Corruption thrives in a globalised world

Has corruption become more common? Or simply easier to expose

Gideon Rachman



Remember the Brics? When the concept was first launched by Goldman Sachs in 2001, it was a handy acronym to describe the world’s most dynamic emerging economies. There were always sceptics who questioned just how much Brazil, Russia, India and China have in common. Those doubts only grew when South Africa joined the club.

But it turns out that the Brics do have something in common after all — corruption. In all five countries, popular rage about graft is at the very heart of politics. And because these countries are increasingly important to the world economy, their corruption problems have global implications.

Both Brazil and South Africa have seen presidents forced out of office by corruption scandals — with Jacob Zuma compelled to resign in South Africa this year, and Dilma Rousseff being impeached in Brazil in 2016. In Russia, the ruling United Russia party is widely known as the “party of crooks and thieves”. The rise to power of Narendra Modi was fuelled by his pledge to crack down on corruption among the elites. The Indian prime minister has since taken the drastic step of abolishing about 80 per cent of the country’s currency, in an effort to squash the black economy. In China, President Xi Jinping’s anti-corruption drive has seen more than 100,000 officials arrested. Meanwhile, Chinese exiles have spread online allegations that corruption extends into President Xi’s inner circle.

High-profile corruption scandals are not confined to the Brics. This month Mariano Rajoy was forced to resign as prime minister of Spain after seven years in office, following a scandal in his political party. And last month Malaysia’s ruling party lost power for the first time since the 1950s — after allegations that the prime minister, Najib Razak, had embezzled vast sums.

Corruption has always existed — and it has never been popular. But the frequency and political impact of corruption scandals seem to be growing all over the world. So has corruption become more common? Or has it simply become easier to expose? The answer seems to be that both things are happening simultaneously.

The globalisation of business and finance opened up opportunities to make corrupt profits in fast-growing emerging economies. Industries that often need official involvement, such as natural resources and infrastructure, are particularly lucrative targets. There are contracts to be awarded and development projects that need official approval. And the money for bribes can always be deposited offshore.

But such malpractice can be exposed. Strong, independent prosecutors and judges such as Brazil’s Sérgio Moro and South Africa’s Thulisile Madonsela have done heroic work in driving forward anti-corruption investigations. Press freedom in Brazil and South Africa has also been critical in keeping up the pressure on corrupt politicians.

Even when the national media are muzzled, the internet provides an alternative medium for airing corruption allegations. The “Panama Papers”, which detailed the offshore financial affairs of many prominent politicians, was the result of an international journalistic project and based on hacked documents.

New forms of international co-operation and transparency have also made would-be crooks more vulnerable to exposure. Changes in the Swiss laws on banking secrecy — made under pressure from the US — were crucial to allowing Brazilian prosecutors to uncover the proceeds of corruption. International investigations by the Swiss and Americans also kept up the pressure on Malaysia’s Mr Razak.

But conquering corruption is not something that can be achieved with a single cathartic effort. Lasting progress requires strong institutions that can survive changes in the political climate; independent courts and prosecutors with training and resources; a press that cannot easily be bought off, jailed or killed; efficient civil servants who cannot be fired at the whim of a corrupt boss. Remove any of those elements and corruption seeps back into the system.

Prosecutors in Brazil are haunted by the example of the “clean hands” investigations in Italy in the early 1990s. These swept away many powerful figures — and were seen as a watershed. But within a few years, Silvio Berlusconi, who epitomised shady business practices, had been elected prime minister.

Searching for examples of lasting cultural change in the battle against corruption, Brazilian prosecutors have lighted upon the example of Hong Kong under British colonial rule and the establishment of an Independent Commission Against Corruption in 1974. Even that achievement may now be in doubt, with growing fears that the independence of Hong Kong’s institutions is being compromised by pressure from mainland China.

The concerns over Hong Kong might give pause to those who interpret the eruption of scandals all over the world as evidence that the global battle against graft is being won. An alternative theory is that the growing economic power of countries such as China, India and Russia may be spreading corrupt practices more widely. The US, EU and UK pride themselves on their sound institutions. But western bankers, lawyers, real estate agents, PR firms (and perhaps even presidents) are often all too willing to share in the proceeds of corruption.


The Latest Chapter in the European Migration Crisis


By Jacob L. Shapiro

 


When 630 people were rescued by a ship called the Aquarius off the coast of Libya last weekend, little did they know their plight would set off a series of events that would deepen the divisions in an already fractured Europe. Within less than a week of the migrants’ rescue, the German government appeared ever closer to collapse, and the French and Italian governments were engaged in a diplomatic spat. The story of the Aquarius will now become part of European history, another chapter in the migration saga that began with German Chancellor Angela Merkel’s open-door refugee policy in 2015 and whose end seems much further away today than it did just a week ago.

‘Close the Doors’

On June 10, as the Aquarius approached Italian waters, the Italian government refused to allow the ship to dock at its ports. The country’s new populist government, which came to power in large part due to the country’s frustration with being the frontline in the migration crisis, used the Aquarius to demonstrate that it was following through on its promise to get tough on illegal immigration. Matteo Salvini, Italy’s new interior minister, took to Twitter to make his government’s position abundantly clear: “Close the doors.”


On June 11, with the Aquarius stranded off the Italian coast, Germany’s struggle over its own immigration policy was intensifying. Merkel rejected Interior Minister Horst Seehofer’s proposal to turn away at the border any refugee who had applied for asylum in another European country. Upon learning of Merkel’s decision, Seehofer canceled a presentation of his 63-point plan to deal with the migration problem scheduled for the following day. A spokeswoman for the German Interior Ministry downplayed the cancellation, explaining that some details simply needed to be ironed out, but she also declined to announce a new date for the presentation.

On June 12, France entered the fray. French President Emmanuel Macron blasted the Italian government as irresponsible and cynical for blocking the Aquarius from Italian ports. The Italian government responded the following day by canceling a meeting in Paris between the French and Italian economy ministers. Italy also summoned the French ambassador and demanded an apology from Macron. Italy’s new prime minister even called Macron’s stance “hypocritical” and decried French self-righteousness over an issue Italy has had to manage with little support from the EU. Meanwhile, the Aquarius set sail for Spain, which granted the ship permission to dock.


On June 13, Seehofer declined to attend a summit in Berlin held by Merkel, and instead met with Austrian Chancellor Sebastian Kurz. Seehofer explained that the move was not a snub but rather had to do with the presence of a journalist who had compared him to the Nazis. But it was Kurz who stole the headlines on this day, as he called for an “axis of the willing against illegal migration” to be formed between Austria, Germany and Italy. Seehofer added that he had spoken to his Italian counterpart the previous day and that they were in “full agreement” over how to secure European borders. None of the men involved seemed concerned about the memories an axis involving Austria, Germany and Italy might dredge up.

Meanwhile, Macron’s government attempted to patch things up with Italy. Macron didn’t issue an apology, but he did call Italian Prime Minister Giuseppe Conte and insisted that he didn’t want to offend Italy. In addition, France’s European affairs minister stressed the need for dialogue and directed France’s criticism away from Italy. Instead, the minister blamed Europe for turning its back on Italy and insisted that Europe needed a much better way of dealing with migrants. This appeared to be enough for the Italian government: Conte pledged his solidarity with Europe in dealing with the issue and is scheduled to meet with Macron on June 15.

On June 14, just when it seemed the worst had passed, German media reported that Merkel’s government might collapse. Tension between her Christian Democratic Union party and coalition partner the Christian Social Union, led by Seehofer, has been brewing over Merkel’s immigration policies since 2015. But German newspaper Augsburger Allgemeine, citing multiple CSU sources, reported that Seehofer raised the possibility during a party meeting of defying Merkel, which could split the governing coalition. German papers are now speculating about a potential vote of no confidence should the spat go on.

A Dangerous Bet

To recap, the three largest and most important countries in the European Union – Germany, Italy and France – are now divided, internally and externally. France continues to push for stronger EU reforms and is tired of waiting for Germany to sign up; in fact, France may now see that Germany is too weak to protest and that it must take the lead. Italy’s new government is anxious to follow through on its campaign promises and is both cautious about and intrigued by the shift in power between Europe’s two heavyweights. Germany seems lost – at worst, it’s on the verge of a government collapse, and at best, it’s so inwardly focused that it can hardly play the leadership role it used to. And all this because the migration issue, now three years old, remains unresolved. A single ship with 630 refugees has laid the contradictions bare for all to see.

This, of course, is not the only problem facing Europe today. The United Kingdom, which voted for Brexit in no small degree due to Germany’s lectures on London having to accept its fair share of refugees back in 2015, finds itself in chaos over its next steps. Germany’s foreign minister gave a rousing speech about a “post-Atlantic Europe” and seems more concerned with pushing back against perceived American slights at Germany than at coming to terms with the friction in his own government. The Balkans seems primed for even more disruption, with Russia this week announcing it wants to be more engaged in the region and the Serbian president saying he was warned that NATO would treat any Serbian incursion into Kosovo as a hostile act.

But most important, and buried under the headlines, is the fact that the European Central Bank announced that it will phase out its bond-buying stimulus program by the end of the year – a program that has staunched the bleeding from the 2008 financial crisis but also exacerbated economic inequality throughout the eurozone. In both Europe and the United States, economies are finally returning to normal after a decade of being coddled by policymakers. Now, the training wheels are about to come off, and policymakers are betting that the economic recovery is stable enough to keep going on its own.

That’s a dangerous bet, especially considering that the economic recoveries in Europe and the United States are fragile at best. The U.S. has rarely gone this long without a cyclical recession. But as the Aquarius has shown, Europe has plenty more problems to contend with, even if the optimists are right about the economy. Ironically, at the center of all this is France, the new de facto leader of Europe. Which brings to mind the old maxim: Be careful what you wish for. You just might get it.

How World Cup Sponsorship Mirrors Global Economic Shifts

fifa-2018


 

There’s been dramatic shift in the country origin for World Cup sponsorship in recent years. A third of the top sponsors are now from China, versus none before 2014. Kalin Anev Janse (@kaanev), secretary general and also a member of the management board of the European Stability Mechanism, the Eurozone’s lender of last resort, explains how the changes mirror those in the world economy. (This article reflects his personal opinion.)

As a Dutch Bulgarian living in Luxembourg, I thought the 2018 World Cup would be a boring sports event. The three countries I identify with – the Netherlands, Bulgaria, and Luxembourg – played in the same group. So statistically I was hopeful that at least one of them would qualify. But somehow, not one made it to Moscow. From that group, only France and Sweden qualified. My only comfort is that the three are in the good company of Italy.

I contemplated watching other sports events this summer, such as Wimbledon, where Bulgarian Grigor Dimitrov is one of the favorites, or the Women’s Hockey World Cup, which the Dutch might win again. But then, you can’t ignore half of humanity: the World Cup is by far the world’s most-watched sports event, viewed last time by more than 3.2 billion people.

Then I found that watching the World Cup was also interesting from a financial point of view, because the same global shifts in capital markets and in macro-economics I am observing in my job are now becoming visible in how the sponsorship of this event is changing.

winners


More Asia, less North America and Europe

Since 1982, the World Cup was won by a European country six times (twice by Germany, twice by Italy, once by Spain and once by France), and by a Latin American country (twice by Brazil and once by Argentina) three times. But in terms of the biggest sponsors, the geographic distribution looks quite different.

In 1986, four European companies supported the event, as well as four from North America and four from Asia. In the 1990s, there was a rapid increase in North American sponsorship, which then halted at the end of that decade. Even though European countries had been winning the tournament, European companies were backing away from the event. In 2018, only one sole European company was still pouring money into it.

origin-top-sponsors

China Replaces Japan as Top Asian Sponsor


If you belong to that one half of the world population watching the World Cup, you might already have seen this trend from the growing number of Chinese billboards around the pitch.

A third of World Cup top partners are now from China, a record for the country. Before 2014, not a single Chinese company was a sponsor. Within the last two installments of the event, there are now as many Chinese top sponsors as there are American.

It is also interesting to see that Chinese companies are replacing Japan as the top Asian sponsor. Until 2006, the Japanese represented the leading Asian brands at the World Cup. This time, they are completely absent.

If you’re not a football fan, it might surprise you that China is so active even without its national team qualifying for the tournament. China played in the World Cup only once, in 2002.

Asian-top-sponsors


So could the World Cup sponsorship serve as a proxy of future global economic shifts? More than you might think.

In previous op-eds (see links below), I have pointed to the fact that Asia is rapidly overtaking Europe and North America in relative economic power, a trend that will continue for the next decades. A prestigious World Cup sponsorship is a sign of Asia’s rising economic power. It puts a company eye-to-eye with some of the biggest industry giants – in front of an enormous and still growing audience. This year, 200 million more people will watch the World Cup than four years ago.

Composition-of-world-gdp


For now, Asia’s presence at the World Cup reflects its economic power more than its football prowess. Judging by the first results, Europe is still pretty good at football. But that might change. Asians love the sport, too. Most of the viewers of the World Cup 2014 were from Asia, and the number of fans is still growing. More than 1.5 billion people in Asia watched at least a minute of the World Cup in 2014, and more than 750 million watched more than 20 minutes. China has the most viewers: a quarter of a billion. With such a large audience, sponsoring the event by Chinese companies is a smart move. Even if the country has not qualified – yet.

Projected-Reach-by-Region


What’s Coming?


The President of China, Xi Jinping, is a big football fan. He has three dreams for China and the World Cup: participate, host and win. China is investing heavily in football schools and exchanges with European counterparts to help it excel at the game. The financial and economic foundations are already there; the infrastructure to get better football results is rapidly being built. With 1.3 billion people, there is a lot of talent to scout.

I really hope that China will one day qualify. Of course, I also hope the same for my beloved Dutch, Bulgarian, and Luxembourg teams. And the economic shifts that are evident in the sponsorship of the game notwithstanding, I will concentrate on the tournament this summer. Why? Because it is simply the most beautiful game in the world. Even if you don’t take part. If you don’t believe me, just ask one of the 3.4 billion people watching the World Cup 2018 right now.

Audience-Reach-Territory-2014
 


The Force Behind Europe’s Populist Tide: Frustrated Young Adults

Struggling to find jobs, and often living at home, younger generations are propelling antiestablishment parties to new heights of power

By Eric Sylvers


Giada Gramanzini moved back to her parents’ home in Naples last year while looking for work. Jobless young people are driving the antiestablishment political shift in Europe.
A youth revolt is upending Italian politics, and it could be a harbinger of things to come.

Western Europe’s largest antiestablishment government came to power earlier this month, driven largely by young Italian voters. Struggling with a persistent lack of job prospects over the past decade, they voted in droves for two parties in the country’s March 4 elections, the 5 Star Movement and the League, an anti-immigration party. 
The result laid bare a stark generation gap, with older Italians, who often have to support their grown children, continuing to vote for mainstream parties.


The same pattern appears across southern Europe, and the forces behind the divide show few signs of slowing. Almost 30% of Italians age 20 to 34 aren’t working, studying or in a training program, according to Eurostat, more than in any other European Union country. Greece is second at 29%, while Spain’s rate is 21%.

“Italy is collapsing and yet nothing has changed in this country for at least 30 years,” said Carlo Gaetani, a self-employed engineer in Puglia. Ten years ago, when he was in his early 20s, he voted for a center-left party that he hoped would push for economic development in southern Italy. When Italy descended into a crippling recession, he felt betrayed by the traditional Italian left-wing parties. He has seen friends struggle to find jobs, and said his own business opportunities are limited to the stagnant private sector, because commissions for the public sector are usually awarded to people with connections he doesn’t have.

Mr. Gaetani, now 33, voted for 5 Star in the 2013 election, a choice he repeated in March with more conviction. “5 Star is our last hope. If they also fail, I think I’ll stop voting,” he said.


SHORT-TERM PROSPECTS
Younger adults who do find employmentmust often accept short-term contracts.

Share of adults age 15-25 with temporary contracts* in 2017

*Generally lasting one year or less.

Source: Eurostat




The employment rate of Italians under 40 fell every year from 2007 to 2014 before flatlining over the past three years, according to Eurostat. Meanwhile, it has risen every year for those between 55 and 64 years, in part due to an increase in the retirement age.

The number of Italians under 34 in absolute poverty—defined as being unable to afford basic goods and services—more than doubled between 2010 and 2016 to 10%, according to the Italian National Institute of Statistics, or Istat. For those over 65, it dropped to 3.8% from 5.4%.

One major problem in southern Europe is a dual employment system in which people with open-ended contracts—often older workers—enjoy ironclad job security and benefits. At the same time, during the downturn, employers began to use more short-term contracts, generally lasting from one month to a year. In Italy, 62% of contracts for those under age 25 were short-term in 2017, up from a quarter in 2000.

Italian policy makers introduced the contracts in the 1990s in part to help young people enter the labor force as a step to permanent work. Employers used them to avoid the cost and hassle involved in firing people. Echoing labor overhauls elsewhere in Europe, Italy introduced a major revamp of work rules in 2014 and 2015 that tried to get employers to use more open-ended contracts, including billions of euros in tax breaks. The most generous breaks expired in 2016.

OUT OF WORK
In Southern Europe, younger adults are still struggling a decade after the financial crisis hit.

People age 20-34 not employed, in school or in a training program

Source: Eurostat



The efforts didn’t have the desired effect of creating structural change to the labor market that would wean employers off using short-term contracts. In 2016, when the tax breaks were in place, only 13% of new hires were on short-term contracts. Last year, more than four out of five new hires were on short-term contracts, according to Istat.

The 5 Star Movement has lured millions of young voters with promises to roll back new labor rules, give the unemployed and poor a so-called universal basic income of €780 ($905) a month, and abolish unpaid apprenticeship contracts. Its leader, Luigi Di Maio, was a 26-year-old university dropout who lived with his parents when he was elected to parliament in 2013. Today, he is a deputy prime minister.

The League also made canceling the recent labor revamp a central part of its electoral platform.

Italy’s economic problems played into young voters’ sentiments about immigration during the campaign as well, one of the animating drivers of support for the League. “We can’t host all of Africa,” said Gianluca Taburchi, a 23-year old supermarket employee from Perugia who voted for the League. “We already have our own problems. We have lots of unemployment and unsecure jobs.”

Matteo Salvini, the leader of the League who became a deputy prime minister and interior minister in the new government, promised to return hundreds of thousands of migrants to their countries of origin. 5 Star, which straddles the line on many issues, spoke of stemming illegal immigration, but stopped short of calling for mass deportations.


Italian Prime Minister Giuseppe Conte, center, with Deputy Prime Ministers Luigi Di Maio and Matteo Salvini, at the Italian Parliament on June 6.
Italian Prime Minister Giuseppe Conte, center, with Deputy Prime Ministers Luigi Di Maio and Matteo Salvini, at the Italian Parliament on June 6. Photo: ettore ferrari/EPA/Shutterstock 




About 53% of Italians under 35 voted for the two parties combined, according to an Ipsos poll.

About 43% of Italians over 65 voted for legacy center-right and center-left parties, while only 28% of young Italians did.

Elsewhere, almost 40% of Spaniards under 35 said in an April poll they would vote for far-left Podemos and its political allies in a coming election. In Greece, more than 41% of those age 18 to 24 voted for Syriza in the 2015 election, six points more than the antiestablishment party got across all age groups.

Argyro Maltasoglou, 30, said she voted for Syriza in the 2015 election because she thought the upstart party would make radical changes, especially in terms of policies to help young people. Since graduating from college in 2013, she has been bouncing between short-term contracts lasting less than a year. She has been looking for a job since her short-term contract as a secretary in an Athens hospital expired in March.

The job paid €500 a month, the most Ms. Maltasoglou has earned so far. She has had to accept money from her parents to get by. “This isn’t what I dreamed of when I was studying,” she said. “I would like to have a family, but I wouldn’t dare to think about it now under these conditions.”

One exception to the generational phenomenon is the U.K.’s 2016 vote to leave the EU: 71% of voters age 18 to 24 voted for the country to remain in the bloc, according to a poll by YouGov. Only 26% of those 65 and over voted to remain.


Supporters of the League marched in a rally on Feb. 24.
Supporters of the League marched in a rally on Feb. 24. Photo: miguel medina/Agence France-Presse/Getty Images   
 
Studies following the Brexit vote showed that, in this case, young Britons valued the increased ease of working, studying and traveling abroad that EU membership brings. At the same time, many older voters viewed leaving the EU as an opportunity for the U.K. to better control immigration.

The pain in southern Europe reflects a feeling across much of the Western world that the younger generation will struggle to surpass their parents in wealth and security. Half of Italians who responded last year to an online survey on jobs site Monster.com said they thought they will earn less over their careers than their parents. 
Young Italians, who bore the brunt of the country’s protracted, triple-dip recession, still bear the scars that will affect their career prospects, homeownership and birthrates for decades to come.





Banks are reluctant to lend to people on short-term contracts, which has helped push up the average age of home buyers to 41.6 years in 2017 from 39.4 years in 2012, according to Fabiana Megliola, head of research for real estate group Tecnocasa. In 2017, 56% of home buyers in Italy were under 45, down 10 percentage points from five years.

The number of Italians getting married has fallen by a fifth over the past decade, according to Istat. In 2016, the last year for which data are available, Italian men got married on average at age 35 and women at 32, in both cases two years later than in 2008. Births hit an all-time low last year.





FAILURE TO LAUNCH

In Italy, economic woes have led many youngpeople to live with their parents and hold offon marriage.

Share of adults age 25-34 living with theirparents in 2016

Source: Eurostat



Number of new marriages in Italy

Source: Italian National Institute of Statistics



In a country with strong family ties, parents are stepping in to help adult children. They can often afford to help because they enjoy pensions that are the fruit of decades of generous retirement benefits. Italy spends more than 15% of its economic output on pensions, the most in Europe except Greece.

About half of Italians age 25 to 34 live with their parents, according to Eurostat, almost double the European average and more than in any other Western European country. The number has risen 3 percentage points in the past decade. And more than a third of Italians in their 30s get economic help from their parents or grandparents, according to a survey by agricultural industry association Coldiretti and polling firm Ixè.

Parties such as 5 Star could continue to win over more young voters if they are able to enact some of the pro-youth policies its leaders campaigned on. “I’m not interested in politics because nobody on either side [of the political spectrum] is doing much to help young people,” said Giada Gramanzini, a 29-year-old Italian university graduate. She hasn’t found a steady job since deciding not to renew a three-month contract as a full-time receptionist that paid her about $2.70 an hour. Last year, she moved back in with her retired parents and sent out more than 70 resumes before moving to New York last month to try her luck in another country.

In the March election she voted for a small pro-European party, in what she called a protest against the Democratic Party—the center-left party that ruled the past five years. She didn’t feel 5 Star was ready to govern.

Her father, Emilio, collects a good pension after working most of his career for the Naples municipal administration. Her mother, Daniela, began working full time at 20 and was employed by the city for several decades. She retired last year.

Giada Gramanzini with her father, Emilio.
Giada Gramanzini with her father, Emilio. Photo: Giovanni Cipriano for The Wall Street Journal 


Daniela worries about the late start Giada is getting on adult life. “How can you not be worried about your daughter if at 29 she still hasn’t found her way?” she asks. 

—Nektaria Stamouli and Jeannette Neumann contributed to this article.




Trump Trade War Is A Side Show

by: Alan Longbon

Summary

- Added together and compared with total trade figures the tariff cost is marginal.

- The trade war is more show than reality and designed to impress President Trump Rust Belt support base.

- Trump woos his Rust Belt support base while selling them down the river.
 
 
The purpose of this article is to show that the impact of tariffs compared with overall trade flows is very small, but the downside for President Trump could be disproportionately larger.
 
Despite being very small, the trade war hogs headlines and makes President Trump look like he is making progress against foreigners who have "unfairly" stolen American manufacturing Jobs.
 
Putting the Trade War in Perspective.
 
The chart below shows trade and tariffs between America's major trading partners.
 
 
 
The above information, plus China, is shown in the table below in terms of imports and exports between each land and the USA.
 
(Source: Trading Economics dot com plus author calculations for 2017)
 
 
The above information provides some perspective on the matter.
 
Except for China, the impact on US allies from the trade war is relatively minor at between one and five percent of total trade between the nations.
 
The actions against Canada, Mexico, and the EU are more bluff and bluster than a real threat to overall trade and prosperity. Though, no doubt catastrophic for specific companies and sectors of the economy. At the macro level, the trade war impact on these countries is a pinprick.

China is an exception in that the effect of the tariffs is potentially over 15% of total trade between the countries.
 
Foreign countries have taken the strategy of targetting some of their tariffs on products that come from parts of the USA where midterm elections are to take place this year. The purpose of this strategy is to damage Republican election chances and to weaken President Trump. The prospect of a hung Congress and Senate is a good way of dissuading the President from pursuing his damaging trade war strategy in the first instance. If the strategy is successful and the Republican power base is diminished with no majority in either the Congress or Senate, then it makes further trade war action harder to enact in the future.
 
President Trump's Trade War Strategy
 
President Trump is on record and repeats almost daily that the purpose of his trade war is to get a fairer deal for America from its trading partners. This is in view of the fact that America generally imports more than it exports and is running a current account deficit against the rest of the world as a result.
 
The US current account balance is shown in the chart below.
 
 
The numbers look large; however, when one compares the result as a percentage of GDP it again becomes a sideshow.
 
 
 
The rest of the world is content to exchange real goods and services for American dollar credits that are generally saved at the Federal Reserve in the form of Treasury deposits. As a monetary currency sovereign, America can create as many dollar credits out of thin air as it likes in return for real goods and services. The political problem is that the Federal Government does not use its sovereign currency creation privilege to make good the current account deficit with new Federal spending on the domestic economy.
The President's aim is to reduce the current account deficit and achieve a situation where trade with each country is more balanced.
 
The purpose of this strategy is to garner and maintain support from the poor, white, middle-aged, working-class Rust Belt voters who put the President in office at the last election.
 
To pander to this support base, the President now seeks to impose trade tariffs on foreign goods. This makes for big daily headlines, and the President is seen by his support base to be doing something for them.
 
The President must think that the political support he gains from his actions is of greater value than the damage that the trade war causes in real terms.
 
Actual Impact of President Trump's Trade War on His Support Base
 
While the President's trade war may be popular with his Rust Belt support base, it is making their situation worse.
 
The term “trade war” is used to describe a situation in which one country applies tariffs to imports from another country, and the other nation retaliates with tariffs of its own.
 
In some cases, there exists a situation where American goods face a more burdensome tariff than they get in return. Cars and trains are an example:
 
 
 
There is a case for such irregularities to be ironed out. Make this the focus. All tariffs are a form of income tax on the consumer and should be eliminated.
 
But, a “trade war” is different from a military war. In a military war, the enemy shoots at you, and you shoot at the enemy.
 
In a trade war, the enemy shoots at you and at itself, while you shoot at the enemy and at yourself.
 
With every nation shooting at other nations and at its own people, how do you “win” a trade war?
 
You don’t. All trade wars are lost because the cost base is made higher. Each nation has higher internal nominal costs and receives less real benefits in the form of goods and services.

The hypothetical purpose of a tariff is to protect local businesses from foreign competition. But a tariff hurts the entire economy.
 
One example: Taxing imported cars would raise the price of all cars because domestic car manufacturers would feel less pressure to hold prices down.
 
The two results - both adverse - would be:
  1. The entire American public pays more money so that the relatively fewer American car makers can receive more money. The philosophy of tariffs is for many to pay more so the few can receive more.
  2. Tax dollars are taken from the economy and sent to the federal government, which being Monetarily Sovereign, and not needing to receive dollars, destroys them. Reducing the money supply is economically recessive.
The arguments for any tariff generally fall into two kinds of goals:
  1. To protect vital industries from extinction. Consider, for instance, steel. Steel is a vital defense product for tanks and battleships, and if there ever were a military war, the nation with a monopoly on steel manufacturing would have a distinct advantage.
  2. To protect domestic jobs. Every industry that is depleted by foreign competition loses jobs.
Both types of protection = protecting vital industries and job protection - are reasonable goals, but neither needs to be costly to the economy. It is not necessary, or even wise, to “shoot” our own people, in order to protect them from enemy “bullets.”
 
Both goals of protectionism can be accomplished by our Monetarily Sovereign government via:
  1. Federal government purchases from domestic suppliers, even at higher than import prices.
  2. Federal tax breaks for the selected industries
  3. Direct federal cash subsidies to the selected companies.
A Monetarily Sovereign government has the unlimited ability to create its sovereign currency.
It can easily fund any sort of protectionism without tariffs, which has the added value of stimulating the economy instead of depressing the economy, as tariffs do.
 
The table above shows that US consumers will pay an additional $86.9B when they purchase imported goods with a new tariff on them. This is $86.9B that cannot be spent on other goods and services and has increased the cost of existing goods and services and is therefore inflationary.
 
$86.9B is almost 0.5% of GDP and might give the Federal Reserve cause to make a rate increase to stave off this inflationary effect. Then everyone pays more for credit as well.

This is where President Trump will be shooting his support base, the rest of America, and himself in the foot. $86.9B worth of financial damage per annum.
 
It will not take long for the poor, white, middle-aged, working-class Rust Belt voters to feel these additional costs, especially if the other nations are tailoring their reprisal tariffs to target this particular demographic.


Fall of the American Empire

By Paul Krugman


CreditDoug Mills/The New York Times



The U.S. government is, as a matter of policy, literally ripping children from the arms of their parents and putting them in fenced enclosures (which officials insist aren’t cages, oh no). The U.S. president is demanding that law enforcement stop investigating his associates and go after his political enemies instead. He has been insulting democratic allies while praising murderous dictators. And a global trade war seems increasingly likely.

What do these stories have in common? Obviously they’re all tied to the character of the man occupying the White House, surely the worst human being ever to hold his position. But there’s also a larger context, and it’s not just about Donald Trump. What we’re witnessing is a systematic rejection of longstanding American values — the values that actually made America great.

America has long been a powerful nation. In particular, we emerged from World War II with a level of both economic and military dominance not seen since the heyday of ancient Rome. But our role in the world was always about more than money and guns. It was also about ideals: America stood for something larger than itself — for freedom, human rights and the rule of law as universal principles.

Of course, we often fell short of those ideals. But the ideals were real, and mattered. Many nations have pursued racist policies; but when the Swedish economist Gunnar Myrdal wrote his 1944 book about our “Negro problem,” he called it “An American Dilemma,” because he viewed us as a nation whose civilization had a “flavor of enlightenment” and whose citizens were aware at some level that our treatment of blacks was at odds with our principles.
And his belief that there was a core of decency — maybe even goodness — to America was eventually vindicated by the rise and success, incomplete as it was, of the civil rights movement.

But what does American goodness — all too often honored in the breach, but still real — have to do with American power, let alone world trade? The answer is that for 70 years, American goodness and American greatness went hand in hand. Our ideals, and the fact that other countries knew we held those ideals, made us a different kind of great power, one that inspired trust.

Think about it. By the end of World War II, we and our British allies had in effect conquered a large part of the world. We could have become permanent occupiers, and/or installed subservient puppet governments, the way the Soviet Union did in Eastern Europe. And yes, we did do that in some developing countries; our history with, say, Iran is not at all pretty.

But what we mainly did instead was help defeated enemies get back on their feet, establishing democratic regimes that shared our core values and became allies in protecting those values.
The Pax Americana was a sort of empire; certainly America was for a long time very much first among equals. But it was by historical standards a remarkably benign empire, held together by soft power and respect rather than force. (There are actually some parallels with the ancient Pax Romana, but that’s another story.)

And while you might be tempted to view international trade deals, which Trump says have turned us into a “piggy bank that everyone else is robbing,” as a completely separate story, they are anything but. Trade agreements were meant to (and did) make America richer, but they were also, from the beginning, about more than dollars and cents.

In fact, the modern world trading system was largely the brainchild not of economists or business interests, but of Cordell Hull, F.D.R.’s long-serving secretary of state, who believed that “prosperous trade among nations” was an essential element in building an “enduring peace.” So you want to think of the postwar creation of the General Agreement on Tariffs and Trade as part of the same strategy that more or less simultaneously gave rise to the Marshall Plan and the creation of NATO.

So all the things happening now are of a piece. Committing atrocities at the border, attacking the domestic rule of law, insulting democratic leaders while praising thugs, and breaking up trade agreements are all about ending American exceptionalism, turning our back on the ideals that made us different from other powerful nations.

And rejecting our ideals won’t make us stronger; it will make us weaker. We were the leader of the free world, a moral as well as financial and military force. But we’re throwing all that away.

What’s more, it won’t even serve our self-interest. America isn’t nearly as dominant a power as it was 70 years ago; Trump is delusional if he thinks that other countries will back down in the face of his threats. And if we are heading for a full-blown trade war, which seems increasingly likely, both he and those who voted for him will be shocked at how it goes: Some industries will gain, but millions of workers will be displaced.

So Trump isn’t making America great again; he’s trashing the things that made us great, turning us into just another bully — one whose bullying will be far less effective than he imagines.


The Social Benefits of Fossil Fuels Far Outweigh the Costs

Inexpensive power enables technological marvels, and even global warming has positive effects.

By Joseph L. Bast and Peter Ferrara

     An offshore oil platform in Huntington Beach, Calif. Photo: lucy nicholson/Reuters 


As several cities continue their suit against oil companies, The People of the State of California v. BP, Judge William Alsup has boiled the case down to its pivotal question. In March he ordered the legal counsels of both parties to help him weigh “the large benefits that have flowed from the use of fossil fuels” against the possibility that such fuels may be causing global warming.

We sent the judge, and posted online, a 24-page document that answers his question. The benefits of oil, coal and gas are rarely acknowledged by environmental activists, who seek to regulate and tax these fuel sources out of existence. But an honest accounting shows that fossil fuels produce enormous social value that far outweighs their costs. 
First, fossil fuels are lifting billions of people out of poverty, and in turn improving health. “The most fundamental attribute of modern society is simply this,” writes historian Vaclav Smil in his 2003 book on energy: “Ours is a high energy civilization based largely on combustion of fossil fuels.”


Fossil fuels, and coal in particular, provided the energy that powered the Industrial Revolution.

Today, coal plants still produce most of the electricity that powers high-tech manufacturing equipment and charges mobile computing devices.


The alternative energy sources environmental activists favor are generally more expensive.

Energy economists Thomas Stacey and George Taylor calculate that wind power costs nearly three times as much as existing coal generation and 2.3 times as much as combined-cycle gas.

There is a negative correlation between energy prices and economic activity. A 2014 survey of economic literature by Roger Bezdek calculates that a 10% increase in U.S. electricity prices would eliminate approximately 1.3% of gross domestic product.

Cheap energy from fossil fuels also improves human well-being by powering labor-saving and life-protecting technologies, such as air-conditioning, modern medicine, and cars and trucks.

Environmental activists often claim that prosperity speeds the depletion of resources and destruction of nature, but the opposite is true. As Ronald Bailey writes in “The End of Doom”: “It is in rich democratic capitalist countries that the air and water are becoming cleaner, forests are expanding, food is abundant, education is universal, and women’s rights respected.”

Fossil fuels have increased the quantity of food humans produce and improved the reliability of the food supply. The availability of cheap energy revolutionized agriculture throughout the world, making it possible for an ever-smaller proportion of the labor force to raise food sufficient to feed a growing global population without devastating nature or polluting air or water.

Fossil-fuel emissions create additional benefits, contributing to the greening of the Earth. A 2017 study published in Nature magazine found that the global mass of land plants grew 31% during the 20th century. African deserts are blooming thanks to fossil fuels.

Finally, if fossil fuels are responsible for a significant part of the warming recorded during the second half of the 20th century, then they should also be credited with reducing deaths due to cold weather. Medical researchers William Richard Keatinge and Gavin Donaldson assessed this effect in a 2004 study. “Since heat-related deaths are generally much fewer than cold-related deaths, the overall effect of global warming on health can be expected to be a beneficial one.”

They estimate the predicted temperature rise in Britain over the next 50 years will reduce cold-related deaths by 10 times the number of increased heat-related deaths. Other research shows climate change has exerted only a minimal influence on recent trends in vector-borne diseases such as malaria, dengue fever and diseases spread by ticks.




Altogether, fossil fuels have produced huge benefits for mankind, many of which continue today. But advocates of alternative energy sources usually manage to omit or diminish many of these benefits when calculating fossil fuels’ “social cost.”

Thankfully, President Trump and congressional Republicans understand that the costs of fossil fuels must be weighed against their substantial benefits. They have decided wisely not to carry on the “war on fossil fuels” waged by the Obama administration, congressional Democrats and their Golden State allies.


Messrs. Bast and Ferrara are senior fellows at the Heartland Institute.


Thinking About the Balkans

By George Friedman

 

The week’s news from the Balkans has been ominous. Serbia is making demands on Kosovo and its supporter, Albania. Serbia continues to see Kosovo as a threat to its national interest. The Russians have gone out of their way to express their support not only for the Serbs but also for the Serbs living in Bosnia. Last month, Russian President Vladimir Putin hosted Serbia’s president in Moscow. Meanwhile, the U.S. friendship with Albania is deep, making the Serbian claim on Kosovo even more dangerous. Far less ominous but no less important, Turkish President Recep Tayyip Erdogan held a campaign rally last month in Sarajevo, the predominantly Muslim capital of Bosnia and home to a large number of Turkish expat voters, to win their support and to show voters at home that Turkish influence was spreading into the Balkans.

The Balkans are always caught between great powers. It’s also not unusual for the Balkans to seem to be on the edge of war. They usually avoid it. When they fail, the result is catastrophic. Eventually, that catastrophe will come, but rather than hazard a guess as to when that will be, the important thing is to understand the dynamics that led to this uncertainty – beginning with geography.

I think of the Balkans as having two parts, a north and a south. The north is generally a plain divided between Croatia, Serbia and Bosnia. Croatia, a predominantly Catholic country with historical ties to Hungary and current ties to Germany and the European Union, is entirely on this plain. Serbia, an Orthodox Christian country, is mostly on the plain. So is the northern part of Bosnia, an area dominated by Serbs. The southern part of the Balkans – southern Bosnia, Montenegro, southeast Serbia, Macedonia and Albania – is mostly mountainous. Southern Bosnia and Albania are primarily Muslim. Macedonia is a mix of Orthodox Christians and Muslim Albanians.

If this sounds complicated, that’s because it is. Nationalism in the region is so intense because it is so fragile. The nation-states are ethnically heterogeneous and have long-held grievances against each other. The various states fear their neighbors, so they use these ethnic divisions to weaken them, which begets more fear. Apart from this, the Serbians and Croatians speak similar, mutually understandable languages. But one is part of the Catholic world and the other part of the Orthodox world. One is oriented toward Germany, the other toward Russia. And they fought one another savagely during World War II – Croatia alongside Germany, Serbia with the Allies.

This explains how the Balkans is, but it doesn’t explain how it got this way. It must be understood that these countries and ethnic groups are the result of millennia of conflict between Europe and the Middle East, a conflict predating Christianity and Islam but one that continued after their emergence. Alexander forged an empire as far as Afghanistan. The Romans passed through the Balkans on their way to creating a land route to Egypt, the source of grain for Rome. The Christian Crusaders passed through here, as did the Turkish Ottomans when they were going north to take Budapest and nearly Vienna. And the Russians, always seeking to contain the European Peninsula and the Ottomans, were instrumental (along with the Greeks) in spreading Orthodoxy. Catholicism, Orthodoxy and Islam engaged in a three-way struggle after the 15th century, all making alliances with each other to defeat the one left out. Theology did not drive the great powers. It did define the small ones.

The Balkans were a highway to empire and a buffer against rising empires. In themselves they had little of value, but they were indispensable for anyone seeking to dominate the Mediterranean or project force from north or south. The rugged hills and valleys created refuge for different groups that survived invasions from either direction because the effort of rooting them out wasn’t worth it. The result was villages surrounded by mountains that preserved their identity even in the face of great power. But great powers did implant themselves on the plains and on some of the less remote valleys. The Catholic and Orthodox churches and the mosques speak to that.

But even within regions that share a religion, the reality is more complex. Over in the next village, the past perseveres, and the anger with it. In the Balkans, nothing is forgotten, and nothing is forgiven. It is an essential and abysmal reality. Sometimes the fights between the villages draw in other villages, draw in capitals, draw in great powers. Sometimes the great powers competing with each other draw in the Balkan capitals and the villages. Either way, there are countless local feuds and endless powers seeking hegemony over a continent, and together they open the door to all the malice in the region. Today, the Russians whisper to the Serbs, the Americans whisper to the Albanians, the Germans whisper to the Croatians, and each whispers back. The villages hear rumors of great goings-on, and it starts.

The Balkans are not the only place in the world where this goes on, but there is no other place that is so important to so many great powers. Therefore, it is not surprising that there are always rumors and that the rumors are frequently of war. And it is not surprising that the rumors are usually wrong. It just assures that we will be surprised the time they turn out to be right. It’s only a matter of time. And this is a region that expects war, making it all the more likely.