Bill Clinton’s worrisome economics

Note from Jay Pinho: Below is the second guest post (as well as the second guest contributor) on The First Casualty.

Bill Clinton’s speech at the Democratic National Convention nearly three weeks ago was hailed as one of the great speeches of our time. Chris Matthews was in rare form describing Mr Clinton’s speech as “one of the greatest in convention history.” Indeed, Mr. Matthews was so impressed by the former President’s rhetoric that he not only felt confident asserting 42’s ability to reproduce on Mars, but reproducing with actual Martians. (Unfortunately, it is not yet clear whether a speech evoking the possibility of Clintonian-Martian reproduction tops a speech resulting in thrills up one’s leg.)

Jon Stewart, arguably the most powerful man in American news, lauded the President for his “amazing display of actually saying stuff.”

And it was to Stewart’s Daily Show that Mr. Clinton–a frequent guest–returned on Thursday night, doubling down on the economic principles he had espoused in Charlotte. Paramount among his economic principles is the belief that government and business should partner and work together in determining economic policy.

Mr. Clinton’s argument, of course, is nothing new. In fact, it was on the same show just last year that he provided a concrete example of a good partnership between government and business, namely Germany’s government support for the solar energy industry. Mr. Clinton proudly asserted that a country where the sun hardly ever shines–on that he’s right!–was a global leader in the production of solar energy.

Yet it should come as no surprise that Mr. Clinton no longer uses that example when advocating for partnerships between the public and private sectors. Why? Since Mr. Clinton was on the Daily Show in November 2011, four German solar companies have filed for bankruptcy–in spite of government subsidies in the industry in excess of €100 billion.

In pursuing industrial policy, governments support particular goals they deem worthwhile. But therein lies the problem. For when domestic producers cannot compete with foreign competition–as is the case with Germany’s solar industry–or when there is too little demand for products from subsidized industries, the socialization of monetary losses is finalized.

Even when support for particular industries does not fail in the ordinary sense, however, government support for particular industries distorts the market. (The nature of the market, unfortunately, is too often poorly understood, as evidenced by Mr. Stewart’s mocking of the non-existent “market fairy.” The market does not have an independent mind or will in the way a fairy might; rather, the market is merely an aggregation of individuals’ valuations about goods in society. To attack the market is to attack individuals’ valuations.)

Following, government subsidies are meant to change consumer behavior by pretending to lower the cost of goods which are not valued highly enough by individuals to be self-sustaining. (They do not lower actual costs, however, as subsidies must be paid for through tax revenues.) Or subsidies are put in place to protect national industry from competition from abroad. It goes without saying that this alleged protection also “protects” consumers from cheaper imports.

Now, steadfast opposition to market interventions–i.e. to influencing prices–does not imply that government does not have a role in creating the market framework. In fact, a capitalist economy can only function with a proper economic constitution. On the one hand, this may imply government provision of public goods, i.e. goods wherein one’s consumption neither reduces another’s consumption, nor where it is possible to exclude individuals from consuming goods. On the other hand, this also includes a functioning legal system, antitrust laws, and even state regulation. As ordoliberals like to point out: government should set up the rules for the game, it should not actively play the game.

If this were what Mr. Clinton was talking about when he advocated on behalf of a partnership between the public and private sectors, all would be well. Unfortunately, his view of public-private partnership implies government actively playing the game of the market. Indeed, America would do well to reject 42’s economic philosophy.

Mark McAdam is a football guru. When he’s not writing about the Bundesliga, he advocates on behalf of free societies. He has a Master’s degree in “Politics, Economics & Philosophy” and studied at the University of Hamburg’s Institute for Economic Systems, the History of Economic Thought and the History of Ideas.

The gold-plated rock worth billions

Note from Jay Pinho: Below is the inaugural guest post on The First Casualty, with many more to come. Erik Landstrom is a master’s degree candidate in International Affairs at the School of International and Public Affairs (SIPA) at Columbia University in New York. His studies concentrate on Energy and Environment, which he blogs about at his new site, Erik Landstrom on Energy. This post is adapted from one on his site.

If you weren’t aware of it, I will try to update you on a little-known fact that has, strangely enough, avoided much media attention, crowded out by “You didn’t build that” and most recently the “47%.” Right now the second- and third-largest economies in the world, Japan and China, are engaged in a territorial dispute that has a significant probability of getting worse before it gets better. They are fighting over a seemingly worthless rock formation in the South China Sea (the same one that figured in the 2010 fishing boat incident, if you remember).

The Senkaku (Japan), Diaoyu (China), or Tiaoyutai (Taiwan) islands

So why are they fighting about these seemingly worthless rocks? Most of you probably know the answer: potential mineral and hydrocarbon resources that exist in the area, as well as fishing rights. Both countries are signatories to the UNCLOS, or in plain-speak “Law of the Sea,” which stipulates that any state might claim an Exclusive Economic Zone (EEZ) 200 nautical miles (nm) out to sea. Inhabitable islands have the right to claim this as well; however, the above island should by all rights be classified as an uninhabitable rock, reducing its ability to claim significant surrounding space. China does not take this stance. (I will return to talk about UNCLOS in other posts, specifically why the U.S. has not signed it.)

In other words, this rock is not worthless. It is potentially more expensive per gram/ounce than had it been made out of pure gold! Prove that it is inhabitable and you win the jackpot.

So the rock formation has become the center of attention for world power politics and is a likely stage for many future skirmishes and standoffs. Especially taking into account China’s current build-up of naval capabilities coupled with its claim (see below) to basically the entire contested area, the entire region is slightly worried. Leon Panetta, the US Defense Secretary, is in the region to continue talks on a regional ballistic missile system that will protect Japan from attacks by North Korea, but as we can all see from the timing it will probably serve a dual purpose. China’s response was to launch a major naval exercise involving around 40 missiles.

No one knows how much oil or gas exists in the South China Sea as no exploration data exists (only estimations). The estimations of oil resources have ranged between ~20bn barrels and ~200 barrels, and gas reserves are said to be around 900tcf (trillion cubic feet). For those of you that have a hard time putting the numbers in perspective, the U.S., which is the 3rd-largest oil producer in the world, has between 22-30bn barrels of P90 (90% probability) oil reserves. And Qatar, which has the 3rd-largest gas reserves, has 884tcf. How much exists around this specific rock formation is unknown.