Some Chicago Boyz know each other from student days at the University of Chicago. Others are Chicago boys in spirit. The blog name is also intended as a good-humored gesture of admiration for distinguished Chicago School economists and fellow travelers.
… Foremost on the front burner is an attempt by the Democrats to raise the federal minimum wage to $15 an hour. A fiscal review by the Senate Budget Committee, however, showed that doing so would make human labor costs so prohibitive that all human workers would quickly be replaced by AI software, self-serve kiosks, or those creepy headless Boston Dynamics robots. As companies could no longer afford to pay people $120 to not do a lick of work on the first Monday in September, “Labor Day” would have to be changed to “Robot Labor Day,” and the focus would switch to celebrating how our robot friends keep companies in business, rather than how minimum wages and unions almost destroyed them.
A fascinating look at the Soviet economic system in the 1930s, as viewed from the front lines of that system.
Gennady Andreev-Khomiakov was released from a labor camp in 1935, and was fortunate to find a job as a book-keeper in a sawmill. When the factory manager, Grigory Neposedov (a pseudonym) was assigned to run a larger and more modern factory (also a sawmill), he took Gennady with him.
Although he had almost no formal education, Neposedov was an excellent plant manager. As Gennady describes him:
He was unable to move quietly. Skinny and short, he moved around the plant so quickly that he seemed to be running, not walking. Keeping pace with the director, the fat chief mechanic would be steeped in perspiration…He rarely sat in his office, and if he needed to sign some paper or other, you had to look for him in the mechanic’s office, in the shops, or in the basement under the shops, where the transmission belts and motors that powered the work stations were located…This enthusiasm of his, this ability to lose himself completely in a genuine creative exertion, to give his all selflessly, was contagious. It was impossible to be around Neposedov without being infected by his energy; he roused everyone, set them on fire. And if he did not succeed in shaking someone up, it could unmistakely be said that such a person was dead or a complete blob.
With his enthusiasm and dedication to his factory, Neposedov comes across almost as a Soviet version of Hank Reardon (the steel mill owner in Ayn Rand’s Atlas Shrugged), with this differenceNepodesov could throw himself as enthusiastically into bureaucratic manipulation as into his technical and leadership work. All of his skills would be needed to make this factory a success.
Although the sawmill had modern equipment, it was producing at only a fraction of its design capacity. One of the problems was energy: the plant was powered by a 200HP steam engine, and whoever had built the place had spent almost all of the budget on other equipment, leaving very little for the boiler. The original boiler that came with the plant turned out to be useless, and was replaced with a salvaged boiler..this worked, but was not in good shape and produced only about half the steam needed to run the engineand the plantat full power.
At this point in history, and in this particular corner of the Soviet economy, the amount that was available to be paid to workers was strongly related to the output of a plant. And workers at this sawmill were becoming increasingly desperate, on the point of actual starvation. Neposedov, aided by Gennady, pusued a three-part program of improvement: (1)fix the boiler, (2)improve the workflow (as we would now call it) within the plant, and (3)put in place an incentive system for the workers.
New “pipes” for the boiler were somehow obtained (I think “pipes” in this context refers to boiler flues) and the workflow was continuously analyzed and improved. The most interesting part of the story, though, deals with the incentive program. The plant manager apparently had discretion to put such programs in place as long as he could pay for them out of increased output. (As the book describes it, there were extensive accounting systems in place throughout the Soviet economyindeed, Lenin had once gone so far as to say “Socialism is accounting.” The accounting seems a bit similar to what you would find in a multidivisional American company with extensive intracompany transactions.) The incentive system that Gennady designed for this sawmill was based on very sharp pay increases for the workers when production exceeded targetso that, for example, you could double your pay by producing only 25% over target. (Actually, the plan paid collectively by group and by shift, rather than on an individual basis.)
The incentive plan, together with the repaired steam boiler, resulted in very high production140%, then 160% of targetand correspondingly high pay for the workers. Gennady had some nervous moments when he feared he had made a mistake in the calculations and the cost of the additional wages would exceed the amount generated by the new production….a mistake like this could easily have landed him back in Siberia, or worse. But it turned out that the new system was indeed sustainable.
The local Communist Party leadership, while pleased with the increased production, was disturbed that the propaganda buzzwords of the day were not being implemented. “Socialist competition” was hot at the time, and the Party organizer insisted on competition at the individual worker levels, not just the group and shift level.
Privatization reform of Fannie Mae and Freddie Mac, a hot topic on and off since their founding eight and five decades ago respectively, is heating up once again after more than a decade of temporary conservatorship. All past reform efforts have failed. What should we have learned?
Private markets operate on one set of incentives and accountability, government on an entirely different set. Each has its problems and imperfect solutions.
Private markets may inappropriately discriminate against qualified borrowers, for example, whereas public programs may fail to adequately discriminate.
Public enterprises created to jump-start or complement private markets often miss the mark, with unintended consequences.
Politicians much prefer to deliver subsidies through taxes (in this case tax exempt debt substituting for taxable equity) rather than expenditures especially since the Budget Control Act of 1974 and implicit off-budget credit guarantees that delay the reckoning.
In spite of good intentions and design to get the best of both, privatized hybrid public-private systems inevitably embody the worst: public risk for private profit. Lacking both market and public discipline, they cause systemic failure that “nobody could have seen coming.”
Political reform reflexively blames private market failure, doubling down on unaccountable and ineffective bureaucratic methods while providing opaque bailouts through greater tax and credit subsidies.
Political reform starts with what is, not what should be, repeating the cycle.
U.S. secondary markets evolved entirely in response to anachronistic political forces. FHA was created in 1936 to stimulate new construction jobs subsequent to a huge housing construction boom. Fannie Mae was created two years later to prop up flagging demand for FHA mortgages. Ginnie Mae was created in 1968 to liquidate Fannie Mae after prior privatization attempts failed to reduce official government debt, but the residual $1 billion secondary market facility with minimal shares outstanding as a result of a mandatory user purchase program was instead privatized. When that entity turned down tax exempt pass-through securitization to circumvent the myriad laws and regulations preventing the development of a national securities market, Ginnie Mae stepped in. Rather than liquidate, the privatized Fannie turned to funding conventional mortgages for their mortgage banker clients. To protect their turf, portfolio lending savings and loans then demanded their own secondary market facility, Freddie Mac. It later privatized mainly to provide management incentives comparable to Fannie, particularly stock options.
They then morphed into massive public directed credit institutions, with profits from government subsidies privatized but otherwise lacking the benefits of market efficiency and discipline. About half of F&F subsidies were captured by shareholders, managers and politicians (my estimates), an invitation to affordable housing proponents to share in this booty. Several 2018 Democratic presidential candidates have proposed upping these goals.
U.S. mortgage markets were characterized by cut-throat competition decades before the advent of government sponsored enterprises (GSEs): the indiscriminant lending and private market securitization during the sub-prime lending bubble of 2004 to 2007 suggests that is still the case.
What the private market can’t deliver are the tax and credit subsidies – worth tens of billions annually that result from federal backing to support fixed rate mortgage interest rate and affordable housing credit risks. Any re-privatized hybrid system that promises to mimic the market, e.g., by requiring that it actuarially price a government credit guarantee as the market oriented Milken Institute and others recommend and to impose market capital requirements and risk regulations directly conflicts with these goals and is doomed to failure. Regulatory restrictions will remain malleable because politics has and will continue to trump bureaucracy. Nor will the market discipline this regulated too-big-to-fail public mission duopoly, having correctly inferred an implicit guarantee in the past for the GSEs, disclosures, regulations and legislation notwithstanding.
There is a better “public/private” policy option to deliver these subsidies. Long term fixed rate FHA insured mortgage loans have since 1970 been funded almost exclusively with Ginnie Mae securities. Investors take the interest rate risk, HUD takes the credit risks and all ancillary functions are delegated to a competitive private marketplace. FHA, a government sponsored mutual insurance fund with de facto public backing since incorporated into and regulated by HUD insures each mortgage. The un-capitalized Ginnie Mae de jure security guarantee covers only timeliness of FHA payments, but de facto acts as a guarantor of FHA mortgage securities.
While FHA has failed actuarially in part due to overly ambitious political goals and its focus on borrowers who may not have qualified for a conventional loan – bailouts have been opaque with minimal or no budget transfers, investor losses or market disruption. It survived the sub-prime lending debacle relatively unscathed. This system hasn’t failed systemically because it separates the private and public functions into different entities, minimizing public risk for private profit incentive conflicts.
A federal guarantor for conventional mortgage securities modeled after Ginnie Mae (something Ginnie Mae proposed in the late 1970s but I opposed on grounds that it would displace the private savings and loan system of the time) should replace F&F, with the existing infrastructure auctioned to the highest bidder .
Properly designed, a federal guarantor wouldn’t experience any loss except in catastrophic circumstances. The original Fannie Mae and particularly Freddie Mac secondary market system that left credit risk primarily with multiple state regulated private mortgage insurer’s (pmi’s), experienced negligible credit losses until the market collapse of 2008, after which F&F credit losses of about $300 billion were ten times total pmi industry losses, due to loss severity far exceeding insurance limits. A federal guarantor should be limited to pools of fixed rate mortgages with deeper pmi coverage to reduce exposure, and ideally partially re-insured with private mortgage pool insurers to further capitalize and diversify risk.
The tax and credit subsidies all go to uniformly lower rates. Deeper affordability subsidies in pursuit of federal home ownership affordability goals were previously provided by HUD’s Section 235 homeowner program targeted to individual FHA mortgage borrower needs, the right approach for achieving this goal. But after years of default losses, Congress shut it down in 1989 rather than increase the budget to reflect the true cost. Following the law of unintended consequences, the affordable housing goals were then dramatically expanded in the Federal Housing Enterprises Regulatory Reform Act of 1992, a precursor to their subsequent failure.
The debate over the desirability and magnitude of homeownership subsidies remains unresolved. This proposal shifts it to the political arena.
Kevin Villani
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Kevin Villani, chief economist of HUD during the Carter and Reagan Administrations and Freddie Mac from 1982 to 1985, is the author of Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.
It’s become something of a regular occurrence for the American mainstream media to blow a foreign policy story because of their Trump Derangement Syndrome. Yet they seem to have greatly sunk to new lows in missing the real importance of events leading to the 19 June 2019 Iranian shoot down of an American drone.
RQ-4N BAMS-D (Broad Area Maritime Surveillance-Demonstrator)
President Trump has ended the 1980 Carter Doctrine!
The free flow of oil from the Persian Gulf is no longer a “Vital Interest,” thanks to frac’ing, for a near energy independent USA.
BACKGROUND
CENTCOM confirmed Last Wednesday night of 19 June 2019, in international air space over the Strait of Hormuz, an Iranian surface to air missile (SAM) battery shot down a US Navy RQ-4N BAMS-D (Broad Area Maritime Surveillance-Demonstrator) Global Hawk. The ~$120 million drone in question was a navalised version of the USAF Global Hawk, used as proof of concept for the production MQ-4C Triton. It was essentially an unarmed, jet powered, sail plane with the wing span of a 737 jet liner and several tons of sensors. The drone fills the mission of the U-2, at similar altitudes, without the risks of a human pilot in the event of a shoot down.
Pentagon RQ-4N Shoot Down Map with Drone and SAM launch battery location.
Iran has claimed it used it’s ‘Third of Khordad‘ domestically built SAM system, operated by the IRGC, to shoot down the drone. This SAM system is described as a copy or derivative of the Russian Buk M3 / SA-17 GRIZZLY that incorporates the Bavar 373 missile that, in turn, appears to be a derivative/copy of the Soviet 5V55/SA-10B with additional controls. If you think of it as a late model Raytheon MIM-23 Hawk medium-range surface-to-air missile battery firing an early version of the MIM-104 Patriot PAC 1 missile, you would not be far wrong.
Press TV Tweet of Iranian SAM
It was this lack of a human pilot, either as a death or a prisoner of war, that saw President Trump jump off Iran’s scripted “escalation ladder.” Instead of destroying a SAM battery and converting 150 odd IRGC missile operators into another “Martyr blood sacrifice” for the Mullah regime to celebrate. Pres. Trump responded with cyber-attacks on Iranian missile control systems to remind the Mullah’s of the West’s technological “Black Magic” and additional economic sanctions that will cause further payroll cuts to both the IRGC and it’s over seas terror networks. (Truth be told, the new economic sanctions threaten the Mullah’s power far more than any set of tit for tat military strikes.)
And in a move treated as an afterthought, if the MSM mentioned it at all, President Trump ended an era in American Middle Eastern Foreign Policy.
END OF AN ERA
It has been almost 39 & 1/2 years — 10 years before the Cold War ended — that President Carter pronounced access to Mid-East oil a “Vital Interest” that the United States would go to war to protect.
Our two wars in Iraq both have that date, and that policy, as their starting point.
Now that era is over.
Last week Pres. Trump forged a completely new Middle East Foreign policy for America. Specifically, Pres. Trump took the opportunity Iran’s military escalations leading to the shooting down of the RQ-4N to end the January 23, 1980 “Carter Doctrine” expressed as follows —
“…An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.”
This is how Vandana Hari at the Nikkei Asian Review put it:
“U.S. President Donald Trump says he might take military action against Iran to prevent it from acquiring a nuclear weapon. But he has indicated he won’t necessarily jump in to protect international oil supplies from the Middle East if they are under threat from the Islamic Republic.
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The position, articulated by Trump in an interview with Time magazine on June 17, should not come as a surprise, even if it appears to be at odds with the Pentagon beefing up aircraft carriers and troops in the Middle East in recent weeks, citing a threat from Iran.
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As Trump spelt out in the interview, the U.S. is no longer as dependent on oil from the Middle East as it was, thanks to burgeoning domestic production.
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Air Force General Paul Selva, vice chairman of the U.S. Joint Chiefs of Staff, emphasized the message a day later, pointing out that China, Indonesia, Japan and South Korea were heavily dependent on supplies moving through the Strait of Hormuz, and needed to protect their interests. U.S. Secretary of State Mike Pompeo has made similar comments.”
The pronouncement above was the full “Bell, Book and Candle” exorcism of American foreign policy — President, Joint Chiefs of Staff and Secretary of State. And please carefully note that it happened two days beforethe RQ-4N was destroyed.
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While “freedom of navigation” on the high seas over all and the Persian Gulf in particular remains a “major interest” of the United State of America. It is no longer one which America will automatically go to war over.
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In ending the Carter Doctrine, President Trump has fulfilled his 2016 campaign promise of “No More Iraq’s.”
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By changing the cost benefit calculations of Middle-Eastern oil — no more free riding on American protection of Persian Gulf Sea lanes — the only way a nation can “win” internationally now is by “getting close” to the American hyperpower.
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If you are functionally anti-American. You get nothing but higher insurance rates included in your price of oil to cover the political risk premiumof lacking American protection. China is now paying -defacto- and additional American oil tariff via much higher insurance rate on the VLCC tankers moving Mid-East crude oil to the Far East.
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Japan and South Korea could get lower insurance rates if they send naval forces to the Gulf to work with the US Navy. Or they can replace Mid-Eastern oil with exported US oil.
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China, not so much.
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As a correspondent put it in an e-mail to me when I mentioned the above to the list he and I are in —
“You all need to defend YOUR oil shipments through those NASTY Straits of Hormuz. The U.S. don’t need that filthy Middle East blood-oil no more. In fact, if you don’t want to spend the money and lives pounding sand in Iraq, Kuwait and Iran, we have some FINE Texas frackin’ goodness to sell at a SPECIAL price, just for YOU, our friends and allies for SO many years!”
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Snicker, choke, GASP….”
The American Left has finally gotten what it always wanted…no more “Blood for Oil“ in the Middle East.
Somehow, I don’t think President Trump delivering that reality to them will make them very happy.
A failure to break an impasse in talks in Washington on Friday opened a new phase in the trade fight after more than five months of back-and-forth negotiations. This time, some economists and analysts said, Beijing is taking stock of potential economic damage from higher tariffs.
The U.S. raised punitive tariffs to 25%, from 10%, for $200 billion in goods leaving China on Friday and thereafter. President Trump also ordered staff to begin the paperwork to impose levies on the more than $300 billion worth of everything else China sells to the U.S.
While Beijing has met previous volleys of tariffs from the U.S. by raising duties on American goods—and the government has promised to retaliate—it held its fire. Though China has more limited tariff options, since it imports fewer products from the U.S. than the other way around, the Chinese leadership is also constrained by an economy that is in a shaky recovery from a sharp slowdown.
The world’s biggest oilseed processor just confirmed one of the soybean market’s biggest fears: China has essentially stopped buying U.S. supplies amid the brewing trade war.
“Whatever they’re buying is non-U.S.,” Bunge Ltd. Chief Executive Officer Soren Schroder said in a telephone interview Wednesday. “They’re buying beans in Canada, in Brazil, mostly Brazil, but very deliberately not buying anything from the U.S.”
In a move that caught many in U.S. agriculture by surprise, China last month announced planned tariffs on American shipments of soybeans.
“China has to resume purchases of U.S. soybeans,” Oil World said in its latest newsletter. “The South American supply shortage will make it necessary for China, in our opinion, to import 15 million tonnes of U.S. soybeans in October 2018/March 2019, even if the current trade war is not resolved.”
China may not be in good shape to handle a trade war.
by Gennady Andreev-Khomiakov
