The China Crackdown Paraxox

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We’ve seen compelling evidence of Chinese state-sponsored hacking here in the United States for a number of years, now.  We’ve seen allegations without teeth and finger-waving from any number of politicians, but we’ve yet to see any real action against China.

Early this week, the Obama administration took the most visible and tangible action to date against this activity by indicting five Chinese PLA members.  While this is still generally regarded as a pretty weak tactic, given that US courts have zero recourse against these men (provided they don’t set foot on US soil), this new move has given the United States a much clearer sense of direction on the issue of Chinese hacking simply by prompting a response from the Chinese government.

Today, the Chinese government announced that it would “vet” US tech firms doing business in China — nominally to protect Chinese clients from disruption.  In effect, they’re threatening to make it much more difficult for US firms to do business in China in direct retaliation for the hacking charges.  The message is pretty clear: China considers state-sponsored industrial espionage to be a natural perk offered by China to its industries, and if US companies want to do business in China, that’s the price of admission.

I’ve yet to hear any US companies actually come right out and admit that they’d be willing to put up with a little bit of spying in return for access to a $7.5 trillion market (not to mention its supply chain), but I wouldn’t be a bit surprised if lobbyists all over Washington were asking for some restraint on the part of the administration.  And thus, the paradox: these same companies really want to see the government provide protection (in the interest of fairness), but perhaps not at the cost of losing that market.

Ignoring for the moment the debate about whether mega-corporations should have the ability to sway national policy at all, I think the administration (as others before) is really in a tough spot if the US is acting unilaterally.  There’s encouraging evidence to suggest that all the world’s trading nations, acting together, can influence market fairness, but to-date, these hacking allegations have been far too ethereal to be formally actionable, leaving the US government and corporations to their own devices.

So, what’s a modern global mega-corp to do, assuming it’s got an interest in the Chinese market?  Lobbying Washington for hard-line action against China seems clearly to be a dangerous game, but it seems pretty clear that this paradox favors efforts to improve security.  Although there are few corporations that would seem to have the means to withstand dedicated hacking efforts by a global economic power like China, I think there’s an extent to which many of these firms merely have to improve to the point where other companies become much more attractive targets.

Considering the number of large-scale password breaches we’ve also seen in recent years, I can’t say that I really see a downside to this approach.

 

Externalized Costs 101

Long ago in an economics class, I learned about externalized costs, or externalities.  It appears that most of the American public doesn’t know about this concept, however, based on their consistent lack of ability to connect the dots we see each night on the news.  As a public service, then, here’s a little primer.

Many of us are used to simple economic ideas like supply and demand, but externalized costs are sort of sneaky.  They skew normally simple economic equations a little like insurance can do because they trick us into thinking we’re making rational policy decisions — but if we ignore externalized costs, we’re not (collectively) making good decisions at all.

Although most of the economic externalities we’re interested in are negative, the actual definition of an externality is either a negative or positive economic consequence of an activity that affects a party who didn’t choose to incur that consequence.  One more time in English: if you do something that causes an economic impact to me, and I didn’t have a say in you doing that thing, that’s an externality.

Externalities can take place between two individual parties, but a far more typical scenario involves a governmental entity –maybe because the one function governments perform best is confusing economic transactions.  Recently, AEP CEO Nick Akins made a speech at a conference in California, and he dropped a great one on the crowd gathered there.  You see, Akins believes that our government should start funding carbon capture projects so that AEP can continue to operate coal-fired power generation plants.

In this case, the (proposed) externality would occur by transferring the costs of burning higher-polluting coal (vs. natural gas, for example) from the publicly-traded AEP to the federal government, despite our government’s well-publicized budget challenges.  Those costs, then, would effectively be passed on to all US taxpayers — the ultimate cost-shifting move.

Once you start tuning into this sort of cost-shifting, you’ll begin to recognize more and more cases of externalization — some operating on a truly massive scale.   I’ll touch on a couple of these in upcoming posts.

 

Does this seem odd?

Woof

There seems to be some lack of clarity with respect to what’s going on in Crimea.  Russian troops have taken over military bases there, or maybe not, depending on which press release you read.  So here we sit, playing “we said, they said”, as if there was any hope of resolving anything that way.

It occurs to me, though, that the US is supposedly in possession of a whole flock of it drones that might be able to help.  If these drones were carrying video cameras instead of missiles, wouldn’t we have all sorts of convincing footage we could send to CNN, etc.?  I bet someone could even scare up a projector at the UN headquarters.  I remember something along these lines occurring back when there was a little conflagration down in Cuba, and the visual aids really seemed to cut through the BS pretty handily.

Seems like it might be worth a shot.

Good news

Clearly, Congress has solved all our real problems, as evidenced by this completely toothless farce of a vote today:

You know, I think in hindsight, we were better off with Congress trying to fix baseball.

Energy policy FAIL

Facebook is building a $1.5 Billion (with a B) data center in Altoona, Iowa, and yesterday, I saw a blog post explaining why.

Although there are several reasons why this location makes sense for a modern data center, Facebook’s own blog post notes “an abundance of wind-generated power” among the key draws for Altoona.  I’ve driven up I-65 from Indianapolis to Chicago a couple times a year for the last dozen and a half years, give or take, and I’ve seen vast areas of the adjacent farmland turn into colossal wind farms.  Apparently, Iowa was smart enough to get on this bandwagon, too.  Good for them.

Not in Ohio, though.  Here in Ohio, we’ve got gas.  Governor John Kasich is a famous fracking fan, though I’m sure this doesn’t have anything to do with the $200K+ he’s received in campaign donations from the oil and gas industry (followed closely by $186K to Rep. John Boehner).

Right.

So, thanks to Kasich’s leadership in fracking Ohio over, here are some of the things we get to look forward to (instead of $1.5B data centers):

A deformed fish found downstream of Alberta’s oil sands – ctvnews.ca

  • Hundreds of tons of chemicals, millions of gallons of water, and thousands of tons of sand used per well to make these things productive.
  • Earthquakes, which in a tragically ironic twist, are one of the things Facebook was trying to avoid by locating in Iowa.
  • Mutant fish.  Personally, I’d love to see a few of these tumorous little morsels show up on Kasich’s plate at a State dinner.

Follow the money, folks, and weep.  You’re getting fracked, Ohio.

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We, the People

The dome of the US Capitol building.

The dome of the US Capitol building. (Photo credit: Wikipedia)

Right now, the only thing in Washington that’s truly bipartisan is the cancer that’s eating our Republic from within.  Like so many cancers, the damage has been difficult to spot as it’s grown, but it’s reached a point where it’s visible — at least to some.  Like cancer, when we focus on symptoms, we may very well miss the underlying disease — but it’s there, eating and growing and killing.

Last year, I read a book called “Republic, Lost” by Lawrence Lessig.  It’s a book I wish I could make every American citizen read, but I’ll settle for asking you to read it.  This book explains why Washington has devolved into the gridlocked parking lot we see today.  It’s not a problem caused by either the Democrats or the Republicans in isolation, and it won’t be fixed by one or the other, either.

Our government has well and truly become the living embodiment of Mad Magazine’s famous “Spy vs. Spy” cartoons, and like those cartoons, the only thing that ever gets accomplished any more is for each party to beat the snot out of the other — over and over and over.  “Rebublic, Lost” explains why this is not only not a fluke, it’s an absolutely necessary and obvious extension of the root-cause issues underlying American politics for the last thirty years or so.

While Lessig’s book was an absolute revelation to me, it’s not an especially light read, and it’ll take a small investment of your time to get through its 341 pages.  It’s a worthwhile investment, but I understand that not everyone is going to run out and do that — not during American Idol season, anyway.  So, in the meantime, here’s some appetizer-sized food for thought.  In February, Lessig  gave a TED talk entitled, “We the People, and the Republic we must reclaim”.  It’s just over 18 minutes in length, and if you’ve never read any of Lessig’s work, you need to watch it.  It’ll be the single most valuable contribution you can make to the United States of America in 18 minutes — I promise.

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Tax credits considered harmful

As we teeter on the brink of the Fiscal Cliff, we’re once again hearing calls to simplify our tax code.  If all the loopholes were closed, say proponents, we wouldn’t have high-rollers getting away with disproportionately light tax contributions.  I’m not sure that simplification will solve all our fiscal problems, but I do believe that complicated tax codes benefit the well-off more than the working class.

Moreover, this isn’t just true for individuals — it’s at least as much a problem with corporations.  At a Federal level, large corporations have a growing influence over our elected officials.  Energized by the “Citizens United” verdict of 2010, our most recent elections were the costliest in history, with a lot of that new money being injected via super-PACs that can veil the identity of contributors.  Due to the secrecy afforded those contributors, it’s impossible to say how much of that new money, exactly, comes from corporations, but it’s a lot.  Corporations can’t tell candidates how they expect them to vote, of course — that would be corrupt!  If a candidate happens to infer some intent, though, and take that into consideration when legislating tax code, for instance — why, that’s just a case of a representative doing what he can do to help his constituents.  Corporations, after all, are people, too.

Companies who aren’t large enough to make a splash at the Federal level, though, can still throw their weight around locally.  Frequently, these days, we see this take the form of local tax credits.  Typically, these take the form of an exemption to some or all local tax burdens that are granted to companies who meet some criteria.  The most common systemic criteria, of course, is relocation into a tax district, and tax credits for this are common enough that you’ll see them listed on web sites for cities around the country.  Individual companies are free to negotiate deals like this on an ad-hoc basis, too, in return for either relocating or not (“give me a credit, or I’m outta here”).

Such is the case for USA Vinyl, a Hilliard, OH company that just announced it’s moving to Groveport, OH.  Just in case you’re not familiar with the geography around Columbus, OH, by the way, here’s the move we’re talking about:

Now, in practical terms, what are the impacts of this move?

  • A whole bunch of Hilliard employees are going to have to drive down to Groveport every day, or find new work.
  • Any employees that do choose to commute are going to have to drive along a stretch of Hwy 270 that’s currently under construction and horribly, horribly buggered-up right now, so you can count on them spending hours a day sitting in stop-and-go traffic burning gas in their SUV’s.  I’m not going to go as far as to suggest that the extra traffic will be noticed on top of the mess that already exists, but it can’t help, either.
  • USA Vinyl will expend a bunch of time and energy coordinating a move of 22.2 miles, rather than making vinyl products, but it’s worth it because they’re going to save a bundle on taxes over the next five years or so.
  • There will probably be a moving company or two that enjoy a great quarter.
  • Hilliard will miss out on some local tax revenue.
  • Groveport will also miss out on some local tax revenue.

Huh?

In both cases (Hilliard and Groveport), that missing revenue will have to be made up somewhere.  Services will be cut, or other businesses and/or citizens will be asked to make up the difference.  These communities, then, are rewarding the companies who are willing to uproot themselves and leave a community for a new tax break, and shifting the burden to the citizens left behind.  And it’s happening everywhere.

Perhaps the worst news of all is that once this sort of thing begins, States and municipalities can find themselves locked in a sort of death spiral.  It’s tough to see an employer lured out of your backyard and not want to turn around and do the same thing to someone else.  It’s worth exploring the possibility of ceasing all of these incentives, either by convention or legislation, but of course this would only work until someone somewhere decides to step over the line again, and of course ultimately, there’s always off-shoring that stands to trump all the deals happening here in America.

Ultimately, I believe this is one of those cases where we’d like to be able to look to our elected officials to bring a strong, long-sighted perspective to bear on the problem, and to understand that a strong, balanced local economy is a powerful deterrent to companies who might be tempted to sneak out under cover of darkness.

That’s why we elected them, right?

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News flash: employers need to help with skills gap

I’m certainly not a fan of all of Gov. John Kasich’s policies, including the “frack, baby, frack” approach he’s followed with Ohio’s shale deposits.  But fair is fair: in an announcement today, Kasich told Ohio businesses that the so-called skills gap they’ve been complaining about is a shared problem, and if they want to see a higher-quality labor force, they’re going to need to get involved with the State to help develop skills in time for their eventual demand.

John Kasich

John Kasich (Photo credit: Wikipedia)

I’d actually take this a step further, in fact.  I believe that in an awful lot of cases, businesses are looking for super-specific skill sets, where they’d really be far better off to look at broad aptitudes combined with a personality, work ethic, and determination to gain specific skills as needed.

Why?  When you shop for specific skills only, those skills are useful only as long as those specific needs remain static.  Upgrade a machine or even software, and your workforce now needs to either learn new skills or be replaced with a workforce that’s presumably already been trained on those new skills.

A cynic might observe at this point that businesses that continually shop for specific skills only looks an awful lot like a business that wants workers that someone else has trained (without paying for it) over and over again.  That’s not fair, either.  Paul Krugman pointed out yesterday that if businesses were really looking for specific skills, you’d expect, all things being equal, that employees with those skills would be seeing big pay hikes, and we’re not seeing a whole lot of that.

So, yes, business leaders — if you want an effective work force, you really need to consider the sort of skills you’re going to need in five, ten, even 20 years, and think about what you’re doing to help build that pipeline.  If you’re successful, by the way, you’ll also wind up with a serious competitive advantage compared to the folks that aren’t doing that sort of forecasting.

 

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When a vote isn’t a vote

One of the greatest points made in Larry Lessig‘s book, “Republic, Lost” is that corruption may be evident by appearance even when no actual laws have been broken, and in the case of our government, one of the ways this shows up most profoundly is when we erode the fundamental principle that each citizen’s vote in the Unites States of America carries exactly the same weight as each other citizen’s vote.

Sounds pretty simple, but is it true?

Lessig points out with great effect that when money starts changing hands, most visibly in the form of campaign donations, specific people and corporations begin to lose their anonymity with respect to our elected officials.  In short, if I write a big enough check to my Congressman, I may not actually be entitled to expect him to vote the way I’d like, but I can be sure he’ll know who I am and how I feel about positions that are important to me.  This, as Lessig points out, pretty quickly starts to look a hell of a lot like a duck, if you catch my drift.

But that’s small-potatoes stuff.  I read an article today that absolutely blew me away.  There’s a fella named David Siegel who’s not a big Obama fan.  So much so is he not a fan that he sent a letter to the 7,000 employees of Westgate Resorts explaining that if Obama is reelected, this would represent a threat to some of the jobs that these 7,000 people presumably wish to keep.  In short, Siegel implies, vote against Obama, or else.

Now, I’m no lawyer, but I’m frankly floored that this is even legal.  Beyond legality, however, I’m troubled that a CEO acting as an agent of a corporation would express political motivations this overtly.  It’s not unusual for CEOs or even entire corporations to be pretty forthcoming about their political affiliations, of course, but as citizens, I believe we should give some thought to what, exactly, this is doing to the power of our individual votes.

It’s clearly troubling all by itself when corporations and big-time campaign donors (who happen to represent corporations) wield undo influence by virtue of these donations.  That’s bad enough.  But when a single individual attempts to strong-arm 7,000 employees into voting with him (or else!), we’re seriously at risk of losing any claim of democracy at all.

Again, if this isn’t illegal as hell, I’d really like to know why it’s not — beyond the cynical explanation that keeps popping into my head.  Anybody know the answer?  I’d love to hear it.

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Corporate Socialism

Here’s a quick read for you, courtesy of Yahoo Finance — it’s a pretty interesting take on how our tax code favors those with the resources to milk it.  The article interviews Pulitzer Prize-winner  David Cay Johnston, who explains more about this practice in his book, “The Fine Print: How Big Companies Use ‘Plain English’ to Rob You Blind.”

Johnston explains that although the US nominally has a prohibitively high corporate marginal tax rate (39.2%), very few corporations actually pay taxes at that rate, and the greater the resources of the company, it seems, the more tools they have at their disposal to reduce their burden even further.  Our tax laws allow all sorts of creative accounting practices, and if companies can afford to throw accountants and lawyers around, set up offshore companies, etc., they can make billions in tax burdens evaporate — all legally.

Along with actual tax law, Johnston says, are all the one-off deals that corporations cut with States and municipalities to shirk their local tax burdens.  We hear about this all the time — big companies moving from one State to another — or even just threatening to move — in order to extract a deal from a State and/or city.  “Cut us a deal, or we’re leaving and taking all these jobs with us.”

So, what’s wrong with this picture?  Let me (try to) count the ways:

  • Big companies can throw their weight around in Washington.  If there’s a loophole they like, you can bet that some Congre$$men know about it.
  • Big companies can throw their weight around locally.  If Sam’s Bagels threatens to move its store and 3 employees to another town, I really doubt that this will hit the City Council’s agenda, but if Big Auto, Inc., threatens to move 1,000 jobs, you can bet they’re going to get a sweetheart deal.
  • All the grousing we hear about the 39% corporate tax rate is really a load of you-know-what — at least if your company’s got a decent team of accountants and lawyers.
  • These tax practices are incenting companies to get good at accounting tricks — not to get good at building product or servicing customers.  Maybe it’s just me, but I’d like to see us build companies that are good at contributing to our economy and society, rather than being good at evasion and obfuscation.

Now, before you accuse me of blindly raining on big companies — let me assure you I’ve got nothing against big companies (or individuals who work tax loopholes) per-se.  I do, however, have a problem with big companies that wind up with an unfair advantage just because they’re big.