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Traci Sinclair
| Us or Them |
| Posted by: Traci Sinclair
on 6/28/2010 12:00:00 AM |
Tuesday nights you’ll usually find my husband and me watching The Office reruns, a sitcom about a dysfunctional office led by an often puerile and rarely wise manager, Michael. The Office lampoons many of the vagaries of the office world. In an episode the other night, Michael attempted to resolve a conflict with one of his employees. During a bout of uncharacteristic professionalism, he retrieved the Human Resources Manual and studied a chart that suggested conflicts can be resolved in one of four ways: win-win, win-lose, lose-win, or lose-lose.
I had seen the episode before and soon turned to surfing the internet. While surfing, I stumbled across an article I read earlier in the day but which had failed to capture my attention.
MSNBC reports that the Big Oil companies are closing ranks in response to the increasingly bad-will the public is directing toward them and the sanctions governments are beginning to impose. The U.S. government, for instance, has issued a directive halting all exploratory deep-water oil drilling in the Gulf. (Though a federal court overturned the initial injunction, the government seems resolute and has announced it will redraft and reissue the injunction.)
While The Office droned in the background, I began to wonder if the conventional four-square depiction of conflict resolution might overlook a more basic element of any compromise: effective compromises occur only when the various members first agree that they have a shared stake in the issue at hand. So long as one member refuses to admit its interest in resolving the issue, the situation will tend to stagnate, or if the stakes are high enough, to escalate.
The problem with the recent conflict between the public and Big Oil is that both have something the other not only wants but needs. The public, and the governments that represent them, have to be careful of antagonizing Big Oil too much or of making the sanctions too large. Should the oil stop flowing or even be reduced significantly, the global economy would grind to a stop. However, Big Oil also faces an almost insurmountable obstacle. On the one hand, it depends on the public’s ability to buy its oil, on the other, it depends on the various governments to license its explorations. Without these licenses and the legal protection of the oil still under the ground that accompanies them, Big Oil would quickly be incapable of conducting business. The problem becomes more complicated still because Big Oil not only extracts petroleum from the ground but also employs a sizable number of workers. Were it to fold or have to significantly curtail its business, those employees would find themselves unemployed.
Beyond these logical problems lies one more far-reaching. The world economy currently has no viable alternative to petroleum. The world’s governments are thus indebted to the major oil companies. They depend on Big Oil for the fuel that drives their economies, that makes trade possible, and, it must be said, for massive infusions of campaign funds. And because we are dependent on Big Oil, we must be careful lest we end up paying for the very sanctions we impose.
Politics aside, if the world’s governments are to reach a meaningful accommodation with Big Oil, the solution will begin when both parties recognize that it is in the best interests of both to work to preserve and cultivate national resources.
The episode of The Office concluded with one of Michael’s rare victories. Rather than fixating on the rhetoric of win-win, he was able to convince the employee that they shared a common interest and that in the long-run, it made more sense for them to work together than to keep fighting each other. Remarkably, the innocuous sitcom has a lesson our politicians should learn. Trying to force others to behave in socially responsible ways is usually self-defeating. The change comes when both parties agree that something valuable is at stake and when both are willing to work together to achieve a resolution that benefits both. Until that happens, no long-term solution is likely.
On June 13, several news outlets published a Pentagon report that concluded that Afghanistan contains vast and almost entirely untapped mineral resources. The most common estimate is that Afghanistan has $1 trillion worth of mineral resources. However, Afghanistan’s mining minister claims he has seen reports that place the total value of the minerals closer to $3 trillion.
Understanding numbers as large as $3 trillion requires more than simply counting the zeroes (in this case twelve). To place the projection in context, consider how the amount compares to America’s and to Afghanistan’s respective GDPs as reported by the CIA Fact book: $3 trillion amounts to somewhere between 1/4 and 1/5 of America’s GDP in 2009 and 1300% of Afghanistan’s GDP for 2009.
There is some question, however, if the projections are accurate. Reuters reporter Sue Pleming speculatesthat the announcement is part of the U.S. government’s strategy to change the public’s increasingly negative view of the war. She sites Anthony Cordesman of the Center for Strategic and International Studies who concludes, “The carefully spun good news story about Afghan minerals may or may not prove to be economically realistic.” Former CIA analyst Bruce Riedel’s assessment parallels Cordesman’s, “By publicizing this, they are saying that Afghanistan is an important place beyond terrorism. But, in fact, it could fuel regional rivalries, which have been at the heart of Afghanistan's problems for two centuries.” Both Cordesman and Riedel view economics and politics as linked.
However accurate the assumption that economics and politics are linked might be, the numbers raise questions in and of themselves. For instance, what will the cost of extracting these minerals be? Writing for the AP, Deb Reichmann reports that Afghanistan’s copper reserves are worth about $273 billion at current market value. According to the Arizona Mining Association, developing a mine can cost as much as $50 million. At 0.02% of the total value of the copper deposit, the potential profit seems compelling, even if multiple mines are necessary to access various copper deposits. However, the forecasts don’t tell the whole story. Afghanistan lacks much of the necessary infrastructure to transport the copper once it is mined. And for the most part, Afghanistan lacks both the power grid and the power-generating capacity to support these mines. Moreover, because the veins of minerals tend to be in remote locations, tying into the existing infrastructure seems enormously unlikely.
Economic constraints aside, simply developing the mines takes time. Optimistic projections suggest that the mines could be online within five years of breaking ground. More conservative estimates suggest that developing the mines will take from eight to ten years.
Along with problematic logistics and uncertain development timelines, Afghanistan faces a third problem: personnel. While Afghanistan does have a few arsenal mines, the scope of the operations necessary to mine the mineral resources requires a developed mining culture that will produce not only the day-to-day workers, but also the engineers and supervisors required to run the massive organizations. To be sure, Afghanistan can import workers for the short term, but if the country is to realize as much of the wealth as possible, it will need to cultivate a new culture.
Ultimately, however, the most significant challenge Afghanistan faces is the problem of simple stability. In a region known for its radicalized elements, for raids, and for general and uncontrolled violence, Afghanistan must create stability. Doing so will require two elements. The first is not so difficult: protect the mines themselves. The second is decidedly more difficult: protect not only the roads and rail the mines will need to survive, but also the vehicles that travel these avenues and the workers who staff them. Simply policing this vast system will require a sustained effort that will likely dwarf even the current military operations in the country.
Claims of untapped pots of gold, or in this case copper, make for excellent television sound bites. And these sound bites may even help revitalize public enthusiasm for the American presence in Afghanistan. But in the long run, the decisions will need to be made not on the promise of wealth but on the true costs of developing that wealth. Determining these costs has nothing to do with the pithy and hopeful sound bite and everything to do with the disciplined and laborious balance sheet.
For some time now China has served as the world’s factory. The reasons are simple. China has a massive potential work force. The cost of living in China is quite low compared to western nations which consume most of the products China’s factories produce. As a result, Chinese workers have been willing to work for much lower wages than their counterparts in other countries. Moreover, most Chinese factories have operated according to a simple equation: costs are overhead plus whatever the workers have to be paid. Other considerations, such as worker satisfaction and well-being were largely unconsidered. Workers were treated essentially as cogs in a massive machine. The recent developments at Foxconn’s massive factories suggest that this formula no longer works.
Since January of this year, 13 Foxconn workers have attempted to commit suicide. This rash of outbreaks has led to public outcry, and plant officials have pledged to look into the issue. Though management has explored requiring its workers to make non-suicide pledges, increasing mental health care, and implementing significant pay raises of up to 30%, the feeling of unrest remains.
On June 10th, Chinese workers took the nearly unprecedented step of striking. Officially, China recognizes only one organization that can negotiate with workers--the People’s Communist Party. The recent strikes circumvent the sanctioned authority and for some indicate the beginning of a broad movement toward unions. Yet, Zhow Xiazheng, a sociologist points out, "It's hardly possible for labor unions to be effective, and for the party it is absolutely taboo. No group can represent our people, except the Communist Party.”
But sanctioned or not, the strikes and protests give voice to a growing unrest among Chinese workers. According to Andy Xie, an economist and journalist, the issue is not simply one of money. Xie observes, "Today's youth are more concerned about what will happen to them in the future. They want to settle down in large cities and have interesting and well-paying jobs ... just like their counterparts in other countries. The current factory system isn't set up to realize their dreams."
The short-term and mid-term consequences of these strikes are unknown. If Xiazheng is correct, the government will likely reassert its position as absolute authority. While some changes may be forthcoming, the systemic changes will be minor. However, Xie’s observations seem the more perspicuous. Workers are not simply interchangeable parts in a great mechanized line. Consequently, if the system as a whole is to function, workers must be generally satisfied with not only their pay but with their overall life style. To the degree that they are not, they are likely to continue to behave in a manner that is self-destructive and that damages the company.
The shift on the horizon is as simple to articulate as it is difficult to implement. Rather than regard workers as just another resource to be consumed, China must regard its workers as assets to be developed. And a crucial element of that development is to keep workers satisfied with their jobs.
The other day, while waiting in line to check out from our local grocery store, I overheard the couple in the next line over discussing the long-term consequences of the recent oil spill in the Gulf of Mexico. I was surprised to find they were not discussing the environmental consequences, which according to most experts range from the severe to the catastrophic, or the economic consequences for the Gulf States, which are equally bleak. Instead, they were debating whether or not the crisis would lead to a fundamental change in the U.S. energy market, which would see a move away from petroleum and towards nuclear power.
However, the change they imagine is unlikely in the next several decades. The problem is two-fold. First, nuclear power, which does have the potential to provide an enormous percent of America’s power requirements, faces stiff public mistrust. Second, the problem is not simply of producing energy but of moving that energy to where it is needed.
The potentially catastrophic events at Three Mile Island have served as a rallying cry for opponents to nuclear power. In 1979, the nuclear power plant lost some of its cooling and risked a core breech--essentially the release of super-hot nuclear material into the earth. The material in question is so hot that scientists are unsure how far it could have melted into the earth polluting everything it came in contact with on its way. Ultimately, the plant workers were able to contain the breech. However, the massive news coverage surrounding the event led to a public outcry; and the fear has shaped U.S. public policy to delay issuing the permits required to begin new power plants. Since 1970, no nuclear plants have begun construction in the United States; however President Obama has approved an $8 billion loan guarantee for the construction of two reactors in Georgia. His administration’s actions suggest that the fear surrounding nuclear power may have begun to wane, and that the U.S. will begin to treat nuclear power as a widely viable energy source.
Still, the problem of transporting the energy remains. The problem of bringing the energy to businesses and houses that need it can be solved by upgrading our infrastructure of power lines. However, this solution is not practical for using nuclear power to replace the U.S. dependence on oil. In 2008, the U.S. Energy Information Administration reported that petroleum products account for 95% of the power used for transportation. The remaining 5% is split between natural gas and renewable energy sources, which include biodiesel and the like. More widespread use of electric cars would mitigate the problem somewhat by allowing people to use electricity generated from nuclear power plants to drive their cars. Yet making a significant portion of the demand for transportation energy currently fulfilled by oil will take quite a while.
Ultimately, because of the continuing distrust of nuclear power and the difficulty of finding a wide-spread replacement for oil that will work with our current infrastructure, I suspect oil is here to stay. To be sure, the U.S. government and others will impose greater sanctions on oil companies. And we will likely see a surge in the call for alternative energy and for more economical uses of petroleum. Yet our fundamental dependence on oil will likely remain. Moreover, we need to be careful that in attempting to regulate the oil companies, we do not raise the cost to the consumer while doing little to the oil companies themselves. After all, we now have an example of an oil well hemorrhaging crude oil into the sea. Yet, so far as I know, oil companies have proven to be remarkably adept at closing any hole to their revenue stream.
My problem with dandelions and the European Union’s debt crisis has more in common than it appears: in large part both are problems of myopically applied resources.
Let me explain. My neighbor, or rather the bank that owns the house where my neighbor once lived, has turned off his water. His lawn has died, and patches of dandelions have grown here and there among the brown turf. As the dandelions mature and die, their seeds blow into my yard and sprout. As anyone who has dealt with dandelions knows, the only immediate fix is to weed the new dandelions, and doing so requires a large investment of time. However, even that won’t stop the problem because the hardy dandelions will continue to sprout in his yard. Stopping the problem requires a more systematic response: either I salt my neighbor’s yard so nothing will grow –something the bank is likely to frown on – or I begin to water, and if necessary reseed, his lawn in the hopes of giving the dandelions no place to sprout. Of course, I’ve resisted doing so. After all, it is my water and my seed. It seems unfair to have to devote some of my resources to fixing a problem I didn’t cause.
The current economic crisis in the European Union, and in particular the reluctance of some of the nations to come to the help of others, is on the one hand far more complicated than the issues surrounding my garden. There are more parties involved, and the resources involved are enormous. On the other hand, the underlying decision of what to invest, when to invest, and how much to invest are remarkably similar.
As I suggested in my last blog, the issue can be understood as one of responsibility. Governments like Germany’s, which avoided some of the direct consequence of the economic downturn, feel it is unfair to call on them to devote their resources to bail out the more profligate governments of Greece, Spain, and Portugal. Ironically, their initial decision to withhold their resources may very well lead them to invest significantly more money down the road--just as my initial decision not to water my neighbor’s lawn has led to a problem that will now cost me quite a bit more to fix.
Developing this admittedly overly simplistic metaphor a bit more helps drive home the nature of the choice Germany faces. Either Germans can provide a significant infusion of capital to prop the flagging economies of Greece, Spain, Portugal, and other members of the European Union that are currently flagging, or they can deal with the inevitable problems caused by a falling euro and an economic downturn that is even broader and deeper than it is now. In the long run, the situation is quite simple. No matter how successful a state’s economy, the economy depends on the ability of that state to sell its goods to others. If economic problems significantly encumber those who buy the state’s goods and services, the once strong economy will ultimately fail.
Perhaps Canada and Australia’s representatives to the G-20 need to reread their Shakespeare.
In one of Shakespeare’s more famous passages, Polonius, the advisor from Hamlet, offers his son a set of maxims. The advice is thoroughly conventional and distinctive. Among the truisms is one concerning how his son ought to manage his finances:
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry. (Hamlet, I, iii, 75-77)
Shakespeare’s audience would have recognized the irony of Polonius’s suggestion. The economy of Elizabethan England depended upon the very lending of money that Polonius counseled against. Indeed, producing plays then, as now, was as much about finding investors as it was about the script or the actors. Though clearly far more complex than the economy of Elizabethan England, the global market bears a fundamental similarity to Shakespeare's: both require a significant amount of capital for investment.
Thus the decision of Canada and Australia to oppose the G-20’s attempt to institute a bank tax to fund future bailouts follows from the same reasoning a Polonius’s pronouncement. Both appear to make sense, but in a broader economic context are fundamentally flawed. The simplicity of Canada and Australia’s position is incontrovertible. And this simplicity would seem to support their argument. Both nations claim that because their banking sectors largely resisted the problems that beset the rest of the world, they should not have to pay the bank tax. However the claim rests on an assumption that does not fit the current global economy: their argument assumes that national economies are more autonomous than they are interconnected.
However, even a cursory examination of Canada and Australia’s economies for 2009 invalidates the assumption. Both Canada and Australia suffered staggering losses to the revenue their exports generated. The U.S. Census Bureau concluded that in 2009 the value of Canada’s exports to the U.S. fell nearly 34%. Australia’s government forecasted a lesser but nonetheless significant decline of approximately 25% in the total value of its exports. The reasons for these losses are inescapable. As the global economy slowed, people bought fewer goods, and the value of their exports plummeted.
While creating a relief fund would likely not have sheltered Canada and Australia from all of the consequences of the economic downturn, it would have helped mitigate the impact. And, over the long term, the more stable economic system would surely benefit Canada and Australia’s economies just as it would the rest of the members of the G-20.
One of the more influential theories in contemporary economics is the Nash equilibrium. Nash’s equilibrium suggests that economics is not necessarily a zero-sum game in which one player loses and another wins. Instead, Nash argued that intelligent cooperation between the members could lead to the optimal outcome--even when the immediate consequences of that cooperation, such as paying a tax for a service one is unlikely to need, seem disadvantageous to some members. Given the profound interconnections between the world’s national economies, I suggest that Nash’s propositions are more useful than those of Polonius. The American poet Robert Frost provides an elegant summary of the decision Canada and Australia face. As its title suggests, Frost’s poem, “Mending Wall,” describes two men fixing the flagstone wall that runs along the border of their property. The neighbor is perfectly happy to have a wall stand between him and the narrator. The narrator, however, reflects, “Before I built a wall I'd ask to know what I was walling in or walling out.” It’s a question Canada and Australia should ask themselves.
On its surface, Walter Cannon’s theory of how animals respond to acute stress would seem to have little relevance to understanding why some Greeks, Italians, and Spaniards are responding so strongly to reductions in their governments’ services and entitlements. Yet Cannon’s theory not only helps explain the vehemence of the response but also the forms those responses might take. At its most basic, Cannon theorizes that when an animal feels stress, its biology predisposes it to respond in one of three ways: to freeze, to flee, or to fight. Of these various responses, the last seems particularly useful for understanding the responses in Greece, Italy, and Spain. Unable to escape the economic crisis, and recognizing that it is unlikely to pass them over, citizens in Greece, and to a lesser extent in Italy, have resolved to fight what they are afraid of.
A recent MSNBC articlealludes to this growing anxiety in its conclusion. Sixty-eight-year-old retiree Giannina Di Matteo speaks to the growing sense of anxiety many Italians are experiencing, “I am worried because since the euro has come into being my pension has been cut in half and now I am afraid to be penalized also by this crisis.” Di Matteo’s comment is revealing. She understands the global economic crisis not in abstract terms of secured and unsecured investments and national credit ratings, but in the everyday and intimate terms of what a falling euro means for her future. Moreover, the anxiety she experiences is as intimate as it is pervasive. And insofar as she is unable to hide from or escape from the prevailing Italian economics, Di Matteo may well begin to look for a way to fight it.
The fight has already begun in Greece, which to secure the international loans necessary to keep its government afloat has voted to initiate sweeping reductions in government services and pensions. These measures have sparked significant social opposition as the May 20 rallyof approximately 20,000 Greeks emphasized. But perhaps even more revealing than these large-scale protests are the comments of individual protestors. One of the more telling of these comments comes from the general secretary of Greece's public servants' union, Ilias Iliopoulos. Like Di Matteo, Iliopoulos emphasizes the anxiety the significant reductions in government services cause, but where Di Matteo focuses almost exclusively on the stress she feels, Iliopoulos couches his response in military language, "Let the government hear this message very clearly: We are not retreating from our demands, and we will continue our struggle until we have won.” Revealingly, he seems not only to understand the current crisis in personal terms but also envisions it as a direct competition. And if Cannon’s theory is accurate, we should expect to see the contest imagined in increasingly antagonistic terms.
Applying biological models and theories to economic conditions has a long history. And as most experts will assert, the correspondences are frequently tenuous. Yet I suggest that Cannon’s theory remains useful because it helps us understand where some of the emotion surrounding the public’s response to the global crisis originates. And once we understand the motivations behind the action, we can, perhaps, begin to address it.
Last Thursday, I shared some thoughts about what the prospect of Greece’s bankruptcy reveals about the market. I concluded that while a sovereign nation so closely tied to the EU would have significant effects on the global market, the underlying realization--that the financial system is truly global--is hardly surprising. The remarkable market plunge on May 6 when the NYSE lost nearly 1,000 points in about half an hour speaks as much to anxiety that a global market can cause as it does to the danger of human or computer error.
Indeed, even if the various inquiriescalled for by President Obama ultimately determine that someone somewhere pushed a button that caused the rapid decline, the underlying condition is not the enormous power that certain individuals exert but a fundamental unease that leads to emotional instead of rational choices. On May 6, MSNBC published an articleon the stock slide the day before. The opening two paragraph’s description of investors as “frightened” by the possibility of Greece’s financial instability spreading throughout the EU emphasizes a tendency in the market to be moved as much by emotion as it is by reason. The remainder of the article details several conditions that destabilized Friday’s market. These events ranged from the fluctuating oil prices to the uncertainty of the outcome of England’s latest parliamentary election.
But while the specific information is important for understanding how the current markets are unfolding, the implication of the underlying premise of the article, that economic systems are interconnected and that a change in one may lead to a change in all is less surprising, though perhaps more interesting.
The comedian Tom Lehrer’s repertoire included one of his more famous and more cynical songs “We Will All Go Together When We Go.” Singing about the possibility of global annihilation due to nuclear war, Lehrer gave voice to a fear that was often left unspoken during the Cold War: that the Cold War might turn Hot. But as much as he played upon the uncertainties of the Cold War, Lehrer also emphasized the significance of the rationale behind arms proliferation: the idea of mutually assured destruction so long as the delicate balance held, and so long as both leaders were men of intellect, the idea of nuclear war remained a real but unlikely threat.
Though I do not mean to suggest that financial institutions should borrow strategies from the Cold War, I suspect the system would be a bit more stable and predictable if not only the experts but the general public recognized that the financial world is fundamentally intertwined. Radical changes to one part will certainly affect the others. The more conscious we are of this, the less likely fear and anxiety are to drive decisions. To borrow from Lehrer, we should recognize that we all go together. The trick is to remember not to give in to emotion, but to remain focused on what the market is likely to do over the next three-to-five years, and to base those conclusions on rational, calculated judgments.
On Tuesday May 4, 2010, stock markets around the world fell as investors worried that the European Union’s attempts to contain Greek’s debt crisis would prove insufficient. Though economic crises are rarely the stuff of Hollywood blockbusters, the strum und drang of the various reports seem to offer the perfect script for a cerebral thriller. The question is what would the lead song on the soundtrack be? I propose two. The well-known medieval poem “O’ Fortuna” famously set to music by Carl Orff or the much more modern “Once In A Lifetime” by Talking Heads.
“O Fortuna” does an excellent job of capturing the general anxiety that surrounds the commentary on Greece’s debt crisis. To be sure, the consequences of the crisis are potentially catastrophic for Greece’s citizens, for the EU, and for the global economy. The AP reports that to receive support from the EU, Greece had to slash civil servant pensions and benefits and raise the national sales tax (read more). The consequences for the EU are equally severe. The failure of Greece’s economy would weaken the EU economy in general and might lead to Portugal and Spain suffering a budget crisis similar to Greece’s. The Wall Street Journal notes that on May 4, the euro fell to its lowest level in over a year. Pundits worry that the euro may fall further still as the European economy continues to weaken. And many of the same pundits worry that the global economy, and particularly the economic recovery, will stall and either prolong or worsen the current economic downturn. The sky may not be falling, but it certainly seems that Fortune, that fickle Greek goddess, may have something against Europe’s economic rebound. Carl Orff’s famous ballad concludes with a lyric that articulates the fear pervading many economic forecasts: “So at this hour / without delay / pluck the vibrating string; since through Fate / strikes down the strong, / everyone weep with me!” The lyric’s sentiment echoes that of The Wall Street Journal writers Charles Forelle and Susanne Craig who note that “Economies across the Continent have used complex financial transactions—sometimes in secret—to hide the true size of their debts and deficits” (read more).
Yet, I suggest that the Talking Heads’ “Once in a Lifetime” provides a more useful, if much less dramatic, lead song. Its repetitive conclusion “Same as it ever was. / Same as it ever was. / Same as it ever was. / Same as it ever was. Same as it ever was. / Same as it ever was. Same as it ever was. / Same as it ever was” better articulates what is unfolding in the global economy. As most economists agree, the global economic turndown has put to rest arguments that we do not live in a global economy. That the potential collapse of one player should affect the rest is unsurprising and expected when that minor player has ties to an economic group as significant as the EU. In other words, the consequences are significant and predictable.
All that remains is to choose how to respond to the news. One response is to give in to the anxiety and to allow emotion to drive financial decisions. The other is to remember that the history of the market shows that rational, disciplined investing generally produces the best long-term results. Whatever we choose, at least we now have a soundtrack.
Today, Jim O’Leary, international portfolio manager, is quoted in The Washington Post. He discusses the consumer and the U.S. dollar. Click to read the article.
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