Normative Narratives


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Conflict Watch: Egypt’s Impending Humanitarian Crisis

There has been lots of media coverage over the past two years of the civil unrest in Egypt following the ouster of Honsi Mubarak 2 years ago. While political jockeying continues amongst members of the Muslim Brotherhood (Mr. Morsi’s Sunni dominated party) and the small Christian / Shi’ite minority who see his rule as a challenge to their vested interests secured through decades of supporting the military dictator Honsi Mubarak, the majority of Egyptians are presumably pleased with the new freedoms that have come with democracy and wish simply for the political coherence needed to move the country forward.

But those who stand to lose their privileged positions will not give up so easily (there is also the argument that Egypt’s new constitution does not protect minority rights, but I believe this is a scare tactic being used against Morsi’s regime). It is essentially a collective action problem, those who stand to lose from Morsi’s rule stand to lose a lot, while those who stand to benefit stand to gain only incremental benefits (at least in the short run). Morsi’s opponents are also bolstered by the idea that if they can simply continue to apply pressure a little longer, they can break Morsi’s hold on power.

And they may be correct. I for one am a fan of Morsi and the democracy experiment in Egypt. But no matter who is right or wrong, or who really wants what is best for the people of Egypt, if the Morsi government is unable to provide essential services to the people, his opponents will leverage this ineffectiveness as a means to incite further political instability in Egypt.

At the source of this potential humanitarian crisis is the shortage of food and fuel. It also ties into my post yesterday about international finance and energy subsidies:

“The root of the crisis, economists say, is that Egypt is running out of the hard currency it needs for fuel imports. The shortage is raising questions about Egypt’s ability to keep importing wheat that is essential to subsidized bread supplies, stirring fears of an economic catastrophe at a time when the government is already struggling to quell violent protests by its political rivals. “

“United States officials warn of disaster unless Egypt soon carries out a package of tax increases and subsidy cuts tied to a $4.8 billion loan from the International Monetary Fund. That would persuade other lenders that Egypt was creditworthy enough to obtain billions more in additional loans needed to meet its yawning deficit. “

“Egypt has held two years of unsuccessful talks with the I.M.F., and the current government is still balking at the politically painful package of overhauls — even as rising prices and unemployment make those measures more difficult with each passing day.

‘They are operating on the notion that Egypt is too big to be allowed to fail, that the U.S. and the West will step in,’ Mr. Shimy said. ‘They think Egypt has a right to get the loan, and I think they will probably keep pushing all the way.’”

“Energy subsidies make up as much as 30 percent of Egypt’s government spending, said Ragui Assaad, of the Economic Research Forum here. The country imports much of its fuel, and for the first time last year it was forced to import some of the natural gas used to generate electricity — the reason for the recent blackouts. Egypt also imports about 75 percent of its wheat, mixing the superior foreign wheat with lower-quality domestic supplies to improve its subsidized bread. “

“But the two years of mayhem in the streets since the ouster of Mr. Mubarak have decimated tourism and foreign investment, crippling the economy. The government’s reserve of hard currency has fallen to about $13 billion from $36 billion two years ago.”

Part of the problem appears to be people’s expectations. According to Mr. Farash of the Supply Ministry, people are hoarding goods and gaming the system because they fear future uncertainty. Fuel truck drivers are diverting fuel to black markets, and bakeries are reselling their subsidized wheat at higher prices to people who fear future shortages. The thinking being, once shortages do hit, those who have supplies horded will have the goods they need to survive and will be able to sell their excess at a steep profit.

Morsi’s government is planning on installing “smart cards” to increase accountability of fuel truck drivers and bakers, which should make gaming the system more difficult. But people will still find ways to take advantage if they believe it is essential for their future well being. In order to change people’s expectations and their actions, the Morsi government will need to secure international financing to allow the Egyptian economy to run as usual.

This is where the story ties into yesterdays Normative Narratives post. One section of yesterdays post highlighted a recent IMF report stating that countries should stop fuel subsidies as a means of injecting money into the economy. With 30% of Egyptian spending tied up in fuel subsidies, clearly the IMF will not extend financing until Egypt does something to temper its unsustainable fuel subsidies.

But these subsidies are popular amongst the people, something Morsi understandably does not want to undermine early into Egypt’s first attempt at democracy in decades. There are especially important now as the value of the Egyptian pound has plummeted in conjunction with the instability caused by removing Mubarak from power and unemployment remains high. Reducing fuel subsidies will be important for Egypt’s long term fiscal stability, but doing so prematurely—as the IMF is insisting on—would undermine the popular support needed for a democratic regime to govern.

Which brings us to the second point of yesterdays post; the BRICS proposed development bank. The Bank’s purpose is to provide an alternative to IMF and WB financing, and is specifically focused on energy and infrastructure projects. This Bank could be essential to providing the financing that the IMF is currently unwilling to lend without imposing the politically impossible conditions the IMF is insisting on. But this bank was just proposed, is it really possible for it to provide funding that is needed more or less immediately?

Up till this point, unrest in Egypt has been mostly politically motivated. But if a food and fuel shortage based humanitarian crisis unfolds, the Morsi regime will be under real threat of a full blown revolution. It is essential for Egypt’s attempt at democracy to succeed, as it is a natural experiment whose results will dictate whether future attempts at democracy are attempted in the region. In order for Morsi to remain in power, international financing has to come from somewhere. Will the IMF budge on it’s conditionality? Will the BRICS development bank be running soon enough to help stabilize the Egyptian economy? Will Morsi ultimately have to cave in to IMF demands in order to receive emergency financing? Or will the democracy project in Egypt fail? None of the answers to these important questions are yet written in stone—we will have to keep a close eye on the situation as it continues to unfold.

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Economic Outlook: The IMF Weighs in on Fuel Subsidies; BRICS Unveil Plans to Build Their Own Development Bank

The IMF released a research paper on Wednesday stating a fairly obvious point; that large fuel subsidies put a drain on government budgets, sapping resources that could be used on arguably more important programs:

Developing and industrialized countries should rein in energy subsidies that totaled $1.9 trillion in 2011 to ease budgetary pressures and free resources for public spending in areas like education and health care, International Monetary Fund economists said in a research paper published Wednesday.”

“In 2011, energy subsidies intended to contain energy prices for consumers accounted for 2.5 percent of global gross domestic product, or 8 percent of all government revenue, the fund said.“

“Subsidies have been a counterproductive way to help the poor because they are more beneficial to the rich, who consume more energy, the fund said. The richest 20 percent of households in low- and middle-income countries received six times more in fuel subsidies than the lowest 20 percent, the fund said.

According to its research, 20 countries have pretax energy subsidies that exceed 5 percent of gross domestic product. The top three subsidizers are the United States at $502 billion, China at $279 billion, and Russia at $116 billion.

In advanced economies, like the United States, removing subsidies for fossil fuels could inject revenue into government coffers, the fund said.

“Insufficient energy taxation, including in the largest economy in the world, the United States, is a problem not only for the environment, but many advanced economies are in need of additional resources to support the effort to lower public debt, which is very high now in those economies,” said Carlo Cottarelli, director of the fund’s fiscal affairs department.

Over the longer term, limiting energy subsidies could spur stronger economic growth because it would encourage a more efficient distribution of resources and encourage investment in energy-efficient alternative technologies, Mr. Lipton said.”

While it is fairly obvious that spending money on X takes away money from Y, what is probably not as obvious is how disproportionately fuel subsidies benefit wealthy consumers, but when you think about it makes perfect sense. Also less obvious is how providing fuel subsidies makes it harder for alternative energy sources to compete in the open market. If anything, the  infant renewable industries should be the ones receive subsidies (which they do to a different extent from country to country, and over subsidizing can lead to allegations of “dumping” and strained economic and political relations between countries). But subsidies for renewable are dwarfed by tax breaks for fuel producers.

A study comparing subsidies between “green” and conventional energy from 2002-2008 in the United States highlights this argument well:

“The federal government provided substantially larger subsidies to fossil fuels than to renewables. Subsidies to fossil fuels—a mature, developed industry that has enjoyed government support for many years—totaled approximately $72 billion over the study period, representing a direct cost to taxpayers.

Subsidies for renewable fuels, a relatively young and developing industry, totaled $29 billion over the same period.”

Obama tried to end big oil tax breaks in his first term, unsuccessfully. This is a logical tax loophole to close, as fossil fuel industries are fully matured and oil companies have been reaping billion dollar profit margins for decades. Perhaps as part of fiscal policy and tax reform deals, this issue will again surface in the political debate. Most likely it would take a complete democratic majority in both the executive and legislative branch to pass such legislature which has deep vested interests opposing it.

Ending fossil fuel tax breaks could be synergized with a carbon tax. The combined effect of these two policies could create the market conditions sufficient to wean our dependence of greenhouse gas emitting energy sources. The long run effect would be a more sustainable environmental and fiscal policy.

In other international governance news, the BRICS announced plans to create a development bank meant to challenge institutions such as the IMF and World Bank:

“The leaders of Brazil, Russia, India, China and South Africa, all members of the so-called BRICS Group of developing nations, have agreed to create the bank to focus on infrastructure and development in emerging markets. The countries are also planning to discuss pooling their foreign reserves as a bulwark against currency crises, part of a growing effort by emerging economic powers to build institutions and forums that are alternatives to Western-dominated ones.

“But the alliance faces serious questions about whether the member countries have enough in common and enough shared goals to function effectively as a counterweight to the West.

‘Despite the political rhetoric around partnerships, there is a huge amount of competition between the countries,’ Mr. Verachia [director of the Frontier Advisory Group] said.”

“They have widely divergent economies, disparate foreign policy aims and different forms of government. India, Brazil and South Africa have strong democratic traditions, while Russia and China are autocratic.”

I do not know what to think about this proposed development bank. On one hand, the competition should benefit countries receiving loans, as they will now have a choice for where they will receive development financing. This should result in more favorable loan terms, in addition to diminishing an institutions insistence on imposing potentially damaging “conditionality” alongside loans.

On the other hand, the proposed Bank could end up providing financing for projects that contribute to environmental degradation and human rights abuses. Will Brazil, India and South Africa dominate institutional policy, or will Russia and China?

The IMF, as discussed above, recently suggested curbing fuel subsidies. Two of the largest subsidizers, China and Russia, are members of the BRICS. Russia is the world largest oil producer, while India and China rank among the worlds leading coal producers. Will this development bank serve as a means to undermine the global sustainable development movement, financing dirty energy sources? The Bank’s mandate is to finance energy and infrastructure projects, but it says nothing about what type of energy projects.

China and Russia also have a history of defending governments that perpetuate human rights abuses, handcuffing the international community on the grounds of “national sovereignty” by undermining agreed upon sanctions and vetoing UNSC intervention. The lack of transparency inherent in autocratic regimes means that much of the information coming from these governments has to be closely scrutinized.

The nature of the bank is questionable as well. While investment in energy and infrastructure components of development, they can also perpetuate human rights abuses money goes to help corrupt rulers cement their control. These “enclave economies” are particularly prevalent in Africa, and correlate almost directly with human rights abuses:

“Still, 15 African heads of state were invited to the summit meeting [to unveil the new Bank] in South Africa as observers, a sign of the continent’s increasing importance as an investment destination for all of the BRICS countries.”

It will be up to Brazil, India and South Africa, some of the world’s largest democracies and proponents of renewable energies, to hold Russia and China accountable and act as a counterbalance to their sometimes loose moral and ethical stances on human rights and environmental sustainability.

The proposed bank has the potential to greatly help the developing world raise its standard of living. It also has the potential to perpetuate human rights abuses and undermine regional and global security. How the bank functions remains to be seen, but you can be sure of one thing—the rest of the international community will keep a close eye on its dealings.

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Transparency Thursday: Is There Anything More American Than Baseball?

Baseball is America’s pastime. Despite the NFLs meteoric rise as America’s most popular sport, and the global expansion of basketball, baseball remains uniquely American in more ways than most people generally realize.

For one, baseball is “Americas Pastime” because it has been around longer than football. The exact origins of baseball are debated, but historians agree that it has existed since the early-mid 19th century. In a way, American and Baseball grew up together, and will be forever intertwined. The dog days of summer, hot dogs and cold beer, and watching a baseball game have become an enduring image of American culture. The image of the hard working American also has parallels to baseball players, whose 162 game schedule is unrivaled by any other major sport.

The following analysis is much less nostalgic and much more economical. It is inspired by the fast-approaching beginning of the 2013 MLB season, and a recent report by Forbes which states that the average value of MLB baseball teams rose by 23% last year, the “biggest year-over-year change in valuation ever calculated by Forbes magazine”.

“In its report, Forbes, which has been tracking the league’s finances since 1998, revealed that the money that all teams made from the $450 million sale of the Montreal Expos in 2006 was invested in hedge funds that are now worth more than $1 billion.

“The value of a team used to be about a team itself,” Forbes executive editor Michael Ozanian said in a phone interview with ESPN.com. “Then it shifted to the stadium value and then to the television deals, and now it’s more about what’s not on the field at all.”

Is there any other sport that parallels the U.S. economy so? I think not. Both represent capitalism in their purest forms. America is one of the strongest pro-market advocates of all the world powers. MLB has the most free market-driven amongst major sports.

In baseball, there is no salary cap, and competition is protected through a redistributive luxury tax system. In the U.S., as in baseball, the open market determines someone’s wages, and poorer parties are compensated by redistribution of wealth to help ensure equality (who does this better, the U.S. or MLB, is open to debate). Other major sport’s wages are also determined by market forces, but are influenced in general by salary caps, which distort market values.

The MLBPA is the strongest of all the players unions. Strong unions, believe it or not, used to be a bastion of American wealth. The MLBPA was perhaps too strong, to the point where regular steroid threatened the integrity of the game. Just like in America, vested interests continue to hold sway until the system is “brought to its knees”, and only then is real reform discussed (in baseball it is PED testing, in the American economy financial and tax reform).

Baseball as a sport exemplifies American ideals, and as a business mirrors the U.S. economy. Teams increased value represents not an increase in popularity of the sport, but savvy off field investments by teams.

How would you feel if your team lost lots of money in the financial market and it affected the on-the-field product? We already saw this to a certain extent with the Wilpon-Madoff debacle, but most people assumed this was an isolated issue—the recent Forbes report suggests perhaps all teams are more vulnerable to financial market shocks than we may realize.

But restricting team’s investment opportunities would be decidedly un-American. Perhaps MLB should put a limit on the amount a team can cut it’s payroll from year to year, ensuring that off-the-field investments do not affect the product a team puts on the field?

Most people will not care about this issue unless it affects them directly—out of sight out of mind. Mets fans were outraged that their team’s payroll took a hit when the Wilpon’s lost money in the financial market. I would also not be surprised if eventually we find out the Marlins salary-dump was somehow linked to losses not directly related to baseball activities.

Perhaps investment in financial markets is an unstoppable force, and that any entity that has a large amount of capital—including major sports organizations—will naturally be drawn to it. I do not know if the commissioner’s office has the power to regulate how owners invest their profits even if it wanted to.

Banks have to have a certain amount of reserve cash to back up their assets, known as a reserve requirement. Perhaps the commissioner’s office should institute a similar policy to ensure that financial market fluctuations do not affect the integrity of the game. Or should the system stay as it is, and address teams financial woes on a case-by-case basis as it currently does ?(such as the Dodgers MLB managed bankruptcy)

http://espn.go.com/mlb/story/_/id/9104778/forbes-mlb-teams-see-historic-23-percent-surge-average-values

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Conflict Watch: Two Very Different Approaches to Global Security

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President Obama had a very productive trip to the Middle-East this week. Say what you will about Obama’s domestic policy (I for one like his ideas, and believe he inherited a terrible situation and has been handicapped by the ineptitude of the U.S. Congress, but that’s another matter entirely and not the topic of this blog), but Obama has certainly been a very effective President in terms of diplomatic relations.

One area of diplomacy that the Obama administration has not historically been very effective is the Middle-East. Obama muddle relations with Israel early in his presidency when he condemned Israeli housing development in dispute lands in the West Bank. The territory in question has been seen as vital to a potential two-state solution between Israel and Palestine—Israeli development undermines the ability to potentially return the land to Palestinians as part of a negotiated settlement.

But in his most recent trip, Obama made headway in the contentious geopolitical arena that is the Middle-East. He renewed calls for a two-state solution, calling on the younger generation of Israelis and Palestinians to pressure their governments for a peaceful resolution. It may be cliché to say “the youth is the future”, but it is also accurate, and seeing as any durable two-state solution is at least years (if not decades) away, calling on the youth is an appropriate measure.

Obama fell short of calling for Israel to halt construction in the disputed land. He did call the construction “inappropriate”, but stated that halting construction should not be a precondition for negotiations.

Obama also visited Mahmoud Abbas, President of the Palestinian Authority, as a two-state solution requires two willing negotiation partners. Obama’s visit with Abbas was mainly symbolic—showing the U.S. stands with the Palestinian Authority, and that the government has an alternative other than aligning itself with extremists groups. The closer ties the Palestinian Authority has with the U.S., the better the chances of a two-state solution. The closer the ties with extremist factions within Hamas, the less likely such a solution will occur.

Perhaps most notably was the restoration of full diplomatic ties between Israel and Turkey. Turkey and Israel had a history of close relations which stopped in 2010 after Israel boarded a Turkish ship attempting to bring supplies into disputed lands. The stand-off resulted in the deaths of 9 Turkish citizens and a suspension of diplomatic ties between Israel and Turkey.

Obama was able to convince Prime Minister Netanyahu to apologize and offer compensation to the families who lost loved ones in the dispute. The apology was accepted, and full diplomatic ties were restored.

Turkey is an important geopolitical ally of the U.S., as is Israel. It can only be beneficial for regional and global security to have these two important partners on the same page.

President Obama also visited Jordan, another regional ally. During this visit, he pledged further financial support to Jordan, who receives thousands of Syrian refugees a day as civil war continues to envelop the country. This is the latest measure by the Obama administration to diminish Assad’s prospects by strengthening regional opposition, while still officially keeping the U.S. out of armed conflict.

Contrasting Obama’s proactive foreign policy agenda was Xi Jinping’s (the new Chinese President) speech in Moscow. Xi stated:

“We must respect the right of each country in the world to independently choose its path of development and oppose interference in the internal affairs of other countries,”          

These words mirrored a similar ideology of Vladimir Putin, Russia longtime President:

“Putin, who began a six-year term last May, has often criticized foreign interference in sovereign states.

Russia and China have resisted Western calls to pressure Syrian President Bashar al-Assad over the two-year-old civil conflict that has killed more than 70,000 people.

They both criticized the NATO bombing that helped rebels overthrow Libyan leader Muammar Gaddafi in 2011 and stood together in the Security Council in votes on the Iranian and North Korean nuclear programs.

Both China and Russia have bristled at U.S. and European criticism of their human rights records.

Putin said in a foreign policy decree issued at the start of his new term that Russia would counter attempts to use human rights as a pretext for interference, and his government has cracked down on foreign-funded non-governmental organizations.”

I have often condemned Chinese and Russian position of national sovereignty above all else. Surely national sovereignty is an important safeguard for good governments against malicious foreign intervention, but it should not be a tool for corrupt and disingenuous leaders to stay in power.

This is an unfortunate if not unexpected position for the Chinese President to take. Recent actions implied that Xi may be more open to protection of human rights, as evidenced by his call to support a higher standard of living for Chinese citizens over economic growth. After this most recent trip to Moscow, it appears Xi is taking 2 steps forward and 1 step back on human rights.

This position held by Russia and China also directly undermines the Responsibility To Protect initiative of the United Nations:

“The Responsibility to Protect has three “pillars”.

  1. A state has a responsibility to protect its population from mass atrocities;
  2. The international community has a responsibility to assist the state to fulfill its primary responsibility;
  3. If the state fails to protect its citizens from mass atrocities and peaceful measures have failed, the international community has the responsibility to intervene through coercive measures such as economic sanctions. Military intervention is considered the last resort.[3][4]

R2P safeguards national sovereignty without compromising individual human rights. It states that it is the responsibility of a state to protect its citizen’s rights and in a case where a state cannot protect these rights, the international community will lend assistance.

In a case where the state refuses help or itself perpetuates human rights violations, the international community can impose sanctions and other means to deter such actions. As a last resort, the international community can use military intervention to stop “mass atrocities”.

It is not surprising that China and Russia fear an undermining of national sovereignty, as both nations have strong autocratic regimes (in practice, despite what formal democratic structures they may have).

However, China and Russia must abandon this slippery slope argument and realize there are different degrees of national sovereignty. The international community has no interest in interfering in Chinese and Russian affairs, but it does have an interest in intervening in state perpetuated human rights violations.

Not only are human rights violations deplorable on moral and ethical grounds, they also compromise regional and global security. Protracted Social Conflict theory places humanitarian grievances at the root of most of today’s armed conflicts—and this theory is overwhelmingly supported by both qualitative and quantitative analysis.

Human rights violations lead to instability, which can  create a breeding ground for terrorism. The inability to evoke R2P in Syria has led the opposition to be hijacked by extremist groups, confusing the legitimate humanitarian roots of the conflict with an opportunistic power grab. This has made assisting the Syrian opposition much more difficult than it otherwise could have been.

Ultimately, China and Russia have the same goals as the U.S. and Europe—prosperity and peace through an open international system. This is not the Cold War, where the two sides were so ideologically opposed that only one could survive (capitalism v. communism). Eventually, China and Russia will have to learn that in order to protect their interests, limits must be placed on national sovereignty.

A useful mechanism for checking national sovereignty already exists in R2P; the next great challenge will be getting China and Russia on board with this initiative.

Hopefully it does not take a large terrorist attack in Russia or China to open these countries eyes to the interrelation of human rights violations and global insecurity, but for the time being it seems that these two countries have (unsurprisingly) not changed their positions on national sovereignty and R2P.

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Economic Outlook: The Ripeness of Cyprus


That ripeness refers to the need for Cyprus to diversify it’s economy. Ripeness may not be the right word, as Cyprus is not willingly taking these measures but rather having them imposed, but what else rhymes with Cyprus? (Lack of ripeness, like with this peach, is often a good indicator it is time to throw out said peach, no?)

“Cyprus has a huge banking system — assets around 8 times GDP — based on a business model of attracting offshore money with high rates and good opportunities for tax avoidance/evasion.”

The problem with such a large banking sector is that it creates asset bubbles and leads to  a loss of competitiveness in other sectors. As Cyprus now faces the inevitability of having to diversify its economy away from the banking sector, it faces the difficulty of having wages that are uncompetitive with the rest of its neighbors. It is difficult to be competitive in export industries with a high cost of labor and a high cost of living, as these costs ultimately fall on producers making their goods less competitive. A high cost of living also depresses tourism, as people will choose to go to cheaper destinations.

Transitioning to export based growth is tough in today’s economic conditions, even when labor costs constitute a comparative advantage. This is due to a slump in global aggregate demand, particularly with Cyprus’s current trading partners—EU countries. The EU remains mired with high unemployment and recessions (which are currently hitting Cyprus particularly hard as well), meaning that finding markets for diversified exports would be difficult. The high unemployment (14.7%) and recession conditions (-3.3% GDP growth Q4 2012) mean that Cyprus cannot rely on its domestic markets to buy its goods either.

For these reasons, Cyprus has been reluctant to admit that it must abandon its unsustainable reliance on the financial sector. Cyprus tried to secure an EU bailout by imposing a tax on banking deposits—a measure that Cypriots forcefully rejected. It seems that ultimately Cyprus will have to agree to spare small depositors (average citizens) and force large depositors (who are often foreigners who go to Cyprus as a tax haven) to take a large “haircut”. This would undermine confidence in Cyprus’s banking sector, leading to capital flight.

Cyprus could impose capital controls to prevent capital flight, as Iceland did in a similar situation. This, along with uncertainty of Cyprus’s future in the EU, could mean less FDI (uncertainty is a huge deterrent to investment, especially in the case of a potential EU-exit) which Cyprus will need to diversify its economy due to high levels of debt (84% GDP as of Q3 2012) and high borrowing costs (7% interest rates on long term bonds).

Cyprus is currently at a crossroads, a point summarized nicely by Paul Murphy at FT Alphaville:

“Big depositors in Cypriot banks stand to lose circa 40 per cent of their money here, which has drawn plenty of fury and veiled threats from Russia.”

“Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable.”

So how are Cyprus’s prospects for economic diversification? Actually, this is a potential bright spot in an otherwise dismal picture (for data, see end of the post):

Cyprus has increased its spending, per person, at all levels of schooling over recent years. There has also been a shift to more advanced technological manufacturing, which could be a growth industry (High-technology exports as % of manufactured exports have risen from around 4% in 1990 to close to 40% in 2010). Energy production, specifically a natural gas field adjoining the Cyprus-Israel border, has been discussed as a potential growth sector.

The problem is such exploration requires large upfront costs and profits will not be realized for at least a few years. Given Cyprus’s high borrowing costs, an immediate bailout is needed—Cyprus simply cannot afford to wait for its economy to diversify, even if it was able to secure the funding needed explore it’s gas fields and / or avoid a Euro Zone exit.

Luckily, Cyprus has been laying down the seeds of economic diversification, but those seeds are not ready to sprout. Economic diversification will be painful, based on the composition of Cyprus’s labor force (agriculture 8.5%, industry 20.5%, services 71% (2006 est.); presumably a large portion of people in the services sector work in financial services).

Compounding the problem; “There’s still a real estate bubble to implode, there’s still a huge problem of competitiveness (made worse because one major export industry, banking, has just gone to meet its maker), and the bailout will leave Cyprus with Greek-level sovereign debt.”

Cyprus needs the troika (IMF, ECB, and EC) to provide emergency liquidity to allow its economy time to diversify. There will inevitably be some growing pains—hopefully harsh austerity is not imposed as a condition for receiving these loans, although recent history suggests it will be. Some internal devaluation will be needed to make Cypriot wages competitive again—something that is politically and socially undesirable (as wages tend to be “sticky”) but an inevitable consequence of losing control of monetary autonomy (being in the EU, Cyprus cannot devalue it’s currency to increase export competitiveness)

Cyprus has been investing in human capital, and already has the infrastructure for export based growth through its advanced system of ports, what is needed is stimulus spending to help mobilize Cyprus’s factors of production away from the financial sector.

Just like a child who knows he must do something he doesn’t want to do, Cyprus initially faced it’s unfortunate reality by trying to return to its security blanket—the financial sector. Ultimately, Cyprus needs to be weaned off the teat of the financial sector—even Russia, the biggest loser if large depositors take a loss, has stated it will not extend financing to Cyprus until it secures troika financing (Cyprus pursued Russian financing as an alternative to a troika bailout, presumably to allow it continue with its unsustainable banking practices, in exchange for preferential exploration rights by Russian firms of Cyprus’s natural gas fields. These talks thankfully did not bear fruit, as they would’ve moved Cyprus in the wrong direction; doubling down on an unsustainable financial sector while compromising its most obvious means of economic diversification–it’s natural gas reserves).

It is important to avoid a Euro Zone exit, as this would undermine investor confidence which is needed alongside troika loans to allow Cyprus to diversify its economy. Ultimately, investors will react favorably if Cyprus admits its financial sector is unsustainable and commits to economic diversification. A sustainable economic outlook will attract investment, especially in an industry as profitable a natural gas exploration, but also in other sectors due to low taxes (10% corporate tax rate in Cyprus–lowest in the EU, can help offset the current high wages in Cyprus and temper the social costs of internal devaluation).

Uncertainty and trying to hold onto an exposed unsustainable financial sector will drive away investors. Everybody can now see that Cyprus will have to force a “haircut” on large depositors. The sooner Cyprus “takes its medicine”, the sooner it can get on the path to sustainable economic development.

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Transparency Thursday: Is Your Heating Oil Company Stealing Your Money and Making You Sick?

Hey everyone. It has been an exciting week for me, starting my internship at the UNDP. Lots of great people there working on some of the most pressing issues facing the world today (and looking forward into the future).

As for the blogging schedule, it will be as follows: Transparency Thursday, Friday Economic Outlook, Saturday Conflict Watch. No more sports analysis for now, as I need a little personal time, and I feel that quality unbiased sports analysis is readily available from a number of sources.

Also, between all the topics covered here at NN, sports was always the one that didn’t really fit in with the rest. Maybe one day I’ll get back to it, and certainly if there is an important enough story in sports it can crack the Transparency Thursday rotation, but for the foreseeable future that will be the schedule.

Back to the story at hand; a recent report from the NYT highlighted a criminal suit brought against some of New York’s biggest heating oil providers for illegally “cutting” heating oil with recycled or waste oil. “…companies that in recent years have sold tens of millions of gallons of oil to New York City and New York State for schools, housing complexes, universities, hospitals and other buildings.”

“As part of the criminal investigation, the authorities on March 12 raided at least five heating oil businesses in and around the city, including a delivery company and several businesses that deal in waste oil and some that are licensed to recycle it.”

“The businesses that were raided last week as part of the criminal investigation included Statewide Oil and Heating in Brooklyn — a company that is among several that deliver oil for Hess and that until 2011 delivered for Castle — and four interrelated companies that deal in waste oil: County Oil Company and J. B. Waste Oil Company in Astoria, Queens; New York Oil Recovery Corporation in Brooklyn; and Paradise Heating Oil in Ossining, N.Y.

During the raids, investigators from several state, city and federal agencies — some wearing bright yellow head-to-toe protective suits — tested oil and seized computers, reams of records and other materials, carting away more than 100 boxes of documents from one company alone, according to officials and people briefed on the matter.”

The criminal case coincides with a civil case brought against two of New York’s largest private heating oil providers: “Several commercial and residential building owners filed the two lawsuits, seeking class-action status. One accuses Castle Oil Corporation, which describes itself as the largest independent fuel oil distributor in the metropolitan area, of defrauding customers by mixing its fuel with waste oil. The other accuses Hess Corporation, among the world’s leading energy companies, of delivering fuel oil blended with waste oil to its customers, but one of the lawyers who brought the suit said in court last week that Hess might have been victimized by a trucking company or companies that it hired to deliver oil.”

“Last year alone, Castle sold more than 20 million gallons of No. 4 and No. 6 fuel oil — the grades burned in older furnaces — to New York City agencies, an official said. The lawsuit claims it was mixed with waste oil, like motor oil that has been used and discarded, sludge residue from commercial boilers and other used oil and lubricants.”

“But Castle, in its court papers, argued that the lawsuit’s contention that it mixed its fuel with waste oil was based on a single test of one delivery that it made last year out of 108,000, and that the suit provides no details on who conducted the test or how it was performed.”

Selling recycled waste not only is cheating customers by selling them an inferior product, it also poses significant health and environmental risks:

“Burning waste oil in furnaces could present a significant environmental hazard, and if the accusations that the companies cut their fuel are correct, it would mean that dangerous amounts of toxic pollutants had been released into the atmosphere, experts said.”

“Robert F. Kennedy Jr. — a senior lawyer for the Natural Resources Defense Council, the president of Waterkeeper Alliance and one of the lawyers who brought the lawsuit against Castle — said the environmental impact of the company’s actions were stark.

‘Basically, that company has turned every boiler or furnace that it services into a toxic-waste incinerator, ’Mr. Kennedy said in an interview. ‘When you burn waste oil, there is a tremendous amount of not only benzene, toluene and xylene, which are known carcinogens, but in addition, there is an inventory of heavy metals that are extremely toxic, including mercury, lead, arsenic, cadmium, antimony and zinc.’”

First, I would like to address Castle’s claim that the suit “was based on a single test of one delivery that it made last year out of 108,000”. The way I see it, there are only two possible scenarios which make sense here.

A)     There was a false positive on this one test, meaning Castle is indeed being wrongfully accused.

B)      Castle has been mixing in recycled / waste oil into their heating oil—systematically. It makes little sense that one shipment would be “cut”, as the oil is likely processed in huge quantities.

Of course this is all speculation until more details come back on the failed test. But is logical to assume either none of the oil is cut or all of it is.

Secondly, we will address the difference in the two cases. Presumably, the civil case is brought based on evidence that these 2 companies (Castle and Hess) had been involved in the process of selling “cut” oil to private customers. Whoever purchased the oil would have to bring a civil suit against the private companies. If enough people were affected, the case could turn into a “class-action lawsuit”.

In a criminal case, the government brings action against a party.  If cut oil was sold to schools or other public institutions, then it would be a crime against society as a whole. The criminal case makes sense as the victim in this case would be the government and ultimately the taxpayers. Add in the elements of environmental and healthcare concerns, which are regulated by the government, and a strong criminal case begins to form.

These two cases are both in early phases, so we will have to stay posted to see what comes of them. There are moral and ethical, as well as legal implications for misleading customers. The negative publicity from even being under investigation is likely already hurting these companies. Factoring in potential health and environmental degradation, it would not be surprising if ultimately these companies were forced to pay huge fines. Additionally, I would not be surprised to see stricter industry oversight in the future.

As the price of oil has risen, it seems the quality from some providers may be going down. All the most reason for people to consider more environmentally friendly and transparent forms of energy, such as geothermal and solar.

 


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Transparency Thursday: Deriving the True Cost of “The War on Terror”

The “War on Terror” has been costly in a number of ways. The first thing we think of when we think of the cost of any war is the human death toll. The total number of deaths for U.S. military personnel is estimated at 6,518 . When considering casualties (deaths and wounded soldiers), that number balloons to 48,430. This means, according to estimates, a whopping 41,936 soldiers returned to the U.S. wounded from battle (physically or psychologically).

The number of deaths of indigenous people resulting from “The War on Terror” (which included military intervention in Iraq, Afghanistan and Pakistan) is estimated to be between 272,000 to 329,000.

From a death toll standpoint, the Americans escaped relatively unscathed. According to these numbers, there were 42 foreigner deaths to every American soldier killed. Not to discount those brave men and women who lost their lives fighting in “The War on Terror”, but it was historically one of the least deadly wars in U.S. history (in terms of the total % of U.S. population killed, .002%, and U.S. deaths per day, 1.72).

Human life is the hardest cost to quantify, because there is no numerical value that can be ascribed to a person’s life. Surely, more money was invested in each American soldier that died than in each Middle-Easterner killed, as the U.S. invests more in human capital (education, healthcare) and soldier training than the average Iraqi, Afghani, or Pakistani receives. But many of those killed in The War on Terror were innocent men, women and children. How do you value a life? Based on a person’s skill, or their age, or what they could have accomplished? The answer is that there is no answer, every death is personal (to a family / community), and leaves us wondering “what if”. The U.S. compensates families as best it can for those lost in war (although it can never bring that person back), whole most of the people who had loved ones die at the hands of U.S. soldiers receive nothing and are left trying to pick up the pieces of their shattered lives.

Compared to the human cost, the dollar value of war is relatively straightforward:

“The 2011 study said the combined cost of the wars was at least $3.7 trillion, based on actual expenditures from the U.S. Treasury and future commitments, such as the medical and disability claims of U.S. war veterans.

That estimate climbed to nearly $4 trillion in the update… the costs left out trillions of dollars in interest the United States could pay over the next 40 years.

The interest on expenses for the Iraq war could amount to about $4 trillion during that period, the report said.”

If “The War on Terror” ended today, the bill could total 8 trillion dollars when future interest payments and veterans benefits are considered. To put that in perspective, the U.S. national debt clock currently reads $16.7 trillion. Of all the debt the U.S. government owes, a little less than half of it is due to “The War on Terror” (and one has to wonder how much of the unknown cost of the war is included in the “debt clock” figure, and if that figure should not be adjusted higher as more information on the monetary cost of the war becomes available).

What is less straightforward is the social cost of “The War on Terror”. Since the fighting occurred overseas, everyday U.S. life was generally uninterrupted. Those in the Middle-East were not so lucky:

“Excluded [from the 272,000 to 329,000 estimate] were indirect deaths caused by the mass exodus of doctors and a devastated infrastructure, for example…”

“The war reinvigorated radical Islamist militants in the region, set back women’s rights, and weakened an already precarious healthcare system, the report said. Meanwhile, the $212 billion reconstruction effort was largely a failure with most of that money spent on security or lost to waste and fraud…”

That is not to say that there was no social cost for the U.S. As the above numbers indicate, an estimated 6,500 soldiers died in the war, while an estimated 42,000 more were considered casualties of war. The families of the deceased must be compensated, while those lucky enough to be alive face the challenge of living with a physical or psychological handicap. Those lucky enough to escape with their lives and without injury must still receive the benefits they are entitled to, and these numbers add up over time:

“The report also examined the burden on U.S. veterans and their families, showing a deep social cost as well as an increase in spending on veterans. The 2011 study found U.S. medical and disability claims for veterans after a decade of war totaled $33 billion. Two years later, that number had risen to $134.7 billion.”

As forces are pulled out of Afghanistan, we can only expect that number to rise exponentially. So now that we have a rough idea of the human, social, and dollar costs of war, we must ask ourselves “why did we do this?”  To that question, there is unfortunately no good answer.

The U.S. invaded Iraq in 2001 in response to the September 11th attacks on the World Trade Center. The rationale behind this invasion was that Saddam Hussein had “weapons of mass destruction”. Over time, this claim has been proven false.

When France began involvement in Mali, and while President Obama mulls over his options in Syria, it would be prudent to heed this warning (which I have stated before): be cautious of anybody trying to sell a quick and painless military intervention:

“‘Action needed to be taken,’ said Steven Bucci, the military assistant to former Defense Secretary Donald Rumsfeld in the run-up to the war and today a senior fellow at the Heritage Foundation, a conservative Washington-based think-tank.

Bucci, who was unconnected to the Watson study, agreed with its observation that the forecasts for the cost and duration of the war proved to be a tiny fraction of the real costs.

“If we had had the foresight to see how long it would last and even if it would have cost half the lives, we would not have gone in,” Bucci said. “Just the time alone would have been enough to stop us. Everyone thought it would be short.”

Due diligence must be taken more seriously. The estimated dollar costs of war fail to take into account the human and social costs, and even still tend to be overly optimistic. The price of fanning the flames of hatred in Islamic countries has also yet to be fully realized.

Whenever there is a question of domestic spending in the U.S., a long debate ensues, the specter of “moral hazard” is evoked, and quick action rarely takes place (if at all). Why then were our same tax dollars spent so liberally on these unneeded wars?

Is this what President Eisenhower was referring to when he famously warnedwe must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex”? A future where military spending was out of control, where money was spent on defense without proper due diligence while simultaneously taking money away from crucial domestic programs? I would say it certainly is; military spending accounted for 24% of the 2012 Federal Budget (education accounted for 4%). Eisenhower made this famous warning in his farewell address in 1961, yet it seems that over 50 years later we still have not heeded his words.

What we see now is people saying we didn’t know what we thought we knew, both in terms of the duration of the war and the reason for invading in the first place (weapons of mass destruction). Would a misappropriation of trillions of dollars on domestic programs be tolerated? Of course not. We should therefore take this as a lesson learned and reconsider how the U.S. intervenes in foreign affairs.

I have argued for a substantial downsizing of U.S. D.o.D. spending, with some of the money being reallocated to the D.o.S. (and to USAID specifically, to tackle the humanitarian roots of conflict which provide breeding grounds for terrorist activities), and the rest of the money going to underfunded domestic programs (or paying down the deficit).

Other countries do not want our help in the form of military intervention. While the costs of “The War on Terror” were much higher than initially believe, the benefits have been much lower (and in time may prove to be non-existent). The U.S. holds little sway over Iraqi policy since we pulled out in 2011, and recently Afghani President Hamid Karzia has taken up anti-American rhetoric to prove he is not a puppet of the west as the U.S. begins winding down its military efforts in Afghanistan.

Hopefully a lesson (albeit a costly one) has been learned. You cannot impose democracy through war. Democracy must occur organically through a process of empowering the citizens of a country. Less money, spent more carefully through the D.o.S., would go a longer way in achieving the goal of creating strategic regional allies.

We must also work more closely with existing strategic regional allies (in the Middle East, Turkey, Egypt, and Saudi Arabia come to mind) and our allies in Europe and around the world, to ensure a multilateral approach is taken when intervening in another country. This would reduce both the high (monetary) costs and  anti-American sentiment associated with unilateral U.S. military intervention. It should also increase the meager benefits that have come to define “The War on Terror” by creating lasting allies instead of simply running costly “babysitting” campaigns.

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Economic Outlook: Ryan’s “Path to Prosperity”, But For Who?

Yesterday, Paul Ryan unveiled his budget proposal for 2014, titled “The Path to Prosperity”. Instead of taking his Vice Presidential defeat as a sign that America rejects his fiscal doctrine, Ryan has doubled down on his ideas.

A common criticism of Ryan’s plan during the Presidential campaign was that he never specified how he would achieve a balanced budget, but merely said that cuts will equal this amount, and without raising taxes we will have a balanced budget in 10 years.

The plan is now public domain, and it is safe to say “the devil is in the details”. Here are some highlights of the Ryan proposal:

  • Repeal the Affordable Care Act
  • Cut spending on Education, R & D, cap Pell Grants
  • Cut funding for a trans-American high speed rail and other infrastructure improvements
  • Turn Medicare into a voucher program (ensuring it is underfunded for those with serious chronic conditions)
  • Re-instate the work requirement for Welfare
  • Reduce spending on welfare programs, such as SNAP (food stamp programs)
  • Maintain current high levels of defense spending
  • Does not address the issue of Social Security spending
  • Create a two-bracket tax-system: Reduce top tax rates to 25% (from 39.6), make the lower rate 10% (no more people with 0 or negative tax rates).
  • Reduce the corporate tax rate to 25%, presumably lower capital gains taxes, repeal the Alternative Minimum Tax
  • No additional revenue through closing tax loopholes

The only thing I agree with is Ryan’s assertion that welfare should have its work requirement reinstated. However, this can only occur once unemployment reaches a certain level; you cannot tell people they need to work to receive welfare payments if that work does not exist. By cutting discretionary spending, there will be less government jobs, and the private sector does not seem to feel any need to increase hiring anytime soon despite record profits, so this is really a squeeze on those “takers” that the G.O.P. loves to hate. (Also, this provision was only intended to be temporary as the economy recovers, so the one provision I agree with in Ryan’s budget is not exclusive to Ryan’s budget).

Everything else amounts to class warfare. Cutting spending on education will hurt those who rely on public education (and make Obama’s pre-school / child care programs more difficult to fund, making it harder for lower income workers who cannot readily afford personal child-care). Repealing the Affordable Care Act, reducing Pell grants, and reducing Welfare payments will all disproportionately affect the poorest Americans.

The only discretionary programs that Ryan does not think needs to be cut are defense. This is an odd position, as defense spending accounts for whopping 24% of the 2013 Federal budget (for comparison sake, education (4%) and welfare (11%), do not even combine to come close to defense spending). Yes we have a spending problem, a military spending problem (and social security and medicare need to be overhauled in the long run, but that has nothing to do with getting the American economy producing at potential in the short run), yet somehow the fiscal conservative Ryan found cuts in every other program other than defense.

https://chart.googleapis.com/chart?cht=p3&chs=600x200&chf=bg,s,e8e8ff&chd=t:23,24,4,24,11,2,3,1,3,7&chl=Pensions%2023%|Health%20Care%2024%|Education%204%|Defense%2024%|Welfare%2011%|Protection%202%|Transportation%203%|General%20Government%201%|Other%20Spending%203%|Interest%207%&chtt=Budgeted%20Federal%20Spending%20for%20%20-%20FY%202013

 

On the other hand, Ryan wants to make the wealthy even wealthier. Reducing the tax rates for the wealthiest to 25% (their lowest level in decades), corporate and capital gains taxes (which all go almost exclusively to the richest Americans), will make the rich richer. By levying a minimum 10% tax rate on even the poorest Americans, those who will be squeezed by Ryan’s proposed cuts in discretionary spending will also see their tax bill rise. In effect, Ryan has financed lower taxes for the wealthy with higher taxes for the poor. He has replaced an Alternative Minimum tax for the wealthy with a minimum tax for many people who currently do not pay any taxes (due to being below a certain income threshold and having standard deductions erase their tax bill).

The Democratic plan is, as expected, much more in touch with what America needs:

“The Senate Democratic budget proposal, which began leaking out just as Ryan announced his proposal, would shrink budget deficits by $1.85 trillion over 10 years but not balance the budget. It is largely the work of Democratic Senator Patty Murray of Washington, who heads the Senate Budget Committee.

It would rely on an equal mix of spending cuts and tax hikes on the wealthy. At the same time, it would create a $100 billion fund for rebuilding crumbling roads and bridges, creating construction jobs.”

This budget relies on short term stimulus to reduce unemployment and get the economy working closer to potential output. It realizes the need to put idle labor to work, while reducing the deficit gradually through a combination of closing tax loopholes and spending reductions. It would keep hard fought victories such as the Affordable Care Act and higher taxes on the wealthy in place, while keeping the deficit at a sustainable level.

Paul Krugman recently wrote an interesting piece on cyclically adjusted deficits:

First, fluctuations in the deficit tend to be driven by the business cycle; when the economy slumps, revenues fall and some kinds of expenditure, like unemployment benefits, rise. You want to take out these “automatic stabilizers” when assessing the underlying state of the budget.”

Second, we don’t have to balance the budget to have a sustainable fiscal position; all we need is to ensure that debt grows more slowly than GDP”

The piece basically highlights that once you account for entitlement spending dropping and GDP increasing as the economy recovers, we already have a sustainable fiscal outlook. The “need” to balance the budget in 10 years is made up, and the benefits of doing so questionable at best (and non-existent at worst). But the social and economic costs, both in the short run and long run of Ryan’s proposal, are real, and they are high.

So when you hear about Ryan’s “Path to Prosperity”, ask yourself who is it really a path to prosperity for? Is it a path to prosperity for those who need help getting there, or those who are already prosperous? Will it increase of decrease inequality and social immobility that has come to define this country?

I will let you draw your own conclusions, as the two plans are essentially the same as they have been since the election.  Obama has recently conceded that a deal may not be able to be reached, that the sides may be too ideologically opposed. This would be unfortunate, but it also is starting to seem like a more and more realistic outcome. “The Sequester” looks mild compared to Ryan’s alternative, and unless the GOP is willing to move considerably from this proposal, it is unlikely a deal will be done until after 2014 congressional elections.

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Conflict Watch: Obama Gets Tough on Chinese Cyber-Attacks

The Obama administration ramped up its rhetoric yesterday, calling out China for the first time by name to stop its cyber-attacks “and agree to ‘acceptable norms of behavior in cyberspace.’”:

“The White House, Mr. Donilon [Obama’s national security advisor] said, is seeking three things from Beijing: public recognition of the urgency of the problem; a commitment to crack down on hackers in China; and an agreement to take part in a dialogue to establish global standards.

“Increasingly, U.S. businesses are speaking out about their serious concerns about sophisticated, targeted theft of confidential business information and proprietary technologies through cyber-intrusions emanating from China on an unprecedented scale,” Mr. Donilon said in a wide-ranging address to the Asia Society in New York.”

Just for comparisons sake, here’s what Obama said in his State of the Union address:

“America must also face the rapidly growing threat from cyber attacks.

Now, we know hackers steal people’s identities and infiltrate private e-mails. We know foreign countries and companies swipe our corporate secrets. Now our enemies are also seeking the ability to sabotage our power grid, our financial institutions, our air traffic control systems.

We cannot look back years from now and wonder why we did nothing in the face of real threats to our security and our economy. That’s why, earlier today, I signed a new executive order that will strengthen our cyber defenses by increasing information-sharing and developing standards to protect our national security, our jobs, and our privacy.”

So the Obama administration is certainly focusing more specifically on China, after mounting evidence that the vast majority of cyber-attacks come from a single building in China, which houses Chinese military activities.

It is good that the Obama administration is taking a tougher stance on China. If you remember back to the 2012 presidential campaign season, Obama was generally seen as “soft on China” compared to Mitt Romney, who was “tough on China”. But like most of Mitt’s ideas, his ideas on China we’re outdated. As I highlighted in a previous post, there is no “being soft” or “being tough” on China. China is one of our largest trade partners and an increasingly important partner in issues that require global coordination. Romney wanted the U.S. to be harder on China for currency manipulation, which is simply no longer a legitimate issue.

We must work with China, and that means picking our battles. We need China to come together and work on global environmental and security issues. China has done a good job so far dealing with its wayward ally North Korea, agreeing with the U.N. to strengthen sanctions following North Korea’s third nuclear test this past February.

China must also play fair in trade relations. Lack of transparency makes it difficult to determine when China is “dumping” goods (or over-subsidizing certain goods past what is considered acceptable by international standards) into other countries and when it is simply taking advantage of a more efficient production process. Luckily the W.T.O. exists to handle such trade disputes, so the U.S. and China do not have to have a direct political face-off when addressing such issues (there is an impartial dispute settlement process).

But cyber-attacks, either perpetuated by or simply ignored by the Chinese government, are unacceptable:

“The nation’s top intelligence official [James R. Clapper Jr., the director of national intelligence] warned Congress on Tuesday that a cyber-attack could cripple America’s infrastructure and economy and suggested that such attacks pose the most dangerous immediate threat to the United States, more pressing than an attack by global terrorist networks.”

America is generally insulated by physical attacks due to geography and military technology. 9/11 also served as a wakeup call, leading to much stricter counter-terrorism security measures. America is a safer place today from physical attacks, but remains vulnerable to cyber-attacks.

Safeguarding American economic and infrastructure information will come to be a defining issue in Obama’s legacy. As Obama said in his State of the Union address, “we cannot look back years from now and wonder why we did nothing”. Countering cyber-attacks will take a mixed approach of better security at home and tougher penalties to deter those who would seek to steal our intellectual property / national security secrets.    

This also highlights why Obama was prudent in not addressing China as a currency manipulator. Chinese-American relations are always a sensitive matter; had Obama taken a hard stance on Chinese currency manipulation, he would have used a considerable amount of diplomatic capital on a non-issue, and would not have been able to be so assertive on the much more important issue of cyber-security.

Getting tough on China is the right thing to do, as long as we’re getting tough on the right issues.

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