Why the U.S. helps defend South Korea and what can go wrong

This is another case where the diplomatic logic is not obvious until Tyler Cowen explains it

It is not because we need to subsidize their defense per se, to cite one argument which some non-interventionist critics have attacked.  It is so, when North Korea behaves in a ridiculous manner, the South can respond (not respond) with great restraint.  What we are subsidizing is a) a feeling of security, and b) not building nuclear weapons in response.  We do something broadly similar for Japan.

The potential problem is when the same U.S. acts which produce a feeling of security in South Koreans produce a feeling of insecurity in North Korean leaders.  And the broader game we are playing, with numerous allies, means we might end up pushing some individual confrontations  beyond an optimal point (e.g., how would Israel respond with Iran if we wavered on South Korea?)  Might we have to overinvest in the South Korean feeling of security — from a strictly Korean peninsula point of view — to keep Japan, Israel, Taiwan, the Saudis, and others ‘in line’?

It would be good if the North Korean leadership would read this blog post, as they would then realize that what to their eyes appears to be American ‘overstepping’ is done for the sake of other audiences.  It is problematic for the American government to itself communicate this point.  Imagine announcing ‘we don’t stand by South Korea as much as it appears, we are just doing this because Israel faces a signal extraction problem and we can somewhat sway their inference toward relaxing about their own security situation.’

It would be bad if the Saudi leadership would read this blog post (or understand this to begin with).  The American government would then have to produce a feeling of security for South Korea all the more.

Question: where in the media have you seen any discussion of this nuance?

What do Firefighters do? They sure don’t fight fires

Alex Tabarrok with a revealing, US-centric post. So what do they actually do? 

(…) The decline of demand has created a problem for firefighters. What Fred McChesney wrote some 10 years ago is even more true today:

Taxpayers are unlikely to support budget increases for fire departments if they see firemen lolling about the firehouse. So cities have created new, highly visible jobs for their firemen. The Wall Street Journal reported recently, “In Los Angeles, Chicago and Miami, for example, 90% of the emergency calls to firehouses are to accompany ambulances to the scene of auto accidents and other medical emergencies. Elsewhere, to keep their employees busy, fire departments have expanded into neighborhood beautification, gang intervention, substitute-teaching and other downtime pursuits.” In the Illinois township where I live, the fire department drives its trucks to accompany all medical emergency vehicles, then directs traffic around the ambulance—a task which, however valuable, seemingly does not require a hook-and-ladder.

Here’s some data. Note that medical calls dwarf fire calls. Twenty five years ago false alarms were half the number of fires, today false alarms significantly exceed the number of fires.

An Economics Masterpiece You Should Be Reading Now: Justin Yifu Lin’s “The Quest for Prosperity”

My reading list is overflowing, but it looks like Clive Clook’s recommendation has to go on the top of the Development Economics list. Are you ready for “new structuralism”?

The most valuable new book I’ve read this year is Justin Yifu Lin’s “The Quest for Prosperity.” George Akerlof, a Nobel laureate in economics and a man not given to reckless overstatement, calls it “a masterpiece.” I’d say that’s right.

(…)

Lin … was an observer and participant in China’s economic miracle. From 2008 until earlier this year, he was the World Bank’s chief economist. Today he’s back in China, at Peking University.

Lin’s book is intellectually ambitious. He sets out to survey the modern history of economic development and distill a practical formula for growing out of poverty. It’s a serious undertaking: Lin isn’t trying to be another pop economics sensation. But “The Quest for Prosperity” is lightly written and accessible. It weaves in pertinent stories and observations, drawing especially from his travels with the World Bank. He leavens the economics skillfully.

Two Schools

Essentially, he proposes a middle way between two contending schools: structuralism, which emphasizes barriers to development that government intervention is needed to overcome, and the neoclassical approach, which stresses market forces and frowns on industrial planning. He calls his hybrid “new structuralism,” suggesting a closer affinity with the first. (That branding is a bit misleading, but I can see that the alternative — new neoclassicism — doesn’t roll off the tongue.)

(…) 

China’s Success

Structural transformation, of course, is exactly what China has achieved. Elsewhere Lin has acknowledged that China needs further policy reforms and that all is not well. Yet the country’s success of the past several decades is indisputable — and this is no Soviet-style industrialization mirage. Russian factories sold their output to captive markets. Nobody with a choice ever bought a Soviet-made car or television. China’s outward-looking producers are world-class. I’m typing this on a best-of-breed Apple Inc. laptop, manufactured in China.

As I argued in my last column, China is a capitalist country. But how did it get that way?

Lin’s answer draws on both development paradigms. He sees a vital role for government in overcoming barriers to development. But interventions, he argues, must respect compelling market realities. Of these, the most important is international comparative advantage. Poor countries have lots of cheap labor. For them, capital-intensive heavy industry isn’t the way to go.

For today’s developing countries, Lin says, the global economy is the indispensable setting, and looking outward is the sine qua non of rapid development. On the input side, that’s because of the opportunity it affords for technologically driven catch-up growth. On the output side, it’s because the world is a market for exports. On this view, “export pessimism,” the idea that poor countries couldn’t prosper through international trade, was one of the biggest mistakes of the import- substitution school. Globalization is the poor’s best friend.

Currently $15.37 on Kindle.

The Palestinian Emirates?

Tyler Cowen has evidently been traveling in the Middle East. E.g., My favorite things Israel. Two days later Tyler posted a provocative piece on the UAE-style multi-city-state solution proposed by Dr. Mordechai Kedar of Bar-Ilan University:

From Barry Shaw:, this is also known as the ‘eight-state solution’:

(…) He visualizes eight emirate-type city states with designated borders that will incorporate the Arabs within them. The rest of the land can be populated by the inhabitants, whether they be Jews or Arabs, living and behaving with respect and deference to the inhabitants of the various city-states. The states shall be granted sovereignty. They shall be granted surrounding land for expansion and development. Road systems in vacant lands shall be developed for transport of people and commerce, both Jewish and Arab.

If Palestinians could ‘vote with their feet’ across these various Emirates, it would be interesting to see what kind of policies would evolve, relative to what is produced by currently existing forms of political participation.

Here is a web site devoted to the concept, with one more detailed account here.  I should add that there are versions of this idea which do not add all of the ‘baggage’ found on this web site.

In presenting this material, I am not seeking to have MR commentators reprise all of the usual debates on the broader topic of Middle East peace or lack thereof.  Nonetheless I had never heard this idea before, and so I am passing it along.

I’m intrigued with the Emirates concept. The multi-part Barry Shaw series is a good place to start

(…)  Clearly, the decades-old search for an impossible two-state solution has eluded us. Seemingly intelligent and influence people still beat on about it being the only game in town. I have advise for them. Start to think out of the box. Open your minds and horizons to other solutions. Give alternatives the opportunity to succeed or fail, even as you stubbornly cling to your impossible dream.Israel has accepted that large parts of Judea and Samaria are occupied by large numbers of Arabs with an antipathy to Israel. Neither does Israel, the democratic Jewish state, desire to integrate millions of antagonistic Arabs into an Israeli society, thereby potentially tipping the demographic scales against a Jewish majority.This was the reasoning behind the two-state notion which, despite decades of the best efforts of the international community, has failed.All that has been achieved is a Palestinian split between two sections of their society, neither of which recognizes the Jewish State of Israel, and a fading minority-backed leader defying logic with a contentious move at the UN that is bound to kill the only apparent solution on the horizon.Why would political and social scientists and other “experts” want to pour money into a situation that their basic instincts tell them is doomed to failure? But they do.Why do politicians and think-tank experts vacuously point the finger at Israel, rather than examine the pathetic and dysfunctional artificially created “Palestinian” society that is torn asunder by internal bickering and back-stabbing (literally). Their violent political divide is teetering on collapse and chaos, propped up by massive financial injections, mainly provided by the West and even Israel, with Arab regimes promising assistance but defaulting on their commitments.So who says the two-state solution need be the only solution that prevents a one-state no starter? More and more people believe the two-state collapse will not be a disaster and that the dark vacuum may enable alternatives to emerge into the light of day for consideration and application.Gradually, opinion-makers are coming to the conclusion that the two-state solution is dead.

And I recommend Dr. Kedar’s PalestinianEmirates.com

The economic incentives to the locals who would be residents of each emirate – those are compelling. The Hamas and Fatah politicians who feed off the conflict will of course try everything to prevent any progress. But eventually the interests of ordinary families might prevail.

What is not yet clear to me is why the Arab regimes (who profit politically from keeping the conflict on the front pages) would want to back the Emirates proposal? It might bring peace and left the hated Israel still standing. Where is the incentive for Egypt or Syria?

Scott Adams: imagine scenarios in which Israeli cities are still habitable in ten years

Scott Adams asks readers for scenarios that allow Israelis to live above ground. If you see a way out of the drone war, please visit Scott's comments section

In my book The Religion War, written ten years ago, I predicted a future in which terrorists could destroy anything above ground whenever they wanted. They simply used inexpensive drones with electronics no more sophisticated than an Android app.

Fast-forward to today, Iran is sending drones to Hezbollah, and Hezbollah has training camps right next to Syrian chemical weapons stockpiles. Meanwhile, Hamas has its own drone production facility, or did, until Israel found it. One presumes Hamas will build more. How long will it be before Israel is facing suicide drones that only cost its enemies $100 apiece, fit in the trunk of a car, and can guide themselves to within 20 feet of any target? I'd say five years.

So what happens when the drone attacks start happening in volume? Let's game this out. My assumption is that the coming inevitable wave of hobby-sized suicide drones will be unstoppable because they will fly low to their target and be so numerous that no defense will be effective. I predict it will be too dangerous to live above ground in Israel within ten years unless the trend is reversed. But what could stop the trend?

(…)


The economic legacy left by the baby-boomers is leading to a battle between the generations

Voters need to understand that US demographic trends are bad for growth, and very bad for the total future tax burden. But majority rule democracy is not well-designed to find an optimize solution to the growing conflict between aging retirees and the working population that pays for the elderly benefits. 

This Economist analysis seems to conclude that inflation is the only politically feasible outcome:

(…)Sadly, arithmetic leaves but a few ways out of the mess. Faster growth would help. But the debt left by the boomers adds to the drag of slower labour-force growth. Carmen Reinhart and Kenneth Rogoff, two Harvard economists, estimate that public debt above 90% of GDP can reduce average growth rates by more than 1%. Meanwhile, the boomer era has seen falling levels of public investment in America. Annual spending on infrastructure as a share of GDP dropped from more than 3% in the early 1960s to roughly 1% in 2007.

Austerity is another option, but the consolidation needed would be large. The IMF estimates that fixing America’s fiscal imbalance would require a 35% cut in all transfer payments and a 35% rise in all taxes—too big a pill for a creaky political system to swallow. Fiscal imbalances rise with the share of population over 65 and with partisan gridlock, according to other research by Mr Eschker. This is troubling news for America, where the over-65 share of the voting-age population will rise from 17% now to 26% in 2030.

That leaves a third possibility: inflation. Post-war inflation helped shrink America’s debt as a share of GDP by 35 percentage points (see article). More inflation might prove salutary for other reasons as well. Mr Rogoff has suggested that a few years of 5% price rises could have helped households reduce their debts faster. Other economists, including two members of the Federal Reserve’s policymaking committee, now argue that with interest rates near zero, the Fed should tolerate a higher rate of inflation to speed up recovery.

The Economist does not link the IMF study which they referenced. I think it is: The Challenge of Public Pension Reform in Advanced and Emerging Economies, December 2011. Excerpt on reform options:

IMF pension reform chartA. Advanced Economies

32. Most advanced economies face the double challenge of high debt and rising age- related spending, particularly in health care (Figure 12). A number of countries with above-average levels of pension spending also face large projected increases in age-related outlays (Austria, Belgium, Finland, Greece, Portugal, and Slovenia). In some other countries with below-average levels of pension spending today, projected increases in age-related spending are substantial (Luxembourg, Korea, New Zealand, Switzerland, and the United States).

33. Pension reforms that curtail eligibility (e.g., by increasing the retirement age), reduce benefits, or increase contributions can help countries address these fiscal challenges. The trade-offs across these choices are illustrated in Figure 13. Beyond what is already legislated, with no increases in payroll taxes and no cuts in benefits, average statutory ages would have to increase by about another 21⁄2 years to keep spending constant in relation to GDP over the next twenty years.23 Relying only on benefit reductions would require an average 15 percent across-the-board cut in pensions. Relying only on contributions would require an average payroll rate hike of 21⁄2 percentage points. To keep pension spending as a share of GDP from rising after 2030, additional reforms would be needed: for each decade, retirement ages would have to increase by about 1 year, benefits cut by about 6 percent, or contribution rates increased by about 1 percentage point.

Also on future liabilities The Financial Impact of Longevity Risk, April 2012

Patrick Chovanec: China’s Solyndra Economy

Patrick Chovanec is keeping a watchful eye on the squishy areas of China’s economy. It’s not just the banks and the over-leveraged local authorities – the subsidized renewables are under stress.

On Aug. 3, the owner of Chengxing Solar Company leapt from the sixth floor of his office building in Jinhua, China. Li Fei killed himself after his company was unable to repay a $3 million bank loan it had guaranteed for another Chinese solar company that defaulted. One local financial newspaper called Li’s suicide “a sign of the imminent collapse facing the Chinese photovoltaic industry” due to overcapacity and mounting debts.

President Barack Obama has held up China’s investments in green energy and high-speed rail as examples of the kind of state-led industrial policy that America should be emulating. The real lesson is precisely the opposite. State subsidies have spawned dozens of Chinese Solyndras that are now on the verge of collapse.

(…) Chinese solar companies blame many of their woes on the antidumping tariffs recently imposed by the U.S. and Europe. The real problem, however, is rampant overinvestment driven largely by subsidies. Since 2010, the price of polysilicon wafers used to make solar cells has dropped 73%, according to Maxim Group, while the price of solar cells has fallen 68% and the price of solar modules 57%. At these prices, even low-cost Chinese producers are finding it impossible to break even.

Continue reading

A Stunning Visualization of China’s Air Pollution

 

NASA image: Satellites Map Fine Aerosol Pollution Over China

Were you thinking of a China holiday perhaps? The interactive images in this Atlantic article might dampen your enthusiasm: 

(…) China’s censors have tremendous power in print, online, and even in public spaces such as Tiananmen Square. But when it comes to air pollution, even the Chinese government can’t obscure the facts. People see and breathe it every day.

The debate over whose statistics are most “accurate” can be confusing — how to sort out truth from spin? That’s why a group of us at the Asia Society decided to launch China Air Daily, a website that provides up-to-date information on air pollution in the country’s largest urban sectors, and even compares them to major cities from elsewhere in the world. 

So if you need to fly to China, check out China Air Daily first.

When Companies Become Countries

Scott Adams writes so many provocative and thoughtful posts that it is very challenging to highlight just one. Try this one, and this one, and this one. If you like those, then you know what to do (subscribe):

I wonder when the first multinational company will form its own country to avoid wars, government red tape, and corporate taxes. It feels inevitable. I assume it will involve seasteading.

The current notion of seasteading involves floating cities that are outside the control of existing nations. That concept has its appeal, especially as a way to test new forms of government. But existing corporations already have their own form of government called management, and despite its warts, it generally works.

Imagine, for example, that one of the world’s beloved companies such as Apple or Facebook someday decides to start its own country on the sea. The company’s existing management structure would need to add several functions, such as education, healthcare, and police. The corporate government would look a lot like the Chinese government. In other words, it would be efficient in terms of profit, while giving up freedoms that employees are already accustomed to giving up. For example, company employees don’t have freedom of speech when it comes to criticizing management. Somehow we live with that restriction and it doesn’t seem too onerous.

There would be no taxes for permanent residents of the company country. Public services would be funded from corporate profits. Every paid service in the country, from banking, to insurance, to groceries, would be company-run. The accounting would be transparent and the profits would flow to public services.

The big worry with this model is the “company store” abuse that was common during the early days of the United States. In some cases, an employer would take advantage of its monopoly on goods and services to gouge its employees, turning them into virtual slaves. But I think that risk can be addressed by accounting transparency, and by capping the compensation of top management to a multiple of the average employee pay. It also helps if employees can choose to leave whenever they want. That keeps management in line.

Wages in the company country would be low while still attracting top talent, so long as the cost of living islow, taxes are non-existent, and the lifestyle is awesome. Employees could earn less while saving far more, especially if they own equity in the company.

This prediction assumes that traditional governments continue to bankrupt themselves and strangle their own industries with red tape. That feels like a safe bet. But the main reason a company might want to form its own country is to attract the best minds, and the lowest cost of labor, from all over the world without any immigration issues.

Do company countries seem inevitable or unlikely to you? [From When Companies Become Countries]

China estimate of the day

Here’s a useful perspective on China’s infrastructure spend-up from GK Dragonomics via Tyler Cowen:

Another study, by Andrew Batson and Janet Zhang at GK Dragonomics, a Beijing-based research firm, finds that China still has less than one-quarter as much capital per person as America had achieved in 1930, when it was at roughly the same level of development as China today.

Here is more, and I thank David Levey for the pointer. The post as a whole considers whether China is overinvesting and concludes maybe not. Here are further debates on how China is doing.

[From China estimate of the day]