Deep State: Inside Washington's Shadowy Power Elite

From Jesse's Cafe:

“Our plutocracy, whether the hedge fund managers in Greenwich, Connecticut, or the Internet moguls in Palo Alto, now lives like the British did in colonial India: ruling the place but not of it. If one can afford private security, public safety is of no concern; to the person fortunate enough to own a Gulfstream jet, crumbling bridges cause less apprehension, and viable public transportation doesn’t even compute. With private doctors on call and a chartered plane to get to the Mayo Clinic, why worry about Medicare?”

― Mike Lofgren, The Deep State: The Fall of the Constitution and the Rise of a Shadow Government


"Our analyses suggest that majorities of the American public actually have little influence over the policies our government adopts. Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, and a widespread (if still contested) franchise.

But we believe that if policymaking is dominated by powerful business organizations and a small number of affluent Americans, then America’s claims to being a democratic society are seriously threatened."

Martin Gilens and Benjamin I. Page, Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, Princeton 2014

"As a congressional staff member for 28 years specializing in national security and possessing a top secret security clearance, I was at least on the fringes of the world I am describing, if neither totally in it by virtue of full membership nor of it by psychological disposition.

But, like virtually every employed person, I became, to some extent, assimilated into the culture of the institution I worked for, and only by slow degrees, starting before the invasion of Iraq, did I begin fundamentally to question the reasons of state that motivate the people who are, to quote George W. Bush, 'the deciders.'

Cultural assimilation is partly a matter of what psychologist Irving L. Janis called groupthink, the chameleon-like ability of people to adopt the views of their superiors and peers. This syndrome is endemic to Washington: The town is characterized by sudden fads, be it negotiating biennial budgeting, making grand bargains or invading countries. Then, after a while, all the town's cool kids drop those ideas as if they were radioactive.

As in the military, everybody has to get on board with the mission, and questioning it is not a career-enhancing move. The universe of people who will critically examine the goings-on at the institutions they work for is always going to be a small one. As Upton Sinclair said, 'It is difficult to get a man to understand something when his salary depends upon his not understanding it.'"

Mike Lofgren

http://jessescrossroadscafe.blogspot.kr/2016/01/deep-state-inside-washingtons-shadow.html

Bernie Sanders On Wall St Reform and Financial Policy

From Jesse's cafe:

Sanders is greatly undercovered by the major print and visual media.

And when they do cover him it is usually shallow and dismissive, even with so called 'progressive' outlets like MSNBC and the New York Times. This is not something new. Hillary is 'the machine candidate' of the new Wall Street wing of the Democratic establishment that has thrown its traditional constituency of the working middle class under the bus for corporate money and power.

You may not have heard it, but Sanders has matched and perhaps even exceed Hillary Clinton in campaign contributions. The difference is that Hillary is getting hers in big chunks from Big Money, while Bernie is getting his money from many, many smaller donations from the public.

Sanders is the only candidate from both parties who is serious about genuine reform of the financial system and reining in the Fed, Big Money, and the Banks. Rand Paul would take on the Fed, but falls far short on everything else.

Hillary's record on this subject, and her service to Big Money, and the role that she and Bill played in gutting the progressive wing of the Democratic Party while making themselves rich on their speeches to the Big Money crowd, speaks for itself. To expect anything different from her if she gets in office will be like deja vu the hope and change from Obama which didn't make it past his third week in office when he brought back Clinton's financial policy team.

Related: Key Segments of Sander's Wall Street Reform Speech Disappear





http://jessescrossroadscafe.blogspot.kr/2016/01/bernie-sanders-on-wall-st-reform-and.html

NY Times: Kim Young-sam, South Korean President Who Opposed Military, Dies at 87

The former president Kim Young-sam is a critical figure in the Korean history.  He led Korea in transition period.  I was rewriting his policies including the globalization policy last week for my book.  I'd like to share his legacy on this blog down the road.

From NY Times:

Kim Young-sam, the former president of South Korea who replaced the last of the country’s military leaders, purged politicized generals and introduced a landmark reform aimed at transparency in financial transactions, died on Sunday in Seoul. He was 87.

Although he won with the support of the military-backed party, Mr. Kim did not forget his roots. He purged a clique of politically ambitious army officers who went by the name Hanahoe, which roughly meant “an association of one-for-all, all-for-one.” The officers were forced to retire.

Mr. Kim’s purge culminated in the arrest and conviction of Mr. Chun and Mr. Roh on mutiny and corruption charges for their roles in the 1979 coup and a bloody crackdown on a pro-democracy uprising the following year, as well as for collecting hundreds of millions of dollars each in bribes from businessmen. (Mr. Kim later pardoned them and released them from prison.)

Mr. Kim also barred South Koreans from owning bank accounts under pseudonyms. That change is considered a critical step in South Korea’s long-running campaign against corruption; bank accounts under borrowed names had been widely used by politicians and businessmen to hide slush funds.

In 1997, South Korea swallowed the humiliation of a $58 billion bailout from the International Monetary Fund during the Asian financial crisis. Mr. Kim was criticized for failing to prevent the crisis by overhauling the country’s powerful family-run conglomerates.

http://www.nytimes.com/2015/11/22/world/asia/kim-young-sam-former-president-of-south-korea-dies-at-87.html?_r=0

Reich: Restore Balance, Break Up the Big Banks, Financial Transaction Tax

From Jesse's cafe:

Hillary Clinton and her husband Bill are charter founders of the Wall St Wing of the Democratic Party. They removed one of the great counterbalances to the corporatists, and have organized political corruption into a cottage industry like Lansky and Luciano organized crime into a business.

The problem is that neither most Republicans nor many Democrats make any bones about serving Big Money first anymore. It is understood that this is how things are. Soft corruption and the revolving door is the fashion.

Mitch McConnell's new chief is a former lobbyist for Koch, for example. And the Republican presidential field is devoted to Big Money while confounding their constituents with emotional sideshows and manipulative pandering to their worst impulses and scapegoating.

Reich's ideas of reinstating Glass Steagall and a nominal Financial Transactions tax have potential. It was a mistake to repeal Glass-Steagall in the first place. I wonder who presided over that? Oh yes, Bill and Hill. And NAFTA. Everything had a price tag including the Lincoln bedroom and Presidential pardons. Very entrepreneurial.

The emphasis on the Transaction Tax should be very 'nominal' and without exemptions on professionals and institutions and 'market makers' so that the HFT crowd and raw speculation from the Banks' trading desks are the targets, and not the average investor.

I also think the Fed itself, in particular the NY Fed, should be banned from making trades in anything but the official and quasi-official bond markets. And all their public markets activity should be transparent with no more than a quarter lag.

The Congress and their staffers cannot be exempt from 'insider trading' and selling information for favors to the funds and trading desks. I mean, come on. Management of companies and the media get plenty of access to insider information as well, and they are not above the law because 'it is too hard' not to use it.

Given the regulatory capture we have today I am not optimistic about reform until there is another crisis. There are only a handful of genuine reformers, but many flavors of opportunists in sheep's clothing.

So Robert, how can you be so gung ho for reform, but so unqualifiedly endorsing the unreformed Hillary Clinton?

Why don't more Beltway and media progressives and liberals come out for Liz Warren or Bernie Sanders? Because they want reform, but cannot offer their supporters the biggest Washington payoff, which is money and power, which are the mother's milk of the politically corrupt.



http://jessescrossroadscafe.blogspot.kr/2015/05/reich-restore-balance-break-up-big-banks.html

Bill Black: New Labour Leaders Want to Go Back to Blair’s Policies That Blew Up the UK

From Naked Capitalism:

Yves here. Get yourself a cup of coffee. This is a meaty, meaning lengthy but rewarding post. Black focuses on a seminal Tony Blair speech to show how Labor sold radical deregulation, with its now all too well known disastrous results. But Black’s close reading of that speech is also instructive in showing the rhetorical sleight of hand Blair used to legitimate bad policy. That type of dissimulation is why these failed prescriptions keep being revived successfully, with little to no change in substance and messaging.
Given the media effort and the push by the Red Tories to lionize former UK Prime Minister Tony Blair I thought it was a good idea to explain just how destructive his war on financial regulation, supervision, enforcement, and prosecutions was. Blair most famously made public his war on regulation and his embrace of “winning” the regulatory race to the bottom in his May 26, 2005 speech on “Risk and the State.” In a classic example of “be careful what you ask for; for you may receive it,” he called on his Nation to embrace greater risk. He claimed that the public’s excessive aversion to risk produced a regulatory nightmare: “The result is a plethora of rules, guidelines, responses to ‘scandals’ of one nature or another that ends up having utterly perverse consequences.” Blair endorsed the Chicago School (and Tory) analysis of the folly of regulation – claiming that it characteristically produces “utterly perverse consequences.”
Blair then admitted at the beginning of his speech that the existing regulatory system had produced exceptional benefits for the public rather than “utterly perverse consequences.” He admitted that absent regulation the harm to the public would have been extreme.

http://www.nakedcapitalism.com/2015/05/bill-black-new-labour-leaders-want-to-go-back-to-blairs-policies-that-blew-up-the-uk.html

Joseph Stiglitz: Inequality, Wealth, and Growth: Why Capitalism Is Failing

From Jesse's Cafe:

As I had written some time ago in the The Fall of the American Republic: The Quiet Coup:

"I am not so optimistic that this reform is possible, because there has in fact been a soft coup d'etat in the US, which now exists in a state of crony corporatism that wields enormous influence over the media and within the government.

To be clear about this, the oligarchs are flush with victory, and feel that they are firmly in control, able to subvert and direct any popular movement to the support of their own ends and unslakable will to power.

This is the contempt in which they hold the majority of American people and the political process: the common people are easily led fools, and everyone else who is smart enough to know better has their price. And they would beggar every middle class voter in the US before they will voluntarily give up one dime of their ill gotten gains.

But my model says that the oligarchs will continue to press their advantages, being flushed with victory, until they provoke a strong reaction that frightens everyone, like a wake up call, and the tide then turns to genuine reform."

The article which I wrote was based on the insightful and largely ignored work by renowned economist Simon Johnson called The Quiet Coup.

This lecture by Stiglitz below is a little 'wonky' and uses some terminology which may be unfamiliar.

Nevertheless if you listen to it and just try to capture the main points of his discussion it will be worthwhile.

His basic premise is to ask why capitalism has shown a tendency to stagnation since 1980 in the United States and other parts of the West.

I am, as you know, an adherent to the belief that there has been a soft coup d'état in the US. One can always quibble about the exact dates, but that is of less importance. I have said it was shortly after Greenspan's 'irrational exuberance' speech, although the stage was certainly set for this during the 1980's with the rise of the efficient markets hypothesis, the assumption of rational wealth optimizers in the markets, and of course, the laughable supply side economics which are the old trickle down canard in drag.

The point, rather, is to understand what has happened, to continue to shine a light on it, and to hope that Simon Johnson is correct, that the overreach of the 'winners' will eventually provoke a reaction.

Quite frankly I had thought it would have come by now. One can rarely go wrong betting on the power of apathy and momentum, and the persistent greed of the sociopaths and their enablers.

After all, in the aftermath of a tragic derailment of the flagship train line in the US from Washington to Boston that could have been prevented by continuing investments in fundamental railroad infrastructure, the House of Republicans have voted to further slash Amtrak funding by $260 million.

They hate anything that benefits the public without putting an abundant stream of income into the pockets of their corporate money masters. This explains their virulent animosity to Social Security, public transportation, public healthcare, public education, public infrastructure, consumer protections, environmental laws, safety regulations, product safety measures, and any sort of financial regulation that inhibits the greed and power of the Banks.

And we should be ashamed for continually standing quiet in the face of such pathological incivility.

But I can almost guarantee that if this crash had been the result of some sort of despicable act of terrorism for example, the public coffers would already be wide open, flowing with a Niagara of funds for homeland security and the militarization of domestic law enforcement. Millions for the corporatized state, but little or nothing for the people.

I am increasingly concerned that, as has happened so many times in the past, the status quo will greet this eventual reaction for reform, justice, and equality with repression and even draconian measures to maintain what they perceive as their rightful place and power.

Like apathy and momentum, it is also difficult to underestimate the self-delusion and overreach of sociopaths who would be as gods, even if they are gods of the damned.

History is replete with examples.

 

http://jessescrossroadscafe.blogspot.kr/2015/05/stiglitz-why-capitalism-has-been.html

Nomi Prins: The Clintons and Their Banker Friends

From Naked Capitalism:

By Nomi Prins, a former Wall Street executive, the author of six books, a speaker, and a distinguished senior fellow at the non-partisan public policy institute Demos. Her most recent book, All the Presidents’ Bankers: The Hidden Alliances that Drive American Power (Nation Books) has just been released in paperback and this piece is adapted and updated from it. Originally published at TomDispatch
The past, especially the political past, doesn’t just provide clues to the present. In the realm of the presidency and Wall Street, it provides an ongoing pathway for political-financial relationships and policies that remain a threat to the American economy going forward.
When Hillary Clinton video-announced her bid for the Oval Office, she claimed she wanted to be a “champion” for the American people. Since then, she has attempted to recast herself as a populist and distance herself from some of the policies of her husband. But Bill Clinton did not become president without sharing the friendships, associations, and ideologies of the elite banking sect, nor will Hillary Clinton. Such relationships run too deep and are too longstanding.
To grasp the dangers that the Big Six banks (JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley) presently pose to the financial stability of our nation and the world, you need to understand their history in Washington, starting with the Clinton years of the 1990s. Alliances established then (not exclusively with Democrats, since bankers are bipartisan by nature) enabled these firms to become as politically powerful as they are today and to exert that power over an unprecedented amount of capital. Rest assured of one thing: their past and present CEOs will prove as critical in backing a Hillary Clinton presidency as they were in enabling her husband’s years in office.
In return, today’s titans of finance and their hordes of lobbyists, more than half of whom held prior positions in the government, exact certain requirements from Washington. They need to know that a safety net or bailout will always be available in times of emergency and that the regulatory road will be open to whatever practices they deem most profitable.
Whatever her populist pitch may be in the 2016 campaign — and she will have one — note that, in all these years, Hillary Clinton has not publicly condemned Wall Street or any individual Wall Street leader. Though she may, in the heat of that campaign, raise the bad-apples or bad-situation explanation for Wall Street’s role in the financial crisis of 2007-2008, rest assured that she will not point fingers at her friends. She will not chastise the people that pay her hundreds of thousands of dollars a pop to speak or the ones that have long shared the social circles in which she and her husband move. She is an undeniable component of the Clinton political-financial legacy that came to national fruition more than 23 years ago, which is why looking back at the history of the first Clinton presidency is likely to tell you so much about the shape and character of the possible second one.

http://www.nakedcapitalism.com/2015/05/nomi-prins-the-clintons-and-their-banker-friends.html

Power: The Essence of Corrupt Banking and Politics Is to Grow and Control the Debt

From Jesse's Cafe:

Money is power. And those who control the money, if they have the will for it, can use it as a means to incredible power, to create debt, and to control it, thereby controlling the debtors, both as individuals, as communities, as regions, and whole nations.

This is the story of global trade deals, the Dollar, and the foul marriage between politics, money, and central banking. The more discretion and secrecy that is granted to those who create money and debt, the more vulnerable is the freedom of the people.

This is the story of Cyprus, of Greece, and of the Ukraine.

And there will be more.

This will to power is as old as Babylon, and as evil as hell.

 "The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations.

Each central bank, in the hands of men like Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Bank, Charles Rist of the Bank of France, and Hjalmar Schacht of the Reichsbank, sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

Professor Carroll Quigley, Tragedy and Hope, 1966http://jessescrossroadscafe.blogspot.kr/2015/05/power-essence-of-banking-is-to-grow-and.html

Iain Marlow: South Korea’s chaebol problem (한국의 재벌 문제)

A good analysis of the chaebol problem.  In order for Korea to move on to the next phase of development, the chaebol issue is critical.

What this article doesn't address is the underlying factors of the chaebol system.  Chaebols have been a part of Korea Inc.  in order to tackle the chaebol problem, the state has to correct the problem of Korea Inc., which is extremely hard for the Korean power elite.  Politics has overriden economics either in teh West or in the East.

In my view, the core idea of the so-called creative economy by the current Park Geun-hye regime is solid and promising for the next phase of Korea's development, economically, socially, and politically.  What concerns us is that her administration doesn't seem to grasp where lies the problems deterring Korean SMEs from growing and thriving.  They are complex and embedded in the old system.  Once they do, thereby making some progress toward genuine infrastructure building for SMEs' prosperity, President Park Keun-hye would be remembered as a good president, beyond his father's (President Park Chung-hee) legacy (both desirable and undesirable). 

Meanwhile, the Park regime should stop propping up any unproductive businesses (i.e., destructive force of financialization).  Otherwise, she would be remembered as another failed president in the political history of Korea.

From the globe and mail:

In the war’s aftermath, though, and particularly after a military coup in 1961, something remarkable happened. Family-owned, South Korean firms – recognizable companies such as Samsung and Hyundai – struck an unlikely alliance with South Korea’s authoritarian government. Protected from competition, showered with cheap loans and encouraged to sprawl into new, strategic industries without fear of failing, these companies grew into global behemoths and built South Korea into a wealthy, export-oriented powerhouse in less than a generation.

But like many in South Korea, Mr. Eom, 66, has lost respect for the so-called chaebol – a term that combines the Korean words chae (wealth) and bol (clan). He works for a small manufacturing firm that sells to the chaebol, and he says the large firms often pay late, arbitrarily refuse shipments and use their huge market dominance to bully smaller firms. He and others have become increasingly frustrated with the chaebol’s growing power and influence in South Korean society, as well as what many perceive to be the arrogance of the children now taking control of the family-run firms as a widely-respected, older generation passes on control.

“Things are not the same,” Mr. Eom says. “The problem with the chaebol is that what they earn, they don’t give back to society – they simply spread out with more tentacles.”

The chaebol may deserve much of the credit for South Korea’s rapid economic development, but many now fear the country’s massive conglomerates have become far too powerful. Samsung Group alone now accounts for roughly 20 per cent of South Korea’s gross domestic product.

South Korea’s economy has slowed sharply in recent quarters, and is pushing up against the limits of its export-led growth. Economic observers say the chaebol’s dominance is now suffocating the country’s attempt to shift gears and foster a more innovative services-oriented economy powered by small businesses.

Powerful South Korean exporters are being hit at the low end by expanding Chinese manufacturers and at the high end by Japanese players who have benefited from a deliberately-weakened yen. Exporters are creating fewer jobs in South Korea as the chaebol move production offshore.

That has left large firms profitable, but the domestic economy hurting: South Korea’s household debt is now rising fast, small and medium-sized businesses are still unproductive and failing to grow larger, and the high-value services sector is lagging well behind other countries.

“This has raised concerns about Korea’s traditional catch-up strategy led by exports produced by large chaebol companies,” the Organization for Economic Co-operation and Development said in a report last year.

http://www.theglobeandmail.com/report-on-business/south-koreas-chaebol-problem/article24116084/

Satyajit Das: Two Views of Japan’s Setting Sun

Similarities are so there.

From Naked Capitalism:

Das discusses two recent books on Japan, and both provide windows on how Japan is coping with its now lost two decades. One of them is by Tag Murphy, who I met in my days in Japan and has long been a very insightful commentator. As I said at the Atlantic Economy conference, rather than trying to “jump start the economy,” which would take more radical restructuring than they are willing to engage in, the top wealthy might be better served to worry about managing low growth better. And for its many flaws, egalitarian Japan has muddled through a far more severe bubble and bust with more grace than we have.

http://www.nakedcapitalism.com/2015/04/satyajit-das-two-views-japans-setting-sun.html

Financial Times: South Korea resource drive undone by scandal

From FT:

Just a few years after he helped the government spearhead a bold overseas investment drive, Sung Wan-jong was found hanging by his tie from a tree in northern Seoul, undone by one of South Korea’s most high-profile business scandals of recent years.

State-controlled companies — as well as private groups such as Keangnam Enterprises, chaired by Sung — were encouraged to raise debt to acquire energy assets abroad, from Iraqi Kurdistan to the Gulf of Mexico.

But there are growing complaints that the programme led to a huge waste of public funds, with some allegedly lost to corruption. The national board of audit and inspection on April 3 estimated that state-controlled companies suffered net losses of Won3.4tn ($3.1bn) by pursuing overseas resource projects under Mr Lee.

http://www.ft.com/intl/cms/s/0/54c0dcd2-df4d-11e4-b6da-00144feab7de.html

NY Times: South Korea’s Invasion of Privacy

From NYT:

South Koreans have had to deal with a series of affronts to their privacy recently, but one blow stings more than the rest: The country’s three main telecommunication companies — KT, SK Telecom and LG Uplus — have been funneling subscriber information to law enforcement agencies whenever a request is made, without demanding a warrant or informing affected customers.

They gave away names, addresses, resident registration numbers and other customer information pertaining to more than six million phone numbers in the first half of 2014 alone. All of that data now sits with law enforcement authorities, with no prospect of disposal.

The collusion between telecom firms and the state is just another item in a long list of invasions of privacy by the government since President Park Geun-hye became a contender for high office more than four years ago. Some commentators warned that Ms. Park’s election might stoke authoritarianism because of her appeal among conservatives who honor her late father, the anti-Communist dictator Park Chung-hee, but no one predicted the republic of surveillance that has taken shape under her watchful eyes.

This downward spiral began during the tenure of President Lee Myung-bak, Ms. Park’s predecessor. But under this president, surveillance has reached new heights.

Initially, government monitoring was said to have something to do with reducing crime, social instability and pro-North Korean activities. But surveillance has become so commonplace that the government and the public seem to have forgotten its purpose. Policing the Internet, poring over private chats, installing an ever-increasing number of close-circuit television cameras and collecting information on telecommunication users are all part of this government’s tool kit.

In principle, Articles 17 and 18 of South Korea’s democratic Constitution prohibit the infringement of “privacy” and “privacy of correspondence.” But conservatives have sought to minimize those guarantees by invoking Article 37, which allows for curtailing rights “when necessary for national security, the maintenance of law and order or for public welfare.”

International condemnation is mounting over South Korea’s direction. Freedom House now classifies South Korea’s Internet and press freedoms as only “partly free” and has downgraded the country’s political rights rating by a notch for 2014. Amnesty International and Human Rights Watch have both called on the government to stop undermining freedom of expression, particularly in the arenas of politics and journalism.

Eventually, Ms. Park’s policies will threaten to undermine the “creative economy” she says she wants to stimulate. Her security and surveillance abuses are turning people away from the very technology companies that the country needs to stay competitive.

South Korea’s abrupt regression from a much-touted model of democracy into a land of fast-dwindling freedom is a cautionary tale even in this global age of surveillance. The erosion of privacy rights can and must be halted. We must be able to keep talking freely, even when there are those who would prefer our silence and blind submission.

http://www.nytimes.com/2015/04/03/opinion/south-koreas-invasion-of-privacy.html?_r=0

China’s military and growing political power

From VOXEU:

The Soviets matched the US only by spending up to 20% of GDP on the military during the Cold War. This column argues that, in stark contrast to this example, China has the potential to match the US in certain military spheres with similar burden on its economy. Using exchange rates comparisons significantly understates the Chinese military spending. A much more realistic assessment is obtained using PPP terms. If both countries spent the same fraction of their GDP on the military, the relative size of China’s military machine would be more than 90% of the US one.
China’s rapid economic growth has led to a spate of comparisons between the sizes of the economies of China and the US. Authors wishing to make China look big use exchange rates adjusted for local prices.
Frankel (2014) argues that GDP converted at market exchange rates is a better measure of economic power since international spending power but not local spending power is what matters. Specifically, comparisons based on market exchange rate are appropriate for measuring the importance of a country in the world economy, such as the national share of world demand, the impact on financial markets, and international voting rights.

• As Frankel notes, since the market exchange rate is approximately half the value of the purchasing power parity (PPP) exchange rate, the US remains the world’s largest economic power by a substantial margin.

But another aspect of China’s rise is its rising military strength. Its military budget has grown at double digit rates for 20 years. The wider political economy implications of China’s rise also depend on this military muscle (Mearsheimer 2006, Friedberg 2011, Kaplan 2014). As evidenced by Obama’s ‘pivot to Asia’, this is already changing the balance of power in Asia, and the US foreign policy response (Clinton 2011, The Economist 2012).
But how should we compare this spending in RMB to the US military budget? Will market exchange rates or PPP exchange rates give a more accurate comparison of relative real military spending in each country?

Military Spending in China and the US

In a recent paper, (Robertson and Sin 2015), we show that China’s military budget was 18% of that of the US using market exchange rate comparisons, but 33% of the one of the US using PPP exchange rates. In addition, China spends only around 2% of its GDP on the military, compared to 5% by the US. If China raised its military spending to GDP ratio to the US level, it would be close to par with the US in PPP terms, but still far behind it in terms of market exchange rates.
Such large differences due to exchange rate choices cause anxiety in the Pentagon. It is a ‘known unknown’ that has been flagged many times by, for example, the Rand Corporation, the US Department of Defence, and military statistical abstracts such as the IISS and SIPRI (Crane et al. 2006, US Department of Defence 2011, IISS 2012, SIPRI 2012).
Frankel also points out that the market exchange rate matters for military power. He gives the example of China’s ability to project power in the South China Sea, which depends on its ability to purchase naval capacity. Likewise, China imports the latest generation anti-ship missiles from Russia.
But military spending more generally has a large domestic component. Around 1/3 of China’s military budget is spent on personnel – all of whom are paid substantially lower wages than their US equivalents – even after adjusting for differences in training. So, in this case it is not obvious whether market exchange rates or PPP exchange rate comparisons give a more accurate perspective.

A Military Unit Cost Exchange Rate

The correct exchange rate with which to compare military spending would be a price or unit cost ratio of military services in each country. We, therefore, tackle this problem by developing Tornqvist and Fisher price indices applied to data on broad military budget shares for personnel, equipment, and operations spending.
In accordance with Frankel’s arguments above, we use market exchange rates as a measure of relative military equipment costs facing each country since most equipment, or close substitutes, is tradable. For relative operations costs, however, we use PPP exchange rates as a reasonable proxy since the operations budget represents a bundle of traded and non-traded goods and services.
Finally, relative personnel costs are obtained using manufacturing wages, either gross or net of on-costs, since this represents the social opportunity cost of military employment.
Even after adjusting for differences in average schooling, we find that these differences in personal costs are very large. Because of this, our resulting relative military cost (RMC) exchange rates are very low. Thus, while the market exchange rate in 210 was around 6.8 RMB per dollar, and the PPP exchange rate was 3.7 RMB per dollar, we obtain a relative military cost exchange rate of 2.9 RMB per dollar.
This low relative military costs exchange rate implies a real value of China’s military spending of 40% of the US in real terms – larger than the level implied by using PPP rates of 33%, and much larger than the market exchange rate based figure of 18%. Moreover, if both countries spent the same fraction of their GDP on the military, the relative size of China’s military machine is over 90% of the one of the US.
One strength of our method is that it allows for the fact that the US uses more equipment-intensive techniques and China uses labour-intensive techniques. Thus, it avoids substitution bias associated with fixed basked approaches. Moreover, it can also be readily calculated with minimal data.
One caveat is that the method assumes the technology for combing inputs –but not the inputs choice – is the same in both countries. But even allowing for say, a 10%-20% productivity advantage in the US due, for example, to less corruption and better procurement practices, it would still leave a very large estimate of real spending that would be closer to the PPP estimate of China’s military spending.

Conclusion

We find that converting China’s military spending in RMB to dollars using market exchange rates will dramatically understate its real size. A more realistic assessment shows that China’s real spending is closer to the value implied by PPP exchange rates.
This economic measure of military strength is important because it shows that China has the potential to match the US in certain military spheres with a similar burden on its economy. This is in stark contrast to the Soviets’ cold war strategy, where they matched the US only by spending up to 20% of GDP on the military.
So, in terms of military spending, China is ‘number 2’ but only by a small and shrinking margin. This will matter a great deal in terms of its ability to enforce territorial claims and achieve its foreign policy objectives. In these terms, China’s ability to wield international political power would seem to be very close to that of the US.

http://www.voxeu.org/article/mismeasuring-china-s-military-spending

Democracy and the threat of revolution: New evidence

From VoxEU:

Some theories suggest that the threat of revolution plays a pivotal role in democratisation. This column provides new evidence in support of this hypothesis. The authors use democratic transitions from Europe in the 19th century, Africa at the turn at the 20th century, and the Great Reform Act of 1832 in Great Britain. They find that credible threats of revolution have systematically triggered pre-emptive democratic reforms throughout history.

http://www.voxeu.org/article/democracy-and-threat-revolution-new-evidence

Dilemma in President Park Guen-hye’s Policy Undertaking (박근혜 정부의 정책 딜레마)

Korea is in for a rough ride (For instance, the overall debt level is mounting; The Korean economy is easily shaken by the foreign financial entities; The income disparity is growing; The currency war is looming, and so on) The Park Geun-hye administration may be the last regime for Korea to turn things around given a dire economic situation around the globe.

The Korean people have high hopes for the Park Guen-hye administration.(The following post titled “Park Urges Chaebols To Share Growth With Community and Promises SMEs Support; 박 당선인 중소기업 대통령 되겠다” explains the reason for it: http://innovationandeconomicanalysis.blogspot.kr/2012/12/park-urges-chaebols-to-share-growth.html)  I have argued that any policy apparatus should be geared toward serving the broader social interest.  The president has promised to become a president of SMEs.  If the present genuinely cares for serving the best interests of the most people (I believe she does) she needs to push for a reform.

If she is really serious about job creations by putting SMEs on center stage in the Korea’s economic landscape, she may have to overhaul the centrally-planned command economy and adopt the free enterprise system with proper regulations.  This means that keeping her promise requires breaking down the institutional setup which his late father, President Park Chung-hee engineered to run the command economy. The very system which contributed to Korea’s rapid economic growth in the early stage of industrialization incurred structural risks. (I have discussed this in another post titled “Comparison of Two Critical Regimes in Korea: The Park Chunghee Regime vs. Kim Daejung Regime (박정희 정권과 김대중 정권의 비교) http://innovationandeconomicanalysis.blogspot.kr/2012/09/comparison-of-two-critical-regimes-in.html)  This system encompasses the centrally-planned economic/innovation model (Please see this posting titled "The Fallacy of Korea’s Economic and Innovation Model (한국 경제와 혁신 모델의 오류)" http://innovationandeconomicanalysis.blogspot.kr/2012/10/the-fallacy-of-koreas-economic-and.html), the oligarchy system, and the chaebol system.  The Korean model of concentrated political power in a partnership between the government and chaebols has hindered any reform effort.  President Park needs to reform the old system which has hampered the free enterprise system.  She has to set up institutional arrangements for the free enterprise system to grow and flourish.  Therein lie her biggest challenge and dilemma.

I have argued that innovation endeavor has to serve the best interests of the most people.  I am glad that President Park is determined to pursue this goal.  Then, the Park administration may have to develop a policy making apparatus in line with this goal.  In this context, the Park administration may have to limit its role in providing the conditions in which innovation and entrepreneurship can flourish on a level playing field, rather than directly intervening in the markets.  Furthermore, since innovation and production go hand in hand, the Park government also has to make an earnest effort to keep the manufacturing under wraps.  In this framework, the Park administration has to come up with ways to allocate resources efficiently in productive capacity, create incentives for citizens to gain necessary skills, draft and enact the necessary regulations, or provide tax breaks to encourage entrepreneurship and invest in new businesses in emerging technologies.  

The major policy agenda for the Park administration is building a creative economy(창조경제) to create more jobs.  Toward this, the new administration has promised to stop the power abuse by conglomerates while protecting the Korean SMEs.  President Park Guen-hye pledged her administration would play an active role in job creations by expanding investment in science technology and the information and communication technology.  Will the Park administration perform the market-forming role in a bid to generate the short-term return on investment which will stifle the entrepreneurship in the long-term as the case of the mobile phone did?  The very act of the Korean government promoting a specific industry (e.g., the ICT industry) may be hindering the reform effort Korea needs to pursue in order to transform from the command economy into the free enterprise system.  Letting the market forces run their course may be better than employing wrong policy measures that would work in the short term, if history is any guide (For example, please see a post titled “How the U.S. Government Policy Prolonged the Depression” http://innovationandeconomicanalysis.blogspot.kr/2013/03/how-us-government-policy-prolonged.html)

It has been reported the newly formed economic team of the Park administration would announce a stimulus package this week including issuing the government bonds.  We have seen what Japan, another strong command economy, has done during the last two decades.  It hasn’t worked and experienced a 23-year deflationary spiral. (I posted numerous postings on this)

It may be too early to tell, yet I’m concerned that considering the way things play out, the new administration may end up another experiment.

Update: Korea Goes All-Out To Boost Economy; Exports, Investment and Consumption Remain Weak (http://innovationandeconomicanalysis.blogspot.kr/2013/03/korea-goes-all-out-to-boost-economy.html)

장년기 접어든 한국 경제, 시스템 힐링으로 재도약해야

서울경제로부터:

"이제 '나를 따르라' 식 리더십이 아닌 상대방과 대화하고 타협해서 융합에너지를 만들어내는 '멀티플레이어(multiplier) 리더십'이 반드시 필요합니다."

강봉균(사진) 군산대 석좌교수는 대한민국 시스템 개조를 위해 가장 필요한 것은 대화와 협상이라는 어려운 과정을 이끌 수 있는 리더십이라고 강조했다. 상대방을 인정하고 능동적으로 협상할 수 있는 리더십이 있어야 우리 사회의 병리현상을 치유할 수 있다는 것이다.

입법부(국회의원)와 행정부(재정경제부 장관)에서 두루 경륜을 쌓은 그는 박근혜 대통령이 '제2의 한강의 기적'을 만들자고 주창했지만 현재 우리는 첫 번째 기적을 만들 때와 전혀 다른 시대에 살고 있다는 점을 강조했다. 강 교수는 "1960~1970년대만 해도 한국경제는 20대 청년 같은 성장에너지를 갖고 있었지만 지금은 50대 장년기에 들어서 여기저기 아픈 곳을 먼저 고치지 않고는 건강을 유지하기 힘들다"고 비유했다.

그가 가장 큰 병리현상으로 꼽은 것은 정치다. 강 교수는 "박 대통령은 노무현ㆍ이명박 전 대통령처럼 여의도와 거리를 두고 여야의 싸움정치를 구경하는 대통령이 돼서는 안 된다"며 "국민들은 양보할 것은 양보하고 타협할 것은 타협하는 변화된 모습을 갈망하고 있다"고 설명했다.

강 교수는 특히 현재 자신이 몸담고 있는 교육과 관련, 개혁 대상인 '교수집단'을 설득해야 한다고 했다. 강 교수는 "교수집단은 전공학과별 칸막이를 제거하면 자신들의 생존이 보장되지 않는다고 생각해 융합인재 양성에 흔쾌히 협력하지 않을 것"이라며 "대기업도 정부가 추진하는 대학교육 개혁을 도와줘야 인재난에서 벗어날 수 있다"고 주장했다.

http://economy.hankooki.com/lpage/economy/201303/e2013031717051070070.htm

김종수: ‘창조경제’ 집착의 득실

중앙일보로부터:

여야의 팽팽한 대립으로 정부조직 개편안이 표류하는 가운데 국정의 파행이 계속되고 있다. 북한의 거듭되는 도발 위협 때문에 급한 대로 일부 장관을 먼저 임명해 새 정부의 첫 국무회의를 열었지만 핵심 각료의 부재는 정부가 정상 가동되지 못하는 현실을 더욱 부각시켰을 뿐이다.

　여야가 정부조직 개편안에서 국정 파행에도 불구하고 물러설 수 없다고 생각하는 핵심 쟁점은 종합유선방송사업자(SO)의 관할권 문제다. 새누리당은 “SO업무를 신설되는 미래창조과학부가 맡아야 한다”는 것이고, 민주당은 “현행대로 방송통신위원회에 남겨둬야 한다”는 것이다. 새누리당은 “(새 정부가 추진하는) 창조경제의 핵심인 정보통신기술(ICT)산업을 키우기 위해서는 미래부에 가야 한다”고 주장하고, 민주당은 “(SO 관할권을 독임제 부처인 미래부에 두면) 방송이 정치적으로 악용될 수 있다”고 맞서고 있다. 결국 정부 1개 과의 업무를 어느 부처가 맡느냐를 두고 두 당이 한 치의 양보도 없이 대립하고 있는 셈이다.

　 그런데 두 당의 주장을 가만히 들어보면 논점이 전혀 다르다는 사실을 발견하게 된다. 새누리당은 SO 관할권을 ‘경제적 논리’로 접근하는 반면, 민주당은 ‘정치적 논리’로 해석하고 있지 않은가. 새누리당은 경제적 이유로 미래부에 두자는 것이고, 민주당은 정치적 이유로 안 된다는 식이다. 두 당이 같은 사안을 두고 전혀 다른 주파수로 일방적인 주장을 펴고 있으니 타협이나 절충은커녕 정상적인 대화조차 어려운 것이다.

　이 문제에 대한 박근혜 대통령의 대국민 담화는 사태가 꼬인 이유를 보다 분명하게 보여준다. 박 대통령은 담화에서 “우리 경제가 한 단계 도약하고 질 좋은 일자리를 창출하려면 반드시 과학기술과 방송통신의 융합에 기반한 ICT산업의 육성을 통해 국가 성장동력을 마련해야 한다”고 말했다. 방송진흥기능의 미래부 이관이 경제적 문제임을 분명히 한 것이다. 박 대통령은 그러면서 “(민주당이) 과거 생각의 틀에 갇혀 본질에서 벗어난 정치적 논쟁으로 이 문제를 묶어놓으면 안 될 것”이라고 못박았다. 민주당이 경제문제를 정치논쟁으로 변질시켰다고 규정한 것이다.

　이제 정부조직 개편안이 표류하는 이유는 명확해졌다. 청와대와 여당은 경제 논리로 말하고, 야당은 정치 논리로 맞서고 있기 때문이다. 해법은 청와대와 여당이 경제 논리를 정치적 언어로 번역해 야당을 설득하든지, 아니면 야당의 정치 논리를 받아들여 정치적으로 푸는 수밖에 없다. 그런데 지금까지 진행된 여야의 협상과 청와대의 대응을 보면 당분간 두 가지 대안 가운데 어느 쪽도 성사될 가망은 없어 보인다. 박 대통령이 경제 논리를 통한 설득이나 정치적 타협에 나설 생각이 없기 때문이다. 박 대통령은 담화에서 “저는 대한민국의 대통령으로서 국가의 미래를 위해 이 문제만큼은 물러설 수 없다는 절박한 심정”이라며 “이것(방송진흥기능)이 빠진 미래부는 껍데기만 남아 굳이 미래부를 만들 필요가 없다는 생각”이라고 했을 정도다.

　그런데 여기서 잠시 한 가지 짚고 넘어가야 할 대목이 있다. 방송진흥기능의 미래부 이관이 경제적으로 필요한 일이라고 해도 그것이 과연 국정의 공백을 정당화할 만큼 중대한 사안인지에 대해서는 별도의 판단이 필요하다. 물론 박 대통령은 이를 정부조직 개편에서 양보할 수 없는 핵심 포인트라고 보는 것 같다. 새 정부가 과거 정부와 차별화해 내세운 간판 정책이 ‘창조경제’이고, 창조경제를 이루는 골간이 ICT산업 육성이므로, 창조경제의 주무부처인 미래부에서 당연히 ICT산업 정책을 총괄해야 한다는 논리에서다. 그러나 이 같은 논리구조는 일견 형식적으로 내적 정합성(整合性)을 갖추고 있기는 하지만 사안의 중대성을 판단하는 기준으로는 적합하지 않다. 왜냐하면 ‘창조경제’라는 것이 박근혜 정부의 성격을 규정하는 포괄적이고도 유일한 국정목표가 아니기 때문이다. 대통령직인수위원회가 밝힌 박근혜 정부의 최우선 국정과제는 일자리 창출이다. 그리고 일자리 창출의 해법으로 제시된 것이 ‘창조경제’다. 일자리를 만드는 방법에는 여러 가지가 있고, 이른바 ‘창조경제’는 일자리 창출이라는 국정과제를 달성하기 위한 여러 수단 가운데 하나다. 즉 전체 국정과제와 정책목표의 틀에서 보면 창조경제는 비교적 하위 목표이고, ICT산업 육성은 그것을 달성하기 위한 하위 과제다. 그렇다면 그것이 정부조직 개편에서 관철되지 않는다고 해서 전체 국정과제를 추진할 수 없는 것도 아니고 그래서도 안 된다. 지엽말단적인 사안을 가지고 국정운영 전체를 거는 것은 아무래도 과해 보인다. 자칫하면 순수하게 경제 논리에서 시작된 정부조직 개편 요구를 야당과의 정치적 힘겨루기에 쓴다는 오해를 받을 소지도 있다.

http://joongang.joinsmsn.com/article/aid/2013/03/13/10525970.html?cloc=olink|article|default

The Human Cost Of Fiscal Mismanagement of Government

From Zero Hedge:

During the Great Depression, there were countless suicides. People jumping out of buildings because they lost everything and could not face a future that was destitute. The photographs of such scenes will live forever. The same is taking place throughout Southern Europe today and it is a cry for fiscal responsibility upon government. In Italy, just since the start of the year, 23 entrepreneurs have committed suicide. Politicians are responsible for these economic declines.

http://www.zerohedge.com/news/2013-03-06/guest-post-human-cost-fiscal-mismanagement-government

김성주: 박근혜 정부, 혁명적 사고 필요

김성주 회장이 정부 보직을 맡지 않는다 하더라도 박대통령께 간간이 의견을 피력해 주시면 좋겠다는 생각을 하게 된다.

한국경제로부터:

새누리당 공동선대위원장을 맡았던 김성주 성주그룹 회장은 5일(현지시간) 미국 뉴욕에서 "박근혜 정부가 혁명적 사고를 할 필요가 있다"고 밝혔다.

김 회장은 이날 특파원들을 만나 "한국에 앞으로 3∼5년이 정말 중요한 시기"라면서 "박근혜 정부가 성공하려면 예스맨보다는 글로벌 시각을 갖고 파격적인 제안을 할 수 있는 사람을 영입해 인식 체계의 대전환을 이뤄야 한다"고 말했다.

그는 "이를 위해선 여성 인력을 많이 활용해 여성과 남성의 장점을 융합할 수 있어야 하고 정부가 젊어져야 한다"고 설명했다.

김종훈 미래창조과학부 장관 내정자의 사퇴에 대해서도 입을 열었다. 김 회장은 "새 정부의 창조 경제는 상당히 좋은 얘기고 김 내정자가 할 수 있는 일이 있었을 텐데 사퇴해 안타깝다"고 말했다.

http://news.hankyung.com/201303/201303066964g.html?ch=news

아시아경제로부터:

지난 대선에서 박근혜 대선후보 공동선대위원장으로 활동했던 김성주 성주그룹 회장이 오랜만에 정치에 대해 입을 열었다. 5일(현지시간) 뉴욕주재 특파원들과의 간담회에서다.

김회장은 이날 "3년, 아니면 5년 내에 창조 경제와 국가 혁신을 해치워야하는데 걱정이다"라는 말을 수차례 강조했다.

그런 의미에서 대선이후 박근혜 정부 출범까지의 더딘 행보가 답답하게 느껴지는 모양이다. 김 회장은 "(박근혜 대통령이) 굳이 정부조직법에 미련을 두고 매달릴 필요도 없지 않느냐"면서 "창조 경제 같은 문제는 청와대 같은 곳에 (국가) 전략을 다루는 위원회 같은 '브레인 바디(brain body)' 를 두어서 끌고 가도 잘 진행될 수 있다"고 주장했다. "박근혜 정부가 혁명적 사고를 할 필요가 있다"고 덧붙이기도 했다.

최근 김종훈 전 미래창조과학부 장관 내정자 낙마에 대해선 "그분이 일할 수 있는 환경이 아직 조성되지 않은 것 같다"면서 "그런 분도 차라리 위원회 같은 곳에 참여시켜서 일을 시켰으면 좋았겠다"고 말했다.

박근혜 정부 인선에 대한 아쉬움도 털어놓았다. 그는 국가 혁신을 과감하게 이끌고 갈 젊은이들과 여성 인재 기용을 좀 더 과감하게 했으면 좋겠다는 말을 누차 강조했다.

정치재개에 나서는 안철수 전 서울대교수에 대해선 "왜 정치 참여를 권력쟁취의 방식으로만 해야하는 지 모르겠다. 그러면 (다른 정치인과) 똑같은 사람이 되는 것 아니냐"며 거부감을 드러냈다.

http://view.asiae.co.kr/news/view.htm?idxno=2013030608550888815&nvr=Y

Science Minister Nominee Resigns Amid Impasse Over Gov't Reorganization Bill

From Yonhap:

President Park Geun-hye's science minister nominee resigned Monday amid a prolonged parliamentary impasse over the new president's government reorganization bill.

"As I watched the confusion over the government reorganization bill, my dreams were also shattered," Kim Jeong-hoon, the nominee, told a news conference at the National Assembly in Seoul.

Kim, a 52-year-old Korean American tech entrepreneur, was named last month to become the first chief of Park's newly created future creation and science ministry.

The ministry, which comes under the government reorganization plan, has been a key source of dispute in the parliamentary impasse because the main opposition Democratic United Party insists it should not be given control over broadcasting policies currently handled by the watchdog Korea Communications Commission.

http://english.yonhapnews.co.kr/national/2013/03/04/73/0301000000AEN20130304002100315F.HTML