantially increased and/or benefits reduced. 

No, US overspending is not about “fraud, waste and abuse”. It is not about too much foreign aid, as many believe. It is mostly rooted in our big federal entitlement programs. Social Security, Medicare, Food Stamps and other related programs, absorb about 2/3 (yes, that is a lot more than half!) of the US total federal budget, currently at $ 4.7 trillion (again: a trillion is 1,000 billion).

Good programs designed in a different
era

The problem about these programs (most of them) aimed at providing for our senior citizens is that they were designed in another era, (Social Security goes back to FDR in the 1930s, Medicare goes back to the 1960s when Lyndon Johnson was president).

Clearly that was a different America, with completely different demographics. The programs as designed were solvent and meant to be self-sustaining. But this is no longer the case. The way the system works, the payroll taxes paid by current workers and their employers go directly to fund the benefits for the retirees. The problem is that the US population is slowly shrinking, which means fewer active people are supporting the benefit for a larger number of retirees, while health care costs for seniors have been increasing. Simply stated, the programs are no longer self-sustaining.

Kicking the can down the road

This trend of the growing cost of entitlements, year after year, both in absolute terms and as a percentage of the federal budget, is not news. This has been going on for decades. But lawmakers and presidents of both parties simply ignored the problem, in large measure because they believe you cannot tell the truth to the American voters. Even talking about serious reforms that would modify or potentially decrease benefits to retirees is deemed to be political suicide in Washington.

The Debt Commission recommendations went
nowhere

For example, back in 2010, then President Barack Obama created a bipartisan commission to review federal spending and make recommendations on ways to reduce deficits in the future. It became known as “The Debt Commission”.  The two co-chairmen were Erskine Bowles (Democrat), and Alan Simpson (Republican). These two elder statesmen took the job very seriously, without any partisan animosities. This was no Washington wishy-washy anodyne process marked by generalities and obfuscations. Indeed, their 59-page report was entitled “The Moment of Truth”. It included actionable plans to reform entitlements, while also raising taxes; so that these key programs providing needed benefits to millions of American retirees would remain solvent and available to all beneficiaries, now and in the future, without bankrupting the federal government.

Well, nothing, absolutely nothing, happened after the report was issued. President Obama, just like all the other presidents before him, did not want to kill his chances of re-election in 2012 by becoming “The president who killed Social Security and Medicare”. So, notwithstanding the serious work done by these two elder statesmen whom I consider true American patriots, no action to reform entitlements, defense spending and raise some taxes was undertaken under president Obama.

And, by the way, no action whatsoever under President Trump. Trump fully understands that his political is made up mostly of blue-collar white workers. And these are precisely the people who need these programs aimed at low income retirees the most.

How else could we save money?

Well, if we cannot reform costly entitlements, what else could be done to restrain public spending, this way reducing the deficits, and down the line slowing down the monstrous growth of the US national debt? Well, not much. “Oh come on, many would scream. We could start by cutting our gigantic defense budget!” Sure we could. But it would not solve our structural fiscal imbalance.

And by the way, believe or not, US defense spending is now close to a historic low as a percentage of GDP. Yes, while America spends more than $ 700 billion on the Pentagon, this large figure is only 3% of GDP. During the Cold War the US routinely spent close to 10% on the military. Which is to say that current defense spending levels are not an aberration.

While it may be possible to spend less or at least more wisely on defense, contrary to popular opinion, most of the Pentagon budget is not devoted to procuring new super expensive, unnecessary weapons. Most of the money goes to salaries (we must pay for an all-volunteer force), and operations and maintenance. This includes all that is needed to keep at least a percentage of a large force ready. Think of training, housing, food, deployments, fuel for an enormous fleet of vehicles, airplanes and vessels, and a lot more.

While we can and should have a sensible discussion about better ways to spend defense dollars, do not expect even significant savings to make a big difference. Indeed, our federal budget deficits are so huge that even if we abolished the Defense Department altogether, (an unlikely scenario), Uncle Sam would still be in the red.

Well, what about other areas of spending? Where else could we cut in order to achieve big savings? Well, no fat targets out there. As a percentage of total federal spending, transportation, energy, agriculture, commerce, and so on, claim relatively little money. Again, even if we abolished the Departments of Education or Energy, we would still run a large deficit. By the same token, cutting 10% or 15% here and there would impair basic functions without saving much money.

And do not forget another budget line item that keeps growing and cannot be cut. That is the interest on the existing national debt, now about 10% of total federal spending. To put it in perspective, this enormous number is about half of all defense spending.

Not on the verge of bankruptcy

To put all this in perspective, America right now is not –I repeat is not—on the verge of bankruptcy. Investors and foreign governments still eagerly buy our Treasury Bonds. They believe that America will be able to meet all its financial obligations.

Still, unless federal spending is seriously reformed –and by that I mean mostly a serious revision of our key entitlement programs, via a bipartisan agreement– we are definitely headed towards bankruptcy.

More money for everybody

If not today, pretty soon something drastic will have to be done. Either we cut spending, (remember: the fat target is entitlement reform), or we raise taxes, or a combination of both. But, right now, we are going in exactly the opposite direction.

With no public debate, and in a completely irresponsible fashion, our national leaders, in both parties, one year before the 2020 elections have decided that they want to tell voters that the free money party is still on. “Cheer up everybody! More spending, therefore more goodies for everyone: Mid-West farmers and Boeing”.

Deficits do not matter?

One last note. While our elected leaders act myopically to pursue the immediate goals of currying favors with the voters ahead of a major national election, at least some academics have come up with the bizarre “theory” that –guess what— in America federal deficits do not matter. When you have a country like the US that can borrow in its own currency, assuming tame inflation, large deficits are not an issue. According to these economists, Washington can just keep borrowing and borrowing and nothing bad will even happen. There are no limits. Apparently, our growing national debt (the cumulative result of chronic annual deficits) does not have to be paid back. Got that?

I would say
that if this preposterous idea is accepted as a sound foundation for managing
our public finances, then we truly deserve to go bankrupt.