Month: August 2016

Iran rattling sabers in the Persian Gulf

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Iranian Revolutionary Guard Corp Navy (IRGCN) ships attacked US Navy vessels last week. The incidents took place near the Strait of Hormuz, a narrow connector between the Persian Gulf and the Arabian Sea. No one was injured in what appeared to be an exercise in harassment. The Iranian speed boats did come close enough to significantly raise the risk of a deadly collision. When one of the Iranian boats came within 200 yards of the American vessel, the USS Tempest. The Americans fired three warning shots and the Iranian decided to call it a day.

There seems to be little official concern on the part of the United States. A state department spokeswoman dismissed the incidents as “unacceptable behavior.” Iranian Defense Minister, General Hossein Dehghan, seemed to suggest that the Iranians were reacting to a perceived threat. “If a foreign vessel enters our waters, we warn them and if it’s an invasion we confront them.”

The American ships in these incidents were operating in International Waters just as they have been since at least 1988. There is nothing new in the situation.

A similar campaign of harassment was carried out from December 2007 through January 2008. In the diplomatic exchanges that followed the naval confrontations, the Iranian threatened to seal off the Strait of Hormuz. That would halt shipping of one third of the world’s oil supply and throw oil markets into a tail spin. The Commander of the US 5th Fleet said that such an action would not be tolerated.

At the end of 2011, Iranian Vice President Mohammad-Reza Rahimi threatened to close down the Strait in response to the imposition of sanctions designed to force a halt to Iran’s nuclear development program. Iranian Admiral Habibollah Sayyari stated that the Iran navy could easily shutdown oil shipments through the strait. A spokeswoman for the US 5th Fleet said the US Navy was ready to respond appropriately. Independent analysts concluded that the US Navy could break a shutdown in less than a month.

The Strait of Hormuz was not shutdown in January 2012.  On January 9, 2012, Iranian Defense Minister Ahmad Vahidi said that Iranian government had never threatened to shut down shipping in the strait. As a matter of fact the Islamic Republic of Iran was a staunch defender of security in the strait.

Nevertheless, by the end of January 2012 a flotilla consisting of six American ships, seven British ships and a French frigate had assembled to help ensure the free flow of shipping through the Strait of Hormuz.

Tensions in the area seemed to be easing in January 2016 after conclusion of the Nuclear deal with Teheran and the lifting of sanctions. But deep seated, fundamental issues remain. Iran and the Western Powers are locked in a clash of cultures and Mideast oil is vital to the Western Way of Life. Approximately one fifth of the world’s petroleum travels by way of the Strait of Hormuz. Loss of that much fuel even for a short period of time would create an extreme hardship. That fact is well understood on both side of the culture divide.

Climate Change, Minimum Income and the Disappearing Middle Class

Naomi Klein 20aug16Reich Saving Capitalism 20aug16

Canadian journalist Naomi Klein charges capitalism with blocking efforts to save humanity from climate change disaster in her book “This Changes Everything”. But she plays fast and loose with facts. Economist Robert Reich argues for capitalism in his book “Saving Capitalism”. He provides plenty of supporting facts but he ignores the rest of the story.

Ms Klein begins “This Changes Everything” with the woeful tale of US Airways Flight 3593 unable to take off as scheduled because “the wheels of the US Airways jet had sunk into the black pavement as if it were wet cement.” This happened “…Because DC is so damn hot…” as “someone” posted on one of the social media sites. None of the real news outlets bothered to cover the story.

This is her smoking gun. Climate Armageddon is upon us. But so many facts are missing that it looks like another urban legend. The airport is not identified. The date of the incident is not mentioned.  The person who supposedly posted about the incident is not named. There is no evidence that Ms Klein made any effort to verify the report.

Ms Klein complains that world leaders can agree on far reaching trade agreements but are unable to do anything to limit climate change. Apparently she doesn’t appreciate the difference between pushing something profitable versus pushing something costly. I want climate change addressed and soon. My grandchildren will be senior citizens with responsible jobs and their children will be coming into their peak years in 2050 when the global climate situation is expected to get really bad. If they are going to enjoy a life at least as good as mine, they need advocates who understand how difficult making the necessary changes is going to be.

For example, coal fired power plants cannot be tolerated. The ones now in operation will have to be shut down. When those plants are shut down, the coal mining operations will also be shut down. But everyone must understand that these developments are going to be a disaster for many people. Men who earn their livelihood by coal mining as did my grandfathers are going to find themselves out of work just like the steelworkers and the auto workers. Reaching an actionable agreement on what needs to be done is going to be painful.

Ms Klein wants electric utilities turned over to the control of local governments. She argues that when power utilities are locally controlled as they are in Germany, they will move quickly from coal to solar and wind.

But the United States already has a substantial number of municipally controlled power utilities. A study in 1998, found that 15 per cent of the electricity sold in the United States was provided by governmentally controlled utilities.  According to Ms. Klein’s logic about 15 per cent of the electricity generated in the United States should be powered by green energy sources.  But a Duke University study in 2009, found that less than three per cent was derived from wind or solar technologies. The municipally owned power utilities in the United States have not made a massive switch to green technologies over the first decade of the twenty first century.

Fortunately, capitalists have been developing mechanisms for a smooth transition to renewable energy sources. Non-utility energy providers can use the existing power grid to offer energy alternatives to customers because of laws like PURPA (1978) and the EPAact (1992). Many areas in the United State already allow competition. Even though the competition is limited, it is producing substantial benefits. Some power companies are even offering their customers the option of choosing to have their power generated by eco-friendly sources.  (See “The Concise Encyclopedia of Economics: Electricity and Its Regulation” by Robert J. Michaels)

Even more encouraging is the emergence of programs that allow customers to install rooftop solar panels and sell excess power to their local power company. This arrangement lowers the customer’s bill and helps the power company avoid building additional capacity.

One of Ms Klein’s favorite bad guys is the World Trade Organization or WTO. She mentions it eight times in “This Changes Everything.” She cites three green energy programs that were “challenged” by the WTO. One example that she cites is a green energy project in Ontario, Canada. But the WTO did not actually challenge the green energy project. China challenged a job growth scheme that went along with that green energy project. If Ontario had been serious about converting to green energy, it could have used products from China. The resulting energy would have been just as green.

Canada, China and practically all other countries are tied together in a global village. Our world functions as a global market place that allows us to buy and sell goods anywhere in the world. That global market place requires a governing body to make and enforce rules for all of the participants.

The WTO is a critical entity charged with keeping our society functioning. It is not perfect. Many if not all of the players are looking for ways to use the rules to their advantage. Some players are more successful than others. The WTO can either be tool to be manipulated or it can be a work in progress. Either way, we cannot realistically get along without it.

Economist Dr. Robert Reich believes that the more successful players are establishing rules in the marketplace that will ensure their positions of wealth and privilege. In essence, we have passed through the golden age of the common man and returned to a period of royalty and paupers. The rich are too rich and getting richer by the day while the poor are getting poorer and the middle class is going extinct.

In “Saving Capitalism”, Dr. Reich writes, “Put simply, globalization and technological change have made most of us less competitive. The tasks that we used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines. My solution … [is] an activist government that raises taxes on the wealthy, invests the proceeds in excellent schools and other means people need to get ahead, and redistributes to the needy.” In other words, we need a little bit of socialism to save capitalism.

He calls up a vision of an American Golden Age in which factory workers could earn as much as engineers, designers, accountants and even managers without bothering to complete high school.

That fabled Utopia lasted three decades from 1945 through 1975. It was only possible because of a special set of economic circumstances.  When WWII ended, our economy flipped from enforced scarcity to unfettered abundance. Consumer demand rose rapidly. Production capacity was converted from meeting war demands to meeting the growing consumer demands. The technological advances of WWII were adapted to creating new products for consumers. It was the ultimate Win-Win situation.

In the early years of that era, some unions were highly effective at gaining wage concessions for their members. The unions were most effective in the Industrial Northeast where they had been successful in securing a monopoly on labor. For example, the United Auto Workers (UAW) supplied all of the blue collar labor for the big three automakers – Chrysler, Ford and General Motors. The automobile manufacturing giants were forced to come to terms with the unions in order to keep their factories running. The resulting wages were very generous for the times. The workers represented by the UAW were making much more than non-unionized workers doing equivalent work. In some cases they were making more than their managers.

The Big Three Auto Makers were among the most profitable and the most influential companies in the world in spite of the incredibly high wages they paid their factory workers. They accomplished this economic miracle by charging premium prices for their products. “Sticker Shock” was coined to describe the reaction Americans had when they found out how much a new car would cost.

The Ford, Chrysler and GM could get away with price gouging because Americans were moving out to the suburbs and needed cars for transportation. But the high prices created an opening for competition. Volkswagon, Datsun (Nissan), Toyota and Honda entered the market with less expensive, well-made economical cars. American automakers began losing market share and their profits declined.

The American automakers had to reduce the size of their workforce in order to stay profitable while meeting the auto workers wage demands. The UAW pushed for higher wages, the manufacturers pushed for automation. It was a losing the battle for both sides.

By 2008, Chrysler and GM had to be rescued from bankruptcy along with Wall Street and the Big Banks. Ford was on the verge of bankruptcy but engineered its own turnaround rather than accept help from the Federal Government. Detroit, the home of the American car, and its citizens were the biggest losers. The city that had once boasted one of the highest paid worker populations in the world was stuck with one of the highest rates of unemployment in the country.

It is unrealistic to expect that the successes of that golden age in America will be reproduced. But many observers, including Dr. Reich, are appalled by the extent to which we seem to have fallen back into an age of royal families and peasantry. Their solution is a cost of living adjustment to the minimum wage. Some would also like to see a cap on CEO earnings. These steps may be helpful but successful business enterprises are essential because they provide the jobs that people need in order to get ahead.

It seems to me that the focus on CEO salary is based on a misunderstanding of the CEO’s role. According to Dr. Reich, “The net worth to society of many CEOs … may be less than they command in the market. …Much of what they do entails taking money out of one set of pockets and putting into another, in escalating zero-sum activity.”

The CEO is actually the head of the management team which is responsible for pulling everything together in a successful business. Managers are responsible for supplying the factories, the production tools, the components that are used assemble products, and the workforce. Management is also responsible for shipping products to sales outlets.

Everything has to be paid for before the first unit is sold. Management has to risk investing in the production of cars before any income can be realized from the sale of products such as cars. If the products do not sell the upfront investment will be lost.

The buck stops at the CEO’s desk. Some CEO signed off on the decision to design the Edsel. When the design was complete, the CEO authorized production and sale of Edsels. When the Edsel didn’t sell, the CEO took the heat for the failure. The company, Ford, lost money on the project but everyone who worked on it, including the autoworkers got paid for doing their job.

Brian Roberts the CEO of Comcast Corporation is singled out as an example of the overcompensated executive. Roberts makes $26.5 million per year in total compensation which puts him somewhere between NFL Quarterback Aaron Rodgers who is paid $22 million per year and Tennis star Serena William who earns $30 million per year.

Comcast is an example of a successful business that makes it possible for people to get ahead. It provides jobs for 153 thousand workers who generate $74.5 billion in revenue by providing service to over 20 million customers. CEO Brian Roberts has a unique role in making Comcast a successful business. In the quarter century since he was named president of Comcast, the company’s revenue has grown by over 1000 per cent. In all fairness, a successful CEO should be as well compensated as entertainers who are making very little contribution to the well-being of our country.

Clyde Prestowitz, offers an alternative approach to dealing with our current economic situation. His years as a senior trade negotiator for the United States have convinced him that we are doing a terrible job of competing in the global market. In “The Betrayal of American Prosperity”, he writes “This brings us to the irony of America’s role as the world’s sole super power. Beyond our blind adherence to simplistic free-trade orthodoxy and market fundamentalism… We have evolved from a country that wanted no foreign entanglements and saw the business of American governments as business, into a country in which the business of government has become trading America’s productive and technological base for geopolitical and military advantage.”

Mr. Prestowitz wants us to look at what is working for countries that America competes with in the global market place. He wants our government to develop a focused economic policy that targets markets and products for development in order to generate living wage jobs. Then he wants us to support that policy with seed money to develop successful commercial enterprises.

That is a change I can support.

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