Signs of Sanity at the International Trade Commission

Today is a pretty good day, as far as trade policy goes.

This morning, pursuant to a five-year “Sunset Review,” the U.S. International Trade Commission voted to revoke longstanding antidumping and countervailing duty restrictions against imported carbon steel plate and corrosion-resistant steel from 15 different countries.  The ITC also voted to continue the measures against corrosion-resistant steel from Korea and Germany for at least another five years.

While not perfect, today’s outcome is something to rejoice.  Revocation of trade remedy restrictions is rare, indeed, and rarer still where steel is concerned.

As described in this recent paper, the U.S. steel industry is doing phenomenally.  And given the dramatic growth in demand for steel in other regions of the world, today’s decision is unlikely to produce a significant surge in U.S. steel imports.  But at least now, U.S. steel consuming industries, which have been forced to endure some of the highest steel prices in the world on account of the limited competition, will have greater flexibility and negotiating leverage to counter the growing market power of the domestic steel industry.

Another Blue Ribbon Energy Report Falls Flat

Yesterday saw the publication of yet another blue ribbon style report on energy policy, this one called Recommendations to the Nation on Reducing U.S. Oil Dependence, from the Energy Security Leadership Council.  The press went wild.  Color me unimpressed.

The authors of the report are convinced that America’s reliance on foreign oil is a dangerous thing.  But why?  Panicky narratives abound, but none of them are particularly well informed.

Consider the widespread concern about the prospect of being cut off from supply.  Relying on foreign producers for oil means that we might find ourselves without physical access to petroleum if those foreign producers were to decide to shut us out.  But that worry is only plausible if you fail to understand and fully appreciate the fungible nature of the global oil market.  As MIT oil economist M.A. Adelman once wrote:

Rarely has a word [“access”] been so compact of error and confusion. Nobody has ever been denied access to oil: anyone willing to pay the current price could have more than he wanted. One may assume what he likes about future demand, supply, and market control, and conclude that the future price will be high or low, but that price will clear the market in the future as in the past. The worry about “access” assumes something queer indeed: that all of the producing countries will join in refusing to sell to some particular buyer—for what strange motive is never discussed … it takes only one other country, with a desire for gain, to cure this irrationality. 

The 1973 oil embargo proves the point.  As Adelman notes,  

The “embargo” of 1973–4 was a sham. Diversion was not even necessary, it was simply a swap of customers and suppliers between Arab and non-Arab sources… .  The good news is that the United States cannot be embargoed, leaving other countries undisturbed. 

In short, the only way for producers to keep their oil out of America is to impose a military blockade of U.S. ports.  Market agents – not agents of the producer states – decide where oil goes when it enters the market.  As long as someone is willing to buy oil from a producing state and then sell it to the United States, no shut off is possible absent military force.

OK, so physical access isn’t the problem – our vulnerability to producer-induced price spikes is the real worry.  Or is it? 

Recent macroeconomic studies suggest that the economy is nowhere near as vulnerable to oil-induced recessions as once thought.  How else to explain the world’s gangbuster economic performance in the teeth of the present price spike?

Nor is it reasonable to fear that producers might shut down drilling platforms in an act of global economic spite.  Producers need oil revenues more than consumers need the oil.  Even vitriolic anti-American regimes such as revolutionary Iran, Iraq under Saddam Hussein, and Libya prior to our recent rapprochement, have shown no interest in committing the economic and political suicide entailed in shutting down the only significant source of revenue they have.

Supply disruptions can and do happen, but they have historically tended to be modest and temporary.  Over the past 50 years, we’ve had 12 supply crises with an average of a 5.4 percent reduction in global oil supply for each event, and none of those supply disruptions lasted for more than 9 months.

Question #1 – don’t market agents have every incentive to insure against such events?  That, after all, is what futures contracts, oil inventories, and energy efficient technologies are for.  To argue that government must act to hedge against such possibilities is to argue that governmental actors are better risk managers than market actors.  And that is a fairly dubious proposition.

Question #2 – what sense does it make to say goodbye to an energy source that is cheap most of the time but expensive some of the time (oil) and hello to an energy source that is expensive all of the time but presumably more price stable (biofuels)?  If any individual company or consumer wants to go that route, then fine.  But why should the government dictate energy choices for every single person and corporate entity in the United States?  Are market actors so incapable of making intelligent decisions about what to buy that the feds have to step in?  And if so, why not have the feds grab the reins in other sectors of the economy?  

The final worry is that our dependence on foreign oil requires military expenditures and foreign policy contortions to keep producers safe and friendly.  But this is nonsense.  If the U.S. didn’t pay to secure oil production and tanker traffic abroad, producers would do so as long as the marginal costs associated with security expenditures were less than the marginal benefits associated with oil production – as they certainly are.  The U.S. military “oil mission” is really a welfare program in disguise.  And friendly relationships have nothing to do with it.  As noted above, without oil revenues, producing states could not pay their troops, fund their secret police, build luxurious palaces, or even feed their people (read: keep riots from breaking out).  Whether they like us or not, they have to produce, and as long as they produce, we will have oil to buy as long as we are willing to pay the market clearing price.

All of this is well known and completely uncontroversial to oil economists of the Left, Right, and Center.  But it’s a complete revelation to foreign policy mavens and military professionals, who simply do not understand a single thing about the oil market.  Unfortunately, too many people in Washington listen to the latter but not the former.

And yes, it simply kills me to see that Cato board member Fred Smith (CEO of Federal Express) is one of the two co-chairmen of the group that issued this report. 

Jack Wenders, RIP

Jack Wenders, professor emeritus of economics at the University of Idaho, passed away at the end of November. Jack was a tireless champion of reason and liberty, and was very well known in Idaho for pointing out the shortcomings of the state’s bureaucratic, monopolistic school system, and how they could be overcome through parental choice and market incentives. I met Jack at a conference back in 2004 and was impressed not only by his knowledge but by his passion for the work. He will be missed by everyone at Cato who knew him.

Neocons Want a Mulligan on Iraq

And, it appears, President Bush may give it to them.  The LA Times reports:

military officials are taking a close look at a proposal advanced by Frederick W. Kagan, a former West Point Military Academy historian, to combine a surge with a quick buildup of the Marines and the Army. That could allow new units to take the place of the brigades sent to Iraq to augment the current force.

“It is essential for the president to couple any recommendation of a significant surge in Iraq with the announcement that he will increase permanently the size of the Army and the Marines,” Kagan said.

Kagan, who plans to release a preliminary report on his proposal Thursday, said he had discussed his ideas with people in the government. Although the military has had trouble meeting recruiting goals, Kagan said Army officials believed they could recruit at least an extra 20,000 soldiers a year. The Army missed its recruiting targets in 2005 but met this year’s goal.

This strategy faces a few obstacles, though.  First:

Only 12% of Americans support a troop increase, whereas 52% prefer a fixed timetable for withdrawal, a Los Angeles Times/ Bloomberg poll has found.

Indeed.  This echoes this recent USA Today/Gallup poll which revealed that 57% of Americans want U.S. troops out of Iraq within one year.  Also, there are deeper problems with the “more troops” strategy:

Kalev Sepp, an instructor at the Naval Postgraduate School, said that the U.S. had demonstrated that many commanders simply did not understand how to mount effective, long-term counterinsurgency strategies.

Increasing the size of the force, Sepp said, will mean that U.S. forces continue to focus on killing insurgents, not training Iraqis. “That kind of approach is still tied to the idea that attrition, of just killing enough of our opponents, is going to get us to success,” Sepp said.

It’s disheartening in the extreme, almost to the point of being maddening, that President Bush continues to look to the folks who brought you the war in the first place for the way forward.  There are a few problems with the Kagan approach.

This surge of roughly 25,000 additional troops, at this stage in the conflict, is unlikely to even suppress the violence significantly in Baghdad.  Kaganites like to point to U.S. operations in Tal Afar as an analog.  In that instance, a population of (a guesstimated) 150,000 Iraqis was pacified by 3,800 U.S. soldiers, with Iraqi forces in tow.  Kagan protests, in response to those who say the forces don’t exist to replicate this strategy in the rest of Iraq or even Baghdad, that their opposition “rests on vague extrapolations of force ratios in Tal Afar to the entire population of Iraq or of Baghdad.”

But our extrapolations aren’t vague at all–they’re based on all the counterinsurgency literature out there.  Kagan’s plan doesn’t use the normal metrics for stability ops–he changes them completely.  He uses studies that are based on total population, but then decides, without much explanation, that only using the Sunni population for calculation is appropriate in this instance, since “it would be unnecessary and unwise to send coalition forces into Kurdistan or most of the Shiite lands.”

But force requirements in the literature aren’t based on hostile population or some sub-segment of the population, they’re based on total population.  Rarely can counterinsurgencies adequately quantify the number of hostile population.  So we use overall population for a metric.

Take this quintessential Parameters article by James Quinlivan of RAND.  Quinlivan points out that “From the start, practitioners of counterinsurgency have been clear in stating that the number of soldiers required to counter guerrillas has had very little to do with the number of guerrillas.”  You can’t slice the population the way Kagan does and then use the counterinsurgency literature for benchmarks.  It’s goalpost shifting.  Apples and oranges.

Discussing the more useful historical ratio, Quinlivan concludes that “Force ratios larger than ten members of the security forces for every thousand of population are not uncommon in current operations… . Sustaining a stabilizing force at such a force ratio for a city as large as one million … could require a deployment of about a quarter of all regular infantry battalions in the U.S. Army.”  The very study Kagan cites (.pdf) echoes this finding:

International troop levels should be at least 1,000 soldiers per 100,000 inhabitants and international police levels should be at least 150 police officers per 100,000 inhabitants, especially when there is the potential for severe instability.

And just to amplify that, the Pentagon’s Defense Science Board released a study (.pdf) in 2004 concluding that “The United States will sometimes have ambitious goals for transforming a society in a conflicted environment. Those goals may well demand 20 troops per 1,000 inhabitants … working for five to eight years.”

Sure enough, if you look at the U.S. troop to Iraqi population in Kagan’s example of Tal Afar, you come up with more than 20 U.S. troops per 1,000 inhabitants.  To get a 20 U.S. troops per 1,000 inhabitants ratio in Baghdad alone (population 6,000,000), you come up with 120,000 troops.  And as Kagan admits in his article, the approach to Tal Afar, which involved building a large sand berm around the city to isolate it, “may not be appropriate for a large city like Baghdad.”  Probably right.

Kagan also skirts the issue of force protection, the primary focus on which has kept U.S. casualties “low” at 3,000.  Kagan admits, without openly pointing to the resulting skyrocket in dead Americans, that “close interaction with the population and even with the enemy is essential.”

This all leaves on the table the problem of whether or not a lot of the troublemakers in Baghdad wouldn’t head for the hinterland when they saw such a force coming.  Senator John McCain, for all his faults, has this right when he worries about playing “Whack-a-Mole” across Iraq.

So then, what about cranking it up to 20/1,000 for all of Iraq?  You’d need 500,000 troops.

In short, Kagan’s plan appears in any light to be a recipe for compounding the disaster of the neocons’ policies in Iraq thus far.  But despite the history of the last four years, neoconservatives still have a tremendous amount of sway with the White House.  Sharing the same a priori commitment to an illusory “victory” in Iraq seems to be a precondition of getting the president’s ear.  It would be good if someone, at some point, would attempt to disabuse him of this idea, and confront him with the cold facts on the ground.  It’s been almost four years.

The upshot, it seems, is that the neocons are going to get a “do over” in Iraq.  And, unfortunately, it looks like the U.S. military is going to pay the price for their Mulligan.

NYT Nails Stern Review

OK, The New York Times per se has not weighed in with harsh criticism, but Prof. Hal Varian of U. Cal. Berkeley, a contributor for the NYT’s excellent “Economic Perspectives” column, weighs in today with a nice summary of the problematic assumptions made by Sir Nicholas Stern in the oft-quoted Stern Review on the Economics of Climate Change.  For those who don’t recall, Stern argued that it makes sense to spend 1 percent of the world’s GDP to reduce greenhouse gas emissions because the costs associated with those emissions might total anywhere between 5-20% of global GDP some time down the road.

Regular readers here will notice that Prof. Varian’s arguments closely mirror those I made earlier on this page (for the curious, here and here, with a minor correction to the latter here).

So it’s not just me folks …..

Prosecutors Subpoena ACLU

Federal prosecutors are using a grand jury subpoena in an attempt to force the ACLU to return a leaked document, which was apparently classified.

The grand jury is a legal enigma.  For background, read this Cato study

Excerpt:

The grand jury is perhaps the most mysterious institution in the American criminal justice system. While most people are generally familiar with the function of the police officer, the prosecutor, the defense lawyer, the judge, and the trial jury, few have any idea about what the grand jury is supposed to do and its day-to-day operation. That ignorance largely explains how some over-reaching prosecutors have been able to pervert the grand jury, whose original purpose was to check prosecutorial power, into an inquisitorial bulldozer that enhances the power of government and now runs roughshod over the constitutional rights of citizens.

Like its more famous relative, the trial jury, the grand jury consists of laypeople who are summoned to the courthouse to fulfill a civic duty. However, the work of the grand jury takes place well before any trial. The primary function of the grand jury is to inquire into the commission of crimes within its jurisdiction and then determine whether an indictment should issue against any particular person. But, in sharp contrast to the trial setting, the jurors hear only one side of the story and there is no judge overseeing the process. With no judge or opposing counsel in the room, grand jurors naturally defer to the prosecutor since he is the most knowledgeable official on the scene. Indeed, the single most important fact to appreciate about the grand jury system is that it is the prosecutor who calls the shots and dominates the entire process.

This ACLU case has the potential for a landmark precedent regarding the scope of the grand jury’s subpoena power.