U.S. Is Not Broke: Obama Launches Jobs at Libyans

Of course neither Obama nor the Congress nor the news media think of this past weekend’s launch of hostilities with Libya in these terms. But it’s what’s happening. Three weeks ago we were being told by Obama, the Democrats, the Republicans, and lord knows Fox News, that the “U.S. is broke”.  We “must cut spending and cut the deficit”.  It was all nonsense then and it’s nonsense now.  All the talk about needs to cut the deficit were nothing but political posturing to cover for the truth which is that they don’t want to help ordinary Americans and they don’t care about jobs. The “they” is the elected folks from both parties.

Now a chance to get involved in a war over oil and the story is different.  On Saturday in the first few hours alone, the U.S. launched over 119 cruise missiles.  Cruise missiles don’t come back. Launching one is the same as burning money.  Actually it’s worse. Money can be easily replaced by the government – just click and create the new bank reserves. A cruise missile represents lost real goods and resources.  Goods and resources that could have been used for productive purposes and strengthened the economy.  Instead, they simply go boom.  Oftentimes taking human life with them. A cruise missile costs $1,066,465 each. 119 cruise missiles is $119 million gone in an hour or two. Those missiles could have been spent on job-creation and stimulus producing jobs, teaching children, and feeding families. But instead, in a few hours on Saturday, March 19 the U.S. launched  a lot of jobs over Libya.

Lest you think this is just the crank ramblings of a left-over 70’s anti-war commenter (which it may well be), let me quote one of the greatest generals of the 20th century.  Dwight Eisenhower described the opportunity costs of military escapades and equipment as:

“Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter with a half-million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. . . . This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.”

Mark Thoma summarized the whole situation quite succinctly.  His entire post:

Revealed Preference

We have enough money to pay for military action in Libya, but not for job creation?


Possible Economic Effects of Japanese Disasters

Some information is starting to develop about the economic impacts of the events in Japan.  A week ago, just after the triple disasters of earthquake, tsunami, and nuclear plant partial meltdown, it was much too difficult to foresee the probable impacts of the crisis. Now it’s starting to show and the news is not encouraging for a world that was only engaged in a weak precarious “recovery” from the Global Recession/Global Financial Crisis.

This crisis is really going to be a “stress-test” of modern globalized supply-chains.  The growth of world trade, particularly trade with and within Asia in the last 2 decades has been less about traditional trade, the buying and selling of finished goods between independent agents in different countries.  Instead, “globalization” is increasingly about extended specialization that stretches production processes around the globe. In traditional trade, a disruption of supply from one region is quickly substituted by other products from other regions. Thus traditionally, a natural disaster in one area tended to harm the economy of that region but not have ripple effects elsewhere.  Now, with globalized supply chains for complex designed products like consumer electronics, automobiles, industrial equipment, and computers, a simple disruption in one region might require the shutdown of production in far distant regions as parts become scarce.  Parts of sub-assemblies are usually design-specific and cannot be easily replaced by other sources.

We’re seeing the early signs of such problems.  Last week GM announced the temporary shutdown of an assembly plant in Shreveport, LA due to a lack of parts from Japan.  The NYTimes and WSJ report, via Calculated Risk, that in Japan itself, while Nissan has announced the first re-start of an entire auto assembly plant, resumption of full production at Japanese automakes remains uncertain.  Honda has warned that full production may not restart until May.  They also report that GM has had to curtail production at at least 2 plants in Europe in Spain and Germany. Now today, USA Today reports that the GM shutdown in Shreveport has rippled back to Tonawonda, NY, where GM makes engines for the pickups that are hung up pending Japanese parts.  More on the Japanese struggles to recover at the NYTimes.

Right now, many economists, particularly investment bank economists are saying the risks to global growth are minimal.  But much of their argument is based on the past and the experience with the Kobe earthquake in Japan in 1994.  I’m not so sure.  For one thing, the global supply chains are much more complex and tightly integrated now than they were after Kobe.  It’s not just autos. It’s also a lot of other industries and production spread throughout east Asia such as Hong Kong, Taiwan, Thailand, and Korea.

Another very serious factor is how fast electrical power generation can be restored.  The Economist quotes Richard Koo:

the country as a whole might have suffered about a 12% decline in its capacity to supply electricity. Since the elasticity of electricy usage to GDP is about 2, this means that Japan’s GDP might have shrunk by as much as 6% in the wake of this disaster. Although efforts to improve electricity supply are on the way, even a momentary GDP decline of 6% is a huge shock to the economy.

I’m inclined to agree.  Electricity capacity is not quickly restored if the entire plants are scrapped as is happening with Fukashima, the site of the destroyed nuclear reactors.  This could mean a very deep contraction for Japan with a slow recovery. A 6% decline in the third largest GDP in the world and one of the most active trading partners would be a very serious dent in the world economy.  Especially at a time when Europe is struggling to grow because of it’s Euro-strait jacket monetary system and growth-reducing austerity policies.

Here in the U.S., we are facing our own threats to this very anemic “recovery” in the form of deeper state and local government spending and employment cuts.  We are also facing the prospect of higher gas prices for a protracted period which will also slow the economy.  I had hopes that the Japanese disasters, by slowing the Japanese economy, might at least weaken global demand for oil and possibly temper the recent rises in prices. But, alas, with the weekend decision to bomb Libya, oil prices have once again begun to rise.

Beyond Regulation: Thorium As Safe Nuclear Power?

The disaster at the Japanese Fukashima nuclear reactor has, not surprisingly, re-opened debates about nuclear energy, it’s safety, and energy policy in general.  I’m not going to go into the whole debate or the merits of nuclear energy vs. coal-powered vs. solar, etc. here now. But what I do want to do is to talk about the role of government in any energy policy and safety debate.

There  is a clear regulatory role for government to promote safety regardless of the type of energy program.  Economic theory (at least beyond the simple one-liner slogan economics) and economic history both clearly show a needed role for government.  The dangers posed by any energy source (coal, nuke, etc) are either:  a) long-term developing as in slow creation of cancers from breathing polluted exhaust or slow radiation poisoning, or b) highly uncertain, perhaps improbable, but horrific should it happen (nuclear meltdown), or c) extremely difficult to detect and assess for untrained consumers/neighbors, or d) some combination of a, b, and c.  This means that a purely privately -owned energy generating firm faces incentives to cheat or skimp on safety measures in the near-term and to under-invest in safety.  No legal mechanism exists  (or is practical to create) to adequately ensure that  the producers of the harm, the energy company, pays in full for all damages.  Indeed, most producers or investors need some assurance that they won’t be fully legally liable for all potential damage they may do – that’s why corporations exist instead of partnerships. Since the risks and externalities are unavoidable for consumers, it falls to the government to regulate and mandate safe procedures.

But regulation has it’s limits. Regulators, especially highly-technical and/or long-standing regulators are prone to “capture”.  In other words, the people in the regulatory agency become too friendly, too gullible, and too cooperative with the firms being regulated.  After all, for most of the regulators, these firms are where they’re going to work after their government job. No sense making enemies. The highly technical nature of the task makes it difficult for others in government to understand or get good information from either the captured regulators or firms themselves.  What often happens in this scenario is an increasing series of accidents that are covered-up or handled to the firm’s benefit and not the environment’s or public’s benefit.  The BP oil spill is a good example. Unfortunately, it appears that at least the initial responses to the Fukashima disaster fall into this category as well.  (I had a good link for this but I can’t find it now).

But  beyond regulation government has another critical role in safety.  Government can fund the new discovery of new technologies that are safer but disruptive of the existing firms and system. The really early research and development work that is highly uncertain but yet yields both the new ideas and the proof of concepts from which new industries and new technologies emerge are nearly always funded by government.  Early R&D, particularly for highly disruptive new technologies, is simply too expensive, too uncertain in payout, and too long in paying out to attract private investment.  It has always been thus.  Canals? Government funded. Cotton gin? Telegraph? Electicity generation? Railroads? Internet? The Web? Relational Databases? Computers? All government funded in the early critical stages. It is here where government can play a truly significant role in developing cheap, safe, non-polluting energy.

And it appears that in the nuclear arena, government is doing exactly that. Except it’s not the U.S. government or the French government (the French are really big in existing uranium-based nuclear).  It’s the Chinese and the Norwegians.  They are currently investing in development of thorium-based nuclear power instead of uranium chain-reaction nuclear power such as the U.S. and French and Japanese have relied on for decades. Now a disclaimer, I’m no nuclear physicist. I didn’t even sleep in a Holiday Inn Express last night. But I do understand something about systems.  Real safety comes from having a system that when something goes wrong, it naturally reverts to a default, inert state.  An example is a deadman’s switch on an industrial press. It takes two hands to press switches simultaneously to make the press work. That means as soon as a worker places or leaves a hand in the path of danger, one switch is uncovered and the machine stops.  Or another version means that as soon as the switch is released (reverts to an uncontrolled state), the machine stops.  A major problem with uranium-based nuclear power as I’ve come to understand it, is that this kind of safety isn’t possible. There’s no way to “stop” the process instantly.

Apparently [physicists are welcome to comment and correct], in uranium-based fission nuclear reactors the nuclear reaction is a chain reaction.  It keeps happening without an external input.  It takes an active external input to try to “stop” the reactor.  Yet even that, which happened at Fukashima correctly with the earthquake, doesn’t really stop things.  The fuel continues to react but gradually slows down.  It keeps generating heat for weeks, months, and even longer. This means an active system must be working properly to keep the system cooled and prevent disaster. That means back up systems and redundancies. But the tsunami overwhelmed the backup systems.  Any system that relies on increasing levels of redundant active systems to prevent disaster is a system that is playing probabilities.  It is relying on complexity for safety.  And complexity can never produce really safe systems. It is always limited by the incentives and imagination of the original engineers.

So I’m very excited to read about the existence and potential of thorium-based nuclear reactors.  Ambrose Evans-Pritchard in the U.K. Telegraph explains:

China’s Academy of Sciences said it had chosen a “thorium-based molten salt reactor system”. The liquid fuel idea was pioneered by US physicists at Oak Ridge National Lab in the 1960s, but the US has long since dropped the ball. Further evidence of Barack `Obama’s “Sputnik moment”, you could say.

Chinese scientists claim that hazardous waste will be a thousand times less than with uranium. The system is inherently less prone to disaster.

“The reactor has an amazing safety feature,” said Kirk Sorensen, a former NASA engineer at Teledyne Brown and a thorium expert.

“If it begins to overheat, a little plug melts and the salts drain into a pan. There is no need for computers, or the sort of electrical pumps that were crippled by the tsunami. The reactor saves itself,” he said.

“They operate at atmospheric pressure so you don’t have the sort of hydrogen explosions we’ve seen in Japan. One of these reactors would have come through the tsunami just fine. There would have been no radiation release.”

Thorium is a silvery metal named after the Norse god of thunder. The metal has its own “issues” but no thorium reactor could easily spin out of control in the manner of Three Mile Island, Chernobyl, or now Fukushima.

Professor Robert Cywinksi from Huddersfield University said thorium must be bombarded with neutrons to drive the fission process. “There is no chain reaction. Fission dies the moment you switch off the photon beam. There are not enough neutrons for it continue of its own accord,” he said.

Dr Cywinski, who anchors a UK-wide thorium team, said the residual heat left behind in a crisis would be “orders of magnitude less” than in a uranium reactor.

So back to the question of government role.  When an existing industry such as nuclear power generation exists, dominated by only 1-2 manufacturers of equipment (such as GE) and a small number of very large, very entrenched producers, the utilities themselves, there is enormous resistance and active hostility to change. New technologies are not seen by the existing industry as opportunities. They are only threats. The immediate profit-maximizing “rational” action is to invest not in the new technology, but to in government lobbying efforts to block the development of the new technology. Since nuclear power is an established, well-regulated industry with big bucks behind it, it’s well positioned to stop the new technology, at least in the U.S.   According to Evans-Pritchard, that’s what’s happening in the U.S. and France.  The U.S., which actually first developed the idea of thorium reactors, has dropped the ball. (apparently thorium can’t be used for a-bombs) France, another established uranium player, has actively lobbied against EU research funding of thorium.  And the short-sighted UK government has cut funding for it. Fortunately, there’s a different view in China and Norway where no entrenched uranium-based companies currently exist.

… a few weeks before the tsunami struck Fukushima’s uranium reactors and shattered public faith in nuclear power, China revealed that it was launching a rival technology to build a safer, cleaner, and ultimately cheaper network of reactors based on thorium.

This passed unnoticed –except by a small of band of thorium enthusiasts – but it may mark the passage of strategic leadership in energy policy from an inert and status-quo West to a rising technological power willing to break the mould.

If China’s dash for thorium power succeeds, it will vastly alter the global energy landscape and may avert a calamitous conflict over resources as Asia’s industrial revolutions clash head-on with the West’s entrenched consumption.

China’s Academy of Sciences said it had chosen a “thorium-based molten salt reactor system”. The liquid fuel idea was pioneered by US physicists at Oak Ridge National Lab in the 1960s, but the US has long since dropped the ball. Further evidence of Barack `Obama’s “Sputnik moment”, you could say….

… France’s nuclear industry killed proposals for funding from Brussels, though a French group is now working on thorium in Grenoble.

This is the kind of research and development that could be provide a dramatic spark to the U.S. economy through spin-off effects. But I wouldn’t hold my breath.  Jeffrey Immelt is Obama’s chosen economic advisor from the private sector (at least non-bank private sector). Immelt is CEO of GE. And GE has a huge investment in uranium-based nuclear power, including those reactors and cooling ponds that are melting at Fukashima.

More Food Price Increases? NFL Lockout and Chicken Wings

Well, OK, this isn’t on par with a Japanese earthquake, Libyan oil interruptions, or higher oil prices, but it’s important to some folks.  ABC News Radio tells us:

With NFL owners and players in a standoff, the CEO of one of the nation’s largest chicken farms warns that a long-lasting football lockout would be bad news for a gameday staple, the chicken wing.

“It will be a major blow,” said Joe Sanderson Jr., CEO of Sanderson Farms, the fourth largest poultry company in the U.S. “If we don’t have Sunday football, the demand will go down tremendously, and of course, if that happens, the price will go down.”

Chicken wings are big business. According to Sanderson, wings account for 12 percent of his company’s output, and the National Chicken Council estimates that in 2011, more than 13.5 billion wings will be marketed. Of course, football and wings are inextricably linked.

“We sell about three million pounds of wings a week,” Sanderson said. “And a lot of those wings to go sports bars.”

And while all game days are big business for wings, the “absolute peak,” Sanderson said, comes on Super Bowl Sunday. According to the National Chicken Council, more than 1.25 billion wings were consumed during last Super Bowl weekend.

Pro football owners and the players union are in a disagreement over how much pay players should earn and how long the season should last. If there is no season next year, the effects will be profound, Sanderson said.

While Sanderson says that while the NFL lockout won’t force layoffs at his company, he believes that plenty of other businesses, like restaurants that cater to sports fans, will be in trouble if the season is scrapped.

Actually there’s some lessons here for a micro class. The first is that any action or event in an economy usually has unintended and even unexpected consequences. Often the consequences aren’t the most obvious. Here of course is the possibility that the NFL player lockout (it’s not a strike folks) will affect folks economically other than billionaire NFL owners and millionaire NFL players.  There are the many not-so-well-off workers such as stadium workers who will suffer a loss of income. As the article points out, this could easily spread to restaurants and bars where normally fans would spend money to watch the games.

But there’s other, hidden possible effects. For example, at first pass, we might think that the price of chicken wings might drop because of lowered demand that Sanderson describes. But, assuming that the lowered demand actually translates into lowered total revenue from selling chicken wings (a question of elasticity for which I have no data), then it’s highly probable that the price of other chicken parts will rise. Yes, the NFL lockout might raise the prices of things like boneless chicken breasts and chicken sandwiches.  Why?  Each chicken itself represents a kind of fixed or unit cost to the chicken farmers and producers.  Each chicken comes with a breast and two wings and two legs. Can’t change that (at least not yet!). So if the wings bring less revenue, then either the legs or the breast or back have to pick up the slack.  I wouldn’t be surprised to see boneless chicken prices rise if sales of wings decline.

Of course we could carry this speculation even further. If NFL football doesn’t happen, and chicken wings are preferred snack for NFL football, then what substitutes for either?  If it’s baseball watching that increases as a substitute for NFL, then perhaps demand for hot dogs increases.  Or if college-football with tailgating and NASCAR get a fan boost from the lack of NFL, then perhaps it will be more demand for burgers and sausages on grills?  I think I’m getting hungry.



AT&T and T-Mobile: New Boss, Same As Old Boss

The U.K. Guardian brings us the telecommunication news yesterday of a new cell phone overlord in the U.S.:

In what would be one of the biggest deals since the financial crisis broke, the US telecoms giant AT&T has agreed to buy T-Mobile USA from Deutsche Telekom for $39bn (£24bn), creating the biggest mobile operator in the US.

The deal would bring together the second and third largest mobile groups in the US and will thus face intense regulatory scrutiny. If approved, the merger would shrink the number of major national wireless operators in the US to three from four.

The article warns that the Federal Communications Commission, which has to approve such a merger, has “warned against growing concentration among mobile providers”.  I won’t hold my breath.  The FCC, and the Federal Trade Commission  for that matter, will stamp their feet a little, demand documents, and do a “review”.  Then they will approve it.  In fact, I’ll go so far as to predict that the approval will happen before the internal IT staffs can figure out how to merge the customer billing systems. There’s very, very little in the way of mergers in the last 25 years that Washington won’t approve. The concept of anti-trust is long, long dead.

This merger will create a new monster-sized cell-phone network. (ATT-Mobile?) The new combine will be a 1/3 larger than the current king-of-the-hill, Verizon Wireless. Indeed, there will be only really three networks left, the new ATT-Mobile, Verizon Wireless, and Sprint-Nextel. Consumer choices and options will narrow further. Competition, already weak, will diminish further. AT&T claims in a press release quoted in the Guardian article that:

The firm claims the US wireless industry is “one of the most fiercely competitive markets in the world and will remain so after this deal. The US is one of the few countries in the world where a large majority of consumers can choose from five or more wireless providers in their local market. For example, in 18 of the top 20 US local markets, there are five or more providers.” AT&T also argued that jointly the firms would provide a better wireless broadband service to rural areas, an Obama administration priority.

Hogwash. The reality is that there are 4 major networks now. In 18 major cities there is one or two very small, local, minor fringe players that really only compete for low-cost voice/text traffic and not for data. Think MetroPCS for example. After this merger there will be only 3 major players and maybe another small, insignificant player in each market.  I doubt that will last long either.  Verizon Wireless, having been toppled from it’s perch as largest will soon be on the prowl for acquisitions.  I can easily see Sprint-Nextel being acquired by Verizon.  If nothing else, the several little local players like MetroPCS will no doubt be sending their investment bankers to Verizon with “buy-me” proposals.  At best, we face only 3 competitors. One of those, AT&T, has proven itself reluctant to innovate or invest heavily to meet the growth in data traffic (can say “throttling on iPhone’s?”).  AT&T’s concept of innovation is to lock-in exclusive deals with phones that consumers want such as the iPhone and then milk the quasi-monopoly.  When the monopoly on iPhone ended and Verizon begins offering competition, it takes AT&T less than two months to respond by purchasing a competitor.

There’s another way that competition is lessened. T-Mobile was primarily owned by Deutsche Telekom, the European telecommunications giant created in 1996 when the German telephone and postal system was privatized.  Suppose T-Mobile were sold to another non-cell phone firm.  That would actually increase competition since DT could provide some market discipline through the threat of re-entering.  It could provide what we call a “potential new entrant” since the parent company could, if it wanted, invest and take the firm in new directions.  Now AT&T doesn’t have to worry about Deutsche Telekom.  DT will retain an 8% ownership stake in the new venture meaning that DT is eliminated as potential future competitor or new entrant.  DT will not enter or re-enter the U.S. market since it would lessen the value of their 8% investment.

It’s also an example of how globalization, which is allegedly about increasing world competition, actually lowers competition worldwide.  On a global basis, AT&T and Deutsche Telekom are competitors. They should be threats to enter each other’s markets anywhere. But in practicality they aren’t competitors. They are partners in a variety businesses. In this case, both the AT&T corporate parent and Deutsche Telekom will be co-owners of the new AT&T Cellular in the U.S.  Partners don’t aggressively compete with each other. They find ways to “live and let live” and to allow each to mutually prosper (at the expense of customers).  The partnerships then extend elsewhere. In Europe, DT is also a co-owner partner in a joint T-Mobile Europe venture with Orange, another European telecommunications firm. So now Orange, which could conceivably try to enter the U.S. market, is very unlikely to consider it. It would upset AT&T which would upset DT which could hurt the Orange-T-Mobile venture.  Got it? It’s all a giant world-wide club – the 21st century version of John D. Rockefeller’s trust arrangements. It’s all designed to create “value” for the “shareholders”, although I suspect the management will siphon off a lot of the value before it gets to the shareholders.

So where’s the “value” come from?  Consumers get ready. It’s your pockets.  The bills will get larger and the discounts scarcer and the customer service worse.  ATT explains in the same article:

The combined company is expected to earn back the price of the deal in the next three years as it makes more money from customers and reduces costs by closing retail outlets and cutting back office, technical and call centre staff.

So AT&T expects to save $25 billion over the next 3 years from “more money from customers” and “reduces costs”.  Look at those cost savings listed. That’s not efficiency. That’s cutbacks in customer service. And probably even more dropped cal…….