Archive for April, 2005

Still Soaking the Rich? Who Pays What

Published
by
Steve Darden
on 4/27/2005
in Economics
. 1 Comment

This 26 April WSJ piece updates the impact of US federal income and social security taxes. Many thanks to TaxProf Blog for the analysis!

A close inspection of this graphic summarizes this US Internal Revenue Service study:

The Rich Pay

The Bush administration “tax cuts for the rich” have had little impact on reducing the tax burden for middle-class tax payers and above. The top 20% on the income scale still pay 2/3 of the tax bill. Excerpt from the WSJ article:

An IRS study by a trio of tax wonks shows that, even after including Social Security taxes, the overall tax burden grew more progressive from 1979 to 1999. And while that burden became a tad less progressive after the Bush tax cuts of 2001 and 2003, the rich and upper middle class continued to pay far and away the bulk of U.S. taxes.

The nearby bar chart tells the tale. It is based on an analysis of IRS data by Michael Strudler and Tom Petska of the IRS and Ryan Petska of Ernst and Young. The authors found that over the course of 20 years the richest 0.1% of all taxpayers saw their overall tax share double — to 11.05%, from 5.06%. The top 20% of all earners also saw their tax share increase sharply to more than two-thirds of all taxes paid. Meanwhile, the bottom 20% of earners paid only a tiny share in 1979 but saw even that share cut in half 20 years later — including payroll taxes.

As for the windfall for the wealthy alleged to have been provided by the Bush tax cuts, the authors show that the tax share paid by the superrich fell only marginally even after the 1999 data were adjusted for the lower 2003 tax rates. The richest 0.1% would have still paid nearly double the share they paid in 1979 — that is, double what they paid before the Reagan tax cuts of 1981, which were also supposed to have favored the wealthy. As the authors note, “The progressive nature of the individual income tax system is clearly demonstrated.”

Environmental Heresies

Published
by
Steve Darden
on 4/20/2005
in Climate Change and Global Warming
. 0 Comments

This May 2005 MIT Technology Review article by Stewart Brand may be a bit of a surprise for some readers who have classified Brand as "one of those west coast environmentalists". Stewart Brand was the founder of "The Whole Earth Catalog", and many years ago one of the Merry Pranksters of the "Electric Kool-Aid Acid Test". This article demonstrates that he is the best kind of environmentalist - one who attends to the science, not just the old mantras.

Over the next ten years, I predict, the mainstream of the environmental movement will reverse its opinion and activism in four major areas: population growth, urbanization, genetically engineered organisms, and nuclear power.

Reversals of this sort have occurred before. Wildfire went from universal menace in mid-20th century to honored natural force and forestry tool now, from “Only you can prevent forest fires!” to let-burn policies and prescribed fires for understory management. The structure of such reversals reveals a hidden strength in the environmental movement and explains why it is likely to keep on growing in influence from decade to decade and perhaps century to century.

The success of the environmental movement is driven by two powerful forces—romanticism and science—that are often in opposition. The romantics identify with natural systems; the scientists study natural systems. The romantics are moralistic, rebellious against the perceived dominant power, and combative against any who appear to stray from the true path. They hate to admit mistakes or change direction. The scientists are ethicalistic, rebellious against any perceived dominant paradigm, and combative against each other. For them, admitting mistakes is what science is.

There are a great many more environmental romantics than there are scientists. That’s fortunate, since their inspiration means that most people in developed socie­ties see themselves as environmentalists. But it also means that scientific perceptions are always a minority view, easily ignored, suppressed, or demonized if they don’t fit the consensus story line.

The reader-of-the-whole-thing will be rewarded, because Stewart Brand is paying attention - contributing a number of memorable observations.

E.g., did you know that "the Amish, the most technology-suspicious group in America (and the best farmers), have enthusiastically adopted GM crops."?

On the inversion of Erlich’s Population Bomb and the role of cities:

The environmentalist aesthetic is to love villages and despise cities. My mind got changed on the subject a few years ago by an Indian acquaintance who told me that in Indian villages the women obeyed their husbands and family elders, pounded grain, and sang.  But, the acquaintance explained, when Indian women immigrated to cities, they got jobs, started businesses, and demanded their children be educated. They became more independent, as they became less fundamentalist in their religious beliefs. Urbanization is the most massive and sudden shift of humanity in its history. Environmentalists will be rewarded if they welcome it and get out in front of it. In every single region in the world, including the U.S., small towns and rural areas are emptying out. The trees and wildlife are returning. Now is the time to put in place permanent protection for those rural environments. Meanwhile, the global population of illegal urban squatters—which Robert Neuwirth’s book Shadow Cities already estimates at a billion—is growing fast. Environmentalists could help ensure that the new dominant human habitat is humane and has a reduced footprint of overall environmental impact.

And Brand appreciates Amory Lovins:

Years ago, environmentalists hated cars and wanted to ban them. Then physicist Amory Lovins came along, saw that the automobile was the perfect leverage point for large-scale energy conservation, and set about designing and promoting drastically more efficient cars. Gas-electric hybrid vehicles are now on the road, performing public good. The United States, Lovins says, can be the Saudi Arabia of nega-watts: Americans are so wasteful of energy that their conservation efforts can have an enormous effect. Single-handedly, Lovins converted the environmental movement from loathing of the auto industry to fruitful engagement with it.

Someone could do the same with nuclear power plants. Lovins refuses to. The field is open, and the need is great.

This is a short read - well worth your time.

A Pollution-Free Hydrogen Economy? Not So Soon

Published
by
Steve Darden
on 4/20/2005
in Climate Change, Foreign Policy and Global Warming
. 0 Comments

MIT Technology Review: Prof. Richard A. Muller on the realities of a “hydrogen economy“. Dr. Muller summarizes the basic science and the alternative hydrogen manufacture options. He projects that the economics of production will likely lead to significant increases in atmospheric carbon dioxide, unless society gets behind nuclear energy.

I also believe that the hydrogen will be made by whatever method is cheapest. In the short run, we could revert to electrolysis, powered by electricity from nuclear plants. Right now nuclear energy is expensive, largely, I believe, because of regulations driven by the perceived risk of radioactivity. Yet I think that carbon dioxide in the atmosphere offers a much greater long-term threat to the environment and to health than do nuclear power plants…

For reasons that he doesn’t explain, he is optimistic about cheap solar power somewhere in the future:

When solar-generated electricity becomes cheaper than natural gas or coal, we can leave the fossil fuels in the ground, and have the best of all worlds. Cheap solar is inevitable, and we will not have to plaster the state of California with solar cells to enjoy its benefits. In a square kilometer of sunlight there is are 1,000 megawatts of solar power-the equivalent of a large nuclear power plant. Even if only 10 or 20 percent of the sunlight’s energy is extracted as electricity, the area of the solar cells will not be much larger than what we currently devote to nuclear, gas, or coal plants. Energy can be stored at night (and during cloudy days) in hydrogen. The solar future is coming.

My understanding of the economics of the “hydrogen economy” is that it may work for applications that are physically close to the source of hydrogen manufacture (e.g., close to natural gas supplies), but is non-competitive for transportation. See “Carrying the Energy Future Comparing Hydrogen and Electricity” for an assessment by The Institute for Lifecycle Environmental Assessment (ILEA).

Did Humans Ward off Glaciation 5000 Years Ago?

Published
by
Steve Darden
on 4/20/2005
in Climate Change and Global Warming
. 0 Comments

This highly recommended article by William F. Ruddiman is fun, thought-provoking and sure to be controversial (Dr. Ruddiman is a marine geologist at the University of Virginia). In this piece, "How Did Humans First Alter Global Climate" (subscription required), he examines a new hypothesis that advances in human agriculture explain the observed rising levels of atmospheric carbon dioxide beginning about 8,000 years ago.

This graphic depicts how key innovations, mainly deforestation and rice irrigation, warded off a glaciation that otherwise would have begun about 5,000 years ago:

Early human agricultural activities produced enough greenhouse gases to offset most of the natural cooling trend during preindustrial times (yellow), warming the planet by an average of almost 0.8 degree Celsius. That early warming effect (a) rivals the 0.6 degree Celsius (b) warming measured in the past century of rapid industrialization (orange). Once most fossil fuels are depleted and the temperature rise caused by greenhouse gases peaks, the earth will cool towards the next glaciation - now thousands of years overdue.

In addition to his exposition of this theory of human activities, Dr. Ruddiman provides and excellent overview of other significant factors which impact greenhouse gases, including excellent graphics on the impact of earth’s orbit which accounts for periodicities in solar radiation of 22,000 years, 41,000 years and 100,000 years.

Here are Ruddiman’s concluding comments:

Implications for the Future: the conclusion that humans prevented a cooling and arguably stopped the initial stage of a glacial cycle bears directly on a long-running dispute over what global climate has in store for us in the near future. Part of the reason that policymakers had trouble embracing the initial predictions of global warming in the 1980s was that a number of scientists had spent the previous decade telling everyone almost exactly the opposite—that an ice age was on its way. Based on the new confirmation that orbital variations control the growth and decay of ice sheets, some scientists studying these longer-scale changes had reasonably concluded that the next ice age might be only a few hundred or at most a few thousand years away.

In subsequent years, however, investigators found that greenhouse gas concentrations were rising rapidly and that the earth’s climate was warming, at least in part because of the gas increases. This evidence convinced most scientists that the relatively near-term future (the next century or two) would be dominated by global warming rather than by global cooling. This revised prediction, based on an improved understanding of the climate system, led some policymakers to discount all forecasts—whether of global warming or an impending ice age—as untrustworthy.

My findings add a new wrinkle to each scenario. If anything, such forecasts of an “impending” ice age were actually understated: new ice sheets should have begun to grow several millennia ago. The ice failed to grow because human-induced global warming actually began far earlier than previously thought—well before the industrial era. In these kinds of hotly contested topics that touch on public policy, scientific results are often used for opposing ends. Global-warming skeptics could cite my work as evidence that human-generated greenhouse gases played a beneficial role for several thousand years by keeping the earth’s climate more hospitable than it would otherwise have been. Others might counter that if so few humans with relatively primitive technologies were able to alter the course of climate so significantly, then we have reason to be concerned about the current rise of greenhouse gases to unparalleled concentrations at unprecedented rates.

The rapid warming of the past century is probably destined to persist for at least 200 years, until the economically accessible fossil fuels become scarce. Once that happens, the earth’s climate should begin to cool gradually as the deep ocean slowly absorbs the pulse of excess CO2 from human activities. Whether global climate will cool enough to produce the long-overdue glaciation or remain warm enough to avoid that fate is impossible to predict.

If Smallpox Strikes Portland?

Published
by
Steve Darden
on 4/20/2005
in Homeland Security
. 0 Comments

This is the sixth post in the SeekerBlog Homeland Security series. Click here for the complete set.

Scientific American published the "virtual epidemiology" research of Barrett, Eubank and Smith in the March 2005 Issue: "If Smallpox Strikes Portland" (subscription required).

Suppose terrorists were to release plague in Chicago, and health officials, faced with limited resources and personnel, had to quickly choose the most effective response. Would mass administration of antibiotics be the best way to halt an outbreak? Or mass quarantines? What if a chance to nip a global influenza pandemic in the bud meant sending national stockpiles of antiviral drugs to Asia where a deadly new flu strain was said to be emerging? If the strategy succeeded, a worldwide crisis would be averted; if it failed, the donor countries would be left with less protection.

Public health officials have to make choices that could mean life or death for thousands, even millions, of people, as well as massive economic and social disruption. And history offers them only a rough guide. Methods that eradicated smallpox in African villages in the 1970s, for example, might not be the most effective tactics against smallpox released in a U.S. city in the 21st century. To identify the best responses under a variety of conditions in advance of disasters, health officials need a laboratory where "what if" scenarios can be tested as realistically as possible. That is why our group at Los Alamos National Laboratory (LANL) set out to build EpiSims, the largest individual-based epidemiology simulation model ever created.

The EpiSims project has reached the stage where their social network modeling is producing useful policy input. In particular, this report on a simulated smallpox attack on Portland, Oregon is fascinating. How should cities prepare for such an attack? What are the most effective strategies once a pathogen like smallpox is detected? Is mass vaccination a good policy? What about mass quarantine? How does the response-time of the health authorities affect the death toll?

As you can see from the above summary graphic of the EpiSims simulation, we learned that the most effective strategy is rapid isolation of infected individuals. Next in importance was the speed of public health response. Variations in the vaccination response strategies had little effect on the death toll.

A brief sketch of the simulation parameters:

To answer such questions, we constructed a model of smallpox that we could release into our synthetic population. Smallpox transmission was particularly difficult to model because the virus has not infected humans since its eradication in the 1970s. Most experts agree, though, that the virus normally requires significant physical contact with an infectious person or contaminated object. The disease has an average incubation period of approximately 10 days before flulike symptoms begin appearing, followed by skin rash. Victims are contagious once symptoms have appeared and possibly for a short time before they develop fever. Untreated, some 30 percent of those infected would die, but the rest would recover and be immune to reinfection.

Vaccination before exposure or within four days of infection can stop smallpox from developing. We assumed in all our simulations that health workers and people charged with tracking down the contacts of infected people had already been vaccinated and thus were immune. Unlike many epidemiological models, our realistic simulation also ensures that the chronology of contacts will be considered. If Ann contracted the disease, she could not infect her co-worker Bob a week earlier. Or, if Ann does infect Bob after she herself becomes infected and if Bob in turn infects his family member Cathy, the infection cannot pass from Ann to Cathy in less than twice the minimum incubation period between disease exposure and becoming contagious.

With our disease model established and everyone in our synthetic population assigned an immune status, we simulated the release of smallpox in several hub locations around the city, including a university campus. Initially, 1,200 people were unwittingly infected, and within hours they had moved throughout the city, going about their normal activities. We then simulated several types of official responses, including mass vaccination of the city’s population or contact tracing of exposed individuals and their contacts who could then be targeted for vaccination and quarantine. Finally, we simulated no response at all for the purpose of comparison. In each of these circumstances, we also simulated delays of four, seven and 10 days in implementing the response after the first victims became known. In addition, we allowed infected individuals to isolate themselves by withdrawing to their homes.

For the in-depth report, please see the captioned article, and for more details, refer to the Los Alamos National Laboratory site: "Controlling smallpox: Strategies in a Virtual City Built from Empirical Data". If you have broadband, the site offers a 250MB movie file showing an animation of the model results, at 6 frames per day at 4 hour intervals for 70 days. (The vertical bars displayed on a Portland map represent the number infected at each location, and the color represents the fraction of infected people who are infectious.)

Milton Friedman Talks Economics

Published
by
Steve Darden
on 4/19/2005
in Economics
. 0 Comments

Economist Milton Friedman was interviewed last week by Ned Hunter. It is refreshing to hear Friedman go directly to the meat of today’s issues:

  1. The greatest threat to the U.S. economy?
  2. Should Social Security be privatized? How to fix it?
  3. How big a problem are high oil prices?
  4. How big a problem is the deficit?
  5. Isn’t it a problem that 40% of the national debt is owned by foreigners?
  6. What about a consumption-based tax system? Doesn’t that put an unnecessary burden on the poor?
  7. Immigration?
  8. School vouchers?

I would rate the Jackson Sun interview a must read. See what you think…

Q & A

Question: Over the next 10 years what would you say is the greatest threat to the U.S. economy?

Answer: Excessive government spending.

Q: In any particular area?

A: Government spending can be in any area, but the particular area that we are most concerned with are in the areas of entitlements.

Q: Do you believe that Social Security should be privatized, or no?

A: Yes, I believe that Social Security should be privatized. However there are also other things they can do with it.

Q: How do you believe the system should be fixed, and not just Social Security, but perhaps also Medicare, which seems to be a greater and more prevalent problem?

A: Well first of all, I don’t believe there should be a Social Security system of our present kind. Our current Social Security system is a Ponzi game*, in which the young pay in to pay the current expenses of the old. It’s also being misrepresented, as if it were a form of insurance, that when you pay Social Security taxes, you are paying money which is being put away for your own benefit. That is not the case. The money that you pay goes out immediately, either to pay pensions to current retirees or to pay other expenses of government. There are no real assets corresponding to it.

* A Ponzi Scheme, or game, ”is a fraudulent investment scheme where funds of newer investors are used to pay artificially high returns to original investors,” according to Webster’s New World Dictionary.

One of the interesting things is, everybody talks about the problems of Social Security as the fact that the number of workers are going up less rapidly than the number of retirees. Well if that’s the problem, you would think it would also effect life insurance companies, and yet haven’t heard any problems with the life insurance companies, have you?

The ideal situation would be that we abolish Social Security and let people save for their own retirement.

I think its disgraceful that, well, take the case that always seems to be the most extreme. You have a young man who has AIDS. He is seriously ill and dying at age 50 at the latest, and when he’s 40, the government comes along and says we gotta take a sixth of your income and put it aside for your old age. How absurd can you be?

Social Security has become a kind of an icon, an untouchable, and yet it’s basic premise is flawed.

Q: Knowing that it won’t be abolished, how would you propose to save Social Security?

A: What I would do is link the benefits to the price index, not a wage index. I would do that the whole way down and not just with the upper incomes. That would solve a good part of the problem. I would raise the date of retirement, and I would go in for private accounts, but on a larger scale. I would allow workers to keep 6 percent of their taxes.

Q: If the federal government does move to private accounts, does the $3 trillion that President Bush says he would have to borrow to get that moving cause a greater stress on the American economy?

A: No, because we already have that obligation. What we are talking about is replacing an unfunded debt with funded debt. We already have an obligation to all the people like myself who are currently on Social Security. The difference is it is not written out as funded debt. So when you talk about borrowing, they are not really changing the total government debt, they are only changing how much they recognize, and what is open and above board and how much of it is hidden in other funding.

Q: Adam Smith said ”Wealth is created through the creation of goods.” Can the United States maintain its position of economic leadership in the world as it moves towards a service based economy and sends manufacturing jobs overseas?

A: Well, you mustn’t interpret Adam Smith’s use of the word goods that narrowly. He would not have objected to saying goods and services.

Q: During the Civil War, after the first year, the South had difficulty waging war because it had no manufacturing base to manufacture weapons and clothing. Is the United States putting itself at the mercy of foreign nations by moving so much of its manufacturing overseas?

A: I don’t believe so. I think we have ample manufacturing capacity. More than we need. It’s hard to conceive a world situation where we would have to depend on our own products.

International trade will continue. We aren’t going to be at war with the whole rest of the world, at least that seems a very unlikely possibility. I don’t know of anyone who sees this as a very serious argument.

Q: Given that, should the Federal Reserve take steps to adjust the money supply and intervene in the marketplace to prop up the U.S. dollar?

A: No! The Federal Reserve has one fundamental function and that is to preserve price stability, to keep the general price levels stable, and that is what it ought to pay attention to and let the market take care of the value of the dollar in the foreign exchange markets.

Q: Do you believe that (Federal Reserve Board Chairman) Alan Greenspan is doing that?

A: Yes, I do. I think they have done it very well. I am not a great admirer of the Federal Reserve, but the last 15 years has been about as good a period as the Federal Reserve has ever had in its history.

Q: Do you believe the current Federal Reserve Bank’s policy of increasing interest rates will temper inflation and stimulate the economy?

A: What you have to look at is not what is happening with the interest rates, but what’s happening with the quantity of money, and for the past few years, the quantity of money has been growing at about 4 to 6 percent per year, which is about the right rate to keep the economy growing without inflation. They may have to push the interest rates around in order to achieve that rate of monetary growth.

Q: How high do oil prices have to go before they become a real detriment to the U.S. economy?

A: Well, (laughing) every penny they go up is to that extent a detriment, and every penny they go down is to that extent a benefit. But in neither case is the price of oil a major detriment to the U.S. economy.

Q: And why is that, sir?

A: Because the total expenditures on oil are a small fraction of the total expenditures of the economy of the United States. There is a perfectly good functioning market in oil and gas, and it provides the right incentives. In the same way, if the price of anything goes up, it is a detriment to the economy. If the price of corn goes up, that’s a detriment in a certain way. If the price goes up because it is becoming scarcer, and there is less of it, then that is a sign that it needs to be conserved. But it doesn’t mean that is a detriment to the economy as a whole. If wages go up, is that a detriment to the whole economy?

Q: What do you believe the impact of the current deficit that in U.S. dollars is around $412 billion is on future taxes and the cost of capital?

A: Well I hope it will have the effect of causing government to spend less and hold down the future deficits. But as a matter of pure economy, the deficit is not a major factor in the worldwide capital market. So it doesn’t have much effect on interest rates.

Q: You believe in a balance budget. Do you believe Congress should reinstate the ”Pay-as-you-go” rules that were in existence in the 1990s?

A: I don’t think those are very effective. I would like to see Congress adopt a balanced budget amendment to the constitution. I think that would be much more effective.

Q: Should Americans be wary of the fact that nearly 40 percent of the national debt is owned by foreign nations?

A: No, not at all. And most of it is not owned by foreign nations, it’s owned by foreign individuals. The people who should be wary of that are the people who hold that debt. What can they do with it? They can sell it, but it doesn’t do them any good to sell it if the dollar isn’t any good. And if we were to embark on major inflation, who would sell it? It would be those foreigners who own that debt. They are the ones who have to worry about it, not us.

Q: Is increasing immigration into the U.S. an economic benefit or detriment?

A: (laughing) It’s both. The immigration is a benefit in so far as they provide us with a larger labor force, but it’s a detriment in so far as that labor force is mounting charges on the state through welfare and other programs. In a welfare state world, unfortunately, you cannot have totally free immigration.

Q: Since most of the immigrants to the United States are Mexican, what kind of effect is that having on the Mexican economy?

A: At the moment the Mexican economy is benefiting from the salaries that the Mexican immigrants are sending back home. The Mexican economy is, of course, losing its labor force, but the Mexican economy has not done a good job at creating jobs or job opportunities that these people would be suitable for. The real problem in Mexico is its policy as reflected in the whole economy. There is too much monopoly, too much regulation, too much restriction. All of that needs to be changed to get the Mexican economy growing at a rapid pace.

Q: Ten years after NAFTA (North American Free Trade Agreement), do you view that as a success?

A: Yes, I do. It is a limited success as indicated for example by what’s happening with lumber imports from Canada. We have a very high tariff on that, although we are supposed to have free trade, so that the NAFTA agreement has not been fully implemented. But it has led to a very sizable increase in both imports from Mexico and Canada to the United States and exports to Mexico and Canada, and so to that extent it is a success.

Q: Do you believe that that sort of agreement should be carried forward with the Caribbean nations?

A: Yes I do. I would like to see any extension of free trade that you can get. It is too bad that they are doing it on a country by country basis. It would much better if it were done unilaterally, or eliminated tariffs worldwide, but politically that does not seem feasible, and so some agreements with Caribbean countries or Central American countries is better than no agreement. Any thing that reduces barriers to national trade is a good thing.

Q: Should the U.S. federal government look toward moving away from an income tax-based system to a consumption-based tax system?

A: That would be a very good idea. The disadvantage to taxing income is that it establishes a disincentive for savings, because income that is saved is going to be taxed twice. It is taxed initially when you earn it and save it, and again when (that savings) earns income, because that income is taxed again. With a consumption tax, you would tax it only once, when it is spent, not when it is saved.

Q: Do you believe like some people argue that that would put an unnecessary burden on the poor?

A: Who benefits from the saving? What’s really helped the poor over the long period is having a productive economy with a larger amount of capital producing goods and services. The consumption tax, in so far as the people who receive an income don’t spend it, in so far as they devote it to investment and savings, they are not eliminating what the poor have. On the contrary, they are building a platform that creates income for everybody.

Q: Do you think that as the U.S. moves to a service-based economy from a manufacturing based-economy that the country will continue to create the same type of high-paying jobs that the manufacturing sector did?

A: Absolutely. They have. Just look at the salaries that are being paid in Silicon Valley.

Let’s go back to the basics. What is the real problem so far as the poor is concerned? In my opinion it is the lousy school systems we have, a school system in which something like a third drop out before they finish high school. And why do we have such a poor educational system? Because it is a government monopoly that, with the exception of some private schools, is run by the government, and like everything run by the government, it produces a product that is expensive and of a low quality. So if you want to do something about the poor, the most respective thing you could do would be to privatize the school system and allow parents to have a choice as to where their children would go to school.

Q: Nearly 50 years ago you were the first proponent of school vouchers. Why do you feel vouchers would help?,

A: Where in the country can you find a great advancement that has been produced by a government monopoly? All the great advancements we’ve had in automobiles, in telephones, the radio, you name it, all of those advancements have come about through private enterprise. Through competition in an attempt to make money from a better and cheaper product. But that has not been allowed to operate in the case of schooling. The government has monopolized the production of schooling. It’s through parental choice that you will provide more competition. Then you will produce the kind of increase in quality that only private enterprise and competition is capable of doing.

Q: Is there anything I have not asked you about that you would like to cover?

A: No. I think we’ve pretty much touched on everything.

Q: Well I thank you sir, and I can not tell you what an honor this has been.

A: Well you’re welcome.

Crossroads Arabia » Saudi Anti-Terror Efforts

Published
by
Steve Darden
on 4/12/2005
in Saudi
. 1 Comment

John Burgess has just posted a hopeful piece on a new Anthony Cordesman paper (and interview) on Saudi anti-terror efforts. Progress in KSA is definitely looking better than the media reports are indicating. Recommended:

I strongly recommend you take a few minutes to read these pieces if you’re interested in just what the Saudis are doing to fight terrorism. Much of it goes unreported or underreported in the American media. You might be surprised by what you learn.

The Politics of the Alternative Minimum Tax

Published
by
Steve Darden
on 4/11/2005
in Economics
. 0 Comments

Tigerhawk has a must-read piece today on the Alternative Minimum Tax. Don’t miss this one:

According to the Times, the AMT will suck up so much revenue that it will virtually replace the Bush cuts to the federal income tax:

Seen or unseen, the looming [AMT] tax increases are almost as large as the president’s tax cuts. Leonard E. Burman, a senior fellow at the Urban Institute, estimated that the government would have to raise ordinary income tax rates substantially in every bracket to offset the money lost in each bracket by the elimination of the alternative minimum tax. People in today’s 28 percent bracket, for example, would have to pay a top rate of 35 percent. Those who now pay a top rate of 33 percent would pay 41.4 percent.

This is obviously frustrating both to Republicans — who actually want to cut taxes — and to Democrats, who want to accuse Republicans of having destroyed the fiscal condition of the country. President Bush, for his part, has appointed a bipartisan advisory panel to come up with recommendations for reforming the AMT as part of a broader reform of federal taxation, but has made it clear that any proposed reform must be neutral to revenues in the aggregate.

The problem is, it is hard to see how it is to the political advantage of Republicans to reform the AMT. As I have written before, if the Republicans were to reform the AMT they would accomplish four things, none of which will obviously benefit them politically.

Ibrahim Jaafari - Council on Foreign Relations Q&A

Published
by
Steve Darden
on 4/11/2005
in Foreign Policy and Iraq
. 0 Comments

April 7, 2005: CFR posts a useful backgrounder on Iraq’s new prime minister:

What kind of prime minister will Ibrahim Jaafari make? Jaafari, 58, is a conservative, religious Shiite. For nearly 40 years, he has been active in the Islamic Dawa Party, a movement committed to establishing an Islamic state in Iraq. Experts say he would like to ensure that the constitution the transitional government will draft respects sharia, or Islamic law, but they disagree on how aggressively the soft-spoken family physician will pursue this aim. “He is an Islamist.… He will pursue his ideas. But he is also very ambitious and will be ready to compromise,” says Faleh A. Jabar, a research fellow at Birkbeck College of the University of London and author of The Shiite Movement in Iraq.

What is Jaafari’s background? Jaafari was born in 1947 in the Shiite shrine city of Karbala into a large family that traces its lineage to the Prophet Mohammed. In 1966, while attending medical school in Mosul, he joined the Dawa Islamiya (Islamic Call) Party, which was founded in 1957 to promote political Islam during a time when communism and other secular political movements were gaining strength. In 1980, Jaafari fled to Iran to escape Saddam Hussein’s brutal crackdown on the party. In 1989, he moved to London, where he became Dawa’s spokesman. In 2003, after the U.S.-led invasion of Iraq, Jaafari returned to his homeland. He became the first of nine rotating presidents of the now-defunct Iraqi Governing Council, and in June 2004 was appointed as one of two vice presidents of the interim government. In a 2004 opinion poll, he was ranked the third most popular figure in Iraq, after the Grand Ayatollah Ali al-Sistani, the leading Shiite cleric in Iraq, and Muqtada al-Sadr, the young, renegade Shiite cleric whose militia fought against U.S. forces in April, June, and August 2004.

What accounts for Jaafari’s popularity? The Dawa Party is an indigenous Iraqi movement that for decades was the main resistance party inside Iraq against Saddam Hussein. Thousands of its members were jailed or killed because of their opposition to the regime. “Dawa has earned immense public respect for this and represents a powerful combination of nationalism and Islamism,” says Graham E. Fuller, former vice chairman of the National Intelligence Council. Jaafari draws his support from Iraqi Shiites—some 60 percent of the population—because his party is made up of Shiites and is rooted in their religious tradition. (Experts say, however, that in its first decade of existence, Dawa was a pan-Islamic movement that embraced both Sunni and Shiite precepts.) “Jaafari is seen as an Iraqi who struggled underground and suffered indignities. He was consistently one thing [a Dawa supporter]—unlike other candidates, who changed their allegiances over time,” says Phebe Marr, senior fellow at the U.S. Institute of Peace and author of The Modern History of Iraq.

These are the other questions covered in the full CFR article:

Has the Dawa Party used violence to support its goals?

How did the party react?

Is Dawa still a terror group?

Was Jaafari involved in terrorist activities?

What was the relationship between Jaafari and Iran?

Does Jaafari support the idea that, as in Iran, clerics should run the government?

How much of a religious bent would a Jaafari government have?

What are Jaafari’s views about Iraq’s sectarian and ethnic groups?

What has Jaafari said about Iran?

Would Jaafari ask U.S. forces to leave Iraq soon?

How would a Jaafari-led government treat former members of Saddam’s regime?

Would he be a strong leader?

Prospering in the Secure Economy

Published
by
Steve Darden
on 4/10/2005
in Counter Terrorism and Homeland Security
. 2 Comments

OK, you’ve read "America the Vulnerable". You’ve got a handle on the risk management concepts, and you understand the terrorist threat to globalization, continuing productivity improvements and thus your standard of living. You are intrigued with Stephen Flynn’s proposals, where he suggests that the private sector could actually see net bottom-line benefits from enhancing security.

But you are left wondering - what really is the bottom line? Are all these security regulations going to hurt the companies whose stocks I own?

Well, this 40-page study by Deloitte Research "Prospering in the Secure Economy (PDF 500kb)" will give you some insights. Broadly, it is consistent with Stephen Flynn’s assessments and recommendations. By running several surveys of business leaders, Deloitte has developed a profile of how the private sector views their risks, what strategies they are implementing and what some of the P&L benefits may be (click to enlarge into a new window):

Continuum of Threats

Nobody knows at this point what the total public/private cost of enhanced security is. There are a few agency-estimated costs in Table 3, but I take these as nothing more than indications. It will be years before we get a handle on that.

We also can only guess at what the costs of security failures could be - which we know are going to happen regardless (click to enlarge into a new window).

Some sectors affected by enhanced security look to have significant benefits. Participants may actually benefit to some degree from the leveling effect of regulations. I.e., absent the regulations, in the early phases of adoption their EPS drops due to costs occuring before the benefits accrue.

Supply Chain Visibility: This appears to be the most-researched area, and it happens to be one I know a bit about. As an investor it is an area I’ll be looking at (click to enlarge into a new window):

The common enabler to these efficiency gains is better visibility into the supply chain. Technologies such as RFID tags (see box), sensors, smart containers, and electronic reporting and supply chain software solutions, when combined with changes in business practices, can provide companies an unprecedented degree of visibility into their supply chains. This has manifest security and business benefits (see Figure 5 and nearby discussion of RFID tags). For example, a study of the first phase of the Smart and Secure Tradelanes initiative, involving 65 companies across three continents, documented net savings to shippers of $378 to $462 per container per shipment from employing a mix of IT tools to secure and streamline shipping. Efficiency was enhanced in five major ways: lower overhead, reduced transaction costs, increased labor productivity, reduced theft, and lower inventory costs.

One problem with existing logistics systems, for example, is the large number of containers that in transit deviate significantly from their original assigned routing, making it nearly impossible to estimate arrival times. Security-tracking tools can help resolve this problem by enabling suppliers and customers to track such changes—and better estimate arrival times.

New security technologies will eventually allow cargo to be cleared more quickly through customs. Once electronic devices can demonstrate that a shipping container remains in its original intact condition from the time it’s packed and sealed to the time it’s delivered (and we’re still a long way away from that point), then customs officials could conceivably clear the container before it even arrives at port, enabling it to be delivered without delay.

Reduced maritime theft and fraud, which today costs companies between $30 billion and $50 billion a year, represents another potential benefit of security-driven modernization. RFID tags, tamper-proof container seals, and wireless communications will all make pilfering much more difficult. In 1997, technology industry leaders joined together to form the Technology Asset Protection Association (TAPA). By combining best practices and developing security standards for freight carriers, TAPA was able to bring cargo theft numbers down by 30 percent between 2000 and 2004. An added benefit: lower insurance premiums thanks to the reduced claims.

I think there are opportunities hidden in the scramble to adjust to new threats and new regulations. The Deloitte study has the same perspective:

Businesses have essentially three choices when it comes to addressing the new realities of the secure economy and complying with the new security requirements.

- Option one: They can choose to ignore them in the belief that the costs of compliance are too steep compared to the potential benefits or the penalties from noncompliance…

- Second, firms can adopt a bare-minimum security compliance strategy—treating it as simply an add-on cost that should be minimized to the greatest extent possible…

- A more promising option is the third one: Businesses can look to security compliance as a strategic issue—an opportunity to create business value and realize a positive return on their security investment. This more proactive approach moves security upstream: It becomes part of the business process, integrated into the normal course of operations, rather than simply a drain at the end. Investments in security go hand-inhand with real, measurable business benefits. In the same Conference Board survey, 61 percent of executives said that security investments can provide value for their companies and a positive return on investment. Chris Mahoney, senior vice president of Global Transportation Services at UPS, captures a view held by a growing number of forwardthinking executives when he says:

Emerging security regulations will force major changes by shippers and transportation companies and the promise of increased visibility in facilitating secure commerce. These demands—fueled by technology, globalization, and an increasingly empowered consumer—are shaping a new age of commerce. With this new age comes new rules…new models…new ways of looking at things…new challenges…and rich new opportunities.

Bottom-line: we don’t know the costs nor the benefits with any precision. But we do know that managing this level of change reactively is not the way to keep the Board of Directors happy. This seismic tremor of change will once again highlight the well-managed companies, just as did the onset of globalization. Remember Japan, Inc. circa 1988 when they were going to own everything?

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