AEI » Latest Content American Enterprise Institute: Freedom, Opportunity, Enterprise Mon, 22 Dec 2014 19:20:49 +0000 en-US hourly 1 Once again, the US versus Europe — and monetary policy Mon, 22 Dec 2014 19:20:49 +0000 MKM Partners Chief Economist Mike Darda notes the strong reading from Chicago Fed’s National Activity Index for November — consistent with above-trend growth — and makes this point:

Indeed, both the USA and UK business cycles appear strong enough to warrant some gradual tightening of monetary conditions later next year. By sharp contrast, the perpetually too tight ECB looks to be in an indefinite zero rate trap, the result of repeated monetary blunders.

As we have pointed out before, euro area NGDP growth has run at a pitiful 1.7% per annum rate over the last four years (less than 45% of the pre-crisis average) where as it has been running at about 4% in the USA and UK (more than 70% of the pre-crisis average). Fiscal headwinds have been stiffer in the USA and UK; the divergence is a monetary story. If NGDP growth is running at a 4-5% rate in 2015, there is a case for tightening policy at some point in 2015 in the USA (and UK). In any event, steady NGDP growth and low inflation/interest rate environments will tend to be associated with elevated stock market valuations.

Of course, this ups the ire of the financial stability hawks who want the Fed to tighten to knock stock valuations down. However, the only way for the Fed to actually do this is to either 1) undermine the business cycle, causing recession or deflation; or 2) target a much higher rate of inflation/NGDP, which would result in much higher interest rates (and thus lower stock market valuations).

In 1928-1929, the Fed chose option 1 in the pursuit of financial stability. The results were not pretty. During the 1970s, the Fed and political system ending up precipitating option 2 in the pursuit of unrealistically low levels of unemployment. Better for central bankers to focus on slow, steady NGDP growth, which will mitigate the risks of both scenarios and provide a backdrop of stability.

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Free speech, political correctness struggle to coexist on campus Mon, 22 Dec 2014 19:05:19 +0000 The total discrediting of Rolling Stone’s story on rape at the University of Virginia has shined a light on one of the least palatable features of American life: the so-called epidemic of rape on campus.

Authorities from Barack Obama on down have cited the phony statistic that one in five college women is raped. Phony, because it’s based on a 2007 survey conducted at two Midwestern schools, not of a random sample, but of a small number of self-selected respondents. The study also includes unwanted touching and kissing in its broad definition of “sexual assault.”

A Department of Justice survey released this month presents a different picture. Between 1995 and 2013, it reports, an average of 0.61 percent of female students were raped or sexually assaulted every year — 2.4 percent over four years, not 20 percent. Moreover, DOJ reports, that rate has been declining significantly in recent years, in line with a national decline in rape.

In other words, there is no suddenly raging epidemic of rape on campus. Nevertheless, colleges and universities have been scampering to comply with mandates from the Obama Department of Education to set up procedures in which campus administrators, with no legal training, act as investigators, prosecutors, judges, juries and executioners.

Accused students are not allowed to have lawyers or to confront witnesses, and legal rules of evidence do not apply. State legislatures have passed or are considering laws requiring schools to adopt (and many schools are adopting) a “yes means yes” standard, requiring express consent at each stage of a sexual encounter.

These kangaroo courts can and do expel male students, putting a blot on their records for life. No wonder dozens of them are suing universities and getting big cash settlements. No wonder 28 current and retired Harvard law professors signed a letter calling such processes “deeply unfair and undemocratic.”

Some day, I suspect, this frenzy will be seen as akin to the hysteria over satanic abuse in day care centers in the 1980s. Many people went to jail over utterly fraudulent charges based on bogus psychological research, akin to the Salem witch trials.

It’s not surprising, however, that these abusive frenzies have taken hold at the nation’s colleges and universities. Increasingly, they are our society’s least free, least fair and least honest institutions.

Consider campus speech codes. The Foundation for Individual Rights in Education (FIRE) reports that 58 percent of the 427 colleges and universities it monitors have speech codes banning or penalizing speech that is protected by the First Amendment in America generally.

The good news is that the number of speech codes is declining, partly in response to FIRE’s advocacy and lawsuits. The bad news is that the Obama Education Department continues to use threats to cut off funding to coerce universities to ban “sexual harassment,” defined as “any unwelcome conduct of a sexual nature.” As FIRE notes, “This is an overbroad definition that is not in accordance with the First Amendment.”

The rationale for speech codes? Usually it is that students, especially racial minorities and women, should not encounter anything offensive on campus. Administrators evidently believe that people should not be allowed to express thoughts someone else doesn’t want to hear. The authors of the First Amendment had a different idea.

A third way in which universities and colleges are corrupted is in the widespread resort to racial quotas and preferences — literally, racial discrimination — in admissions to selective institutions.

Administrators do not admit they are discriminating by race. That would, among other things, violate the letter of the Civil Rights Act. But everyone knows they are using “holistic” standards to admit more blacks and Hispanics (and thus fewer Asians and whites) than they would under the criteria they admit to using. They evidently feel that “diversity” justifies discriminating by race and lying about it.

Kangaroo courts, speech codes, racial discrimination: I suspect some older readers cannot believe such practices have become standard operating procedure at American colleges and universities — indeed, the major focus of many administrators, who now outnumber teachers on the nation’s campuses.

Historically, universities and colleges saw themselves as havens of free speech and fair play, insulated from the larger society to protect those things from interference. Now they insulate themselves in order to violate due process, suppress speech and discriminate by race.

There’s still some good scholarship and teaching on campus. But it exists, uneasily, amid a culture of lying and intellectual corruption.

Michael Barone is a senior political columnist for the Washington Examiner. This column is reprinted with permission from

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More and more of America’s superrich may be getting that way through entrepreneurship Mon, 22 Dec 2014 18:04:09 +0000 In a recent National Review story, economist Tino Sanandaji takes issue with inequality researcher Thomas Piketty, author of this year’s surprising best-seller, “Capital in the Twenty-First Century,” over how America’s superrich got that way. Sanandaji:

Piketty believes that most top wealth is inherited and that the rich tend to pass on their growing wealth to the next generation. It goes like this: Assume that the wealthy receive a return of 6 percent of their capital, spend half and reinvest the remaining 3 percent perpetually while the growth rate of the economy is 2 percent; the fortunes of the rich will outgrow the economy by 1 percent per year and eventually take over the economy.

But Piketty is aware that the force driving his r > g theory — rentiers with ever-growing inherited fortunes — is ill-suited for the United States. The book therefore introduces a second force behind inequality to better account for trends here. Piketty believes that most top earning Americans are senior managers of large firms, a group that he labels “supermanagers.”

But there is a problem with Piketty’s analysis: Where are the entrepreneurs?  Again, Sanandaji:

Wealthy rentiers and salaried corporate executives may be vaguely unsympathetic groups, but they do not constitute the bulk of rich Americans. In particular, Piketty underestimates the importance of entrepreneurs and business owners. It’s not a minor oversight: Self-employed business owners who actively manage their firms own around 70 percent of the wealth of the top 0.1 percent. With top earnings, too, business owners are far more important than salaried executives. This doesn’t change the fact that inequality is high and rising, but it undermines Piketty’s explanation for why inequality is increasing in the United States.

Indeed, if you dig deep into Forbes magazine’s annual surveys of the superrich in the US and abroad — a key data source for Sanandaji — you find a couple of interesting data points. First, the US creates billionaire entrepreneurs at a faster clip than any other large advanced economy. One might argue this a healthy sign soon for US innovation and growth.

Second, self-made billionaires increasingly populate the ranks of the richest people in the country. In its latest Forbes 400 issue, the magazine gave each member a 1-to-10 score with “1 indicating the fortune was completely inherited, while a 10 was for a Horatio Alger-esque journey.” Forbes then applied that analysis all the way back to 1984. Here is what Forbes found: “Looking at the numbers over time, the data lead us to an interesting insight: in 1984, less than half of people on The Forbes 400 were self-made; today, 69% of the 400 created their own fortunes.”

The chart below helps illustrates that point by comparing  the 1s  vs. the 10s over time, Forbes finds that for “the first time in our data set, we see the number of self-made billionaires who rose from nothing, and overcame various tough obstacles, outpacing those that just sat on their fortunes.”




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Time for the IMF in Russia Mon, 22 Dec 2014 17:23:42 +0000 The last thing that a beleaguered Vladimir Putin will want to hear is that Russia has now reached the stage where it desperately needs an IMF supported economic adjustment program. Without such a program it is difficult to see how Russia can regain domestic and international confidence in the management of its economy. Absent the IMF, it is also difficult to see how Russia will be able to avoid the imposition of damaging capital controls on its economy.

There can be no denying that Russian policymakers were totally blindsided by the recent collapse in international oil prices from around US$110 a barrel in mid-2014 to US$60 dollars a barrel at present. All too likely this will prove to have been a very costly lapse in economic policy judgment particularly considering that energy accounts for around two thirds of Russian exports and around half of its tax revenues.

A dramatic drop in international oil prices would have been difficult for Russia in normal times. Yet these are hardly normal times for Russian since effective financial sanctions are now being imposed on the country in the context of the ongoing Ukrainian crisis. Those sanctions have already precipitated more than US$100 billion in capital flight from Russia since the start of this year. They are also now seriously restricting the ability of Russian corporations to refinance their large US dollar debts coming due.

In responding to a burgeoning balance of payments crisis, Russian policymakers appear to have made every mistake in the book. The central bank was painfully slow to use its large international reserves or interest rate policy to calm market fears about the currency’s stability. Compounding matters, the central bank has managed to convey the impression that the Russian government stands fully behind the Russian corporate sector’s more than US$600 billion in foreign currency debt.

Worse yet, the central bank’s actions have not been backed up by any serious adjustment to the government’s budget spending plans despite the fact that the oil price now is around 40% below the level assumed in the government’s budget. Similarly no changes have been proposed to reform the insidious interconnection between the government and the corporate sectors, which has seriously undermined confidence in the management of the economy.

With the government seemingly at sea, there has been a dramatic swoon in the Russian ruble, which has lost almost half of its value since the start of the year. This is something that Russia can ill-afford considering that inflation is already over 9% and that the Russian people are  all too familiar with the pain associated with very high inflation rates. The public is already starting to hoard groceries before they get more expensive and are rushing to their ATMs while the going is still good. It would seem to be only a matter of time before they start running on their banks.

Experience amply suggests that it is very difficult to regain economic confidence once it has been lost. Those countries in Russia’s present dire economic circumstances that have succeeded in doing so have done so in the context of a carefully coordinated economic adjustment program that had the imprimatur of an outside independent agency like the IMF.

For Vladimir Putin to successfully approach the IMF, he would have to back down on his Ukrainian adventure to win Western support. Considering that to be highly unlikely, Russians should brace themselves for a rough economic ride next year. For not only is it all too likely that Russia will experience a deep economic recession and double digit inflation. It will also be subjected to capital controls that will further distort Russia’s already highly distorted economy.

Follow AEIdeas on Twitter at @AEIdeas.

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No, China is not ready to cut off North Korea Mon, 22 Dec 2014 16:12:38 +0000 Like clockwork, just days after another North Korean provocation, the press begins reporting that this time, China is upset, for real, no kidding. The story at the moment is from the New York Times, headlined “Chinese Annoyance With North Korea Bubbles to the Surface,” asserting that an article critical of Pyongyang written by a retired, once-influential army general might represent a deeper current of thought in China about the dangers of continuing to support the Kim regime. In a country of 1.3 billion people, it would be shocking if there weren’t divergent views on just about everything, and even surprising if a few of those didn’t make their way into the state-controlled press. Yet this is a long way from saying that China is thinking of cutting North Korea loose, pulling the life support that has kept the Kim government alive as it continues to destroy what little remains of the country’s economy and comes ever closer to a miscalculation that could ignite conflict on the Korean peninsula.

To give a bit of perspective on how Western reporters and officials continue to hope for something that just ain’t happening, a few headlines from recent years: “China Frustration With North Korea Offers Hope for U.S.” appeared in June 2013, and a few months before that it was “China’s Anger at North Korea Overcomes Worry About U.S. Stealth Flights,” while “China’s Anger at North Korea Test Signals Shift” came out way back in May 2009. Those are just a few of the pieces asserting that ties were cooling between Beijing and Pyongyang and that Washington could soon see a major shift in China’s attitude.

The hope each time, fed by ever-optimistic U.S. government officials, who would regularly share the same sentiments in off-the-record meetings in Washington, was that maybe now we could turn to Beijing to start putting real pressure on North Korea to end its nuclear program, curb its missile launches, and in general stop acting crazy. That is why we still see stories such as “U.S. Approaches China in Effort to Respond to North Korean Hacking,” in which a “senior U.S. official” states that “we have discussed this issue with the Chinese to share information, express our concerns about this attack, and to ask for their cooperation.”

If such senior U.S. officials are playing a psy-ops game, and maybe sending some unsettling threats to Pyongyang through Chinese intermediaries — such as “We’re going to empty your bank accounts” — then we should applaud their Machiavellian finesse. However, if they are talking to Beijing with a straight face, which is more likely the case, then they are living in some version of the Matrix, where they have not yet taken the red pill. Maybe a simpler analogy is Lucy and the football. Normally, it’s the North Koreans who pull the football away from our negotiators, but in this case, we’re setting the ball up ourselves and all but asking the Chinese to yank it away as we hurtle down the field of international cooperation at full speed. I mean, if you’re Chinese president Xi Jinping, or his underlings, what else are you going to say to the gullible Americans but “Of course we hear your pain, and believe me, we are here to help”?

That is not to say the Chinese aren’t worried by just how insane Kim Jong-un may well be, seeing that he pulled a Godfather-style family dinner on his uncle last year — an uncle who just happened to be until that moment the power behind the throne and China’s main conduit into the Bizarro world of North Korea. But the bigger picture hasn’t changed. Beijing is essentially receiving an in-kind donation from the United States thanks to the stalemate with North Korea: tens of thousands of U.S. troops tied down every year on the Korean peninsula, costing us millions of dollars and requiring thousands of hours of government work on all levels. It’s a waste of resources that Beijing could hardly hope to get us to do otherwise. The Chinese have no incentive to help us “solve” the North Korean problem, since that would release a not insignificant amount of U.S. strength to focus on China’s own moves to extend their control through much of Asia’s strategic waters.

Actually, I don’t think American officials are that desperate, self-delusional, or amateurish. However, they cannot break out of their dialogue dependency trap, either with North Korea, which has led to two decades of broken agreements, or with China, where they cannot but think that keeping open the lines of communication somehow gets us closer to our goals. If so, then the hundreds (thousands?) of man-hours of chitchat with our Chinese friends should have resulted in a North Korea that is busy stuffing Christmas sack with toys for tots and, oh, closing down its concentration camps and turning off the thousands of nuclear centrifuges spinning 24/7 making little juche nukes.

No, as attractive as the prospect of engaging in meaningful diplomatic dialogue with our Chinese partners is, the signal we send is one of being both helpless and clueless: helpless in that we have no North Korea policy in Year Six of the Obama administration (which may almost be better than the disaster of the Bush years) and clueless in that we somehow think that we’re showing just how responsible we are by diplomatically engaging North Korea’s major supporter, which has no interest in any type of lessening of tensions between the U.S. and North Korea.

The problem is that North Korea has just opened up a whole new, and much more dangerous, chapter in state-sponsored terrorism. American companies are at direct risk, self-censorship has already been adopted, and there is still no American response, as we seem to have been caught with our pants down once again. That augurs for a lot more cyber terrorism in the coming years while we are busy paying courtesy calls on our Chinese friends who are, this time, really, really angry with North Korea. Trust us.

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The pathetic Pacific pivot Mon, 22 Dec 2014 16:06:21 +0000 ...]]]> As the historically minded will recall, back in 2012 the Obama administration declared that the United States “will of necessity rebalance toward the Asia-Pacific.” That was the guidance the commander in chief gave to the U.S. military, the idea being that since, the peace of Europe was eternal and self-sustaining, and the Middle East was a mess made by George Bush, that the most important mission for the 21st century was to keep an eye on the Chinese, the “rising” great power.

Our Asian allies were very pleased by this, particularly the Japanese who had become a frequent target for expressions of Chinese nationalism incited by the government in Beijing. But the South Koreans, Southeast Asians, and the Australians – who had just published a defense white paper speculating about the retreat of the United States from the region – were likewise reassured when the U.S. Navy announced that it would base 60 percent of its ships in the Pacific.  There will soon be 2,500 Marines based in Darwin, in northern Australia, too.

East Asia’s enthusiasm for this “pivot” – the term initially pedaled by the White House – has subsided substantially since then.  In the part of the Pacific that matters most, the waters of the western Pacific from the Sea of Japan through the South China Sea to the Malacca Strait, the U.S. military is decreasing toward a vanishing point. Budget cuts are slashing the overall size of the armed forces and the wars of the Middle East remain a giant, sucking chest wound that demands attention, exposing the Pacific Pivot as all hat, no cattle.

A good way to measure this is to chart the deployments of the five aircraft carriers that comprise the backbone of the Pacific Fleet.  Looking at the official Navy information cataloged by the website STRATFOR reveals how gaping the American absence has become.  In the 32 months from May of 2012 through this December, there have been 12 months where there has been no aircraft carrier – none – in the area controlled by the 7th Fleet, the command that oversees the western Pacific.  In only four of those 32 months have there been two carriers in the region; in such a large area, that’s probably the absolute minimum requirement for any kind of effective presence and deterrence.  The numbers would be even worse but for the fact that the USS George Washington, which is based in Yokosuka, Japan, was constantly at work; alone it accounted for more than 80 percent of the total carrier presence in this period.  Alas, the George Washington is about to undergo the periodic overhaul of its nuclear powerplant, a process that will take it out of service for about two years.  Today’s 10-carrier Navy can’t come up with a substitute until next summer, when the USS Ronald Reagan may begin to operate from Japan.

This heavy use of the Yokosuka-based carrier has been necessary to offset the fact that two of the other Pacific fleet carriers, the Ronald Reagan and the USS John C. Stennis, have been in periods of extensive, if normal and predictable, servicing. But just as crippling to the Navy’s Pacific posture has been the need to participate in deployments to the Persian Gulf, a mission that occupied much of the Stennis’ time prior to maintenance and has also eaten up large slices of the Everett, Washington-based USS Nimitz deployments.

The carrier presence picture is mirrored almost exactly when it comes to Marine amphibious ships.  The Pacific amphib fleet consists of five ships, with one based at Sasebo, Japan.  The Marines were able to keep two of these “mini-carriers” in the 7th Fleet area of operations for only three of the 32 months, again relying on the Japan-based Bonhomme Richard to maintain the majority of the presence.

To be sure, carrier presence is not the only, or perhaps even most important, measure of naval power, let alone overall U.S. military power.  Nonetheless, these numbers are strongly indicative.  Where carriers sail, they are accompanied by a bevy of escort ships, including Arleigh Burke-class destroyers and attack submarines – also, with their Tomahawk cruise missiles, much in demand in the Middle East these days.

This deployment arithmetic is the reality of the Obama Pivot.  And it is no accident, comrade, that the increase in boat-bumping and other aggressive behavior by the Chinese People’s Liberation Army correlates pretty nearly to the decrease in U.S. patrolling, particularly in the South China Sea, which is a long way even from Yokosuka.  That port is on the northeast side of Japan, about 1,300 miles as the crow flies from the Taiwan Strait and 2,100 miles from the middle of the South China Sea.  The Navy’s carriers are extremely capable warships, but they can’t be in two places at once.  Even if the missions are split perfectly between the Navy and Marine Corps, the line is thin.

And the Obama “Rebalance” is, in fact, an Obama Retreat, not simply from the Middle East or in the face of Vladimir Putin’s aggression, but from the Pacific theater that was touted as its focus.  Chinese leader Xi Jinping will, no doubt, be happy to conclude treaties that pretend to control the climate while he exerts increasing military control over maritime East Asia.

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Shouldn’t shale billionaire Harold Hamm be Person of the Year? Mon, 22 Dec 2014 16:04:40 +0000 I’m not going to argue Time magazine was wrong to give its annual “Person of the Year” award to the Ebola fighters. Perfectly reasonable choice. But how could one of the finalists  — a group that also included Vladimir Putin, Taylor Swift, Jack Ma, Tim Cook, Masoud Barzani, and Roger Goodell — not be fracking billionaire Harold Hamm, founder and CEO of Continental Resources?

As Forbes magazine puts it, “Harold Hamm has transformed the U.S. oil industry like no one since John D. Rockefeller, while helping to keep domestic prices low — and making himself a $17 billion fortune. And the Wall Street Journal: ” …  since 2005 America truly has been in the midst of a revolution in oil and natural gas, which is the nation’s fastest-growing manufacturing sector. No one is more responsible for that resurgence than Mr. Hamm. He was the original discoverer of the gigantic and prolific Bakken oil fields of Montana and North Dakota that have already helped move the U.S. into third place among world oil producers.”

At the very least give the nod to the shale revolution, which is the driving force behind the economic and geopolitical story of the year — the stunning collapse in oil prices. So long income stagnation. A new Citi note calculates that the fall to below $60 per barrel will boost real net income by $1,150 per household next year, or more than 2% of median family income.

What’s more, the oil gusher has provoked a wild gamble by Saudi Arabia: Instead of cutting production to support prices, the Saudis have decided to  “let prices slide to test how long, and at what levels, American shale producers can keep pumping,” according to WSJ reporters Jay Solomon and Summer Said. And as you may have heard, this is also not so great news for the petro-dictatorships of Iran, Russia and Venezuela. To focus for a second on the nasty Putin regime, the Financial Times reports that Alexei Kudrin, former finance minister and possible future prime minister, says Russia faces a “full-blown economic crisis next year” that could trigger a series of bank defaults and turn Russia’s sovereign debt into junk.

Actually, the falling oil prices are also lousy news for Hamm, who has lost half of his $20 billion fortune during the decline. Maybe a shoutout from Time would soften the blow.

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2015: Breakthrough in India? Mon, 22 Dec 2014 15:27:28 +0000 The safe bet is always that India won’t get its act together economically. For risk-takers, next year may be a time to make the unsafe bet. It’s possible that India will finally adopt a unified goods and services tax (GST). This would constitute a major step toward a unified market, which is a basic contributor to prosperity that has been absent to now.

It seems bizarre to outsiders but India does not have a true national economy. States do not freely trade with each other. Perhaps the worst problem is the application of different taxes at each state border, which discourages inter-state commerce. The solution is a single tax system, the GST.

The problem dates back to independence and solutions have been considered for almost three decades. They have all either failed or been plainly inadequate. But the necessary votes, both procedural and substantive, to create a unified GST have now been scheduled for 2015. This could be the breakthrough reform India and its friends have been waiting for since Narendra Modi’s electoral triumph in May.

Of course, a number of things can still go wrong. The GST can be rejected by the legislature or, despite their tentative agreement, by the states themselves.

Opposition to GST could be substantial enough that it is postponed again rather than forcing anyone to actually make a difficult choice. This would hardly be a surprise in India. Or the GST could be modified such that the country remains effectively divided economically and few benefits are realized.

If a sound GST can somehow emerge, however, it could be the start of the transformation so many have waited for. In particular, Indian manufacturing has been the story of a few fairly successful states, with most of the country performing poorly.

A unified national market encourages specialization that makes production in each state more efficient. It enables the creation of supply chains across states. And, of course, it greatly expands the pool of available customers. A sound GST would help create conditions for better manufacturing performance in all states.

The happiest outcome would be an employment boost. This, in turn, would make manufacturing labor reform much easier politically.

At present only small manufacturers can freely fire regular workers, which sharply discourages hiring. If this restriction is loosened across the country, as it has been in a limited way in the state of Rajasthan, then the labor market and the tax system will both be far more conducive to fulfilling Prime Minister Modi’s dreams of India as a global manufacturing powerhouse.

The odds of this happy sequence remain low. But they are higher than they were even a month ago. Indian reform may be the key global economic story in 2015.

Follow AEIdeas on Twitter at @AEIdeas.

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“High quality” preschools: Read the fine print Mon, 22 Dec 2014 15:04:16 +0000 AEI early-childhood education expert Katharine Stevens writes in the Wall Street Journal that the December 10, 2014 award of $750 million to states, district, agencies and non-profits is nothing but a Trojan horse.

Personally highlighted by President Obama, Education Secretary Arne Duncan, and HHS Secretary Sylvia Burwell, the Early Head Start-Child Care Partnerships and the Preschool Development Grants include a mountain of costly, hard to follow federal regulations (including 2,400 Head Start performance standards stipulating how to clean potties or place a cot in a room) and a “qualified workforce” requirement which mandates that all preschool teachers must have a college degree even though it would cost the 300,000 current teachers who don’t have a degree $23 billion to comply.

Stevens explains that preschool teacher quality and pay should be defined by effectiveness in the classroom – not by credentials. She notes that the new rule will keep many talented teachers from entering the profession, and that there are other ways to ensure academic ability.

“[T]hese new federal grants are paying states to institutionalize a misguided conception of quality, repeating the same mistakes that the education establishment has been making in K-12 for decades: focusing on teacher credentials rather than effectiveness, holding programs accountable for compliance rather than outcomes, and advocating centralized control rather than innovation.”

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Are low gas prices good or bad? Mon, 22 Dec 2014 06:00:53 +0000 ...]]]> Oil prices have been falling — and with them the quality of reporting and writing about this periodic event. Stock market “guru” Laszlo Birinyi (just to select one of many annoying examples) claims that “It [the oil price drop] is just a black swan. It comes clearly out of the blue. Four standard deviations out of anything else [ie, exceedingly far from mean expectations]. In a case like that, there are no perimeters.” This quote is remarkable only for its accumulation of indefensible claims, not for its overall tenor: falling oil prices have been generally treated as a shocking, unprecedented, and (most incredibly) a highly regrettable development that will end the rise of the US stock market and create unrest and uncertainty around the world.

What do those commentators want? When oil prices reached the all-time peak (in current dollars) of $145.31 on July 3, 2008 (using the West Texas Intermediate, WTI, oil values), they claimed that a rise to $250 a barrel was imminent, and that it would bring the end of modern high-energy economies — but by December 23, 2008, the WTI oil price was down to $30.28, dropping by 79 percent in less than half a year. Now, when the prices are falling, some so-called experts see no downward perimeters, and the very people who yesterday blamed OPEC for pushing prices too high are now wondering why the cartel (which has never had any easy control of the market) does not step in, drastically cut its output, and arrest the price fall because (in a white is black reversal) low oil prices are now widely seen as deeply disruptive.

But when the prices were rising between 2003 and 2007, the expert consensus, drawing on simplistic analyses of peak-oil activists, expected a continuous fall in global oil extraction and an ensuing fight over the remaining scarce resources — yet by 2013 global oil production was nearly 11 percent above the 2003 level, and in the intervening period the additional extraction easily accommodated the rise of China to the world’s second-largest oil consumer and (by 2014) the world’s leading oil importer. Peak oil nightmares have not come to govern the oil market, which has remained well supplied at affordable prices: when adjusted for inflation, oil prices in 2013-2014 were lower than they were in 1980-1981, and when also adjusted for the decreased oil intensity of modern economies they were a bargain. In 2013 the US economy produced a dollar of GDP with 57 percent less oil than it did in 1980, hence the 2013 price adjusted for inflation and oil intensity was lower than in 1974!

But now we are facing no perimeters. Really? Does Birinyi expect oil to go to a penny a barrel or perhaps be negative for a while (but that would still be a perimeter, albeit an abysmal one). And how about that black swan? The poorly worded intent was to stress that on the day of the comment (December 10, 2014), the WTI price was 43 percent below its June 20, 2014 peak, which is so rare that the probability of its occurrence is less than 0.01 percent (anything falling four standard distributions away from the mean will have frequency lower than that). But what is now unfolding is the eighth oil price decline of more than 30 percent during the past 30 years: the previous ones began in 1986, 1988, 1990, 1993, 1998, 2001, and 2008, and hence, on average, such a drop comes once in less than four years. That looks like a bevy of black swans, one that flies an undulating path: inevitably, during the past 30 years relatively sharp price rises followed the drops. Even when calculated with annual averages (rather than with daily extremes), WTI prices were up 24 percent in 1990, 57 percent in 2000, 34 percent in 2004, 39 percent in 2008, and 20 percent in 2011.

Peak oil nightmares have not come to govern the oil market, which has remained well supplied at affordable prices.

So we must be repeating, with the Romans, nihil novi sub sole  — but only those who have retained some historical memory will find that resonant: in the era of tweets, the memories of most observers have apparently shrunk to an equivalent of 140 characters, and historical perspectives have been replaced by twaddle about swans and non-existent perimeters.

Nor is there anything new about the intensity of the latest shift: recurrent events show that small changes in the global supply or demand (or the anticipation of such relatively restrained movements) often result in disproportionately large price moves and, moreover, that there is no obvious, simple correlation (only more complex, time-specific explanations) between the two trends. In 1986, consumption rose by 3 percent as prices fell by 46 percent, and in 2009 consumption fell by nearly 2 percent as prices declined by 38 percent (amid a deep economic downturn). Conversely, in 1980 prices rose by 51 percent (driven by the take-over in Tehran) even though the consumption fell by 4 percent, and in 2007 prices rose by 39 percent while consumption rose only by 1.5 percent.

The latest (December 2014) International Energy Agency forecast cut the growth of global oil consumption by about a third but this still means that the world would consume 1 percent more oil in 2015 than it did in 2014 — and yet the price of oil has already fallen by more than 40 percent (and further decline is widely anticipated), confirming again the long-established reality of large price over-reactions to small demand shifts (in this case even with the aggregate demand growth).

As for the causes, there is an unusually large choice of straightforward explanations and recurrent conspiracy theories. The explanations include: soaring US shale oil production (undoubtedly the single most important factor, but still just one of many); the Saudis finally getting tired of playing the swing producer and refusing to cut their extraction and prop the falling price (but Ali Ibrahim al-Naimi, Saudi oil minister, simply says: “You know what a market does for any commodity. It goes up and down and up and down”); China’s economic slowdown resulting in reduced purchases of crude oil (undoubtedly a significant contributor); and efficiency gains and inroads made by green energies in the European Union (a negligible factor).

Conspiracy theories are fittingly intriguing, always involving the unfathomable Saudis. First, the price cut is engineered by the Sunni Saudis to weaken their despised fellow OPEC member, Shii Iran (Saudis can weather even a prolonged price cut, mullahs in Tehran are already in a precarious economic position). Second, the Saudis are trying to kill two flies with one swat: hurt the Iranians, and if not to put an end to, then at least seriously affect, the extent of the future US shale oil extraction by killing the fracking through low prices. Third, a totally opposite conspiracy, the Saudis are working in accord with the Americans, each pumping at the full tilt, in order to punish Putin’s Russia (forcing it to live with low oil export earnings as retaliation for its Ukrainian adventure and for its support of Iran). Fourth . . .

Enjoy freewheeling cogitations based on your favorite theories, but be aware that falling oil prices are, as always, only a limited-time offer: we are not at the threshold of a new era of an oil-less civilization. We cannot pinpoint the onset of a renewed price rise any better than we can forecast the week or the month when prices will begin to fall, but the forces behind these shifts remain the same. On the supply side it is OPEC’s still large capacity to export oil (and one that could become even larger once Iraq gets its act together and once Iran joins the world); new supplies from non-OPEC producers now ranging from equatorial Africa to the Arctic Ocean; and, particularly, the fate of America’s hydraulic fracturing of oil shales: will it really eliminate the country’s dependence on oil imports?

On the demand side it is the reduced need for automotive fuel in the United States (as the belated improvement in efficiency is finally adding up to significant savings); now near-chronically parlous state of the EU (the world’s largest oil importing region with largely moribund economies); changing prospects in China (as its economic growth rate will soon be only half of the recent peaks); India’s inability to emulate China’s rapid rise (reality still has not caught up with the perennial promise of better performance, Modi or not); and Africa’s still too low growth (if the continent as a whole had done half as well as China during the past decade it would have soaked up any new oil supply additions).

As always, it will be a complex combination of these changing factors that will determine how low the prices will go, how long they will stay there, and how rapidly they will resume yet another rise. Meanwhile my advice is to enjoy low oil prices, knowing that we are living through yet another down chapter of a prolonged undulating saga. What is the best thing to do? Old World herbalists and modern promoters of chamomile tea agree: the golden-hued beverage has a mild sedative effect, it eases anxiety and insomnia and it leaves a soothing aftertaste. I recommend increased doses of this classic tisane (with a touch of honey) as long as the current oil price fall lasts. By the time the trend, inevitably, reverses itself, your drinking of chamomile tea might become a new, and beneficial, habit — ready to ease the anxiety brought on by the rising prices.

Vaclav Smil does interdisciplinary research in the fields of energy, environmental and population change, food production and nutrition, technical innovation, risk assessment, and public policy. He is the author of 35 books and has just finished writing “Natural Gas: Fuel for the 21st Century.”

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