Kurdistan Showdown

The United Kalavrvta has been cleared by the Coast Guard to begin offloading 1 million barrels of Kurdish oil in Galveston. As it threatened to do, Iraq has filed suit asking US Marshalls to seize the oil.

As I mentioned in a previous post, Kurdistan took one step closer to independence while Baghdad was reeling from ISIS victories on the battlefield, by signing a separate export agreement with Turkey, a NATO member, despite Baghdad’s assertion of sovereignty over all of Iraq.

It seems likely Baghdad will prevail in court. If so, and the oil is seized, the regional government of Kurdistan, now desperately short of cash, will have its back against the wall. You have to wonder what their Plan B is.

War

On Friday the European Commission put a draconian round of what it euphemistically calls “restrictive measures” against Russia up for approval by EU member nations. The measures are intended to inflict damage. They will be interpreted by the Kremlin as belligerent, and they are likely to be approved.

It is difficult to see how the Kremlin can back down. And if the EU launches sufficiently crippling measures, it is difficult to see what the Kremlin loses by taking the next step and openly occupying a non-NATO country on its border.

Perhaps a number of western governments will actually welcome this as an opportunity to make the “restrictive measures” permanent. So much for the reset.

While we were patting ourselves on the back for our forays into Eastern Europe in the mid-2000s, in the name of democracy, many Russians were probably remembering the 600,000 Red Army soldiers lost defending Kiev from Hitler’s invasion, and sourly noting that Ukraine only came into existence as a state with the fall of the Soviet Union. Others were undoubtedly chafing over obstructionism against the ambitious South Stream pipeline project on the part of influential members of the EU.

Which is not to defend Vladimir Putin. It is only to point out that the momentum building toward disaster in Eastern Europe is not the consequence of a single man. We might have hoped for a Russian leader who would have found a way to stifle Russian ambitions and muffle grievances, a kind of Slavic Mahmoud Abbas, but we can hardly complain that they picked one who speaks their own cultural language.

Maybe this is all inevitable. If so, if this is the best that can be done, then one shudders at the eventual collision between the West and China.

But what to do about it?

In a previous post I tried to point out that there are areas in any modern economy where markets don’t operate reliably, or don’t operate at all. Market meaning something that works through supply and demand to optimize society’s allocation of resources.

Sometimes this is because what constitutes supply (let’s say savings) and what constitutes demand (say business investment) don’t actually meet directly in a marketplace,  but go through an intermediary (institutions like banks, etc.) with its own motivations. Sometimes it’s because one side (say skilled labor) can not change rapidly in response to the other (say factories relocating overseas).

Why should we care? Because in a market for coffee sweeteners, for example, all sides can adjust fluidly to the best balance of prices that makes consumers happy and is profitable for business. Which is presumably a good thing for society. Where markets can not accomplish this, the consequences may be very much to the detriment of society. (See the Great Depression.) Waiting for a generation of people to die off is not an acceptable way to optimize the use of resources.

I still don’t like the term income inequality, for reasons I’ve already explained, but fortunately there are people seriously studying the effects of income imbalance. I just discovered this short paper, published earlier this year. From the paper:

[T]here is a strong negative relation between the level of net inequality and growth in income per capita…and there is a weak (if anything, positive) relationship between redistribution and subsequent growth

[T]he things that governments have typically done to redistribute do not seem to have led to bad growth outcomes, unless they were extreme. And the resulting narrowing of inequality helped support faster and more durable growth

It’s a growing consensus. Beyond a certain point, income imbalance hurts the economy. And many economies are beyond that point. The question is, what can we do?

When markets don’t work

Everyone has heard of the law of supply and demand. It’s supposed to be why markets work (whatever ‘work’ is supposed to mean). The price for a product or service is high enough to stimulate enough supply for the market, yet low enough that all of that product or service is consumed. In other words, the market finds its own equilibrium.

Free-market advocates also claim that the law of supply and demand, operating across markets for all goods and services, leads to the most efficient allocation of resources. This is less persuasive. When China was plagued with opium dens, it’s hard to see how this was efficient in any useful sense of the word. It is equally hard to see how a modern economy would benefit from an open market in heroin, tainted food, or half-trained doctors.

While the efficacy of supply and demand in finding an equilibrium price seems indisputable (with exceptions like asset bubbles), there are areas of the modern capitalist economy where it just doesn’t work that way.

Take savings and investment. Some people labor under the impression that savings must always equal investment, but they forget the role of financial intermediaries (or else they are confused as to what ‘investment’ is). Decisions to save and decisions to invest are made by different people, or at least people acting in different roles, and they are often made for contradictory reasons. When the economic horizon looks cloudy, the preference to save increases, but the desire to invest decreases. You might think that interest rates would fall until things are brought back into balance again, but if you’re worried about your job, you don’t save based on the rate of return. You save to have cash available. It won’t matter much if your savings earn 5% or 0.5%. In the same situation, financial intermediaries (e.g. banks) accumulate reserves (or they should), which means they’re happy to accept your deposit, even if they have no plans to lend it out.

This is a source of economic instability. Barring intervention by the authorities (monetary policy or fiscal stimulus), production drifts down until enough people have lost jobs or hours so that they are forced to spend more of what they do make, and their diminished savings falls back into balanced with the diminished need for business investment.

So there’s an equilibrium, but one could hardly call it ‘optimum’.

There is another area. Less explored, but perhaps all the more significant.

Virtually everything produced in a modern economy is the result of a collective effort, meaning it takes an organization to deliver goods and services. The main reason for this is that it takes specialization to produce something of sufficient value in sufficient quantity to be competitive in the market.

So if it takes 100 different jobs and skills sets to produce XYZ widgets, and the sale of those widgets brings in a certain amount of money, how is that money divided among the different jobs, and the return to capital?

In other words, what is the value of any particular kind of labor, versus the owners and managers of capital?

Well, you say, it’s determined by supply and demand. And yet, I respond, the US  economy is awash in capital (starting long before quantitative easing) in the forms of monetary wealth and glutted capacity, while at the same time the returns to capital and its managers absorb a steadily greater portion of national income.

So what is the mechanism supposed to be that brings the distribution of income into equilibrium? Is it stagnation, where low or no inflation combines with low rates of interest, declining growth, and a declining labor force participation? It’s hard to see how this leads to rising wages for those who continue working, without fairly disruptive changes to society. Alternatively, it’s hard to see how the continued stagnation of income for most of the population represents a useful optimum.

The history of the past 20 or 30 years suggests that, if there is an equilibrium process at work, unlike the markets we are familiar with this one may operate over time frames that exceed the normal allotment of working years, if not the human life span. And this is not at all optimal.

Income what?

The phrase “income inequality” has been all the rage. Economists study it. Talking heads rant about it. Politicians debate it. And it has become another litmus test in the Great Liberal-Conservative Theater of the Absurd.

But “income inequality” can not possibly mean what it suggests, that those who think it is a problem believe that all incomes should be equal. I’ve known some Marxist firebrands in my time, and even they would have paused before suggesting such a thing.

So why employ a term that poisons the discussion at it’s start? The usual left-wing laziness, I suppose, abetted by the usual right-wing ambush mentality.

But there is something real here.

For years, economists have thought of such inequality in part as a side effect of policies that fostered the country’s economic dynamism…But economists’ thinking has changed sharply…The concentration of income in the hands of the rich might not just mean a more unequal society…It might mean less stable economic expansions and sluggish growth.

Income Inequality May Take Toll on Growth – NYT 10/16/2012

While the steady or slightly accelerating global growth rates predicted by the IMF is the most likely outcome, it may not be achievable because of three imbalances: social, geographical and demographic. These seem deeply embedded in the structure of global capitalism today. They are weakening demand, creating excess savings and driving the buildup of borrowing and lending that has been both a cause and consequence of the global financial crisis…

If too much of the income created by capitalism’s capacity to increase production flows to people who are already rich and likely to save rather than spend, then crises of under-consumption become almost inevitable…

Karl Marx was right – at least about one thing – Reuters 6/11/2014

Granted that any or all of these opinions may turn out to be wrong (although I am doubtful of that), it is important to distinguish between the technical questions concerning national and global economies, and the political questions surrounding who should get what.

So I propose we stop talking about “income inequality”, because the converse is something no one wants or expects to achieve, and think instead in terms of “income imbalance” — the converse of which at least stands a chance of having meaning.

 

Can democracy survive? – 2

Beginning in the early 1920s, Vladimir Lenin and Joseph Stalin propelled the Soviet Union into a centrally-planned industrial economy, ordering the construction of dozens of power plants and the electrification of industry. After the Wehrmacht invaded in 1941, the planned economy was ready to be re-purposed for war production, without essentially changing its character. After the German surrender, the Soviet Union rose to become the world’s second superpower, but the planners were losing their grip. By the time Ronald Reagan entered office, the planned economy, choking with its own unmanageable complexity, stifling all individual initiative, and falling behind, was crumbling badly.

In a world of increasingly complex technology and increasingly complex interrelationships, where effective private action was becoming increasingly important, the Soviets were committed to a trajectory of failure.

The genius of the capitalist system, such as it is, is to permit thousand of economic actors to ferret out and exploit areas of need, want, and desire, through profit-making business ventures organized to supply products and services as the opportunities arise.

Of course, even capitalists are can be reined in or called to account. Avenues of profitable exploitation, from drugs and prostitution to the convenient disposal of industrial waste in rivers and streams, are cut off by central authorities. And only a few think we would be better off were this not so.

Democracy might be thought of as a system where thousands of political actors are permitted to ferret out and exploit areas of grievance, greed, and zealotry, through office-seeking careers that promise to deliver a voice and recognition, as opportunities arise.

Unlike capitalists, activists and politicians are hardly restrained at all. From the founders of the Ku Klux Klan, to the Students for Democratic Action and the Weathermen, to Richard Mellon Scaife and Karl Rove, political actors very often bring more heat than light, as the saying goes.

But the genius of democracy is in no small part its ability to give every faction, no matter how wrong it is, a voice of some kind, so long as it is a large enough faction to be an electoral factor. And any faction that does not meet that threshold is in any case too small to endanger national stability if ignored.

Absent an existential crisis, democracy as we understand it is a battle of private agendas flying flags of public ideals, the institutions of government the battleground. But multifarious private agendas do not necessarily lead to effective public action.

In a world of competing nation-states, volatile finance, and environmental danger, where effective public action is increasingly important and increasingly difficult, it is right and prudent to think hard about what trajectory the world’s established democracies are on, and whether democracy as we now understand it can, and should, survive.