The 30 Year Russia-China Gas Deal Tells Us That Carbon Energy Is Here To Stay

WASHINGTON – We have been told time and again by President Obama that America has to invest in renewable energy because otherwise China will dominate the solar panels industry. (Remember US subsidies to Solyndra and others?)

The Chinese see the future

You see, the Chinese are smart and strategic. They have seen the light. They understand that carbon based energy is a thing of the past. And this is why they are investing massively in renewables. Therefore it is imperative for America to stay in the game, regain lost ground and develop are our own world-class solar energy sector. Hence the need to subsidize the US solar energy industry.

How do we explain a $ 400 billion gas deal?

Indeed. Well, if it were so, if China had passed the inflection point and is now totally committed to renewables, how do we explain the fact that China just signed a $ 400 billion, 30 year contract for Russian natural gas? And do consider that, as a component of this deal, China is also obligated to spend at least $ 22 billion to develop the infrastructure (pipelines, pumping stations and more) necessary to get all this gas to its final destinations within China.

Again, this is a $ 400 billion deal for deliveries that will take place over the next 30 years –a very long time horizon. How does this square with China’s strategic decision to go all the way with solar power?

China needs carbon based energy

Well, it does not. This “contract of the century” does not mean that China suddenly ditched renewables. But it certainly means that Beijing believes that it needs a lot more energy, and that natural gas from Russia is a good and cost competitive source.

I certainly do not fully comprehend the (mostly hidden) intricacies of how a web of soft loans, subsidises and other political favors allow Chinese solar companies to stay in business. But the Russia gas deal tells me that China realistically believes that its renewable energy sector is not mature enough. Otherwise, it would make no sense to be locked into a 30 year natural gas contract.

Europe: the disasters of imposed renewable energy

In Europe the picture of the negative consequences of politically imposed renewable energy is more transparent. Inspired by the lofty goal of reducing harmful emissions, European policy-makers decided to tax carbon energy while subsidizing renewables. If you indeed believed that carbon is bad (and it certainly is) while we have perfectly suitable, zero emissions alternatives, then it made perfect sense to encourage their adoption through a combination of carbon taxes and incentives for wind and solar.

Wrong premise

Great idea. Except that the premise was totally wrong. Sure enough, carbon produces emissions. This is true. But as of today we do not —repeat, we do not— have cost-effective alternatives. At the current level of development, renewables are still inefficient  and on average more expensive than carbon based energy sources.

But Europe went ahead anyway. The net result of this disastrous policy choice is that the European consumers pay for the subsidies bestowed on solar and wind through sky-high electricity rates. As a result, many European industries are penalized because their costs are much higher due to the inflated price of electricity.

Higher prices, higher emissions

And guess what, notwithstanding all this, in Germany total emissions are actually higher today than they were before this gigantic subsidy scheme was enacted.

And how is this possible? Well, very simple. Subsidized solar displaced gas-fired power generation. Therefore the only cost competitive fossil alternative is coal. And coal, compared with natural gas, produces higher emissions.

Moral choices, bad outcomes

There you have it. Talk about the unintended consequences of lofty and supposedly “moral” policies. The Europeans wanted to be good and wise by embracing renewables, while taxing carbon. What they got instead is the forced deployment of immature renewable technologies. This led to very expensive electricity and…higher emissions.

That said, the gist of this story is not that carbon energy is “good” while renewables are “bad”. The essence is that it is unwise to force the adoption of still immature technologies through policy mandates.

I do understand that some policy-makers acted in this way because of the urgency represented –in their view– by climate change and global warming. Still, whatever their good intentions, they made a mistake. In the end, their ill-advised choices do not improve the climate, while they ended up costing a lot more.

I am confident that sooner or later we shall come up with cost-effective, renewable technologies that will replace emission producing carbon energy. But we are not there yet.

If we were there, then the choice would be obvious. All economic sectors in all countries would ditch carbon based energy and embrace renewables. Consumers would not need to be prodded by mandates, tax incentives and subsidies in order to shift.

Fund research

If governments really wanted to help the development of cost-effective replacements for carbon they should fund more research in renewable energy. They should not try to pick winners within a renewable energy sector that has a long way to go before it can be truly competitive.




Will Russia Make Money With The Mega Gas Deal It Just Signed With China?

WASHINGTON – While US President Barack Obama tries to isolate Putin because of his bad behavior in Ukraine, China is quite willing to support him by signing a mega deal with Russia’s Gazprom, (valued at $ 400 billion) for 30 years of gas supplies. So much for a united international front aimed at “punishing” Russia.

A good day for Putin

On the face of it, this is a political triumph for Putin. As the West treats him like a pariah, he goes ahead and signs the largest energy deal in recent history, a deal that gives Russia the  opportunity to supply the gigantic Chinese market.

Again, so much for international isolation.

How lucrative?

That said, how lucrative is this deal? We do not really know, because many of the critical details have not been made public. Do keep in mind that Russia and China have been negotiating on something like this for at least a decade. The impediment was price. China wanted a discount. Russia did not want to give it. Can we speculate that now Putin really needed a deal in order to buttress his prestige at home and that therefore he agreed on a lower price?

In the end, will Russia make a lot of money out of this, or only a little? Too early to tell.

But do keep in mind that there are many costly variables here that cannot be easily quantified. Indeed, the deal includes enormous upfront investments, on both sides, to develop the gas fields in Russia and the infrastructure, (pipelines and more), to carry all this gas from Russia to China. Russia committed to invest $ 55 billion, while China will spend $ 20 billion. Will there be cost overruns? Will there be delays on what is already a multi-year, complex project? You can count on it.

Political victory

That said, for the moment at least, this is a major political victory for Putin. With America in the lead, the West is trying to isolate Russia on account of its role in fomenting unrest in Ukraine.

Well, in response, Putin has done his own “pivot to Asia”. He has struck a historic, gigantic gas deal with China, a country that clearly could not care less about Putin’s actions in Europe and the fate of Crimea or Eastern Ukraine.

Did the Chinese get lower prices?

But the Chinese are shrewd negotiators. It is quite possible that Beijing, fully aware of the fact that Putin needed a “political” victory, agreed to sign the mega-deal only after they managed to extract more favorable terms regarding the price of gas.

Still, this agreement proves that, whatever the size of its economic gain, to the extent that Russia can sell what other countries want to buy, it will not be isolated.

America’s sanctions failed

And this implies, (sadly), that the whole American strategy of targeted sanctions against Russia is a failure. This is yet another occasion in which America’s public and loud promises to punish bad actors proved to be ineffective. If President Obama keeps threatening retributions that he cannot deliver, America, until not too long ago “The Hyperpower”, will become a joke.




What Is The Use Of Indicting Chinese Hackers?

WASHINGTON – I do not quite understand why the US Department of Justice in a very public way announced that 5 members of the Chinese military –their names and photographs all over the US media– have been indicted of cyberspying against US corporations.

China is engaged in hacking

It is a well-known fact that China’s government is actively engaged in stealing economically valuable information via hacking into the IT systems of major US companies. The targeted entities know this. Other companies are at least aware of the threat. The US Government is also aware, and, working with the private sector, it is (we hope) trying to create barriers and countermeasures, difficult as this is.

Why a public announcement?

If this is so, what is to be gained by “naming and shaming” specific Chinese individuals allegedly responsible for hacking activities against some US companies? The only value of this rather theatrical announcement made by Eric Holder, The US Attorney General, is that, by naming names and making reference to specific circumstances, hacking becomes much more “real”, including for those who should pay more attention but probably do not. And this may be good.

Indeed, the sad truth is that America is deeply vulnerable to hacking and cyber attacks. The total value of the economic information stolen by China and other hackers is probably in the hundreds of billions.

The indictment changes nothing

That said, however, an indictment by the US Department of Justice, probably followed by a trial, (with no defendants in court), will not by itself enhance the security of US corporations.

The named individuals work for the Chinese Government. China has no intention of cooperating in this matter. It has already denied any wrongdoing, stating that these are just slanderous accusations that come from a country –America– whose extensive NSA spying has been exposed by the revelations made by Edward Snowden.

Sure enough, the US Government would like to draw a fine distinction between “spying for national security” and “spying for economic gain”. But this distinction is not appreciated by  most people. China is engaged in spying, and so is America. That’s the way it is.

Therefore, once again, what is to be gained by trying to publicly embarrass China? Is this move part of a broader strategy aimed at taking a hard line against a country that –at least in some areas– seems unwilling to play by the rules? If this so, I do not see the contours of this strategy.

A complex relationship

The fact is that dealing with China is very complicated. There is a web of relationships. There are literally hundreds of thousands of Chinese students enrolled in American universities. Most US IT companies rely on Chinese partners to produce/assemble computers, smart phones and other gadgets. China in turn relies on the US as its main export market for consumer goods, while it buys coal and agricultural products from America. While Alcoa,  Westinghouse, US Steel Corp. and others have been targeted by China’s hackers, Wal-Mart relies on Chinese suppliers to fill up the shelves of its mega-supermarkets; while GM, Caterpillar and GE want to preserve their Chinese markets.

Not playing by the rules

The real problem in this vast and multi-faceted relationship is that China “is not like us”. China now has a modern and vibrant economy. But the country is run by an unelected elite that plays by its own rules, while often ignoring international agreements and standards. Since hacking cannot be easily proven, (and forget about “punishing” the perpetrators), China will continue engaging in the theft of economically valuable information, if it thinks it can profit from it.

America is in no position to seriously punish China for its misdeeds. Whatever the damages of Chinese hacking, there are just too many US players interested in keeping the economic/investment/trade channels open.

Leave it to the experts

Therefore, it seems to me that this rather secretive hacking war should be left to the experts. While we all know that setting up  real, permanent barriers to cyber spying is next to impossible, recruiting the best professionals so that they can keep improving workable countermeasures is a better course of action than public announcements in which the US Government declares the intention to put Chinese bad guys on trial.




Former Treasury Secretary Tim Geithner Admits That America’s Economy Is Sputtering. Too Much Poverty, No Income Growth

WASHINGTON – Former Treasury Secretary Timothy Geithner just published “Stress Test” his memoirs of the incredible and challenging post-2008 recession years.

America is doing poorly

In a Q&A session with TIME magazine, (May 16, 2014), about the book and the American economy, this is what Geithner replied to a question about rising income inequality in the USA:

“If you look at this country today, we still [have] high levels of poverty, a long period of almost no growth in the median wage. You referred to the big rise in inequality, but also there’s a diminished sense of mobility [and] opportunity across generations. And that’s a very damaging thing. It is very important that we rediscover a capacity to try to deliver policies that do a better job of improving the chances the average person has coming out of school today”.

Welcome candor

Well, here is welcome (but chilling) candor from a former top-tier economic policy-maker who can finally tell the truth, as he is no longer in office. A most unflattering picture of today’s America and of its prospects. A lot of poverty, and no income growth. As for the vaunted bliss of “upward mobility”, well it is gone. The younger generation has no real opportunity to do better than the one before. We are stuck. And policy-makers have no new bright ideas.

Geithner saved us from financial collapse

To his credit, Geithner, while Secretary of the Treasury, managed to rescue the country from a historic financial catastrophe that might have become a lot worse. The Big Recession did not turn into the Big Depression. True enough, as he himself admits, the emergency measures taken by the Obama administration in a sense “rewarded” Wall Street and therefore some of the people who had engaged in reckless behavior. But Geithner (and others) saved us from complete disaster.

However, the various emergency interventions did not include the relaunch of an innovation wave that would make America great again. We survived, and we are here to tell the tale.

We survived, but we are not thriving

But, compared to other ages, including the “roaring ’90s” we are just limping along. As Geithner himself readily admits: no more upward mobility, too much poverty, and wage stagnation. And, worst of all, little hope of a good, high rewards career for those who come out of university today, with an enormous debt burden represented by their student loans.

Can America escape decline?

As I said, Geithner’s candor is welcome. America is in trouble. Deep trouble, (unless you think that stagnation and economic decline, as long as they do not come about too suddenly, are basically OK.)

Still, it would be nice if somebody could come up with some kind of magic formula for restarting America’s innovation engines.

 




The Kiev Provisional Government Should Let Eastern Ukraine Go –Today

WASHINGTON – I have said this before, and I’ll repeat it now: just like Crimea is gone –for good– Eastern Ukraine is also lost. In  previous articles posted here I stated that the only way in which the Kiev provisional government could bring this dangerous constitutional/territorial crisis to an end would be to immediately grant independence to the Eastern Provinces inhabited mostly by ethnic Russians and/or Russian speakers who have now decided that it is time to rejoin Mother Russia.

Let the East go

I wrote this before “the vote” just held in the East (Donetsk, Luhansk) had taken place. And now, after a vote (no matter how unconstitutional) in which it would appear that 80 to 90% of the people want to secede, I do not see any way in which this Moscow-inspired mess can be undone. There is no path leading Ukraine back to constitutional order, territorial integrity and respect for authority.

Fraudulent vote

Of course the Kiev people denounce the whole thing. This “vote” is an illegal and unconstitutional farce –they claim. In principle, they are right. But here we are not debating the issue before an impartial International Court with jurisdiction over the future of Ukraine. Here we have a political reality.

The ethnic Russians want to secede

Whatever their reasons, a majority of the Russian speakers in Eastern Ukraine said that they want to be part of Russia. And there are no organized groups saying the opposite. Or, at the very least, we cannot hear any strong voices in those Eastern regions asserting their desire to be part of Ukraine.

Of course, we may argue that “the loyalists” in the East are quiet because they have been intimidated and are therefore afraid to speak. Likewise, we may safely assume that the vote just held in the East was fraudulent, and therefore invalid.

But the truth is that Russia has openly encouraged this secession and the people in Eastern Ukraine welcomed the opportunity to rejoin Russia. And now they have a facade of a semi-legal claim. They “voted”, and they “freely expressed” their secession wishes. Now Moscow can argue, no doubt with a straight face, that it is all about the “right to self-determination” of an oppressed minority.

Crying foul will accomplish nothing

The Kiev provisional government can cry foul all it wants. Unless they want to engage in a (totally pointless and hopeless) military confrontation with Moscow that would simply prolong this agony without any purpose whatsoever, they should accept the facts on the ground.

They lost. They really lost. America will not escalate this crisis in order to protect the principles of the Ukrainian Constitution. (So far, the Pentagon pledged meals ready to eat, uniforms and socks, as “military aid” to the outnumbered Ukrainian military forces. No, this not a joke). And, if Obama is unwilling, forget about perpetually timid Europe.

Accept defeat in the East and focus on economic reconstruction in the West

Accepting this defeat is tough for the people in Kiev. But, realistically, they have no choice. Their real goal should be to start working on their future. And this means focusing (with Western help) on the economic reconstruction of their devastated country.

This is an almost impossible task assuming peace and quiet. Trying to work on tough economic problems while managing a secessionist movement in the East is totally unthinkable.

As painful as this is, the Kiev provisional government should accept reality and quickly come to a settlement. The people in Donetsk and Luhansk say they want to join Russia?

Let them go –today!




Pew Research Center: 72% of Black Children Raised By Single Mothers

WASHINGTON – The Pew Research Center just provided fresh data about the American family. Well, we sort of knew that the classic “nuclear family” is no longer the dominant model.

Stunning facts

But here are some almost incredible facts about the growing number of children raised by unwed mothers. The national average is now 41%. Among Black women the ratio is 72%. This is truly stunning.

Let’s leave aside any moral considerations about the vanishing of “traditional families”, about the loss of once “sacred values”, and so on. Let’s focus, however, on the socio-economic impact of the rising number of children raised by single mothers.

Well educated mothers would have no problems raising kids

In principle, if we could assume that all or most single mothers were well-educated, with good jobs and therefore able to pay for quality day care for their kids, there should be no major problems.

If we could assume that these children are indeed taken care of, if we could stipulate that they will have access to good health care and later on a good education, then their future prospects should be at least within the national average.

Poverty delivers more poverty

But unfortunately it is not so. In most cases, single mothers, and especially young Black mothers, are poor and uneducated. Sure enough, there are social programs that provide some support. But never enough to make a real difference.

And therefore the most common reality is that the majority of Black children are raised in poverty or semi-poverty. As they grow up, they can expect to get only a mediocre or bad education.

Most of them will not finish high school. Many will become involved in petty crime, or worse, ending up in jail. Overall, this means that the majority will have only very limited jobs or career opportunities as adults. In other words, they will be poor and marginalized. And this means that poverty is carried from one generation to the next without any real chance of breaking the cycle.

No chances

While some of the 72% of Black women who have children alone may be resourceful and able to escape poverty, therefore giving real chances to their children, most of them will not.

Of course, poverty has many causes. However, a growing number of poor young mothers, with little or no education, trying to raise babies on their own, do not help to improve the picture.

They are poor and their poor children most likely will be poor adults.




Senate Finance Committee Chairman Ron Wyden Proposes Corporate Tax Reform

WASHINGTON – In a clear and totally non-partisan WSJ op-ed piece, (We Must Stop Driving Businesses Out of the Country, May 9, 2014), Senator Ron Wyden, a Democrat from Oregon, and Chairman of the Senate Finance Committee, makes a case for comprehensive corporate tax reform.

Tax avoidance drives business decisions

In his piece he points out that many large US corporations make significant foreign acquisitions mostly for tax avoidance (better to say tax evasion?) purposes. The latest headline is about the US pharmaceutical giant Pfizer buying UK-based AstraZeneca, so that it can “relocate” to the United Kingdom for tax purposes.

Indeed, if a US corporation can legitimately claim that 20% or more of its stock “is owned by their new, foreign partner” the same corporation can shift its tax domicile to the country where the new subsidiary is located, usually a country with a lower corporate tax rate. This way, in a totally legal way, a large US corporation can cut its tax bill.

Of course, this should not happen. And Wyden pledges his intention to introduce legislation that would close this loophole.

US corporate tax rates are too high

However, at the same time, Wyden recognizes that US corporations are exploiting every possible “legal” avenue to escape from a very heavy US tax burden.

Yes, America, the cradle of capitalism, has one of the highest corporate tax rates in the world: 35%. We know that in many cases this is largely theoretical. Many companies pay much less, or (in some instances) very little, or nothing at all. And this “magic” of a low tax bill despite a high tax rate is due to a jungle of special provisions, tax credits, dispensations and loopholes, incomprehensible to most, that allow many corporations, depending on the sectors they operate in, to pay less.

Lower rates, no loopholes

Without getting into the impossible details of the monstrosity of the US tax code, Wyden proposes a simple, common sensical, approach. Let’s lower the US corporate tax rate, while at the same time eliminating all the loopholes and special treatments for this or that sector.

This way US corporate taxation will be more in line with prevailing rates applied by other developed countries, (about 25%). And this would mean that US corporations would not be incentivized to  pursue business strategies that are in fact mostly, in certain cases entirely, tax avoidance strategies.

Indeed, in an ideal world, the allocation of scarce capital should be driven by business factors and not by calculations of tax advantages. I fully agree.

“Debt Commission” had a similar approach

Going back just a few years, (2010), the “Debt Commission” co-chaired by Republican Alan Simpson and Democrat Erskine Bowles had the political courage to come up with a decent federal spending reduction program matched by a comprehensive tax reform plan. It all made perfect sense. It was a good starting point, that had at least some measure of bipartisan support.

But nothing, absolutely nothing happened, in large part because President Obama essentially distanced himself from the findings and recommendations of the Simpson-Bowles Commission.

What Senate Finance Committee Chairman Wyden suggests now is more limited in scope but essentially in line with the approach that inspired Simpson-Bowles: lower the tax rates, broaden the tax base and eliminate all tax favors to this or that sector. This would be good for the economy, good for the US Treasury and good for individual businesses, especially small and medium-sized companies that would no longer have to spend inordinate amounts of time and resources on tax issues. Everybody would pay, but not too much.

Good idea, (whose time has not come)

All this makes perfect sense. Wyden is not in the pocket of this or that interest group, nor is he trying to mount a populist anti-business crusade that may resonate with the ideological left.

He is proposing common sense. Well, you would think that the traditionally pro-business Republicans would respond enthusiastically. But I doubt it.

Special interests dominate US politics

And sadly this is because behind the “We-are-the-fearless-defenders-of-free-market-capitalism” label, many Republicans (and Democrats too) are subservient to the wishes of the armies of lobbyists permanently encamped in Washington DC.

The lobbies and the powerful economic interests they represent are largely responsible for the grotesque US tax code, with all its ultra-complex and in fact impenetrable layers of special provisions. They are experts at pushing this or that “provision” (often worth hundreds of millions of dollars) at critical times, in sometimes obscure pieces of legislation nobody really understands.

Corporations, lobbies and campaign finance

The ugly truth is that, while the US economy as a whole suffers because of this ghastly hodgepodge of dispensations and special credits, many economic sectors benefit from it. And so they will fight tooth and nail to keep things as they are. And, of course, at election time, money talks. Elected representatives need vast and always larger sums of money to finance their re-election campaigns. Directly and indirectly, corporations are a major source of those needed finances.

Dysfunction is now system

So, here we are. In large part because of our dysfunctional politics, we have elevated tax dysfunctionality to system. We say that America is the best place in the world to do business, while in fact we have created a tax and regulatory environment that pushes US corporations to relocate their headquarters and/or key operations abroad.

Sensible ideas will be ignored

Ron Wyden, a fair-minded Democrat, proposes sensible reforms. But I doubt that he will find enough allies –Republicans and Democrats– to make something happen. In order to cut the Gordian knot of the absurd US tax system, we need a new political consensus.

Yes, we need to rediscover the simple truth that the job of people sent to Washington is to pursue the “common good”, as opposed to electing Representatives and Senators who will respond mostly to the demands of special interests.

Sadly, I do not see this “back to basics” (but in essence revolutionary) transformation coming along.




After The Release Of The National Climate Assessment Report, Forget About Approval Of The TransCanada Keystone Pipeline

WASHINGTON – The US Government just released the congressionally mandated National Climate Assessment. As you can imagine, the emphasis is on mostly negative, man-made changes to the climate and therefore to the environment. Things are not looking good, according to the report. That said, the good news is that, by limiting certain human activities, especially concerning the use of fossil fuels, we can improve our outlook. 

Is regulation the best tool?

Assuming that the report is correct, it is not entirely clear to me that regulatory actions aimed at restricting the use of fossil fuels will be able to reverse whatever damage has already been inflicted on the environment.

I know that this is a difficult and divisive subject. Still, many scientists who do not deny the reality of man-made climate change believe that it is a lot more cost-effective to invest scarce resources in actions aimed at mitigating the impact of climate change rather than trying to reverse it by curbing the use of this or that.  Anyway, this is a truly complicated subject that cannot be addressed in just a few words.

Forget about the Keystone pipeline

Still, on a more practical level, one of the most immediate (politically motivated) policy consequences of this report is that we may as well forget about any decision on the already controversial Keystone pipeline that could carry almost 800,000 barrels of Canadian oil a day from Alberta down to Texas refineries.

This project has already been demonized by all the US environmentalists as something that would trigger a real catastrophe. It has been said that buying and then refining this Canadian heavy oil is basically a criminal act, as this is oil is a super pollutant that will damage the air, the atmosphere and everybody coming in contact with it.

It all about politics

Well, let’s say that this is at least an exaggeration. But this belief is firmly held by lots of Democrats. And Obama does not want to offend them (there is a national election coming up in November) by authorizing the project.

Sure enough, if we were thinking strategically, if we were thinking US energy security, it would make a lot of sense to increase US oil imports from Canada, a stable and dependable ally, as opposed to buying the same oil from OPEC countries. This is obvious.

But Obama cannot talk energy security with the environmentalists in his own party. And so he has tried to be clever by creating an endless project review process that allows him to delay a decision without openly offending anybody.

Some Democrats may suffer

True enough, there are some Democrats, mostly Senators running for re-election, who may suffer politically because of this, since their centrist constituents are actually in favor of the Keystone pipeline. But the White House is not inclined to approve such a controversial project just a few months before the November mid-term elections.

Still, for anybody who might have harbored any residual hope regarding approval of the Keystone pipeline, the just released National Climate Assessment report should put the issue to rest.

The report says that carbon is bad

Now we have heard it from higher authority: carbon based energy is bad. We should use less, not more. Never mind that the issue at stake here is not consuming more oil but decreasing our dependence on OPEC oil. As we have to import almost half the oil we consume anyway, it would be wiser to buy it from a friend close by, rather than from the Persian Gulf.

Regarding the pipeline, the real issue is energy security  

And yes, Canadian heavy oil may indeed pollute more, but I do not believe that using more of it will make such a big difference, if we take into account global emissions of greenhouse gases dominated by thousands of super dirty Chinese and Indian coal-fired power plants that the US environmentalists cannot close down.




America Shall Not “Pay Any Price” To Protect Ukraine’s Territorial Integrity

WASHINGTON – The Moscow-inspired and Moscow supported Ukrainian crisis is slowly morphing into something resembling a civil war. Whether this is the actual direction or not, it is obvious that the Kiev government will be unable to achieve its goal of recreating law and order within Eastern Ukraine.

Illegitimate government in Kiev

The Kiev provisional government is described by Moscow, and now by many if not most ethnic Russians in Ukraine, as illegitimate, (it came into power via the violent overthrow of the properly elected government), and bent on destroying the large Russian minority living in the East. As we all know, it is a government led by neo-Nazis and Russophobes, and so on.

This being the case, the Russians in the East have every right to resist the police and military forces sent by Kiev to kill them. And Moscow has every right to intervene in order to protect its brethren on the other side of the border.

This being the official Russian interpretation of events, add to the mix overwhelming Russian military force now deployed close to the border with Ukraine and compare these well armed Russians with a small and ill-equipped Ukrainian army.

Hopeless situation

Once you have done this, you can only come up with one conclusion: the situation is hopeless. Kiev cannot and will not prevail in this crisis. Further escalation will simply give Putin a pretext for intervening directly.

It would make sense for Kiev to resist this well-orchestrated, indirect Russian aggression only if the provisional government could have the comfort of a solid, US-led, Western commitment to its security and territorial integrity.

In another era, America would have helped

Yes, there was a time in which the US pledged its unconditional support to all those who were seeking freedom against tyranny.

Yes, there was a time in which America was the defender of freedom:

“….Let the word go forth from this time and place, to friend and foe alike, that the torch has been passed to a new generation of Americans–born in this century, tempered by war, disciplined by a hard and bitter peace, proud of our ancient heritage–and unwilling to witness or permit the slow undoing of those human rights to which this nation has always been committed, and to which we are committed today at home and around the world.

Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty. [bold added]

This much we pledge–and more.

To those old allies whose cultural and spiritual origins we share, we pledge the loyalty of faithful friends. United there is little we cannot do in a host of cooperative ventures. Divided there is little we can do–for we dare not meet a powerful challenge at odds and split asunder….”

America, the defender of freedom

No, this is not fiction. This was the most memorable part of John Kennedy’s Inaugural Address delivered on January 20, 1961. Yes, a long time ago, but not so long ago. Kennedy delivered it when America was engaged in the Cold War, a global ideological and geo-political struggle against Soviet communism and Soviet-inspired mischief.

Mercifully, today there is no longer a Soviet Union. But we have a Russian Federation led by Vladimir Putin, a tyrant who wants to make his own rules and impose them on weak neighbors, counting on Western timidity. And Putin’s calculation about Washington’s inaction is most probably correct.

Obama’s America may grumble; but it will not do much. JFK’s pledge to “pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty” sadly, does not apply any more.

Moscow knows this, and this is why it is not backing off, whatever Obama says it will do in response to Russia’s open support for the separatists in Eastern Ukraine.

Kiev should realize it cannot win

It is high time that the Kiev provisional government realizes this as well. As America will not intervene, its fight against the Russian separatists in the East is hopeless. Kiev cannot win without the active support of powerful and credible allies –and this means Washington. In fact, prolonging a fight against this manufactured insurrection may make matters far worse.

It is time for Kiev to recognize that Eastern Ukraine is lost. No, America is not ready to “pay any price” for the “success of liberty“.

And if America will not protect and support Ukraine, forget about Europe, whose real concerns are about unhindered  deliveries of precious Russian gas and business deals with Moscow.




America’s Economy: Stagnation and Inequality, A Bad Mix

WASHINGTON – Capitalism is still by far the best economic system we know. But it is not as good as we would like it to be. Here in America we are in the middle of what Tyler Cowen appropriately named “The Great Stagnation”.

No innovation

Indeed, beyond the still vibrant IT sector, we seem to have lost the ability to innovate. There are no ground breaking inventions, no real “game changers” in power generation, civil aviation, biotech, agribusiness, and so on, that open up entire new sectors.

Stagnation also means little or no productivity growth, and that means thin margins for many industries. And technological changes, to the extent that they exist, usually have a negative effect on mundane functions, (and that means jobs), that can be easily replaced by automation.

Little growth, low wages

Yes, the economy grows; but just a little. There are good news on employment. We have just added almost 300,000 jobs in April. But they are mostly low paying jobs. There are millions of Americans who would love to trade their current part-time jobs with full-time employment. The middle class is barely treading water. Millions of Americans are actually doing worse now than 10 or 20 years ago.

Growing inequality

At the same time, whatever new wealth is produced, it ends up in the hands of fewer and fewer people. So, here we have it. Very little economic growth and growing socio-economic disparities.

The US is becoming a bit like Brazil and other Latin American countries. Modest growth, huge inequality and a shrinking middle class.

No good answers

These are really major issues. And nobody has a good answer. How do we reduce inequality without punitive actions against those who do better or very well? How can we help the shrinking middle class without creating a gigantic and ultimately unaffordable welfare state? And –most critical issue– how do we recreate the magic of broad based innovation? As I said, nobody really knows, for sure.

Retreaded political ideas

But politicians are forced by the circumstances to come up with answers. Confronted with this phenomenon of lower incomes for the middle class, while those at the top have become fabulously wealthy, the left simply retrenched to familiar ground. This growing inequality –its leaders say– is unjust and immoral. The state should do more to help those at the bottom. And you finance these needed social safety nets by taxing the rich who are taking more than fair share anyway.

Redistribution

This approach may make some people feel better. But in the long run it is self-defeating. No public policy founded on redistribution ever managed to give any real impulse to growth. The rich will hide their wealth whenever they can and/or move to another country if they have the opportunity. Those who cannot escape will lose their motivation to invest and expand. If things are bad today, you can rest assured that they will be worse tomorrow.

Free-market capitalism will work its magic

That said, the orthodox pro-capitalist have no new insights either. The idea that, if you leave the system alone –that means deregulation, lower taxes– it will take care of itself, looks at best a bit naive, at worst utterly disingenuous. While one should not tinker with innovation by having politicians picking winners and losers and by subsidizing this or that, are there ways in which public policy can stimulate innovation and expand opportunity?

Expanding opportunity

Is there anything that can be done to give a good, if not excellent, public education to millions of poor kids who are stuck in mediocre or failing public schools? These kids are part of our future human capital reservoir. If we let them grow up with no education, they will be able to do little for themselves and even less for society.

These lean times should stimulate new, constructive ideas. But they do not. The left thinks in terms of redistribution financed via higher taxes imposed on the rich. The right still thinks in terms of pure free market capitalism whereby the “invisible hand” will take care of everything.

Immediate handouts seem better 

These stale recipes will not work. Sadly, in this unimaginative political landscape it is likely that those on the left who promise a free lunch to people who are really hungry will get more attention.

The millions of Americans who are not doing well are more inclined to listen to the politicians who offer immediate relief. Paraphrasing the old story, for most people in need receiving a fish now seems more appealing than enrolling in a course that will teach them how to fish.

The point is that we shall soon run out of fish.