Archives: March, 2008

Airbus, Alabama, Boeing, and McCain

Press reports on the tanker saga have left two points unappreciated. The first is the hidden cost of creating a new aircraft assembly facility in Alabama. The second is how John McCain’s demands for competition in this deal helped Airbus and Northrop – not because McCain is crooked but because competition in defense contracting is phony.

To review: The Air Force needs refueling tankers because we fight far-off wars and don’t want to ask permission for overseas basing rights. B-52 bombers couldn’t fly from Missouri to Afghanistan to bomb the Taliban without tankers. Fighters and cargo aircraft need them too. The Air Force’s tanker fleet of 520 KC-135s and 59 larger KC-10s is old. In 2004, the Air Force tried to begin replacing them by leasing tankers from Boeing, as private airlines do. The deal unraveled when it emerged that leasing the tankers would add $6 billion to the taxpayers’ bill, that the deal was partially intended to prop up Boeing, and that Boeing had bought influence with Pentagon officials. McCain led the opposition. Two Boeing executives and one Air Force official went to prison. The Secretary of the Air Force and the head of Boeing lost their jobs.

Still looking for new tankers, the Air Force solicited another set of proposals for the new tanker, now dubbed the KC-45A. A few weeks ago, Airbus, a subsidiary of EADS, the European Aeronautic Defence and Space Company, won, along with its partner, American defense contractor Northrop-Grumman. The deal would eliminate jobs in Kansas and Washington where Boeing has production facilities. Congressmen and Senators from those states erupted into patriotic indignation and vowed hearings. Politicians from Alabama, where Airbus will place a new production facility, vowed to fight for the deal. Boeing protested, which forces a GAO review – delaying the start of production by at least 100 days. Now allegations have emerged that McCain aided the victors while taking their money and their lobbyists for his Presidential campaign. Got it?

The Air Force says EADS’s tanker is better than Boeing’s. I believe them. It would be reckless to choose an inferior product given the likely protest from the loser and what happened in 2004. But while getting the best plane for the least money is essential, when it awards contracts, the Pentagon should be able to consider their effect on the political landscape, because that landscape drives future contracts. You can’t get the politics out of defense contracting, so you need to get the politics right.

The political problem with the Airbus deal is that it opens a production facility in Alabama to make conventional aircraft assembled elsewhere into tankers, but will not close Boeing’s similar plant in Wichita, Kansas. This means taxpayers have a new mouth to feed. Because they create concentrated interests, US military production facilities are nearly impossible to close. In the private sector, sellers make money by cutting costs and delivering products more efficiently. In defense contracting, companies succeed by keeping production lines open and relying on local Congressman, workers and lobbyists to get them work. That’s why the US has twice the number of shipyards it needs despite consolidation in the shipbuilding industry. It would have been better to keep all the production in Europe, preventing new domestic lobbies from forming, or more realistically, accomplish the same thing by making Airbus lease Boeing’s plant.

Senator McCain has mud on his face because after he blocked the Boeing lease deal and pushed to reopen the bidding, he got around $14,000 in contributions from EADS employees, more than any other politician. Then he hired some of their lobbyists for his presidential campaign. Did that affect his behavior on the current round of proposals? McCain says no. “All I asked for in this situation was a fair competition,” he says.

But keep in mind what fair competition here means. As my friend Owen Cote, a researcher at MIT, points out, with only two viable competitors, this is a not a real market. Ensuring competition among two sellers means giving both leverage over the buyer, because if one exits the process, competition is lost. What the press has not pointed out is that McCain’s insistence on competition gave Airbus the power to force changes in the Air Force’s criteria.

There were two disputes about the Pentagon’s request for proposals that McCain got involved in to the benefit of Northrop-Airbus. First, in September and December 2006, just before the Pentagon was to release its RFP, McCain wrote to top Pentagon officials, asking them to eliminate language in the RFP forcing consideration of how penalties due to a WTO dispute over subsidies might affect the tanker’s production cost. That provision, championed by Boeing booster Norman Dicks (D-WA), would have hurt Northrop-Airbus more than Boeing. McCain got his wish.

Second, in the December letter, McCain asked the Pentagon to give the proposals credit for having more cargo space, instead of equal points for having in excess of a certain amount of space. Meanwhile, the Northrop-Airbus team, which was proposing a bigger aircraft, threatened to withdraw their bid if the Air Force did not change its criteria on this issue. This double whammy put the Air Force up a creek. If Northrop and Airbus weren’t bluffing, leaving the criteria be would hand the deal to Boeing, and enrage McCain, who could then accuse the Air Force in public hearings of giving Boeing another sweetheart deal. The Air Force complied, giving another advantage to Northrop-Airbus.

It therefore appears that John McCain was necessary to EADS getting this deal, even as he was taking in their campaign contributions and lobbyists. That doesn’t mean there’s anything nefarious here. McCain had good reason to help block the deal in the first round. The changes he asked for in the second round were arguably wise. The subsidy issue could actually be seen as an ace in the hole for Boeing that should not have been there in the first place. Plus $14,000 is cheap if he were going to sell out.

But it sure doesn’t look good. Who was it that said that “questions of honor are raised as much by appearances as by reality in politics”?

The Toilet Paper Police

This story from a Florida TV station probably calls for some serious analysis about over-regulation and the need for cost-benefit analysis. But that presupposes a level of maturity that I don’t have. Instead, I’ll just note that it’s about time that politicians address issues where they have genuine expertise:

A proposed law currently making its way through the Florida legislature might help you with what can be an embarrassing problem. Here’s the bottom line, the bill would be a mandate that all eating establishment must have enough toilet paper when you go into the restroom. The only problem is the bill doesn’t dictate how much toilet paper is “enough.” State Senator Victor Crist, a Republican from Tampa, felt the problem was so important, a law must be passed to protect the backsides of anyone in Florida. The measure will also try to regulate the cleanliness of restrooms in eating establishments.

Keystone Cops, D.C. Auxiliary

In a new plan to combat crime on the streets of our fair city, Mayor Adrian Fenty and Police Chief Cathy Lanier are encouraging residents to submit to voluntary searches of their homes in exchange for amnesty if the residents have illegal guns (or drugs).  (“Excuse me, ma’am, mind if I take a look around… “)

Well, this isn’t illegal – consent is, after all, one of the exceptions to the warrant requirement – but it is head-scratchingly poor public policy.  Those who don’t want to give up their contraband won’t consent to searches, those who want to get rid of it will find a way to do that without signaling “check here again next week,” and the police will waste their resources rifling through the homes of people with nothing to hide.

Maybe D.C. should pass a law outlawing gun ownership.  Oh wait, they already did that and are fighting to keep it in the face of, um, the Second Amendment.  (The Supreme Court hears argument in D.C. v. Heller next Tuesday.)

The bottom line is that voluntary home searches, like outright gun prohibitions, only hurt law-abiding citizens.  Those who have already chosen to engage in crime will not be deterred merely because their actions violate gun-related ordinances in addition to the laws against robbery, rape, murder, etc.  The only guns swept up in this “amnesty” will be those kept by people trying to protect their families from the criminals the police fail to catch.

Blame OPEC? Not So Fast!

In today’s Washington Post, columnist Robert Samuelson blames OPEC for the 2003-2008 oil price spiral in an arresting column titled OPEC’s Triumph. Color me skeptical.

Samuelson says that the beginning of the price surge can be traced back to early 1999, when oil prices were around $10 a barrel. OPEC and major non-OPEC producers in Norway, Mexico, and Russia jointly agreed to “cut production sharply,” Samuelson reports, and subsequent compliance with those output quotas was “surprisingly good.”

Well, let’s go to the data (specifically, data from the Energy Information Administration found here and here). In 1998, oil production in OPEC (minus Angola) plus the “Big Three” non-OPEC members mentioned by Samuelson was on average 43.6 million barrels per day (mbd). In 1999, aggregated production from those parties did indeed drop by about 1 mbd, but in 2000, production from the same shot up by 2.5 mbd and remained steady in 2001 (45 mbd). Production in 2002 dropped by about 1.5 mbd, but then jumped by 2.6 mbd in 2003; 3 mbd in 2004, and 1.4 mbd in 2005 before dropping back by 0.5 mbd in 2006.

So at best, we have some evidence that the producer agreement flagged by Samuelson had the desired effect in 1999 – if not necessarily thereafter. But even that’s unclear. Oil markets were so soft in 1999 that plenty of “non-conspirators” cut oil production that year as well. Canada, for instance, went from 2.7 mbd in 1998 to 2.63 mbd in 1999 before jumping back up to 2.75 mbd in 2000. The United States exhibits the same pattern; 9.28 mbd in 1998, 8.99 mbd in 1999, and 9.06 mbd in 2000. Many smaller “price takers” unaffiliated with any cartel made the same production decisions. Australia, for instance, went from 649,000 barrels a day (bd) in 1998 to 647,000 bd in 1999 and 828,000 bd in 2000.

If post-1999 OPEC decisions were truly constraining global crude oil supply, we should see an increasing amount of unused production capacity lying idle in those countries. But we don’t. While the true amount of unutilized production capacity is hard to estimate confidently, industry watchers seem to agree that it is going down, not up. Producers don’t seem to be holding any light crude oil back at all (the most valuable kind to the market) and what they are holding back (very heavy sour crudes) is hard to sell. That doesn’t square with a story about how recent decision-making by OPEC is responsible for starving the market and inflating price.

If OPEC is to blame for all of this, the blame rests on cartel members who haven’t invested as much in production capacity as they might have absent membership in the same. But it takes a long time for investment in new production capacity to yield substantial amounts of crude oil – sometimes as much as 8-10 years. And given the prices of a decade ago (the lowest inflation adjusted prices in recorded history), it’s hard to blame the cartel for a lack of investment from 1999-2003. Even non-cartel members were uninterested in substantial investments in production capacity back then.

Now, none of this is to rule out Samuelson’s hypothesis out of hand. Production costs are so low in OPEC (they are widely thought to be less than $5.00 a barrel in Saudi Arabia), that one could argue that any profit maximizing economic actor not caught up in price-fixing operations would have invested a lot more money in production capacity than we’ve seen in the Persian Gulf to-date. But there are alternative explanations out there for this lack of investment. Maybe “cheap oil” is indeed running out. Maybe domestic political considerations are frustrating investments (these are state-owned oil companies after all). Maybe marginal production costs outside of Saudi Arabia are a lot steeper than many analysts realize. Maybe it’s not the cartel per se that’s constraining production; maybe it’s the unilateral exercise of Saudi market power under the cartel’s cover that’s to blame. It’s worth noting that academics have studied OPEC for decades and are still unable to find hard evidence that the cartel has indeed given us higher crude oil prices than would have been given us in an alternative world without OPEC.

Interestingly enough, the chief source for Samuelson’s column – oil economist Philip Verleger – doesn’t buy Samuelson’s argument. Verleger thinks that the increasing demand for oil securities as a hedge against volatility in equity markets and the weakening dollar explains the bulk of the price run-up between 2003-2007 and that the United States government – via its insane buy-orders for the SPR – is largely responsible for the near-doubling of oil prices since last August.

There are, of course, alternative explanations out there, but none of them fit comfortably with the data. And that’s what makes oil markets so interesting to watch these days – nobody can be completely sure exactly what is going on. Samuelson’s explanation, however, is somewhat less convincing than most.

Taking It to the Teachers Unions

The Center for Union Facts just rolled out a national campaign yesterday highlighting one of the primary functions of teachers unions; protecting bad teachers and keeping good ones down. From the AP:

Critics who say unions block education reforms and make it virtually impossible to fire bad teachers will offer 10 instructors it deems the nation’s worst $10,000 to quit their careers.

The Center for Union Facts, a Washington-based nonprofit, will launch a campaign Tuesday spending $1 million on ads and a billboard in New York’s Times Square. It also says it’s starting a Web site with data documenting how far unions go to protect bad teachers.

It’s also inviting nominations for a contest to determine the nation’s worst unionized teachers. The “winners” will be offered $10,000 each if they permanently resign or retire from any career in education — if they sign a release agreeing to have their name and the reasons for their selection published by the group.

Enjoy watching the teachers union official //wcco [dot] com/video/?id=39291 [at] wcco [dot] dayport [dot] com">sweat on local news.

RateMyCop.com Enjoying Streisand Effect

A site for community review of police officers called RateMyCop.com gets the benefit of the “Streisand effect” today. For a period of time, it was shut down by its web registrar, GoDaddy.com, most likely because of law enforcement complaints about being subject to public oversight.

(The “Streisand effect” is the phenomenon where an attempt to censor or remove information from the Internet backfires, causing it to be more widely publicized. The term refers to a 2003 incident in which Barbra Streisand sued a photographer and Web site in an attempt to have an aerial photo of her house removed from a publicly available collection of 12,000 California coastline photographs. The lawsuit made the photo very popular.)

The Freedom Movement Surges on Broadway

Move over, George Clooney. Libertarianism is the hottest new thing among serious artists. One of our greatest living playwrights, David Mamet, has just announced that he has given up “brain-dead liberalism” for a new appreciation of capitalism and constitutionalism.

As a child of the ’60s, I accepted as an article of faith that government is corrupt, that business is exploitative, and that people are generally good at heart….

The Constitution, written by men with some experience of actual government, assumes that the chief executive will work to be king, the Parliament will scheme to sell off the silverware, and the judiciary will consider itself Olympian and do everything it can to much improve (destroy) the work of the other two branches. So the Constitution pits them against each other, in the attempt not to achieve stasis, but rather to allow for the constant corrections necessary to prevent one branch from getting too much power for too long….

And I began to question my hatred for “the Corporations”—the hatred of which, I found, was but the flip side of my hunger for those goods and services they provide and without which we could not live…

What about the role of government? Well, in the abstract, coming from my time and background, I thought it was a rather good thing, but tallying up the ledger in those things which affect me and in those things I observe, I am hard-pressed to see an instance where the intervention of the government led to much beyond sorrow….

I began reading not only the economics of Thomas Sowell (our greatest contemporary philosopher) but Milton Friedman, Paul Johnson, and Shelby Steele, and a host of conservative writers, and found that I agreed with them: a free-market understanding of the world meshes more perfectly with my experience than that idealistic vision I called liberalism.

David Mamet. In the Village Voice. Ouch. Limousine liberals must be crying in their Pellegrino.

But he’s not the only one. Tom Stoppard, another candidate for the title of greatest living playwright, recently admitted to being a “timid libertarian” in an interview with Time:

Stoppard has always stood apart from many other British playwrights of his generation, like David Hare, for avoiding an overtly political (usually left-wing) point of view. He describes his politics as “timid libertarian.” Yet he can rev up a pretty bold rant on Britain’s “highly regulated society,” which he thinks is “betraying the principle of parliamentary democracy.” There was the garden party he threw recently, for example, where because there was a pond on the property, he was required to hire two lifeguards. “The whole notion that we’re all responsible for ourselves and we don’t actually have to have nannies busybodying all around us, that’s all going now. And I don’t even know in whose interest it’s supposed to be or who wishes it to be so. It seems to be like a lava flow, which nobody ordered up. Of course, one does know in whose interest it is. It’s in the interests of battalions of civil servants in jobs that never existed 10 years ago.”

This was no surprise to fans–such as the British political theorist Norman Barry–who had seen themes of freedom, responsibility, morality, and anti-communism (he was born in Czechoslovakia, though his family left before the communists replaced the Nazis in power) in his plays.

Poor Hollywood. Still mired in old, outmoded left-liberalism as high culture moves toward an embrace of freedom.