The Grasshopper and the Ant: The U.S. and China

We're the grasshopper: for years, we've been outsourcing jobs, burning gasoline, building gambling casinos, buying video games and fantasizing that our real estate values were earned. The Chinese are now the ant (we were the ant once when we were building a nation in the wilderness).

The Chinese look at the size of their population, the scarcity of many key resources in their country and the growing resource problems of the world. From their point of view, they need to secure resources for their growing economy. And they've been doing just that. They now consume more iron and coal than any other country. That's the clearest evidence of the economic dynamo they have created in the last thirty years.

Although China has more than 4 times the population of the U.S., they are still far short of our consumption levels in some resources such as oil. Nevertheless, they seem to see the future and they are locking in contracts and also building reserves. Here's an Associated Press story:

Since crude oil and other commodity prices plunged last year - oil tumbled from $147 last July to nearly $33 in December - China has been rushing to build up stockpiles at bargain prices, economists say. That motive, more than a revival in actual industrial demand, has driven its recent import boom of oil, copper and other metals.

(snip)

Ultimately, China aims to have about three months of supply in national reserves. It now has about a month's worth, or about 38.6 million tons of crude oil in both commercial and state reserves, according to state media reports.

The United States also has taken advantage of the drop in oil prices to buy crude for its Strategic Petroleum Reserve, which is far bigger than China's.

The U.S. reserve is about 730 million barrels. China's reserve will be about 170 million barrels. I'm struck by the fact that our reserve, if we include domestic production, is intended to last about 70 days. China's reserve is supposed to last 90 days.

Although one can easily argue that China is making it harder for the U.S. to find oil (along with deliberate production cuts by some members of OPEC), Chinese purchases have helped the price of oil recover. Obviously when oil is $147 a barrel, the price can cripple economies. But a price of $65 to $75 is important. A lot of the oil that is still being found in the world is expensive to produce. If the price of oil falls too low, some of these projects cannot be developed.

The truth is that no one quite knows what's going on with the world's resources—or the world economy for that matter. The Chinese are taking no chances and are planning for the future. In contrast, the free marketeers, including many in the U.S., claim that high prices will naturally develop more resources or at least substitutes. But while we've been waiting for dreamosol to fuel our cars since the 1970s, the events of the last four years tells us that we are in a new era of volatility, an era that means a lot of old thinking and old habits have got to go out the window. With adjustments, capitalism will probably survive. But we have to stop thinking that the markets are some magic bullet. They aren't, as we have seen all too often.

Some people are paying attention and it's not a pretty sight. Here's Paul Volcker's recent comments:

Former Federal Reserve chairman Paul Volcker said the rise of China and other emerging economies has underscored a decline in the comparative economic and intellectual leadership of the U.S.

“I don’t know how we accommodate ourselves to it,” Volcker, an economic adviser to President Barack Obama, said in an interview with PBS’s Charlie Rose taped yesterday in New York. “You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.”

Part of the rage of the right wingers over the last year is that they don't understand why the good times don't just keep rolling on (never mind that the good times have been something of an illusion for some years). They blame the government but our government for the last 30 years has not taken the lead. The business sector has and it is failing us. And it will continue to do so until there is real reform in Washington. For too long, the grasshoppers have ruled.

Obama Cuts Expensive Missile Defense Plan

Many of the biggest boondoggles in American history have not come from Democrats. Repeated tax cuts for the rich has to qualify as one type of Republican boondoggle, particularly since those tax cuts undermine Medicare and Social Security. However, the most widely acknowledged boondoggles in the last thirty years have been a long string of unnecessary military contracts. Of the latter group, one of the oddest boondoggles has been the "Star Wars" missile defense program and its various permutations.

Ronald Reagan rode a wave of Republican conservatism in 1980 to win the White House. Of course Reagan's conservatism wasn't nearly as extreme as what we've seen since 1994. But Reagan got talked into a missile defense shield that was never completed and that has never worked reliably enough in the testing stage to give anyone confidence that such a system could take out a significant number of ICBMs. As a program, it has undergone many modifications, is largely a bust and has wasted billions of dollars. It didn't work in the early 1980s when it was first proposed and despite advances in computers and nuclear technology it still doesn't work. In addition, even if it did work, it would be fairly inexpensive to foil.

The whole concept of the original "Star Wars" idea seems largely to have come from Edward Teller, the father of the H-Bomb. Either Teller did not understand as much about physics and technology as he thought he did or he told a big whopper to the president of the United States. One of the problems with secrecy in Washington is that stupidity occurs over and over. To this day, much of the "Star Wars" project remains shrouded in murky details.

When George W. Bush became president, he brought with him a number of Cold War warriors, including such people as Donald Rumsfeld, Condi Rice and Paul Wolfowitz. One of the things that has become obvious about the younger Bush's presidency is that he had a number of advisers who were still fighting old wars. The current war in Iraq is in some way old business from 1991. Despite Bush's claim of seeing into Putin's soul, the deteriorating relationship with Russia during the Bush years had a number of roots, not all coming from the U.S. side. A significant factor, though, was the Cold War mentality that kept surfacing in our relations with Putin.

In addition, "New Europe," consisting largely of former members of the Eastern European communist bloc, has been a pet project of elite Republicans looking for cozy financial and political relationships. Putting defense missiles in Eastern Europe was just as much about irritating the Russians (despite the claim of defending against Iranian missiles) as it was solidifying a relationship with more conservative elements in places like Poland (remember that Western Europe was not in favor of the missiles).

On Thursday, The Wall Street Journal carried a story on Obama's new policy:

The White House will shelve Bush administration plans to build a missile-defense system in Poland and the Czech Republic, according to people familiar with the matter, a move likely to cheer Moscow and roil the security debate in Europe.

The U.S. will base its decision on a determination that Iran's long-range missile program has not progressed as rapidly as previously estimated, reducing the threat to the continental U.S. and major European capitals, according to current and former U.S. officials.

Additional details suggest a more modest, largely navy-based missile defense program would be developed closer to Iran. I'm not entirely sure what all this means. In a sense, Americans have had a defense perimeter around Iran for the last seven years, even before the official start of the war in Iraq.

Of course, after the news about shelving the missile program, it didn't take long for the neoconservatives and various Republicans to do their screaming and hollering. What is noteworthy is how much Republican criticism of Obama is about appeasing Russia and how little of it is about Iran. That, of course, is something of a giveaway.

Here's Romney and Santorum:

"President Obama has made a dangerous and alarming decision to shelve our missile-defense system in Europe," Romney said in a statement. "His decision is wrong in every way, despite his rationale."

Santorum, the former Pennsylvania senator, said the president is spurning European allies in order to "appease" Russia — "a potential foe."

More was also said by others. Is there something to what they're saying? Maybe not. Here's a interesting response by Russia:

In the first tangible response to the US decision to scrap its planned shield in Eastern Europe, an unnamed military source told the Interfax news agency that the Kremlin had frozen plans to deploy truck-mounted Iskander missiles in Kaliningrad and would not now site nuclear-capable T-22 strategic bombers there either.

Of course, not much has actually happened. Our imaginary missile defense is being scrapped so Russia appears to be scrapping its imaginary response. But President Obama will be meeting with Medvedev next week. There's one further item to note:

The Russian foreign ministry on Saturday condemned Iranian President Mahmoud Ahmadinejad for saying the Holocaust was "a myth," calling his statement "totally unacceptable."

Russians are tough customers but they haven't got much to gain by too much tension in the world. The reality is that a healthy world economy is good for Russia's oil prices. And that requires a healthy U.S. economy.

Poor Republicans. Relations with Russia just ain't what they used to be.

China's Economy Rolls On

At one point last year, the Chinese stock market had lost two-thirds of its value from its high in late 2007. That kind of fall was actually scarier than what we saw with the Dow Jones when it reached its peak in October 2007, sagged for months and then suddenly fell off the cliff last fall. But the Dow Jones in March of this year fell only slightly below half its October 2007 level and only briefly before rebounding to its current level.

Now here's an irony, American stock markets are moving up while the economic news is not good on the job front. Meanwhile, the Chinese stock market is having minor problems but the economy is booming. In China, there is no economy unless workers have jobs. No jobs means enormous unrest.

In the U.S., jobs and the health of corporations have become increasingly disconnected. In recent years the U.S. has repeatedly seen wages stagnate and the real unemployment rate rise while corporations post record profits.

But the Chinese are not succeeding simply because they emphasize jobs. They're also succeeding because they pushed a big stimulus package. Here's the story from The New York Times:

“The whole country’s economy is back on track,” said Shi Yingyi, a 34-year-old housewife who joined the throng. “I feel more confident now.”

The confidence stems from China’s three-pronged effort — a combination of stimulus, liberal bank lending and broad government support for exports.

The Chinese central bank said the country’s economy surged at an annualized rate of 14.9 percent in the second quarter. The United States economy shrank at an annual rate of 1 percent in that period.

There are two main differences between what the Chinese have done in the last year and what Americans have done. First, the Chinese acted sooner than the U.S. while developing a plan. Although Bush gets credit—of sorts—for stopping the recurrence of another Great Depression, he had no plan, and let things deteriorate far longer than he should have. Bush also did nothing once Bernanke and Paulson were able to put the brakes on the economic meltdown.

Actually, Bush, as he so often did on a range of issues during his eight years in office, sat on his hands when economic warning signs showed up in 2005, 2006, 2007 and 2008. Many prominent Republicans are very adept these days at describing what they don't like but somewhere along the line Republican leaders have lost the ability to come up with useful ideas. For most congressional Republicans, a good idea is doing a favor for a useless corporate lobbyist.

Now the second thing the Chinese did is that they pushed a massive stimulus package and made sure banks were loaning money. Obama pushed a stimulus package his first day in office but such a package should have been forthcoming weeks if not months earlier. Unfortunately, given conservative Democrats, uncooperative Republicans and media types who are too dense too realize that Republican economics has failed, the stimulus package that finally did get passed under Obama wasn't quite big enough. It's likely we're going to need more, particularly in terms of stimulating the development of alternative energy. What many Americans, particularly conservatives in the South, do not understand is that we cannot spend enormous amounts of money on foreign oil and enormous amounts of money on Chinese goods and expect the American economy to thrive for long, particularly if we keep destroying good-paying jobs at home. It simply won't work.

I should mention one other problem: American banks are still not loaning money nearly as much as they should. Now banks have a great deal to do with why the economy went sour in the last thirty months. Many of those problems are still not addressed, largely because no one outside the Bush Administration realized just how little anyone in government was minding the store.

In a broader sense, the banking crisis is a function of conservative policies that have been pushed by Republicans with help from moderate to conservative Democrats for the last thirty years. Actually, a more accurate way of describing the problem is this way: for the last thirty years, too many politicians practicing business as usual managed to get themselves reelected year after year. If the American economy is to thrive in the years ahead—and everyone should remember that a lesson of this recession is how key a player the U.S. is in the world economy—we are going to need more reforms from Obama and congressional Democrats. If these reforms do not happen, it is highly unlikely they will happen under the Republicans who currently lead the GOP.

Paul Krugman and the Politics of Reform

Before I get to Krugman, I've been thinking about the person who shouted, "You lie!" to President Obama when he was giving his health care speech last night. For a moment, I assumed the person calling out was probably in the gallery above the members of Congress. I was wrong. A Republican representative from South Carolina did the shouting. It's apparent that 90% of the Republicans in Congress these days have nothing to contribute on any number of fronts concerning the problems our nation is facing.

By the way, it's generally accepted that if you like what the president is saying, you applaud and maybe cheer. If you don't like what he says, you sit quietly and glower. Republicans know this and the representative was dealt with, even if people like Limbaugh are too ignorant and authoritarian to understand.

I don't know how relevant it is, but it's been pointed out that the conservative representative who did the shouting is from a safe district. Safe? As in what? Is ignorance now safe? Is being politically safe supposed to be a good thing? The problems facing our nation face everyone, not just people outside of 'safe' districts. Republicans unable to face our problems only aggravate those problems.

In a roundabout way this is all relevant to Krugman's long magazine article in The New York Times; in a sense, Krugman's point is that the old economics was never as sound as many had led themselves to believe and the proof was the failure to foresee last year's meltdown of the economy. Here's an excerpt:

...in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. [Economist Robert] Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.

What happened to the economics profession? And where does it go from here?

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations.

I remember an article from two to four years ago that discussed how certain types of fancy equations didn't last very long in the investment sector. Nevertheless, for more than a decade a class of fancy equations would sometimes prove useful for around a year or two and were lucrative for big firms like Goldman Sachs. Eventually, though, the equations begin to break down, partly because competitors can figure out the same formula, thus taking a slice of the pie until there isn't much money for anyone to make; sometimes conditions simply change until the formulas break down. So the financial whizzes are busy all the time coming up with new formulas. Some formulas work well. Some don't. But the general trend in the last few years is that the fancy equations work for shorter and shorter periods of time. If that wasn't a danger signal, I don't know what is. We're facing several dangers but one of the dangers that these fancy formulas point to is a growing complexity to the world economy that no one seems to fully understand. One way to get the world economy to be a little less complex is to rein in people like Goldman Sachs who have so much activity going on that is hidden from the public. The sliced and diced mortgage derivatives were a classic example of increased complexity that was dangerous and unnecessary. But that requires reform.

So that brings us to the health care issue which is simply just one of the pressing issues that are being handled at the moment. As I've been watching developments over the past few months, my biggest concern is not how much health care the government can somehow bring to the American people, but whether we can truly have reform in the first place. So far, I don't see all that much reform coming out of Washington on any front. I see adjustments. But adjustments are not reforms. We can adjust goal posts, change the uniforms, get better clocks but that's not reform. In many ways, the same games are still being played. It's business as usual. If too many blue Democrats, or weather vane Democrats fail to see the need for reform, we have a problem. It's a problem the progressives might overcome, if they understand how badly we need reform. But if there are too many compromises and the 'reforms' are too watered down, the next Republican president will be free to push the reforms aside. In some respects, that's what George W. Bush did on a number of policy fronts.

In the end, even the Republicans have to come to grips with the fact that their economic policies of the last thirty years have fundamentally failed. We can no longer count on cheap energy and we can no longer afford to believe that the Saudis, Japanese and Chinese, along with others, will prop up our economy looking for safe havens for their dollars.

Health care will make sense only if everyone has to have health care and if every business is somehow involved with providing health care. Businesses need to be put on an even playing field. At the same time, however, health care will still remain an expense for corporations so we need to make sure jobs aren't outsourced as a way of avoiding health care payments. There are a number of ways to deal with both problems, but the only solution that I know of that will work for sure is national health insurance that simply bypasses corporations. Insurance companies might still have a role but that route is only likely to work if we have something that's set up like medicare. So the health care debate, while not a final view of things to come, may say a lot about reform across a wide spectrum during the next couple of years.

If the American people think turning to Republicans is the way to deal with our nation's problems, the United States will probably begin an economic slide that will be difficult to stop. Actually, we've been sliding for most of the last thirty years.

The curious thing about Krugman's study of the current state of macroeconomic theory is that he notes most of the neoclassical economists come from the Midwest. Let's see, Republican governors appoint college heads or create an environment leading to more conservative college heads. Those who lead colleges start looking for economists who fit their own economic views or at least economists who seem to be in their ballpark. Suddenly we have too many economists quoted by journalists who scratch around Washington in places that find jobs for those economists who leave the Midwest: the Heritage Foundation, the Cato Institute, etc. Oh, and as Krugman noted, the Hoover Institute. Hoover was a nice guy who used classical economics to deal with the Great Depression. As my grandfathers taught me, one Republican and one Democrat, that didn't work out too well.

Battery Technology from Oregon to the Isle of Man

A few weeks ago I wrote about lithium oxygen batteries that use air. In that battery, porous carbon is the key. It turns out there is another battery being developed that also uses air. The zinc-air battery is featured in Technology Review:

Zinc-air batteries, which use zinc metal as the anode and an alkaline paste as the electrolyte, are simple, inexpensive, nontoxic, and long- lasting. But engineers haven't been able to figure out how to recharge them. Cody Friesen, an associate professor of materials science at Arizona State University, solved the problem by using a porous electrode and a liquid solution of zinc ions and additives as the electrolyte.

There's an article in Business Week about a company in Switzerland that's about to build a plant in Oregon that will make zinc air batteries:

A Swiss company developing zinc batteries for electric cars has chosen Portland as its U.S. headquarters and manufacturing center.

ReVolt Technology LLC also announced Tuesday it's applying for $30 million in research grants from the U.S. Department of Energy.

Now notice that the Business Week article doesn't mention that the batteries are "zinc-air" batteries. The whole point of such batteries is that an important element of the battery doesn't have to be carried by a vehicle; oxygen can be drawn from the air. So I looked up ReVolt (interesting name) and confirmed that they are indeed zinc-air, though there is no mention of Cody Friesen. Maybe this means there is more than one way to create zinc-air batteries. That would be good for competition. I just wish Americans would get their projects moving a little faster.


Technology Review has another article on an Oregonian connection to the battery industry. For the first time, there has been a race of electric motorcycles on the Isle of Man. The field of electric bikes are not going to match the speed of the gasoline-powered bikes but it turns out at least two of the entrants were from Oregon. Oregon is going green maybe faster than California. Here's a key paragraph on the point of the whole race:

As the day arrives, everyone watching knows that the TTXGP will be slower than the "real" motorcycle race, the TT, because the TTXGP is an energy-limited race. In effect, the "gas tank" of an electric bike is minuscule, so to win the TTXGP the bikers must mind their energy consumption. In contrast, the gas bikers in the TT run with their throttles wide open. However, batteries' energy density has been improving at a rate of about 8 percent a year, which means that even without any other technological progress, electric bikes should run head to head with gas in about 20 years. The TTXGP is intended to make the future arrive sooner.

Let's hope battery technology gets moving a lot quicker than twenty years. For me, the highlight of the story was that the underdogs won. They had the lowest budget and the fastest time (the engineer, admittedly, was an expert on battery technology—but he kept it simple). Maybe the age of the garage inventor is not over!