Month: January 2009

… because none of the cabinet secretaries pay federal taxes anyway… (see the latest from the New York Times on Tom Daschle’s unpaid $140,000)

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I recently finished listening to Imperial Life in the Emerald City: Inside Iraq’s Green Zone as a book on CD. The book is marred by the author’s antipathy to the Bush Administration. The facts of the Iraq occupation and its cost are sufficiently damning that the journalist author did not need to “tell”; the basic facts would have “shown” the spectacular incompetence and waste of the U.S. effort (“show don’t tell” being the first rule of journalism). Despite this flaw, the book is well worth reading if only to see how grand government plans have unintended consequences. Right here in the U.S., via this new stimulus bill, we may be about to repeat many of our mistakes from Iraq.

One interesting point of the book is how mismanagement of automobile transportation can wreck a country. In Saddam’s Iraq gasoline was essentially free, costing perhaps 5 cents per gallon. Importing a car, however, was subject to high tariffs and some quotas. The result was that you could get anywhere within Baghdad in 15 minutes or less. The U.S. occupation eliminated the tariffs and quotas out of a belief that free trade was a unqualified good. Cars flooded in from the four corners of the world and Baghdad soon had such horrific traffic that Iraqi tempers boiled and American soldiers were at risk of attack any time they got stuck in their Humvees. What about the gasoline? Our bureaucrats decided that it would generate too much anger if we removed the gasoline subsidies, so gas remained a tiny fraction of the world price. With all of the extra cars on the road, Iraq’s refineries, even operated at full capacity, could not keep up with demand. The U.S. taxpayer was tapped to pay Halliburton to truck in vast quantities of gasoline from Kuwait and then re-sell that gas to Iraqis for 5 cents per gallon.

The electricity situation in Iraq is covered in great detail. Iraq hadn’t build new power plants for decades. Electricity was free and therefore Iraqis had no incentive to conserve. As the population ballooned, demand for electricity outstripped supply. Saddam simply cut off most of the country most of the time, leaving Baghdad as the only part of Iraq with continuous power. When the U.S. arrived, Iraqis and Americans decided that it was the responsibility of U.S. taxpayers to give every Iraqi unlimited 24/7 electricity power at no cost. This required making up for 20 years of neglected maintenance and powerplant construction. (We mostly failed at this effort, despite spending $billions.)

An overarching problem was that Iraqis prior to Saddam had been accustomed to one of the world’s best lifestyles. Without doing any work, they were guaranteed food, health care, education, electricity, and gasoline. Imported luxury goods were brought in by the government and sold at a fraction of their cost. An Iraqi who got a job with a government-owned factory was guaranteed a job for life, even if the factory was not competitive on the world market. All of this was paid for with oil revenue. The Iraqis assumed that with Saddam gone they should be able to return to their 1970s paradise and were angry when the U.S. did not give them what they deserved. The population of Iraq was about 10 million in the 1970s and is 28 million today. There is no way that oil revenues could keep pace with population growth and therefore, absent continuing drains on the U.S. taxpayer, Iraqis would either have to get to work or accept a lower standard of living.

Some of the details aren’t relevant to why we failed in Iraq, but they are entertaining. SAIC was given millions of dollars to run a media company in Iraq. They wanted a vehicle. Instead of buying one in Jordan or Kuwait and driving it to Baghdad (or buying one the car dealers in Baghdad who were making regular trips to Europe and bringing back cars), they bought a Hummer in the U.S. and chartered a DC-10 cargo plane to deliver it to Baghdad. The cost? At least $380,000. As this was a cost-plus contract, they earned a nice profit on top of the $380,000 spent.

The overall method of American occupation is so expensive that taxpayers should shudder in horror at the prospect of ever engaging in an Iraq-style nation-building experiment again. Billions of dollars were spent to make the Green Zone just like the U.S. Americans insisted on 24/7 power and air conditioning, big-screen televisions, and food just like you’d get in a North Carolina cafeteria. All of the food, which included copious quantities of pork, was flown in from Europe or the U.S. We can complain about Halliburton all that we want, but after reading about all of the stuff that Halliburton was asked to do, you might conclude that we got a bargain.

Iraqis interviewed by the author ended up blaming us for everything. In Saddam’s socialist paradise, all Iraqis were created equal. The U.S. occupation established U.S.-style ethnic group quotas for important jobs, making people conscious of their Sunni, Shiite or Kurdish background (the Christians and Jews, remnants of the original population of the country prior to the Arab invasion, had mostly been driven out of Iraq by the 1950s, so Christians and Jews did not get quotas). According to the Iraqis interviewed, they wouldn’t have started killing each other if the Americans hadn’t put race and religious sect front and center.

The interviewees end up very pessimistic about forcing democracy on a country that does not have the civil institutions of the U.S. They learn that it isn’t enough to hold elections.

Aside from making us depressed about how we spent $1 trillion over the last few years, does the book have any value? Our involvement in Iraq is winding down, the hated King Bush II and his incompetent lackeys have been driven out of Washington, and we’ll never get the money back. I think the book is valuable and relevant to our present situation because it shows what happens when the U.S. government tries to solve a big problem quickly. The president delegates the challenge to some trusted advisors. They pick enthusiastic young party-loyal folks drawn from Congressional staff, think-tanks, and lobbying firms, to execute a grand plan. There is a lot of ideology at the top and little in the way of a feedback mechanism to know if the plan is working. Between the TARP bonfire and the stimulus plan currently working its way through Congress we are preparing to spend $1.5 trillion of our children’s money in a terrible hurry. There is little reason to believe that it will go better than our attempt to rebuild Iraq in America’s image. That’s my pitch for reading Imperial Life in the Emerald City: Inside Iraq’s Green Zone.

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On my visit to the MIT Campus today, I picked up the latest issue of our official newspaper, Tech Talk. I figured that the great minds of MIT would collectively have some hope to offer a world in the throes of economic collapse. The three cover stories were about saving energy in buildings on campus, a camera that helps blind people take pictures, and “Institute launching diversity and inclusion site” (“MIT will launch a new web site dedicated to promoting diversity and inclusion at the Institute”).

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Looking out at the frozen Hell of the driveway, a solid lake of ice, inspired me to visit the MIT gym. I ran into a personal trainer who is also a professional jazz musician. He said that personal training was way down. How about the jazz? “One club in DC says that ticket sales are down 30-40 percent. They’re cutting ticket prices and guarantees to performers.”

How about folks who read this blog? Are folks cutting down on going out for dinner and entertainment?

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This probably would have been a better question to ask before we spent $700 billion of taxpayer funds, but… why do we need to preserve America’s banks? Couldn’t we do all of our banking with foreign banks? If Citigroup had been allowed to fail, for example, Hong Kong and Shanghai Bank would still be open for business. What does an American business need that Barclays can’t provide? If the cash is coming from Persian Gulf oil states, couldn’t a startup company here go IPO on the Dubai stock exchange?

One might argue that some of these foreign banks are not in the best shape and are requiring European and Asian governments to bail them out. That’s as may be, but it doesn’t bleed the American taxpayer. We get our cars from Japan, our TVs from China, and our strawberries from Mexico. If most of Wall Street had disappeared, couldn’t we have gotten our financial services from more prudent banks and/or those that had been bailed out by someone else’s tax money?

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On October 1, I asked whether the TARP program was likely to turn the U.S. into England (blog entry). Now that we’re four months deeper into the recession, what do folks think? An economist asked me recently whether I saw the U.S. as likely to collapse like it did in the 1930s or recover? And if the economy were to recover, what did I think would spur the recovery? My reply was that maybe the most likely scenario was a long gradual downward slide, sort of like England in the post-World War II period.

We’ve got a system where those who have political power can continue to tap into rich veins of wealth even if what they’re doing is not sustainably boosting GDP. Wall Street executives, government at all levels, public employee union members, union members in some private companies, and similarly situated folks can avoid nearly all of the pain of the downturn while non-union workers at private companies get destroyed. That is a lot like what happened in various European countries. They’d have very high unemployment and economic stagnation, but workers who already had jobs were taken care of. If we give all of our money to the economic winners of the last few decades, what will be left for building new industries and jobs for young people?

And if the U.S. does turn into the U.K., how can a young person adapt? I talked with a kid who is about to graduate from Olin College of Engineering, perhaps the nation’s best undergraduate engineering program. He had two job offers, both from government contractors. What about his friends? One of them did get offered a job recently by some sort of financial services company. It is in the Netherlands and the kid will be moving there in June (whereupon he will cease to pay U.S. local, state, and federal taxes, unless he gets a big raise in which case some of his income will be subject to federal income tax).

[Loosely related New York Times article: Mancur Olson’s seminal work, The Rise and Decline of Nations, published in 1982, helped explain how stable, affluent societies tend to get in trouble. The book turns out to be a surprisingly useful guide to the current crisis. In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods. His primary case study was Great Britain in the decades after World War II. As an economic and military giant for more than two centuries, it had accumulated one of history’s great collections of interest groups — miners, financial traders and farmers, among others. These interest groups had so shackled Great Britain’s economy by the 1970s that its high unemployment and slow growth came to be known as “British disease.”]

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Imagine a Monty Python movie where some angry Frenchmen were looking for a way to taunt Americans and said “Americans are too dumb to figure out how to watch television.” We don’t need to wait for Monty Python to reunite because we have Barack Obama and the U.S. Senate saying the same thing (nytimes story).

I have symphathy for folks too dumb to watch over-the-air HDTV because I’m one of them. Back in 2003, I bought an accessory ATSC tuner (“conversion box”) as a conversation piece. It cost about $300 back then and no government coupons were available to help pay for them. I went through the checkout line at BestBuy with a friend born in the 1970s. She said “What are you going to do with that?” I replied that I intended to watch the new HDTV broadcasts. “You don’t have cable,” she responded. “How are you going to get the signal?” I explained that the Feds had just required local TV stations to start broadcasting in HDTV. “Where will the information come from?” From the ether, I explained. Electromagnetic waves in the ether. Like the ones that go to the car radio. “TV comes from the wall. Or from satellite,” she responded. “TV stations don’t transmit like radio stations.” Don’t you remember rabbit ears? Blank stare.

Once home, I discovered that some of the stations were too weak to receive with an indoor antenna, though I lived smack in the middle of an urban area in a wood-framed house. Changing channels was not instant, as with analog TV, but took several seconds to jump from station to station, thus putting an end to any pleasure from channel surfing. Each station was broken up into multiple substations. Channel 2 could be received as “2-1, 2-2, 2-10” and sometimes more variations. Channel 2-2 would show something totally different from 2-1. How would you know what was on 2-2 or 2-10? There was no published TV guide that I could find that said (no longer true today; tvguide.com lists this info (though you could also argue that anyone with Internet access doesn’t need TV because all of the important TV content is available as streaming video)). Without a program listing, the only way to figure out what was on was by channel surfing, which, as noted previously, took forever because the tuner needed to do a lot of computation before latching onto a digital stream. Sometimes a subchannel would show video from one source while playing audio from an unrelated show.

I gave up on TV and went back to the PC.

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While the U.S. is losing thousands of jobs every day, it might seem odd that Congress is making it tougher for companies to hire people in the U.S. This New York Times story covers the fact that it will now be possible for someone to sue a company 20 or 30 years after they were hired, on the grounds that the person who hired them (who may be dead by the this time, and thus unavailable to testify) paid them less money than a person of another sex or a difference race. If you’re an employer, how do you budget for this liability? How do you account for it in your pension fund, given that once 20 years of pay are adjusted the pension fund will need to be beefed up to pay out a higher pension based on the revised salary. It sounds at first as though we’re rearranging the deck chairs on the Titanic. In a nation where everyone is unemployed we’re going to argue about how much people should have been paid back in 1979 when they had jobs. (Only from the perspective of 2009 does 1979 look like it might have been a good year for the economy!)

The effect on young people would appear to be especially pernicious. The people who have the best chance of arguing that they were discriminated against are in their 50s and 60s (Lilly Ledbetter, the plaintiff for whom the bill is named, was hired by Goodyear in 1979 and retired in 1998). As the U.S. economy shrinks, the pool of available money to pay wages shrinks. If more of the money is given to oldsters and their attorneys, less money will be available to 22-year-olds starting their careers.

An economist would tell you that pay discrimination laws aren’t necessary in a free market. A company that was underpaying women, for example, would find that its skilled women had quit to work for a competitor. If women in all sectors of the economy were underpaid, a company could make tremendous profits with little risk simply by hiring an all-female workforce and entering markets where most firms had a mixed or all-male workforce.

Perhaps Congress is smarter than it would be appear at first glance. Employers who aren’t subject to the market can do whatever they want and many of the most egregious cases of pay discrimination have been at monopolies such as the old telephone company and at government agencies. Looking at where the jobs are right now and where we are going, the U.S. is no longer a market economy. By the time we’re done with layoffs and stimulus, at least 40 percent of the economy will be government (federal, state, local). 16 percent of the economy is health care (overlaps with the preceding 40 percent), which does not behave according to the free market, and something like 7 percent is Wall Street, recently nationalized in all but name (and upside). A school district can pay its workers whatever it wants to and however it wants to; parents have no choice but to continue to pay property taxes and send their children to the local school. A hospital can pay doctors more or nurses less and still get its Medicare and Medicaid funds. A Wall Street firm can hand out bonuses to the (mostly male?) managers who drove it into insolvency because there are always more TARP funds available.

A 22-year-old who is lucky enough to find a job in the land of his or her birth will most likely find it in the non-market portion of the U.S. economy. If present trends continue, a child born today who remains in the U.S. is virtually certain to work for the government, in government-sponsored health care, or at a government-guaranteed financial firm. Thus the new bill may not be as simple as the “old folks and plaintiff’s lawyers continue to grab everything that isn’t nailed down”.

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Prompted by the death of my Amazon Kindle, I uncovered a very interesting book at the local public library: Devil in the Mountain: A Search for the Origin of the Andes.

The author, a geologist, chronicles his ten years of arduous field work on the Bolivian Altiplano trying to figure out “How come these mountains are so high?” and “How come these mountains sprang up so relatively recently?” (towards the end of the book it turns out that the answer has to do with the cooling that the Earth has experienced since the age of the dinosaurs)

This would have been a terrible book for the Kindle anyway, as the drawings are excellent and essential to understanding the material.

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An increasing chorus of politicians and journalists are asking “Should the government simply nationalize the bankrupt banks?” Right now we pour in taxpayer money and it goes right back out of the bank in the form of bonuses, acquisitions, losses on bad assets, etc. The banks on average remain insolvent. A nationalized bank would have the advantage of instant investor confidence. Any obligation of the nationalized bank would be as safe as a Treasury Bill.

By guaranteeing hundreds of billions of dollars in potential losses for Citigroup and Bank of America, the U.S. taxpayer is already on the hook for the downside, i.e., we’ve already nationalized any potential losses. With a full nationalization, the taxpayers might potentially reap some of the upside, if the U.S. economy ever does recover. Could the government afford to run these banks? Certainly not with the efficiency that we ran the Iraq occupation (see Imperial Life in the Emerald City to get a sense of the scale of the waste). Let’s try to figure out the scale of the problem.

The total Federal civilian employment is about 2.4 million full-time employees who are paid approximately $180 billion per year (source), roughly $75,000 per employee. Merrill Lynch had approximately 60,000 employees sharing $15 billion in salary, roughly $250,000 per employee per year. Collectively these folks ran their company into insolvency. Can the Federal government get skilled people for less than $250,000 per year? Our Supreme Court justices seem to work very hard and very competently and earn $208,000 per year. The Treasury Department and Federal Reserve Bank are able to attract some of the nation’s best financial talent at salaries less than 1% of what Wall Street pays its top executives. The U.S. military has “finance officers” who manage programs costing hundreds of millions of dollars and can be responsible for millions of dollars in $100 bills. These folks aren’t paid any more than officers who perform other tasks, yet they seem to do a competent job. At least at the federal level, employees seem to be able to work with large numbers without being paid tens of millions of dollars themselves.

Citigroup has 300,000 employees. Bank of America had 200,000 prior to the Merrill acquisition. In round numbers, let’s assume that the to-be-nationalized banks together have a total payroll of 1 million people. The worst-case scenario would be that the banks can’t generate any revenue to pay salaries. If bank employees were placed on the standard Federal salary schedule, the cost of paying 1 million people for one year would be $75 billion, a small fraction of the money devoted to TARP so far and a tiny fraction of the total bailout money proposed. Would workers accept lower salaries? These are troubled times and the lure of a steady federal paycheck is strong. Furthermore, where else could they go? What banks are hiring right now or in the foreseeable future?

Right now the taxpayers are on the hook not only for the losses generated by the big banks, but also to keep paying boom-era salaries that were only possible because of phony accounting that assigned ridiculously high values to subprime assets and resultant fake profits. Nationalizing the banks and putting bank employees on the same salary schedule as the U.S. Treasury Department appears to be more affordable.

Of course, then we get back to the risk of whether the government could be even more incompetent at running these institutions than their former management…

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