On the North Korean Deal

Comment to the NY Times:

You have to say Trump got what he wanted—something that he could sell as an accomplishment for the mid-term elections. Kim of course had a stronger negotiating position, since he didn’t need a deal in the same way.  What we’ve got is a repeat of the way this process started: Trump gives in to Kim and gets lauded as a peacemaker. Maybe the press will grow up.

Kim got a cancellation of military exercises—a clear signal of US disengagement in the area. Good news for him and for China. The US got nothing, since sanctions were effectively abandoned by China when the negotiation process started. Kim’s statement of principles is no more of a commitment than what he’s said all along.

It also needs to be noted that the whole affair amounts to a ringing endorsement of nuclear proliferation.

Best quote thus far (from the Guardian):

Beatrice Fihn, the executive director of the International Campaign to Abolish Nuclear Weapons (Ican), tweeted: “We support diplomacy and peaceful solutions. But there is no agreement on nuclear disarmament and this all looked more like a big welcome party to the nuclear-armed club.”

Trump’s Fabulous Foreign Policy Triumphs

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Trump’s foreign policy has been a media success. David Brooks has decreed that Trump’s “Lizard Wisdom” is far superior to liberal elitism.  Others have called attention to Trump’s fiendishly-clever strategy of brutal attack followed by pull-back to less crazy positions.  That approach hasn’t done much for the real world, but it sure has worked with the press.

With North Korea the press turned from hysteria at the “rocket man” rhetoric to admiration when Trump decided to cool it by accepting Kim’s meeting proposal.  All that  happened, though, is that Kim received a gift that North Korean leaders have wanted for years—certified international status—with no preconditions, which is to say with no commitment to do anything at all.

Kim is running this show for his own benefit.  Whether there will be advantages or disadvantages to the US remains to be seen, but Chinese president Xi sure doesn’t look unhappy.  And the presumption of success adds pressure on Trump to get an agreement under whatever assurances Kim will accept.  The only success in this picture is Trump’s convincing the press of an accomplishment.

Next about China.  David Brooks was crowing about a new opening for American cars—ignoring that Xi had already announced an opening for American cars before the trade war.  Trump’s trade war with China seems to be following the pattern of North Korea:  bluster followed by an agreement that can be trumpeted as “great”.  And the press is likely to fall for it again, overjoyed that the trade war has been replaced by “reason”.

In fact the dual trade wars (China and the EU) have greatly weakened the negotiations with China, and Xi can be quite happy with the cards Trump has dealt.  The U.S. represents 18% of China’s exports; the EU is almost the same.  Trump took half his leverage off the table with the attack on the EU.  As far as Xi is concerned—only in his dreams!

The third issue is the cancelling of the Iran nuclear deal.  This isn’t a case of bluster and retreat, but it’s another pretty story for public consumption.  Trump, Brooks and others talk about the moral imperative (ignoring the nuclear weapons consequences) of imposing sanctions for Iran’s other transgressions.  However, not only is it clear that the sanctions strengthen the hand of the fanatical clerics, but also by turning on the sanctions we have just played our last card.  We’re simply out of the game in Iran, waiting for rescue by regime change.   It’s interesting that we expect ordinary Iranians to love us and hate the Mullahs, because we choose to starve the poor and bankrupt the middle class.

Iran now has no reason (short of war) to care about US policy,  a position they succinctly expressed with the immediate rocket attack on Israel.  We have taken one more step to complete irrelevancy in the Middle East, this time leading to a possible war and a nuclear Iran.

As Trump has said over and over again:  he can’t lose because he owns the press—he’s just too good as copy.  On foreign policy you can push that one step farther: the copy is all you get.

Tesla and Ice

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This is a short note on a couple of issues related only in that they say something relevant about the future we should be planning for.

The first relates to Tesla and its production difficulties with the new, lower-priced model 3.  The highly-automated production of the model 3 is well-behind schedule, to the point where it is a big hit to the cash flow of the company.  We mention it here, though, because the delay is an indication that mass production of electric cars is something fundamentally new.

An electric car is a much simpler machine than an ordinary, gas-powered vehicle.  In principle the construction should be both cheaper and easier to automate.  Current production of Teslas is intrinsically a low-volume operation.  The model 3 will be the first indication of what newly-imagined electric car production is like.

I don’t know if we’re in for a shock or not (this is after all a first go at it), but this could be another big change to conventional middle-class employment.  And there will be follow-on effects for gas stations, and especially maintenance and repair.  This is another of many indications that broad, technology-based disruption of jobs is going to happen.

 

The other story is about the commissioning of a new class of Russian icebreaker—targeted at clearing northern ship lanes freed up by the retreat of polar ice with global warming.  The phenomenon is already clear, although the amount of traffic is still small.  The Russians are preparing for the opportunity with multiple classes of new machines planned for release up to 2025.  The Chinese have announced cooperation with the objective of reducing shipping times to Europe by a third.

The US is of course uninterested in consequences of climate change.  The only Coast Guard ice breaker is 40 years old, and they have a hard time getting authorization to get a new one.  The Bering strait, however, could be a shipping lane.

This is a very small example, but climate change affects many things, and as a country we’re trying to avoid finding out about them.

 

The current federal budget is put together for a world where the private sector will take care of everything.  That has always been a fantasy—the efficiency of the private sector comes in large part from its ability to ignore everything not relevant to immediate financial success.  It is particularly false for a world undergoing fundamental change.  We either recognize it and help people through it, or we fall behind and revert to the nightmares of the nineteenth century.

Keeping Score on North Korea

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Now that Fox News has awarded the Nobel Peace Prize to Trump, it’s time to go over what has happened thus far with North Korea and what is likely to happen from here on out.  Here’s the timeline.

1. Trump and Kim Jong-un exchange rocket launches, military maneuvers, nuclear tests, insults, and other hysterics, so the world gets worried something disastrous might happen. This enhances the domestic position and international profile of both participants.

2. The South Korean President—elected on a platform of better relations with the North—takes the occasion of the Olympics to try to calm the situation.

3. Kim seizes the opportunity and opens a full-scale charm offensive toward the South. Kim’s sister easily bests Mike Pence in the Olympic charm event.

4. Trump reverses decades of US policy and agrees to a one-on-one meeting with Kim without pre-conditions. Score 1 for Kim.

5. South Korea’s president, seeing Trump’s threats and how little South Korea’s welfare figured into US policy, realizes he can’t count on the US as a reliable ally. This is a strong incentive to conclude a peace process agreement with the North.  Score 1 more for Kim.

6. For US consumption Kim has now been declared “very honorable” and Trump is a hero for resolving the situation. The negotiation is considered a success before it has begun.  On the basis of negotiating position, score 1 more for Kim.

7. The most probable outcome is a staged denuclearization of North Korea in exchange for a draw-down of US military personnel and equipment in the South. The “staged denuclearization” we’ve seen many times before; the US military disengagement is new.  Trump exults over the money saved.  Score 2 for Kim.

8. The final situation essentially replaces US influence in South Korea with North Korean influence. Further this is one more step in the US disengagement from Asia to the benefit of China.  Score 1 more for Kim, 4 for Xi Jinping.

9. Final score:  Kim 6, Xi 4, US 0

Update on Climate Change

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This note is an update to the climate change article from last year.  The story hasn’t gotten any better, but there is enough that’s new to warrant a revisit.

The most fundamental piece of bad news is the opening figure, which comes from the Global Carbon Project.  After three years of seeming stability, the world production of carbon dioxide increased significantly in 2017.  (The figure says “projection” just to indicate that the final computations are in process.)  Without too much evidence we might as well call that the Trump bump.  As we noted last time, worldwide unanimity on climate change is important precisely because the advantages of cheating are so obvious.  We—with probably the most to gain from the Paris Agreement process—are the cheaters in chief.  So it’s not surprising others will have fewer second thoughts as well.

We have to put this change into perspective.  Even a stable value of CO2 emission means things are getting worse, because it is the total amount of CO2 in the atmosphere that drives temperature change, and it all adds up.  The stable value was attractive, because it seemed to indicate that CO2 had finally peaked and might start to decline.  And the decline might mean the total CO2 could be bounded.  We’re now back to worrying about the peak, with no idea how bad things will get.

Two more new slides from the Global Carbon Project show what we stand to gain from Paris Agreement unanimity.  The first shows the current per capita production of carbon dioxide.

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As has been true for many years US per capita usage sits way above everyone else, more than twice both Europe and China.  That is a direct expression of our carbon-powered standard of living.

The second slide shows who is going to have to make changes to protect that US standard of living from the effects of climate change.

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This shows that the major growth in carbon dioxide production is not from the biggest economies (note that even China has stabilized), it’s from the have-nots trying to achieve some fraction of our standard of living.   We are asking them to ignore not only our past exploitation of fossil fuel resources but even our current high per capita use and to delay their own immediate hopes for a better life in order to make the world a safer place for everyone.  So much for the question of who benefits from the Paris Agreement process!

That introduces the next topic—public attitudes to climate change.  There were enough strange weather events in the past year to give people pause, so we’re getting close to—but still not over—the hump.  The latest poll numbers have both good news and bad.  First the good news:

Overall, 45 percent of those surveyed said global warming would pose a serious threat in their lifetimes, the highest overall percentage recorded since Gallup first asked the question in 1997. Despite partisan divisions, majorities of Americans as a whole continue to believe by wide margins that most scientists think global warming is taking place, that it is caused by human activities and that its effects have begun.

Then the bad—the improvement is only partisan:

Gallup asked whether people agreed that most scientists believe global warming is occurring, and 42 percent of Republicans said yes, down from 53 percent a year earlier and back to a level last seen in 2014. Just 35 percent of Republicans said that they believe global warming is caused by human activities, down from 40 percent.

This seems like another proof of a much-discussed feature of human nature—when people are confronted with proof that their beliefs are wrong, they double down on defending those beliefs.   Unfortunately those are the people running the show.

How can turn that around?  A recent Steven Pinker book made an interesting point.  Much of the rhetoric around climate change focusses on conservation and a new world view of collective responsibility.  But conservation actually isn’t the main point—since we’re not repealing the industrial revolution, the main point has to be new energy sources.  We’re not creating a new world where no one drives Chevy Suburbans anymore, we’re just changing the power source.  Conservation, however important, is about buying time until we can get there.  Perhaps that’s one way to get climate change out of the culture wars (as it should be).

In any case the focus has to be on the reality of climate change, and everything else is tactics. With tactics it’s easier to be bipartisan.   One indication is that Congress, over Trump’s objection, passed a bill continuing tax breaks for solar, nuclear, geothermal, and carbon-capture projects.  This effort united left-wing and right-wing approaches to climate change largely under the radar.  However, it must be recognized that even with such efforts the US is now lagging far behind in support for the technology of climate change.

Carbon capture (separating out CO2 and storing it underground or elsewhere) deserves some special mention, because it has become a bigger topic in the past year.  On one hand this is an idea that has been around for decades without going very far, and what’s more the coal industry supports it as a lifeline.  On the other hand the technology seems to be improving, the Obama administration supported it as a transitional technology, and even the IPCC climate studies assume some form of it will be used.  It currently exists as an expensive add-on for power plants, and some still-speculative variants have been proposed to pull carbon dioxide straight out of the air.  Both the power plant and out-of-the-air applications have a common need for CO2 storage technology, of which there are many variants.

The biggest issue with carbon capture is that it can be (and is being) used to delay doing anything about climate change—why worry about carbon getting into the atmosphere if we’ll pull it all out later.  The problem is that the technology still has such big questions about cost and scaling, that “later” could be very late or never (and some effects, such as melting glaciers, are irreversible).  What you have to say is that the technology investment is necessary and at worst it at least gets the climate dialog past the hoax stage.  And if we could just get the Kochs interested in that business (which is largely oil industry technology), it would settle the Republican perception of climate change once and for all!

Returning to reality, we have to conclude the past year seems like a pause for progress.  After Trump took the US out of the Paris Agreement, many wanted to talk about all that could be done to maintain momentum nonetheless.  The chart at the beginning shows the limits of that point of view.  There are other indicators as well:

– The auto industry’s step back from future fuel efficiency standards

Exxon’s declaration that climate change is no risk to their profits

– Business as usual in the International Energy Agency’s World Energy Outlook:

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– Even the new preoccupation with carbon capture has to be viewed as a vote of no-confidence in the progress of conservation.   If prevention isn’t going to happen, then repair is all we’ve got.

What’s more than there has even been a preoccupation with a more drastic step, so-called geo-engineering.  This means injecting chemicals or particles into the atmosphere so as to dim the sun and cool the earth despite the increasing CO2 concentration.  There are many risks:  continuing ocean acidification, reduced photosynthesis and food supply, and weaponization of the technology.  Since CO2 would continue to accumulate, any loss of protection would have disastrous effects.  These are desperate measures.

As to what we should be doing, the picture is not too different from last year, but we can be perhaps more explicit.

  1. Because burning carbon is now recognized to have definite costs (i.e. whatever is necessary to counteract the CO2 increase), we need some kind of carbon tax so that the free market economy can react correctly. Since that cost is not currently captured, our economy is incurring a significant distortion that needs to be fixed.
  2. We need to get back into the Paris Agreement process to return focus to the goal. To repeat the obvious, the Paris process was always intended to be iterative—with countries readjusting their goals to eventually reach the target. We’re only at step one, so we had better help the world get back on-track.
  3. We have to recognize that at this stage we’re in no position to judge winners and losers among contributing technologies. So the solution has to be all of the above: nuclear, solar, wind, geothermal, batteries, carbon capture, even substituting gas for coal as a temporary measure.  The IPCC gave us what they called a carbon dioxide budget—the amount of CO2 we can add and still stay below a global temperature rise of 2 ⁰ C.  In 2014 (the year of the report) it was 800 giga-tons.  It is now below 700.
  4. People have to recognize that despite confusing news reports, we are all in this together. Some people will be hit by sea-level rise, some by drought, some by sheer temperature, some by storms, some by an effect we haven’t seen yet. Some may even be a little later.  But ultimately there’s nowhere to hide, and even “later” comes fast.
  5. There is no excuse for not funding research in all the contributing technologies and also research to understand the climate effects we are going to live with for however many years it takes to get past fossil fuels.
  6. Ideally all elements of society should be involved in planning such major changes. The carbon tax will help make that happen, but it’s not the whole story. We can’t keep fighting about this.

This administration likes to talk about itself as bringing business practices to government.   The evidence for climate change is such that any reasonable business would be doing its best to quantify the risk, so as to take appropriate action.   Businesses that choose to ignore disruptive new technologies or entrants are the ones that disappear—along with their disparaging comments on how the new stuff will never amount to anything.  Unless we choose to wake up—that’s us.

It’s time to be real.

 

Yet Another Gift to China

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The first point to make is that the current hysteria about a trade war with China is parallel to what happened a few months ago with North Korea.  Then we had weeks of unhinged bluster that kept the press busy around the clock.  Finally it dissipated without a trace when Trump gave in to Kim’s request for a meeting—ignoring all of his and other Presidents’ demands for preconditions.

Trump had his weeks of media-certified toughness and was on to the next photo op.

(It’s not clear what will come out of the meeting, but if the South Korean trade deal is any model—it takes very little to put on a media show of triumph.  Also, it’s hard not to wonder what would happen if the two Koreas got together and decided to keep the nukes.  After all, Trump campaigned on a platform of forcing allies to take full responsibility for their own defense!)

A trade war with China is a God-given opportunity.   The Chinese have already announced as yet unspecified trade openings for the West.  So the punch line is already there—all that’s necessary is the prelude.  We’re currently getting our full-scale dose of Trump toughness on trade.  Every time the stock market goes up or down it’s just that much more publicity.  And the conclusion will be a triumphant proof of Trump’s populism for the mid-term elections.  But since Trump needs a deal, that means—as with Kim—that the Chinese are running the show.

As we’ve noted here before, this is a critical time for negotiation with China.   The West needs to be united in setting the stage for what could be a major period of international growth.  By definition this needs to be done within the framework of the WTO.  Instead of that, however, we have Trump claiming a “national security” exemption for every act of his trade war—thereby undermining the whole notion of WTO-based standards for trade.

There’s just nothing that won’t be sacrificed to a photo op.

For the Economy—Stop the Tantrums and Look

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To forestall expectations—this article is not about Trump’s daily antics.  It starts with a basic fact from Dani Rodrick (no cheerleader for globalization).  He talks about asking students a simple question: Would you rather be rich in a poor country or poor in a rich country?

…think of a rich person as someone in the top 10 percent of a country’s income distribution while a poor person is in the bottom 10 percent.   Similarly, a rich country is in the top decile of all countries ranked by average income per person while a poor country is in the bottom decile of that list.

The correct answer is “Poor in a rich country”—and it’s not even close.  The average poor person in a rich country, according to my parameters, earns three times more than the average rich person in the poor country ($9,400 versus $3,000 adjusted for differences in purchasing power across countries).  Disparities in other aspects of well-being, such as infant mortality, go the same way too.  The poor in a rich country have it much, much better than the rich in the poor country.

Students get it wrong because they don’t realize what a minute share of society those BMW-driving superrich represent—no larger perhaps than one hundredth of 1 percent of the total population.  When we expand the numbers to cover the full top 10 percent of a typical poor country, we have come down to income levels that are a fraction of what most poor people in rich countries make.

There’s a lot here that’s relevant, but the most basic message is that when you make the pot bigger, things ought to get better for everyone—even in the most extreme cases.

We live in time period where the pot is getting bigger all over the world, and especially in the hugely populated countries of China and India.  So the right question to ask is NOT “how can we stop those people from stealing from us?” but “why are we not making things better for everyone?”  As we’ll see it is a useful question to ask.

The major changes going on in the world are technological.  Technology has made production of many goods both cheaper and ever easier to locate anywhere.  There are good (and increasingly many) jobs in that world, but they are not the same jobs.   Some jobs get replaced by technology, some jobs get moved to places where labor is cheap enough to compete with the next level of automation.  In both cases they cease to be good jobs.   As with other such cases in the past, the social dislocations are enormous—but they are only as bad as we make them.  And the best way to make matters worse is to pretend the changes don’t exist!

In this country we have both the rhetoric and the policy of such delusion.  We’ve gotten out of the business of helping people who lose jobs in the blind belief that a happy private sector will take care of it.  In fact, people are going to lose jobs and find their skills devalued through no fault of their own.  Further, with the changing economy, education is for most people the necessary path to a good job and a viable financial future.  However we have become alarmingly hostile to it, underfunding it and looking for reasons to limit it to the targeted “vocational ed” that seems to be in the air.  And internationally our response to problems of dislocation has been a tantrum:  everyone is out to get us, so we’ll take our marbles and go home.

The rhetoric says that Mexico and China and …  have caused an epidemic of depression, joblessness, and despair.  That’s self-destructive blindness.  (The worst thing about globalization is all that can be blamed on it!)  We did it.  We refused to recognize the technological dislocation we’re living through, so we provided no help, blithely punting to the private sector.  However, private sector expansion and even tariffs are false hopes for jobs that aren’t economically viable.  We have to support people, and as much as possible get them on a new track.  And we particularly need to make sure that the next generation doesn’t suffer for it.

That takes money, but it’s not as if we don’t have any.   We’ve just devoted $1.4T to a corporate tax cut that is nothing more than a misguided subsidy to have the private sector solve this very same problem!  (We know now that the money is going instead to investors, primarily via stock buybacks.  Real tax reform is another subject and can be close to revenue-neutral.)  We have to spend it on the people who need it and on education and infrastructure.

And for the rest of the economy, things aren’t so bad out there in the real world.

First of all, even before the tax cuts, our corporations and our upper tier of incomes have been doing just fine.  There are problems for people, middle class and below.   But there’s no indication that the technology-driven side of American business is going anywhere but up.

Second this is a period of unprecedented geopolitical opportunity.   China has finally reached the point where it is a viable market for the West and with an incentive to act that way.   There has been so much rhetoric about China that even the basics get lost.  China has been a statistically poor country for a very long time.  Its economic development has been export-directed and they do have some shady practices, but China’s ability to absorb imports has been limited at best.  That is no longer true, and China recognizes that its economic interdependence with the West requires a new relationship.  Given China’s size, the opportunities are real—which is to say that if we play our cards right the pie should get bigger for everyone .  (A more recent NY Times piece also makes that point.)  And given the speed and magnitude of technological change, the pie should continue getting bigger for a long time.

In some ways you can compare our situation to the world in the 1950’s.  European countries had lost their colonies and their predominance, and they had to recover from the damage in the war.  It was a rough transition, but they ended up far better off than they had been before.

We are living through a time of major transition.  We are well-positioned, but we have to help some people through it.   And with more players we may not always be so overwhelmingly predominant as we are today.   But this is an extraordinary future for us and everyone else.  We just have to be willing to open our eyes and get it.

Another Gift to China

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Trump’s latest tariffs on steel and aluminum were announced to combat unfair trade practices from China.  The first problem with that explanation is that China is no better than 11th on the latest list of steel exporters to the US!

The craziness of the action, however, just goes on from there.   According to the steel industry itself, the major problem with steel today is overproduction in China leading to overcapacity worldwide.  That’s a problem for every country that produces steel.  As the NY Times pointed out, if we were really serious about Chinese behavior, there are plenty of other countries in the same boat, so collective—and effective—action is straightforward.  (The US actually has a good record of success with the WTO.)  Instead we’re going after those potential allies.   And as a matter of fact China has already pledged to reduce its steel production in response to such international pressure.   The new tariffs take the pressure off China by making the tariff wars, not the overproduction, the main issue.

The tariff proposal itself is particularly suspect, because it applies to all countries across the board.  We are by definition not responding to particular protectionist behavior in targeted countries.  Since we’re not punishing actual perpetrators, the proposed tariff is essentially a cheap way of financing subsidies to the steel and aluminum industries.  It’s perfectly rational for the steel industry to want a subsidy by whatever means.   But the President of the United States has an obligation to recognize that a shakedown of potential allies is not a good way to deal with an offender!

It’s worth saying a few words about fair trade.   First of all, it’s worth recognizing that making something better and cheaper is not of its nature unfair.  It is the task of trade agreements to define the rules of the game.  Dumping below cost is unfair.  Subsidies of all kinds are unfair (but can be hidden in many different ways!)    Sales restrictions are unfair.   Below standard wage arrangements or environmental rules are unfair.

China’s case is not unusual in its evolution, but it has reached historically unique proportions.   For many years China was basically an underdeveloped country, with a limited ability to purchase imports to match its export-directed production—regardless of whether its markets were open or closed.  As the Chinese economy has grown, however, the state has maintained that mindset despite the growth.  And the Chinese population—after Mao—sees the improvement as more than acceptable, and any serious labor agitation is a good way to get shot.

China still has the mindset—and per-capita production—of a poor country.  But the country is so big that its prosperous part is a huge market that should be opened to the rest of the world.   The upshot is that there is plenty to discuss about fair trade with China, and now is a good time (from the point of view of international leverage) to do it.  But instead we’re stuck with a trade war that will be damaging to everyone—including us—and real progress with China may get lost in the noise.

Even if we just want to focus on the steel industry, this didn’t have to happen.  The best way to help the American steel industry is to buy American steel.   Everyone agrees we have an infrastructure problem—in any reasonable world we would be using American steel to rebuild the country.  Instead that got sacrificed to private-sector fantasy in the budget.

The final and perhaps most serious subject is the way this is being done.  Trump has been able to set tariffs by fiat by claiming national security as motivation.  Normally, without this seldom-used national security ploy, tariffs are a matter for Congress.  That we’ve started this way is a scary first step.  And Trump has already announced how he is going to respond to possible European Union tariff retaliation—by large tariffs on imported cars.  You can hardly claim that is a national security matter—but it sure doesn’t seem like this government by fiat is going to stop!

So we no longer need to argue about whether Trump will or won’t try to make himself a dictator.  Unless something happens, he is already in position to wreck our economy all by himself.